-----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, A/Kyima0aVrF1U3WPYCl7WNIPwuUp09jMvJqcmupq96S0YCQ9wD6EpCxh8virpyw plYqcQhKv+jIVDrH/i5XKA== 0000903423-98-000303.txt : 19980831 0000903423-98-000303.hdr.sgml : 19980831 ACCESSION NUMBER: 0000903423-98-000303 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19980828 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMOND BRANDS OPERATING CORP CENTRAL INDEX KEY: 0001064048 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411905675 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-58223 FILM NUMBER: 98700574 BUSINESS ADDRESS: STREET 1: 1800 CLOQUET AVENUE CITY: CLOQUET STATE: MN ZIP: 55720 BUSINESS PHONE: 2188796700 MAIL ADDRESS: STREET 1: 1800 CLOQUET AVENUE CITY: CLOQUET STATE: MN ZIP: 55720 S-4/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1998 REGISTRATION NO. 333-58223 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- DIAMOND BRANDS OPERATING CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3999 411905675 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER) INCORPORATION OR CODE NUMBER) ORGANIZATION) 1800 CLOQUET AVENUE CLOQUET, MINNESOTA 55720-2141 (218) 879-6700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- EMPIRE CANDLE, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) KANSAS 3999 742812720 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER) INCORPORATION OR CODE NUMBER) ORGANIZATION) 1800 CLOQUET AVENUE CLOQUET, MINNESOTA 55720-2141 (218) 879-6700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- FORSTER INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MAINE 3089 010473635 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER) INCORPORATION OR CODE NUMBER) ORGANIZATION) 1800 CLOQUET AVENUE CLOQUET, MINNESOTA 55720-2141 (218) 879-6700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- THOMAS W. KNUESEL VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER DIAMOND BRANDS OPERATING CORP. 1800 CLOQUET AVENUE CLOQUET, MINNESOTA 55720-2141 (218) 879-6700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES OF CORRESPONDENCE TO: PAUL J. SHIM, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON ONE LIBERTY PLAZA NEW YORK, NEW YORK 10006 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [_] ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- DIAMOND BRANDS OPERATING CORP. REGISTRATION STATEMENT ON FORM S-4 (CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-K) ITEM LOCATION IN PROSPECTUS - ---- ---------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus............................... Facing Page of the Registration Statement; Cross Reference Sheet; Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus...................... Available Information; Incorporation of Certain Documents by Reference; Outside Back Cover Page of Prospectus 3. Risk Factors, Ratio of Earnings to Fixed Charges and Other Information...... Prospectus Summary; Risk Factors; Selected Historical and Pro Forma Consolidated Financial Data 4. Terms of the Transaction................ Prospectus Summary; Risk Factors; The Exchange Offer; Description of the New Notes; Plan of Distribution; Certain United States Federal Income Tax Considerations 5. Pro Forma Financial Information......... Capitalization; Unaudited Pro Forma Consolidated Financial Data 6. Material Contracts With the Company Being Acquired........................... Not Applicable 7. Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters....................... Not Applicable 8. Interests of Named Experts and Counsel.................................. Not Applicable 9. Disclosure of Commission Position on Indemnification for Securities Act Liabilities.............................. Not Applicable 10. Information with Respect to S-3 Registrants.............................. Not Applicable 11. Incorporation of Certain Information by Reference................................ Not Applicable 12. Information with Respect to S-2 or S-3 Registrants.............................. Not Applicable 13. Incorporation of Certain Information by Reference................................ Not Applicable 14. Information with Respect to Registrants Other Than S-3 or S-2 Registrants........ Outside Front Cover of Prospectus; Prospectus Summary; Selected Historical and Pro Forma Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Consolidated Financial Statements 15. Information with Respect to S-3 Companies................................ Not Applicable 16. Information with Respect to S-2 or S-3 Companies................................ Not Applicable 17. Information with Respect to Companies Other Than S-3 or S-2 Companies.......... Not Applicable 18. Information if Proxies, Consents or Authorizations Are to be Solicited....... Not Applicable 19. Information if Proxies, Consents or Authorizations Are Not to be Solicited or in an Exchange Offer.................. Prospectus Summary; Management; Capital Stock of Holdings and the Issuer; Certain Relationships and Related Transactions ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED AUGUST 28, 1998 PROSPECTUS DIAMOND BRANDS OPERATING CORP. OFFER TO EXCHANGE SERIES B 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OUTSTANDING SERIES A 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED. Diamond Brands Operating Corp., a Delaware corporation (the "Issuer"), hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal (the "Letter of Transmittal" and such offer being the "Exchange Offer"), to exchange Series B 10 1/8% Senior Subordinated Notes due 2008 of the Issuer (the "New Notes"), which are guaranteed by the Issuer's subsidiaries (the "Guarantors") and which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement on Form S-4 together with all amendments and exhibits, the "Registration Statement") of which this Prospectus is a part, for an equal principal amount of outstanding Series A 10 1/8% Senior Subordinated Notes due 2008 of the Issuer (the "Old Notes"), which are jointly and severally guaranteed, fully and unconditionally, by the Guarantors and of which $100,000,000 aggregate principal amount is outstanding as of the date hereof. The New Notes and the Old Notes are collectively referred to herein as the "Notes." Any and all Old Notes that are validly tendered and not withdrawn on or prior to 5:00 P.M., New York City time, on the date the Exchange Offer expires, which will be , 1998 (30 calendar days following the commencement of the Exchange Offer, which will occur on the date of effectiveness of the Registration Statement) unless the Exchange Offer is extended (such date, including as extended, the "Expiration Date"), will be accepted for exchange. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions, which may be waived by the Issuer, and to the terms of the Registration Rights Agreement, dated as of April 21, 1998, by and among the Issuer, the Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated (the "Initial Purchasers") (the "Registration Rights Agreement"). Old Notes may only be tendered in integral multiples of $1,000. See "The Exchange Offer." The New Notes will be entitled to the benefits of the same Indenture (as defined herein under "Available Information") that governs the Old Notes and that will govern the New Notes. The form and terms of the New Notes are the same in all material respects as the form and terms of the Old Notes, except that the New Notes have been registered under the Securities Act and therefore will not bear legends restricting the transfer thereof. See "The Exchange Offer" and "Description of the New Notes." The New Notes will be represented by permanent global notes in fully registered form and will be deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of a nominee of DTC. Beneficial interests in the permanent global notes will be shown on, and transfers thereof will be effected through, records maintained by DTC and its participants. Based on interpretations by the staff of the Securities and Exchange Commission (the "Commission"), as set forth in no-action letters issued to third parties, including Exxon Capital Holdings Corporation, SEC No-Action Letter (available May 13, 1988), Morgan Stanley & Co. Incorporated, SEC No- Action Letter (available June 5, 1991), and Shearman & Sterling, SEC No-Action Letter (available July 2, 1993) (collectively, the "Exchange Offer No-Action Letters"), the Issuer and the Guarantors believe that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by each holder (other than a broker-dealer who acquires such New Notes directly from the Issuer for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act and other than any holder that is an "affiliate" (as defined in Rule 405 under the Securities Act) of the Issuer) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement with any person to participate in a distribution of such New Notes. By tendering Old Notes in exchange for New Notes, each holder, other than a broker-dealer, will represent to the Issuer and the Guarantors that: (i) it is not an affiliate (as defined in Rule 405 under the Securities Act) of the Issuer; (ii) it is not a broker-dealer tendering Old Notes acquired for its own account directly from the Issuer; (iii) any New Notes to be received by it will be acquired in the ordinary course of its business; and (iv) it is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement or understanding to participate in a distribution of New Notes. If a holder of Old Notes is engaged in or intends to engage in a distribution of New Notes or has any arrangement or understanding with respect to the distribution of New Notes to be acquired pursuant to the Exchange Offer, such holder may not rely on the applicable interpretations of the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as (continued on next page) ---------- FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER, SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS. ---------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ---------- The date of this Prospectus is , 1998 (continued from cover page) it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. Pursuant to the Registration Rights Agreement, the Issuer and the Guarantors have agreed that they will make this Prospectus available to any Participating Broker-Dealer for a period of time not to exceed one year after the date on which the Exchange Offer is consummated for use in connection with any such resale. See "Plan of Distribution." Neither the Issuer nor the Guarantors will receive any proceeds from this offering. The Issuer has agreed to pay the expenses of the Exchange Offer. No underwriter is being utilized in connection with the Exchange Offer. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUER ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES AND BLUE SKY LAWS OF SUCH JURISDICTION. The Old Notes have been designated as eligible for trading in the Private Offerings, Resale and Trading through Automated Linkages ("PORTAL") market. Prior to this Exchange Offer, there has been no public market for the New Notes. If such a market were to develop, the New Notes could trade at prices that may be higher or lower than their principal amount. Neither the Issuer nor any of the Guarantors intends to apply for listing of the New Notes on any securities exchange or for quotation of the New Notes on The Nasdaq Stock Market's National Market or otherwise. The Initial Purchasers have previously made a market in the Old Notes, and the Issuer and the Guarantors have been advised that the Initial Purchasers currently intend to make a market in the New Notes, as permitted by applicable laws and regulations, after consummation of the Exchange Offer. The Initial Purchasers are not obligated, however, to make a market in the Old Notes or the New Notes and any such market-making activity may be discontinued at any time without notice at the sole discretion of the Initial Purchasers. There can be no assurance as to the liquidity of the public market for the New Notes or that any active public market for the New Notes will develop or continue. If an active public market does not develop or continue, the market price and liquidity of the New Notes may be adversely affected. See "Risk Factors--Risk Factors Relating to the Notes-- Absence of Public Market." --------------- AVAILABLE INFORMATION Neither the Issuer nor any of the Guarantors is currently subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Issuer will become subject to such requirements upon the effectiveness of the Registration Statement. Pursuant to the Indenture by and among the Issuer, the Guarantors and State Street Bank and Trust Company (as trustee), dated as of April 21, 1998 (the "Indenture"), the Issuer has agreed to file with the Commission and provide to the holders of the Old Notes annual reports and the information, documents and other reports which are required to be delivered pursuant to Sections 13 and 15(d) of the Exchange Act. This Prospectus constitutes a part of the Registration Statement filed by the Issuer and the Guarantors with the Commission, through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"), under the Securities Act, with respect to the New Notes offered hereby. This Prospectus omits certain of the information contained in the Registration Statement, and reference is hereby made to the Registration Statement for further information with respect to the Issuer and the securities offered hereby. Although statements concerning and summaries of certain documents are included herein, reference is made to the copies of such documents filed as exhibits to the Registration Statement or otherwise filed with the Commission. These documents may be inspected without charge at the office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies may be obtained at fees and charges prescribed by the Commission. Copies of such materials may also be obtained from the Web site that the Commission maintains at http://www.sec.gov. --------------- The Guarantors are the subsidiaries guaranteeing the Issuer's obligations under the Notes and are each wholly-owned subsidiaries of the Issuer. The guarantee of each Guarantor is full and unconditional, and joint and several with guarantees of each other Guarantor. Separate financial statements of the Guarantors are not set forth in this Prospectus as the Issuer has determined that they would not be material to investors. i PROSPECTUS SUMMARY Prior to the Recapitalization (as defined herein under "--The Recapitalization"), Diamond Brands Incorporated ("Holdings") and its direct subsidiaries carried on the business described herein. In connection with the Recapitalization, Holdings organized the Issuer and immediately prior to the consummation of the Recapitalization, Holdings transferred substantially all of its assets and liabilities to the Issuer. Holdings' current operations are, and future operations are expected to be, limited to owning the stock of the Issuer. Unless the context otherwise requires, the "Company" or "Diamond Brands" refers to Holdings, the Issuer, and its direct and indirect subsidiaries. The financial statements and other financial data herein are, for the periods prior to the consummation of the Recapitalization, those of Holdings. The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and the audited and unaudited consolidated financial statements of the Company and the Unaudited Pro Forma Consolidated Financial Data (as defined herein under "Unaudited Pro Forma Consolidated Financial Data") of the Company included elsewhere in this Prospectus. Market data used throughout this Prospectus were obtained from Information Resources, Inc. ("IRI") as of March 1, 1998 (which data include only sales reported by grocery stores, drug stores and mass merchandisers), internal company surveys or industry publications. Although the Company believes that such sources are reliable, the accuracy and completeness of such information is not guaranteed and has not been independently verified. Except as otherwise set forth herein, references to "pro forma" statement of operations data of the Company and the Issuer for the year ended December 31, 1997 are to such data that give effect to the Recapitalization, including the issuance of the Notes and the incurrence of indebtedness under the Bank Facilities (as defined herein under "--The Recapitalization"), and the Empire Acquisition (as defined herein under "--Corporate Information") as if they had occurred on January 1, 1997; references to "pro forma" statement of operations data of the Company and the Issuer for the six months ended June 30, 1998 are to such data that give effect to the Recapitalization as if it had occurred on January 1, 1997. THE COMPANY OVERVIEW Diamond Brands is a leading manufacturer and marketer of a broad range of branded consumer products, including wooden matches and fire starters ("Wooden Lights"), plastic cutlery and straws ("Cutlery"), scented, citronella and holiday candles ("Candles"), and toothpicks, clothespins and wooden crafts ("Woodenware"). The Company's products are marketed primarily under the Diamond, Forster and Empire brand names, which have been in existence since 1881, 1887 and 1950, respectively. The Company believes it has the leading domestic retail market share in the wooden match, plastic cutlery, toothpick, clothespin and wooden craft product categories. In each of these product categories, which in the aggregate represented approximately 63% of 1997 pro forma gross sales, the Company believes it has achieved a domestic retail market share of more than double that of its nearest branded competitor. For the year ended December 31, 1997, the Company generated pro forma net sales of $120.7 million and pro forma EBITDA (as defined herein under "--Summary Historical and Pro Forma Consolidated Financial Data") of $31.6 million, which represented a pro forma EBITDA margin (as defined herein under "--Summary Historical and Pro Forma Consolidated Financial Data") of 26.2%. For the six months ended June 30, 1998, the Company generated net sales of $58.6 million and EBITDA of $11.9 million, which represented an EBITDA margin of 20.4%. The Company believes it has achieved its leading market shares and strong profitability by: (i) capitalizing on the Company's strong brand name recognition, high quality products and category management strategy to secure and maintain retail shelf space; (ii) expanding its product offerings through strategic acquisitions, including the Forster Acquisition (as defined herein under "--Corporate Information") in 1995 and the Empire Acquisition in 1997; (iii) achieving significant cost savings through the integration of the Forster and Empire businesses, including headcount reductions and facilities consolidations; and (iv) focusing on reducing manufacturing and administrative costs. The Company's products are sold in substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. Diamond Brands also sells certain of its products to institutional and other customers such as food service and food processing companies and redistributors ("Institutional/Other"). The Company sells its products through a nationwide sales network consisting primarily of independent broker organizations and also sells products directly to selected mass merchandisers and warehouse clubs, including 1 Wal-Mart and Price Costco. In order to strengthen relationships with its customers, the Company employs a category management strategy, which includes a corporate rebate program that provides incentives to grocery retailers to buy multiple products from the Company. Diamond Brands produces its products at four automated manufacturing facilities located in Cloquet, Minnesota, East Wilton, Maine, Strong, Maine, and Kansas City, Kansas. The Company believes it is a low-cost manufacturer in most of its product categories. In the United States, Diamond Brands believes it is the sole manufacturer of wooden matches and the largest manufacturer of toothpicks and clothespins. COMPETITIVE STRENGTHS The Company believes that its stable and diverse product portfolio, strong brand names, national distribution and cost-efficient manufacturing have resulted in strong financial performance and provide an attractive platform for growth. In particular, the Company believes it is distinguished by the following competitive strengths: . DIVERSE PRODUCT PORTFOLIO WITH ATTRACTIVE SALES MIX. The Company has a diverse product portfolio with its 1997 pro forma gross sales consisting of Wooden Lights (15.9%), Cutlery (26.9%), Candles (21.5%), Woodenware (23.0%) and Institutional/Other (12.7%). This product portfolio allows the Company to offer retailers a broad product offering without relying on any one product category for profitability. Diamond Brands' product mix includes stable and well-established categories (such as Wooden Lights and Woodenware), as well as higher-growth categories (such as Cutlery and Candles). In addition, the Company believes its product mix is attractive because its product categories tend to be less reliant on new product introductions than are other consumer product categories. Approximately 98% of the Company's 1997 pro forma gross sales consisted of products introduced prior to 1994. The Company also believes that its products are not significantly impacted by changes in overall economic conditions. . STRONG BRAND NAMES WITH LEADING MARKET SHARES. The Company's three primary brand names--Diamond, Forster and Empire--have been in existence since 1881, 1887 and 1950, respectively. The Company believes that strong brand name recognition and high quality products have contributed to its leading domestic retail market shares in the wooden match, plastic cutlery, toothpick, clothespin and wooden craft product categories. In each of these product categories, which in the aggregate represented approximately 63% of 1997 pro forma gross sales, the Company believes it has achieved a domestic retail market share of more than double that of its nearest branded competitor. The Company believes its strong brand names and leading market shares provide a competitive advantage in selling its products to retailers. . WELL-ESTABLISHED NATIONAL RETAIL DISTRIBUTION. Diamond Brands' products are sold in substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. The Company has established relationships with many of the largest retailers in the United States such as Wal-Mart, Price Costco, Target, Publix and Kroger. The Company sells its products through a nationwide sales network consisting primarily of independent broker organizations and also sells products directly to selected mass merchandisers and warehouse clubs. The Company employs a category management strategy which includes a corporate rebate program that provides incentives to grocery retailers to buy multiple products from the Company. . COST-EFFICIENT MANUFACTURING. The Company believes that its four automated manufacturing facilities position it as a low-cost manufacturer in most of its product categories. The Company continues to invest in automation equipment in order to reduce headcount and increase efficiency. . STRONG CASH FLOW WITH LIMITED MAINTENANCE CAPITAL EXPENDITURES. The Company's strong EBITDA and EBITDA margin, together with limited maintenance capital expenditure requirements, provide the Company with significant cash flow to reduce indebtedness and implement its business strategy. Over 90% of the Company's capital expenditures in the five years ended December 31, 1997 have related to productivity improvements and capacity expansions. The Company currently expects its capital expenditures for 1998 to be approximately $2.5 million, of which approximately $1.3 million had been expended in the six months ended June 30, 1998. 2 . EXPERIENCED MANAGEMENT TEAM. The Company's existing senior management team possesses extensive industry and product knowledge and has an average tenure of seven years with the Company. In addition, in connection with the Recapitalization, Naresh K. Nakra became President, Chief Executive Officer ("CEO") and a director of Diamond Brands. Dr. Nakra has more than 25 years of experience in the branded consumer products and food industries, including five years as President and CEO of Gruma Corporation, whose subsidiaries include Mission Foods Corporation, a leading manufacturer and marketer of tortilla products, and Azteca Milling, a leading manufacturer and marketer of corn flour. Based on IRI data, Gruma Corporation achieved significant increases in sales and market share during Dr. Nakra's tenure. Dr. Nakra and the Company's existing senior management team have experience in identifying, consummating and integrating strategic acquisitions. See "New Chief Executive Officer." BUSINESS STRATEGY The Company's business strategy, which is designed to enhance its strong market positions and increase sales and EBITDA, includes the following elements: . CONTINUE TO PRODUCE HIGH QUALITY PRODUCTS. The Company believes that product quality has been a key factor in its success and intends to continue manufacturing high quality products in a cost-efficient manner in each of its product categories. The Company believes that its products are of superior or equivalent quality compared to those of its competitors, and that its brand names and "Made in the USA" label distinguish the Company's products from those of its competitors. . EXPAND CATEGORY MANAGEMENT STRATEGY TO INCREASE RETAIL SHELF SPACE. Diamond Brands utilizes a category management strategy to maintain and increase shelf space for its products at retail outlets. A central element of this strategy is the Company's corporate rebate program, which provides incentives to grocery retailers to buy multiple products from the Company. The Company intends to expand its corporate rebate program to include additional grocery retailers. The category management strategy also includes consolidated invoicing and shipping across the Company's product lines, which allows retailers to lower buying costs and reduce their number of suppliers. . ENTER NEW DISTRIBUTION CHANNELS. The Company's products are sold primarily through grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. While the Company has been successful in these distribution channels, management believes there is potential to increase sales and EBITDA by: (i) penetrating additional retail outlets including gift stores and party supply stores; (ii) increasing sales efforts in the food service industry; and (iii) entering international markets. The Company has taken initial steps to explore potential international opportunities, in particular, in Canada and the Caribbean, and expects to further explore such opportunities in the future. The Company intends to utilize its strong brand names, diverse product portfolio and cost-efficient manufacturing to facilitate its entry into new distribution channels. . CAPITALIZE ON STRONG BRAND NAMES AND NATIONAL DISTRIBUTION TO INTRODUCE NEW PRODUCTS. The Company intends to continue developing new products and product line extensions designed to capitalize on the Company's strong brand names and existing distribution and manufacturing capabilities. The Company intends to use its category management strategy and existing relationships with retailers to secure retail shelf space for these new products. . PURSUE ATTRACTIVE ACQUISITION OPPORTUNITIES. The Company has successfully completed and integrated three strategic acquisitions in the last seven years. In 1991, the Company purchased certain assets of Universal Match. In 1995, the Company strengthened its position in the Woodenware and Cutlery product categories through the Forster Acquisition and in February 1997, the Company added candles to its product portfolio through the Empire Acquisition. The Company believes there are additional opportunities to generate incremental sales and EBITDA through strategic acquisitions. Although the Company does not currently have any particular strategic acquisition opportunities identified, it intends to consider regularly and to pursue strategic acquisitions that: (i) add to or complement its product portfolio; (ii) leverage its existing distribution and manufacturing capabilities; or (iii) provide access to new distribution channels for its products. 3 THE RECAPITALIZATION Holdings, its then existing stockholders (the "Stockholders"), Seaver Kent- TPG Partners, L.P., an investment partnership jointly formed by Seaver Kent & Company, LLC ("Seaver Kent") and Texas Pacific Group ("TPG"), and Seaver Kent I Parallel, L.P. (collectively, the "Sponsors") entered into a Recapitalization Agreement dated as of March 3, 1998 (the "Recapitalization Agreement"), which provided for the recapitalization of Holdings (the "Recapitalization"). Pursuant to the Recapitalization Agreement, the Sponsors and other investors purchased from Holdings, for an aggregate purchase price of $47.0 million, shares of pay-in-kind preferred stock of Holdings ("Holdings Preferred Stock"), together with warrants (the "Warrants") to purchase shares of common stock of Holdings ("Holdings Common Stock") at $0.01 per share until the Warrants expire in April 2008. The values assigned to the Warrants and Holdings Preferred Stock were $12.3 million and $34.7 million, respectively, based upon the sale prices of comparable preferred stock instruments in the marketplace.Dividends in respect of Holdings Preferred Stock accumulate at 12% per annum (representing a 15% per annum effective yield) to its mandatory redemption value of $47.0 million on the mandatory redemption date on October 15, 2009. Holdings has the option, at any time, to redeem Holdings, Preferred Stock at a price equal to the Liquidation Preference (as defined herein under "Capital Stock of Holdings and the Issuer") plus all accumulated and unpaid dividends. The shares of Holdings Common Stock issuable upon the full exercise of the Warrants would represent 77.5% of the outstanding shares of Holdings Common Stock after giving effect to such issuance. In addition, Holdings purchased (the "Equity Repurchase") for $211.4 million, subject to certain working capital adjustments, from the Stockholders, all outstanding shares of Holdings' capital stock other than shares (the "Retained Shares") of Holdings Common Stock having an implied value (based solely on the $13.98 per share price to be paid in the Equity Repurchase) of $15.0 million (the "Implied Value"), which continue to be held by certain of the Stockholders. The Equity Repurchase price of $13.98 per share was determined based upon a competitive process with potential investors managed by Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the Company. The Retained Shares would represent 22.5% of the outstanding shares of Holdings Common Stock after giving effect to the full exercise of the Warrants. Holdings, the Sponsors and the holders of the Retained Shares also entered into a Stockholders Agreement pursuant to which, among other things, the Sponsors have the ability to direct the voting of outstanding shares of Holdings Common Stock in proportion to their ownership of such shares as if the Warrants were exercised in full. Accordingly, the Sponsors have voting control of Holdings. In connection with the Recapitalization, Holdings organized the Issuer and, immediately prior to the consummation of the Recapitalization, Holdings transferred substantially all of its assets and liabilities to the Issuer. Holdings' current operations are, and future operations are expected to be, limited to owning the stock of the Issuer. The Issuer repaid substantially all of the Company's funded debt obligations existing immediately before the consummation of the Recapitalization (the "Debt Retirement")in the amount of $51.8 million. Funding requirements for the Recapitalization (which was consummated on April 21, 1998) were $296.5 million (including the Implied Value of the Retained Shares) and were satisfied through the Retained Shares and the following: (i) the purchase by the Sponsors and other investors of Holdings Preferred Stock and the Warrants for $47.0 million ($45.8 million in cash and $1.2 million in officer notes receivables); (ii) $100.0 million of gross proceeds from the offering of the Old Notes (the "Offering"); (iii) $80.0 million of borrowings under senior secured term loan facilities (the "Term Loan Facilities") provided by a syndicate of lenders (collectively, the "Banks") led by DLJ Capital Funding, Inc. ("DLJ Capital Funding"), as Syndication Agent, Wells Fargo Bank, N.A. ("Wells Fargo"), as Administrative Agent, and Morgan Stanley Senior Funding, Inc. ("Morgan Stanley Senior Funding"), as Documentation Agent; (iv) $10.6 million of borrowings under a senior secured revolving credit facility (the "Revolving Credit Facility" and, together with the Term Loan Facilities, the "Bank Facilities") having availability of up to $25.0 million to be provided by the Banks, DLJ Capital Funding, Wells Fargo and Morgan Stanley Senior Funding; and (v) $45.1 million of gross proceeds from the sale by Holdings of 12 7/8% senior discount debentures due 2009 (the "Holdings Senior Discount Debentures") in a separate offering. The Equity Repurchase, the Debt Retirement, the issuance and sale by Holdings of Holdings Preferred Stock, the Warrants and the Holdings Senior Discount Debentures and the Offering and the borrowing by the Issuer of funds under the Bank Facilities (which proceeds were distributed to Holdings) were effected in connection with the Recapitalization. The Recapitalization was accounted for as a recapitalization transaction for accounting purposes. 4 The following table sets forth the sources and uses of funds in connection with the Recapitalization:
(IN THOUSANDS) SOURCES: Bank Facilities (1)........................................ $ 90,582 Notes offered in the Offering.............................. 100,000 Holdings Senior Discount Debentures........................ 45,105 Holdings Preferred Stock (2)............................... 45,783 Implied Value of the Retained Shares (3)................... 15,000 -------- Total sources of funds................................... $296,470 ======== USES: Equity Repurchase.......................................... $211,421 Debt Retirement............................................ 51,834 Implied Value of the Retained Shares (3)................... 15,000 Transaction fees and expenses (4).......................... 18,215 -------- Total uses of funds...................................... $296,470 ========
- -------- (1) Represents (i) $10.6 million drawn under the $25.0 million Revolving Credit Facility, (ii) $30.0 million under the Term A Loan Facility (as defined herein) and (iii) $50.0 million under the Term B Loan Facility (as defined herein). See "Description of the Bank Facilities." (2) Represents cash proceeds associated with the Holdings Preferred Stock and excluding the $1.2 million officer notes receivable. (3) Based solely on the purchase price per share to be paid for shares of Holdings Common Stock in the Equity Repurchase, multiplied by the number of the Retained Shares. The Implied Value of the Retained Shares does not represent a purchase, sale or other change in such equity investment for accounting or tax purposes or any funds or proceeds paid to or used by the Company in the Recapitalization, and does not necessarily represent a market valuation for the Retained Shares. (4) Includes deferred financing costs of $9.8 million, legal and advisory fees of $4.7 million, management bonus payments of $1.6 million, bridge financing fees of $1.0 million, compensation expense related to repurchase of common stock upon exercise of stock options of $0.6 million, and other recapitalization expenses of $0.5 million. All costs except for the deferred financing cost of $9.8 million and $1.3 million in legal and advisory fees have been expensed by the Company in the period which includes the date of the Recapitalization. 5 NEW CHIEF EXECUTIVE OFFICER In connection with the Recapitalization, Naresh K. Nakra became President, CEO and a director of Diamond Brands. Dr. Nakra, 52, has more than 25 years of experience in the branded consumer products and food industries. From 1993 to 1998, Dr. Nakra served as President and CEO of Gruma Corporation, a U.S. subsidiary of Gruma, S.A., a Mexico-based multinational company. Gruma Corporation's subsidiaries include Mission Foods Corporation, a leading manufacturer and marketer of tortilla products, and Azteca Milling, a leading manufacturer and marketer of corn flour. These businesses sell and distribute products manufactured in 14 facilities to retail and food service customers in the United States, Latin America, Europe and the Pacific Rim. Based on IRI data, Gruma Corporation achieved significant increases in sales and market share during Dr. Nakra's tenure. THE SPONSORS SEAVER KENT & COMPANY, LLC Seaver Kent is a private equity firm located in Menlo Park, California, that specializes in private, control investments in middle-market companies. Seaver Kent was founded in October 1996 by Alexander M. Seaver and Bradley R. Kent, both of whom were formerly general partners of InterWest Partners, one of the nation's leading venture capital firms. The principals of Seaver Kent have successfully partnered with management to build businesses through both internal growth and strategic acquisitions, and in particular have extensive experience investing in consumer and household products companies. Portfolio companies in which funds managed by the principals of Seaver Kent have made investments include AMX Corporation, Artco-Bell Holding, Bojangles', Cafe Valley, Favorite Brands International, Heidi's Fine Desserts and MidWest Folding Products. TEXAS PACIFIC GROUP TPG was founded by David Bonderman, James G. Coulter and William S. Price, III in 1992 to pursue public and private investment opportunities through a variety of methods, including leveraged buyouts, recapitalizations, joint ventures, restructurings and strategic public securities investments. The principals of TPG manage TPG Partners, L.P. and TPG Partners II, L.P., both Delaware limited partnerships, with aggregate committed capital of over $3.2 billion. Among TPG's other investments are branded consumer products companies Beringer Wine Estates, Del Monte Foods Company, Ducati Motor, Favorite Brands International and J. Crew. Other TPG portfolio companies include America West Airlines, Belden & Blake Corporation, Denbury Resources, Genesis ElderCare, Paradyne, Virgin Entertainment and Vivra Specialty Partners. In addition, the principals of TPG led the $9 billion reorganization of Continental Airlines in 1993. CORPORATE INFORMATION The Company's predecessor, Diamond Match, was formed in 1881 following the consolidation of 12 match companies. Holdings was incorporated under the laws of Minnesota in 1986 when the stockholder group previous to the Recapitalization purchased certain assets of Diamond Match. In 1991, Diamond Brands purchased certain assets of Universal Match. In March 1995, Diamond Brands acquired (the "Forster Acquisition") Forster Holdings, Inc. ("Forster") and in February 1997, the Company acquired (the "Empire Acquisition") the business of Empire Manufacturing Company ("Empire"). The Issuer is a wholly- owned subsidiary of Holdings and was incorporated under the laws of the State of Delaware in April 1998 as part of the Recapitalization. The principal executive offices of the Company are located at 1800 Cloquet Avenue, Cloquet, Minnesota 55720, and its telephone number is (218) 879-6700. 6 THE EXCHANGE OFFER Registration Rights The Old Notes were issued on April 21, 1998 (the Agreement................... "Issue Date") to the Initial Purchasers. The Initial Purchasers placed the Old Notes with institutional investors. In connection therewith, the Issuer, the Guarantors and the Initial Purchasers entered into the Registration Rights Agreement, providing, among other things, for the Exchange Offer. See "The Exchange Offer." The Exchange Offer.......... New Notes are being offered in exchange for an equal principal amount of Old Notes. As of the date hereof, $ 100,000,000 aggregate principal amount of Old Notes is outstanding. Old Notes may be tendered only in integral multiples of $1,000. Resale of New Notes......... Based on interpretations by the staff of the Commission, as set forth in no-action letters issued to third parties, including the Exchange Offer No-Action Letters, the Issuer and the Guarantors believe that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by each holder thereof (other than a broker-dealer who acquires such New Notes directly from the Issuer for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act and other than any holder that is an "affiliate" (as defined under Rule 405 of the Securities Act) of the Issuer) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement with any person to participate in a distribution of such New Notes. By tendering Old Notes in exchange for New Notes, each holder, other than a broker-dealer, will represent to the Issuer and the Guarantors that: (i) it is not an affiliate (as defined in Rule 405 under the Securities Act) of the Issuer; (ii) it is not a broker-dealer tendering Old Notes acquired for its own account directly from the Issuer; (iii) any New Notes to be received by it were acquired in the ordinary course of its business; and (iv) it is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement or understanding to participate in a distribution of the New Notes. If a holder of Old Notes is engaged in or intends to engage in a distribution of New Notes or has any arrangement or understanding with respect to the distribution of New Notes to be acquired pursuant to the Exchange Offer, such holder may not rely on the applicable interpretations of the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Each Participating Broker- Dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. The Letter of Transmittal states that by so 7 acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker- Dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker- Dealer as a result of market-making activities or other trading activities. The Issuer and the Guarantors have agreed that they will make this Prospectus available to any Participating Broker- Dealer for a period of time not to exceed one year after the date on which the Exchange Offer is consummated for use in connection with any such resale. See "Plan of Distribution." To comply with the securities laws of certain jurisdictions, it may be necessary to qualify for sale or register the New Notes prior to offering or selling such New Notes. The Issuer and the Guarantors have agreed, pursuant to the Registration Rights Agreement and subject to certain specified limitations therein, to register or qualify the New Notes for offer or sale under the securities or "blue sky" laws of such jurisdictions as may be necessary to permit consummation of the Exchange Offer. Consequences of Failure to Exchange Old Notes......... Upon consummation of the Exchange Offer, subject to certain exceptions, holders of Old Notes who do not exchange their Old Notes for New Notes in the Exchange Offer will no longer be entitled to registration rights and will not be able to offer or sell their Old Notes, unless such Old Notes are subsequently registered under the Securities Act (which, subject to certain limited exceptions, the Issuer will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors--Risk Factors Relating to the Notes-- Consequences of Failure to Exchange" and "The Exchange Offer--Terms of the Exchange Offer." Expiration Date............. 5:00 p.m., New York City time, on , 1998 (30 calendar days following the commencement of the Exchange Offer, which will occur on the date of effectiveness of the Registration Statement), unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. Interest on the New Notes... The New Notes will accrue interest at the applicable per annum rate set forth on the cover page of this Prospectus, from (i) the later of (A) the last interest payment date on which interest was paid on the Old Notes surrendered in exchange therefor or (B) if the Old Notes are surrendered for exchange on a date subsequent to the record date for an interest payment date to occur on or after the date of such exchange and as to which interest will be paid, the date of such interest payment or (ii) if no interest has been paid on the Old Notes, from the Issue Date of such Old Notes. Interest on the New Notes is payable on October 15 and April 15 of each year, commencing October 15, 1998. 8 Conditions to the Exchange Offer....................... The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain customary conditions, which may, under certain circumstances, be waived by the Issuer and the Guarantors. See "The Exchange Offer--Conditions." Except for the requirements of applicable federal and state securities laws, there are no federal or state regulatory requirements to be complied with or obtained by the Issuer or the Guarantors in connection with the Exchange Offer. Procedures for Tendering Old Notes................... Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with the Old Notes to be exchanged and any other required documentation to the Exchange Agent (as defined herein) at the address set forth herein or effect a tender of Old Notes pursuant to the procedures for book-entry transfer as provided for herein. See "The Exchange Offer--Procedures for Tendering" and "-- Book-Entry Transfer." Guaranteed Delivery Procedures.................. Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes and a properly completed Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date may tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures." Withdrawal Rights........... Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Old Notes, a written or facsimile transmission notice of withdrawal must be received by the Exchange Agent at its address set forth herein under "The Exchange Offer--Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. Acceptance of Old Notes and Delivery of New Notes...... Subject to certain conditions, any and all Old Notes that are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date will be accepted for exchange. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Certain Tax Considerations.. The exchange of New Notes for Old Notes should not be considered a sale or exchange or otherwise a taxable event for federal income tax purposes. See "Certain United States Federal Income Tax Considerations." Exchange Agent.............. State Street Bank and Trust Company is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. Fees and Expenses........... All expenses incident to consummation of the Exchange Offer and compliance with the Registration Rights Agreement will be borne by the Issuer. See "The Exchange Offer--Fees and Expenses." Use of Proceeds............. There will be no cash proceeds payable to the Issuer or the Guarantors from the issuance of the New Notes pursuant to the Exchange Offer. See "Use of Proceeds." 9 SUMMARY OF TERMS OF NEW NOTES The Exchange Offer relates to the exchange of up to $100,000,000 aggregate principal amount of Old Notes for up to an equal aggregate principal amount of New Notes. The New Notes will be entitled to the benefits of the same Indenture that governs the Old Notes and that will govern the New Notes. The form and terms of the New Notes are the same in all material respects as the form and terms of the Old Notes, except that the New Notes have been registered under the Securities Act and therefore will not bear legends restricting the transfer thereof. See "Description of the New Notes." Maturity Date............... April 15, 2008. Interest Rate and Payment The New Notes will bear interest at a rate of 10 Dates....................... 1/8% per annum. Interest will be payable semi- annually in arrears on each October 15 and April 15, commencing October 15, 1998. Guarantee................... The Issuer's payment obligations under the New Notes are jointly and severally guaranteed, fully and unconditionally, by the Guarantors. Optional Redemption......... The New Notes will be redeemable at the option of the Issuer, in whole or in part, at any time on or after April 15, 2003, in cash at the redemption prices set forth herein, plus accrued and unpaid interest and Liquidated Damages (as defined herein under "Description of the New Notes--Registration Rights; Liquidated Damages"), if any, thereon to the redemption date. In addition, at any time prior to April 15, 2001, the Issuer may, at its option, on any one or more occasions, redeem up to 35% of the aggregate principal amount of the New Notes originally issued at a redemption price equal to 110.125% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Equity Offerings (as defined herein under "Description of the New Notes--Certain Definitions"); provided that at least 65% of the original aggregate principal amount of the New Notes remains outstanding immediately after each such redemption. See "Description of the New Notes--Optional Redemption." Subsidiary Guarantees....... The New Notes will be guaranteed, jointly and severally, by all of the Issuer's Restricted Subsidiaries (as defined herein under "Description of the New Notes--Certain Definitions") (other than Restricted Subsidiaries that do not guarantee any indebtedness of the Issuer or any other Restricted Subsidiary). The Subsidiary Guarantees (as defined herein under "Description of the New Notes--Guarantees") may be released under certain circumstances. See "Description of the New Notes--Guarantees." Ranking..................... The New Notes will be general unsecured obligations of the Issuer and will be subordinated in right of payment to all existing and future Senior Debt (as defined herein under "Description of the New Notes -- Certain Definitions") of the Issuer, including borrowings under the Bank Facilities. The Subsidiary Guarantees will be general unsecured obligations of the Guarantors and will be subordinated in right of payment to all existing and future Senior Debt of the Guarantors, including guarantees of the Bank Facilities. As of June 30, 1998, the Issuer and the Guarantors had approximately $86.1 million of Senior Debt. The Indenture permits the Issuer and the Guarantors to incur additional indebtedness, 10 including Senior Debt, subject to certain limitations. The Indenture prohibits the incurrence of any indebtedness by the Issuer and the Guarantors that is senior to the New Notes and the Subsidiary Guarantees, as the case may be, and subordinated to Senior Debt of the Issuer and the Guarantors, as the case may be. See "Description of the New Notes--Subordination" and "--Certain Covenants--Limitation on Layering Debt." Repurchase at the Option of Holders..................... Upon the occurrence of a Change of Control (as defined herein under "Description of Holdings Indebtedness") each holder of New Notes will have the right to require the Company to repurchase all or any part of such holder's New Notes at a price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon. In addition, if the Issuer or any of its Restricted Subsidiaries consummates an Asset Sale (as defined herein under "Description of the New Notes -- Certain Definitions"), which is permitted in limited circumstances, and the Issuer or its Restricted Subsidiaries has Excess Proceeds (as defined herein under "Description of the New Notes -- Repurchase at the Option of Holders -- Asset Sales"), from such Asset Sale in an amount exceeding $7.5 million, the Issuer will be required to make an offer to all holders of New Notes and, to the extent required by the terms of any debt which ranks pari passu with the New Notes ("Pari Passu Indebtedness") to purchase the maximum principal amount of New Notes and any such Pari Passu Indebtedness, that may be purchased out of the Excess Proceeds, at a price in cash equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, in accordance with the procedures set forth in the Indenture or such Pari Passu Indebtedness, as applicable. See "Description of the New Notes--Repurchase at the Option of Holders." Restrictive Covenants....... The Indenture under which the New Notes will be issued contains certain covenants that limit the ability of the Issuer and its Restricted Subsidiaries to, among other things, incur additional indebtedness, pay dividends or make certain other restricted payments, consummate certain asset sales, enter into certain transactions with affiliates, incur indebtedness that is subordinate in right of payment to any Senior Debt and senior in right of payment to the New Notes, incur liens, impose restrictions on the ability of a Restricted Subsidiary to guarantee the payment of any indebtedness of the Issuer or any indebtedness of any other Restricted Subsidiary, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Issuer. See "Description of the New Notes--Certain Covenants." 11 USE OF PROCEEDS There will be no cash proceeds payable to the Issuer or the Guarantors from the issuance of the New Notes pursuant to the Exchange Offer. The proceeds from the sale of the Old Notes were used to fund the Recapitalization. See "Use of Proceeds" and "The Recapitalization." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered in participating in the Exchange Offer. 12 SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following table sets forth summary historical financial data of the Company for each of the years in the five-year period ended December 31, 1997, which have been audited by Arthur Andersen LLP, independent public accountants, and for the unaudited six months ended June 30, 1997 and 1998. The summary historical consolidated financial data for the years ended December 31, 1995, 1996 and 1997 are derived from and should be read in conjunction with the audited consolidated financial statements of Holdings and the related notes thereto included elsewhere in this Prospectus. The summary historical financial data for the years ended December 31, 1993 and 1994 are derived from audited financial statements of Holdings that are not included in this Prospectus. The summary historical financial data for the six months ended June 30, 1997 and 1998 are derived from unaudited consolidated financial statements for such periods included elsewhere in this Prospectus. The unaudited pro forma consolidated statement of operations data of the Issuer for the year ended December 31, 1997 gives effect to the Recapitalization and the Empire Acquisition as if they had occurred on January 1, 1997. The unaudited pro forma consolidated statement of operations data of the Issuer for the six months ended June 30, 1998 gives effect to the Recapitalization as if it had occurred on January 1, 1997. The unaudited pro forma consolidated financial data do not purport to represent what the Issuer's or the Company's financial condition or results of operations would actually have been had the Recapitalization and the Empire Acquisition in fact occurred on the assumed dates, nor do they project the Issuer's and/or the Company's financial condition or results of operations for any future period or date. The financial data set forth below should be read in conjunction with the audited consolidated financial statements and the related notes thereto, the unaudited consolidated financial statements and the related notes thereto, "Unaudited Pro Forma Consolidated Financial Data," "Selected Historical and Pro Forma Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," all included elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED DECEMBER 31, PRO FORMA ENDED JUNE 30, PRO FORMA -------------------------------------------- DECEMBER 31, ---------------- JUNE 30, 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------- ------- ------- ------- -------- ------------ ------- ------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales............... $33,538 $31,289 $77,659 $90,201 $118,072 $120,714 $54,675 $58,558 $58,558 Gross profit............ 10,730 8,223 21,169 27,169 39,490 40,186 17,045 17,210 17,210 Operating income........ 6,423 4,070 10,417 17,301 26,555 26,781 11,031 9,829 9,829 Net income (1).......... 3,957 3,578 4,102 7,636 20,629 5,151 7,495 4,468 514 Other Data: Depreciation and amortization (2)....... $ 1,207 $ 1,250 $ 3,761 $ 4,204 $ 4,668 $ 4,856 $ 2,225 $ 2,105 $ 1,032 Cash flows from operating activities .. 4,881 4,371 4,453 13,847 21,313 -- 7,831 4,473 -- Cash flows used in investing activities .. (836) (585) (44,539) (1,979) (28,746) -- (25,946) (1,273) -- Cash flows from (used in) financing activities .. (1,710) (3,082) 36,652 (11,868) 7,433 -- 18,115 (3,200) -- EBITDA (3).............. 7,630 5,320 14,178 21,505 31,223 31,637 13,286 11,934 11,934 EBITDA margin (4)....... 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 24.3% 20.4% 20.4% Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 1,250 $1,273 $1,273 CREDIT DATA: Cash interest expense............................................ $ 16,934 -- -- $8,467 Ratio of EBITDA to cash interest expense......................... 1.9x -- -- 1.4x Ratio of total debt to EBITDA.................................... 6.8x -- -- N/A Ratio of earnings to fixed charges (5)........................... 1.5x -- -- 1.1x
AS OF DECEMBER 31, AS OF JUNE 30, ------------------ --------------- 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Working capital....... $ 5,325 $ 6,483 $ 6,989 $ 5,409 $ 13,247 $ $ 27,313 Total assets.......... 16,720 17,328 69,630 66,503 94,550 106,874 Total debt, including current maturities... 7,629 7,347 46,713 34,845 49,497 186,125 Stockholders' equity (deficit)............ 5,246 6,024 10,118 17,754 27,930 (96,547)
13 - -------- (1) For the years ended December 31, 1993, 1995 and 1996 and the period from April 21, 1998 to June 30, 1998, the Company was a Subchapter C corporation for federal income tax purposes. For the years ended December 31, 1994 and 1997, the six months ended June 30, 1997 and the period from January 1, 1998 to April 20, 1998, the Company was a Subchapter S corporation for federal income tax purposes. See "Selected Historical and Pro Forma Consolidated Financial Data" for unaudited pro forma income tax data. (2) Excludes amortization of deferred financing costs. (3) EBITDA represents operating income plus depreciation and amortization (excluding amortization of deferred financing costs). The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. Holders tendering Old Notes in the Exchange Offer should consider the following factors in evaluating such measures: EBITDA and related measures (i) should not be considered in isolation, (ii) are not measures of performance calculated in accordance with generally accepted accounting principles ("GAAP"), (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Issuer's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Issuer's operating performance or measures of its liquidity. Additionally, because all companies do not calculate EBITDA and related measures in a uniform fashion, the calculations presented in this Prospectus may not be comparable to other similarly titled measures of other companies. (4) EBITDA margin represents EBITDA as a percentage of net sales. (5) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges for this purpose include interest expense, amortization of deferred financing costs and one-third of operating lease payments (the portion deemed to be representative of the interest factor). 14 RISK FACTORS Prospective holders of the New Notes should carefully review the information contained and incorporated by reference in this Prospectus and should particularly consider the following matters: RISK FACTORS RELATING TO THE COMPANY SUBSTANTIAL LEVERAGE; LIQUIDITY; STOCKHOLDERS' DEFICIT In connection with the Recapitalization, the Company incurred a significant amount of additional indebtedness, the debt service obligations of which could, under certain circumstances, have material consequences to security holders of the Issuer, including holders of the New Notes. As of June 30, 1998, the Issuer and its Guarantors had outstanding approximately $186.1 million of total indebtedness (including approximately $86.1 million of Senior Debt) and stockholders' deficit of approximately $96.5 million. On April 15, 2003, Holdings will be required to redeem Holdings Senior Discount Debentures with an aggregate principal amount at maturity equal to (i) $33.2 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of the Holdings Senior Discount Debentures then outstanding by (y) $84.0 million at a redemption price equal to 100% of the principal amount at maturity of the Holdings Senior Discount Debentures so redeemed (the "Mandatory Debenture Redemption"). Commencing October 15, 2003, Holdings will be required to make semi-annual cash payments of interest on the Holdings Senior Discount Debentures. Subject to the restrictions in the Bank Facilities and the Indenture, the Company may incur additional senior or other indebtedness from time to time to finance acquisitions or capital expenditures or for other general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Bank Facilities and the Indenture restrict, but do not prohibit, the payment of dividends by the Issuer to Holdings to finance the Mandatory Debenture Redemption and the payment of interest on the Holdings Senior Discount Debentures. See "Description of Holdings Indebtedness," "Description of the Bank Facilities" and "Description of the New Notes." There can be no assurance that the Issuer will be entitled under the terms of the Bank Facilities and the Indenture to dividend sufficient funds to Holdings to fund the Mandatory Debenture Redemption or the payments of cash interest on the Holdings Senior Discount Debentures. Holdings' failure to consummate the Mandatory Debenture Redemption or to make interest payments on the Holdings Senior Discount Debentures would cause an Event of Default (as defined therein) under the Holdings Senior Discount Debentures. See "Description of Holdings Indebtedness." The level of the Company's indebtedness could have important consequences to holders of the Notes, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired; (ii) a significant portion of the Issuer's cash flow from operations must be dedicated to the payment of principal and interest on the Company's indebtedness (including its current quarterly principal debt service requirement of $125,000 under the Bank Facilities), thereby reducing the funds available to the Issuer for its operations; (iii) significant amounts of the Company's borrowings will bear interest at variable rates, which could result in higher interest expense in the event of increases in interest rates; (iv) the Indenture and the Bank Facilities contain financial and restrictive covenants, the failure to comply with which may result in an Event of Default which, if not cured or waived, could have a material adverse effect on the Company; (v) the indebtedness outstanding under the Bank Facilities is secured and matures prior to the maturity of the Notes; (vi) the Company may be substantially more leveraged than certain of its competitors, which may place the Issuer at a competitive disadvantage; and (vii) the Company's substantial degree of leverage may limit its flexibility to adjust to changing market conditions, reduce its ability to withstand competitive pressures and make it more vulnerable to a downturn in general economic conditions or its business. See "Description of Holdings Indebtedness," "Description of the Bank Facilities" and "Description of the New Notes." The Company's ability to make scheduled payments of principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance its indebtedness (including the Notes), or to fund planned capital or other expenditures, will depend upon its future financial and operating performance, which will be affected by 15 prevailing economic conditions and financial, business and other factors, many of which are beyond its control. There can be no assurance that the Issuer's operating results, cash flow and capital resources will be sufficient for payment of the Company's indebtedness in the future. In the absence of such operating results and resources, the Issuer could face substantial liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations, and there can be no assurance as to the timing of such sales or the proceeds that the Issuer could realize therefrom. If the Issuer is unable to service its indebtedness, it may take actions such as reducing or delaying planned expansion and capital expenditures, selling assets, restructuring or refinancing its indebtedness or seeking additional equity capital. There can be no assurance that any of these actions could be effected on satisfactory terms, if at all, and the failure to take these actions successfully could have a material adverse effect on the Company's business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." COMPETITION; MARKET DATA The markets for certain of the Company's products are highly competitive. The Company competes, particularly with respect to its Candles and Cutlery products, with a number of domestic manufacturers which are larger and have significantly greater resources than the Company. In addition, the Company competes with foreign manufacturers, particularly those located in Sweden, Chile, Brazil, Japan, China and Korea, which may have lower manufacturing costs than those of the Company. Diamond Brands believes that the barriers to entry into the Company's business are relatively low, and there can be no assurance that the Company will not face greater competition from existing or additional manufacturers in the future. Diamond Brands cannot predict the pricing or promotional activities of its competitors or their effects on the Company's ability to market and sell its products. Attempts by existing or new competitors seeking to gain or retain market share by reducing prices or through other promotional activities could have a material adverse effect on the Company's business, financial condition and operating results. In addition, there can be no assurance that the Company's sales volume or market shares would not be adversely affected by consumer reaction to higher prices or that industry manufacturing capacity will not change so as to create an imbalance of supply and demand in future periods. See "Business--Competition." Market data used throughout this Prospectus were obtained from IRI (which data include only sales reported by grocery stores, drug stores and mass merchandisers), internal company surveys or industry publications. Although the Company believes that such sources are reliable, the accuracy and completeness of such information has not been independently verified. In particular, the Company is not aware of the availability of statistics relating specifically to Wooden Lights, Candles and Woodenware products. Therefore, management's estimates with respect to such products are based only on the limited data in the public domain and the Company's participation in the branded consumer products industry. Accordingly, prospective holders of the New Notes should not place undue emphasis on the market data and predictions of future trends contained in the Prospectus. RELIANCE ON MAJOR CUSTOMERS The Company derives its revenue primarily from the sale of its products to substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. During the year ended December 31, 1997, sales to the Company's top 10 customers accounted for approximately 39% of the Company's pro forma gross sales, with one customer, Wal-Mart and its subsidiary, Sam's Club, accounting for approximately 19% of pro forma gross sales. The loss of Wal-Mart or other significant customers or a significant reduction in their purchases from the Company, could have a material adverse effect on the Company's business, financial condition and operating results. See "Business--Customers." DEPENDENCE ON RAW MATERIAL AVAILABILITY; PRICING The primary raw materials used by Diamond Brands are generally available from multiple suppliers, and the Company has not experienced any significant interruption in the availability of such materials. However, the 16 price of polystyrene resin, the key raw material from which the Company's Cutlery products is produced, can be volatile. The polystyrene resin used by the Company is produced from petrochemical intermediates which are, in turn, derived from petroleum. Polystyrene resin prices may fluctuate as a result of, among other things, worldwide changes in natural gas and crude oil prices and supply, as well as changes in supply and demand for polystyrene resin and petrochemical intermediates from which it is produced. Among other industries, the automotive and housing industries are significant users of polystyrene resin. As a result, significant changes in worldwide capacity and demand in these and other industries may cause significant fluctuations in the prices of polystyrene resin. Although the Company has generally passed on these price changes to customers on a delayed basis, there can be no assurance that the Company will be able to purchase polystyrene resin at prices that can be adequately passed on to customers. Although the Company in January 1997 entered into a three-year supply contract with a major supplier of polystyrene resin, under which the Company believes it receives the lowest price available to any customer purchasing similar volume, and receives short-term price protection during periods of rising prices, there can be no assurance that this transaction would reduce the impact on the Company of changes in polystyrene resin prices. Other primary raw materials required by Diamond Brands in its business include glass and metal containers, wax and fragrances to produce the Company's Candles products, birch and maple wood to produce the Company's Woodenware products, and aspen wood and commodity chemicals to produce the Company's Wooden Lights products. Other major raw materials include paperboard and corrugated cardboard. Significant increases in the prices of such raw materials could have a material adverse effect on the Company's business, financial condition and operating results. Although the Company believes that sources of its principal raw materials will continue to be adequate to meet requirements and that alternative sources are available, there can be no assurance that severe shortages of raw materials will not occur in the future that could increase the cost or delay the shipment of the Company's products and have a material adverse effect on the Company's business, financial condition and operating results. See "Business--Raw Materials." DEPENDENCE ON NEW MANAGEMENT AND KEY PERSONNEL In connection with the Recapitalization, Naresh K. Nakra became President, CEO and a director of Diamond Brands. Although Dr. Nakra has significant experience in the branded consumer products and food industries, there can be no assurance that this management transition will not adversely affect the Company's business, financial condition and operating results. In addition, while the Company believes that it has developed depth and experience among its key personnel, there can be no assurance that the Company's business would not be adversely affected if one or more of these key individuals left the Company. The Company does not maintain any key-man or similar insurance policy in respect of Dr. Nakra or any of its other senior management or key personnel. See "Management." RISKS RELATING TO THE COMPANY'S ACQUISITION STRATEGY As part of its business strategy, Diamond Brands intends to pursue strategic acquisitions. The Company regularly considers the acquisition of other companies engaged in the manufacture and sale of related products. Future acquisitions by the Company could result in the incurrence of additional indebtedness and contingent liabilities, which could have a material adverse effect on the Company's business, financial condition and operating results. In addition, the process of integrating acquired operations into the Company's operations may result in unforeseen operating difficulties, may absorb significant management attention and may require significant financial resources that would otherwise be available for the ongoing development or expansion of the Company's existing operations. There is no assurance that the Company will be able to identify desirable acquisition candidates or will be successful in entering into definitive agreements with respect to desirable acquisitions. Moreover, even if definitive agreements are entered into, there can be no assurance that any future acquisition will thereafter be completed or, if completed, that the anticipated benefits of the acquisition will be realized. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." ENVIRONMENTAL REGULATIONS The Company's operations are subject to a wide range of general and industry specific federal, state and local environmental laws and regulations which impose limitations on the discharge of pollutants into the air and 17 water and establish standards for the treatment, storage and disposal of solid and hazardous waste. Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous substances on such property. Although management believes that the Company is in substantial compliance with all applicable environmental laws and regulations, unforeseen expenditures to remain in such compliance, or unforeseen environmental liabilities, could have a material adverse effect on the Company's business, financial condition and operating results. Additionally, there can be no assurance that changes in environmental laws and regulations or their application will not require further expenditures by the Company. See "Business--General--Legal and Regulatory Matters." CONTROL OF THE COMPANY The Sponsors and their affiliates, through their ownership of securities and through contractual arrangements, control the Company and have the power to elect a majority of directors of the Company, approve all amendments to the Company's charter documents and effect fundamental corporate transactions such as mergers and asset sales. See "The Recapitalization." CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS The information contained herein contains forward-looking statements that involve a number of risks and uncertainties. A number of factors could cause actual results, performance, achievements of the Company, or industry results to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to the following: the competitive environment in the Company's business in general and in the Company's specific market areas; changes in prevailing interest rates and the availability of and terms of financing to fund the anticipated growth of the Company's business; inflation; changes in costs of goods and services; economic conditions in general and in the Company's specific market areas; demographic changes; changes in or failure to comply with federal, state and/or local government regulations; liability and other claims asserted against the Company; changes in operating strategy or development plans; the ability to attract and retain qualified personnel; the ability to control inventory levels; the significant indebtedness of the Company; labor disturbances; the ability to negotiate agreements with suppliers on favorable terms; changes in the Company's capital expenditure plan; and other factors referenced herein. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Forward-looking statements regarding sales and EBITDA are particularly subject to a variety of assumptions, some or all of which may not be realized. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward- looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "pro forma," "anticipates" or "intends" or the negative of any thereof, or other variations thereon or comparable terminology, or by discussions of strategy or intentions. Given these uncertainties, prospective holders of New Notes are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligations to update any of these factors or to announce publicly the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. RISK FACTORS RELATING TO THE NOTES SUBORDINATION OF NOTES; ASSET ENCUMBRANCE The Notes are subordinated in right of payment to all existing and future Senior Debt of the Issuer, including the Bank Facilities. By reason of such subordination, in the event of bankruptcy, liquidation, reorganization or other winding-up of the Issuer or upon a default in payment with respect to, or the acceleration of, any Senior Debt of the Issuer, the assets of the Issuer will be available to pay obligations on the Notes only after all Senior Debt has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of 18 the Notes then outstanding. In addition, under certain circumstances, no payments may be made with respect to principal of or interest on the Notes if a default exists with respect to Senior Debt. If the Issuer incurs any additional pari passu debt, the holders of such debt would be entitled to share ratably with the holders of the Notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of the Issuer. This may have the effect of reducing the amount of proceeds paid to holders of the Notes. In addition, no cash payments may be made with respect to the Notes during the continuance of a payment default with respect to the Senior Debt and, under certain circumstances, no payments may be made with respect to the principal of (and premium, if any) on the Notes for a period of up to 179 days if a nonpayment default exists with respect to Senior Debt. The Subsidiary Guarantees are subordinated to the Guarantor Senior Debt of each Guarantor (which includes the Guarantors' guarantees under the Bank Facilities) to the same extent that the Notes are subordinated to Senior Debt of the Issuer, and the ability to collect under the Subsidiary Guarantees may therefore be similarly limited. See "Description of the New Notes." In addition, indebtedness outstanding under the Bank Facilities are secured by substantially all of the assets of the Issuer. As of June 30, 1998, the Issuer had outstanding approximately $86.1 million of Senior Debt (all of which was secured borrowings) and the Issuer had approximately $18.8 million of additional revolving borrowing availability under the Revolving Credit Facility. See "--Restrictive Debt Covenants," "Description of the Bank Facilities" and "Description of the New Notes." RISKS OF INCREASED LEVERAGE; ADDITIONAL SENIOR DEBT The Indenture and the Bank Facilities, subject to certain significant restrictive debt covenants contained therein, allow the Issuer to incur additional Senior Debt from time to time. A highly leveraged transaction in which the Company incurs significant additional Senior Debt could adversely affect the holders of the New Notes. Holders of Senior Debt of the Issuer will be entitled to receive payment in full of all obligations due in respect of such Senior Debt before holders of the New Notes will be entitled to receive any payment or distribution of any kind with respect to the New Notes and until all obligations with respect to Senior Debt are paid in full, any payment or distribution to which holders of New Notes would be entitled will be made to holders of Senior Debt. See "--Restrictive Debt Covenants" and "Description of the New Notes." RESTRICTIVE DEBT COVENANTS The Indenture and the Bank Facilities contain a number of significant covenants that, among other things, restrict the ability of the Issuer and its subsidiaries to dispose of assets, incur additional indebtedness, prepay indebtedness (including the Notes) or amend certain debt instruments (including the Indenture), pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by the Issuer or its subsidiaries, or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, under the Bank Facilities, the Issuer is required to comply with specified financial ratios and tests, including minimum interest coverage ratios, leverage ratios and fixed charge coverage ratios below a specified maximum. See "Description of the Bank Facilities" and "Description of the New Notes." The Issuer's ability to comply with these covenants may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any of these covenants or restrictions could result in a default under the Bank Facilities and/or the Indenture, which would permit the senior lenders, or holders of Notes, or both, as the case may be, to declare all amounts borrowed thereunder to be due and payable, together with accrued and unpaid interest and Liquidated Damages, if any thereon, and the commitments of the senior lenders to make further extensions of credit under the Bank Facilities could be terminated. If the Issuer were unable to repay its indebtedness to its senior lenders, those lenders could proceed against the collateral securing the indebtedness as described under "Description of the Bank Facilities." See "--Subordination of Notes; Asset Encumbrance." POSSIBLE INABILITY TO REPURCHASE NOTES UPON CHANGE OF CONTROL The Bank Facilities prohibit the Issuer from purchasing any Notes (except in certain limited amounts) and also provide that certain change of control events with respect to the Issuer will constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Issuer becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Issuer is prohibited from purchasing the Notes, the Issuer could seek the consent of its lenders to the purchase of the Notes or could attempt to refinance the borrowings that contain the prohibition. If the Issuer does not obtain that consent or repay those borrowings, the Issuer will remain prohibited from purchasing the Notes by the relevant Senior Debt. In that case, the Issuer's failure to purchase the tendered Notes would constitute an Event of Default 19 under the Indenture which would, in turn, constitute a default under the Bank Facilities and could constitute a default under other Senior Debt. In those circumstances, the subordination provisions in the Indenture would likely restrict payments to the holders of the Notes. Furthermore, no assurance can be given that the Issuer will have sufficient resources to satisfy its repurchase obligation with respect to the Notes following an occurrence of a Change of Control. See "Description of the Bank Facilities" and "Description of the New Notes." FRAUDULENT TRANSFER STATUTES Under federal or state fraudulent transfer laws, if a court were to find that, at the time the Notes and Subsidiary Guarantees were issued, the Issuer or a Guarantor, as the case may be, (i) issued the Notes or a Subsidiary Guarantee with the intent of hindering, delaying or defrauding current or future creditors or (ii) (A) received less than fair consideration or reasonably equivalent value for incurring the indebtedness represented by the Notes or a Subsidiary Guarantee, and (B)(1) was insolvent or was rendered insolvent by reason of the issuance of the Notes or such Subsidiary Guarantee, (2) was engaged, or about to engage, in a business or transaction for which its assets were unreasonably small or (3) intended to incur, or believed (or should have believed) it would incur, debts beyond its ability to pay as such debts mature (as all of the foregoing terms are defined in or interpreted under such fraudulent transfer statutes), such court could avoid all or a portion of the Issuer's or a Guarantor's obligations to holders of the Notes, subordinate the Issuer's or a Guarantor's obligations to holders of the Notes to other existing and future indebtedness of the Issuer or such Guarantor, as the case may be, the effect of which would be to entitle such other creditors to be paid in full before any payment could be made on the Notes, and take other action detrimental to holders of the Notes, including in certain circumstances, invalidating the Notes. In that event, there would be no assurance that any repayment on the Notes or under the Subsidiary Guarantees would ever be recovered by holders of the Notes. The definition of insolvency for purposes of the foregoing considerations varies among jurisdictions depending upon the federal or state law that is being applied in any such proceeding. However, the Issuer or a Guarantor generally would be considered insolvent at the time it incurs the indebtedness constituting the Notes or a Subsidiary Guarantee, as the case may be, if (i) the fair market value (or fair saleable value) of its assets is less than the amount required to pay its total existing debts and liabilities (including the probable liability on contingent liabilities) as they become absolute or matured or (ii) it is incurring debts beyond its ability to pay as such debts mature. There can be no assurance as to what standard a court would apply in order to determine whether the Issuer or a Guarantor was "insolvent" as of the date the Notes and Subsidiary Guarantees were issued, or that, regardless of the method of valuation, a court would not determine that the Issuer or a Guarantor was insolvent on that date. Nor can there be any assurance that a court would not determine, regardless of whether the Issuer or a Guarantor was insolvent on the date the Notes and Subsidiary Guarantees were issued, that the payments constituted fraudulent transfers on another ground. To the extent that proceeds from the sale of the Notes are used to repay indebtedness under the Bank Facilities, or to make a distribution to a stockholder on account of the ownership of capital stock, a court may find that the Issuer or a Guarantor did not receive fair consideration or reasonably equivalent value for the incurrence of the indebtedness represented by the Notes or a Subsidiary Guarantee, as the case may be. To the extent any Subsidiary Guarantees were avoided as a fraudulent conveyance or held unenforceable for any other reason, holders of the Notes would cease to have any claim in respect of such Guarantor and would be creditors solely of the Issuer and any Guarantor whose Subsidiary Guarantee was not avoided or held unenforceable. In such event, the claims of holders of the Notes against the issuer of an invalid Subsidiary Guarantee would effectively be subject to the prior payment of all liabilities and preferred stock claims of such Guarantor. There can be no assurance that, after providing for all prior claims and preferred stock interests, if any, there would be sufficient assets to satisfy the claims of holders of the Notes relating to any voided portions of any of the Subsidiary Guarantees. Based upon financial and other information currently available to it, management of the Issuer and each Guarantor believes that the Notes and the Subsidiary Guarantees are being incurred for proper purposes and in good faith and that the Issuer and each Guarantor (i) is solvent and will continue to be solvent after issuing the 20 Notes or its Subsidiary Guarantees, as the case may be, (ii) will have sufficient capital for carrying on its business after such issuance, and (iii) will be able to pay its debts as they mature. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, if a court were to avoid the Subsidiary Guarantees under fraudulent conveyance laws or other legal principles, or, by the terms of such Subsidiary Guarantees, the obligations thereunder were reduced as necessary to prevent such avoidance, or the Subsidiary Guarantees were released, the claims of other creditors of the Guarantors, including trade creditors, would to such extent have priority as to the assets of such Guarantors over the claims of holders of Notes. The Subsidiary Guarantees of the Notes by any Guarantor will be released upon the sale of such Guarantor or upon the release by the lenders under the Bank Facilities of such Guarantor's Subsidiary Guarantee of the Issuer's obligation under the Bank Facilities. The Indenture limits the ability of the Issuer and its Restricted Subsidiaries to incur additional indebtedness and to enter into agreements that would restrict the ability of any subsidiary to make distributions, loans or other payments to the Issuer. However, these limitations are subject to certain exceptions. See "Description of the New Notes." CONSEQUENCES OF FAILURE TO EXCHANGE Upon consummation of the Exchange Offers, subject to certain exceptions, holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will no longer be entitled to registration rights and will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon as a consequence of the issuance of the Old Notes pursuant to exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act (which, subject to certain limited exceptions, the Issuer will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Issuer does not currently anticipate that it will register the Old Notes under the Securities Act. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "The Exchange Offer--Terms of the Exchange Offer." ABSENCE OF PUBLIC MARKET The Old Notes have been designated as eligible for trading in the PORTAL market. Prior to this Exchange Offer, there has been no public market for the New Notes. If such a market were to develop, the New Notes could trade at prices that may be higher or lower than their principal amount. Neither the Issuer nor any of the Guarantors intends to apply for listing of the New Notes on any securities exchange or for quotation of the New Notes on The Nasdaq Stock Market's National Market or otherwise. The Initial Purchasers have previously made a market in the Old Notes, and the Issuer and the Guarantors have been advised that the Initial Purchasers currently intend to make a market in the New Notes, as permitted by applicable laws and regulations, after consummation of the Exchange Offer. The Initial Purchasers are not obligated, however, to make a market in the Old Notes or the New Notes and any such market-making activity may be discontinued at any time without notice at the sole discretion of the Initial Purchasers. There can be no assurance as to the liquidity of the public market for the New Notes or that any active public market for the New Notes will develop or continue. If an active public market does not develop or continue, the market price and liquidity of the New Notes may be adversely affected. 21 THE RECAPITALIZATION Holdings, the Stockholders and the Sponsors entered into the Recapitalization Agreement, which provided for the Recapitalization of Holdings. Pursuant to the Recapitalization Agreement, the Sponsors and other investors purchased from Holdings, for an aggregate purchase price of $47.0 million, Holdings Preferred Stock together with the Warrants to purchase shares of Holdings Common Stock at $0.01 per share until the Warrants expire in April 2008. The values assigned to the Warrants and Holdings Preferred Stock were $12.3 million and $34.7 million, respectively, based upon the sale prices of comparable preferred stock instruments in the marketplace. Dividends in respect of Holdings Preferred Stock accumulate at 12% per annum (representing a 15% per annum effective yield) to its mandatory redemption value of $47.0 million on the mandatory redemption date of October 15, 2009. Holdings has the option, at any time, to redeem Holdings Preferred Stock at a price equal to the Liquidation Preference plus all accumulated and unpaid dividends. The shares of Holdings Common Stock issuable upon the full exercise of the Warrants would represent 77.5% of the outstanding shares of Holdings Common Stock after giving effect to such issuance. In addition, Holdings purchased for $211.4 million, subject to certain working capital and debt adjustments, from the Stockholders all outstanding shares of Holdings' capital stock, other than the Retained Shares. The Retained Shares would represent 22.5% of the outstanding shares of Holdings Common Stock after giving effect to the full exercise of the Warrants, having the Implied Value of $15.0 million. The Equity Repurchase price of $13.98 per share was determined based upon a competitive process with potential investors managed by Donaldson, Lufkin & Jenrette Securities Corporation on behalf of the Company. Holdings, the Sponsors and the holders of the Retained Shares also entered into a Stockholders Agreement pursuant to which, among other things, the Sponsors have the ability to direct the voting of outstanding shares of Holdings Common Stock in proportion to their ownership of such shares as if the Warrants were exercised in full. Accordingly, the Sponsors have voting control of Holdings. In connection with the Recapitalization, Holdings organized the Issuer and, immediately prior to the consummation of the Recapitalization, Holdings transferred substantially all of its assets and liabilities to the Issuer. Holdings' current operation are, and future operations are expected to be, limited to owning the stock of the Issuer. The Issuer repaid substantially all of the Company's funded debt obligations existing immediately before the consummation of the Recapitalization in the amount of $51.8 million. Funding requirements for the Recapitalization (which was consummated on April 21, 1998) were $296.5 million (including the Implied Value of the Retained Shares) and were satisfied through the Retained Shares and the following: (i) the purchase by the Sponsors and other investors of Holdings Preferred Stock and the Warrants for $47.0 million ($45.8 million in cash and $1.2 million in officer notes receivables); (ii) $100.0 million of gross proceeds from the Offering; (iii) $80.0 million of borrowings under the Term Loan Facilities; (iv) $10.6 million of borrowings under the Revolving Credit Facility; and (v) $45.1 million of gross proceeds from the sale by Holdings of the Holdings Senior Discount Debentures in a separate offering. The Equity Repurchase, the Debt Retirement, the issuance and sale by Holdings of Holdings Preferred Stock, the Warrants and the Holdings Senior Discount Debentures and the Offering and the borrowing by the Issuer of funds under the Bank Facilities (which proceeds were distributed to Holdings) were effected in connection with the Recapitalization. The Recapitalization was accounted for as a recapitalization transaction for accounting purposes. 22 The following table sets forth the sources and uses of funds in connection with the Recapitalization:
(IN THOUSANDS) ---------- SOURCES: Bank Facilities (1)............................................. $ 90,582 Notes offered in the Offering................................... 100,000 Holdings Senior Discount Debentures............................. 45,105 Holdings Preferred Stock (2).................................... 45,783 Implied Value of the Retained Shares (3)........................ 15,000 -------- Total sources of funds........................................ $296,470 ======== USES: Equity Repurchase............................................... $211,421 Debt Retirement................................................. 51,834 Implied Value of the Retained Shares (3)........................ 15,000 Transaction fees and expenses (4)............................... 18,215 -------- Total uses of funds........................................... $296,470 ========
- -------- (1) Represents (i) $10.6 million drawn under the $25.0 million Revolving Credit Facility, (ii) $30.0 million under the Term A Loan Facility and (iii) $50.0 million under the Term B Loan Facility. See "Description of the Bank Facilities." (2) Represents cash proceeds associated with the Holdings Preferred Stock, excluding the officer notes receivable of $1.2 million. (3) Based solely on the purchase price per share to be paid for shares of Holdings Common Stock in the Equity Repurchase, multiplied by the number of the Retained Shares. The Implied Value of the Retained Shares does not represent a purchase, sale or other change in such equity investment for accounting or tax purposes or any funds or proceeds paid to or used by the Company in the Recapitalization, and does not necessarily represent a market valuation for the Retained Shares. (4) Includes deferred financing costs of $9.8 million, legal and advisory fees of $4.7 million, management bonus payments of $1.6 million, bridge financing fees of $1.0 million, compensation expense related to repurchase of common stock upon exercise of stock options of $0.6 million, and other recapitalization expenses of $0.5 million. All costs except for the deferred financing cost of $9.8 million and $1.3 million in legal and advisory fees have been expensed by the Company in the period which includes the date of the Recapitalization. NEW CHIEF EXECUTIVE OFFICER In connection with the Recapitalization, Naresh K. Nakra became President, CEO and a director of Diamond Brands. Dr. Nakra, 52, has more than 25 years of experience in the branded consumer products and food industries. From 1993 to 1998, Dr. Nakra served as President and CEO of Gruma Corporation, a U.S. subsidiary of Gruma, S.A., a Mexico-based multinational company. Gruma Corporation's subsidiaries include Mission Foods Corporation, a leading manufacturer and marketer of tortilla products, and Azteca Milling, a leading manufacturer and marketer of corn flour. These businesses sell and distribute products manufactured in 14 facilities to retail and food service customers in the United States, Latin America, Europe and the Pacific Rim. Based on IRI data, Gruma Corporation achieved significant increases in sales and market share during Dr. Nakra's tenure. 23 THE SPONSORS SEAVER KENT & COMPANY, LLC Seaver Kent is a private equity firm located in Menlo Park, California, that specializes in private, control investments in middle-market companies. Seaver Kent was founded in October 1996 by Alexander M. Seaver and Bradley R. Kent, both of whom were formerly general partners of InterWest Partners, one of the nation's leading venture capital firms. The principals of Seaver Kent have successfully partnered with management to build businesses through both internal growth and strategic acquisitions, and in particular have extensive experience investing in consumer and household products companies. Portfolio companies in which funds managed by the principals of Seaver Kent have made investments include AMX Corporation, Artco-Bell Holding, Bojangles', Cafe Valley, Favorite Brands International, Heidi's Fine Desserts and MidWest Folding Products. TEXAS PACIFIC GROUP TPG was founded by David Bonderman, James G. Coulter and William S. Price, III in 1992 to pursue public and private investment opportunities through a variety of methods, including leveraged buyouts, recapitalizations, joint ventures, restructurings and strategic public securities investments. The principals of TPG manage TPG Partners, L.P. and TPG Partners II, L.P., both Delaware limited partnerships, with aggregate committed capital of over $3.2 billion. Among TPG's other investments are branded consumer products companies Beringer Wine Estates, Del Monte Foods Company, Ducati Motor, Favorite Brands International and J. Crew. Other TPG portfolio companies include America West Airlines, Belden & Blake Corporation, Denbury Resources, Genesis ElderCare, Paradyne, Virgin Entertainment and Vivra Specialty Partners. In addition, the principals of TPG led the $9 billion reorganization of Continental Airlines in 1993. USE OF PROCEEDS There will be no cash proceeds payable to the Issuer or the Guarantors from the issuance of the New Notes pursuant to the Exchange Offer. The proceeds from the sale of the Old Notes were used for the retirement of debt, to consummate the other components of the Recapitalization and to pay related fees and expenses. CAPITALIZATION The following table sets forth as of June 30, 1998 the actual capitalization of the Issuer. See "The Recapitalization," "Use of Proceeds," "Description of the Bank Facilities" and "Description of the New Notes." This table should be read in conjunction with the "Selected Historical and Pro Forma Consolidated Financial Data" included elsewhere in this Prospectus.
AS OF June 30, 1998 ----------------- (IN THOUSANDS) Debt (including current maturities): Revolving Credit Facility (1).............................. $ 6,250 Term Loan Facilities (2)................................... 79,875 Notes offered in the Offering.............................. 100,000 Total debt............................................... 186,125 Stockholders' equity (deficit)............................... (96,547) Total capitalization.................................. $ 89,578
- -------- (1) Represents the portion drawn under the $25.0 million Revolving Credit Facility. Future borrowing under the Revolving Credit Facility will be available for general corporate purposes. See "Description of the Bank Facilities." (2) The Term Loan Facilities have an aggregate capacity of $80.0 million and are comprised of a $30.0 million Term A Loan Facility and a $50.0 million Term B Loan Facility. See "Description of the Bank Facilities." 24 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA The following unaudited pro forma consolidated financial data of the Issuer (the "Unaudited Pro Forma Consolidated Financial Data") include the unaudited pro forma consolidated statement of operations for the year ended December 31, 1997 and for the six months ended June 30, 1998 (the "Unaudited Pro Forma Consolidated Statements of Operations"). The Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997 is based on the audited consolidated statement of operations of Holdings, and is adjusted to give effect to the Recapitalization and the Empire Acquisition as if they had occurred on January 1, 1997. The Unaudited Pro Forma Consolidated Statement of Operations data for the six months ended June 30, 1998 is based on the unaudited consolidated statement of operations of Holdings, and is adjusted to give effect to the Recapitalization as if it had occurred on January 1, 1997. Pro forma adjustments as applied to the respective historical consolidated financial information of Holdings reflect and account for the Recapitalization as a recapitalization. Accordingly, the historical basis of Holdings' assets and liabilities has not been impacted by the Recapitalization. The Recapitalization and the Empire Acquisition and their related adjustments are described in the accompanying notes. The pro forma adjustments are based upon certain assumptions that management of the Issuer believes are reasonable in the circumstances. The pro forma adjustments are preliminary in nature. The Equity Repurchase price is subject to adjustment based upon the amount of working capital, as defined, as of April 21, 1998. The final determination of the working capital adjustment is contingent upon the resolution of a dispute between the Stockholders and Sponsors in the amount of $1.4 million. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. The Unaudited Pro Forma Consolidated Financial Data should be read in conjunction with the notes included herewith, Holdings' audited consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. The Unaudited Pro Forma Consolidated Financial Data do not purport to represent what the Issuer's results of operations or financial position would have been had the Recapitalization and the Empire Acquisition occurred on the assumed dates, or to project the Issuer's results of operations or financial position for any future period or date. The Unaudited Pro Forma Consolidated Statements of Operations do not give effect to non-recurring charges directly attributable to the Recapitalization. 25 UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
HISTORICAL PRO FORMA ADJUSTMENTS ----------------------- --------------------------------- EMPIRE HOLDINGS (1) EMPIRE (2) ACQUISITION RECAPITALIZATION PRO FORMA ------------ ---------- ----------- -------------------- --------- (IN THOUSANDS) Net sales............... $118,072 $2,642 $ -- $ -- $120,714 Cost of sales........... 78,582 1,946 -- -- 80,528 -------- ------ ----- -------- -------- Gross profit.......... 39,490 696 -- -- 40,186 Selling, general and administrative expenses............... 11,414 310 -- -- 11,724 Goodwill amortization... 1,521 -- 160 (3) -- 1,681 -------- ------ ----- -------- -------- Operating income (loss)............... 26,555 386 (160) -- 26,781 Interest expense........ 4,550 64 270 (4) 12,946 (5) 17,830 -------- ------ ----- -------- -------- Income (loss) before income taxes......... 22,005 322 (430) (12,946) 8,951 Provision for income taxes.................. 1,376 -- -- 2,424 (6) 3,800 -------- ------ ----- -------- -------- Income (loss) from continuing operations before nonrecurring charges directly atrributable to the Recapitali- zation................ $ 20,629 $ 322 $(430) $(15,370) $ 5,151 ======== ====== ===== ======== ========
FOR THE SIX MONTHS ENDED JUNE 30, 1998
HISTORICAL RECAPITALIZATION PRO FORMA ---------- ---------------- --------- (IN THOUSANDS) Net sales............................. $58,558 $ -- $58,558 Cost of sales......................... 41,348 -- 41,348 ------- ------- ------- Gross profit........................ 17,210 -- 17,210 Selling, general and administrative expenses............................. 6,540 -- 6,540 Goodwill amortization................. 841 -- 841 ------- ------- ------- Operating income.................... 9,829 -- 9,829 Interest expense...................... 6,155 2,760 (5) 8,915 ------- ------- ------- Income (loss) before income taxes... 3,674 (2,760) 914 Provision (benefit) for income taxes.. (794) 1,194 (6) 400 ------- ------- ------- Income (loss) from continuing operations before nonrecurring charges directly atrributable to the Recapitalization............. $ 4,468 $ (3,954) $ 514 ======= ======== ======
See accompanying notes to Unaudited Pro Forma Consolidated Statements of Operations. 26 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (1) Includes results of operations of Empire for the period from March 1, 1997 to December 31, 1997. (2) Represents the results of operations of Empire for the period from January 1, 1997 to February 28, 1997. (3) Reflects the additional amortization of goodwill related to the Empire Acquisition for the period from January 1, 1997 to February 28, 1997. (4) Reflects two months of interest expense related to the Empire Acquisition for the period from January 1, 1997 to February 28, 1997 based on borrowings of $24.7 million at an annualized interest rate of 8.125% less the actual interest expense of $0.1 million. (5) Gives effect to the increase in estimated cash and non-cash interest expense from the use of borrowings to finance the Recapitalization:
FOR THE SIX FOR THE YEAR MONTHS ENDED ENDED DECEMBER 31, JUNE 30, 1997 1998 ------------------ ------------- (IN THOUSANDS) Interest on the Notes (a)................ $10,125 $5,062 Interest on the Bank Facilities: Revolving Credit Facility (b).......... 484 242 Term A Loan Facility (b)............... 2,325 1,163 Term B Loan Facility (c)............... 4,000 2,000 ----- ----- Total cash interest expense............................. 16,934 8,467 Amortization of deferred financing costs. 896 448 ----- ----- Total pro forma interest expense..... 17,830 8,915 Less: amount in historical statements of operations (Holdings and Empire)................... 4,614 6,155 Less: pro forma interest expense adjustment for Empire................... 270 -- ------- ------ Adjustment to interest expense........... $12,946 $2,760 ======= ======
-------- (a) Interest is calculated at an effective interest rate of 10.125%. (b) Interest is calculated at an effective interest rate of 7.75%. (c) Interest is calculated at an effective interest rate of 8.00%. A 1/8% variance in the effective interest rate would have increased/decreased interest expense by $0.2 million for the year ended December 31, 1997 and $0.1 million for the six months ended June 30, 1998. (6) Estimated income tax effects of (i) the Company's election to change its status from a Subchapter S corporation to a Subchapter C corporation as of January 1, 1997, in conjunction with the Recapitalization and (ii) pro forma interest expense and goodwill amortization adjustments. 27 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated historical financial data of the Company, for each of the years in the five-year period ended December 31, 1997, which have been audited by Arthur Andersen LLP, independent public accountants, and for the unaudited six months ended June 30, 1997 and 1998. The selected historical consolidated financial data for the years ended December 31, 1995, 1996 and 1997 are derived from and should be read in conjunction with the audited consolidated financial statements of Holdings and the related notes thereto included elsewhere in this Prospectus. The selected historical consolidated financial data for the years ended December 31, 1993 and 1994 are derived from audited financial statements of Holdings that are not included in this Prospectus. The selected historical consolidated financial data for the six months ended June 30, 1997 and 1998 are derived from unaudited consolidated financial statements for such periods included elsewhere in this Prospectus. The unaudited pro forma consolidated statement of operations data of the Issuer for the year ended December 31, 1997 gives effect to the Recapitalization and the Empire Acquisition as if they had occurred on January 1, 1997. The unaudited pro forma consolidated statement of operations data of the Issuer for the six months ended June 30, 1998 gives effect to the Recapitalization as if it had occurred on January 1, 1997. The unaudited pro forma consolidated financial data do not purport to represent what the Issuer's or the Company's financial condition or results of operations would actually have been had the Recapitalization and the Empire Acquisition in fact occurred on the assumed dates, nor do they project the Issuer's and/or the Company's financial condition or results of operations for any future period or date. The financial data set forth below should be read in conjunction with the audited consolidated financial statements and the related notes thereto, "Unaudited Pro Forma Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," all included elsewhere in this Prospectus.
SIX MONTHS YEAR ENDED DECEMBER 31, PRO FORMA ENDED JUNE 30, PRO FORMA -------------------------------------------- DECEMBER 31, ---------------- JUNE 30, 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------- ------- ------- ------- -------- ------------ ------- ------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales............... $33,538 $31,289 $77,659 $90,201 $118,072 $120,714 $54,675 $58,558 $58,558 Cost of sales........... 22,808 23,066 56,490 63,032 78,582 80,528 37,630 41,348 41,348 ------- ------- ------- ------- -------- -------- ------- ------- ------- Gross profit........... 10,730 8,223 21,169 27,169 39,490 40,186 17,045 17,210 17,210 Selling, general and administrative expenses............... 4,307 4,153 10,152 9,148 11,414 11,724 5,334 6,540 6,540 Goodwill amortization... -- -- 600 720 1,521 1,681 680 841 841 ------- ------- ------- ------- -------- -------- ------- ------- ------- Operating income....... 6,423 4,070 10,417 17,301 26,555 26,781 11,031 9,829 9,829 Interest expense........ 639 492 3,963 3,858 4,550 17,830 2,160 6,155 8,915 ------- ------- ------- ------- -------- -------- ------- ------- ------- Income before provision for income taxes...... 5,784 3,578 6,454 13,443 22,005 8,951 8,871 3,674 914 Provision for income taxes.................. 1,827 -- 2,352 5,807 1,376 3,800 1,376 (794) 400 ------- ------- ------- ------- -------- -------- ------- ------- ------- Net income............. $ 3,957 $ 3,578 $ 4,102 $ 7,636 $ 20,629 $ 5,151 $ 7,495 $ 4,468 $ 514 ======= ======= ======= ======= ======== ======== ======= ======= ======= UNAUDITED PRO FORMA INCOME TAX DATA: Income before income taxes.................. $ 5,784 $ 3,578 $ 6,454 $13,443 $ 22,005 $ 8,951 $ 8,871 $ 3,674 $ 914 Provision for income taxes(1)............... 2,140 1,324 2,700 5,807 9,000 3,800 3,500 1,500 400 ------- ------- ------- ------- -------- -------- ------- ------- ------- Pro forma net income.... $ 3,644 $ 2,254 $ 3,754 $ 7,636 $ 13,005 $ 5,151 $ 5,371 $ 2,174 $ 514 ======= ======= ======= ======= ======== ======== ======= ======= ======= OTHER DATA: Depreciation and amortization (2)....... $ 1,207 $ 1,250 $ 3,761 $ 4,204 $ 4,668 $ 4,856 $ 2,255 $ 2,105 $ 2,105 Cash flows from operating activities .. 4,881 4,371 4,453 13,847 21,313 -- 7,831 4,473 -- Cash flows used in investing activities .. (836) (585) (44,539) (1,979) (28,746) -- (25,946) (1,273) -- Cash flows from (used in) financing activities .. (1,710) (3,082) 36,652 (11,868) 7,433 -- 18,115 (3,200) -- EBITDA (3).............. 7,630 5,320 14,178 21,505 31,223 31,637 13,286 11,934 11,934 EBITDA margin (4)....... 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 24.3% 20.4% 20.4% Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 1,250 $1,273 $ 1,273 28 CREDIT DATA: Pro Forma Pro Forma December 31, June 30, 1997 1998 ------------ --------- Cash interest expense............................................ $ 16,934 -- -- $ 8,467 Ratio of EBITDA to cash interest expense......................... 1.9x -- -- 1.4x Ratio of total debt to EBITDA.................................... 5.8x -- -- N/A Ratio of earnings to fixed charges (5)........................... 1.5x -- -- 1.1x As of As of December 31, June 30 ---------------------------------------------------- ------- 1993 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- ---- (in thousands) Balance Sheet Data: Working capital ........ $ 5,325 $ 6,483 $ 6,989 $ 5,409 $13,247 $ 27,313 Total assets ........... 16,720 17,328 69,630 66,503 94,550 106,874 Total debt, including current maturities ... 7,629 7,347 46,713 34,845 49,497 186,125 Stockholders' equity (deficit) ............ 5,246 6,024 10,118 17,754 27,930 (96,547)
- -------- (1) For the years ended December 31, 1993, 1995 and 1996 and the period from April 21, 1998 to June 30, 1998, the Company was a Subchapter C corporation for federal income tax purposes. For the years ended December 31, 1994 and 1997, the six months ended June 30, 1997 and the period from January 1, 1998 to April 20, 1998, the Company was a Subchapter S corporation for federal income tax purposes. See "Selected Historical and Pro Forma Consolidated Financial Data" for unaudited pro forma income tax data. (2) Excludes amortization of deferred financing costs. (3) EBITDA represents operating income plus depreciation and amortization (excluding amortization of deferred financing costs). The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. Holders tendering Old Notes in the Exchange Offer should consider the following factors in evaluating such measures: EBITDA and related measures (i) should not be considered in isolation, (ii) are not measures of performance calculated in accordance with GAAP, (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Issuer's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Issuer's operating performance or measures of its liquidity. Additionally, because all companies do not calculate EBITDA and related measures in a uniform fashion, the calculations presented in this Prospectus may not be comparable to other similarly titled measures of other companies. (4) EBITDA margin represents EBITDA as a percentage of net sales. (5) The ratio of earnings to fixed charges has been calculated by dividing income before income taxes and fixed charges by fixed charges. Fixed charges for this purpose include interest expense, amortization of deferred financing costs and one-third of operating lease payments (the portion deemed to be representative of the interest factor). 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with, and is qualified in its entirety by, "Selected Historical and Pro Forma Consolidated Financial Data," the audited consolidated financial statements of Holdings for the three-year period ended December 31, 1997 and the notes thereto, and the unaudited consolidated financial statements of Holdings for the six months ended June 30, 1997 and 1998 and the notes thereto included elsewhere in this Prospectus. GENERAL The Company is a leading manufacturer and marketer of a broad range of consumer products, including Wooden Lights, Cutlery, Candles and Woodenware. The Company's products are marketed primarily under the nationally recognized Diamond, Forster and Empire brand names, which have been in existence since 1881, 1887 and 1950, respectively. The Company derives its revenue primarily from the sale of its products to substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. During the year ended December 31, 1997, sales to the Company's top 10 customers accounted for approximately 39% of the Company's pro forma gross sales, with one customer, Wal-Mart and its subsidiary, Sam's Club, accounting for approximately 19% of the Company's pro forma gross sales. The Company's ability to maintain and increase its sales depends on a variety of factors including its competitive position in such areas as price, quality, brand identity, distribution and customer service. See "Risk Factors." The Company's products are manufactured at its four automated manufacturing facilities located in Cloquet, Minnesota, East Wilton, Maine, Strong, Maine, and Kansas City, Kansas. Net sales, as calculated by the Company, are determined by subtracting discounts and allowances from gross sales. Discounts and allowances consist of price promotions, cash discounts, corporate rebates, slotting fees, consumer coupons, co-op advertising and unsaleables. The Company's cost of sales and its resulting gross margin (defined as gross profit as a percentage of net sales) are principally determined by the cost of raw materials, the cost of the labor to manufacture its products, the overhead expenses of its manufacturing facilities, warehouse costs and freight expenses to its customers. In recent years, the Company has focused on improving its gross margin by seeking to: (i) consolidate manufacturing operations; (ii) reduce headcount and expenses in manufacturing; and (iii) increase operating efficiencies through capital projects with rapid returns on investment. Polystyrene resin, a commodity whose market price fluctuates with supply and demand, is a significant component of cost of sales in the Company's Cutlery products. In order to mitigate the impact of changing polystyrene resin prices, the Company in January 1997 entered into a three-year supply contract with a major supplier of polystyrene resin, under which the Company believes it receives the lowest price available to any customer purchasing similar volume, and receives short-term price protection during periods of rising prices. During periods of rising prices, the Company generally has been able to pass through the majority of the polystyrene resin price increases to its customers on a delayed basis. During periods of declining polystyrene resin prices, the Company generally has reduced prices to its customers. Selling, general and administrative expenses consist primarily of selling expenses, broker commissions and administrative costs. Broker commissions and certain selling expenses generally vary with sales volume while administrative costs are relatively fixed in nature. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, gross sales and gross sales as a percentage of the Company's aggregate net sales for the Company's major product groups, as well as the Company's aggregate net sales, EBITDA and EBITDA margin. 30
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ----------------------------------------- --------------------------- 1995 1996 1997 1997 1998 ------------ ------------ ------------- ----------- ------------- (DOLLARS IN MILLIONS) Wooden Lights........... $17.6 22.6% $19.8 22.0% $ 20.9 17.7% $ 9.6 17.6% $ 9.8 16.7% Cutlery................. 27.9 35.9 32.6 36.1 35.4 30.0 18.7 34.2 20.3 34.6 Candles................. -- -- -- -- 25.5 21.6 6.7 12.3 11.1 18.9 Woodenware.............. 25.7 33.1 28.7 31.8 30.2 25.6 15.6 28.6 15.8 27.0 Institutional/Other..... 13.8 17.8 17.5 19.4 16.7 14.1 9.0 16.3 8.3 14.2 ----- ----- ----- ----- ------ ----- ---- ---- ---- ---- Total gross sales...... 85.0 109.4 98.6 109.3 128.7 109.0 59.6 109.0 65.3 111.4 Discounts and allow- ances.................. (7.3) (9.4) (8.4) (9.3) (10.6) (9.0) (4.9) 9.0 (6.7) (11.4) ----- ----- ----- ----- ------ ----- ---- ---- ---- ---- Net sales.............. $77.7 100.0% $90.2 100.0% $118.1 100.0% $ 54.7 100.0% $ 58.6 100% ===== ===== ===== ===== ====== ===== ==== ==== ==== ==== EBITDA (1).............. $14.2 18.3% $21.5 23.8% $ 31.2 26.4% $ 13.4 24.5% $ 5.8 9.9% ===== ===== ===== ===== ====== ====== One Time/ Nonrecurring(2) ...... -- -- 2.0 3.4 ---- ---- ---- ---- Adjusted EBITDA (3) .... $ 13.4 24.5% $ 13.9 23.7% ==== ==== ==== ====
- -------- (1) EBITDA represents operating income plus depreciation and amortization (excluding amortization of deferred financing costs). The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. Holders tendering Old Notes in the Exchange Offer should consider the following factors in evaluating such measures: EBITDA and related measures (i) should not be considered in isolation, (ii) are not measures of performance calculated in accordance with GAAP, (iii) should not be construed as alternatives or substitutes for income from operations, net income or cash flows from operating activities in analyzing the Issuer's operating performance, financial position or cash flows (in each case, as determined in accordance with GAAP) and (iv) should not be used as indicators of the Issuer's operating performance or measures of its liquidity. Additionally, because all companies do not calculate EBITDA and related measures in a uniform fashion, the calculations presented in this Prospectus may not be comparable to other similarly titled measures of other companies. (2) Represents one time/non recurring charges primarily in the Candle division, incurred in connection with the Recapitalization, relating to unusual customer allowances ($0.3 million), inventory shrinkage ($0.4 million), devaluation of inventory ($0.3 million ), write down for obsolescence ($0.1 million), severance of candle division chief operating officer ($0.1 million), write-off of receivables relating to the Venture Stores bankruptcy ($0.1 million) and recruiting and relocation costs to strengthen management team ($0.2 million). The Company has made a claim for a refund of the Equity Repuchase amount, totaling $1.5 million, under the Recapitalization Agreement. In addition, the Company also incurred a devaluation of inventory to actual cost at its Maine facilities of $0.5 million. (3) Represents EBITDA excluding Recapitalization Expenses and One Time/Nonrecurring Expenses. The following table sets forth, for the periods indicated, certain historical statement of operations data and such data as a percentage of net sales for the Company.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, --------------------------------------- --------------------------- 1995 1996 1997 1997 1998 ----------- ------------ ------------ ----------- ----------- (DOLLARS IN MILLIONS) Net sales............... $77.7 100.0% $ 90.2 100.0% $118.1 100.0% $54.7 100.0% $58.6 100.0% Cost of sales........... 56.5 72.7 63.0 69.8 78.6 66.6 37.7 68.9 41.4 70.6% ----- ----- ------ ----- ------ ----- ----- ----- ----- ----- Gross profit............ 21.2 27.3 27.2 30.2 39.5 33.4 17.0 31.1 17.2 29.4 Selling, general and administra- tive expenses.......... 10.1 13.0 9.2 10.2 11.4 9.6 5.3 9.7 6.5 11.1 Goodwill amortization... 0.6 0.8 0.7 0.8 1.5 1.3 0.7 1.3 0.8 1.4 ----- ----- ------ ----- ------ ----- ----- ----- ----- ----- Operating income(loss).. 10.5 13.5 17.3 19.2 26.6 22.5 11.0 20.1 9.8 16.7 Interest expense........ 4.0 5.1 3.9 4.3 4.6 3.9 2.2 4.0 6.2 10.6 ----- ----- ------ ----- ------ ----- ----- ----- ----- ----- Income (loss) before provision for income taxes....... $ 6.5 8.4% $ 13.4 14.9% $ 22.0 18.6% $ 8.8 16.1% $(3.7) (6.3%) ===== ===== ====== ===== ====== ===== ===== ===== ===== =====
31 SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 NET SALES. Net sales for the six months ended June 30, 1998, increased 7.1% to $58.6 million from $54.7 million for the six months ended June 30 1997, primarily due to the Empire Acquisition which added net sales of $3.0 million. The remaining increase in 1998 net sales resulted from the continued growth in Cutlery, and the introduction of Reflections candles into the grocery trade, which added $2.0 million in gross sales. The increase in gross sales was offset somewhat by increased promotional and slotting allowance spending of $1.8 million, primarily for Cutlery and Candles, including $0.3 million of Candle allowances. Gross sales of Cutlery products increased from 8.6% to $20.3 million, primarily as a result of growth in both branded and private label products. GROSS PROFIT. Gross profit increased $0.2 million to $17.2 million for the six months ended June 30, 1998 from the six months ended June 30, 1997, while gross margin declined from 31.1% to 29.4%. The increased gross profit reflects the impact of the Empire Acquisition ($0.8 million) and the increased volume of sales reflected above, offset by certain inventory and production problems incurred with the candle product line. The Company has made a claim against the former shareholders under the Recapitalization Agreement to recover these costs. Management believes these inventory problems were one time and nonrecurring in nature and that the production problems are being addressed. In addition, the Company incurred a devaluation of inventory to actual cost in its Maine facilities of $0.5 million. Excluding the effects of these factors, gross margin would have been 31.9% SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net sales increased to 11.1% for the six months ended June 30, 1998 from 9.7% in the six months ended June 30, 1997. The Company had non-recurring costs relating to the severance of the Chief Operating Officer of the Candle division ($0.1 million), the write-off of receivables as a result of the Venture Stores bankruptcy ($0.1 million) and expensing of recruiting and relocation costs ($0.2 million) to strengthen the management team. In addition, the Company incurred higher expenses to support the introduction of Reflections candles into the grocery trade. GOODWILL AMORTIZATION. Goodwill amortization in the six months ended June 30, 1998 increased to $0.8 million, from $0.7 million in the six months ended June 30, 1997 as the result of the Empire Acquisition. INTEREST EXPENSE. Interest expense for the six months ending June 30, 1998 increased to $6.2 million from $2.2 million for the six months ended June 30, 1997. This increase is the result of increased debt load and deferred financing costs associated with the Recapitalization. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 NET SALES. Net sales in 1997 increased 30.9% to $118.1 million from $90.2 million in 1996. This increase primarily reflected the impact of the Empire Acquisition in February 1997, which contributed net sales of $24.0 million. Without giving effect to the Empire Acquisition, net sales in 1997 increased 4.3% to $94.1 million. The remaining increase in 1997 net sales principally resulted from continued growth in gross sales of Wooden Lights, Cutlery and Woodenware products, partially offset by a slight decline in gross sales of Institutional/Other products (reflecting a $0.9 million one-time order of advertising matches in 1996) and increased discounts and allowances resulting from additional sales volume. Gross sales of Cutlery products increased 8.6% to $35.4 million, primarily as a result of growth in private label sales. Gross sales of Woodenware and Wooden Lights increased 5.2% and 5.6% to $30.2 million and $20.9 million, respectively, principally as a result of adding new customers. GROSS PROFIT. Gross profit in 1997 increased 45.2% to $39.5 million from $27.2 million in 1996. Gross margin increased to 33.4% in 1997 from 30.2% in 1996. The increase in gross profit primarily reflected the impact of the Empire Acquisition, which contributed gross profit of $6.2 million. Without giving effect to the Empire Acquisition, gross profit increased 22.4% to $33.3 million, and gross margin increased to 35.4%. Gross margin was significantly impacted by: (i) reduced clothespin manufacturing costs as a result of lower headcount and raw material costs and higher manufacturing yields; (ii) reduced Cutlery manufacturing costs as a result of lower polystyrene resin prices; (iii) operating efficiencies achieved through capital projects with rapid returns on investment; (iv) increased sales volume in the Company's Wooden Lights, Cutlery and Woodenware products; and (v) the lower gross margins associated with the Candles operations of Empire. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net sales decreased to 9.6% in 1997 from 10.2% in 1996. The decrease in selling, general and administrative expenses as a percentage of net sales resulted primarily from spreading certain fixed and semi-fixed costs over a larger sales base, and a continued emphasis by the Company on reducing administrative costs. Excluding the Empire Acquisition, selling, general and administrative expenses decreased to 9.9% of net sales in 1997. GOODWILL AMORTIZATION. Goodwill amortization in 1997 increased to $1.5 million from $0.7 million in 1996 as a result of the Empire Acquisition. INTEREST EXPENSE. Interest expense in 1997 increased to $4.6 million from $3.9 million in 1996. The increase was due primarily to additional borrowings under the Company's existing bank credit facilities in connection with the Empire Acquisition in February 1997. 32 PROVISION FOR INCOME TAXES. As of January 1, 1997, the Company changed its status from a Subchapter C corporation to a Subchapter S corporation for federal income tax purposes. As a Subchapter S corporation, the Company's stockholders were primarily responsible for income taxes with respect to the Company's income. The effective income tax rate of 6.2% for the year ended December 31, 1997 resulted from the removal of the deferred tax assets and liabilities as of December 31, 1996 due to the election of Subchapter S corporation status. The effective income tax rate of 43.2% for the year ended December 31, 1996 varied from the federal statutory rate primarily as a result of non-deductible goodwill amortization and state income taxes. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 NET SALES. Net sales in 1996 increased 16.1% to $90.2 million from $77.7 million in 1995. This increase primarily reflected: (i) a full year of Forster operations in 1996 as compared to approximately 10 months in 1995; (ii) continued growth in the sales volume of Cutlery products; (iii) increased sales of Wooden Lights products as a result of increases in unit volumes and prices; (iv) a 3% unit price increase in toothpick products; and (v) a $0.9 million one-time order of advertising matches. GROSS PROFIT. Gross profit in 1996 increased 28.3% to $27.2 million from $21.2 million in 1995. Gross margin increased to 30.2% in 1996 from 27.3% in 1995. The increases in gross profit and gross margin principally resulted from: (i) increased sales volume achieved in connection with the Forster Acquisition; (ii) cost savings achieved in connection with the consolidation of the manufacturing of the toothpick and clothespin products into a single facility; (iii) increased sales volume of higher-margin Wooden Lights products; (iv) declining polystyrene resin prices; and (v) reduced Cutlery manufacturing costs through investments in automated equipment that lowered headcount and increased efficiency. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net sales decreased to 10.2% in 1996 from 13.0% in 1995. The decrease in selling, general and administrative expenses was due primarily to cost savings achieved in connection with the Forster Acquisition, as well as spreading certain fixed and semi-fixed costs over a larger sales base and a continued emphasis by the Company on reducing administrative costs. GOODWILL AMORTIZATION. Goodwill amortization in 1996 increased to $0.7 million from $0.6 million in 1995 as a result of a full year of goodwill amortization in connection with the Forster Acquisition. INTEREST EXPENSE. Interest expense in 1996 decreased to $3.9 million from $4.0 million in 1995. This decrease was due primarily to the Company's payments on indebtedness incurred in the Forster Acquisition in March 1995 and lower variable interest rates associated with the Company's term note and revolving line of credit during 1996 compared to 1995. PROVISION FOR INCOME TAXES. The effective income tax rate increased to 43.2% for the year ended December 31, 1996 from 36.4% for the year ended December 31, 1995. The 1995 effective tax rate decreased due to the recognition of a net deferred tax asset of $0.3 million as a result of the Company's election to change its status from a Subchapter S corporation to a Subchapter C corporation for federal income tax purposes effective January 1, 1995. The 1995 and 1996 effective income tax rates varied from the federal statutory rate primarily as a result of non-deductible goodwill amortization and state income taxes. LIQUIDITY AND CAPITAL RESOURCES HISTORICAL Cash provided by operating activities was $7.8 million and $4.5 million for the six months ended June 30, 1997 and 1998, respectively. Cash provided by operating activities was $4.5 million, $13.8 million and $21.3 million for the years ended December 31, 1995, 1996 and 1997, respectively. The Company's primary cash requirements have been to fund working capital, maintenance capital expenditures and acquisitions. The 33 Company has generally used internally generated funds and amounts available under its existing revolving credit facility as its primary sources of liquidity, with borrowings being utilized principally to fund acquisitions. In 1997, the Company invested $24.7 million in the Empire Acquisition, and in 1995 the Company invested $42.4 million in the Forster Acquisition. These acquisitions were funded from borrowings under senior bank credit facilities. Capital expenditures (excluding acquisition costs) for the six months ended June 30, 1997 and 1998 were $1.3 million. Capital expenditures (excluding acquisition costs) for the year ended December 31, 1997 were $4.1 million compared to $2.0 million for the year ended December 31, 1996 and $1.9 million for the year ended December 31, 1995. This higher level of capital spending in 1997 was primarily attributed to facility consolidation and investments in new candle lines at the Company's Kansas City facility. The Company's historical capital expenditures have been primarily used to expand capacity and improve manufacturing efficiencies. The Company currently expects its capital expenditures for 1998 to be approximately $2.5 million. AFTER THE RECAPITALIZATION Holdings, the Stockholders and the Sponsors entered into the Recapitalization Agreement, which provided for the Recapitalization of Holdings. Pursuant to the Recapitalization Agreement, the Sponsors and other investors purchased from Holdings, for an aggregate purchase price of $47.0 million, Holdings Preferred Stock together with the Warrants. In addition, Holdings purchased for $211.4 million, subject to certain working capital and debt adjustments, from the Stockholders, all outstanding shares of Holdings capital stock other than the Retained Shares. As a result of the Recapitalization, the Company's capital structure changed substantially. As of June 30, 1998, the Company's capital structure consisted of $100.0 million of Old Notes; $80.0 million of Term Loan Facilities; the Revolving Credit Facility, of which approximately $10.6 million was used to consummate the Recapitalization and of which approximately $6.3 million was drawn as of such date; and $84.0 million Holdings Senior Discount Debentures, of which $45.1 million was received in gross proceeds and $47.0 million of Holdings Preferrred Stock. In April 2003, the Company will be required to redeem a certain amount of Holdings Senior Discount Debentures equal to (i) $33.2 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of Holdings Senior Discount Debentures then outstanding by (y) $84.0 million, at a redemption price equal to 100% of the principal amount of Holdings Senior Discount Debentures so redeemed. Commencing October 15, 2003, the Company will be required to make semi-annual cash payments of interest on the Holdings Senior Discount Debentures. The Company's ability to make scheduled payments of the principal of, or to pay the interest or Liquidated Damages, if any, on, or to refinance, its indebtedness (including Holdings Senior Discount Debentures), or to fund planned capital or other expenditures will depend on its future financial or operating performance, which will be affected by prevailing economic conditions and financial, business, and other factors, many of which are beyond its control. Based upon the current level of operations, management believes that cash flow from operations and available borrowings under the Revolving Credit Facility will be adequate to meet the Company's anticipated future requirements for working capital, budgeted capital and other expenditures and scheduled payments of principal and interest on its indebtedness, including Holdings Senior Discount Debentures, for the next several years. There can be no assurance that the Company's business will generate sufficient cash flow from operations or that future borrowings will be available under the Revolving Credit Facility in an amount sufficient to enable the Company to service its indebtedness, including Holdings Senior Discount Debentures, or to make anticipated capital and other expenditures. Following the Recapitalization, the Company's primary sources of liquidity are cash flow from operations and borrowing under the Revolving Credit Facility. The Company's primary uses of cash are debt service requirements, capital expenditures and working capital. The Company expects that continuing requirements for debt service, capital expenditures and working capital will be funded from operating cash flow and borrowings under the Revolving Credit Facility. 34 RECENTLY ISSUED ACCOUNTING STANDARDS Financial Accounting Standards Board Statement ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information," issued in June 1997 and effective for fiscal years beginning after December 15, 1997, redefines how operating segments are determined and requires expanded quantitative and qualitative disclosures relating to a company's operating segments. The Company believes that the effect on it of adopting SFAS No. 131 will not be significant. INFLATION AND ECONOMIC TRENDS Although its operations are affected by general economic trends, the Company does not believe that inflation has had a material impact on its results of operations. YEAR 2000 Many computer systems and software applications, including most of those used by the Company, identify dates using only the last two digits of the year. These systems are unable to distinguish between dates in the year 2000 and dates in the year 1900. That inability (referred to as the "Year 2000" issue), if not addressed, could cause certain systems or applications to fail or provide incorrect information after December 31, 1999 or when using dates after December 31, 1999. This in turn, could have an adverse effect on the Company, due to the Company's direct dependence on its own system and applications and indirect dependence on those of other entities with which the Company must interact. The Company has implemented a process to either replace or modify all of the Company's current computer systems and software applications to become Year 2000 compliant. In connection with this process, the Company has retained two information technology consulting groups. The Company is dependent on these consulting groups to assess the impact of the Year 2000 issue and to recommend any necessary corrective action. The core of the new computer systems and software applications which are Year 2000 complaint have already been installed and by the end of the year 1998, these systems and applications are expected to be functioning, with only enhancing features to be added in 1999. The Company expects to complete the process by June 1999. The Company currently estimates that its costs incurred in 1997 and through the year 2000 to enhance its information systems may cost approximately $0.9 million. These costs include estimates for employee compensation on the project team, consultants, hardware and software. At June 30, 1998, the Comapny had spent approximately $168,000. The Company does not anticipate incurring any additional expenses in connection with the Year 2000 issue. As a result of the implementation of the new computer systems and software applications, the Company is not likely to initiate other major systems projects in connection with the Year 2000 issue. Although there can be no assurance that the Company will not experience cost overruns or delays in connection with its plan for replacing or modifying its information systems, the Company does not intend to develop contingency plans. In the event that the Company is unsuccessful in its efforts to enhance its computer systems and software applications to be Year 2000 compliant, it could experience cost overruns stemming from customer billing and collection problems. These problems are not likely, however, to have an adverse material effect on the Company's results of operations. 35 BUSINESS OVERVIEW Diamond Brands is a leading manufacturer and marketer of a broad range of branded consumer products, including Wooden Lights, Cutlery, Candles and Woodenware. The Company's products are marketed primarily under the Diamond, Forster and Empire brand names, which have been in existence since 1881, 1887 and 1950, respectively. The Company believes it has the leading domestic retail market share in the wooden match, plastic cutlery, toothpick, clothespin and wooden craft product categories. In each of these product categories, which in the aggregate represented approximately 63% of 1997 pro forma gross sales, the Company believes it has achieved a domestic retail market share of more than double that of its nearest branded competitor. For the year ended December 31, 1997, the Company generated pro forma net sales of $120.7 million and pro forma EBITDA of $31.6 million, which represented a pro forma EBITDA margin of 26.2%. For the six months ended June 30, 1998, the Company generated net sales of $58.6 million and EBITDA of $11.9 million, which represented an EBITDA margin of 20.4% The Company believes it has achieved its leading market shares and strong profitability by: (i) capitalizing on the Company's strong brand name recognition, high quality products and category management strategy to secure and maintain retail shelf space; (ii) expanding its product offerings through strategic acquisitions, including the Forster Acquisition in 1995 and the Empire Acquisition in 1997; (iii) achieving significant cost savings through the integration of the Forster and Empire businesses, including headcount reductions and facilities consolidations; and (iv) focusing on reducing manufacturing and administrative costs. The Company's products are sold in substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. Diamond Brands also sells certain of its products to institutional and other customers such as food service and food processing companies and redistributors. The Company sells its products through a nationwide sales network consisting primarily of independent broker organizations and also sells products directly to selected mass merchandisers and warehouse clubs, including Wal-Mart and Price Costco. In order to strengthen relationships with its customers, the Company employs a category management strategy, which includes a corporate rebate program that provides incentives to grocery retailers to buy multiple products from the Company. Diamond Brands produces its products at four automated manufacturing facilities located in Cloquet, Minnesota, East Wilton, Maine, Strong, Maine, and Kansas City, Kansas. The Company believes it is a low-cost manufacturer in most of its product categories. In the United States, Diamond Brands believes it is the sole manufacturer of wooden matches and the largest manufacturer of toothpicks and clothespins. COMPETITIVE STRENGTHS The Company believes that its stable and diverse product portfolio, strong brand names, national distribution and cost-efficient manufacturing have resulted in strong financial performance and provide an attractive platform for growth. In particular, the Company believes it is distinguished by the following competitive strengths: . DIVERSE PRODUCT PORTFOLIO WITH ATTRACTIVE SALES MIX. The Company has a diverse product portfolio with its 1997 pro forma gross sales consisting of Wooden Lights (15.9%), Cutlery (26.9%), Candles (21.5%), Woodenware (23.0%) and Institutional/Other (12.7%). This product portfolio allows the Company to offer retailers a broad product offering without relying on any one product category for profitability. Diamond Brands' product mix includes stable and well-established categories (such as Wooden Lights and Woodenware), as well as higher-growth categories (such as Cutlery and Candles). In addition, the Company believes its product mix is attractive because its product categories tend to be less reliant on new product introductions than are other consumer product categories. Approximately 98% of the Company's 1997 pro forma gross sales consisted of products introduced prior to 1994. The Company also believes that its products are not significantly impacted by changes in overall economic conditions. . STRONG BRAND NAMES WITH LEADING MARKET SHARES. The Company's three primary brand names--Diamond, Forster and Empire--have been in existence since 1881, 1887 and 1950, respectively. The Company believes that strong brand name recognition and high quality products have contributed to its 36 leading domestic retail market shares in the wooden match, plastic cutlery, toothpick, clothespin and wooden craft product categories. In each of these product categories, which in the aggregate represented approximately 63% of 1997 pro forma gross sales, the Company believes it has achieved a domestic retail market share of more than double that of its nearest branded competitor. The Company believes its strong brand names and leading market shares provide a competitive advantage in selling its products to retailers. . WELL-ESTABLISHED NATIONAL RETAIL DISTRIBUTION. Diamond Brands' products are sold in substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. The Company has established relationships with many of the largest retailers in the United States such as Wal-Mart, Price Costco, Target, Publix and Kroger. The Company sells its products through a nationwide sales network consisting primarily of independent broker organizations and also sells products directly to selected mass merchandisers and warehouse clubs. The Company employs a category management strategy which includes a corporate rebate program that provides incentives to grocery retailers to buy multiple products from the Company. . COST-EFFICIENT MANUFACTURING. The Company believes that its four automated manufacturing facilities position it as a low-cost manufacturer in most of its product categories. The Company continues to invest in automation equipment in order to reduce headcount and increase efficiency. . STRONG CASH FLOW WITH LIMITED MAINTENANCE CAPITAL EXPENDITURES. The Company's strong EBITDA and EBITDA margin, together with limited maintenance capital expenditure requirements, provide the Company with significant cash flow to reduce indebtedness and implement its business strategy. Over 90% of the Company's capital expenditures in the five years ended December 31, 1997 have related to productivity improvements and capacity expansions. The Company currently expects its capital expenditures for 1998 to be approximately $2.5 million, of which approximately $1.3 million had been expended in the six months ended June 30, 1998. . EXPERIENCED MANAGEMENT TEAM. The Company's existing senior management team possesses extensive industry and product knowledge and has an average tenure of seven years with the Company. In addition, in connection with the Recapitalization, Naresh K. Nakra became President, CEO and a director of Diamond Brands. Dr. Nakra has more than 25 years of experience in the branded consumer products and food industries, including five years as President and CEO of Gruma Corporation, whose subsidiaries include Mission Foods Corporation, a leading manufacturer and marketer of tortilla products, and Azteca Milling, a leading manufacturer and marketer of corn flour. Based on IRI data, Gruma Corporation achieved significant increases in sales and market share during Dr. Nakra's tenure. Dr. Nakra and the Company's existing senior management team have experience in identifying, consummating and integrating strategic acquisitions. See "New Chief Executive Officer." BUSINESS STRATEGY The Company's business strategy, which is designed to enhance its strong market positions and increase sales and EBITDA, includes the following elements: . CONTINUE TO PRODUCE HIGH QUALITY PRODUCTS. The Company believes that product quality has been a key factor in its success and intends to continue manufacturing high quality products in a cost-efficient manner in each of its product categories. The Company believes that its products are of superior or equivalent quality compared to those of its competitors, and that its brand names and "Made in the USA" label distinguish the Company's products from those of its competitors. . EXPAND CATEGORY MANAGEMENT STRATEGY TO INCREASE RETAIL SHELF SPACE. Diamond Brands utilizes a category management strategy to maintain and increase shelf space for its products at retail outlets. A central element of this strategy is the Company's corporate rebate program, which provides incentives to grocery retailers to buy multiple products from the Company. The Company intends to expand its corporate rebate program to include additional grocery retailers. The category management strategy also includes consolidated invoicing and shipping across the Company's product lines, which allows retailers to lower buying costs and reduce their number of suppliers. 37 . ENTER NEW DISTRIBUTION CHANNELS. The Company's products are sold primarily through grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. While the Company has been successful in these distribution channels, management believes there is potential to increase sales and EBITDA by: (i) penetrating additional retail outlets including gift stores and party supply stores; (ii) increasing sales efforts in the food service industry; and (iii) entering international markets. The Company has taken initial steps to explore potential international opportunities, in particular, in Canada and the Caribbean, and expects to further explore such opportunities in the future. The Company intends to utilize its strong brand names, diverse product portfolio and cost- efficient manufacturing to facilitate its entry into new distribution channels. . CAPITALIZE ON STRONG BRAND NAMES AND NATIONAL DISTRIBUTION TO INTRODUCE NEW PRODUCTS. The Company intends to continue developing new products and product line extensions designed to capitalize on the Company's strong brand names and existing distribution and manufacturing capabilities. The Company intends to use its category management strategy and existing relationships with retailers to secure retail shelf space for these new products. . PURSUE ATTRACTIVE ACQUISITION OPPORTUNITIES. The Company has successfully completed and integrated three strategic acquisitions in the last seven years. In 1991, the Company purchased certain assets of Universal Match. In 1995, the Company strengthened its position in the Woodenware and Cutlery product categories through the Forster Acquisition and in February 1997, the Company added candles to its product portfolio through the Empire Acquisition. The Company believes there are additional opportunities to generate incremental sales and EBITDA through strategic acquisitions. At any given time, the Company may be in various stages of considering such opportunities. Although the Company does not currently have any particular strategic acquisition opportunities identified, it intends to consider regularly and to pursue strategic acquisitions that: (i) add to or complement its product portfolio; (ii) leverage its existing distribution and manufacturing capabilities; or (iii) provide access to new distribution channels for its products. PRODUCTS The following table sets forth the Company's gross sales and percentage of total gross sales by product category.
GROSS SALES PERCENTAGE OF GROSS SALES ------------------------------------------ ----------------------------------------- FISCAL YEAR SIX MONTHS FISCAL YEAR SIX MONTHS ENDED DECEMBER 31, ENDED JUNE 30, ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- --------------- ---------------------------- ----------------- PRO PRO FORMA FORMA 1995 1996 1997 1997(1) 1997 1998 1995 1996 1997 1997(1) 1997 1998 ----- ----- ------ ------- ------- ------- ----- ----- ----- ------- ----- ----- (IN MILLIONS) Wooden Lights........... $17.6 $19.8 $ 20.9 $ 20.9 $ 9.6 $ 9.8 20.7% 20.1% 16.2% 15.9% 16.2% 15.0% Cutlery................. 27.9 32.6 35.4 35.4 18.7 20.3 32.8 33.1 27.5 26.9 31.3 31.3 Candles................. -- -- 25.5 28.3 6.7 11.1 -- -- 19.8 21.5 11.3 17.0 Woodenware.............. 25.7 28.7 30.2 30.2 15.6 15.8 30.2 29.1 23.5 23.0 26.2 24.2 Institutional/Other..... 13.8 17.5 16.7 16.7 9.0 8.3 16.3 17.7 13.0 12.7 15.0 12.7 ----- ----- ------ ------ ------- ------- ----- ----- ----- ----- ----- ----- Total................ $85.0 $98.6 $128.7 $131.5 $ 59.0 $ 65.3 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ====== ====== ======= ======= ===== ===== ===== ===== ===== =====
(1) The pro forma gross sales data for the year ended December 31, 1997 give effect to the Empire Acquisition as though it had occurred on January 1, 1997. 38 WOODEN LIGHTS The Company's Wooden Lights products include kitchen matches, penny matches (smaller wooden matches), fireplace matches and fire starter products. The Company focuses on the retail consumer market, which it believes offers higher margins and less competition than the institutional market. The Company sells its wooden match products primarily under the Diamond, Ohio Blue Tip and Fire Chief names and its fire starter products under the SuperMatch and Superstart names. Diamond Brands' Wooden Lights products are primarily sold through grocery stores, drug stores and mass merchandisers. The Company manufactures its Wooden Lights products at its Cloquet, Minnesota facility. The Company believes it is the sole manufacturer of wooden matches in the United States and that it holds the leading domestic retail market share in the wooden match category with a market share of more than double that of its nearest branded competitor. The Company competes in the domestic retail wooden match market with foreign manufacturers, particularly from Sweden, Chile, China and Korea. The wooden match market is mature, and the Company has maintained relatively stable sales and attractive gross margins. Although the market for penny match and kitchen match products is affected by smoking patterns, the Company believes that its wooden match product mix makes it somewhat less dependent on smoking patterns than manufacturers of book matches and disposable lighters. The market for fire starter products, which are used by consumers in both household and camping applications, is growing in the United States, and the Company competes with First Brands, Duraflame and Pine Mountain, each of which the Company believes has a greater market share than that of the Company. Diamond Brands' kitchen match products are sold primarily in 250 count boxes in both the "strike anywhere" and "strike on box" format. Penny matches are sold in 32 and 40 count boxes in both strike formats. The Company's fireplace matches are imported. Retail prices for the Company's wooden matches generally range from $0.59 to $1.99. Retail prices for the Company's fire starter products generally range from $1.29 to $4.99. The Company's strategy in Wooden Lights focuses on maintaining and increasing retail shelf space. In addition, the Company plans to focus on increasing its presence in the fire starter category by expanding consumer and trade promotions. CUTLERY The Company offers a wide range of plastic cutlery and straws. The Company focuses on the retail consumer market which it believes offers higher margins and less competition than the institutional market. The Company significantly expanded its Cutlery business through the Forster Acquisition in March 1995. In 1997, Diamond Brands entered the retail plastic straw market to offer its customers a more complete product line. The Company's Cutlery products are sold under both the Diamond and Forster brand names. The Company is also a major supplier of private label plastic cutlery to retailers. Diamond Brands' Cutlery products are primarily sold through grocery stores, drug stores and mass merchandisers. The Company manufactures its Cutlery products at its East Wilton, Maine facility. The retail plastic cutlery market includes four major branded participants (Diamond Brands, OWD, Maryland Plastic and Envirodyne Inc.'s Clear Shield division) and a sizable private label component. The Company believes that it holds the leading domestic retail market share in the plastic cutlery category with a market share of more than double that of its nearest branded competitor. The Company also believes that private label sales will continue to represent an attractive growth area. Consumer demand for convenience and the growing popularity of prepared foods are positively impacting the Company's Cutlery product growth. The Company produces its plastic cutlery products in various weights (heavy duty, full size and lightweight), colors (including holiday themes) and packages (boxes and bags of 24, 48, 72, 100 and 288 pieces). The Company also manufactures seasonal products for Christmas and Halloween. Heavy duty cutlery is the Company's largest plastic cutlery product line, followed by full-size cutlery, which is marketed as dinnerware. Servingware consists of large plastic serving spoons and forks. Retail prices for the Company's Cutlery products generally range from $0.59 to $1.49. The Company's strategy in the Cutlery segment focuses on: (i) expanding on the Company's current category management strategy in grocery stores by emphasizing the corporate rebate program; (ii) providing consumer promotions such as coupon inserts and "buy one, get one free" promotions; (iii) increasing private label sales to better utilize the Company's manufacturing capabilities; and (iv) supporting newly introduced plastic straw products through cross-promotions with plastic cutlery. CANDLES The Company's candle products include scented candles, outdoor citronella candles, holiday candles, luminaries and related products. The Company entered the candle business through the Empire Acquisition in February 1997. The Company sells its Candles primarily under the Empire, Richly Scented Candle, Patty-O-Candle, Diamond Reflections and Concord names. The Company manufactures its candle products at its Kansas City, Kansas facility. The Company believes the U.S. candle market exceeds $1 billion in annual sales and is highly fragmented, with the majority of manufacturers generating annual sales of less than $15 million each. The candle market is 39 divided into holiday products (approximately one-third) and non-holiday products (approximately two-thirds), with the fastest growing segment being scented candles. The Company's principal competitors in the candle business include Blyth Industries, Inc., the industry leader with a broad portfolio and extensive distribution, Dial Corporation, Lancaster Colony Corporation, S.C. Johnson, Lamplight Farms and The Yankee Candle Company. From time to time during the year-end holiday season, the Company experiences competition from foreign manufacturers of candles. The Company currently manufactures poured candles and imports holiday candles, tapers, pillars and votives. The Company offers its candle products in various containers, sizes (ranging from 4 ounces to 23 ounces) and fragrances. Citronella candles' popularity has grown in recent years due to their effectiveness as a natural insect repellent. The Company sells citronella candles in a variety of decorative container types, including pails, glass jars, pottery, terra cotta bowls and planters, and bamboo torches. Imported holiday candles are sold under the Concord name. Retail prices for the Company's candle products generally range from $0.99 to $9.99. The Company's Candles are sold primarily through mass merchandisers, warehouse clubs and grocery stores. Part of Diamond Brands' rationale for the Empire Acquisition was a plan to increase the Company's sales of candle products to grocery stores by capitalizing on the Company's network of independent broker organizations. As part of this strategy, the Company recently introduced Diamond Reflections to compete in grocery stores at a discount to the market leaders. The Company also intends to leverage its distribution capabilities and further enhance its product line by beginning to manufacture votive, pillar and taper candles over the next three years. In addition, the Company believes that the recently completed consolidation of its candle manufacturing facility in Kansas City, Kansas will further lower its candle manufacturing costs and improve product quality. WOODENWARE The Company's Woodenware products include toothpicks, clothespins, clothesline and wooden crafts (small wooden shapes). Diamond Brands strengthened its leadership position in these product lines with the Forster Acquisition in March 1995. The Company focuses on the retail consumer market, which it believes offers higher margins and less competition than the institutional market. Diamond Brands' Woodenware products, with the exception of wooden crafts, are sold through grocery stores, mass merchandisers, warehouse clubs and drug stores. Wooden crafts are sold primarily through Wal- Mart and craft retail stores. All of the Company's Woodenware products, with the exception of clothesline and wooden crafts, are sold both under the Diamond and Forster brand names. The Company manufactures its Woodenware products at its facilities in Cloquet, Minnesota (toothpicks), East Wilton, Maine (plastic clothespins), and Strong, Maine (toothpicks, clothespins and wooden crafts). The Company believes it holds the leading domestic retail market share in the clothespins, toothpick, and wooden craft categories with a market share of more than double that of its nearest branded competitor in each of these product categories. The toothpick market is a mature market and the Company faces competition from two domestic toothpick companies and imports from China, Brazil and Canada. The clothespin market is a mature market, and the Company faces competition from Magla/Seymour and imports from China. The Company sells a variety of toothpick stock-keeping units ("SKUs") under both the Diamond and Forster brand names. The majority of its square, round and flat toothpicks are sold in 250 count boxes, while specialty and colored toothpick SKUs are sold in 100, 120 or 250 count plastic containers. Retail prices on the Company's toothpicks generally range from $0.39 to $1.99. The Company also sells both wooden and plastic clothespins under the Diamond and Forster names. The Company sells clothespins in 18, 24, 36, 50 and 100 count bags. Retail prices for the Company's clothespins generally range from $0.99 to $3.49. The Company's wooden craft products are used for creative play and to build structures, including houses and figurines, and comprise a large number of SKUs. Retail prices for the Company's wooden craft products generally range from $0.39 to $1.99. The Company's Woodenware strategy focuses on maintaining and increasing shelf space. For both its toothpick and clothespin products, the Company utilizes a "Made in the USA" label on the package to differentiate its products from imports. The Company believes that Woodenware products manufactured in the 40 United States are regarded by consumers as having higher quality levels than foreign brands. Diamond Brands also cross-markets clothespins and clothesline. INSTITUTIONAL/OTHER The Company's Institutional/Other product group consists of institutional/food service products (such as wrapped toothpicks, heavy duty reusable plastic cutlery, bulk cutlery, coffee stirrers, skewers and steak markers) and industrial woodenware products (such as ice cream sticks and corn dog sticks), which are sold primarily to food service and food processing customers. The Company's Institutional/Other products also include resale book matches, which are sold primarily to retailers, and advertising matches, which are primarily sold to redistributors. Diamond Brands is the primary supplier of wooden advertising matches to the two leading redistributors of advertising matches in North America and is also the largest producer of corn dog sticks in North America. Advertising matches are penny matches packaged in boxes carrying an advertising logo and are principally utilized as promotional tools by restaurants, bars and hotels. The Company offers certain products in the institutional market, largely to utilize available production capabilities. Although the Company has not focused on competing generally in the institutional market, management believes there is potential to increase sales and EBITDA by increasing its presence in the institutional market. SALES AND MARKETING The Company sells its products in substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. Diamond Brands also sells certain of its products to institutional and other customers such as food service and food processing companies and redistributors. The Company has established strong relationships with many of the largest retailers in the United States (such as Wal-Mart, Price Costco, Target, Publix and Kroger). The Company sells its products through a nationwide sales network consisting primarily of independent broker organizations and also sells products directly to selected mass merchandisers and warehouse clubs, including Wal-Mart and Price Costco. The Company utilizes a category management strategy designed to maintain and increase shelf space at retail outlets. A central element of this strategy is the Company's corporate rebate program, which provides incentives to grocery retailers to buy multiple products from the Company. The Company intends to expand its corporate rebate program to include additional grocery retailers. The category management strategy also includes consolidated invoicing and shipping across the Company's product lines, which allows retailers to lower buying costs and reduce their number of suppliers. The Company cross-markets its products through the use of product packaging which include coupons or promotional offers for other Company products. The Company offers price promotions and cash discounts to retailers as a means of increasing sales volume from time to time. In addition, the Company employs consumer promotion programs to increase sales, including coupon inserts, "buy one, get one free" promotions, bonus packs and shipper displays. 41 PRODUCT DEVELOPMENT The Company has an active program of product development, focusing on product line extensions (such as specialty toothpicks, fireplace matches and plastic servingware) and new products in related areas (such as plastic straws, SuperMatch and clothesline). The Company believes its products mix is attractive because its product categories tend to be less reliant on new product introductions than are other consumer product categories. CUSTOMERS The Company derives its revenue primarily from the sale of its products to substantially all major grocery stores, drug stores, mass merchandisers and warehouse clubs in the United States. During the year ended December 31, 1997, sales to the Company's top 10 customers accounted for approximately 39% of the Company's pro forma gross sales, with one customer, Wal-Mart and its subsidiary, Sam's Club, accounting for approximately 19% of pro forma gross sales. MANUFACTURING Diamond Brands operates four automated manufacturing facilities located in Cloquet, Minnesota (round and flat toothpicks, matches, ice cream and corn dog sticks), East Wilton, Maine (Cutlery and plastic clothespins), Strong, Maine (clothespins, square toothpicks and wooden crafts), and Kansas City, Kansas (Candles). The Company believes that its four automated manufacturing facilities position it as a low-cost manufacturer in most of its product categories. The Company has continued to invest in automation equipment in order to reduce headcount and increase efficiency. For example, Diamond Brands' automated cutlery operations consist of combination modules which include an injection molding machine, molds and robotic packaging machinery, which allows the Company to automatically package cutlery in boxes and bags suitable for retail distribution. The Company believes that these operations provide it with a competitive advantage over other retail plastic cutlery manufacturers. The Company believes it has sufficient manufacturing capacity to satisfy its foreseeable production requirements. Following the Empire Acquisition in February 1997, Diamond Brands consolidated its two Candles manufacturing facilities to one location in Kansas City, Kansas. In addition, the layout of the new facility has increased efficiencies and reduced handling significantly. The Company believes that the consolidation of its candle manufacturing facility will significantly reduce its candle manufacturing costs in 1998. The Company is currently outsourcing the production of certain products, including resale book and fireplace matches, specialty toothpicks, holiday candles and plastic straws. In the aggregate, sales of outsourced products amounted to less than 10% of the Company's 1997 pro forma gross sales. COMPETITION The markets for certain of the Company's products are highly competitive. The Company competes, particularly with respect to its Candles and Cutlery products, with a number of domestic manufacturers which are larger and have significantly greater resources than the Company. In addition, the Company competes with foreign manufacturers, particularly those located in China, Sweden, Brazil, Chile, Japan and Korea. Although the barriers to entry into the Company's businesses are relatively low, the Company believes that it has a number of competitive advantages over potential new market entrants (including strong brand names, established national distribution and existing cost-efficient manufacturing operations) and that the relatively small market size for certain of the Company's products may make those markets economically less attractive to potential competitors. 42 RAW MATERIALS The primary raw materials used by Diamond Brands are generally available from multiple suppliers, and the Company has not experienced any significant interruption in the availability of such materials. However, the price of polystyrene resin, the key raw material from which the Company's Cutlery products is produced, can be volatile. The polystyrene resin used by the Company is produced from petrochemical intermediates which are, in turn, derived from petroleum. Polystyrene resin prices may fluctuate as a result of, among other things, worldwide changes in natural gas and crude oil prices and supply, as well as changes in supply and demand for polystyrene resin and petrochemical intermediates from which it is produced. Among other industries, the automotive and housing industries are significant users of polystyrene resin. As a result, significant changes in worldwide capacity and demand in these and other industries may cause significant fluctuations in the prices of polystyrene resin. In an attempt to mitigate the impact of changing polystyrene resin prices, the Company in January 1997 entered into a three- year supply contract with a major supplier of polystyrene resin, under which the Company believes it receives the lowest price available to any customer purchasing similar volume, and receives short-term price protection during periods of rising prices. During periods of rising prices, the Company generally has been able to pass through the majority of the polystyrene resin price increases to its customers on a delayed basis. During periods of declining polystyrene resin prices, the Company generally has reduced prices to its customers. Other primary raw materials required by Diamond Brands in its business include glass and metal containers, wax and fragrances to produce the Company's Candles products, birch and maple wood to produce the Company's Woodenware products, and aspen wood and commodity chemicals to produce the Company's Wooden Lights products. Other major raw materials include paperboard and corrugated cardboard. GENERAL TRADEMARKS The Company owns over 30 United States trademark registrations with respect to certain of its products. All of the Company's United States trademark registrations can be maintained and renewed provided that the trademarks are still in use for the goods and services covered by such registrations. The Company regards its trademarks and tradenames as valuable assets. EMPLOYEES At June 30, 1998, the Company had 743 full-time employees of which 208 of the Company's employees are represented by the United Paper Workers International Union. In August 1997, the Company signed a six-year labor agreement with the United Paper Workers International Union, which included a 3.0% annual wage increase. Five of the Company's employees are represented by the International Union of Operating Engineers. In 1997, the Company extended its labor agreement with the International Union of Operating Engineers for six additional years. The Company has not had a work stoppage at any of its current facilities in the last 25 years and believes its relations with its employees are good. 43 PROPERTIES The following table sets forth certain information regarding the Company's facilities:
SIZE (SQUARE LEASE LOCATION PRIMARY USE FEET) TITLE EXPIRATION -------- ----------------------------- ------- ------ ---------- Cloquet, Minnesota........ Manufacturing of matches, 290,000 Owned -- toothpicks and ice cream and corn dog sticks; warehouse; administration Minneapolis, 5,000 Leased April 2000 Minnesota........ Sales and marketing East Wilton, Maine............ Manufacturing of plastic 75,000 Owned -- cutlery and plastic clothespin; administration East Wilton, 150,000 Owned -- Maine............ Warehouse East Wilton, 240,000 Owned -- Maine............ Printing; warehouse Strong, Maine..... Manufacturing of toothpicks, 62,000 Owned -- clothespins and wooden crafts Kansas City, Kansas........... Manufacturing of candles; 282,000 Leased July 2000(1) warehouse; administration
- -------- (1) Option to renew lease until July 2002. LEGAL AND REGULATORY MATTERS The Company is a defendant in several lawsuits, including product liability lawsuits, arising in the ordinary course of business. Although the amount of any liability that could arise with respect to any such lawsuit cannot be accurately predicted, in the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the financial position or results of operations of the Company. A predecessor to the Company and certain other match producers are parties to a 1946 consent decree under which the parties thereto are prohibited from engaging in anticompetitive acts or participating in specified commercial relationships with one another. The Company's operations are subject to a wide range of general and industry specific federal, state and local environmental laws and regulations which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous waste. Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous substances on such property. Although management believes that the Company is in substantial compliance with all applicable environmental laws and regulations, unforeseen expenditures to remain in such compliance, or unforeseen environmental liabilities, could have a material adverse affect on its business and financial positions. Additionally, there can be no assurance that changes in environmental laws and regulations or their application will not require further expenditures by the Company. 44 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position of individuals who are serving as the directors and executive officers of Holdings, the Issuer and the Guarantors. Each director of the Issuer or any of the Guarantors will hold office until the next annual meeting of stockholders or until his or her successor has been elected and qualified. Officers of the Issuer and each of the Guarantors are elected by their respective Boards of Directors and serve at the discretion of such Boards.
NAME AGE POSITION - ------------------------ --- ----------------------------------------------------- Naresh K. Nakra......... 52 President, CEO and Director Alexander M. Seaver..... 39 Director Bradley R. Kent......... 34 Director Alfred Aragona.......... 57 Director Richard S. Campbell..... 45 Vice President of Supply Chain Thomas W. Knuesel....... 50 Vice President of Finance and Chief Financial Officer Christopher A. Mathews.. 43 Vice President of Manufacturing John F. Young........... 56 Vice President of Sales and Marketing
NARESH K. NAKRA PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR Dr. Nakra has been President, CEO and a director of Holdings, the Issuer and the Guarantors since April 1998. From January 1993 to March 1998, he served as President and CEO of Gruma Corporation, a U.S. subsidiary of Gruma, S.A. ALEXANDER M. SEAVER DIRECTOR Mr. Seaver has been a director of Holdings, the Issuer and the Guarantors since April 1998. Mr. Seaver is a principal and founding member of Seaver Kent. Prior to forming Seaver Kent in October 1996, Mr. Seaver was with InterWest Partners from 1987 to 1996, where he was a general partner. At InterWest Partners, Mr. Seaver focused on non-technology acquisitions, recapitalizations and late-stage venture capital investments. Mr. Seaver has served on the board of directors of a variety of companies including Favorite Brands International, Bojangles', Cafe Valley, Heidi's Fine Desserts, Java City and Pacific Grain Products. BRADLEY R. KENT DIRECTOR Mr. Kent has been a director of Holdings, the Issuer and the Guarantors since April 1998. Mr. Kent is a principal and founding member of Seaver Kent. Prior to forming Seaver Kent in October 1996, Mr. Kent was with InterWest Partners from 1993 to 1996, where he was a general partner. At InterWest, Mr. Kent focused on non-technology acquisitions, recapitalizations and late-stage venture capital investments. Mr. Kent has served on the board of directors of Cafe Valley, Artco-Bell Holding and MidWest Folding Products. ALFRED ARAGONA DIRECTOR Mr. Aragona has been a director of Holdings, the Issuer and the Guarantors since July 1998. Mr. Aragona is Chairman and CEO of Cafe Valley, a national baked goods company and Chairman of Pacific Grain Products, Inc., an international grain company. From 1986 to 1992, Mr. Aragona served as President and CEO of Uncle Ben's, Inc. RICHARD S. CAMPBELL VICE PRESIDENT OF SUPPLY CHAIN Mr. Campbell joined the Company in 1992 and served as the Vice President of Operations--Maine. In June 1998, Mr. Campbell was appointed Vice President of Supply Chain for all facilities. Prior to joining the Company, Mr. Campbell served as the Director of Engineering at Parker Brothers from 1984 to 1992. THOMAS W. KNUESEL VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER Mr. Knuesel rejoined the Company in 1995 as the Vice President of Finance and Chief Financial Officer. Prior to rejoining the Company, Mr. Knuesel served as the Vice President of Finance of VEE Corporation from 45 1989 to 1995. He served as the Vice President and Corporate Controller of the Company from 1986 to 1989 and as the Vice President and Controller of Carter- Day Co. from 1984 to 1986. CHRISTOPHER A. MATHEWS VICE PRESIDENT OF MANUFACTURING Mr. Mathews joined the Company in 1986 and served as the Vice President of Operations--Minnesota. In June 1998, Mr. Mathews was appointed Vice President of Manufacturing for all facilities. Prior to joining the Company, Mr. Mathews served as the General Manager of Northern Mining Equipment Corporation from 1981 to 1986 and as the Mill Engineer of United States Steel from 1979 to 1981. JOHN F. YOUNG VICE PRESIDENT OF SALES AND MARKETING Mr. Young joined the Company in 1991 as the Vice President of Sales and Marketing. Prior to joining the Company, Mr. Young served as an Independent Master Broker/Sales Agent from 1989 to 1991 and as the Executive Vice President of Minnetonka, Inc. from 1979 to 1989. BOARD COMMITTEES The Board of Directors of Holdings, the Issuer and the Guarantors have each approved the formation of an audit committee (the "Audit Committee") and a compensation committee (the "Compensation Committee"). Mr. Seaver and Mr. Kent are the only members of each of the Audit and Compensation Committees. No other Audit and Compensation Committee members have been appointed, but the Board of Directors of Holdings, the Issuer and the Guarantors may appoint additional members in the future. The Audit Committee will recommend to the Board of Directors the accounting firm to be selected as independent auditors and reviews matters relating to public disclosure, corporate practices, regulatory and financial reporting, accounting procedures and policies, financial and accounting controls, and transactions involving conflicts of interest. The Audit Committee also will review the planned scope and results of audits, the annual reports of the stockholders, the proxy statement and will make recommendations regarding approval to the Board of Directors. The Compensation Committee of Holdings, the Issuer and the Guarantors will review and make recommendations to the Board of Directors from time to time regarding compensation of officers and non-employee directors. The Compensation Committee will also administer the Company's stock-based compensation and incentive plans and make decisions regarding the grant of stock options and other awards to officers and employees thereunder. Mr. Seaver also serves on the compensation committees of the boards of directors of Favorite Brands International, Inc., Java City and Pacific Grain Product. 46 Director Compensation Members of the Board of Directors of Holdings, the Issuer and the Guarantors are not currently compensated for their services as directors. Outside directors may in the future be compensated in a form and amount to be decided by the Compensation Committee and the Board of Directors of each of the respective companies. EXECUTIVE COMPENSATION The following table sets forth compensation paid by the Company for fiscal year 1995, 1996 and 1997 to its CEO during fiscal 1997 and to each of the four other most highly compensated executive officers of the Company as of the end of fiscal 1997 (collectively, the "named executives").
NUMBER OF NAME AND PRINCIPAL SECURITIES UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS OPTIONS COMPENSATION - ------------------------ ---- -------- -------- --------------------- ------------ EDWARD A. MICHAEL....... 1997 $225,000 $118,102 -- $13,022(1) Chief Executive Officer 1996 210,000 115,000 -- 10,023(2) and President 1995 160,000 80,000 -- 9. 915(3) A. DRUMMOND CREWS....... 1997 214,113 -- -- 8,542(4) Chief Operating Officer, 1996 -- -- -- Empire Candle, Inc. 1995 -- -- -- CHRISTOPHER A. MATHEWS.. 1997 128,000 81,957 20,000 13,022(1) Vice President of 1996 115,000 45,840 -- 10,023(2) Operations--Minnesota 1995 97,781 40,000 -- 7,699(5) THOMAS W. KNUESEL....... 1997 128,000 72,728 20,000 13,022(1) Vice President of 1996 120,000 44,904 -- 52,084(7) Finance and Chief 1995 85,039 33,000 -- 5,545(7) Financial Officer RICHARD S. CAMPBELL..... 1997 123,000 66,900 20,000 12,275(8) Vice President of 1996 115,000 40,365 -- 8,015 Operations--Minnesota 1995 105,000 20,000 -- 7,370(10)
- -------- (1) This amount includes the Company's contribution of $4,750 to 401K and $8,272 to the profit sharing plan. (2) This amount includes the Company's contribution of $4,500 to 401K and $5,523 to the profit sharing plan. (3) This amount includes the Company's contribution of $4,500 to 401K and $5,415 to the profit sharing plan. (4) This amount includes the Company's contribution of $4,750 to 401K and $3,792 to the profit sharing plan. (5) This amount includes the Company's contribution of $3,494 to 401K and $4,205 to the profit sharing plan. (6) This amount includes the Company's contribution of $4,500 to 401K and $5,523 to the profit sharing plan and $42,061 of reimbursement for moving expenses. (7) This amount includes the Company's contribution of $2,475 to 401K and $3,070 to the profit sharing plan. (8) This amount includes the Company's contribution of $2,892 to 401K and $9,383 to the profit sharing plan. (9) This amount includes the Company's contribution of $1,350 to 401K and $6,665 to the profit sharing plan. (10) This amount includes the Company's contribution of $1,283 to 401K and $6,087 to the profit sharing plan. 47 The option grants in 1997 for the named executive officers are shown in the following table.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR NUMBER OF OPTION TERM SECURITIES EXERCISE OF ----------------------------- NAME AND PRINCIPAL UNDERLYING OPTION BASE PRICE EXPIRATION POSITION GRANTED ($/SHARE) DATE 5% 10% ------------------ ----------------- ----------- ------------ -------------- --------------- EDWARD A. MICHAEL....... -- -- -- $ -- $ -- Chief Executive Officer and President A. DRUMMOND CREWS....... -- -- -- -- -- Chief Operating Officer, Empire Candle, Inc. CHRISTOPHER A. MATHEWS.. 20,000 7.50 December 31, 244,334 389.061 Vice President of 2006 Operations--Minnesota THOMAS W. KNUESEL....... 20,000 7.50 December 31, 244,334 389,061 Vice President of 2006 Finance and Chief Finance Officer RICHARD S. CAMPBELL..... 20,000 7.50 December 31, 244,334 389,061 Vice President of 2006 Operations--Maine
The number of options held and their value at year end of fiscal 1997 for the named executive officers are shown on the following table.
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN- NUMBER OF UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT SHARES ACQUIRED VALUE OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END NAME AND PRINCIPAL POSITION ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - --------------------------- --------------- -------- -------------------------- ------------------------- EDWARD A. MICHAEL........ -- $-- -- $ -- Chief Executive Officer and President A. DRUMMOND CREWS........ -- -- -- -- Chief Operating Officer, Empire Candle, Inc. CHRISTOPHER A. MATHEWS... 0 0 6,667/13,333 72,204/144,396 Vice President of Operations--Minnesota THOMAS W. KNUESEL........ 0 0 6,667/13,333 72,204/144,396 Vice President of Finance and Chief Finance Officer RICHARD S. CAMPBELL...... 0 0 6,667/13,333 72,204/144,396 Vice President of Operations--Maine
EMPLOYMENT AGREEMENTS AND OTHER COMPENSATION ARRANGEMENTS The Company and Dr. Nakra entered into an employment agreement, dated April 21, 1998, which provides that in consideration for Dr. Nakra's service as President, CEO and a director of the Company, Dr. Nakra will receive an annual base salary of $375,000 and an annual target bonus based on certain performance objectives of the Company. Pursuant to the Transaction Advisory Agreement (as defined herein under "Certain Relationships and Related Transactions"), the Company paid Dr. Nakra a transaction advisory fee of $250,000, representing 10% of the aggregate fees paid to equity investors with respect to the Recapitalization, and will pay him bonuses equal to 10% of the aggregate fees paid to equity investors with respect to any subsequent acquisitions by the Company. Dr. Nakra is also entitled to various executive benefits and perquisites under the employment agreement. Dr. Nakra's employment agreement provides that in the event Dr. Nakra's employment is terminated by the Company without cause, or by Dr. Nakra for good reason, the Company will continue to pay Dr. Nakra his base salary for a one-year period. Upon consummation of the Recapitalization, Dr. Nakra, pursuant to his employment agreement, purchased $1.0 million of Holdings Preferred Stock with Warrants for a purchase price equal to the per share price that the Sponsors paid for Holdings Preferred Stock with Warrants in connection with the Recapitalization (the "Preferred Share Price"). Pursuant to his employment agreement, Dr. Nakra provided for $666,000 of such purchase price through a full-recourse five-year promissory note, which will be accelerated upon change of control of the Company, bearing an annual interest rate of 6.75%. The balance of the purchase price was paid by Dr. Nakra in cash. 48 In addition, the Company provides Dr. Nakra a 10-year option to purchase additional shares of Holdings Common Stock which represent: (i) 6% of the total outstanding shares of Holdings Common Stock after giving effect to the full exercise of the Warrants at an exercise price equal to the Implied Value of Holdings Common Stock of $13.98 per share and (ii) 2% of the total outstanding shares of Holdings Common Stock after giving effect to the full exercise of the Warrants and other management options at the time of Recapitalization at an exercise price equal to two times the Implied Value of Holdings Common Stock. On the 180th day after the commencement of Dr. Nakra's employment, one-quarter of such options will vest and become exercisable, and on the first day of each of the subsequent 30 consecutive calendar months, one-thirtieth of the balance of such options will vest and become exercisable. In the event Holdings sells stock to provide funds for future acquisitions, Holdings will grant Dr. Nakra a 10-year option to purchase: (i) 4% of such newly issued stock at a price equal to that paid by other investors; and (ii) 1% of such newly issued stock at a price equal to two times that paid by other investors. Dr. Nakra's right to exercise these options will fully vest in 48 equal portions over the 48-month period following grant of such options. All non-vested options, however, will become fully-vested and exercisable in the event of the death or disability of Dr. Nakra or a change in control of the Issuer (except in connection with initial public offering). All non-vested options will be forfeited upon termination of Dr. Nakra's employment with the Issuer and all vested options will be exercisable for a period of 30 days following the termination date. The shares of Holdings Common Stock acquired by Dr. Nakra pursuant to the foregoing will be subject to a stockholders agreement providing for certain transfer restrictions and registration rights. Such shares are also subject to customary tag-along and bring- along provisions which give Dr. Nakra the right to sell an equal proportion of his shares of Holdings Common Stock in the event that the Sponsors sell more than 10% of their shares of Holdings Common Stock, and that require Dr. Nakra to sell (at the Sponsors' election) all of his shares of Holdings Common Stock in the event that the Sponsors receive a bona fide offer to sell all of their shares of Holdings Common Stock. Holdings also provides 10-year non-qualified stock options to Messrs. Campbell, Knuesel, Mathews and Young to purchase shares of Holdings Common Stock which represent up to an aggregate of 166,953 shares at an exercise price of $13.98 per share. On the first anniversary of the date of the Recapitalization, one-quarter of such options will vest and become exercisable, and at the end of each of the subsequent 36 consecutive calendar months, one thirty-sixth of the balance of such options will vest and become exercisable. Prior to the Recapitalization, Holdings was a party to certain 10-year non- qualified stock option agreements, dated January 1, 1997, with these executives and Mr. Beach that provided the right to purchase up to an aggregate of 90,000 shares of Holdings Common Stock at an exercise price of $7.50 per share. One-third of the options became exercisable immediately upon entering into such agreements, one-third vested and became exercisable on January 1, 1998, and the remainder were to vest and become exercisable on January 1, 1999. Upon consummation of the Recapitalization, the Company accelerated the exercisability of any part of such options which were not then exercisable. The cash-out payment for such compensation arrangement was $518,132. In addition, the Company made a severance payment to Mr. Crews in the amount of $125,000 upon consummation of the Recapitalization, to be paid over a six-month period. Upon consummation of the Recapitalization, the Company awarded bonus payments in an aggregate amount equal to approximately $1.2 million to Messrs. Campbell, Knuesel, Mathews, Young and Crews pursuant to their respective change of control agreements. The bonus payments were provided for by the Company from the proceeds payable to the Stockholders in the Equity Repurchase. 49 The Company and Mr. Campbell are parties to an employment agreement, dated May 26, 1992, and amended April 27, 1994. Mr. Campbell's agreement provides for an initial two-year term and then renews automatically for successive one-year terms unless either party gives notice of its intent not to renew at least 90 days prior to expiration of the current term. In addition to a base salary, Mr. Campbell is also entitled to a performance bonus as described below. In the event that the employment of Mr. Campbell is terminated by the Company other than for cause, death, retirement or voluntary resignation, the Company will pay Mr. Campbell a severance payment in an amount equal to Mr. Campbell's then-current base salary. The Company has entered into change of control agreements with each of Mr. Knuesel, Mr. Mathews, and Mr. Young (collectively, the "Executives"). The agreements provide that each Executive's employment may be terminated by such Executive or by the Company for any reason or no reason at all. If the Company terminates such Executive's employment for other than cause or the Executive terminates his employment for good reason, such Executive is entitled to his full base salary through the time his notice of termination of employment is given and a severance payment equal to his annual base salary plus an amount equal to his annual target bonus. The total severance payment will not exceed 130% of such Executive's annual base salary. The severance payment will be offset, however, by any compensation received by such Executive under new employment during the 12-month period after leaving the Company. In addition, for 12 months after termination of his employment the Executive is entitled to continue participation in the health insurance plan of the Company as if he were an executive of the Company. The change of control employment agreements also provide a prohibition on disclosing confidential information and a non-compete provision which prohibits the Executives from engaging in certain competitive activities under certain circumstances for one year after termination of each Executive's employment. Other than the change of control agreements, none of the Executives has any employment agreement with the Company. In 1997, the annual base salary for Messrs. Knuesel, Mathews, Young and Campbell was $128,000, $128,000, $133,000 and $123,000, respectively. In 1998, the annual base salary for Messrs. Knuesel, Mathews, Young and Campbell was $137,000, $137,000, $152,000 and $137,000, respectively. The Company maintains a bonus program pursuant to which each of Messrs. Knuesel, Matthews, Young and Campbell has the opportunity to earn an annual bonus based upon annual target EBITDA, return on invested capital and other mutually agreed upon individual performance goals. The amount of each executive's annual bonus under the bonus program ranges from 0% to 60% of the respective executive's annual salary, with the target bonus set at 30% if such performance objectives are achieved and a maximum of 60% if such objectives are exceeded. Until July 1998, the Board of Directors, upon recommendations of the President and CEO, determined officer bonuses. A Compensation Committee was formed in July 1998 and future compensation decisions are expected to be made by the Compensation Committee and recommended to the Board of Directors for approval. The Company does not maintain any key-man or similar insurance policy in respect of Dr. Nakra or any of its other senior management or key personnel. However, the purchase of key-man life insurance may be considered in the future by the Compensation Committee of the Board of Directors. 50 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In connection with the Recapitalization, the Company entered into a ten-year agreement (the "Management Advisory Agreement") with Seaver Kent to which entitled Seaver Kent to receive from the Company (but, at its discretion, may waive) an annual fee for management advisory services equal to the greater of $200,000 and 0.05% of the budgeted consolidated net sales of the Company. In addition, the Company agreed to indemnify Seaver Kent, its affiliates and shareholders, and their respective directors, officers, agents, employees and affiliates from and against all claims, actions, proceedings, demands, liabilities, damages, judgments, assessments, losses and costs, including fees and expenses, arising out of or in connection with the services rendered by Seaver Kent thereunder. The Management Advisory Agreement makes available the resources of Seaver Kent concerning a variety of financial and operational matters. The services provided by Seaver Kent cannot otherwise be obtained by the Issuer without the addition of personnel or the engagement of outside professional advisors. In connection with the Recapitalization, the Issuer also entered into an agreement (the "Transaction Advisory Agreement") with Seaver Kent pursuant to which Seaver Kent received a cash financial advisory fee of approximately $2.75 million upon the closing of the Recapitalization as compensation for its services as financial advisor for the Recapitalization. Seaver Kent is also entitled to receive (but, at its discretion, may waive) fees of up to 1.5% of the "transaction value" for each subsequent transaction in which the Issuer is involved. The term "transaction value" means the total value of any subsequent transaction, including, without limitation, the aggregate amount of the funds required to complete the subsequent transaction (excluding any fees payable pursuant to the Transaction Advisory Agreement and fees, if any, paid to any other person or entity for financial advisory, investment banking, brokerage or any other similar services rendered in connection with such transaction) including the amount of any indebtedness, preferred stock or similar items assumed (or remaining outstanding). The Stockholders bore (from the proceeds of the Equity Repurchase) certain other financial advisory, legal and accounting fees and expenses incurred by the Company in connection with the Recapitalization. In addition, the Sponsors and Andrew M. Hunter, III entered into a letter agreement dated March 3, 1998 which stated the Sponsors' intent to grant Mr. Hunter an option to purchase Holdings Common Stock in an amount representing 2.73% of the fully diluted outstanding shares of Holdings Common Stock as of the date of grant, with an exercise price equal to the Implied Value of Holdings Common Stock of $13.98 per share, in consideration of certain consulting services to be provided by Mr. Hunter on a mutually acceptable basis after the consummation of the Recapitalization. Holdings and its subsidiaries entered into a tax sharing agreement providing, among other things, that each of the subsidiaries will reimburse Holdings for its share of income taxes determined as if such subsidiary had filed its tax returns separately from Holdings. Immediately following the consummation of the Recapitalization, certain of the Stockholders held 22.5% of outstanding shares of Holdings Common Stock after giving effect to the full exercise of the Warrants. See "The Recapitalization." 51 DESCRIPTION OF HOLDINGS INDEBTEDNESS The Holdings Senior Discount Debentures were issued at a discount to their aggregate principal amount at maturity to generate gross proceeds to Holdings of approximately $45.1 million. The yield to maturity of the Holdings Senior Discount Debentures is 12 7/8% (computed on a semi-annual bond equivalent basis), calculated from April 21, 1998. The Holdings Senior Discount Debentures were issued under an indenture dated as of April 21, 1998 (the "Holdings Indenture") between Holdings and State Street Bank and Trust Company, as trustee, and are senior unsecured obligations of Holdings. Cash interest will not accrue or be payable on the Holdings Senior Discount Debentures prior to April 15, 2003. Thereafter, cash interest on the Holdings Senior Discount Debentures will accrue at a rate of 12 7/8% per annum and will be payable in arrears on October 15 and April 15 of each year, commencing October 15, 2003. The Holdings Senior Discount Debentures will mature on April 15, 2009. On April 15, 2003, Holdings will be required to redeem Holdings Senior Discount Debentures with an aggregate principal amount at maturity equal to (i) $33.2 million multiplied by (ii) the quotient obtained by dividing (x) the aggregate principal amount at maturity of the Holdings Senior Discount Debentures then outstanding by (y) $84.0 million, at a redemption price equal to 100% of the principal amount at maturity of the Holdings Senior Discount Debentures so redeemed. The Holdings Senior Discount Debentures will be redeemable at the option of Holdings, in whole or in part, at any time on or after April 15, 2003, in cash at the redemption prices (expressed as a percentage of principal amount) set forth below, plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of redemption, if redeemed during the twelve-month period commencing April 15 in the years set forth below:
REDEMPTION YEAR PRICE ---- ---------- 2003.......................... 106.438% 2004.......................... 104.292% 2005.......................... 102.146% 2006 and thereafter........... 100.000%
Notwithstanding the foregoing, at any time on or prior to April 15, 2001 Holdings may (but shall not have the obliagation to) redeem, on one or more occasions, up to 35% of principal amount at maturity of the Holdings Senior Discount Debentures originally issued at a redemption price equal to 112.875% of the Accreted Value (as defined in the Holdings Indenture) thereof plus accrued and unpaid interest and Liquidated Damages (as defined in the Holdings Indenture), if any, thereon to the redemption date, with net cash proceeds of one or more Equity Offerings (as defined in the Holdings Indenture); provided that at least 65% of the original aggregate principal amount at maturity of the Holding Senior Discount Debentures remains outstanding immediately after each such redemption and provided further, that such redemption will occur within 90 days of the date of the closing of such Equity Offering. In the event of a Change of Control (as defined in the Holdings Indenture), each holder of Holdings Senior Discount Debentures has the right to require the repurchase of such holder's Holdings Senior Discount Debentures at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the purchase date. The Holdings Indenture contains covenants that, among other things, limit the ability of Holdings to enter into certain mergers or consolidations or incur certain liens and of Holdings and its subsidiaries to incur additional indebtedness, pay dividends, redeem capital stock or make certain other restricted payments and engage in certain transactions with affiliates. Under certain circumstances, Holdings will be required to make an offer to purchase the Holdings Senior Discount Debentures at a price equal to 100% of the principal amount thereof, plus accrued interest to the date of purchase with the proceeds of certain asset sales. The Holdings Indenture contains certain customary events of defaults, which include the failure to pay interest and principal, the failure to comply with certain covenants in the Holdings Senior Discount Debentures or the Holdings Indenture, a default under certain indebtedness, the imposition of certain final judgments or warrants of attachment and certain events occurring under bankruptcy laws. 52 CAPITAL STOCK OF HOLDINGS AND THE ISSUER GENERAL The Issuer is authorized by the terms of its Certificate of Incorporation to issue 1,000 shares of common stock, par value $.01 per share. The Issuer has issued and outstanding 1,000 shares of common stock, each share of which is entitled to one vote. Holdings owns all of the issued and outstanding capital stock of the Issuer. Holdings does not have any material assets other than the common stock of the Issuer. Holdings' Articles of Incorporation authorizes Holdings to issue an aggregate total of 50,000,000 shares of common stock. Holdings currently has outstanding 1,490,650 shares of common stock and 47,000 shares of Holdings Preferred Stock. Holdings Preferred Stock has a liquidation preference of $1,000 per share (the "Liquidation Preference") and will accumulate dividends at the rate of 12.0% of the Liquidation Preference per annum (representing a 15% per annum effective yield), payable semi-annually to the mandatory redemption value of $47.0 million on the mandatory redemption date of October 15, 2009. Dividends will compound to the extent not paid. Shares of Holdings Preferred Stock may be redeemed at the option of Holdings, at any time, in whole or in part, at a redemption price per share equal to the Liquidation Preference per share plus an amount equal to all accumulated and unpaid dividends. The pay-in-kind feature of Holdings Preferred Stock also permits Holdings the option to pay dividends by the issuance of additional shares of Holdings Preferred Stock having an aggregate liquidation preference equal to the amount of dividend being paid, rather than by cash dividends. Optional redemption of Holdings Preferred Stock is subject to, and expressly conditioned upon, certain limitations under the Indenture, the Holdings Indenture, the Bank Facilities, the New Notes offered hereby and other documents relating to Holdings' or the Issuer's indebtedness. Holdings may also be required to redeem shares of Holdings Preferred Stock in certain other circumstances, including the occurrence of a change of control of Holdings, in each case subject to the terms of the Indenture, the Holdings Indenture, the Bank Facilities, the New Notes offered hereby and other documents relating to Holdings' or the Issuer's indebtedness. Holders of Holdings Preferred Stock do not have any voting rights with respect thereto, except for such rights as are provided under applicable law, the right to elect, as a class, one director of Holdings in the event that Holdings fails to comply with its redemption obligations and class voting rights with respect to transactions adversely affecting the rights, preferences or powers of the Holdings Preferred Stock. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Beneficial Owners of More Than 5% of the Issuer's Voting Securities(1)
AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL OWNERSHIP BENEFICIAL OWNER TITLE OF CLASS (NUMBER OF SHARES) PERCENT OF CLASS - ------------------- --------------------- -------------------- ---------------- Seaver Kent-TPG Partners, L.P.......... Holdings Common Stock 2,659,320(2) 55.75%(4) 3000 Sand Hill Road, Suite 230 Menlo Park, California 94025 Seaver Kent I Parallel, L.P.......... Holdings Common Stock 265,217(3) 5.56%(5) 3000 Sand Hill Road, Suite 230 Menlo Park, California 94025 Alexander M. Seaver..... -- -- (6) -- Bradley R. Kent......... -- -- (7) -- Andrew M. Hunter, III... Holdings Common Stock 289,736 19.44% 537 Herrington Road Wayzata, Minnesota 55391 John L. Morrison........ Holdings Common Stock 109,350 7.34% 234 S. Edgewood Avenue Wayzata, Minnesota 55391
- -------- 53
AMOUNT AND NATURE OF NAME AND ADDRESS OF BENEFICIAL OWNERSHIP BENEFICIAL OWNER TITLE OF CLASS (NUMBER OF SHARES) PERCENT OF CLASS - ------------------- --------------------- -------------------- ---------------- Edward A. Michael....... Holdings Common Stock 97,272 2.04% 4901 Golf Shore Blvd., Suite 201 Naples, Florida 34103 Alan S. McDowell........ Holdings Common Stock 87,751 5.88% Box 25152 Jackson, Wyoming 83001 Robert J. Keith, Jr..... Holdings Common Stock 86,206 5.78% 100 Bushaway Road Wayzata, Minnesota 55391
- -------- (1) Because the Issuer is a wholly-owned subsidiary of Holdings, this chart identifies beneficial owners of more than 5% of the voting securities of Holdings. (2) Includes 300,216 shares acquired through the exercise of Warrants, 215 shares utilized for cashless exercise, and 2,358,889 shares issuable upon exercise of Warrants. (3) Includes 29,813 shares acquired through the exercise of Warrants, 22 shares utilized for cashless exercise, and 235,382 shares issuable upon exercise of Warrants. (4) Includes 49.25% represented by unexercised, issuable Warrants as described in note (2) above. (5) Includes 4.93% represented by unexercised, issuable Warrants as described in note (3) above. (6) Seaver Kent - TPG Partners, L.P. is an entity affiliated with Alexander M. Seaver. Mr. Seaver disclaims beneficial ownership of all shares owned by such entity. (7) Seaver Kent - TPG Partners, L.P. is an entity affiliated with Bradley R. Kent. Mr. Kent disclaims beneficial ownership of all shares owned by such entity. SECURITY OWNERSHIP OF MANAGEMENT
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (NUMBER OF SHARES) PERCENT OF CLASS ----------------------------- ---------------------------- HOLDINGS HOLDINGS HOLDINGS HOLDINGS NAME OF BENEFICIAL OWNER COMMON STOCK PREFERRED STOCK COMMON STOCK PREFERRED STOCK - ------------------------ ------------ --------------- ------------ --------------- Seaver Kent--TPG Partners, L.P.......... 2,659,320(1) 22,636 55.75%(10) 48.16% Seaver Kent I Parallel, L.P.................... 265,217(2) 2,264 5.56%(11) 4.82% Alexander M. Seaver..... --(3) -- -- -- Bradley R. Kent......... --(4) -- -- -- Alfred Aragona.......... -- -- -- -- Naresh K. Nakra ........ 117,344(5) 1,000 2.46%(12) 2.13% Edward A. Michael....... 97,272 -- 2.04% -- A. Drummond Crews....... -- -- -- -- Christopher A. Mathews.. 50,721(6) 400 1.06%(13) 0.85% Thomas W. Knuesel....... 11,925(7) 100 0.25%(14) 0.21% Richard S. Campbell..... 47,224(8) 400 0.99%(15) 0.85% John F. Young........... 14,589(9) 100 0.31%(16) 0.21% All Executive Officers and Directors (nine persons)......... 3,263,612(17) 26,900 68.42% 57.23%
54 - -------- (1) Includes 300,216 shares acquired through the exercise of Warrants, 215 shares utilized for cashless exercise, and 2,358,889 shares issuable upon exercise of Warrants. (2) Includes 29,813 shares acquired through the exercise of Warrants, 22 shares utilized for cashless exercise, and 235,382 shares issuable upon exercise of Warrants. (3) Seaver Kent-TPG Partners, L.P. and Seaver Kent I Parallel, L.P. are entities affiliated with Alexander M. Seaver. Mr. Seaver disclaims beneficial ownership of all shares owned by such entities. (4) Seaver Kent-TPG Partners, L.P. and Seaver Kent I Parallel, L.P. are entities affiliated with Bradley R. Kent. Mr. Kent disclaims beneficial ownership of all shares owned by such entities. (5) Includes 13,267 shares acquired through the exercise of Warrants, 10 shares utilized for cashless exercise, and 104,067 shares issuable upon exercise of Warrants. (6) Includes 3,497 shares owned prior to the Recapitalization, 5,366 shares acquired through the exercise of Warrants, 4 shares utilized for cashless exercise, and 41,854 shares issuable upon exercise of Warrants. (7) Includes 1,342 shares acquired through the exercise of Warrants, 1 share utilized for cashless exercise, and 10,582 shares issuable upon exercise of Warrants. (8) Includes 5,366 shares acquired through the exercise of Warrants, 4 shares utilized for cashless exercise, and 41,854 shares issuable upon exercise of Warrants. (9) Includes 2,664 shares owned prior to the Recapitalization, 1,342 shares acquired through the exercise of Warrants, 1 share utilized for cashless exercise, and 10,582 shares issuable upon exercise of Warrants. (10) Includes 49.45% represented by unexercised, issuable shares as described in note (1) above. (11) Includes 4.93% represented by unexercised, issuable shares as described in note (2) above. (12) Includes 2.18% represented by unexercised, issuable shares as described in note (5) above. (13) Includes 0.88% represented by unexercised, issuable shares as described in note (6) above. (14) Includes 0.22% represented by unexercised, issuable shares as described in note (7) above. (15) Includes 0.88% represented by unexercised, issuable shares as described in note (8) above. (16) Includes 0.22% represented by unexercised, issuable shares as described in note (9) above. (17) Includes all shares currently held and exercisable by entities affiliated with a director as described in notes (1) and (2) above and all shares currently held and issuable as described in notes (5) through (9) above. 55 DESCRIPTION OF THE BANK FACILITIES On the closing date of the Recapitalization (the "Closing Date"), the Issuer entered into the Bank Facilities among the Issuer, the Banks, DLJ Capital Funding, as Syndication Agent, Wells Fargo, as Administrative Agent, and Morgan Stanley Senior Funding, as Documentation Agent. DLJ Capital Funding is a lender under the Bank Facilities. The following is a summary description of the principal terms of the Bank Facilities. The description set forth below does not purport to be complete and is qualified in its entirety by reference to certain agreements setting forth the principal terms and conditions of the Bank Facilities, which are available upon request from the Company. STRUCTURE The Banks provided the Issuer with loans of (i) $30.0 million under a senior secured term loan facility (the "Term A Loan Facility"), (ii) $50.0 million under a senior secured term loan facility (the "Term B Loan Facility") and (iii) up to $25.0 million under the Revolving Credit Facility. The full amount of the Term A Loan Facility, the Term B Loan Facility and approximately $7.0 million of the Revolving Credit Facility were borrowed on the Closing Date under the Bank Facilities to: (i) partially finance the Recapitalization, including the Debt Retirement, (ii) pay certain fees and expenses related to the Recapitalization and (iii) fund working capital requirements. See "Use of Proceeds." The Revolving Credit Facility may be utilized to fund the Issuer's working capital requirements, including issuance of stand-by and trade letters of credit, and for other general corporate purposes. The Term A Loan Facility is comprised of a single tranche term facility of $30.0 million, and the Term B Loan Facility is comprised of a single tranche term facility of $50.0 million. Loans and letters of credit under the Revolving Credit Facility will be available at any time during its six-year term subject to the fulfillment of customary conditions precedent including the absence of a material adverse change in the condition of the Issuer and the absence of a default under the Bank Facilities. The Company is required to repay loans outstanding under the Term Loan Facilities in accordance with the following amortization schedule:
AMOUNT AMORTIZED --------------- FISCAL YEAR TERM A TERM B ----------- ------- ------- (IN THOUSANDS) 1998....................................................... $ -- $ 375 1999....................................................... 2,250 500 2000....................................................... 4,125 500 2001....................................................... 4,500 500 2002....................................................... 5,625 500 2003....................................................... 6,000 500 2004....................................................... 6,000 500 2005....................................................... 1,500 35,000 2006....................................................... -- 11,625 ------- ------- Total.................................................... $30,000 $50,000 ======= =======
SECURITY; GUARANTY The Issuer's obligations under the Bank Facilities are guaranteed by each of the Issuer's direct and indirect domestic subsidiaries. The Bank Facilities and the guarantees thereof are secured by (i) a first priority perfected lien on all the property and assets (tangible and intangible) of the Issuer and each of its existing and future direct and indirect domestic subsidiaries, (ii) all of the capital stock of the Issuer and (iii) all of the capital stock (or similar equity interests) of the Issuer's existing and future direct and indirect domestic subsidiaries. 56 INTEREST; MATURITY At the Issuer's option, borrowings under the Bank Facilities bear interest at (i) the Administrative Agent's base rate or (ii) the Administrative Agent's Adjusted Eurodollar Rate, plus applicable margins as set forth under the Bank Facilities. The Term A Loan Facility will mature seven years after the Closing Date. The Term B Loan Facility will mature eight years after the Closing Date, and the Revolving Credit Facility will terminate six years after the Closing Date. FEES The Issuer is required to pay the Banks, on a quarterly basis, an annual commitment fee based on the daily average unused portion of the Revolving Credit Facility which has accrued from the Closing Date. The Issuer is also obligated to pay (i) a quarterly letter of credit fee on the aggregate amount of outstanding letters of credit and (ii) a fronting bank fee for the letter of credit issuing bank. COVENANTS The Bank Facilities contain a number of covenants that, among other things, restrict the ability of Holdings (other than the financial covenants), the Issuer and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness (including the Notes) or amend certain debt instruments (including the Indenture), pay dividends, create liens on assets, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted by the Issuer or its subsidiaries, make capital expenditures or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, under the Bank Facilities, the Issuer is required to maintain, on a consolidated basis, specified financial ratios and tests, including minimum fixed charge coverage ratios, leverage ratios below a specified maximum and interest coverage ratios. The Company is currently in compliance with all financial covenants, tests and ratios to which it is subject under the Bank Facilities. The following is a summary of certain financial tests which apply to the Company under the Bank Facilities (capitalized terms have the meanings set forth in the Bank Facilities): Minimum Fixed Charge Coverage Ratio. The Minimum Fixed Charge Coverage Ratio (a ratio of EBITDA to certain interest expense, capital expenditure expense, scheduled principal payments under the Bank Facilities and dividends) for any computation period shall not be less than the ratio set forth below opposite the period in which such computation period ends: Period Ending Ratio ------------- ----- March 31, 1999 - March 31, 2001 1.2 June 30, 2001 - March 31, 2002 1.3 June 30, 2002 - December 31, 2002 1.4 March 31, 2003 - September 30, 2003 1.3 March 31, 2005 - March 31, 2006 0.5 57 Maximum Leverage Ratio. The Maximum Leverage Ratio (a ratio of total indebtedness to EBITDA) on any computation period shall not exceed the ratio set forth below opposite the period in which such computation period ends: Period Ending Ratio ------------- ----- June 30, 1998 - December 31, 1998 6.6 March 31, 1999 - June 30, 1999 6.5 September 30, 1999 6.3 March 31, 2000 6.0 June 30, 2000 5.9 September 30, 2000 5.7 March 31, 2001 5.4 June 30, 2001 5.3 September 30, 2001 5.1 March 31, 2002 4.9 June 30, 2002 4.7 September 30, 2002 4.6 March 31, 2003 4.4 June 30, 2003 4.3 September 30, 2003 4.2 March 31, 2004 - March 31, 2006 4.0 Interest Coverage Ratio. The Interest Coverage Ratio (a ratio of EBITDA to certain interest expense under the Bank Facilities) for any consecutive four-fiscal quarter period ending on the dates set forth below to be less than the correlative ratio indicated: Period Ending Ratio ------------- ----- March 31, 1999 - June 30, 1999 1.60 September 30, 1999 - March 31, 2000 1.70 June 30, 2000 - September 30, 2000 1.80 December 31, 2000 - March 31, 2001 1.90 June 30, 2001 - September 30, 2001 2.00 March 31, 2002 - June 30, 2002 2.20 September 30, 2002 2.30 March 31, 2003 2.50 June 30, 2003 2.60 September 30, 2003 2.70 March 31, 2004 - March 31, 2006 2.75 EVENTS OF DEFAULT The Bank Facilities contain customary events of default, including nonpayment of principal, interest or fees, material inaccuracy of representations and warranties, violation of covenants, cross-default to certain other indebtedness (including the Notes and the Senior Discount Debentures), certain events of bankruptcy and insolvency, material judgments against the Issuer, invalidity of any guarantee or security interest and a change of control of the Issuer in certain circumstances as set forth therein. 58 THE EXCHANGE OFFER The following is a summary of the material provisions of the Registration Rights Agreement. This summary does not purport to summarize all of the provisions of the Registration Rights Agreement, and reference also is made to the provisions of the Registration Rights Agreement, which has been filed as an exhibit to the Registration Statement and a copy of which is available as set forth under the heading "Available Information." TERMS OF THE EXCHANGE OFFER In connection with the issuance of the Old Notes pursuant to a Purchase Agreement dated as of April 15, 1998, by and among the Issuer, the Guarantors and the Initial Purchasers, the Initial Purchasers and their respective assignees became entitled to the benefits of the Registration Rights Agreement. Under the Registration Rights Agreement, the Issuer and the Guarantors are required to file within 75 days after April 21, 1998 (the date the Registration Rights Agreement was entered into and the Closing Date) a registration statement (the "Exchange Offer Registration Statement") for a registered exchange offer with respect to an issue of New Notes. Under the Registration Rights Agreement, the Issuer and the Guarantors are also required to (i) use their respective best efforts to cause such Exchange Offer Registration Statement to become effective within 150 days after the Closing Date, (ii) use their respective best efforts to keep the Exchange Offer open for at least 20 business days (or longer if required by applicable law), (iii) use their respective best efforts to consummate the Exchange Offer within 45 days following the date on which the Exchange Offer Registration Statement is declared effective by the Commission and (iv) cause the Exchange Offer to comply with all applicable federal and state securities laws. The Exchange Offer being made hereby, if commenced and consummated within the time periods described in this paragraph, will satisfy those requirements under the Registration Rights Agreement. Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, all Old Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be accepted for exchange. New Notes of the same class will be issued in exchange for an equal principal amount of outstanding Old Notes accepted in the Exchange Offer. Old Notes may be tendered only in integral multiples of $1,000. This Prospectus, together with the Letter of Transmittal, is being sent to all registered holders as of , 1998. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered in exchange. However, the obligation to accept Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth herein under "--Conditions." Old Notes will be deemed to have been accepted as validly tendered when, as and if the Trustee has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of Old Notes for the purposes of receiving the New Notes and delivering New Notes to such holders. Based on interpretations by the staff of the Commission, as set forth in no- action letters issued to third parties, including the Exchange Offer No-Action Letters, the Issuer and the Guarantors believe that the New Notes issued pursuant to the Exchange Offer may be offered for resale, resold or otherwise transferred by each holder thereof (other than a broker-dealer who acquires such New Notes directly from the Issuer for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act and other than any holder that is an "affiliate" (as defined in Rule 405 under the Securities Act) of the Issuer without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holder's business and such holder is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement with any person to participate in a distribution of such New Notes. By tendering the Old Notes in exchange for New Notes, each holder, other than a Participating Broker-Dealer, will represent to the Issuer and the Guarantors that: (i) it is not an affiliate (as defined in Rule 405 under the Securities Act) of the Issuer; (ii) it is not a broker- dealer tendering Old Notes acquired for its own account directly from the Issuer; (iii) any New Notes to be received by it will be acquired in the ordinary course of its business; and (iv) it is not engaged in, and does not intend to engage in, a distribution of such New Notes and has no arrangement or understanding to participate in a distribution of the New Notes. If a holder of New Notes is engaged in or intends to engage in a distribution of the New Notes or has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the 59 Exchange Offer, such holder may not rely on the applicable interpretations of the staff of the Commission and must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any secondary resale transaction. Each Participating Broker-Dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a Participating Broker-Dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such Participating Broker-Dealer as a result of market-making activities or other trading activities. The Issuer and the Guarantors have agreed that they will make this Prospectus available to any Participating Broker-Dealer for a period of time not to exceed one year after the date on which the Exchange Offer is consummated for use in connection with any such resale. See "Plan of Distribution." In the event that (i) any changes in law or the applicable interpretations of the staff of the Commission do not permit the Issuer and the Guarantors to effect the Exchange Offer, or (ii) if any holder of Transfer Restricted Securities (as defined herein) notifies the Issuer within 20 business days following the consummation of the Exchange Offer that (A) such holder was prohibited by law or Commission policy from participating in the Exchange Offer or (B) such holder may not resell the New Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such holder or (C) such holder is a broker-dealer and holds Old Notes acquired directly from the Issuer or one of its affiliates, then the Issuer and the Guarantors will (x) cause to be filed a shelf registration statement pursuant to Rule 415 under the Act (the "Shelf Registration Statement") on or prior to 30 days after the date on which the Issuer determines that it is not required to file the Exchange Offer Registration Statement pursuant to clause (i) above or 60 days after the date on which the Issuer receives the notice specified in clause (ii) above and will (y) use their respective best efforts to cause such Shelf Registration Statement to become effective within 150 days after the date on which the Issuer becomes obligated to file such Shelf Registration Statement. If, after the Issuer has filed an Exchange Offer Registration Statement, the Issuer is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer will not be permitted under applicable federal law, then the filing of the Exchange Offer Registration Statement will be deemed to satisfy the requirements of clause (x) above. Such an event will have no effect on the requirements of clause (y) above. The Issuer and the Guarantors will use their respective best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended to the extent necessary to ensure that it is available for sales of Transfer Restricted Securities by the holders thereof for a period of at least two years following the date on which such Shelf Registration Statement first becomes effective under the Securities Act. The term "Transfer Restricted Securities" means each Old Note, until the earliest to occur of (a) the date on which such Old Note is exchanged in the Exchange Offer and entitled to be resold to the public by the holder thereof without complying with the prospectus delivery requirements of the Act, (b) the date on which such Old Note has been disposed of in accordance with a Shelf Registration Statement, (c) the date on which such Old Note is disposed of by a broker-dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including delivery of the prospectus contained therein) or (d) the date on which such Old Note is distributed to the public pursuant to Rule 144 under the Act. If (i) the Exchange Offer Registration Statement or the Shelf Registration Statement is not filed with the Commission on or prior to the date specified in the Registration Rights Agreement, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the date specified for such effectiveness in the Registration Rights Agreement, (iii) the Exchange Offer has not been consummated within 195 days after the Closing Date or (iv) any Registration Statement required by the Registration Rights Agreement is filed and declared effective but will thereafter cease to be effective or fail to be usable for its intended purpose without being succeeded immediately by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective immediately (each such event referred to in clauses (i) through (iv), a "Registration Default"), then the Issuer and the Guarantors hereby jointly and severally agree to pay Liquidated Damages to each holder of New Transfer Restricted Securities. With respect to the first 90-day period immediately following the occurrence of such Registration Default the Liquidated Damages will equal $.05 per 60 week per $1,000 principal amount of Transfer Restricted Securities held by such holder for each week or portion thereof that the Registration Default continues. The amount of the Liquidated Damages will increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $.30 per week per $1,000 principal amount of Transfer Restricted Securities. Notwithstanding anything to the contrary set forth herein, (1) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (i) above, (2) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of (ii) above, (3) upon consummation of the Exchange Offer, in the case of (iii) above, or (4) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of (iv) above, the Liquidated Damages payable with respect to the Transfer Restricted Securities a result of such clause (i), (ii), (iii) or (iv), as applicable, will cease. All accrued Liquidated Damages will be paid to the holder of the global notes representing the Old Notes by wire transfer of immediately available funds or by federal funds check and to holders of certificated securities by mailing checks to their registered addresses on each October 15 and April 15. All obligations of the Issuer and the Guarantors set forth in the preceding paragraph that are outstanding with respect to any Transfer Restricted Security at the time such security ceases to be a Transfer Restricted Security will survive until such time as all such obligations with respect to such security will have been satisfied in full. Upon consummation of the Exchange Offer, subject to certain exceptions, holders of Old Notes who do not exchange their Old Notes for New Notes in the Exchange Offer will no longer be entitled to registration rights and will not be able to offer or sell their Old Notes, unless such Old Notes are subsequently registered under the Securities Act (which, subject to certain limited exceptions, the Issuer will have no obligation to do), except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "Risk Factors--Risk Factors Relating to the Notes--Consequences of Failure to Exchange." EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION The term "Expiration Date" will mean , 1998 (30 calendar days following the commencement of the Exchange Offer, which will occur on the date of effectiveness of the Registration Statement), unless the Exchange Offer is extended, if and as required by applicable law, in which case the term "Expiration Date" will mean the latest date to which the Exchange Offer is extended. In order to extend the Expiration Date, the Issuer will notify the Exchange Agent of any extension by oral or written notice and will notify the holders of the Old Notes by means of a press release or other public announcement prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Issuer and the Guarantors reserve the right (i) to delay acceptance of any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer and not permit acceptance of Old Notes not previously accepted if any of the conditions set forth herein under "--Conditions" has occurred and has not been waived by the Issuer and the Guarantors, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (ii) to amend the terms of the Exchange Offer in any manner deemed by it to be advantageous to the holders of the Old Notes. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the Exchange Agent. If the Exchange Offer is amended in a manner determined by the Issuer to constitute a material change, the Issuer will promptly disclose such amendment in a manner reasonably calculated to inform the holders of the Old Notes of such amendment. 61 INTEREST ON THE NEW NOTES The New Notes will accrue interest at the applicable per annum rate set forth on the cover page of this Prospectus, from (i) the later of (A) the last interest payment date on which interest was paid on the Old Notes surrendered in exchange therefor or (B) if the Old Notes are surrendered for exchange on a date subsequent to the record date for an interest payment date to occur on or after the date of such exchange and as to which interest will be paid, the date of such interest payment or (ii) if no interest has been paid on the Old Notes, from the Issue Date. Interest on the New Notes is payable on October 15 and April 15 of each year commencing October 15, 1998. PROCEDURES FOR TENDERING To tender in the Exchange Offer, a holder must complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In addition, either (i) certificates for such Old Notes must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book- Entry Confirmation") of such Old Notes, if such procedure is available, into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date or (iii) the holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS OF OLD NOTES. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE ISSUER. Delivery of all documents must be made to the Exchange Agent at its address set forth below. Holders of Old Notes may also request their respective brokers, dealers, commercial banks, trust companies or nominees to effect such tender for such holders. The tender by a holder of Old Notes will constitute an agreement between such holder and the Issuer in accordance with the terms and subject to the conditions set forth herein and in the Letter of Transmittal. Only a holder of Old Notes may tender such Old Notes in the Exchange Offer. The term "holder" with respect to the Exchange Offer means any person in whose name Old Notes are registered on the books of the Issuer or any other person who has obtained a properly completed bond power from the registered holder. Any beneficial owner whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on his behalf. If such beneficial owner wishes to tender on his own behalf, such beneficial owner must, prior to completing and executing the Letter of Transmittal and delivering his Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such owner's name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by any member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an "eligible guarantor" institution within the meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the Old Notes tendered pursuant thereto are tendered (i) by a registered holder who has not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. 62 If the Letter of Transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by bond powers and a proxy which authorizes such person to tender the Old Notes on behalf of the registered holder, in each case as the name of the registered holder or holders appears on the Old Notes. If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Issuer, evidence satisfactory to the Issuer of their authority to so act must be submitted with the Letter of Transmittal. All questions as to the validity, form, eligibility (including time of receipt) and withdrawal of the tendered Old Notes will be determined by the Issuer in its sole discretion, which determination will be final and binding. The Issuer reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes which, if accepted, would, in the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves the absolute right to waive any irregularities or conditions of tender as to particular Old Notes. The Issuer's interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Issuer will determine. Neither the Issuer, the Guarantors, the Exchange Agent nor any other person will be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor will any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost to such holder by the Exchange Agent to the tendering holders of Old Notes, unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. In addition, the Issuer reserves the right in its sole discretion, subject to the provisions of the Indenture, to (i) purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date or, as set forth under "--Conditions," (ii) to terminate the Exchange Offer in accordance with the terms of the Registration Rights Agreement and (iii) to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers could differ from the terms of the Exchange Offer. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, all Old Notes properly tendered will be accepted, promptly after the Expiration Date, and the New Notes will be issued promptly after acceptance of the Old Notes. See "--Conditions" below. For purposes of the Exchange Offer, Old Notes will be deemed to have been accepted as validly tendered for exchange when, as and if the Issuer has given oral or written notice thereof to the Exchange Agent. In all cases, issuance of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Notes or a timely Book- Entry Confirmation of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if Old Notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or nonexchanged Old Notes will be returned without expense to the tendering holder thereof (or, in the case of Old Notes tendered by book-entry transfer procedures described below, such nonexchanged Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. 63 BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Prospectus. Any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. However, although delivery of Old Notes may be effected through book-entry transfer at the Book- Entry Transfer Facility, the Letter of Transmittal or facsimile thereof with any required signature guarantees and any other required documents must, in any case, be transmitted to and received by the Exchange Agent at one of the addresses set forth below under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery procedures described below must be complied with. GUARANTEED DELIVERY PROCEDURES If a registered holder of New the Old Notes desires to tender such Old Notes, and the Old Notes are not immediately available, or time will not permit such holder's Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedures for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal and Notice of Guaranteed Delivery, substantially in the form provided by the Issuer (by mail or hand delivery), setting forth the name and address of the holder of New Old Notes and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within three New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book- Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal are received by the Exchange Agent within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL OF TENDERS Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time on the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent prior to 5:00 p.m., New York City time on the Expiration Date at one of the addresses set forth below under "--Exchange Agent." Any such notice of withdrawal must specify the name of the person having tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn (including the principal amount of such Old Notes) and (where certificates for Old Notes have been transmitted) specify the name in which such Old Notes are registered, if different from that of the withdrawing holder. If certificates for Old Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such holder is an Eligible Institution. If Old Notes have been tendered pursuant to the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time of receipt) of such notices will be determined by the Issuer, whose determination will be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the holder thereof without cost to such holder (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's 64 account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described above, such Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "-- Procedures for Tendering" and "--Book-Entry Transfer" above at any time on or prior to the Expiration Date. CONDITIONS Notwithstanding any other term of the Exchange Offer, Old Notes will not be required to be accepted for exchange, nor will New Notes be issued in exchange for any Old Notes, and the Issuer and the Guarantors may terminate or amend the Exchange Offer as provided herein before the acceptance of such Old Notes, if because of any change in law, or applicable interpretations thereof by the Commission, the Issuer and the Guarantors determine that they are not permitted to effect the Exchange Offer. The Issuer and the Guarantors have no obligation to, and will not knowingly, permit acceptance of tenders of Old Notes from affiliates (within the meaning of Rule 405 under the Securities Act) of the Issuer or the Guarantors or from any other holder or holders who are not eligible to participate in the Exchange Offer under applicable law or interpretations thereof by the Commission, or if the New Notes to be received by such holder or holders of Old Notes in the Exchange Offer, upon receipt, will not be tradable by such holder without restriction under the Securities Act and the Exchange Act and without material restrictions under the "blue sky" or securities laws of substantially all of the states of the United States. EXCHANGE AGENT State Street Bank and Trust Company has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance and requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: By Mail: By Overnight Mail or Courier: P.O. Box 778 Two International Place Boston, Massachusetts 02102 Boston, Massachusetts 02102 Attention: Corporate Trust Department Attention: Corporate Trust Department Kellie Mullen Kellie Mullen By Hand in New York to 5:00 p.m. By Hand in Boston to 5:00 p.m.: (as drop agent): Two International Place 61 Broadway Fourth Floor 15th Floor Corporation Trust Corporate Trust Window Boston, Massachusetts 02110 New York, New York 10006 For information call: (617) 664-5587 FEES AND EXPENSES The expenses of soliciting tenders pursuant to the Exchange Offer will be borne by the Issuer. The principal solicitation for tenders pursuant to the Exchange Offer is being made by mail; however, additional solicitations may be made by telegraph, telephone, telecopy or in person by officers and regular employees of the Company. The Issuer will not make any payments to brokers, dealers or other persons soliciting acceptances of the Exchange Offer. The Issuer, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection 65 therewith. The Issuer may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of the Prospectus and related documents to the beneficial owners of the Old Notes, and in handling or forwarding tenders for exchange. The expenses to be incurred in connection with the Exchange Offer will be paid by the Issuer, including fees and expenses of the Exchange Agent and Trustee and accounting, legal, printing and related fees and expenses. The Issuer will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Notes tendered, or if tendered Old Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. 66 DESCRIPTION OF THE NEW NOTES GENERAL The Old Notes were issued, and the New Notes offered hereby will be issued, pursuant to the Indenture dated as of April 21, 1998 among the Issuer, the Guarantors and State Street Bank and Trust Company, as trustee (the "Trustee"). The terms of the New Notes will include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The New Notes will be subject to all such terms, and perspective holders of New Notes are referred to the Indenture and the Trust Indenture Act for a statement thereof. The following summary of the material provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein, of certain terms used below. Copies of the proposed form of Indenture and Registration Rights Agreement are available as set forth herein under "--Additional Information." The definitions of certain terms used in the following summary are set forth below under "-- Certain Definitions." The New Notes will be general unsecured obligations of the Issuer and will be subordinated in right of payment to all current and future Senior Debt. The operations of the Issuer are conducted in part through its Subsidiaries and, therefore, the Issuer is dependent in part upon the cash flow of its Subsidiaries to meet its obligations under the New Notes on a senior subordinated unsecured basis. See "Risk Factors--Risk Factors Relating to the Notes--Fraudulent Transfer Statutes." As of the Issue Date, all of the Issuer's subsidiaries were Restricted Subsidiaries. However, under certain circumstances, the Issuer will be able to designate current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the restrictive covenants set forth in the Indenture. As of June 30, 1998, the Issuer had Senior Debt of approximately $86.1 million. The Indenture permits the incurrence of additional Senior Debt in the future. PRINCIPAL, MATURITY AND INTEREST The New Notes in an aggregate principal amount of up to $100.0 million will be issued in the Exchange Offer. The New Notes will mature on April 15, 2008. Interest on the New Notes will accrue at the rate of 10 1/8% per annum and will be payable semi-annually in arrears on October 15 and April 15, commencing October 15, 1998, to holders of record on the immediately preceding October 1 and April 1, respectively. Interest on the New Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Issue Date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, premium, if any, and interest and Liquidated Damages, if any, on the New Notes will be payable at the office or agency of the Issuer maintained for such purpose within the City and State of New York or, at the option of the Issuer, payment of principal, premium, interest and Liquidated Damages may be made by check mailed to holders of the New Notes at their respective addresses set forth in the register of holders of the New Notes; provided that all payments of principal, premium, interest and Liquidated Damages with respect to New Notes represented by one or more permanent global notes ("Global Notes") will be required to be made by wire transfer of immediately available funds to the accounts of DTC or any successor thereto. Until otherwise designated by the Issuer, the Issuer's office or agency in New York will be the office of the Trustee maintained for such purpose. The New Notes will be issued in denominations of $1,000 and integral multiples thereof. GUARANTEES The Issuer's payment obligations under the New Notes are jointly and severally guaranteed, fully and unconditionally, by the Guarantors (the "Subsidiary Guarantees"). The Subsidiary Guarantee of each Guarantor will be subordinated to the prior payment in full of all Senior Debt of such Guarantor, which would include approximately $86.1 million of Senior Debt outstanding as of June 30, 1998, and the amounts for which the Guarantors will be liable under the guarantees issued from time to time with respect to Senior Debt. The obligations of each Guarantor under its Subsidiary Guarantee will be limited so 67 as not to constitute a fraudulent conveyance under applicable law. See "Risk Factors--Risk Factors Relating to the Notes--Fraudulent Transfer Statutes." The Indenture provides that no Guarantor may consolidate with or merge with or into (whether or not such Guarantor is the surviving Person), another corporation, Person or entity whether or not affiliated with such Guarantor unless (i) subject to the provisions of the following paragraph, the Person formed by or surviving any such consolidation or merger (if other than such Guarantor) assumes all the obligations of such Guarantor, pursuant to a supplemental indenture in form and substance reasonably satisfactory to the Trustee, under the Indenture and the Subsidiary Guarantees; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. The Indenture provides that in the event of a sale or other disposition of all of the assets of any Guarantor, by way of merger, consolidation or otherwise, or a sale or other disposition of all of the capital stock of any Guarantor, then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or otherwise, of all of the capital stock of such Guarantor) or the corporation acquiring the property (in the event of a sale or other disposition of all or substantially all of the assets of such Guarantor) will be released and relieved of any obligations under its Subsidiary Guarantee. In addition, the Indenture provides that, in the event the Company designates a Restricted Subsidiary to be an Unrestricted Subsidiary in accordance with the Indenture, then such Restricted Subsidiary will be released from its obligations under its Subsidiary Guarantee. See "-- Repurchase at the Option of Holders--Asset Sales." SUBORDINATION The payment of Obligations in respect of the New Notes is subordinated in right of payment, as set forth in the Indenture, to the prior payment in full of all Obligations in respect of Senior Debt, whether outstanding on the date of the Indenture or thereafter incurred. Upon any payment or distribution to creditors of the Issuer of any kind, whether in cash, property or securities in a liquidation or dissolution of the Issuer or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Issuer or its property, an assignment for the benefit of creditors or any marshaling of the Issuer's assets and liabilities, whether voluntary or involuntary, the holders of Senior Debt of the Issuer will be entitled to receive payment in full in cash of all Obligations due in respect of such Senior Debt (including interest after the commencement of any such proceeding at the rate specified in the applicable Senior Debt whether or not allowable as a claim in any such proceeding) before holders of New Notes will be entitled to receive any payment or distribution of any kind with respect to the New Notes, and until all Obligations with respect to Senior Debt are paid in full, any payment or distribution to which holders of New Notes would be entitled will be made to the holders of Senior Debt (except that holders of New Notes may receive and retain Permitted Junior Securities and payments made from the trust described under "--Legal Defeasance and Covenant Defeasance"). The Issuer also may not make any payment upon or in respect of the New Notes (except in Permitted Junior Securities or from the trust described under "-- Legal Defeasance and Covenant Defeasance") if (i) a default in the payment of the principal of, premium, if any, or interest on Designated Senior Debt occurs and is continuing or (ii) any other default occurs and is continuing with respect to Designated Senior Debt that permits holders of the Designated Senior Debt as to which such default relates to accelerate its maturity, in the case of this clause (ii) only, and the Trustee receives a notice of such default invoking the provisions described in this paragraph (a "Payment Blockage Notice") from the holders of any Designated Senior Debt or any agent or trustee therefor. Payments on the New Notes may and will be resumed (a) in the case of a payment default, upon the date on which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received, unless a payment default has occurred and is continuing (as a result of nonpayment of a scheduled principal repayment upon Designated Senior Debt, nonpayment of principal upon the stated maturity of any Designated Senior Debt or the acceleration of the maturity of any Designated Senior Debt). No 68 new period of payment blockage (other than for a payment default) may be commenced unless and until 360 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee will be, or be made, the basis for a subsequent Payment Blockage Notice unless such default will have been cured or waived for a period of not less than 90 days. Whenever the Issuer is prohibited from making any payment in respect of the New Notes, the Issuer also will be prohibited from making, directly or indirectly, any payment of any kind on account of the purchase or other acquisition of the New Notes. If any holder of New Notes receives any payment or distribution that such holder of New Notes is not entitled to receive with respect to the New Notes, such holder of New Notes will be required to pay the same over to the holders of Senior Debt. The Indenture further requires that the Company promptly notify holders of Senior Debt if payment of the New Notes is accelerated because of an Event of Default. As a result of the subordination provisions described above, in the event of a liquidation or insolvency, holders of New Notes may recover less ratably than creditors of the Issuer who are holders of Senior Debt. As of March 31, 1998, on a pro forma basis after giving effect to the Recapitalization, the Issuer and its Guarantors would have had outstanding approximately $84.8 million in aggregate principal amount of Senior Debt. The Indenture limits, subject to certain financial tests, the amount of additional Indebtedness, including Senior Debt, that the Issuer and its Subsidiaries can incur. See "-- Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock." OPTIONAL REDEMPTION Except as described below, the New Notes will not be redeemable at the Issuer's option prior to April 15, 2003. Thereafter, the New Notes will be subject to redemption at any time at the option of the Issuer, in whole or in part, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:
REDEMPTION YEAR PRICE ---- ---------- 2003........................................ 105.063% 2004........................................ 103.375% 2005........................................ 101.688% 2006 and thereafter......................... 100.000%
Notwithstanding the foregoing, at any time on or prior to April 15, 2001, the Issuer may (but will not have the obligation to) redeem, on one or more occasions, up to an aggregate of 35% of the principal amount of New Notes originally issued at a redemption price equal to 110.125% of the principal amount thereof, plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the redemption date, with the net cash proceeds of one or more Equity Offerings; provided that at least 65% in aggregate principal amount of the New Notes originally issued remains outstanding immediately after the occurrence of such redemption; and provided further, that such redemption occurs within 90 days of the date of the closing of such Equity Offering. MANDATORY REDEMPTION Except as set forth under "--Repurchase at the Option of Holders," the Issuer is not required to make mandatory redemption or sinking fund payments with respect to the New Notes. 69 REPURCHASE AT THE OPTION OF HOLDERS CHANGE OF CONTROL Upon the occurrence of a Change of Control, each holder of New Notes will have the right to require the Issuer to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder's New Notes pursuant to the offer described below (the "Change of Control Offer") at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Issuer will mail a notice to each holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase New Notes on the date specified in such notice, which date will be no earlier than 30 days (or such shorter time period as may be permitted under applicable law, rules and regulations) and no later than 60 days from the date such notice is mailed (the "Change of Control Payment Date"), pursuant to the procedures required by the Indenture and described in such notice. The Issuer will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the New Notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the Indenture relating to such Change of Control Offer, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations described in the Indenture by virtue thereof. On the Change of Control Payment Date, the Issuer will, to the extent lawful, (1) accept for payment all New Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the office or agency where the New Notes may be presented for payment (the "Paying Agent") an amount equal to the Change of Control Payment in respect of all New Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the New Notes so accepted together with an officer's certificate stating the aggregate principal amount of New Notes or portions thereof being purchased by the Issuer. The Paying Agent will promptly mail to each holder of New Notes so tendered the Change of Control Payment for such New Notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book entry) to each holder a new New Note equal in principal amount to any unpurchased portion of the New Notes surrendered, if any; provided that each such new New Note will be in a principal amount of $1,000 or an integral multiple thereof. The Indenture provides that, prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, the Issuer will either repay all outstanding Senior Debt or obtain the requisite consents, if any, under all agreements governing outstanding Senior Debt to permit the repurchase of New Notes required by this covenant. The Issuer will not be required to purchase any New Notes until it has complied with the preceding sentence, but failure to comply with the preceding sentence will constitute an Event of Default. The Issuer will publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date. The Change of Control provisions described above will be applicable whether or not any other provisions of the Indenture are applicable. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit holders of New Notes to require that the Issuer repurchase or redeem the New Notes in the event of a takeover, recapitalization or similar transaction. The Bank Facilities prohibit the Issuer from purchasing any New Notes and provides that certain change of control events with respect to the Issuer would constitute a default thereunder. Any future credit agreements or other agreements relating to Senior Debt to which the Issuer becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Issuer is prohibited from purchasing New Notes, the Issuer could seek the consent of its lenders to the purchase of New Notes or could attempt to refinance the borrowings that contain such prohibition. If the Issuer does not obtain such a consent or repay such borrowings, the Issuer will remain prohibited from purchasing New Notes. In such case, the Issuer's failure to purchase tendered New Notes would constitute an Event of Default under the Indenture which would, in turn, constitute a default under the Bank Facilities. In such circumstances, the subordination provisions in the 70 Indenture would likely restrict payments to holders of New Notes. In addition, the exercise by holders of New Notes of their right to require the Issuer to repurchase the New Notes could cause a default under such Senior Debt, even if the Change of Control itself does not, due to the financial effect of such repurchases on the Issuer. Finally, the Issuer's ability to pay cash to holders of New Notes upon a repurchase may be limited by the Issuer's then existing financial resources. The Issuer will not be required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by the Issuer and purchases all New Notes validly tendered and not withdrawn under such Change of Control Offer. The definition of Change of Control includes a phrase relating to the sale, lease, transfer, conveyance or other disposition of "all or substantially all" of the assets of the Issuer and its Subsidiaries taken as a whole. Although there is a developing body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, the ability of a holder of New Notes to require the Issuer to repurchase such New Notes as a result of a sale, lease, transfer, conveyance or other disposition of less than all of the assets of the Issuer and its Subsidiaries taken as a whole to another Person or group may be uncertain. ASSET SALES The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Issuer (or the Restricted Subsidiary, as the case may be) receives consideration at the time of such Asset Sale at least equal to the fair market value (evidenced by a resolution of the Board of Directors set forth in an officer's certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of and (ii) at least 75% of the consideration therefor received by the Issuer or such Restricted Subsidiary is in the form of cash or Cash Equivalents, provided that the amount of (x) any liabilities (as shown on the Issuer's or such Restricted Subsidiary's most recent balance sheet) of the Issuer or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the New Notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Issuer or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Issuer or any such Restricted Subsidiary from such transferee that are converted by the Issuer or such Restricted Subsidiary into cash (to extent of the cash received) within 180 days following the closing of such Asset Sale will be deemed to be cash for purposes of this provision. Within 360 days after the receipt of any Net Proceeds from an Asset Sale, the Issuer or the Restricted Subsidiaries may apply such Net Proceeds, at its option, (a) to repay Senior Debt, or (b) to the investment in, or the making of a capital expenditure or the acquisition of other long-term assets, in each case used or useable in a Permitted Business, from a party other than the Issuer or a Restricted Subsidiary, or (c) the acquisition of Capital Stock of any Person primarily engaged in a Permitted Business if, as a result of the acquisition by the Issuer or any Restricted Subsidiary thereof, such Person becomes a Restricted Subsidiary, or (d) a combination of the uses described in clauses (a), (b) and (c). Pending the final application of any such Net Proceeds, the Issuer or its Restricted Subsidiaries may temporarily reduce Senior Debt or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $7.5 million, the Issuer will be required to make an offer to all holders of New Notes and, to the extent required by the terms of any Pari Passu Indebtedness, all holders of such Pari Passu Indebtedness (an "Asset Sale Offer"), to purchase the maximum principal amount of New Notes and any such Pari Passu Indebtedness that may be purchased out of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the date of purchase, in accordance with the procedures set forth in the Indenture or such Pari Passu Indebtedness, as applicable. To the extent any Excess Proceeds remain after consummation of 71 the Asset Sale Offer, the Issuer may use such Excess Proceeds for any purpose not otherwise prohibited by the Indenture. If the aggregate principal amount of New Notes and any such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee will select the New Notes to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds will be reset at zero. SELECTION AND NOTICE If less than all of the New Notes are to be redeemed or repurchased in an offer to purchase at any time, selection of New Notes for redemption or repurchase will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which the New Notes are listed, or, if the New Notes are not so listed, on a pro rata basis, by lot or by such other method as the Trustee deems fair and appropriate; provided that New Notes purchased pursuant to an Asset Sale Offer or to be redeemed with the proceeds of an Equity Offering will be selected on a pro rata basis; provided further that no New Notes of $1,000 or less will be redeemed or repurchased in part. Notices of redemption may not be conditional. Notices of redemption or repurchase will be mailed by first class mail at least 30 but not more than 60 days before the redemption date or repurchase date to each holder of New Notes to be redeemed or repurchased at its registered address. If any New Note is to be redeemed or repurchased in part only, the notice of redemption or repurchase that relates to such New Note will state the portion of the principal amount thereof to be redeemed or repurchased. A new New Note in principal amount equal to the unredeemed or unrepurchased portion thereof will be issued in the name of the holder thereof upon cancellation of the original New Note. On and after the redemption or repurchase date, interest and Liquidated Damages will cease to accrue on New Notes or portions of them called for redemption or repurchase. CERTAIN COVENANTS RESTRICTED PAYMENTS The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Issuer's or any of its Restricted Subsidiaries' Equity Interests (including, without limitation, any such dividend, distribution or other payment made in connection with any merger or consolidation involving the Issuer or any of its Restricted Subsidiaries), other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Issuer or dividends or distributions payable to the Issuer or any Wholly Owned Subsidiary of the Issuer; (ii) purchase, redeem or otherwise acquire or retire for value (including, without limitation, any such purchase, redemption, or other acquisition or retirement for value made as a payment in connection with any merger or consolidation involving the Issuer) any Equity Interests of the Issuer or any Restricted Subsidiary (other than any such Equity Interests owned by the Issuer or any Restricted Subsidiary of the Issuer); (iii) make any payment on or with respect to, or purchase, redeem, defease or otherwise acquire or retire for value, any Indebtedness that is subordinated to the New Notes, except a payment of interest or a payment of principal at Stated Maturity; or (iv) make any Restricted Investment (all such payments and other actions set forth in clauses (i) through (iv) above being collectively referred to as "Restricted Payments"), unless, at the time of and immediately after giving effect to such Restricted Payment: (a) no Default or Event of Default will have occurred and be continuing; and (b) the Issuer would, at the time of such Restricted Payment, and after giving pro forma effect thereto as if any Indebtedness incurred in order to make such Restricted Payment had been incurred at the beginning of the applicable four quarter period, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under caption "--Incurrence of Indebtedness and Issuance of Preferred Stock;" and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Issuer and its Restricted Subsidiaries after the date of the Indenture (excluding Restricted 72 Payments permitted by clauses (ii), (iii), (iv), (vi), (vii), (viii) and (x) of the next succeeding paragraph), is less than the sum (without duplication) of (i) 50% of the Consolidated Net Income of the Issuer for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date of the Indenture to the end of the Issuer's most recently ended fiscal quarter for which internal financial statements are available at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate Qualified Proceeds received by the Issuer from contributions to the Issuer's capital or the issue or sale subsequent to the date of the Indenture of Equity Interests of the Issuer (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Issuer that have been converted into such Equity Interests (other than Equity Interests (or Disqualified Stock or convertible debt securities) sold to a Subsidiary of the Issuer and other than Disqualified Stock or convertible debt securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date of the Indenture is sold for Qualified Proceeds or otherwise liquidated or repaid (including, without limitation, by way of a dividend or other distribution, a repayment of a loan or advance or other transfer of assets) for in whole or in part, the lesser of (A) the Qualified Proceeds with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment, plus (iv) upon the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the lesser of (x) the fair market value of such Subsidiary or (y) the aggregate amount of all Investments made in such Subsidiary subsequent to the Issue Date by the Issuer and its Restricted Subsidiaries, plus (v) $2.0 million. The foregoing provisions will not prohibit (i) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Issuer or any Guarantor in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Restricted Subsidiary of the Issuer) of, other Equity Interests of the Issuer (other than any Disqualified Stock); provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement, defeasance or other acquisition will be excluded from clause (c) (ii) of the preceding paragraph; (iii) the defeasance, redemption, repurchase, retirement or other acquisition of subordinated Indebtedness in exchange for, or with the net cash proceeds from, an incurrence of Permitted Refinancing Indebtedness; (iv) the payment of any dividend (or the making of a similar distribution or redemption) by a Restricted Subsidiary of the Issuer to the holders of its common Equity Interests on a pro rata basis; (v) so long as no Default or Event of Default has occurred and is continuing, the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Issuer, Holdings or any Restricted Subsidiary of the Issuer, held by any member of the Issuer's (or any of its Subsidiaries') management, employees or consultants pursuant to any management, employee or consultant equity subscription agreement or stock option agreement in effect as of the date of the Indenture; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests must not exceed (1) $1.5 million in any twelve-month period and (2) in the aggregate, the sum of (A) $7.0 million and (B) the aggregate cash proceeds received by the Issuer from any reissuance of Equity Interests by Holdings or the Issuer to members of management of the Issuer and its Subsidiaries (provided that the cash proceeds referred to in this clause (B) will be excluded from clause (c)(ii) of the preceding paragraph); (vi) payments required to be made under the Tax Sharing Agreement; (vii) distributions made by the Issuer on the date of the Indenture, the proceeds of which were utilized solely to consummate the Recapitalization; (viii) the payment of dividends or the making of loans or advances by the Issuer to Holdings not to exceed $1.5 million in any fiscal year for costs and expenses incurred by Holdings in its capacity as a holding Issuer or for services rendered by Holdings on behalf of the Issuer; (ix) so long as no Default or Event of Default has occurred and is continuing, the declaration and payment of dividends to holders of any class or series of Disqualified Stock of the Issuer or any Guarantor issued after the date of the Indenture in accordance with the covenant described below under the caption "--Incurrence of Indebtedness and Issuance of Preferred Stock"; and (x) so long as (A) no Default or Event of Default has occurred and is continuing and (B) immediately before and immediately after giving effect thereto, the Issuer would have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph described under the caption "--Incurrence of Indebtedness and Preferred Stock," (I) from and after 73 April 15, 2003, payments of cash dividends to Holdings in an amount sufficient to enable Holdings to make payments of interest required to be made in respect of the Holdings Senior Discount Debentures in accordance with the terms thereof in effect on the date of the Indenture, provided that such interest payments are made with the proceeds of such dividends, and (II) a $16.0 million cash dividend that the Issuer will be entitled to declare and pay to Holdings on April 15, 2003 to enable Holdings to redeem $33.2 million aggregate principal amount at maturity of the Holdings Senior Discount Debentures as required by the terms of the Holdings Senior Discount Debentures in accordance with such terms in effect on the date of the Indenture, provided that such redemption is made with the proceeds of such dividend. The Board of Directors may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default or an Event of Default. For purposes of making such determination, all outstanding Investments by the Issuer and its Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant. All such outstanding Investments will be deemed to constitute Investments in an amount equal to the greater of (i) the net book value of such Investments at the time of such designation and (ii) the fair market value of such Investments at the time of such designation. Such designation will only be permitted if such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. The amount of all (i) Restricted Payments (other than cash) will be the fair market value on the date of the Restricted Payment of the asset(s) or securities proposed to be transferred or issued by the Issuer or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment and (ii) Qualified Proceeds (other than cash) will be the fair market value on the date of receipt thereof by the Issuer of such Qualified Proceeds. The fair market value of any non-cash Restricted Payment and Qualified Proceeds will be determined by the Board of Directors whose resolution with respect thereto will be delivered to the Trustee, such determination to be based upon an opinion or appraisal issued by an accounting, appraisal or investment banking firm of national standing, if such fair market value exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Issuer will deliver to the Trustee an Officers' Certificate stating that such Restricted Payment is permitted and setting forth the basis upon which the calculations required by the covenant "--Restricted Payments" were computed, together with a copy of any fairness opinion or appraisal required by the Indenture. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK The Indenture provides that: (i) the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise become directly or indirectly liable, contingently or otherwise, with respect to (collectively, "incur") any Indebtedness (including Acquired Debt); (ii) that neither the Issuer nor any Guarantor will issue any Disqualified Stock; and (iii) that the Issuer will not permit any of its Restricted Subsidiaries that are not Guarantors to issue any shares of preferred stock; provided, however, that the Issuer or any Guarantor may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Issuer's most recently ended four full fiscal quarters for which internal financial statements are available immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1.0, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred, or the Disqualified Stock had been issued, as the case may be, at the beginning of such four-quarter period. The provisions of the first paragraph of this covenant do not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Issuer (and the guarantee thereof by the Guarantors) of Indebtedness under Credit Facilities; provided that the aggregate principal amount of all Indebtedness (with letters of credit being deemed to have a principal amount equal to the maximum potential liability of the Issuer and the 74 Guarantors thereunder) outstanding under all Credit Facilities after giving effect to such incurrence, including all Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (i), does not exceed an amount equal to $105.0 million less the aggregate amount of all principal repayments (optional and mandatory) thereunder constituting permanent reductions of such Indebtedness pursuant to and in accordance with the covenant described under "--Repurchase at the Option of Holders--Asset Sales"; (ii) the incurrence by the Issuer and the Guarantors of Indebtedness represented by the New Notes and the Subsidiary Guarantees; (iii) the incurrence by the Issuer or any of the Guarantors of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase money obligations, in each case incurred for the purpose of financing all or any part of the purchase price or cost of construction or improvements of property used in the business of the Issuer or such Guarantor, in an aggregate principal amount not to exceed $5.0 million at any time outstanding; (iv) other Indebtedness of the Issuer and its Restricted Subsidiaries outstanding on the Issue Date (other than Indebtedness to be repaid in connection with the Recapitalization); (v) the incurrence by the Issuer or any of its Restricted Subsidiaries of Permitted Refinancing Indebtedness in exchange for, or the net proceeds of which are used to refund, refinance or replace Indebtedness (other than intercompany Indebtedness) that was permitted by the Indenture to exist or be incurred; (vi) the incurrence of intercompany Indebtedness (A) between or among the Issuer and any Wholly Owned Restricted Subsidiaries of the Issuer or (B) by a Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary of the Issuer or a Wholly Owned Restricted Subsidiary; provided, however, that (i) if the Issuer is the obligor on such Indebtedness, such Indebtedness is expressly subordinated to the prior payment in full in cash of all Obligations with respect to the New Notes, and if a Guarantor incurs such Indebtedness to a Restricted Subsidiary that is not a Guarantor, such Indebtedness is subordinate in right of payment to the Subsidiary Guarantee of such Guarantor; and (ii)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Issuer or a Wholly Owned Restricted Subsidiary of the Issuer will be deemed, in each case, to constitute an incurrence of such Indebtedness by the Issuer or such Subsidiary, as the case may be, not permitted by this clause (vi); (vii) the incurrence by the Issuer or any of the Guarantors of Hedging Obligations that are incurred for the purpose of fixing or hedging (i) interest rate risk with respect to any floating rate Indebtedness that is permitted by the terms of this Indenture to be outstanding, (ii) the value of foreign currencies purchased or received by the Issuer in the ordinary course of business or (iii) the price of raw materials used by the Issuer or its Restricted Subsidiaries in a Permitted Business; (viii) Indebtedness incurred in respect of workers' compensation claims, self insurance obligations and performance, surety and similar bonds provided by the Issuer or a Guarantor in the ordinary course of business; (ix) Indebtedness arising from agreements of the Issuer or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the disposition of any business, assets or Capital Stock of a Restricted Subsidiary; (x) the guarantee by the Issuer or any of the Guarantors of Indebtedness of the Issuer or a Guarantor that was permitted to be incurred by another provision of this covenant; (xi) the incurrence by the Issuer or any of its Restricted Subsidiaries of Acquired Debt in an aggregate principal amount at any time outstanding not to exceed $17.0 million; 75 (xii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five business days of incurrence; and (xiii) the incurrence by the Issuer or any Guarantor of additional Indebtedness (which may be Indebtedness under Credit Facilities) in an aggregate principal amount (or accreted value, as applicable) at any time outstanding, including all Indebtedness incurred to refund, refinance or replace any Indebtedness incurred pursuant to this clause (xiii), not to exceed $10.0 million. For purposes of determining compliance with this covenant, in the event that an item of Indebtedness meets the criteria of more than one of the categories of Permitted Debt described in clauses (i) through (xiii) above or is entitled to be incurred pursuant to the first paragraph of this covenant, the Issuer will, in its sole discretion, classify such item of Indebtedness in any manner that complies with this covenant and such item of Indebtedness will be treated as having been incurred pursuant to only one of such clauses or pursuant to the first paragraph hereof. Accrual of interest, the accretion of accreted value and the payment of interest in the form of additional Indebtedness will not be deemed to be an incurrence of Indebtedness for purposes of this covenant. LIENS The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien securing Indebtedness or trade payables on any asset now owned or hereafter acquired, or any income or profits therefrom or assign or convey any right to receive income therefrom for purposes of security, except Permitted Liens unless (x) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the New Notes, the New Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens, (with the same relative priority as such subordinate or junior Indebtedness will have with respect to the New Notes and Subsidiary Guarantees) and (y) in all other cases, the New Notes are secured by such Lien on an equal and ratable basis. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to the Issuer or any of its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any other interest or participation in, or measured by, its profits, or (b) pay any Indebtedness owed to the Issuer or any of its Restricted Subsidiaries, (ii) make loans or advances to the Issuer or any of its Restricted Subsidiaries; (iii) guarantee any Indebtedness of the Issuer or any Restricted Subsidiary of the Issuer (provided that this clause (iii) will apply only to Restricted Subsidiaries that are Guarantors); or (iv) transfer any of its properties or assets to the Issuer or any of its Restricted Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (a) the Bank Facilities as in effect as of the date of the Indenture, and any amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings thereof, provided that such amendments, modifications, restatements, renewals, increases, supplements, refundings, replacements or refinancings are no more restrictive with respect to such dividend and other payment restrictions than those contained in the Bank Facilities as in effect on the date of the Indenture, (b) the Indenture and the New Notes, (c) applicable law or any applicable rule, regulation or order, (d) any agreement or instrument governing Indebtedness or Capital Stock of a Person acquired by the Issuer or any of its Restricted Subsidiaries as in effect at the time of such acquisition (except to the extent such agreement or instrument was created or entered into in connection with or in contemplation of such acquisition), which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired, provided that, in the case of Indebtedness, such Indebtedness was permitted to be incurred under the terms of the Indenture, (e) customary non- assignment provisions in leases, licenses, encumbrances, 76 contracts or similar assets entered into in the ordinary course of business and consistent with past practices, (f) purchase money obligations for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iv) above on the property so acquired, (g) Permitted Refinancing Indebtedness, provided that the restrictions contained in the agreements governing such Permitted Refinancing Indebtedness are no more restrictive than those contained in the agreements governing the Indebtedness being refinanced and (h) contracts for the sale of assets containing customary restrictions with respect to a Subsidiary pursuant to an agreement that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. MERGER, CONSOLIDATION OR SALE OF ASSETS The Indenture provides that the Issuer may not consolidate or merge with or into (whether or not the Issuer is the surviving corporation), or, sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its properties or assets in one or more related transactions, to another Person unless (i) the Issuer is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Issuer) or to which such sale, assignment, transfer, lease, conveyance or other disposition have been made is a corporation or limited liability company organized or existing under the laws of the United States, any state thereof or the District of Columbia; (ii) the Person formed by or surviving any such consolidation or merger (if other than the Company) or the Person to which such sale, assignment, transfer, lease, conveyance or other disposition have been made assumes all the obligations of the Issuer under the New Notes and the Indenture pursuant to a supplemental indenture in a form reasonably satisfactory to the Trustee; (iii) immediately after such transaction no Default or Event of Default exists; and (iv) except in the case of a merger of the Issuer with or into a Wholly Owned Restricted Subsidiary of the Issuer, the Issuer or the entity or Person formed by or surviving any such consolidation or merger (if other than the Issuer), or to which such sale, assignment, transfer, lease, conveyance or other disposition have been made will, at the time of such transaction and after giving pro forma effect thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, be permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described above under the caption "-- Incurrence of Indebtedness and Issuance of Preferred Stock." For purposes of this covenant, the sale, lease, conveyance, assignment, transfer, or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Issuer, which properties and assets, if held by the Issuer instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Issuer on a consolidated basis, will be deemed to be the transfer of all or substantially all of the properties and assets of the Issuer. The foregoing clause (iv) will not prohibit (a) a merger between the Issuer and a Wholly Owned Restricted Subsidiary of Holdings created for the purpose of holding the Capital Stock of the Issuer or (b) a merger between the Issuer and a Wholly Owned Restricted Subsidiary of the Issuer so long as, in the case of each of clause (a) and (b), the amount of Indebtedness of the Issuer and its Restricted Subsidiaries is not increased thereby. TRANSACTIONS WITH AFFILIATES The Indenture provides that the Issuer will not, and will not permit any of its Restricted Subsidiaries to, make any payment to or Investment in, or sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction, contract, agreement, understanding, loan, advance or guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms that are no less favorable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Issuer or such Restricted Subsidiary with an unrelated Person and (ii) the Issuer delivers to the Trustee (a) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $1.0 million, a resolution of the Board of Directors set forth in an officer's certificate certifying that such Affiliate Transaction complies with clause (i) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Board of Directors and (b) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of $10.0 million, an opinion as to the fairness to the holders of such Affiliate Transaction from a financial point of view issued by an accounting, appraisal or investment banking firm of national standing; provided that the following will not be deemed to be Affiliate Transactions: (1) any employment agreements, stock option or other compensation agreements or plans (and the payment of amounts or the issuance of securities thereunder) and other reasonable fees, compensation, benefits and indemnities paid or entered into by the Issuer or any of its Restricted Subsidiaries in the ordinary course of business of the Issuer or such Restricted Subsidiary to or with the officers, directors or employees of the Issuer or its Restricted Subsidiaries, (2) transactions between or among the Issuer and/or its Restricted Subsidiaries, (3) Restricted Payments (other than Restricted Investments) that are permitted by the provisions of the Indenture described above under the caption "Restricted Payments," (4) customary advisory and investment banking fees paid to Seaver Kent and its Affiliates, and (5) transactions with suppliers or customers, in each case in the ordinary course of business (including, without limitation, pursuant to joint venture agreements) and otherwise in accordance with the terms of the Indenture, which are fair to the Issuer in the good faith determination of the Board of Directors of the Issuer and are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. LIMITATION ON LAYERING DEBT The Indenture provides that (i) the Issuer will not incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to any Senior Debt and senior in any respect in right of payment to the New Notes, and (ii) no Guarantor will incur, create, issue, assume, guarantee or otherwise become liable for any Indebtedness that is subordinate or junior in right of payment to Senior Debt of such Guarantor and senior in any respect in right of payment to such Guarantor's Subsidiary Guarantee. 77 BUSINESS ACTIVITIES The Issuer will not, and will not permit any Restricted Subsidiary to, engage in any business other than Permitted Businesses. ADDITIONAL SUBSIDIARY GUARANTEES The Indenture provides that the Issuer will not permit any Restricted Subsidiary to guarantee the payment of any Indebtedness of the Issuer or any Indebtedness of any other Restricted Subsidiary (in each case, the "Guaranteed Debt"), unless (i) if such Restricted Subsidiary is not a Guarantor, such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for a Subsidiary Guarantee of payment of the New Notes by such Restricted Subsidiary, (ii) if the New Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary are subordinated in right of payment to the Guaranteed Debt, the Subsidiary Guarantee under the supplemental indenture will be subordinated to such Restricted Subsidiary's guarantee with respect to the Guaranteed Debt substantially to the same extent as the New Notes or the Subsidiary Guarantee are subordinated to the Guaranteed Debt under the Indenture, (iii) if the Guaranteed Debt is by its express terms subordinated in right of payment to the New Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, any such guarantee of such Restricted Subsidiary with respect to the Guaranteed Debt will be subordinated in right of payment to such Restricted Subsidiary's Subsidiary Guarantee with respect to the New Notes substantially to the same extent as the Guaranteed Debt is subordinated to the New Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, (iv) such Restricted Subsidiary subordinates rights of reimbursement, indemnity or subrogation or any other rights against the Issuer or any other Restricted Subsidiary as a result of any payment by such Restricted Subsidiary under its Subsidiary Guarantee to its obligation under its Subsidiary Guarantee, and (v) such Restricted Subsidiary delivers to the Trustee an opinion of counsel to the effect that (A) such Subsidiary Guarantee of the New Notes has been duly authorized, executed and delivered, and (B) such Subsidiary Guarantee of the New Notes constitutes a valid, binding and enforceable obligation of such Restricted Subsidiary, except insofar as enforcement thereof may be limited by bankruptcy, insolvency or similar laws (including, without limitation, all laws relating to fraudulent transfers) and except insofar as enforcement thereof is subject to general principles of equity. REPORTS The Indenture provides that, whether or not required by the rules and regulations of the Commission, so long as any New Notes are outstanding, the Issuer will furnish to holders of New Notes (i) all quarterly and annual financial information that would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Issuer were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" that describes the financial condition and results of operations of the Issuer and its consolidated Subsidiaries and, with respect to the annual information only, a report thereon by the Issuer's certified independent accountants and (ii) all current reports that would be required to be filed with the Commission on Form 8-K if the Issuer were required to file such reports, in each case within the time periods set forth in the Commission's rules and regulations. In addition, whether or not required by the rules and regulations of the Commission, at any time after the consummation of the Exchange Offer contemplated by the Registration Rights Agreement (or, if the Exchange Offer is not consummated, after the effectiveness of the Shelf Registration Statement), the Issuer will file a copy of all such information and reports with the Commission for public availability within the time periods set forth in the Commission's rules and regulations (unless the Commission will not accept such a filing) and make such information available to securities analysts and prospective investors upon request. In addition, at all times that the Commission does not accept the filings provided for in the preceding sentence, the Issuer and the Guarantors have agreed that, for so long as any New Notes remain outstanding, they will furnish to holders and to securities analysts and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. 78 EVENTS OF DEFAULT AND REMEDIES The Indenture provides that each of the following constitutes an Event of Default (each, an "Event of Default"): (i) default for 30 days in the payment when due of interest on, or Liquidated Damages with respect to, the New Notes (whether or not prohibited by the subordination provisions of the Indenture); (ii) default in payment when due of the principal of or premium, if any, on the New Notes (whether or not prohibited by the subordination provisions of the Indenture); (iii) failure by the Issuer or any of its Restricted Subsidiaries for 30 days after notice by the Trustee or by holders of at least 25% in principal amount of New Notes then outstanding to comply with the provisions described under the captions "--Repurchase at the Option of Holders-- Change of Control" or "--Asset Sales," "--Certain Covenants--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of Preferred Stock"; (iv) failure by the Issuer or any of its Restricted Subsidiaries for 60 days after notice by the Trustee or by holders of at least 25% in principal amount of New Notes then outstanding to comply with any of its other agreements in the Indenture or the New Notes; (v) default under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by the Issuer or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Issuer or any of its Restricted Subsidiaries) whether such Indebtedness or guarantee now exists, or is created after the date of the Indenture, which default (a) is caused by a failure to pay principal of such Indebtedness after giving effect to any grace period provided in such Indebtedness (a "Payment Default") or (b) results in the acceleration of such Indebtedness prior to its stated maturity and, in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or the maturity of which has been so accelerated, aggregates $10.0 million or more; (vi) failure by the Issuer or any of its Restricted Subsidiaries to pay final non-appealable judgments aggregating in excess of $10.0 million (net of any amounts with respect to which a reputable and creditworthy insurance Issuer has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted by the Indenture, any Subsidiary Guarantee is held in any judicial proceeding to be unenforceable or invalid or ceases for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, denies or disaffirms its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Issuer or any of its Significant Subsidiaries. If any Event of Default occurs and is continuing, the Trustee or holders of at least 25% in principal amount of the then outstanding New Notes may declare all the New Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency, with respect to the Issuer or any Significant Subsidiary, all outstanding New Notes will become due and payable without further action or notice. Holders of the New Notes may not enforce the Indenture or the New Notes except as provided in the Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding New Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from holders of New Notes notice of any continuing Default or Event of Default (except a Default or Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. In the event of a declaration of acceleration of the New Notes because an Event of Default has occurred and is continuing as a result of the acceleration of any Indebtedness described in clause (v) of the preceding paragraph, the declaration of acceleration of the New Notes will be automatically annulled if the holders of any Indebtedness described in clause (v) of the preceding paragraph have rescinded the declaration of acceleration in respect of such Indebtedness within 30 days of the date of such declaration and if (a) the annulment of the acceleration of New Notes would not conflict with any judgment or decree of a court of competent jurisdiction and (b) all existing Events of Default, except nonpayment of principal or interest on the New Notes that became due solely because of the acceleration of the New Notes, have been cured or waived. The holders of a majority in aggregate principal amount of the New Notes then outstanding by notice to the Trustee may on behalf of holders of all New Notes waive any existing Default or Event of Default and its consequences under the Indenture except a continuing Default or Event of Default in the payment of interest on, or the principal of, the New Notes. 79 The Issuer is required to deliver to the Trustee annually a statement regarding compliance with the Indenture, and the Issuer is required upon becoming aware of any Default or Event of Default, to deliver to the Trustee a statement specifying such Default or Event of Default. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS No director, officer, employee, incorporator or stockholder of the Issuer, as such, will have any liability for any obligations of the Issuer under the New Notes, the Indenture or the Subsidiary Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each holder of New Notes by accepting a New Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the New Notes. Such waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the Commission that such a waiver is against public policy. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Issuer may, at its option and at any time, elect to have all of its obligations and the obligations of the Guarantors discharged with respect to the outstanding New Notes ("Legal Defeasance") except for (i) the rights of holders of outstanding New Notes to receive payments in respect of the principal of, premium, if any, and interest and Liquidated Damages on such New Notes when such payments are due from the trust referred to below, (ii) the Issuer's obligations with respect to the New Notes concerning issuing temporary New Notes, registration of New Notes, mutilated, destroyed, lost or stolen New Notes and the maintenance of an office or agency for payment and money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee, and the Issuer's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Issuer may, at its option and at any time, elect to have the obligations of the Issuer released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations will not constitute a Default or Event of Default with respect to the New Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "--Events of Default and Remedies" will no longer constitute an Event of Default with respect to the New Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Issuer must irrevocably deposit with the Trustee, in trust, for the benefit of holders of New Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium, if any, and interest and Liquidated Damages on the outstanding New Notes on the stated maturity or on the applicable redemption date, as the case may be, and the Issuer must specify whether the New Notes are being defeased to maturity or to a particular redemption date; (ii) in the case of Legal Defeasance, the Issuer must have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Issuer has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel must confirm that, subject to customary assumptions and exclusions, holders of the outstanding New Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Issuer must have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that, subject to customary assumptions and exclusions, holders of the outstanding New Notes will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default has occurred and be continuing on the date of such deposit (other than a Default or Event of Default resulting from the financing of amounts to be applied to such deposit) or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument (other than the Indenture) to which the Issuer or any of its Subsidiaries is a party or by which the Issuer or any of its Subsidiaries is bound; (vi) the Issuer must have delivered to the Trustee an opinion of counsel to the effect that, subject to customary assumptions and exclusions (which assumptions and exclusion must not relate to the operation of Section 547 of the United States Bankruptcy Code or any analogous New York State law provision), after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; (vii) the Issuer must deliver to the Trustee an Officers' Certificate stating that the deposit was not made by the Issuer with the intent of preferring holders of New Notes over the other creditors of the Issuer with the intent of defeating, hindering, delaying or defrauding creditors of the Issuer or others; and (viii) the Issuer must deliver to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Legal Defeasance or the Covenant Defeasance have been complied with. 80 TRANSFER AND EXCHANGE A holder may transfer or exchange New Notes in accordance with the Indenture. The Registrar and the Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and the Issuer may require a holder to pay any taxes and fees required by law or permitted by the Indenture. The Issuer is not required to transfer or exchange any New Note selected for redemption. Also, the Issuer is not required to transfer or exchange any New Note for a period of 15 days before a selection of New Notes to be redeemed. The registered holder of a New Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as provided in the next two succeeding paragraphs, the Indenture, the Subsidiary Guarantees or the New Notes may be amended or supplemented with the consent of holders of at least a majority in principal amount of the New Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, New Notes), and any existing default or compliance with any provision of the Indenture, the Subsidiary Guarantees or the New Notes may be waived with the consent of holders of a majority in principal amount of the then outstanding New Notes (including consents obtained in connection with a purchase of, or tender offer or exchange offer for, New Notes). Without the consent of each holder affected, an amendment or waiver may not (with respect to any New Notes held by a non-consenting holder): (i) reduce the principal amount of New Notes whose holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the New Notes (other than provisions relating to the covenants described above under the caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or change the time for payment of interest on any New Note, (iv) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the New Notes (except a rescission of acceleration of the New Notes by holders of at least a majority in aggregate principal amount of the New Notes and a waiver of the payment default that resulted from such acceleration), (v) make any New Note payable in money other than that stated in the New Notes, (vi) make any change in the provisions of the Indenture relating to waivers of past Defaults or the rights of holders of New Notes to receive payments of principal of or premium, if any, or interest on the New Notes, (vii) waive a redemption payment with respect to any New Note (other than a payment required by one of the covenants described above under the caption "--Repurchase at the Option of Holders"), (viii) except as otherwise permitted by the Indenture release any Guarantor from any of its obligations under its Subsidiary Guarantee or the Indenture, or amend the provisions of the Indenture relating to the release of Guarantors, or (ix) make any change in the foregoing amendment and waiver provisions. In addition, any amendment to the provisions of Article 10 of the Indenture (which relate to subordination) or the related definitions will require the consent of holders of at least 75% in aggregate principal amount of the New Notes then outstanding if such amendment would adversely affect the rights of holders of New Notes. Notwithstanding the foregoing, without the consent of any holder of New Notes, the Issuer and the Trustee may amend or supplement the Indenture, the Subsidiary Guarantees or the New Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated New Notes in addition to or in place of certificated New Notes, to provide for the assumption of the Issuer's or a Guarantor's obligations to holders of New Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to holders of New Notes or that does not adversely affect the legal rights under the Indenture of any such holder, to comply with requirements of the Commission in order to effect or maintain the qualification of the Indenture under the Trust Indenture Act or to allow any Restricted Subsidiary to guarantee the New Notes. 81 CONCERNING THE TRUSTEE The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Issuer, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue or resign. Holders of a majority in principal amount of the then outstanding New Notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default occurs (which are not cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any holder of New Notes, unless such holder will have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. BOOK-ENTRY, DELIVERY AND FORM New Notes will be issued in registered, global form in minimum denominations of $1,000 and integral multiples of $1,000 in excess thereof. Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the Global Notes may not be exchanged for New Notes in certificated form except in the limited circumstances described below. See "--Exchange of Book-Entry New Notes for Certificated New Notes." In addition, transfer of beneficial interests in the Global Notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of Euroclear and CEDEL), which may change from time to time. Initially, the Trustee will act as Paying Agent and Registrar. The New Notes may be presented for registration of transfer and exchange at the offices of the Registrar. DEPOSITORY PROCEDURES DTC has advised the Issuer that DTC is a limited-purpose trust Issuer created to hold securities for its participating organizations (collectively, the "Participants") and to facilitate the clearance and settlement of transactions in those securities between Participants through electronic book- entry changes in accounts of its Participants. The Participants include securities brokers and dealers (including the Initial Purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC's system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly (collectively, the "Indirect Participants"). Persons who are not Participants may beneficially own securities held by or on behalf of DTC only through the Participants or the Indirect Participants. The ownership interests and transfer of ownership interests of each actual purchaser of each security held by or on behalf of DTC are recorded on the records of the Participants and Indirect Participants. DTC has also advised the Issuer that, pursuant to procedures established by it, (i) upon deposit of the Global Notes, DTC will credit the accounts of Participants tendering Old Notes with portions of the principal amount of the Global Notes and (ii) ownership of such interests in the Global Notes will be shown on, and the transfer of ownership thereof will be effected only through, records maintained by DTC (with respect to the Participants) or by the Participants and the Indirect Participants (with respect to other owners of beneficial interest in the Global Notes). 82 Investors in the Global Notes may hold their interests therein directly through DTC, if they are participants in such system, or indirectly through organizations (including Euroclear and CEDEL) which are participants in such system. Euroclear and CEDEL would hold interests in the Global Notes on behalf of their participants through customers' securities accounts in their respective names on the books of their respective depositaries, which are Morgan Guaranty Trust Company of New York, Brussels office, as operator of Euroclear, and Citibank, N.A., as operator of CEDEL. The depositaries, in turn, would hold such interests in the Global Notes in customers' securities accounts in the depositaries' names on the books of DTC. All interests in a Global Note, including those held through Euroclear or CEDEL, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or CEDEL may also be subject to the procedures and requirements of such systems. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a Global Note to such persons will be limited to that extent. Because DTC can act only on behalf of Participants, which in turn act on behalf of Indirect Participants and certain banks, the ability of a person having beneficial interests in a Global Note to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of a physical certificate evidencing such interests. For certain other restrictions on the transferability of the New Notes, see "-- Exchange of Book-Entry New Notes for Certificated New Notes," "--Exchange of Certificated New Notes for Book-Entry New Notes." EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT HAVE NEW NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF NEW NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE. Payments in respect of the principal of and premium and Liquidated Damages, if any, and interest on a Global Note registered in the name of DTC or its nominee will be payable by the Trustee to DTC in its capacity as the registered holder under the Indenture. Under the terms of the Indenture, the Issuer and the Trustee will treat the persons in whose names the New Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee has or will have any responsibility or liability for (i) any aspect of DTC's records or any Participant's or Indirect Participant's records relating to or payments made on account of beneficial ownership interest in the Global Notes, or for maintaining, supervising or reviewing any of DTC's records or any Participant's or Indirect Participant's records relating to the beneficial ownership interests in the Global Notes or (ii) any other matter relating to the actions and practices of DTC or any of its Participants or Indirect Participants. DTC has advised the Issuer that its current practice, upon receipt of any payment in respect of securities such as the New Notes (including principal and interest), is to credit the accounts of the relevant Participants with the payment on the payment date, in amounts proportionate to their respective holdings in the principal amount of beneficial interest in the relevant security as shown on the records of DTC unless DTC has reason to believe it will not receive payment on such payment date. Payments by the Participants and the Indirect Participants to the beneficial owners of New Notes will be governed by standing instructions and customary practices and will be the responsibility of the Participants or the Indirect Participants and will not be the responsibility of DTC, the Trustee or the Issuer. Neither the Issuer nor the Trustee will be liable for any delay by DTC or any of its Participants in identifying the beneficial owners of the New Notes, and the Issuer and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes. Except for trades involving only Euroclear and CEDEL participants, interest in the Global Notes are expected to be eligible to trade in DTC's Same-Day Funds Settlement System and secondary market trading activity in such interests will therefore settle in immediately available funds, subject in all cases to the rules and procedures of DTC and its participants. See "--Same-Day Settlement and Payment." 83 Transfers between Participants in DTC will be effected in accordance with DTC's procedures, and will be settled in same-day funds, and transfers between participants in Euroclear and CEDEL will be effected in the ordinary way in accordance with their respective rules and operating procedures. Cross-market transfers between the Participants in DTC, on the one hand, and Euroclear or CEDEL participants, on the other hand, will be effected through DTC in accordance with DTC's rules on behalf of Euroclear or CEDEL, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or CEDEL, as the case may be, by the counterparty in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or CEDEL, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the relevant Global Note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and CEDEL participants may not deliver instructions directly to the depositaries for Euroclear or CEDEL. Because of time zone differences, the securities account of a Euroclear or CEDEL participant purchasing an interest in a Global Note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or CEDEL participant, during the securities settlement processing day (which must be a business day for Euroclear and CEDEL) immediately following the settlement date of DTC. DTC has advised the Issuer that cash received in Euroclear or CEDEL as a result of sales of interests in a Global Note by or through a Euroclear or CEDEL participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or CEDEL cash account only as of the business day for Euroclear or CEDEL following DTC's settlement date. DTC has advised the Issuer that it will take any action permitted to be taken by holders of New Notes only at the direction of one or more Participants to whose account with DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of the New Notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the New Notes, DTC reserves the right to exchange the Global Notes for legended New Notes in certificated form, and to distribute such New Notes to its Participants. The information in this section concerning DTC, Euroclear and CEDEL and their book-entry systems has been obtained from sources that the Issuer believes to be reliable, but the Issuer takes no responsibility for the accuracy thereof. Although DTC, Euroclear and CEDEL have agreed to the foregoing procedures to facilitate transfers of interests in the Global Notes among Participants in DTC, Euroclear and CEDEL, they are under no obligation to perform or to continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer nor the Trustee will have any responsibility for the performance by DTC, Euroclear or CEDEL or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. EXCHANGE OF BOOK-ENTRY NEW NOTES FOR CERTIFICATED NEW NOTES A Global Note is exchangeable for definitive New Notes in registered certificated form if (i) DTC (x) notifies the Issuer that it is unwilling or unable to continue as depositary for the Global Notes and the Issuer thereupon fails to appoint a successor depositary or (y) has ceased to be a clearing agency registered under the Exchange Act, (ii) the Issuer, at its option, notifies the Trustee in writing that it elects to cause the issuance of the New Notes in certificated form or (iii) there has occurred and be continuing an Event of Default or any event which after notice or lapse of time or both would be an Event of Default with respect to the New Notes. In addition, beneficial interests in a Global Note may be exchanged for certificated New Notes upon request but only upon at least 20 days prior written notice given to the Trustee by or on behalf of DTC in accordance with its customary procedures. In all cases, certificated New Notes delivered in exchange for any Global Note or beneficial interests therein will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear the applicable restrictive legend referred to in "Notice to Investors," unless the Issuer determines otherwise in compliance with applicable law. 84 SAME-DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in respect of the New Notes represented by the Global Notes (including principal, premium, if any, and interest and Liquidated Damages, if any) be made by wire transfer of immediately available funds to the accounts specified by the Global Note holder. With respect to New Notes in certificated form, the Issuer will make all payments of principal, premium, if any, interest and Liquidated Damages, if any, by wire transfer of immediately available funds to the accounts specified by the holders thereof or, if no such account is specified, by mailing a check to each such holder's registered address. The New Notes represented by the Global Notes are expected to be eligible to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement System, and any permitted secondary market trading activity in such New Notes will, therefore, be required by the Depositary to be settled in immediately available funds. The Issuer expects that secondary trading in any certificated New Notes will also be settled in immediately available funds. Because of time zone differences, the securities account of a Euroclear or CEDEL participant purchasing an interest in a Global Note from a Participant in DTC will be credited, and any such crediting will be reported to the relevant Euroclear or CEDEL participant, during the securities settlement processing day (which must be a business day for Euroclear and CEDEL) immediately following the settlement date of DTC. DTC has advised the Issuer that cash received in Euroclear or CEDEL as a result of sales of interests in a Global Note by or through a Euroclear or CEDEL participant to a Participant in DTC will be received with value on the settlement date of DTC but will be available in the relevant Euroclear or CEDEL cash account only as of the business day for Euroclear or CEDEL following DTC's settlement date. REGISTRATION RIGHTS; LIQUIDATED DAMAGES Pursuant to the Registration Rights Agreement, the Issuer agreed to file with the Commission the Exchange Offer Registration Statement on the appropriate form under the Securities Act with respect to the New Notes. Upon the effectiveness of the Exchange Offer Registration Statement, the Issuer will offer to the holders of Transfer Restricted Securities (as defined herein) pursuant to the Exchange Offer who are able to make certain representations the opportunity to exchange their Transfer Restricted Securities for New Notes. If (i) the Issuer is not required to file the Exchange Offer Registration Statement or permitted to consummate the Exchange Offer because the Exchange Offer is not permitted by applicable law or Commission policy or (ii) any holder of Transfer Restricted Securities notifies the Issuer within the specified time period that (A) it is prohibited by law or Commission policy from participating in the Exchange Offer (other than due solely to the status of such holder as an affiliate of the Issuer within the meaning of the Securities Act) or (B) that it may not resell the New Notes acquired by it in the Exchange Offer to the public without delivering a prospectus and the prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales or (C) that it is a broker-dealer and owns New Notes acquired directly from the Issuer or an affiliate of the Issuer, the Issuer will file with the Commission a Shelf Registration Statement to cover resales of the Transfer Restricted Securities by the holders thereof who satisfy certain conditions relating to the provision of information in connection with the Shelf Registration Statement. The Issuer will use its best efforts to cause the applicable registration statement to be declared effective as promptly as possible by the Commission. For purposes of the foregoing, "Transfer Restricted Securities" means each Note until (i) the date on which such Note has been exchanged by a person other than a broker-dealer for a New Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of a Note for a New Note, the date on which such New Note is sold to a purchaser who receives from such broker-dealer on or prior to the date of such sale a copy of the prospectus contained in the Exchange Offer Registration Statement, (iii) the date on which such Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement or (iv) the date on which such Note is distributed to the public pursuant to Rule 144 under the Securities Act. The Registration Rights Agreement provides that (i) the Issuer will file an Exchange Offer Registration Statement with the Commission on or prior to 75 days after the Closing, (ii) the Issuer will use its best efforts to have the Exchange Offer Registration Statement declared effective by the Commission on or prior to 150 days after the Closing, (iii) unless the Exchange Offer would not be permitted by applicable law or Commission policy, the Issuer will commence the Exchange Offer and use its best efforts to issue within 195 days after the Issue Date New Notes in exchange for all Old Notes tendered prior thereto in the Exchange Offer and (iv) if obligated to file the Shelf Registration Statement, the Issuer will use its best efforts to file the Shelf Registration Statement with the Commission on or prior to 75 days after such filing obligation arises and to cause the Shelf Registration Statement to be declared effective by the Commission on or prior to 150 days after such obligation arises. If (a) the Issuer fails to file any of the Registration Statements required by the Registration Rights Agreement on or before the date specified for such filing, (b) any of such Registration Statement is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), or (c) the Issuer fails to consummate the Exchange Offer within 195 days after the Issue Date, or (d) the Shelf Registration Statement or the Exchange Offer Registration Statement is declared effective but thereafter ceases to be effective or usable in connection with resales of Transfer Restricted Securities during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a 85 "Registration Default"), then the Issuer will pay liquidated damages ("Liquidated Damages") as follows: to each holder of Transfer Restricted Securities, with respect to such 90-day period immediately following the occurrence of the first Registration Default in an amount equal to $0.05 per week per $1,000 principal amount of Transfer Restricted Securities held by such holder. The amount of the Liquidated Damages will increase by an additional $0.05 per week per $1,000 principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of Liquidated Damages of $0.30 per week per $1,000 principal amount of Transfer Restricted Securities. All accrued Liquidated Damages will be paid by the Issuer to the Global Note holder by wire transfer of immediately available funds or by federal funds check and to holders of Certificated Securities by wire transfer to the accounts specified by them or by mailing checks to their registered addresses if no such accounts have been specified. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. Holders of Transfer Restricted Securities will be required to make certain representations to the Issuer (as described in the Registration Rights Agreement) in order to participate in the Exchange Offer and will be required to deliver information to be used in connection with the Shelf Registration Statement and to provide comments on the Shelf Registration Statement within the time periods set forth in the Registration Rights Agreement in order to have their New Notes included in the Shelf Registration Statement and benefit from the provisions regarding Liquidated Damages set forth above. CERTAIN DEFINITIONS Set forth below are certain defined terms used in the Indenture. Reference is made to the Indenture for a full disclosure of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Debt" means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person or assumed in connection with the acquisition of any asset used or useful in a Permitted Business acquired by such specified Person; provided that such Indebtedness was not incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person, or such acquisition, as the case may be. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of 10% or more of the voting securities of a Person shall be deemed to be control. "Asset Sale" means (i) the sale, lease (other than an operating lease entered into in the ordinary course of business), conveyance or other disposition of any assets or rights (including, without limitation, by way of a sale and leaseback) other than sales of inventory in the ordinary course of business consistent with past practices (provided that the sale, lease, conveyance or other disposition of all or substantially all of the assets of the Issuer and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption "-- Repurchase at the Option of Holders--Change of Control" and/or the provisions described above under the caption "--Certain Covenants--Merger, Consolidation or Sale of Assets" and not by the provisions of the covenant described under the caption "--Certain Covenants--Asset Sales"), and (ii) the sale by the Issuer and the issue or sale by any of the Restricted Subsidiaries of the Issuer of Equity Interests of any of the Issuer's Subsidiaries, in the case of either clause (i) or (ii), whether in a single transaction or a series of related transactions that have a fair market value (as determined in good faith by the Board of Directors) in excess of $1.0 million or for net cash proceeds in excess of $1.0 million. Notwithstanding the foregoing, the 86 following shall not be deemed to be Asset Sales: (i) a transfer of assets by the Issuer to a Wholly Owned Restricted Subsidiary of the Issuer or by a Wholly Owned Restricted Subsidiary of the Issuer to the Issuer or to a Wholly Owned Restricted Subsidiary of the Issuer, (ii) an issuance of Equity Interests by a Restricted Subsidiary of the Issuer to the Issuer or to a Wholly Owned Restricted Subsidiary of the Issuer, (iii) a Restricted Payment that is permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments," (iv) the sale and leaseback of any assets within 90 days of the acquisition of such assets, provided that the sale price of such assets is not materially less than the acquisition price of such assets, and (v) the periodic clearance of aged inventory. "Bank Facilities" means that certain credit facility, dated as of April 21, 1998, by and among the Issuer, DLJ Capital Funding, as Syndication Agent, Wells Fargo, as Administrative Agent, Morgan Stanley Senior Funding, as Documentation Agent, the Lenders party thereto and Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as Arranger, providing for up to $105.0 million of borrowings, including any related notes, guarantees, collateral documents, instruments and agreements executed in connection therewith, and in each case as amended, extended, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time, including any agreement restructuring or adding Subsidiaries of the Issuer as additional borrowers or guarantors thereunder and whether by the same or any other agent, lender or group of lenders. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Cash Equivalents" means (i) securities issued or unconditionally and fully guaranteed or insured by the full faith and credit of the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (ii) obligations issued or fully guaranteed by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's"), (iii) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition, bankers' acceptances with maturities not exceeding one year and overnight bank deposits, in each case with any lender party to the Bank Facilities or with any domestic commercial bank having capital and surplus in excess of $250.0 million, (iv) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clauses (i) and (iii), above entered into with any financial institution meeting the qualifications specified in clause (iii) above, (v) commercial paper having one of the two of the highest ratings obtainable from either Moody's or S&P and in each case maturing within one year after the date of acquisition and (vi) investments in funds investing exclusively in investments of the types described in clauses (i) through (v) above. "Change of Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Issuer and its Subsidiaries taken as a whole to any "person" (as such term is used in Section 13(d)(3) of the Exchange Act), other than the Principals and their Related Parties, (ii) the adoption of a plan relating to the liquidation or dissolution of the Issuer, (iii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined above), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of 40% or more of the Voting Stock of the Issuer (measured by voting power rather than number of shares) and (B) the Principals 87 and their Related Parties beneficially own, directly or indirectly, in the aggregate a lesser percentage of the Voting Stock of the Issuer than such other "person", (iv) the first day on which a majority of the members of the Board of Directors of the Issuer are not Continuing Directors or (v) the Issuer consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Issuer, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Issuer is converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the Voting Stock of the Issuer outstanding immediately prior to such transaction is converted into or exchanged for Voting Stock (other than Disqualified Stock) of the surviving or transferee Person and (B) either (1) the "beneficial owners" (as defined above) of the Voting Stock of the Issuer immediately prior to such transaction own, directly or indirectly through one or more subsidiaries, not less than a majority of the total Voting Stock of the surviving or transferee corporation immediately after such transaction or (2) if, immediately prior to such transaction the Issuer is a direct or indirect subsidiary of any other Person (such other Person, the "Holding Company"), then the "beneficial owners" (as defined above) of the Voting Stock of such Holding Company immediately prior to such transaction own, directly or indirectly through one or more subsidiaries, not less than a majority of the Voting Stock of the surviving or transferee corporation immediately after such transaction. "Consolidated Cash Flow" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period plus (i) an amount equal to any extraordinary loss plus any net loss realized in connection with an Asset Sale (to the extent such losses were deducted in computing such Consolidated Net Income of such Person and its Restricted Subsidiaries), plus (ii) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period, to the extent that such provision for taxes was included in computing such Consolidated Net Income, plus (iii) consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued and whether or not capitalized (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations), to the extent that any such expense was deducted in computing such Consolidated Net Income, plus (iv) depreciation and amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other non-cash charges (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash charges in any future period or amortization of a prepaid cash charge that was paid in a prior period) of such Person and its Subsidiaries for such period to the extent that such depreciation, amortization and other non-cash charges were deducted in computing such Consolidated Net Income, minus (v) non-cash items increasing such Consolidated Net Income for such period, in each case, on a consolidated basis and determined in accordance with GAAP. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and other noncash charges of, a Restricted Subsidiary of a Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP, provided that (i) the Net Income (but not loss) of any Person that is not a Restricted Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Restricted Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Restricted Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded, and (iv) the cumulative effect of a change in accounting principles shall be excluded. 88 "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Issuer or Holdings who (i) was a member of such Board of Directors on the date of the Indenture immediately after consummation of the Recapitalization or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were either members of such Board at the time of such nomination or election or are successor Continuing Directors appointed by such Continuing Directors (or their successors). "Credit Facilities" means, with respect to the Issuer, one or more debt facilities (including, without limitation, the Bank Facilities) or commercial paper facilities with banks or other institutional lenders providing for revolving credit loans, term loans, receivables financing (including through the sale of receivables to such lenders or to special purpose entities formed to borrow from such lenders against such receivables) or letters of credit, in each case, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time. Indebtedness under Credit Facilities outstanding on the Issue Date shall be deemed to have been incurred on such date in reliance on the exceptions provided by clause (i) of the definition of Permitted Debt. "Default" means any event that is or with the passage of time or the giving of notice or both would be an Event of Default. "Designated Senior Debt" means (i) any Senior Debt outstanding under the Bank Facilities and (ii) any other Senior Debt permitted under the Indenture the principal amount of which is $25.0 million or more and that has been designated by the Issuer as "Designated Senior Debt." "Disqualified Stock" means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder thereof), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date that is 91 days after the date on which the New Notes mature; provided, however, that a class of Capital Stock shall not be Disqualified Stock hereunder solely as the result of any maturity or redemption that is conditioned upon, and subject to, compliance with the covenant described above under the caption "--Certain Covenants--Restricted Payments"; and provided further, that Capital Stock issued to any plan for the benefit of employees of the Issuer or its subsidiaries or by any such plan to such employees shall not constitute Disqualified Stock solely because it may be required to be repurchased by the Issuer in order to satisfy applicable statutory or regulatory obligations. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Equity Offering" means an offering of common stock (other than Disqualified Stock) of the Issuer or Holdings, pursuant to an effective registration statement filed with the Commission in accordance with the Securities Act, other than an offering pursuant to Form S-8 (or any successor thereto) provided that in the case of an Equity Offering by Holdings, Holdings contributes to the common equity of the Issuer the portion of the net cash proceeds thereof necessary to pay the aggregate redemption price of the Notes to be redeemed in connection therewith. "Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued (including, without limitation, amortization of debt issuance costs and original issue discount, non-cash interest payments, the interest component of any deferred payment obligations, the interest component of all payments associated with Capital Lease Obligations, commissions, discounts and other fees and charges incurred in respect of letter of credit or bankers' acceptance financings, and net payments (if any) pursuant to Hedging Obligations; provided, however, that in no event shall any amortization of deferred financing costs incurred in connection with the Recapitalization be included in Fixed Charges), (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) any interest expense on 89 Indebtedness of another Person that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon) and (iv) the product of (a) (without duplication) (1) all dividends paid or accrued in respect of Disqualified Stock which are not treated as interest for tax purposes for such period and (2) all cash dividend payments on any series of preferred stock of such Person or any of its Restricted Subsidiaries, other than dividend payments on Equity Interests payable solely in Equity Interests (other than Disqualified Stock) of the Company, times (b) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP. "Fixed Charge Coverage Ratio" means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person and its Restricted Subsidiaries for such period to the Fixed Charges of such Person and its Restricted Subsidiaries for such period. In the event that the Issuer or any of its Restricted Subsidiaries incurs, assumes, Guarantees, repays or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems preferred stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption, Guarantee, repayment or redemption of Indebtedness, or such issuance or redemption of preferred stock, as if the same had occurred at the beginning of the applicable four-quarter reference period. In addition, for purposes of making the computation referred to above, (i) acquisitions that have been made by the Issuer or any of its Restricted Subsidiaries, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period and Consolidated Cash Flow for such reference period shall be calculated without giving effect to clause (iii) of the proviso set forth in the definition of Consolidated Net Income and shall reflect any pro forma expense and cost reductions attributable to such acquisitions (to the extent such expense and cost reduction would be permitted by the Commission to be reflected in pro forma financial statements included in a registration statement filed with the Commission), and (ii) the Consolidated Cash Flow attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded and Consolidated Cash Flow shall reflect any pro forma expense or cost reductions relating to such discontinuance or disposition (to the extent such expense or cost reductions would be permitted by the Commission to be reflected in pro forma financial statements included in a registration statement filed with the Commission), and (iii) the Fixed Charges attributable to discontinued operations, as determined in accordance with GAAP, and operations or businesses disposed of prior to the Calculation Date, shall be excluded, but only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Subsidiaries following the Calculation Date. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect on the date of the Indenture provided, however, that all reports and other financial information provided by the Company to the holders, the Trustee and/or the Commission shall be prepared in accordance with GAAP, as in effect on the date of such report or other financial information. "Guarantee" means a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner (including, without limitation, letters of credit and reimbursement agreements in respect thereof), of all or any part of any Indebtedness. "Guarantors" means, initially, each Subsidiary of the Issuer on the Issue Date and thereafter each of the Subsidiaries of the Issuer that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture, and their respective successors and assigns. 90 "Hedging Obligations" means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements and (ii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or the value of foreign currencies. "Holdings" means Diamond Brands Incorporated, a Minnesota corporation, the corporate parent of the Issuer, or its successors. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments or letters of credit (or reimbursement agreements in respect thereof) or banker's acceptances or representing Capital Lease Obligations or the balance deferred and unpaid of the purchase price of any property or representing any Hedging Obligations, except any such balance that constitutes an accrued expense or trade payable, if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability upon a balance sheet of such Person prepared in accordance with GAAP, as well as all indebtedness of others secured by a Lien on any asset of such Person (whether or not such indebtedness is assumed by such Person) and, to the extent not otherwise included, the Guarantee by such Person of any indebtedness of any other Person. The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest, and (ii) the principal amount thereof in the case of any other Indebtedness. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of direct or indirect loans (including guarantees of Indebtedness or other obligations), advances or capital contributions (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business), purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities, together with all items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. If the Issuer or any Restricted Subsidiary of the Issuer sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Issuer such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Issuer, the Issuer shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the final paragraph of the covenant described above under the caption "--Certain Covenants--Restricted Payments." "Issue Date" means the date on which Notes are first issued and authenticated under the Indenture. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any option or other agreement to sell or give a security interest therein). "Net Income" means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends, excluding, however, (i) any gain (but not loss), together with any related provision for taxes on such gain (but not loss), realized in connection with (a) any Asset Sale (including, without limitation, dispositions pursuant to sale and leaseback transactions) or (b) the extinguishment of any Indebtedness of such Person or any of its Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss), together with any related provision for taxes on such extraordinary or nonrecurring gain (but not loss). "Net Proceeds" means the aggregate cash proceeds received by the Issuer or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees, and sales commissions) 91 and any relocation expenses incurred as a result thereof, taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under the Credit Facilities) secured by a Lien on the asset or assets that were the subject of such Asset Sale and any reserve for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP. "Non-Recourse Debt" means Indebtedness (i) as to which neither the Issuer nor any of its Restricted Subsidiaries (a) provides credit support of any kind (including any undertaking, agreement or instrument that would constitute Indebtedness), or (b) is directly or indirectly liable (as a guarantor or otherwise) and (ii) as to which the lenders have been notified in writing that they will not have any recourse to the stock or assets of the Issuer or any of its Restricted Subsidiaries, including the stock of such Unrestricted Subsidiary. "Obligations" means, with respect to any Indebtedness, any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right of payment to the Notes. "Permitted Business" means the design, manufacture, importing, exporting, distribution, marketing, licensing and wholesale and retail sale of household and consumer goods, molded plastic goods and woodenware, and businesses reasonably related thereto. "Permitted Investments" means (a) any Investment in the Issuer or in a Restricted Subsidiary of the Issuer; (b) any Investment in Cash and Cash Equivalents; (c) any Investment by the Issuer or any Restricted Subsidiary in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Issuer or (ii) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Issuer or a Restricted Subsidiary of the Issuer; (d) any Restricted Investment made as a result of the receipt of non-cash consideration from an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption "--Repurchase at the Option of Holders--Asset Sales" or any transaction not constituting an Asset Sale by reason of the $1.0 million threshold contained in the definition thereof; (e) any acquisition of assets solely in exchange for the issuance of Equity Interests (other than Disqualified Stock) of the Issuer; (f) Hedging Obligations entered into in the ordinary course of the Issuer's or its Restricted Subsidiaries' Businesses and otherwise in compliance with the Indenture; (g) loans and advances to employees and officers of the Issuer and its Restricted Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $2.0 million at any one time outstanding; (h) additional Investments not to exceed $8.0 million at any one time outstanding; and (i) Investments in securities of trade creditors or customers received in settlement of obligations or pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers. "Permitted Junior Securities" means Equity Interests in the Issuer or debt securities that are subordinated to all Senior Debt (and any debt securities issued in exchange for Senior Debt) to substantially the same extent as, or to a greater extent than, the Notes are subordinated to Senior Debt pursuant to Article 10 of the Indenture, that have a final maturity date and a weighted average life to maturity which is the same as or greater than the New Notes and that are not secured by any collateral. "Permitted Liens" means (i) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date (other than Liens to be extinguished in connection with the Recapitalization); (ii) Liens securing Senior Debt and Liens on assets of Restricted Subsidiaries securing Guarantees of Senior Debt permitted to be incurred under the Indenture; (iii) Liens securing the New Notes and the Subsidiary Guarantees; (iv) Liens of the Issuer or a Wholly Owned Restricted Subsidiary on assets of any Restricted Subsidiary of the Issuer; (v) Liens securing Permitted Refinancing Indebtedness which is incurred to refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; provided, however, that such Liens (A) are not materially less favorable to 92 holders and are not materially more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being refinanced and (B) do not extend to or cover any property or assets of the Issuer or any of its Restricted Subsidiaries not securing the Indebtedness so refinanced; (vi) Liens for taxes, assessments or governmental charges or claims that are either (A) not delinquent or (B) being contested in good faith by appropriate proceedings and as to which the Issuer or its Restricted Subsidiaries shall have set aside on its books such reserves as may be required pursuant to GAAP; (vii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, supplies, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent for a period of more than 60 days or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (viii) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance an other types of social security or similar obligations, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (ix) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; (x) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Issuer or any of its Restricted Subsidiaries; (xi) any interest or title of a lessor under any lease, whether or not characterized as capital or operating; provided that such Liens do not extend to any property or assets which is not leased property subject to such lease; (xii) Liens securing Capital Lease Obligations and purchase money Indebtedness incurred in accordance with the covenant described under "-- Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock;" provided, however, that (A) the Indebtedness shall not exceed the cost of such property or assets being acquired or constructed and shall not be secured by any property or assets of the Issuer or any Restricted Subsidiary of the Issuer other than the property or assets of the Issuer or any Restricted Subsidiary of the Issuer other than the property and assets being acquired or constructed and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition or construction; (xiii) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (xiv) Liens securing reimbursement obligations with respect to letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (xv) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual, or warranty requirements of the Issuer or any of its Restricted Subsidiaries, including rights of offset an set-off; (xvi) Liens securing Hedging Obligations which Hedging Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (xvii) Liens securing Acquired Debt incurred in accordance with the covenant described under "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"; provided that (A) such Liens secured such Acquired Debt at the time of and prior to the incurrence of such Acquired Debt by the Issuer or a Restricted Subsidiary of the Issuer and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Debt by the Issuer or a Restricted Subsidiary of the Issuer and (B) such Liens do not extend to or cover any property or assets of the Issuer or any of its Restricted Subsidiaries other than the property or assets that secured the Acquired Debt prior to the time such Indebtedness became Acquired Debt of the Issuer or a Restricted Subsidiary of the Issuer and are not more favorable to the lienholders than those securing the Acquired Debt prior to the incurrence of such Acquired Debt by the Issuer or a Restricted Subsidiary of the Issuer; and (xviii) leases or subleases granted to others not interfering in any material respect with the business of the Issuer or its Restricted Subsidiaries. "Permitted Refinancing Indebtedness" means any Indebtedness of the Issuer or any of its Subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, prepay, retire, renew, replace, defease or refund Indebtedness of the Issuer or any of its Subsidiaries (other than such Indebtedness described in clauses (i), (vi), (vii), (viii), (ix), (x), (xii) and (xiii) of the covenant described above under the caption "-- 93 Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"); provided that: (i) the principal amount (or accreted value, if applicable) of such Permitted Refinancing Indebtedness does not exceed the principal amount of (or accreted value, if applicable), plus accrued interest on, the Indebtedness so extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded (plus the amount of reasonable expenses incurred in connection therewith including premiums paid, if any, to the holders thereof); (ii) such Permitted Refinancing Indebtedness has a final maturity date at or later than the final maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded; (iii) if the Indebtedness being extended, refinanced, renewed, prepaid, retired, replaced, defeased or refunded is subordinated in right of payment to the New Notes, such Permitted Refinancing Indebtedness has a final maturity date later than the final maturity date of, and is subordinated in right of payment to, the New Notes on terms at least as favorable to the holders of New Notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by the Issuer or by the Restricted Subsidiary who is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded. "Person" means any individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Principals" means Seaver Kent--TPG Partners, L.P. and Seaver Kent I Parallel, L.P. "Qualified Proceeds" means any of the following or any combination of the following: (i) cash, (ii) Cash Equivalents, (iii) long-term assets that are used or useful in a Permitted Business and (iv) the Capital Stock of any Person engaged primarily in a Permitted Business if, in connection with the receipt by the Issuer or any Restricted Subsidiary of the Issuer of such Capital Stock, (a) such Person becomes a Wholly Owned Restricted Subsidiary and a Guarantor or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all of its assets to, or is liquidated into, the Issuer or any Wholly Owned Restricted Subsidiary of the Issuer that is a Guarantor. "Related Party" with respect to any Principal means (A) any controlling stockholder or a majority of (or more) owned Subsidiary of such Principal or, in the case of an individual, any spouse or immediate family member of such Principal, or (B) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding a majority (or more) controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (A). Without limiting the generality of the foregoing, each of SKC GenPar LLC, TPG Advisors II, Inc. and their respective Affiliates shall be deemed to be Related Parties of the Principals. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" means any Subsidiary of the Issuer other than an Unrestricted Subsidiary. "Senior Debt" means (i) all Indebtedness of the Issuer or any Guarantor outstanding under Credit Facilities and all Hedging Obligations with respect thereto, (ii) other Indebtedness of the Issuer or any of its Guarantors permitted to be incurred under the terms of the Indenture, unless the instrument under which such Indebtedness is incurred expressly provides that it is on a parity with or subordinated in right of payment to the New Notes and (iii) all Obligations with respect to the foregoing. Notwithstanding anything to the contrary in the foregoing, Senior Debt will not include (w) any liability for federal, state, local or other taxes owed or owing by the Issuer, (x) any Indebtedness of the Issuer to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in violation of the Indenture. "Significant Subsidiary" means any Subsidiary that would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect on the date of the Indenture. 94 "Stated Maturity" means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness, and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total Voting Stock thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof). "Tax Sharing Agreement" means, the tax sharing agreement among Holdings, the Issuer and any one or more of Holdings' subsidiaries, as amended from time to time, so long as the method of calculating the amount of the Issuer's (or any Restricted Subsidiary's) payments, if any, to be made thereunder is not less favorable to the Issuer than as provided in such agreement as in effect on the Issue Date, as determined in good faith by the Board of Directors of the Issuer. "Unrestricted Subsidiary" means any Subsidiary (other than the Subsidiary Guarantors as of the date of the Indenture or any successor to any of them) of the Issuer that is designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution, but only to the extent that such Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement, contract, arrangement or understanding with the Issuer or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Issuer or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Issuer; (c) is a Person with respect to which neither the Issuer nor any of its Restricted Subsidiaries has any direct or indirect obligation (x) to subscribe for additional Equity Interests or (y) to maintain or preserve such Person's financial condition or to cause such Person to achieve any specified levels of operating results; (d) has not guaranteed or otherwise directly or indirectly provided credit support for any Indebtedness of the Issuer or any of its Restricted Subsidiaries; and (e) has at least one director on its board of directors that is not a director or executive officer of the Issuer or any of its Restricted Subsidiaries and has at least one executive officer that is not a director or executive officer of the Issuer or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with the Trustee a certified copy of the Board Resolution giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenant described above under the caption "--Certain Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Issuer as of such date. The Board of Directors of the Issuer may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness and issuance of preferred stock by a Restricted Subsidiary of the Issuer of any outstanding Indebtedness or outstanding issue of preferred stock of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness and preferred stock is permitted under the covenant described under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock" calculated on a pro forma basis as if such designation had occurred at the beginning of the four quarter reference period, (ii) such Subsidiary becomes a Subsidiary Guarantor, and (iii) no Default or Event of Default would exist following such designation. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. "Weighted Average Life to Maturity" means, when applied to any Indebtedness at any date, the number of years obtained by dividing (i) the sum of the products obtained by multiplying (a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by (ii) the then outstanding principal amount of such Indebtedness. "Wholly Owned Restricted Subsidiary" of any Person means a Restricted Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors' qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more "Wholly Owned Restricted Subsidiaries of such Person." 95 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following is a general summary of the material United States federal income tax consequences of the ownership and disposition of the New Notes and the exchange of Old Notes for New Notes that may be relevant to a holder of an Old Note or New Note. This summary is based on laws, regulations, rulings and decisions now in effect, all of which are subject to change (possibly with retroactive effect) and to differing interpretations. This summary deals only with holders that will acquire their New Notes at original issuance and will hold New Notes as capital assets, and does not address tax considerations applicable to investors that may be subject to special tax rules, such as banks, tax-exempt entities, insurance companies or dealers in securities or currencies, persons that will hold New Notes as a position in a "straddle" or conversion transaction, or as part of a "synthetic security" or other integrated financial transaction or persons that have a "functional currency" other than the U.S. dollar. As used herein, the term "United States holder" means a beneficial owner of a New Note that is a United States person or that otherwise is subject to United States federal income taxation on a net income basis in respect of the New Notes. The term "United States person" means a holder of a New Note who is a citizen or resident of the United States, or that is a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, an estate the income of which is subject to United States federal income taxation regardless of its source or a trust if: (i) a U.S. court is able to exercise primary supervision over the trust's administration and (ii) one or more United States persons have the authority to control all of the trust's substantial decisions. The term "United States" means the United States of America (including the States and the District of Columbia), its possessions, territories and other areas subject to its jurisdiction. EXCHANGE OF OLD NOTES FOR NEW NOTES The exchange of Old Notes for New Notes (the "Exchange") pursuant to the Exchange Offer will not be a taxable event for U.S. federal income tax purposes. As a result, no material U.S. federal income tax consequences will result to United States holders exchanging Old Notes for New Notes. A tendering holder's tax basis in the New Notes will be the same as such holder's tax basis in its Old Notes. A tendering holder's holding period for the New Notes received pursuant to the Exchange Offer will include its holding period for the Old Notes surrendered therefor. ALL HOLDERS OF OLD NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE EXCHANGE OF OLD NOTES FOR NEW NOTES AND OF THE OWNERSHIP AND DISPOSITION OF NEW NOTES RECEIVED IN THE EXCHANGE OFFER IN VIEW OF THEIR OWN PARTICULAR CIRCUMSTANCES. UNITED STATES HOLDERS PAYMENTS OF INTEREST Payments of interest on a New Note will be taxable to a United States holder as ordinary interest income at the time that such payments are accrued or are received (in accordance with the United States holder's method of tax accounting). LIQUIDATED DAMAGES Any Liquidated Damages (described herein under "Description of the New Notes--Registration Rights; Liquidated Damages") will be taxable to a United States holder as ordinary income in accordance with such United States holder's method of tax accounting. 96 PURCHASE, SALE AND RETIREMENT OF NEW NOTES A United States holder's tax basis in a New Note received in the Exchange for an Old Note generally will be equal to the United States holder's tax basis in the Old Note. Upon the sale, exchange, or retirement of a New Note, a United States holder generally will recognize gain or loss equal to the difference between the amount realized on the sale, exchange or retirement (less any accrued interest, which will be taxable as such) and the United States holder's tax basis in such New Note. Gain or loss realized by a United States holder on the sale, exchange or retirement of a New Note generally will be long-term capital gain or loss if, at the time of the disposition, the United States holder's holding period for such New Note is more than one year. Under recently enacted legislation, long-term capital gain recognized by an individual holder in respect of New Notes with a holding period of more than one year at the time of disposition generally will be subject to a maximum rate of 20 percent, effective for amounts properly taken into account on or after January 1, 1998. INFORMATION REPORTING AND BACKUP WITHHOLDING A noncorporate United States holder may be subject to information reporting and to backup withholding at a rate of 31 percent with respect to payments of principal and interest made on a New Note, or on proceeds of disposition of a New Note before maturity, unless such United States holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with applicable requirements of the information reporting and backup withholding rules. Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the United States person's United States income tax liability provided that the required information is furnished to the Internal Revenue Service ("IRS"). NON-UNITED STATES HOLDERS Under current United States federal income tax law: (i) payment of interest to a holder who is not a United States holder (a "non-United States holder") will not be subject to withholding of United States federal income tax, provided that (a) the holder does not actually or constructively own 10 percent or more of the combined voting power of all classes of stock of the Company and is not a controlled foreign corporation related to the Company through stock ownership and (b) the beneficial owner provides a statement signed under penalties of perjury that includes its name and address and certifies that it is a non-United States holder in compliance with applicable requirements or, with respect to payments made after December 31, 1999, satisfies certain documentary evidence requirements for establishing that it is a non-United States holder; and (ii) a non-United States holder will not be subject to United States federal income tax on gain realized on the disposition of a New Note. Notwithstanding the above, a non-United States holder that is subject to United States federal income taxation on a net income basis with respect to its income from a New Note generally will be subject to the same rules to which a United States holder is subject with respect to the accrual of interest on a New Note and with respect to gain or loss realized or recognized on the disposition of a New Note. Special rules might also apply to a non-United States holder that is a qualified resident of a country with which the United States has an income tax treaty. A New Note held by an individual non-United States holder who at the time of death is a nonresident alien will not be subject to United States federal estate tax, provided that such holder did not at the time of death actually or constructively own 10 percent or more of the combined voting power of all classes of stock in the Company. INFORMATION REPORTING AND BACKUP WITHHOLDING United States information reporting requirements and backup withholding tax will not apply to payments on, or proceeds from the disposition of, a New Note if the beneficial owner certifies its non-United States status under penalties of perjury (or, with respect to payments made after December 31, 1999, satisfies certain documentary evidence requirements for establishing that it is a non-United States holder) or otherwise establishes an exemption; provided that neither the Company nor its payment agent has actual knowledge that the person is a United States person or that the conditions of any other exemption are not in fact satisfied. 97 Any amounts withheld under the backup withholding rules will be allowed as a refund or credit against the non-United States person's United States income tax liability, provided that the required information is furnished to the IRS. On October 7, 1997, the U.S. Treasury Department issued final Treasury regulations (and subsequently released guidance regarding the effective date of such Treasury regulations) (the "Treasury Regulations") governing information reporting and the certification procedures regarding withholding and backup withholding on certain amounts paid to non-United States persons after December 31, 1999. Such regulations, among other things, may change the certification procedures relating to the receipt by intermediaries of payments on behalf of a beneficial owner of a New Note. Prospective investors should consult their tax advisors regarding the effect, if any, of such new Treasury Regulations on an investment in the New Notes. With respect to payments made after December 31, 1999, for purposes of applying the rules set forth in the four preceding paragraphs to an entity that is treated as fiscally transparent (e.g., a partnership or certain trusts) for United States federal income taxation purposes, the beneficial owner means each of the ultimate beneficial owners of the entity. 98 PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. The Issuer and the Guarantors have agreed that they will make this Prospectus available to any Participating Broker-Dealer for a period of time not to exceed one year after the date on which the Exchange Offer is consummated for use in connection with any such resale. In addition, until such date, all broker- dealers effecting transactions in the New Notes may be required to deliver a prospectus. Neither the Issuer nor the Guarantors will receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. Starting on the Expiration Date, the Issuer and the Guarantors will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Issuer has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Old Notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Old Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS The validity of the New Notes has been passed upon for the Issuer by Cleary, Gottlieb, Steen & Hamilton, New York, New York. EXPERTS The audited consolidated financial statements and schedules of Diamond Brands Incorporated and subsidiaries in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said reports. 99 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 AND 1997 AND FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997: Report of Independent Public Accountants .............................. F-2 Consolidated Balance Sheets as of December 31, 1996 and 1997 .......... F-3 Consolidated Statements of Operations for the Years Ended December 31, 1995, 1996 and 1997 .................................................. F-4 Consolidated Statements of Stockholders' Equity ....................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997 .................................................. F-6 Notes to Consolidated Financial Statements ............................ F-7 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND JUNE 30, 1998 AND FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1998: Unaudited Consolidated Balance Sheet as of December 31, 1997 and June 30, 1998 ............................................................. F-15 Unaudited Consolidated Statements of Operations for the Six Months Ended June 30, 1997 and 1998 .................................. F-16 Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1998 ......................................... F-17 Notes to Unaudited Consolidated Financial Statements .................. F-18
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Diamond Brands Incorporated: We have audited the accompanying consolidated balance sheets of Diamond Brands Incorporated (a Minnesota corporation) and Subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Brands Incorporated and Subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Minneapolis, Minnesota, February 6, 1998, except as to Note 8, which is as of April 21, 1998 F-2 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
AS OF DECEMBER 31, ---------------- 1996 1997 ------- ------- ASSETS CURRENT ASSETS: Accounts receivable, net of allowances of $639 and $1,195, respectively.............................................. $ 9,868 $15,526 Inventories................................................ 11,790 20,744 Deferred income taxes...................................... 1,875 -- Prepaid expenses........................................... 303 406 ------- ------- Total current assets..................................... 23,836 36,676 ------- ------- PROPERTY, PLANT AND EQUIPMENT: Land....................................................... 558 558 Buildings and improvements................................. 5,896 5,955 Machinery and equipment.................................... 22,344 27,664 ------- ------- Property, plant and equipment............................ 28,798 34,177 Less--Accumulated depreciation........................... (13,528) (16,633) ------- ------- Property, plant and equipment, net....................... 15,270 17,544 GOODWILL..................................................... 26,540 39,454 DEFERRED FINANCING COSTS..................................... 857 876 ------- ------- Total assets............................................. $66,503 $94,550 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt....................... $ 6,573 $ 7,892 Accounts payable........................................... 3,834 4,500 Accrued expenses........................................... 8,020 11,037 ------- ------- Total current liabilities................................ 18,427 23,429 POSTRETIREMENT BENEFIT OBLIGATIONS........................... 1,551 1,586 DEFERRED INCOME TAXES........................................ 499 -- LONG-TERM DEBT, net of current maturities.................... 28,272 41,605 ------- ------- Total liabilities........................................ 48,749 66,620 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Common stock, $0.01 par value; 50,000 shares authorized; 16,112 shares issued and outstanding.......... 161 161 Additional paid-in capital................................. 774 774 Retained earnings.......................................... 16,819 26,995 ------- ------- Total stockholders' equity............................... 17,754 27,930 ------- ------- Total liabilities and stockholders' equity............... $66,503 $94,550 ======= =======
The accompanying notes are an integral part of these consolidated balance sheets. F-3 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------ 1995 1996 1997 ------- ------- -------- (IN THOUSANDS) NET SALES............................................. $77,659 $90,201 $118,072 COST OF SALES......................................... 56,490 63,032 78,582 ------- ------- -------- Gross profit........................................ 21,169 27,169 39,490 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 10,152 9,148 11,414 GOODWILL AMORTIZATION................................. 600 720 1,521 ------- ------- -------- Operating income.................................... 10,417 17,301 26,555 INTEREST EXPENSE...................................... 3,963 3,858 4,550 ------- ------- -------- Income before provision for income taxes............ 6,454 13,443 22,005 PROVISION FOR INCOME TAXES (Note 5)................... 2,352 5,807 1,376 ------- ------- -------- Net income.......................................... $ 4,102 $ 7,636 $ 20,629 ======= ======= ======== UNAUDITED PRO FORMA NET INCOME: Income before provision for income taxes............ $ 6,454 $13,443 $ 22,005 Pro forma income tax expense (Note 5)............... 2,700 5,807 9,000 ------- ------- -------- Pro forma net income................................ $ 3,754 $ 7,636 $ 13,005 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK --------------- ADDITIONAL NUMBER OF PAR PAID-IN RETAINED SHARES VALUE CAPITAL EARNINGS TOTAL --------- ----- ---------- -------- ------- (IN THOUSANDS) BALANCE, December 31, 1994......... 16,133 $161 $782 $ 5,081 $ 6,024 Retirement of common stock....... (20) -- (8) -- (8) Net income....................... -- -- -- 4,102 4,102 ------ ---- ---- ------- ------- BALANCE, December 31, 1995......... 16,113 161 774 9,183 10,118 Net income....................... -- -- -- 7,636 7,636 ------ ---- ---- ------- ------- BALANCE, December 31, 1996......... 16,113 161 774 16,819 17,754 Distribution to stockholders..... -- -- -- (10,453) (10,453) ------ ---- ---- ------- ------- Net income....................... -- -- -- 20,629 20,629 ------ ---- ---- ------- ------- BALANCE, December 31, 1997......... 16,113 $161 $774 $26,995 $27,930 ====== ==== ==== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------- ------- ------- (IN THOUSANDS) OPERATING ACTIVITIES: Net income........................................ $ 4,102 $ 7,636 $20,629 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization................... 4,073 4,553 5,008 Deferred income taxes........................... (611) 160 1,376 Change in operating assets and liabilities, net of effects of acquisitions: Accounts receivable........................... (1,798) 434 (2,773) Inventories................................... 1,352 (555) (1,727) Prepaid expenses.............................. 212 438 23 Accounts payable.............................. (1,413) (402) (594) Accrued expenses.............................. (1,338) 1,533 (664) Other liabilities............................. (126) 50 35 ------- ------- ------- Net cash provided by operating activities..... 4,453 13,847 21,313 ------- ------- ------- INVESTING ACTIVITIES: Acquisitions, net of cash received................ (42,433) -- (24,696) Purchases of property, plant and equipment........ (1,926) (1,979) (4,050) ------- ------- ------- Net cash used for investing activities........ (44,359) (1,979) (28,746) ------- ------- ------- FINANCING ACTIVITIES: Borrowings under revolving line of credit......... 18,600 20,300 30,300 Repayments under revolving line of credit......... (9,600) (25,500) (29,100) Long-term borrowings.............................. 32,000 -- 21,000 Repayments of long-term borrowings................ (3,010) (6,668) (7,548) Distribution paid to stockholders................. -- -- (6,849) Retirement of common stock........................ (8) -- -- Debt issuance costs............................... (1,420) -- (370) ------- ------- ------- Net cash provided by (used for) financing ac- tivities..................................... 36,562 (11,868) 7,433 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA- LENTS.............................................. (3,344) -- -- CASH AND CASH EQUIVALENTS, beginning of year........ 3,344 -- -- ------- ------- ------- CASH AND CASH EQUIVALENTS, end of year.............. $ -- $ -- $ -- ======= ======= ======= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for-- Interest........................................ $ 3,658 $ 3,882 $ 4,206 ======= ======= ======= Income taxes.................................... $ 3,196 $ 4,504 $ 283 ======= ======= ======= SUPPLEMENTAL NONCASH FINANCING ACTIVITIES: Distribution to stockholders declared but not yet paid............................................. $ -- $ -- $ 3,604 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-6 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 1. BUSINESS DESCRIPTION Diamond Brands Incorporated ("Holdings") and its wholly-owned subsidiary, Forster, Inc. ("Forster"), are engaged in the development, production and distribution of household and consumer products throughout the United States primarily to grocery stores and mass merchandisers. Their products include plastic cutlery, wooden matches, toothpicks, clothespins and other wood products. Holding's wholly-owned subsidiary, Empire Candle, Inc. ("Empire"), formerly Empire Manufacturing Company, is a manufacturer of scented and citronella candles which are distributed throughout the United States and Canada. During 1995, 1996 and 1997, one customer accounted for 17%, 18% and 18% of net sales, respectively. 2. ACQUISITIONS On March 5, 1995, Holdings acquired all of the outstanding common shares of Forster for $42,589,000 (the "Forster Acquisition"). The Company accounted for the acquisition under the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase price over the prior carrying amount of Forster's net assets as of March 5, 1995 of $25,200,000, was allocated as follows:
(IN THOUSANDS) -------------- Goodwill.................................................... $27,862 Deferred financing costs.................................... (603) Accrued expenses............................................ (2,059) ------- $25,200 =======
On February 28, 1997, Holdings acquired Empire (the "Empire Acquisition"). Certain assets were acquired and liabilities assumed by Holdings for $26,000,000, subject to postclosing adjustments. The Company accounted for the acquisition under the purchase method of accounting. The excess of the purchase price over the prior carrying amount of Empire's net assets as of February 28, 1997 of $14,819,000, was allocated as follows:
(IN THOUSANDS) -------------- Goodwill.................................................... $14,436 Property, plant and equipment............................... 383 ------- $14,819 =======
Pro forma results of operations of the Company (unaudited) for the years ended December 31, 1996 and 1997 as though Empire had been acquired on January 1, 1996 are as follows:
1996 1997 -------- -------- (IN THOUSANDS) Net sales................................................ $113,926 $120,714 ======== ======== Net income............................................... $ 10,050 $ 20,521 ======== ========
F-7 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Diamond Brands Incorporated and its subsidiaries (the "Company"), all of which are wholly- owned. All significant intercompany accounts and transactions have been eliminated in consolidation. RECLASSIFICATIONS Certain reclassifications have been made in the 1995 and 1996 financial statements to conform with the 1997 presentation. Such reclassifications had no effect on previously reported results of operations or stockholders' equity. 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 liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Ultimate results reporting could differ from those estimates. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information," issued in June 1997 and effective for financial statements beginning after December 15, 1997, redefines how operating segments are determined and requires expanded quantitative and qualitative disclosures relating to a company's operating segments. The Company anticipates that the effect of adopting SFAS No. 131 will not be significant. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the consolidated balance sheets at December 31, 1997 and 1996 for accounts receivable and payable approximate fair value because of the immediate or short-term maturity of these financial instruments. As the interest rate on the term note and revolving line of credit is reset monthly based on current market rates, the carrying value of the term note and revolving line of credit approximates fair value. The fair value of the stockholder notes payable, industrial development revenue bonds and other debt as of December 31, 1996 and 1997, based on current market rates, were $7,856,000 and $7,489,000, respectively. INVENTORIES Inventories are stated at the lower of first-in, first-out cost or market and include materials, labor and overhead. Inventories consisted of the following as of December 31:
1996 1997 ------- ------- (IN THOUSANDS) Raw materials............................................ $ 3,777 $ 8,111 Work in process.......................................... 526 433 Finished goods........................................... 7,487 12,200 ------- ------- Total.................................................. $11,790 $20,744 ======= =======
F-8 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation for financial reporting purposes is provided on the straight-line method over estimated useful lives of 5 to 29 years for buildings and improvements and 3 to 10 years for machinery and equipment. Maintenance and repairs are charged to expense as incurred. GOODWILL Goodwill represents the costs of acquisitions in excess of the fair value of the net assets and is amortized using the straight-line method over periods of 15 to 40 years. Accumulated amortization as of December 31, 1996 and 1997 was $1,320,000 and $2,841,000, respectively. The Company periodically evaluates whether events and circumstances have occurred that may affect the realizable nature of goodwill and other long- lived assets. If such events or circumstances were to indicate that the carrying amount of these assets would not be recoverable, an impairment loss would be recognized. No such impairment has been recognized for the year ended December 31, 1997. DEFERRED FINANCING COSTS Deferred financing costs consist of debt structuring costs and are being amortized over the lives of the underlying debt agreements. REVENUE RECOGNITION Revenue for products sold is recognized at the time of shipment. OTHER COMPREHENSIVE INCOME The Company has no significant items of other comprehensive income. 4. LONG-TERM DEBT Long-term debt consists of the following as of December 31:
1996 1997 ------- ------- (IN THOUSANDS) Term note, interest at LIBOR (6.125% as of December 31, 1997) plus 2.00% through 2002.......................... $23,250 $37,075 Revolving line of credit, interest at LIBOR (6.125% as of December 31, 1997) plus 2.00%....................... 3,800 5,000 Stockholder notes payable, interest at rates of 8.125% to 11.125%............................................. 5,894 5,894 Industrial development revenue bonds, due in varying amounts through 2002, interest at 7.5% to 9.0%......... 807 688 Other................................................... 1,094 840 ------- ------- Total debt............................................ 34,845 49,497 Less-Current maturities................................. (6,573) (7,892) ------- ------- Total long-term debt.................................. $28,272 $41,605 ======= =======
In connection with the Forster Acquisition (see Note 2), the Company entered into a bank credit agreement that provided for a $15,000,000 revolving credit facility through March 1998 and a $32,000,000 term loan F-9 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 through September 2000. This agreement replaced the existing $3,000,000 revolving credit facility which was due to expire in April 1995. In 1996, the Issuer increased the revolving credit facility to $18,000,000. In connection with the Empire Acquisition (see Note 2), the Company amended its bank credit agreement to a $23,000,000 revolving credit facility through February 2000 and a $44,250,000 term loan through December 2002. Borrowings under the term note and revolving credit agreement are collateralized by all assets of the Issuer. The Company's agreement contains covenants which, among other matters, require the Company to maintain certain financial ratios and prohibit principal payments on debt to stockholders until the credit facilities are paid in full. As of December 31, 1997, the Company was in compliance with these covenants. Revolving line of credit (revolver) data is as follows for the years ended December 31:
1995 1996 1997 ------- ------ ------- (DOLLARS IN THOUSANDS) Revolver borrowings at year-end.................. $ 9,000 $3,800 $ 5,000 Average daily revolver borrowings................ 8,152 6,011 7,015 Highest total revolver borrowings................ 12,800 9,900 10,700 Weighted average interest rates: Based on average daily borrowings................ 8.78% 8.38% 8.14%
Future maturities of long-term debt were as follows as of December 31, 1997:
FISCAL YEAR (IN THOUSANDS) ----------- ------------- 1998................................... $ 7,892 1999................................... 7,930 2000................................... 12,941 2001................................... 7,627 2002................................... 13,107 ------- $49,497 =======
5. INCOME TAXES: Effective January 1, 1995, the Company converted from an S corporation to a C corporation as a result of the Forster Acquisition (see Note 2) and began accounting for income taxes using the liability method. Under this method, deferred income taxes were recognized for temporary differences between the tax and financial reporting bases of the Company's assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Effective January 1, 1997, the Company elected S corporation status due to a change in the tax laws allowing entities with subsidiaries to elect this status. Deferred tax assets and liabilities as of December 31, 1996 are reflected as a charge in the 1997 consolidated statement of operations. The Company would be subject to a tax on built-in gains if certain assets are sold within ten years of election of S corporation status. The taxable income or loss of the Company for years ended after December 31, 1996 is included in the individual returns of stockholders for federal tax purposes and, to the extent allowed and elected, for state tax purposes. Accordingly, there is no provision for current income taxes in 1997. F-10 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 The Company's income tax provision for the years ended December 31 consisted of the following:
1995 1996 1997 ------ ------ ------ (IN THOUSANDS) Current: Federal........................................... $2,518 $4,703 $ -- State............................................. 445 944 -- Deferred............................................ (611) 160 1,376 ------ ------ ------ $2,352 $5,807 $1,376 ====== ====== ======
A reconciliation from the federal statutory tax rate to the effective tax rate is as follows:
1995 1996 ---- ---- Federal statutory tax rate.................................... 34.0% 35.0% Goodwill amortization......................................... 3.2 2.0 State income taxes, net of federal benefit.................... 4.6 4.7 Other items, net.............................................. (5.4) 1.5 ---- ---- Effective income tax rate..................................... 36.4% 43.2% ==== ====
Components of deferred income taxes are as follows as of December 31, 1996:
(IN THOUSANDS) -------------- Net current deferred income tax asset: Workers' compensation.................................... $ 535 Inventory reserves....................................... 480 Postretirement benefits.................................. 589 Allowances for doubtful accounts......................... 188 Other.................................................... 686 ------ Net current deferred income tax asset.................. $2,478 ====== Net noncurrent deferred income tax liability: Depreciation............................................. $1,102 ------ Net noncurrent deferred income tax liability........... $1,102 ======
The unaudited pro forma income tax expense is presented assuming the Company had been a C corporation since January 1, 1995 using an effective income tax rate of 42%, 43% and 41% for the years ended December 31, 1995, 1996 and 1997. 6. EMPLOYEE BENEFITS: DEFINED BENEFIT PENSION PLAN AND DEFINED CONTRIBUTION RETIREMENT PLAN (THE DEFINED PLANS) The Company has a defined benefit pension plan to cover certain hourly employees, which was suspended as of October 1, 1994. Participants will continue to vest in nonvested benefits existing at October 1, 1994. The Company will continue to pay accrued benefits and has no intention to terminate the plan. Plan assets approximate the actuarially determined vested and accumulated benefit obligation as of December 31, 1996 and 1997. F-11 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 The Company also has a defined contribution retirement plan for certain union employees. The Company makes contributions to the plan based on hours worked. Total expense related to the Defined Plans was $294,000 in 1995, $240,000 in 1996 and $267,000 in 1997. 401(K) SAVINGS AND PROFIT-SHARING PLANS (THE PLANS) The Company has two 401(k) savings and profit-sharing plans for certain nonunion employees. The Plans are qualified defined contribution plans in accordance with Section 401(k) of the Internal Revenue Code. In 1997, the Company changed the policy for Forster participants from a 35% match of the first 2% and 15% of the second 2% of participants' contributions to be consistent with the DBI and Empire plan participants. The Company's policy in 1997 for all eligible participants is to match 50% of employee contributions up to a maximum of 3% of compensation. Additionally, the Company makes discretionary profit-sharing contributions that are determined by the board of directors. Total expense related to the Plans was $557,000 in 1995, $725,000 in 1996 and $736,000 in 1997. POSTRETIREMENT MEDICAL BENEFITS (THE POSTRETIREMENT PLANS) The Company provides certain postretirement health and life insurance benefits for all Holdings bargaining unit employees who retire with ten or more years of service. The Company also provides certain postretirement life insurance benefits to eligible Forster employees who retire and have attained age 55 with 20 or more years of service. The cost of postretirement benefits is accrued during an employee's active career. The Company does not fund these benefits prior to the time they are paid. Postretirement data were computed based on a discount rate of 7.0% to 7.5%, a rate of increase in future life insurance premiums of 2.0%, and a rate of increase in life insurance benefits of 2.5% for the years ended December 31, 1995, 1996 and 1997. Components of the net periodic postretirement benefit cost for the years ended December 31, 1995, 1996 and 1997 and the accumulated postretirement benefit obligation as of December 31, 1996 and 1997 are as follows:
1995 1996 1997 ---- ------ ------ (IN THOUSANDS) Net periodic postretirement benefit cost: Service cost (benefits earned during the period)...... $ 36 $ 33 $ 39 Interest cost......................................... 85 96 110 ---- ------ ------ Net periodic postretirement benefit cost.............. $121 $ 129 $ 149 ==== ====== ====== Accumulated postretirement benefit obligation: Retirees.............................................. $ 822 $ 928 Fully-eligible active plan participants............... 528 618 Other active plan participants........................ 201 40 ------ ------ Accumulated postretirement benefit liability............ $1,551 $1,586 ====== ======
The accumulated postretirement benefit obligation was determined using a discount rate of 7.5% and 7.0% for the years ended December 31, 1996 and 1997, respectively. The postretirement medical benefit is a union negotiated commitment. The fixed amounts are paid annually and do not change due to inflationary or health care cost trends. STOCK OPTIONS During 1997, the Company adopted a stock option plan (the "1997 Plan") that authorized the grant of stock options to key executives. Options representing 90,000 common shares have been granted as of December 31, F-12 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 1997 at an exercise price of $7.50 per share. Options generally expire 10 years from the date of grant or at an earlier date as determined by the board of directors. Options granted under the plans are exercisable 33 1/3% each year for three years from the date of grant. In the event of a change of control, as defined in the 1997 Plan, the options become 100% exercisable. Stock option activity was as follows for the year ended December 31, 1997:
WEIGHTED AVERAGE SHARE SHARES PRICE ------ -------- Outstanding, January 1, 1997.............................. -- $ -- Granted................................................. 90,000 7.50 Exercised............................................... -- -- Cancelled............................................... -- -- ------ ----- Outstanding, December 31, 1997............................ 90,000 $7.50 ====== ===== Options exercisable at December 31, 1997.................. 30,000 ====== Weighted average fair value of options granted during 1997..................................................... $ 1.23 ======
The Company follows Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized in connection with stock option grants pursuant to the stock option plans. Had compensation cost been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's pro forma net income would have been as follows for the year ended December 31, 1997:
(IN THOUSANDS) -------------- Net income: As reported........................... $20,629 Pro forma............................. 20,592
In determining compensation cost pursuant to SFAS 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants during 1997: a risk-free interest rate of 6.13%; expected life of three years; and expected volatility of 0%. 7. COMMITMENTS AND CONTINGENCIES: LITIGATION The Company is subject to asserted and unasserted claims encountered in the normal course of business. In the opinion of management and its legal counsel, disposition of these matters will not have a material effect on the Company's financial condition or results of operations. F-13 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 AND 1997 OPERATING LEASES The Company leases office space and equipment with various expiration dates through 2002. Total rent expense was $226,000 in 1995, $340,000 in 1996 and $664,000 in 1997. Future minimum payments for all operating leases with initial or remaining terms of one year or more subsequent to December 31, 1997 are as follows:
FISCAL YEAR (IN THOUSANDS) ----------- ------------- 1998................................... $715 1999................................... 703 2000................................... 438 2001................................... 152 2002................................... 114 Thereafter............................. 79
8. SUBSEQUENT EVENT: Holdings, its then existing stockholders (the "Stockholders"), Seaver Kent-TPG Partners, L.P., an investment partnership jointly formed by Seaver Kent & Company, LLC ("Seaver Kent") and Texas Pacific Group ("TPG"), and Seaver Kent I Parallel, L.P. (collectively, the "Sponsors") entered into a Recapitalization Agreement dated as of March 3, 1998 (the "Recapitalization Agreement"), which provided for the recapitalization of Holdings (the "Recapitalization"). Pursuant to the Recapitalization Agreement, the Sponsors and other investors purchased from Holdings, for an aggregate purchase price of $47.0 million, shares of pay-in-kind preferred stock of Holdings ("Holdings Preferred Stock"), together with warrants (the "Warrants") to purchase shares of common stock of Holdings ("Holdings Common Stock") for $0.01 per share. The shares of Holdings Common Stock issuable upon the full exercise of the Warrants would represent 77.5% of the outstanding shares of Holdings Common Stock after giving effect to such issuance. In addition, Holdings purchased (the "Equity Repurchase") for $211.4 million, subject to certain working capital adjustments, from the Stockholders, all outstanding shares of Holdings' capital stock other than 1,073,268 shares (the "Retained Shares") of Holdings Common Stock which continue to be held by certain of the Stockholders. The Retained Shares would represent 22.5% of the outstanding shares of Holdings Common Stock after giving effect to the full exercise of the Warrants. Holdings, the Sponsors and the holders of the Retained Shares also entered into a Stockholders Agreement pursuant to which, among other things, the Sponsors have the ability to direct the voting of outstanding shares of Holdings Common Stock in proportion to their ownership of such shares as if the Warrants were exercised in full. Accordingly, the Sponsors have voting control of Holdings. In connection with the Recapitalization, Holdings organized Diamond Brands Operating Corp. ("Operating Corp") and, immediately prior to the consummation of the Recapitalization, Holdings transferred substantially all of its assets and liabilities to Operating Corp. Holdings' current operations are, and future operations are expected to be, limited to owning the stock of Operating Corp., preferred stock, and senior discount debentures. Operating Corp. repaid substantially all of the Company's funded debt obligations existing immediately before the consummation of the Recapitalization (the "Debt Retirement") in the amount of $51.8 million. Funding requirements for the Recapitalization (which was consummated on April 21, 1998) were satisfied through the Retained Shares and the following: (i) the purchase by the Sponsors and other investors of Holdings Preferred Stock and the Warrants for $47.0 million ($45.8 million in cash and $1.2 million in officer notes receivables); (ii) $45.1 million of gross proceeds from the offering of the 12 7/8% Holdings senior discount debentures; (iii) $80.0 million of borrowings under senior secured term loan facilities (the "Term Loan Facilities"); (iv) borrowings under a senior secured revolving credit facility having availability of up to $25.0 million and (v) $100.0 million of gross proceeds from the offering of the 10 1/8% senior subordinated notes. The $100.0 million senior subordinated notes are guaranteed fully and unconditionally on a joint and several basis by the subsidiaries of Operating Corp. The Recapitalization was accounted for as a recapitalization transaction for accounting purposes. In connection with the Recapitalization, the Company converted from an S corporation to a C corporation. F-14 DIAMOND BRANDS OPERATING CORP. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 1998 1997 --------- ------------ ASSETS CURRENT ASSETS: Accounts receivable, net of allowances of $689 and $1,195............................................... $17,525 $15,526 Inventories........................................... 21,347 20,744 Deferred tax asset.................................. 2,709 -- Prepaid expenses...................................... 1,957 406 ------- ------- Total current assets................................ 43,538 36,676 ------- ------- PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $17,202 and $16,715.................... 17,554 17,544 GOODWILL................................................ 38,612 39,454 DEFERRED FINANCING COSTS................................ 7,170 876 ------- ------- Total assets........................................ $106,874 $94,550 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt.................. $ 1,250 $ 7,892 Accounts payable...................................... 5,161 4,500 Accrued expenses...................................... 9,814 11,037 ------- ------- Total current liabilities............................. 16,225 23,429 ------- ------- DEFERRED INCOME TAXES......................... 735 -- POSTRETIREMENT BENEFIT OBLIGATIONS.................... 1,586 1,586 LONG-TERM DEBT, net of current maturities............. 184,875 41,605 ------- ------- Total liabilities..................................... 203,421 66,620 ------- ------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT): Common stock, $.01 par value; 50,000 shares authorized; 1 and 16,112 shares issued and outstanding...................................... 1 161 Additional paid in capital............................ -- 774 Retained earnings (accumulated deficit)............... (96,548) 26,995 ------- ------- Total stockholders' equity (deficit).................. (96,547) 27,930 ------- ------- $106,874 $94,550 ======= =======
The accompanying notes are an integral part of these consolidated balance sheets F-15 DIAMOND BRANDS OPERATING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------- 1997 1998 ------- ------- NET SALES...................................................... $54,675 $58,558 COST OF SALES.................................................. 37,630 41,348 ------- ------- Gross Profit................................................. 17,045 17,210 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................... 5,344 6,540 GOODWILL AMORTIZATION.......................................... 680 841 ------- ------- Operating income............................................. 11,031 9,829 INTEREST EXPENSE............................................... 2,160 6,155 ------- ------- Income before provision (benefit) for income taxes........... 8,871 3,674 PROVISION (BENEFIT) FOR INCOME TAXES........................... 1,376 (794) ------- ------- Net income................................................... $ 7,495 $ 4,468 ======= ======= PRO FORMA NET INCOME: Income before provision for income taxes...................... $ 8,871 $ 3,674 Pro forma income tax expense (Note 2)......................... 3,500 1,500 ------- ------- Pro forma net income.......................................... $ 5,371 $ 2,174 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-16 DIAMOND BRANDS OPERATING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ----------------- 1997 1998 ------ ------- OPERATING ACTIVITIES Net income.................................................. $7,495 $ 4,468 Adjustments to reconcile net income to cash provided by operating activities Depreciation and amortization............................. 2,432 3,092 Deferred income taxes..................................... 1,376 (1,974) Change in operating assets and liabilities, net of effects of acquisition Accounts receivable..................................... (5,201) (1,999) Inventories............................................. (1,417) (603) Prepaid expenses........................................ 259 (1,551) Accounts payable........................................ 1,078 661 Accrued expenses........................................ 1,809 2,379 ------ ------- Net cash provided by operating activities............... 7,831 4,473 ------ ------- INVESTING ACTIVITIES Acquisition of Empire, net of cash received...............(24,696) -- Purchases of property, plant and equipment................ (1,250) (1,273) ------ ------- Net cash used for investing activities..................(25,946) (1,273) ------ ------- FINANCING ACTIVITIES Borrowings from bank revolving line of credit............... 21,200 23,700 Repayments to bank revolving line of credit.................(16,100) (22,450) Borrowings on long-term debt................................ 21,000 180,000 Repayments of long-term debt................................ (3,572) (44,622) S-Corp distributions to shareholders........................ (4,043) (5,488) Distributions to parent company............................. -- (127,059) Debt issuance costs......................................... (370) (7,281) ------ ------- Net cash provided by (used for) financing activities...... 18,115 (3,200) ------ ------- NET INCREASE IN CASH AND CASH EQUIVALENTS..................... -- -- CASH AND CASH EQUIVALENTS, beginning of period................ -- -- CASH AND CASH EQUIVALENTS, end of period...................... $ -- $ -- ====== =======
The accompanying notes are an integral part of these consolidated financial statements. F-17 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Diamond Brands Operating Corp. ("Operating Corp") and Operating Corp.'s wholly owned subsidiaries, Forster, Inc. and Empire Candle, Inc. after elimination of all material intercompany balances and transactions. Operating Corp. and its subsidiaries are collectively referred to as "the Company". The Company is a leading manufacturer and marketer of a broad range of consumer products, including wooden matches and firestarters, plastic cutlery and straws, scented, citronella and holiday candles, and toothpicks, clothespins and wooden crafts. The Company's products are marketed primarily in the United States and Canada under the nationally recognized Diamond, Forster and empire brand names. The interim consolidated financial statements of the Company are unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been reflected in the interim periods presented. The significant accounting policies and certain financial information which are normally included in financial statements prepared in accordance with generally accepted accounting principles, but which are not required for interim reporting purposes, have been condensed or omitted. The accompanying consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and related notes included in the Company's audited financial statements for the year ended December 31, 1997. 2. RECAPITALIZATION On March 3, 1998, the stockholders of the Company entered into a recapitalization agreement (the "Recapitalization Agreement") with Seaver Kent -- TPG Partners, L.P. and Seaver Kent I Parallel, L.P. (collectively "the sponsors"), which provided for the recapitalization of the Company. Pursuant to the Recapitalization Agreement, in April 1998, Operating Corp.'s parent, Diamond Brands Incorporated (Holdings) purchased from the existing stockholders 15,129,232 shares of the Company's common stock for $211.4 million by Operating Corp. (i) issuing $100.0 million of senior subordinated notes and (ii) entering into a bank credit agreement which provided for $80.0 million in term loan facilities and a $25.0 million revolving credit facility. The proceeds of such were used to partially fund the Recapitalization. 3. LONG TERM DEBT In April 1998, the Company completed offerings of $100.0 million of 10 1/8% senior subordinated notes due 2008. The net proceeds to the Company for the offerings, after discounts, commissions and other offering costs were $95.4 million and were used to repay existing indebtedness and purchase common stock of the Company. The Company also entered into a bank credit agreement which provides for $80.0 million in term loan facilities with interest rates from LIBOR (5.69% at June 30, 1998) plus 2.0% to LIBOR plus 2.25% due in installments through March, 2006 and $25.0 million revolving credit facility of LIBOR plus 2.0%. As of June 30, 1998, the Company was in compliance with the provisions of its debt covenants. 4. INCOME TAXES Effective January 1, 1997, the Company converted from a C corporation to an S corporation due to a change in the tax laws allowing entities with subsidiaries to elect this status. Deferred tax assets and liabilities as of December 31, 1996 are reflected as a charge in the consolidated statement of operations for the six months ended June 30, 1997. The Company would be subject to a tax on built-in gains if certain assets were sold within ten years of election of S corporation status. The taxable income or loss of the Company for the years ended after December 31, 1996 and prior to the recapitalization is included in the individual returns of the stockholders for federal tax purposes and, to the extent allowed and elected, for state tax purposes. Accordingly, there is no provision for current income taxes for the period from January 1, 1998 to April 20, 1998 and the six months ended June 30, 1997. Effective with the recapitalization in April 1998, the Company elected C corporation status and recognized deferred income taxes for temporary differences between the tax and financial reporting bases of the Company. The unaudited pro forma income tax expense is presented assuming the Company had been a C corporation since January 1, 1997 for the six months ended June 30, 1998 and 1997. 5. NEW ACCOUNTING PRONOUNCEMENTS Financial Accounting Standards board Statement (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information," issued in June 1997 and effective for fiscal years beginning after December 15, 1997, redefines how operating segments are determined and requires expanded quantitative and qualitative disclosure relating to the company's operating segments. The Company believes that the effect on it of adopting SFAS No. 131 will not be significant. F-18 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF. UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW DEBENTURES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. --------------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... i Prospectus Summary........................................................ 1 Risk Factors.............................................................. 15 The Recapitalization...................................................... 22 New Chief Executive Officer............................................... 23 The Sponsors.............................................................. 23 Use of Proceeds........................................................... 24 Capitalization............................................................ 24 Unaudited Pro Forma Consolidated Financial Data........................... 25 Selected Historical and Pro Forma Consolidated Financial Data............. 28 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 30 Business.................................................................. 36 Management................................................................ 45 Certain Relationships and Related Transactions............................ 51 Description of Holdings Indebtedness...................................... 52 Capital Stock of Holdings and the Issuer.................................. 53 Description of the Bank Facilities........................................ 56 The Exchange Offer........................................................ 59 Description of the New Notes.............................................. 67 Certain United States Federal Income Tax Considerations................... 96 Plan of Distribution...................................................... 99 Legal Matters............................................................. 99 Experts................................................................... 99 Index to Consolidated Financial Statements................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- DIAMOND BRANDS OPERATING CORP. OFFER TO EXCHANGE SERIES B 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OUTSTANDING 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008 --------------- PROSPECTUS --------------- , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. REGISTRANTS INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE The Issuer's Certificate of Incorporation provides that a director of the Issuer shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (ii) under Section 174 of the Delaware General Corporation Law (the "DGCL"), as the same exists or hereafter may be amended, or (iv) for any transaction from which the director derived an improper personal benefit. If the DGCL hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of directors shall be eliminated or limited to the full extent permitted by the DGCL. The By-laws of the Issuer provide that each person who was or is a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the corporation or is or was a director or officer of the Issuer who is or was serving at the request of the Issuer as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the corporation to the full extent permitted by the DGCL against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his heirs, executors and administrators. Section 145 of the DGCL provides: 145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE.--(a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person's conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or II-1 not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. (c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. (d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders. (e) Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys' fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person in any such capacity or arising out of such person's status as such whether or not the corporation would have the power to indemnify such person against such liability under this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit II-2 plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. (k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation's obligation to advance expenses (including attorneys' fees). REGISTRANTS INCORPORATED UNDER THE LAWS OF THE STATE OF KANSAS The Articles of Incorporation of Empire Candle, Inc. provide that no director or officer of the corporation will be personally liable to the corporation or to its shareholders for monetary damages for any breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the laws of the State of Kansas. The Articles further provide that any person who at any time serves or served as a director, officer, or employee of the corporation , or of any other enterprise at the request of the corporation, and the heirs, executors and administrators of such person, must be indemnified by the corporation in accordance with, and to the fullest extent permitted by the General Corporation Code of Kansas (the "GCCK"). The Bylaws of Empire Candle, Inc. provide that any person who at any time serves or served as a director, officer, or employee of the corporation , or of any other enterprise at the request of the corporation, and the heirs, executors and administrators of such person, must be indemnified by the corporation in accordance with, and to the fullest extent permitted by the GCCK. Section 17-6305 of the GCCK provides: 17-6305 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; ADVANCEMENT OF EXPENSES; INSURANCE; DEFINITIONS.--(a) A corporation shall have power to indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, including attorney fees, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation; and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be or in or not opposed to the best interests of the corporation, and, with respect to any criminal accent or proceeding, had reasonable cause to believe that such person's conduct was unlawful. (b) A corporation shall have power to indemnify any person who was or is party, or is threatened to be made a party, to any threatened, pending or completed action or suit by or in the right of the corporation to II-3 procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit, including attorney fees, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. (c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b), or in defense of any claim, issue or matter therein, such director, officer, employee or agent shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith, including attorney fees. (d) Any indemnification under subsections (a) and (b), unless ordered by a court, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because such director, officer, employee or agent has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (1) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (2) if such a quorum is not obtainable, or even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (3) by the stockholders. (e) Expenses incurred by a director or officer in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director or officer to repay such account if it is ultimately determined that the director or officer is not entitled to be indemnified by the corporation as authorized in this section. Such expenses incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. (f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in a person's official capacity and as to action in another capacity while holding such office. (g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of this section. (h) For purposes of this section, references to "the corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, office, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. II-4 (i) For purposes of this section, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this section. (j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. REGISTRANTS INCORPORATED UNDER THE LAWS OF THE STATE OF MAINE The Bylaws of Forster Inc. provide that a person who is or was a director, officer, employee or agent of the corporation, or who is or was serving in another capacity at the request of the corporation shall be indemnified by the corporation to the full extent provided by the Maine Business Corporation Act (the "MBCA"). Section 719 of the MBCA provides: 719 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS; INSURANCE.--1. A corporation shall have the power to indemnify or, if so provided in the bylaw, shall in all cases indemnify, any person who was or is a party or is threatened to be made party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that that person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or other enterprise, against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by that person in connection with such action, suit or proceeding; provided that no indemnification may be provided for any person with respect to any matter as to which that person shall have been finally adjudicated; A. Not to have acted honestly or in the reasonable belief that that person's action was in or not opposed to the best interests of the corporation or its shareholders or, in the case of a person serving as a fiduciary of an employee benefit plan or trust, in or not opposed to the best interests of that plan or trust, or its participants or beneficiaries; or B. With respect to any criminal action or proceeding, to have had reasonable cause to believe that that person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order or conviction adverse to that person, or by settlement or plea of nolo contendere or its equivalent, shall not of itself create a presumption that that person did not act honestly or in the reasonable belief that that person's action was in or not opposed to the best interests of the corporation or its shareholders or, in the case of a person serving as a fiduciary of an employee benefit plan or trust, in or not opposed to the best interests of that plan or trust or its participants or beneficiaries and, with respect to any criminal action or proceeding, had reasonable cause to believe that that person's conduct was unlawful. 1-A. Notwithstanding any provision of subsection 1, a corporation shall not have the power to indemnify any person with respect to any claim, issue or matter asserted by or in the right of the corporation as to which that person is finally adjudicated to be liable to the corporation unless the court in which the action, suit or proceeding was brought shall determine that, in view of all the circumstances of the case, that person is fairly and reasonably entitled to indemnify for such amounts as the court shall deem reasonable. II-5 2. Any provision of subsection 1, 1-A or 3 to the contrary notwithstanding, to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsection 1 or 1-A, or in defense of any claim, issue or matter therein, that director, officer, employee or agent shall be indemnified against expenses, including attorneys' fees, actually and reasonably incurred by that director, officer, employee or agent in connection therewith. The right to indemnification granted by this subsection may be enforced by a separate action against the corporation, if an order for indemnification is not entered by a court in the action, suit or proceeding wherein that director, officer, employee or agent was successful on the merits or otherwise. 3. Any indemnification under subsection 1, unless ordered by a court or required by the bylaws, shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances and in the best interests of the corporation. That determination shall be made by the board of directors by a majority vote of a quorum consisting of directors who were not parities to that action, suit or proceeding, or if such a quorum is not obtainable, or even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the shareholders. Such a determination once made may not be revoked and, upon the making of that determination, the director, officer, employee or agent may enforce the indemnification against the corporation by a separate action notwithstanding any attempted or actual subsequent action by the board of directors. 4. Expenses incurred in defending a civil, criminal, administrative or investigative action, suit or proceeding may be authorized and paid by the corporation in advance of the final disposition of that action, suit or proceeding upon a determination made in accordance with the procedure established in subsection 3 that, based solely on the facts then known to those making the determination and without further investigation, the person seeking indemnification satisfied the standard of conduct prescribed by subsection 1, or if so provided in the bylaws, these expenses shall in all cases be authorized and paid by the corporation in advance of the final disposition of that action, suit or proceeding upon receipt by the corporation of: A. A written undertaking by or on behalf of the officer, director, employee or agent to repay that amount if that person is finally adjudicated: (1) Not to have acted honestly or in the reasonable belief that that person's action was in or not opposed to the best interests of the corporation or its shareholders or, in the case of a person serving as a fiduciary of an employee benefit plan or trust, in or not opposed to the best interests of such plan or trust or its participants or beneficiaries; (2) With respect to any criminal action or proceeding, to have had reasonable cause to believe that the person's conduct was unlawful; or (3) With respect to any claim, issue or matter asserted in any action, suit or proceeding brought by or in the right of the corporation, to be liable to the corporation, unless the court in which that action, suit or proceeding was brought permits indemnification in accordance within subsection 2; and B. A written affirmation by the officer, director, employee or agent that the person has met the standard of conduct necessary for indemnification by the corporation as authorized in this section. The undertaking required by paragraph A shall be an unlimited general obligation of the person seeking the advance, but need not be secured and may be accepted without reference to financial ability to make the repayment. 5. The indemnification and entitlement to advances of expenses provided by this section shall not be deemed exclusive of any other rights which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in that person's official capacity and as to action in another capacity while holding such office, and shall constitute as to a person who has ceased to be a director, officer, employee , agent, trustee, partner or fiduciary and shall inure to the benefit of the heirs, executors and administrators of such a person. A right to indemnification required by the bylaws may be enforced by a II-6 separate action against the corporation, if an order for indemnification has not been entered by a court in any action, suit or proceeding in respect to which indemnification is sought. 6. A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, trustee, partner, fiduciary, employee or agent of another corporation, partnership, joint venture, trust, pension or other employee benefit plan or other enterprise against any liability asserted against that person and incurred by that person in any such capacity, or arising out of that person's status as such, whether or not the corporation would have the power to indemnify that person against such liability under this section. 7. For purposes of this section, references to the "corporation" shall include, in addition to the surviving corporation or new corporation, any participating corporation in a consolidation or merger. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits. A list of exhibits included as part of this Registration Statement is set forth in the Exhibit Index which immediately precedes such exhibits and is hereby incorporated by reference herein. (b) Financial Statement Schedules. Schedules, other than Schedule II set forth below, have been omitted since the required information is not present, or not present in amounts sufficient to require submission of the schedule, or because the information is included in the financial statements or notes thereto. SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS) --------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS- BALANCE BEGINNING COSTS AND OTHER ACCOUNTS- DESCRIBE END OF OF PERIOD EXPENSES DESCRIBE (A) (B) PERIOD ---------- ---------- --------------- ----------- ------- Allowance for doubtful accounts............... $341 97 248 (80) $606 ===== ===== ===== ===== ===== FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS) --------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS- BALANCE BEGINNING COSTS AND OTHER ACCOUNTS- DESCRIBE END OF OF PERIOD EXPENSES DESCRIBE (A) (B) PERIOD ---------- ---------- --------------- ----------- ------- Allowance for doubtful accounts............... $606 116 -- (83) ($)639 ===== ===== ===== ===== ===== FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS) --------------------------------------------------------- BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS- BALANCE BEGINNING COSTS AND OTHER ACCOUNTS- DESCRIBE END OF OF PERIOD EXPENSES DESCRIBE (A) (B) PERIOD ---------- ---------- --------------- ----------- ------- Allowance for doubtful accounts............... $639 758 225 (427) $1,195 ===== ===== ===== ===== =====
- -------- (a) Incurred in conjunction with acquisitions of companies. (b) Write off of account balances during the year. ITEM 22. UNDERTAKINGS. The undersigned registrants hereby undertake that, for purposes of determining any liability under the Securities Act of 1933, each filing of any registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plans annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of any of the registrants in the successful defense of any action, suit or proceeding) is asserted by any such director, officer or controlling person in connection with the securities being registered, such registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether or not such indemnification is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The undersigned registrants hereby undertake to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrants hereby undertake to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. The undersigned registrants hereby undertake: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-8 Pursuant to the requirements of the Securities Act, each registrant has duly caused this Amendment No. 1 to the registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Cloquet, State of Minnesota, on August 28, 1998. Diamond Brands Operating Corp. /s/ Naresh K. Nakra By: _________________________________ Name:Naresh K. Nakra Title:President, CEO Empire Candle, Inc. /s/ Naresh K. Nakra By: _________________________________ Name:Naresh K. Nakra Title:President, CEO Forster Inc. /s/ Naresh K. Nakra By: _________________________________ Name:Naresh K. Nakra Title:President, CEO S-1 Pursuant to the requirement of the Securities Act of 1933, this Amendment No. 1 to the registration statement has been signed by the following persons in the capacities and on the dates indicated, on August 28, 1998. SIGNATURES TITLE /s/Naresh K. Nakra Director: Diamond Brands Operating ------------------------------------- Corp.; Empire Candle,Inc; Forster Inc. NARESH K. NAKRA President and Chief Executive Officer: Diamond Brands Operating Corp.; Empire Candle, Inc; Forster Inc. /s/ Alexander M. Seaver Director: Diamond Brands Operating ------------------------------------- Corp.; Empire Candle, Inc.; ALEXANDER M. SEAVER Forster Inc. /s/ Bradley R. Kent Director: Diamond Brands Operating ------------------------------------- Corp.; Empire Candle, Inc.; BRADLEY R. KENT Forster Inc. /s/ Alfred Aragona Director: Diamond Brands Operating ------------------------------------- Corp.; Empire Candle, Inc.; ALFRED ARAGONA Forster, Inc. /s/ Richard S. Campbell Vice President of Supply Chain: ------------------------------------- Diamond Brands Operating Corp.; RICHARD S. CAMPBELL Empire Candle, Inc.; Forster Inc. /s/ Thomas W. Knuesel Vice President of Finance and Chief ------------------------------------- Financial Officer: Diamond Brands THOMAS W. KNUESEL Operating Corp.; Empire Candle, Inc.; Forster Inc. /s/ Christopher A. Mathews Vice President of Manufacturing: ------------------------------------- Diamond Brands Operating CHRISTOPHER A. MATHEWS Corp.; Empire Candle, Inc.; Forster Inc. /s/ John F. Young Vice President of Sales and ------------------------------------- Marketing; Diamond Brands Operating JOHN F. YOUNG Corp.; Empire Candle, Inc.; Forster Inc. S-2 EXHIBIT INDEX NO. DESCRIPTION --- ----------- 2.1+ Recapitalization Agreement, dated as of March 3, 1998 between Seaver Kent-TPG Partners, L.P., Seaver Kent I Parallel, L.P. and Diamond Brands Incorporated (the "Recapitalization Agreement") NOTE: Pursuant to the provision of paragraph (b)(2) of Item 601 of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies of any schedule to the Recapitalization Agreement 3.1+ Certificate of Incorporation of Diamond Brands Operating Corp. 3.2+ Certificate of Incorporation of Empire Candle, Inc. 3.3+ Certificate of Incorporation of Forster Inc. 3.4+ By-laws of Diamond Brands Operating Corp. 3.5+ By-laws of Empire Candle, Inc. 3.6+ By-laws of Forster Inc. 3.7 Stockholders Agreement, dated as of April 21, 1998, among Diamond Brands Incorporated, Seaver Kent-TPG Partners, L.P., Seaver Kent I Parallel, L.P., Naresh K. Nakra and the Stockholders named therein (the "Stockholders Agreement") 4.1+ Indenture dated April 21, 1998, among Diamond Brands Operating Corp., the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto and State Street Bank and Trust Company, as trustee, relating to the Notes (the "Indenture") 4.2+ Form of Series B 10-1/8% Senior Subordinated Notes due 2008 of Diamond Brands Operating Corp. (the "New Notes") (included as Exhibit A of the Indenture filed as Exhibit 4.1) 4.3+ Credit Agreement, dated as of April 21, 1998, among Diamond Brands Operating Corp., the Lenders Party thereto, Wells Fargo Bank, N.A., as Administrative Agent, DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent (the "Credit Agreement") 4.4+ Subsidiary Guarantee Agreement dated as of April 21, 1998, among the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto and Wells Fargo Bank, N.A. 4.5+ Subsidiary Pledge Agreements, dated as of April 21, 1998, among the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto and Wells Fargo Bank, N.A. 4.6+ Subsidiary Security Agreements, dated as of April 21, 1998, among the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto and Wells Fargo Bank, N.A. 4.7+ Subsidiary Copyright Security Agreements, dated as of April 21, 1998, among the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto and Wells Fargo Bank, N.A. 4.8+ Subsidiary Trademark Security Agreements, dated as of April 21, 1998, among the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto and Wells Fargo Bank, N.A. 4.9+ Subsidiary Patent Collateral Assignment and Security Agreements, dated as of April 21, 1998, among the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto and Wells Fargo Bank, N.A. 4.10+ Holdings Pledge Agreement, dated as of April 21, 1998, between Diamond Brands Incorporated and Wells Fargo Bank, N.A. 4.11+ Holdings Guaranty Agreement, dated as of April 21, 1998, between Diamond Brands Incorporated and Wells Fargo Bank, N.A. 4.12+ Registration Rights Agreement, dated as of April 21, 1998, by and among Diamond Brands Operating Corp., the subsidiary guarantors of Diamond Brands Operating Corp. that are signatories thereto, Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated NOTE: Pursuant to the provisions of paragraph (b)(4)(iii) of Item 601 of Regulation S-K, the Registrant hereby undertakes to furnish to the Commission upon request copies of the instruments pursuant to which various entities hold long-term debt of the Company or its parent or subsidiaries, none of which instruments govern indebtedness exceeding 10 percent of the total assets of the Company and its parent or subsidiaries on a consolidated basis - ------------ + previously filed, amended or updated pages only NO. DESCRIPTION --- ----------- 4.13 Tax Sharing Agreement, dated April 21, 1998, by and between Diamond Brands Incorporated and Diamond Brands Operating Corp. 4.14 Tax Sharing Agreement, dated April 21, 1998, among Diamond Brands Operating Corp. and each of its subsidiaries 5.1+ Opinion of Cleary, Gottlieb, Steen & Hamilton regarding legality of the New Notes and the guarantees of the New Notes 10.1+ Employment Agreement, dated April 21, 1998, by and between Diamond Brands Incorporated and Naresh K. Nakra 10.2+ Employment Agreement, dated November 1, 1997, by and between Diamond Brands Incorporated and Thomas W. Knuesel 10.3+ Amendment to the Employment Agreement, dated April 21, 1998, by and between Diamond Brands Incorporated and Thomas W. Knuesel 10.4+ Employment Agreement, dated November 1, 1997, by and between Diamond Brands Incorporated and John F. Young 10.5+ Amendment to the Employment Agreement, dated April 21, 1998, by and between Diamond Brands Incorporated and John F. Young 10.6+ Employment Agreement, dated November 1, 1997, by and between Diamond Brands Incorporated and Christopher A. Mathews 10.7+ Amendment to the Employment Agreement, dated April 21, 1998, by and between Diamond Brands Incorporated and Christopher A. Mathews 10.8+ Employment, Non-competition, and Confidentiality Agreement, dated as of May 26, 1992, by and between Forster Mfg. Co., Inc. and Richard S. Campbell 10.9+ Collective bargaining agreement, dated May 1, 1997, by and between Di- amond Brands Incorporated and Matchmaker Local 970 10.10+ Non-Qualified Stock Option Agreement, made as of January 1, 1997, be- tween Diamond Brands Incorporated and Thomas W. Knuesel 10.11+ Non-Qualified Stock Option Agreement, made as of January 1, 1997, be- tween Diamond Brands Incorporated and John F. Young 10.12+ Non-Qualified Stock Option Agreement, made as of January 1, 1997, be- tween Diamond Brands Incorporated and Christopher A. Mathews 10.13+ Non-Qualified Stock Option Agreement, made as of January 1, 1997, be- tween Diamond Brands Incorporated and Richard S. Campbell 10.14+ Non-Qualified Stock Option Agreement, made as of January 1, 1997, be- tween Diamond Brands Incorporated and John Beach 10.15+ Diamond Brands Incorporated 1997 Non-Qualified Stock Option Plan 10.16+ Non-Qualified Stock Option Agreement, made as of April 21, 1998, be- tween Diamond Brands Incorporated and Naresh K. Nakra 10.17+ Non-Qualified Stock Option Agreement, made as of April 21, 1998 be- tween Diamond Brands Incorporated and Naresh K. Nakra 10.18+ Non-Qualified Stock Option Agreement, made as of April 21, 1998 be- tween Diamond Brands Incorporated and Thomas W. Knuesel 10.19+ Non-Qualified Stock Option Agreement, made as of April 21, 1998, be- tween Diamond Brands Incorporated and John F. Young 10.20+ Non-Qualified Stock Option Agreement, made as of April 21, 1998, be- tween Diamond Brands Incorporated and Christopher A. Mathews 10.21+ Non-Qualified Stock Option Agreement, made as of April 21, 1998, be- tween Diamond Brands Incorporated and Richard S. Campbell 10.22+ Non-Qualified Stock Option Agreement, made as of April 21,1998, be- tween Diamond Brands Incorporated and John Beach NO. DESCRIPTION --- ----------- 10.23+ Term Lease agreements between IBM Credit Corporation and Diamond Brands Incorporated 10.24+ Lease Agreement dated as of November 22, 1996 between Meridian Leasing Corporation and Diamond Brands Incorporated 10.25+ Lease Agreement dated as of June 23, 1997 between LNPJ, L.L.C. and Em- pire Candle, Inc. 10.26+ Lease Agreement dated as of March 17, 1995 between MEPC American Prop- erties Inc. and Diamond Brands Incorporated. 10.27+ Supply Agreement dated as of January 1, 1997 between Ohio Valley Plas- tics and Forster Inc. 10.28 Management Advisory Agreement, dated April 21, 1998, between Diamond Brands Incorporated and Seaver Kent & Co., L.L.C. 10.29 Transaction Advisory Agreement, dated April 21, 1998, between Diamond Brands Incorporated and Seaver Kent & Co. L.L.C. 12.1+ Computation Ratio of Earnings to Fixed Charges 21.1+ Subsidiaries of the Registrant 23.1 Consent of Arthur Andersen LLP 23.2+ Consent of Cleary Gottlieb Steen & Hamilton (included in its legality opinion filed as Exhibit 5.1) 25.1+ Form T-1 with respect to the eligibility of State Street Bank and Trust Company with respect to the Indenture 27.1+ Financial Data Schedule 99.1+ Form of Letter of Transmittal 99.2+ Form of Notice of Guaranteed Delivery 99.3+ Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and other Nominees 99.4 Form of Letter to Client EX-3.3 2
MINIMUM FEE $105. SEE (S)1403 FOR PROPER FILING FEE. -------------------------------------------------------------- BUSINESS CORPORATION FILE NO. 19922196 D PAGES 2 STATE OF MAINE FEE PAID $ DCN 1910000290023 ARTI ----------------- FILED --------------- 06/12/1992 ARTICLES OF INCORPORATION _________________________ /s/ Gary Cooper _________________________ DEPUTY SECRETARY OF STATE (Check box only if applicable) -------------------------------------------------------------- [_] This is a professional service corporation A TRUE COPY WHEN ATTESTED BY SIGNATURE formed pursuant to 13 MRSA Chapter 22. _________________________ DEPUTY SECRETARY OF STATE --------------------------------------------------------------
PURSUANT TO 13-A MRSA (S)403, THE UNDERSIGNED, ACTING AS INCORPORATOR(S) OF A CORPORATION, ADOPT(S) THE FOLLOWING ARTICLES OF INCORPORATION: FIRST: The name of the corporation is Forster Acquisition Co. _________________________________________ and its principal business location in Maine is 79 Depot Street, ________________________ (physical location - Wilton, Maine 04294 ________________________________________________ street (not P.O. Box), city, state and zip code) SECOND: The name of its Clerk, who must be a Maine resident, and the registered office shall be: Peter B. Webster ________________________________________________________________________ (name) One Portland Square, Portland, Maine 04101 ________________________________________________________________________ (physical location - street (not P.O. Box), city, state and zip code) P.O. Box 586, Portland, Maine 04112-0586 ________________________________________________________________________ (mailing address if different from above) THIRD: ("X" one box only) [_] A.1. The number of directors constituting the initial board of directors of the corporation is 2 (See (S)703.1.A) 2. If the initial directors have been selected, the names and addresses of the persons who are to serve as directors until the first annual meeting of the shareholders or until their successors are elected and shall qualify are: NAME ADDRESS ________________ ____________________________________________ ________________ ____________________________________________ ________________ ____________________________________________ 3. The board of directors [X] is [_] is not authorized to increase or decrease the number of directors. 4. If the board is so authorized, the minimum number, if any, shall be one directors, (see (S)703.1.a) and the maximum number, if any, shall be seven directors. [_] B. There shall be no directors initially; the shares of the corporation will not be sold to more than twenty (20) persons; the business of the corporation will be managed by the shareholders. (See (S)701.2.) FOURTH: ("X" ONE BOX ONLY) [_] There shall be only one class of shares (title of class) Common Par value of each share (if none, so state) $ 10.00 Number of shares authorized 10,000 [_] There shall be two or more classes of shares. The information required by (S)403 concerning each such class is set out in Exhibit _____ attached hereto and made a part hereof. SUMMARY The aggregate par value of all authorized shares (of all classes) having a par value is $100,000 The total number of authorized shares (of all classes) without par value is ______________________ shares FIFTH: ("X" ONE BOX ONLY) MEETINGS OF THE SHAREHOLDERS [_] MAY [_] MAY NOT BE HELD OUTSIDE OF THE STATE OF MAINE. SIXTH: ("X" IF APPLICABLE) [_] THERE ARE NO PREEMPTIVE RIGHTS. SEVENTH: OTHER PROVISIONS OF THESE ARTICLES, IF ANY, INCLUDING PROVISIONS FOR THE REGULATION OF THE INTERNAL AFFAIRS OF THE CORPORATION, ARE SET OUT IN EXHIBIT ___ ATTACHED HERETO AND MADE A PART HEREOF. ================================================================================ INCORPORATORS DATED June 11, 1992 ______________________ /s/ Peter B. Webster _____________________________________ Street 81 W. Main Street _________________________________ (signature) (residence address) Peter B. Webster Yarmouth Maine 04096 _____________________________________ ________________________________________ (type or print name) (CITY, STATE AND ZIP CODE) _____________________________________ Street _________________________________ (signature) (residence address) _____________________________________ ________________________________________ (type or print name) (city, state and zip code) _____________________________________ Street _________________________________ (signature) (residence address) _____________________________________ ________________________________________ (type or print name) (city, state and zip code) For Corporate Incorporators* Name Of Corporate Incorporator ____ ___________________________________________ By __________________________________ Street _________________________________ (signature of officer) (principal business location) _____________________________________ ________________________________________ (type or print name and capacity) (city, state and zip code) *Articles are to be executed as follows: If a corporation is an incorporator ((S)402), the name of the corporation should be typed and signed on its behalf by an officer of the corporation. The articles of incorporation must be accompanied by a certificate of an appropriate officer of the corporation certifying that the person executing the articles on behalf of the corporation was duly authorized to do so. SUBMIT COMPLETED FORMS TO: SECRETARY OF STATE, STATION #101, AUGUSTA, ME 04333-0101 ATTN: CORPORATE EXAMINING SECTION FORM NO. MBCA-6 REV. 91 TEL. (207) 289-4195 Filing Fee (See Sec. 1401) - ---------------------------------------- ----------------------------------- For Use by The Secretary State FILE NO. 19922196 D PAGES 2 File No. 19922196D FEE PAID $ 35.00 Fee Paid $35.00 DCN 1922411600004 LNME C.B. -------- ------------- FILED --------------- Date -------- 08/28/1992 [Stamp of Deputy Secretary of State] STATE OF MAINE ARTICLES OF AMENDMENT (Amendment by Shareholders Voting as One Class) Pursuant to 13-A MRSA sections 805 and 807) the undersigned corporation adopts these Articles of Amendment: FIRST: All outstanding shares were entitled to vote on the following amendment as one class. SECOND: The amendment set out in Exhibit A attached was adopted by the shareholders (Circle one) B. by unanimous written consent on August 25, 1992 ----------------------- THIRD: Shares outstanding and entitled to vote and shares voted for and against said amendment were: Number of Shares Outstanding NUMBER NUMBER and Entitled to Vote Voted for Voted Against ------------------------------- --------- ------------- 100 100 0 FOURTH: If such amendment provides for exchange, reclassification or cancellation of issued shares, the manner in which this shall be effected is contained in Exhibit B attached if it is not set forth in the amendment itself. FIFTH: (Complete if Exhibits do not give this information.) If the amendment changes the number or par values of authorized shares', the number of shares the corporation has authority to issue thereafter, is as follows: Class Series (if Any) Number of Shares Par Value (If Any) ----- --------------- ---------------- ------------------ The aggregate par value of all such shares (of all classes and series) having par value is $ ----------. The total number of all such shares (of all classes and series) without par value is shares ---------- SIXTH: Address of the registered office in Maine: P. O. Box 586 One Portland Square, Portland, ME 04101 ----------------------------------------------------------------- (street, city and zip code) Forster Acquisition Co. ----------------------------------------------------------------- (Name of Corporation - Typed or Printed) By* /s/ Peter B. Webster -------------------------------------------------------------- (signature) Peter B. Webster - Clerk ----------------------------------------------------------------- (type or print name and capacity) By* -------------------------------------------------------------- (signature) ----------------------------------------------------------------- (type or print name and capacity) MUST BE COMPLETED FOR VOTE OF SHAREHOLDERS - -------------------------------- I certify that I have custody of the minutes showing the above action by the shareholders. /s/ Peter B. Webster - -------------------------------- (signature of clerk) - -------------------------------- Dated: August 28, 1992 -------------------------- * In addition to any such certification of custody of minutes this document MUST be signed by (1) the Clerk OR (2) the President or vice-president AND the Secretary, an assistant secretary or other officer the bylaws designate as second certifying officer OR (3) if no such officers, a majority of the directors or such directors designated by a majority of directors then in office OR (4) if no directors, the holders, or such of them designated by the holders, of record of a majority of all outstanding shares entitled to vote theron OR (5) the holders of all outstanding shares. NOTE: This form should not be used if any class of shares is entitled to vote as a separate class for any of the reasons set out in section 806, or because the articles so provide. For vote necessary for adoption see section 805. Exhibit A VOTED: To change the name of the Corporation to Forster Mfg. Co., Inc. FURTHER VOTED: To authorize each of the officers, acting singly, to file Articles of Amendment with the Secretary of State and execute any other document and take any other action necessary or convenient to effectuate such change and this vote. Filing Fee $20.00 - ---------------------------------------- ----------------------------------- For Use by The Secretary State FILE NO. 19922196 D PAGES 1 File No. 19922196D FEE PAID $ 20.00 Fee Paid $20.00 DCN 1923011401011 CLRO C.B. -------- ------------- FILED --------------- Date -------- 10/27/1992 [Stamp of Deputy Secretary of State] STATE OF MAINE CHANGE OF CLERK or REGISTERED OFFICE or BOTH Pursuant to 13-A MRSA section 304 the undersigned corporation advises you of the following change(s): FIRST: The name registered office of the clerk appearing on the record in Secretary of State's office Peter B. Webster, PO Box 586 ----------------------------------------------------------------- One Portland Square, Portland, ME 04112-0586 ----------------------------------------------------------------- (street, city, state and zip code) SECOND: The name and physical location of the registered office of the successor (new) clerk, who must be a Maine resident, are: Bruce Coggeshall ----------------------------------------------------------------- (name) One Monument Square, Portland, ME 04101 ----------------------------------------------------------------- (street address (not P.O. Box), city, state and zip code) ----------------------------------------------------------------- (mailing address if different from above) THIRD: Upon a change in clerk this must be completed: (X) Such change was authorized by the board of directors and the power to make such change is not reserved to the shareholders by articles or the bylaws. ( ) Such change was authorized by the shareholders. (Complete the following) I certify that I have custody of the minutes showing the above action by the shareholders. --------------------------------------- (signature of new clerk, secretary or assistant secretary) FORSTER MFG. CO., INC. ----------------------------------------------------------------- (Name of Corporation) By* /s/ Bruce A. Coggeshall -------------------------------------------------------------- (signature) Bruce A. Coggeshall, Clerk ----------------------------------------------------------------- (type or print name and capacity) By* -------------------------------------------------------------- (signature) ----------------------------------------------------------------- (type or print name and capacity) Dated: October 23, 1992 -------------------------- This document MUST be signed by (1) the Clerk OR (2) the President or vice-president AND the Secretary, an assistant secretary or other officer the bylaws designate as second certifying officer OR (3) if no such officers, a majority of the directors or such directors designated by a majority of directors then in office OR (4) if no directors, the holders, or such of them designated by the holders, of record of a majority of all outstanding shares entitled to vote thereon OR (5) the holders of all outstanding shares. FORM NO. MCBA-3 REV. 90 SUBMIT COMPLETED FORMS TO: Secretary of State Station 101 Augusta, Maine 04333 ----------------------------------- FILE NO. 19922196 D PAGES 2 FEE PAID $ 35.00 DCN 1933091600010 AMEN ------------- FILED --------------- 11/05/1993 [Stamp of Deputy Secretary of State] STATE OF MAINE ARTICLES OF AMENDMENT (Amendment by Shareholders Voting as One Class) Pursuant to 13-A MRSA sections 805 and 807, the undersigned corporation adopts these Articles of Amendment: FIRST: All outstanding shares were entitled to vote on the following amendment as one class. SECOND: The amendment set out in Exhibit A attached was adopted by shareholders (Circle one) A. at a meeting legally called and held on, OR B. by unanimous written consent on August 2, 1993 -------------------- THIRD: Shares outstanding and entitled to vote and shares voted for and against said amendment were: Number of Shares Outstanding NUMBER NUMBER and Entitled to Vote Voted for Voted Against ------------------------------- --------- ------------- 100 100 -0- FOURTH: If such amendment provides for exchange, reclassification or cancellation of issued shares, the manner in which this shall be effected is contained in Exhibit B attached if it is not set forth in the amendment itself. FIFTH: If the amendment changes the number or par values of authorized shares, the number of shares the corporation has authority to issue thereafter, is as follows: Class Series (if Any) Number of Shares Par Value (If Any) ----- --------------- ---------------- ------------------ The aggregate par value of all such shares (of all classes and series) having par value is $ ----------. The total number of all such shares (of all classes and series) without par value is shares. ---------- SIXTH: Address of the registered office in Maine is: One Monument Square, Portland, ME 04101 ----------------------------------------------------------------- (street, city and zip code) Forster MRG. Co., INC. ----------------------------------------------------------------- (Name of Corporation) By* /s/ Bruce A. Coggeshall -------------------------------------------------------------- (signature) Bruce A. Coggeshall, Clerk ----------------------------------------------------------------- (type or print name and capacity) By* -------------------------------------------------------------- (signature) -------------------------------------------------------------- (type or print name and capacity) MUST BE COMPLETED FOR VOTE OF SHAREHOLDERS - -------------------------------- I certify that I have custody of the minutes showing the above action by the shareholders. /s/ Bruce A. Coggeshall - -------------------------------- (signature of clerk, secretary or asst. secretary) - -------------------------------- Dated: 8-24-93 -------------------------- - --------------------------------------------- * In addition to any such certification of custody of minutes this document MUST be signed by (1) the Clerk OR (2) the President or vice-president AND the Secretary, an assistant secretary or other officer the bylaws designate as second certifying officer OR (3) if no such officers, a majority of the directors or such directors designated by a majority then in office OR (4) if no directors, the holders, or such of them designated by the holders, of record of a majority of all outstanding shares entitled to vote thereon OR (5) the holders of all outstanding shares. NOTE: This form should not be used if any class of shares is entitled to vote as a separate class for any of the reasons set out in section 806, or because the articles so provide. For vote necessary for adoption see section 805. FORM NO. MCBA-3 REV. 90 SUBMIT COMPLETED FORMS TO: Secretary of State Station 101 Augusta, Maine 04333 EXHIBIT A VOTED: To amend the Articles of Incorporation of this corporation by striking therefrom the following language: "The Board of Directors is authorized to increase or decrease the number of directors, and the minimum number shall be one (1) director (See section 703, 1.A.) and the maximum number, if any shall be seven (7) directors." and substituting in place thereof the following language: "The Board of Directors is authorized to increase or increase or decrease the number of directors, and the minimum number shall be one (1) director, (see section 703, 1.A.) and the maximum number, if any, shall be (8) directors." VOTED: To further amend this corporation's Articles of Incorporation by changing its name from Forster Mfg. Co., Inc. to Forster Inc. - ----------------------------------- FILE NO. 19922196 D PAGES 1 FEE PAID $ 105.00 DCN 193309160011 ANME - ------------- FILED --------------- 11/05/1993 [Stamp of Deputy Secretary of State] STATE OF MAINE STATE OF INTENTION TO DO BUSINESS UNDER AN ASSUMED NAME Pursuant to 13-A MRSA section 307, the undersigned, a corporation (incorporated under the laws of the State of Maine), gives notice of its intention to do business in the this State under an assumed name. FIRST: The name of the corporation is Forster Inc. ---------------------------------- SECOND: The address of the registered office of the corporation in the State of Maine is One Monument Square, Portland, ME 04101 ----------------------------------------------------------------- (street, city, state and zip code) THIRD: The corporation intends to transact business under the assumed name of Forster Mfg. Co., Inc. ----------------------------------------------------------------- COMPLETE THE FOLLOWING IF APPLICABLE FOURTH: If such assumed name is to be used at fewer than all of the corporation's places of business in this State, the location(s) where it will be used is (are): ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- By* /s/ Bruce A. Coggeshall -------------------------------------------------------------- (signature) Bruce A. Coggeshall, Clerk ----------------------------------------------------------------- (type or print name and capacity) By* -------------------------------------------------------------- (signature) -------------------------------------------------------------- (type or print name and capacity) Dated: 8-23-93 -------------------------- This document MUST be signed by (1) the Clerk OR (2) the President or vice-president AND the Secretary, an assistant secretary or other officer the bylaws designate as second certifying officer OR (3) if no such officers, a majority of the directors or such directors designated by a majority then in office OR (4) if no directors, the holders, or such of them designated by the holders, of record of a majority of all outstanding shares entitled to vote thereon OR (5) the holders of all outstanding shares. FORM NO. MCBA-5 REV. 90 SUBMIT COMPLETED FORMS TO: Secretary of State Station 101 Augusta, Maine 04333 - ----------------------------------- FILE NO. 19922196 D PAGES 1 FEE PAID $ 105.00 DCN 193309160011 ANME - ------------- FILED --------------- 11/05/1993 [Stamp of Deputy Secretary of State] STATE OF MAINE STATE OF INTENTION TO DO BUSINESS UNDER AN ASSUMED NAME Pursuant to 13-A MRSA section 307, the undersigned, a corporation (incorporated under the laws of the State of Maine), gives notice of its intention to do business in the this State under an assumed name. FIRST: The name of the corporation is Forster Inc. ---------------------------------- SECOND: The address of the registered office of the corporation in the State of Maine is One Monument Square, Portland, ME 04101 ----------------------------------------------------------------- (street, city, state and zip code) THIRD: The corporation intends to transact business under the assumed name of Forster ----------------------------------------------------------------- COMPLETE THE FOLLOWING IF APPLICABLE FOURTH: If such assumed name is to be used at fewer than all of the corporation's places of business in this State, the location(s) where it will be used is (are): ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- By* /s/ Bruce A. Coggeshall -------------------------------------------------------------- (signature) Bruce A. Coggeshall, Clerk ----------------------------------------------------------------- (type or print name and capacity) By* -------------------------------------------------------------- (signature) -------------------------------------------------------------- (type or print name and capacity) Dated: 8-23-93 -------------------------- This document MUST be signed by (1) the Clerk OR (2) the President or vice-president AND the Secretary, an assistant secretary or other officer the bylaws designate as second certifying officer OR (3) if no such officers, a majority of the directors or such directors designated by a majority then in office OR (4) if no directors, the holders, or such of them designated by the holders, of record of a majority of all outstanding shares entitled to vote thereon OR (5) the holders of all outstanding shares. FORM NO. MCBA-5 REV. 90 SUBMIT COMPLETED FORMS TO: Secretary of State Station 101 Augusta, Maine 04333 Minimum Fee $80 (See ss. 1401 sub-ss. 19) ----------------------------------- FILE NO. 19922196 D PAGES 5 FEE PAID $ 80.00 DCN 1970021600014 MERG ------------- FILED --------------- 12/30/1996 /s/ Gary Cooper ------------------------- Deputy Secretary of State ----------------------------------------- A True Copy When Attested by Signature ------------------------- Deputy Secretary of State ----------------------------------------- BUSINESS CORPORATION STATE OF MAINE (Merger of Domestic and Foreign Corporations) ARTICLES OF MERGER Forster Holdings, Inc. - -------------------------------------------------- A corporation organized under the laws of Delaware INTO Foster Inc. - -------------------------------------------------- A corporation organized under the laws of Maine Pursuant to 13-A MRSA ss. 906, the preceding corporations adopt these Articles of Merger: FIRST: The laws of the State(s) of Delaware, under which the foreign corporation(s) is (are) organized, permit such merger. SECOND: The name of the surviving corporation is Forster Inc. and it is to be governed by the laws of the State of Maine. THIRD: The plan of merger is set forth in Exhibit A attached hereto and made a part hereof. FOURTH: As to each participating domestic corporation, the shareholders of which voted on such plan of merger, the number of shares outstanding and the number of shares entitled to vote on such plan and the number of such shares voted for and against the plan are as follows: Number Name of of Shares Number of Shares Corporation Outstanding Entitled to Vote ----------- ----------- ---------------- Forster Inc. 100 100 Forster Holdings, Inc. 1,656,147.36 1,656,147.36 NUMBER NUMBER Voted for Voted Against --------- ------------- 100 0 1,656,147.36 0 FIFTH: If the shares of any class were entitled to vote as a class, the designation and number of the oustanding shares of each such class, and the number of shares of each such class voted for and against the plan, are as follows: Name of Designation Number of Shares Corporation of Class Outstanding - ----------- ----------- ---------------- Forster Holdings, Common 795,522.36 Inc. Forster Holdings, Series A 860,625 Inc. Cumulative Prefered NUMBER NUMBER Voted For Voted Against - --------- ------------- 795,522.36 0 860,625 0 (Include the following paragraph if the merger was authorized without the vote of the shareholders of the surviving corporation. Omit if not applicable.) SIXTH: The plan of merger was adopted by the participating corporation which is to become the surviving corporation in the merger without any vote of its shareholders, pursuant to section 902, subsection 5. The number of shares of each class outstanding immediately prior to the effective date of the merger, and the number of shares of each class to be issued or delivered pursuant to the plan of merger of the surviving corporation are set forth as follows: Number of Shares Outstanding Number of Shares to Be Issued Designation Immediately Prior to Effective Or Delivered Pursuant to the of Class Date of Merger Merger - ----------- ------------------------------ ----------------------------- N/A SEVENTH: The address of the registered office of the surviving corporation in the State of Maine is* One Portland Square, Portland, Maine 04101 ------------------------------------------------------- (street, city, state and zip code) The address of the registered office of the merged corporation in the State of Delaware is* 1209 Orange Street, Wilmington, Delaware 19801 ------------------------------------------------------- (street, city, state and zip code) EIGHTH: Effective date of the merger (if other than date of filing of Articles) is December 31, 1996 -------------------------------- (Not to exceed 60 days from date of filing of the Articles) DATED 12/27/96 Forster Inc. ---------- -------------------------------- (participating domestic corporation) - -------------------------------- **By-------------------------------- MUST BE COMPLETED FOR VOTE (signature) OF SHAREHOLDERS - --------------------------- I certify that I have custody Edward A. Michael, President of the minutes showing the above -------------------------------- action by the shareholders. (type or print name and capacity) Forster Inc. **By--------------------------------- - -------------------------------- (signature) (name of corporation) - -------------------------------- Edward A. Michael, Secretary (signature of clerk, --------------------------------- secretary or asst. secretary) (type or print name and capacity) - -------------------------------- DATED 12/27/96 Forster Holdings Inc. ---------- -------------------------------- (participating domestic corporation) - -------------------------------- **By-------------------------------- MUST BE COMPLETED FOR VOTE (signature) OF SHAREHOLDERS - --------------------------- I certify that I have custody Edward A. Michael, President of the minutes showing the above -------------------------------- action by the shareholders. (type or print name and capacity) Forster Holdings, Inc. **By-------------------------------- - -------------------------------- (signature) (name of corporation) - -------------------------------- Edward A. Michael, Secretary (signature of clerk, --------------------------------- secretary or asst. secretary) (type or print name and capacity) - -------------------------------- NOTE: If a foreign corporation is the survivor of this merger, see ss. 906.4 and ss. 908.3 as to whether Form MBCA-10Ma is required. *Give address of registered office in Maine. If the corporation does not have a registered office in Maine, the address given should be the principal or registered office in the State of incorporation. - ----------------------------------------------------------------- **This document MUST be signed by (1) the Clerk OR (2) the President or a vice-president and the Secretary or an assistant secretary; or such other officer as the bylaws may designate as a 2nd certifying officer OR (3) if there are no such officers, then a majority of the Directors or such directors as may be designated by a majority of directors then in office OR (4) if there are no such directors, then the Holders, or such of them as may be designated by the holders, of record of a majority of all outstanding shares entitled to vote thereon OR (5) the Holders of all of the outstanding shares of the corporation. SUBMIT COMPLETED FORMS TO: CORPORATE EXAMINING SECTION, SECRETARY OF STATE, 101 STATE HOUSE STATION, AUGUSTA, ME 04333-0101 TEL. (207) 287-4195 FORM NO. MBCA-10C Rev. 96 EXHIBIT A AGREEMENT AND PLAN OF MERGER between FORSTER INC. (the Surviving Corporation) and FORSTER HOLDINGS, INC. (the Merging Corporation) THIS AGREEMENT AND PLAN OF MERGER (this "Plan"), dated effective December 27, 1996, between FORSTER INC., a Maine corporation ("Forster" or the "Surviving Corporation"), and FORSTER HOLDINGS, INC., a Delaware corporation ("FHI" or the "Merging Corporation"). RECITALS -------- 1. The Surviving Corporation is duly organized, validly existing and in good standing under the laws of the State of Maine and is a wholly-owned subsidiary of the Merging Corporation. 2. The Merging Corporation is duly-organized, validly existing and in good standing under the laws of the State of Delaware and owns One Hundred Percent (100%) of the issued and outstanding shares of the Surviving Corporation. The Merging Corporation is a wholly-owned subsidiary of Diamond Brands Incorporated, a Minnesota corporation ("DBI"). 3. The Surviving Corporation has an authorized capital structure, as of the date of this Agreement, of Ten Thousand (10,000) shares of common stock, $10.00 par value per share ("Forster Stock"), and as of the date of this Agreement, One Hundred (100) shares of Forster Stock are issued and outstanding. 4. The Merging Corporation has an authorized capital structure, as of the date of this Agreement, of Two Million (2,000,000) shares of common stock, $.01 par value per share (the "FHI Common Stock), and Two Million (2,000,000) shares of preferred stock, $.01 par value per share, Eight Hundred Seventy-Five Thousand (875,000) of which shares are designated as Series A Cumulative Preferred Stock, $9.4018 stated value per share (the "FHI Preferred Stock"). As of the date of this Agreement, Seven Hundred Ninety-Five Thousand Five Hundred Twenty-Two and 36/100 (795,522.36) shares of FHI Common Stock are issued and outstanding, and Eight Hundred Sixty Thousand, Six Hundred Twenty-Five (860,625) shares of FHI Preferred Stock are issued and outstanding. 5. The directors of the Merging Corporation and the Surviving Corporation have determined that it is advisable and in the best interests of the respective corporations and their stockholders for the Merging Corporation to merge with and into the Surviving Corporation (the "Merger) in accordance with the applicable provisions of the Maine Business Corporation Act (the "Maine Act"), the Delaware General Corporation Law (the "Delaware Law"), and the Internal Revenue Code (the "Code"). 6. The Surviving Corporation and the Merging Corporation desire and intend that the Merger be a tax-free reorganization within the meaning of the applicable provisions of the Act and the Code. NOW, THEREFORE, pursuant to and in accordance with the Maine Act, the Delaware Law, and the Code, the Merging Corporation and the Surviving Corporation (collectively, the "Corporations") agree to merge into a single corporation, which will be the Surviving Corporation, and the Corporations agree upon and prescribe, as follows, the terms and conditons of the Merger, the mode of carrying the Merger into effect, and the manner and basis of exchanging the shares of the FHI Common Stock and the FHI Preferred Stock and transferring the assets and liabilities of the Merging Corporation to the Surviving Corporation. I. Merger --------- 1.1 Merger. On the Effective Date, as defined herein, the Merging Corporation will merge with and into the Surviving Corporation, and the separate existence of the Merging Corporation will cease, subject to the terms and conditions of this Agreement. 1.2 Surviving Corporation. The name of the Surviving Corporation will be Forster Inc. 1.3 Time of Merger. The Merger will be effective at 11:59 p.m. E.S.T., December 31, 1996 (the "Effective Date"). 1.4 Articles and Bylaws. After the Effective Date, the Articles of Incorporation, as amended to date, of the Surviving Corporation will remain in effect as the Articles of Incorporation, and the Bylaws of the Surviving Corporation, existing immediately prior to the Effective Date, will remain in effect as the Bylaws of the Surviving Corporation. 1.5 Directors and Officers. After the Effective Date, the Directors and Officers of the Surviving Corporation immediately prior to the Effective Date will continue to be the Directors and Officers of the Surviving Corporation until such other persons are duly elected and qualified. 1.6 Succession to All Rights and Obligations. As of the Effective Date, the Surviving Corporation will automatically succeed to all of the assets and rights of the Corporations and will be responsible and liable for all the liabilities and obligations of each Corporation. A claim by or against, or a pending proceeding by or against, either Corporation may be prosecuted by the Surviving Corporation as if the Merger had not taken place, or the Surviving Corporation may be substituted in the place of the Merging Corporation. 2 1.7 Registered Address. Before and after the Effective Date, the registered address in the State of Maine of the Surviving Corporation will be One Portland Square, Portland, Maine 04101. II. Exchange of Shares ----------------------- 2.1 Outstanding FHI Common Stock and FHI Preferred Stock. As of the Effective Date, all of the 795,522.36 shares of FHI Common Stock and 860,625 shares of FHI Preferred Stock issued and outstanding will be canceled and retired. 2.2 Outstanding Forster Stock. As of the Effective Date, all of the 100 shares of Forster Stock owned by the Merging Corporation will be canceled and reissued to DBI, and the Surviving Corporation will become a wholly-owned subsidiary of DBI. III. General Provisions ------------------------ 3.1 Approval. This Agreement has been approved by the Board of Directors and Shareholders of the Corporations where required by the Maine Act and the Delaware Law. 3.2 Execution. The officers of the Corporations will execute all such other documents and will take all such other action as may be necessary or advisable to make this Agreement and the Merger effective. 3.3 Abandonment. Notwithstanding the approval of this Agreement by the Corporations, this Agreement may be abandoned by either party at any time prior to the issuance of a Certificate of Merger by the Secretary of State of the State of Maine. IN WITNESS WHEREOF, this Agreement has been executed by the duly authorized and designated officers of the Merging Corporation and the Surviving Corporation as of December 27, 1996. The Merging Corporation: The Surviving Corporation: - ----------------------- ------------------------- FORSTER HOLDINGS, INC. FORSTER INC. By: /s/ Edward A. Michael By: /s/ Edward A. Michael ----------------------- ----------------------- Edward A. Michael Edward A. Michael President President 3 EX-3.7 3 - ------------------------------------------------------------- STOCKHOLDERS AGREEMENT among DIAMOND BRANDS INCORPORATED, SEAVER KENT - TPG PARTNERS, L.P., SEAVER KENT I PARALLEL, L.P., and NARESH K. NAKRA and THE STOCKHOLDERS NAMED HEREIN --------------------------------------------- Dated as of April 21, 1998 ---------------------------------------------- - ------------------------------------------------------------ STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT, dated as of April 21, 1998 (this "Agreement"), among Diamond Brands Incorporated, a Minnesota corporation (the "Company"), Seaver Kent - TPG Partners, L.P., a Delaware limited partnership ("SK-TPG Partners"), Seaver Kent I Parallel, L.P., a Delaware limited partnership ("SK Parallel" and, together with SK-TPG Partners, "SKC"), and Naresh K. Nakra and each of the parties listed on Exhibit A hereto (each, a "Rollover Stockholder" and collectively the "Rollover Stockholders") and each of the parties listed on Exhibit B hereto (each, along with Naresh K. Nakra and each Rollover Stockholder, an "Investor" and collectively, the "Investors"). WHEREAS, as of the date hereof, each of SKC and the Investors owns the securities of the Company as set forth on Exhibit C hereto; and WHEREAS, the parties hereto wish to restrict the transfer of the Shares (as hereinafter defined) and to provide for certain other rights under certain conditions. NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein, the adequacy of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: "Affiliate" of any Person means such Person's spouse and descendants and any trust solely for the benefit of such Person and/or such Person's spouse and/or descendants and any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control," when used with respect to any Person, means the power to direct or cause the direction of the management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of New York are authorized or required by law or executive order to close. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means Common Stock, par value $.01 per share, of the Company or any other capital stock of the Company into which such stock is reclassified or reconstituted. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Initial Public Offering" means the Company's initial Public Offering resulting in net proceeds to the Company of at least $50 million. "Involuntary Transfer" means any transfer, proceeding or action by or in which a Stockholder shall be deprived or divested of any right, title or interest in or to any of the Shares, including, without limitation, any seizure under levy of attachment or execution, any transfer in connection with bankruptcy (whether pursuant to the filing of a voluntary or an involuntary petition under the United States Bankruptcy Code of 1978, or any modifications or revisions thereto) or other court proceeding to a debtor in possession, trustee in bankruptcy or receiver or other officer or agency, any transfer to a state or to a public officer or agency pursuant to any statute pertaining to escheat or abandoned property and any transfer pursuant to a divorce or separation agreement or a final decree of a court in a divorce action. "Involuntary Transferee" has the meaning assigned such term in Section 3.3.1. "New Issuance" has the meaning assigned such term in Section 3.4. "Offered Securities" has the meaning assigned such term in Section 3.1.1. "Offering Notice" has the meaning assigned such term in Section 3.1.1. "Offer Price" has the meaning assigned such term in Section 3.1.1. "Permitted Transferees" has the meaning assigned such term in Section 2.2. "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, governmental body or other entity of any kind. "Public Offering" means any offer for sale of Common Stock pursuant to an effective Registration Statement filed under the Securities Act, other than on a Form S-4 or Form S-8. "Registration Statement" means a registration statement filed pursuant to the Securities Act. "Rightholder" has the meaning assigned such term in Section 3.2.1. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "Selling Stockholder" has the meaning assigned such term in Section 3.1.1. "Series A Preferred Stock" has the meaning assigned such term in the recitals to this Agreement. "Shares" means, with respect to each holder of Common Stock, all shares, whether now owned or hereafter acquired, of Common Stock owned thereby; provided, however, that for the purposes of any computation of the number of Shares either outstanding or held by any Stockholder or otherwise to be determined pursuant hereto, including for purposes of voting in Section 4.1 the shares of Common Stock issuable upon conversion, exercise or exchange of all securities or obligations which are by their terms convertible into shares of Common Stock and any option, warrant or other subscription or purchase right with respect to Common Stock shall be deemed outstanding whether or not such conversion, exercise or exchange has actually been effected. -2- "Stockholders" shall mean SK-TPG Partners, SK Parallel, the Investors and any transferee thereof or other holder of capital stock of the Company who has agreed to be bound by the terms and conditions of this Agreement in accordance with Section 2.4, and the term "Stockholder" shall mean any such Person. "SK Transferee" has the meaning assigned such term in Section 3.2.1. "Third Party Purchaser" has the meaning assigned such term in Section 3.1.1. "transfer" has the meaning set forth in Section 2.1. 2. Restrictions on Transfer of Shares. 2.1. Limitation on Transfer. No Stockholder shall sell, give, assign, hypothecate, pledge, encumber, grant a security interest in or otherwise dispose of (whether by operation of law or otherwise) (each a "transfer") any Shares or any right, title or interest therein or thereto, except in accordance with the provisions of this Agreement; provided, however, that any transferee obtaining any interest in or right to vote such Shares hereunder shall agree to be bound by this Agreement and shall comply with Section 2.4. Any attempt to transfer any Shares or any rights thereunder in violation of the preceding sentence shall be null and void ab initio and the Company shall not register any such transfer. 2.2. Permitted Transfers. Notwithstanding anything to the contrary contained in this Agreement, but subject to Sections 2.3 and 2.4, each of the Stockholders may transfer Shares in accordance with this Section 2.2 (the Persons to whom the Stockholders may so transfer Shares are referred to hereinafter as "Permitted Transferees"). 2.2.1. Transfers by SKC. At any time, SKC may, subject to Section 3.2, transfer Shares to any Person. 2.2.2. Transfers by Investors. At any time, each Investor may (subject to Sections 2.3 and 2.4), transfer Shares to any of their respective Affiliates, any other Investor, to SKC or to a successor trust to such Investor which has the same beneficiaries. At any time, each Investor may, subject to Section 3.1, transfer Shares to any Person. 2.3. Permitted Transfer Procedures. If any Stockholder wishes to transfer Shares to a Permitted Transferee under this Section 2, such Stockholder shall give notice to the Company of its intention to make any transfer permitted under this Section 2 not less than ten (10) days prior to effecting such transfer, which notice shall state the name and address of each Permitted Transferee to whom such transfer is proposed and the number of Shares proposed to be transferred to such Permitted Transferee. 2.4. Transfers in Compliance with Law; Substitution of Transferee. Notwithstanding any other provision of this Agreement, no transfer may be made pursuant to this Section 2 or Section 3 unless (a) -3- the Permitted Transferee has agreed in writing to be bound by the terms and conditions of this Agreement, (b) the transfer complies in all respects with the applicable provisions of this Agreement, and (c) the transfer complies in all respects with applicable federal and state securities laws, including, without limitation, the Securities Act. If requested by the Company in its reasonable judgment, an opinion of counsel, for such transferring Stockholder shall be supplied to the Company at such transferring Stockholder's expense, to the effect that such transfer complies with the applicable federal and state securities laws; provided, however, that no such opinion shall be required with respect to a transfer to a successor trust to an Investor which has the same beneficiaries. Any attempt to transfer any Shares or rights hereunder in violation of this Agreement shall be null and void ab initio and the Company shall not register such transfer. Upon becoming a party to this Agreement, a Permitted Transferee shall be substituted for, and shall enjoy the same rights and be subject to the same obligations as its predecessor hereunder only to the extent that this Agreement specifically states that such Permitted Transferee shall enjoy the particular right or be subject to the particular obligation of its predecessor, as the case may be. 3. Proposed Voluntary Transfers. 3.1. Proposed Voluntary Transfers by an Investor. 3.1.1. Offering Notice. If an Investor (a "Selling Stockholder") wishes to sell or otherwise transfer all or any portion of its Shares to any Person (other than to a Permitted Transferee that is an Affiliate thereof) (a "Third Party Purchaser"), such Selling Stockholder shall offer such Shares first to the Company by sending written notice (the "Offering Notice") to the Company, which shall state (a) the number of Shares proposed to be sold or otherwise transferred (the "Offered Securities") and (b) the proposed purchase price per Share which the Selling Stockholder is willing to accept (the "Offer Price"). Upon delivery of the Offering Notice, such offer shall be irrevocable unless and until the rights of first offer provided for herein shall have been waived by the Company or shall have expired under Section 3.1.2. 3.1.2. The Company's Option. For a period of fifteen (15) days after the giving of the Offering Notice pursuant to Section 3.1.1 (the "Option Period"), the Company or its designee shall have the right to purchase all (but not less than all) of the Offered Securities at a purchase price equal to the Offer Price and upon the terms and conditions set forth in the Offering Notice. 3.1.3. Exercise of Option. The option of the Company under Section 3.1.2 shall be exercisable by delivering written notice of the exercise thereof, prior to the expiration of the 15-day period referred to in Section 3.1.2, to the Selling Stockholder with a copy to the other stockholders. The failure of the Company to respond within such 15-day period to the Selling Stockholder shall be deemed to be a waiver of its rights under Sections 3.1.1 and 3.1.2. 3.1.4. Closing of the Sale to the Company (or its designee). If the Company exercises its option under Section 3.1.2, the closing of the purchase of Offered Securities by the Company (or its designee) under Section 3.1.2 shall be held at the principal office of the Company at 11:00 a.m., local time, on the 45th day after the giving of the Offering Notice pursuant to Section 3.1.1 or at such other time and place as the parties to the transaction may agree. At such closing, the Selling Stockholder shall deliver to the Company (or its designee) certificates representing the -4- Offered Securities, duly endorsed for transfer and accompanied by all requisite transfer taxes, if any, and such Offered Securities shall be free and clear of any liens, claims, options, charges, encumbrances or rights (other than those arising hereunder), and the Selling Stockholder shall so represent and warrant, and shall further represent and warrant that it is the sole beneficial and record owner of such Offered Securities. The Company (or its designee purchaser) shall deliver at the Closing to the Selling Stockholder payment in full in immediately available funds for the Offered Securities purchased by it. At such Closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. 3.1.5. Sale to Third Party Purchaser. Unless the Company elects to purchase all of the Offered Securities pursuant to Section 3.1.2, the Selling Stockholder may sell the offered securities to the Third Party Purchaser at a price per Share equal to the Offer Price set forth in the Offering Notice and otherwise on the terms and conditions set forth in the Offering Notice; provided, however, that such sale is bona fide and made pursuant to a contract entered into within sixty (60) days of the earlier of the waiver by the Company of its option to purchase the Offered Securities or the expiration of the Option Period (the earlier of such dates being referred to herein as the "Contract Date"); and provided, further, that there is full compliance with Section 2.4. If such sale is not consummated within forty-five (45) days of the Contract Date for any reason, then the restrictions provided for herein shall again become effective, and no transfer of such offered Securities may be made thereafter by the Selling Stockholder without again offering the same to the Company in accordance with this Section 3.1. 3.2. Proposed Voluntary Transfers by SKC; Tag Along Right and Bring Along Right. 3.2.1. Tag Along Right. (a) If SKC shall have received a bona fide offer from (or shall have entered into a bona fide written agreement with) a Person or Persons that is not an Affiliate of SKC (each, a "SKC Transferee") to purchase greater than 10% of SKC's Shares in the aggregate in a transaction or series of substantially contemporaneous transactions, then SKC shall send written notice to the Stockholders and their respective Permitted Transferees (each, a "Rightholder") which shall state (i) the number of Shares proposed to be sold or otherwise transferred to the SKC Transferees (the "SKC Offered Securities"), (ii) the proposed purchase price per Share to be paid by the SKC Transferees, (iii) the name of the SKC Transferees and (iv) the projected closing date of the sale or transfer of the SKC Offered Securities, which in no event shall be prior to fifteen (15) days after the giving of such written notice to each Rightholder and (v) that SKC shall sell or otherwise transfer the SKC Offered Securities subject to the rights of each Rightholder contained in this Section 3.2.1. (b) For a period of fifteen (15) days after the giving of the notice pursuant to clause (a) above, each Rightholder shall have the right to sell to the SKC Transferees that number of Shares held by such Rightholder equal to that percentage of the SKC Offered Securities determined by multiplying (i) the number of SKC Offered Securities by (ii) a fraction derived by dividing (x) the total number of Shares then owned by such Rightholder, by (y) the total number of -5- Shares owned by all holders of Common Stock participating in the sale to the SKC Transferees (including the Shares owned by SKC, such Rightholder and all other Rightholders). To the extent that such Rightholder exercises its right to sell Shares pursuant to this Section 3.2.1, the number of Shares of SKC Offered Securities to be sold to the SKC Transferees by SKC shall be reduced proportionately. (c) The rights of each Rightholder under this Section 3.2.1 shall be exercisable by delivering written notice thereof, prior to the expiration of the 15-day period referred to in clause (b) above, to SKC with a copy to the Company. The failure of such Rightholder to respond within such period to SKC shall be deemed to be a waiver of its rights, as the case may be, under Section 3.1.2. 3.2.2. Bring Along Right. If SKC shall have received a bona fide offer from a SKC Transferee to purchase all of its Shares, then SKC shall have the right to deliver a written notice (a "Buyout Notice") to each Stockholder which shall state (i) that SKC proposes to effect such transaction, (ii) the proposed purchase price per Share to be paid by the SKC Transferee, and (iii) the name of the SKC Transferee, and which attaches a copy of any written agreement between SKC and the other parties to such transaction which establishes the terms of such transaction. Each such Stockholder agrees that, upon receipt of a Buyout Notice, each such Stockholder shall be obligated to sell all of its Shares upon the same terms and conditions of such transaction applicable to SKC, unless such sale would result in a violation of applicable laws or regulations (and otherwise take all necessary action to cause consummation of the proposed transaction, including voting such Shares in favor of such transaction); including, without limitation the same per Share consideration as received by SKC. 3.3. Involuntary Transfers. 3.3.1. Rights of First Offer Upon Involuntary Transfer. If an Involuntary Transfer of any Shares (the "Transferred Shares") owned by an Investor or its Permitted Transferees shall occur, the Company (or its designee) shall have the same rights as specified in Section 3.1.3 with respect to such Transferred Shares as if the Involuntary Transfer had been a proposed voluntary transfer by a Selling Stockholder; provided, however, that (a) the time periods shall run from the date of receipt by the Company of notice of the Involuntary Transfer and (b) such rights shall be exercised, as set forth in Section 3.3.2, by notice to the involuntary transferee of such Transferred Shares (the "Involuntary Transferee") rather than to the Stockholder who suffered or will suffer the Involuntary Transfer. 3.3.2. Company Option. For a period of 30 days after the receipt by the Company of notice of the Involuntary Transfer in accordance with Section 3.3.1(a) hereof, the Company or its designee shall have the right to purchase all of the Transferred Shares at the purchase price set forth in Section 3.3.4 by delivering written notice, prior to the expiration of such 30-day period, to the Involuntary Transferee, with a copy to SKC and the other Stockholders. The failure of the Company to respond within such 30-day period shall be deemed to be a waiver of the Company's rights under this Section 3.3.2. -6- 3.3.3. SKC and Investor Options. If the Company does not elect to purchase all of the Transferred Shares owned by the Investors or its Permitted Transferees pursuant to Section 3.3.2, then for a period of sixty (60) days after the receipt by the Stockholders of notice of the Involuntary Transfer of such Transferred Shares in accordance with Section 3.3.1(a) hereof, each of SKC and the Investors shall have the right to purchase that percentage of such Transferred Shares determined by dividing (a) the total number of Shares then owned by SKC (in the case of a purchase by SKC) or the Investors (in the case of a purchase by an Investor) as the case may be, by (b) the total number of Shares held by SKC or the Investors in the aggregate, by delivering written notice, prior to the expiration of such 60-day period, to the Involuntary Transferee, with a copy to the Company. If SKC or any Investor as the case may be, does not elect to purchase all of the Transferred Shares that it is entitled to purchase pursuant to this Section 3.3.3, then the other or others, if such other or others elected to purchase all of the Transferred Shares that it is entitled to purchase pursuant to this Section 3.3.3, shall have the right to purchase all of such Transferred Shares not so purchased. The failure of SKC or an Investor, as the case may be, to respond within such 60-day period shall be deemed to be a waiver of its rights under this Section 3.3.3. 3.3.4. Purchase Price. If the Company, SKC, or an Investor, as the case may be, elects to purchase all of the Transferred Shares, then the Company, SKC, or the Investor, as the case may be, shall purchase the Transferred Shares at a purchase price equal to the Fair Value (as hereinafter defined) thereof. The Fair Value of the Transferred Shares shall be determined by an independent appraiser, which shall be a nationally recognized independent investment banking firm or nationally recognized independent expert experienced in the valuation of corporations. The determination of the appraiser shall be conclusive and binding upon the Company, SKC, and the Investors. If the Company elects to purchase all of the Transferred Shares pursuant to Section 3.3.2, then within five (5) Business Days of such election, the Company shall appoint such appraiser. In the event that the Company does not elect to purchase all of the Transferred Shares, (a) if SKC elects to purchase the Transferred Shares pursuant to Section 3.3.3, then SKC appoint such appraiser within five (5) Business Days of such election and (b) if SKC does not elect to purchase the Transferred Shares that it is entitled to purchase pursuant to Section 3.3.3, then the Investors who elected to purchase the Transferred Shares shall appoint such appraiser within five (5) Business Days of such election. For purposes of this Section 3.3.4, the "Fair Value" of the Transferred Shares means the fair market value of the such Transferred Shares determined by the appraiser based upon all considerations that the appraiser determines to be relevant. 3.35. Closing. The closing of any purchase under this Section 3.3 shall be held at the principal office of the Company at 11:00 a.m., local time, on the fifth Business Day after delivery of written notice to the Involuntary Transferee in accordance with Section 3.3.2 or Section 3.3.3, as applicable, or at such other time and place as the parties to the transaction may agree. At such closing, the Involuntary Transferee shall deliver to the Company, SKC, or the Investor, as the case may be, certificates, if applicable, or other instruments or documents representing the Transferred Shares being purchased under this Section 3.3, duly endorsed with a signature guarantee for transfer and accompanied by all requisite transfer taxes, if any, and such Transferred Shares shall be free and clear of any Liens, including, without limitation, any Lien arising through the action or inaction of -7- the Involuntary Transferee, and the Involuntary Transferee shall so represent and warrant, and shall further represent and warrant that it is the beneficial owner of such Transferred Shares. The Company, SKC, or the Investor, as the case may be, shall deliver to the Involuntary Transferee at the closing payment in full in immediately available funds for such Transferred Shares. At such closing, all of the parties to the transaction shall execute such additional documents as are otherwise necessary or appropriate. 3.3.6. General. In the event that the provisions of this Section 3.3 shall be held to be unenforceable with respect to any particular Involuntary Transfer, the Company, SKC, and the Investors shall have the rights specified in Section 3.3 with respect to any transfer by an Involuntary Transferee of such Shares, and each Stockholder agrees that any Involuntary Transfer shall be subject to such rights, in which case the Involuntary Transferee shall be deemed to be the Selling Stockholder for purposes of Section 3.1 of this Agreement and shall be bound by the provisions of Section 3.1 and the other provisions of this Agreement. 3.3.7. Issuances of Capital Stock by the Company; Preemptive Right. The Company shall give each of the Stockholders and their respective Affiliates who are Permitted Transferees thirty (30) days' prior written notice of the proposed issuance of any capital stock or any security convertible for or exchangeable into capital stock (each a "New Issuance") (other than capital stock, not in excess of ten percent of the outstanding capital stock, on a fully diluted basis, to be issued in connection with an employee stock option plan that is approved by the Company's Board of Directors, an issuance of capital stock as a stock split or stock dividend, an issuance of capital stock pursuant to the exercise of any option, warrant or convertible security outstanding on the date of this Agreement, an issuance of capital stock pursuant to the exercise of any option, warrant or convertible security issued after the date hereof, or the issuance of capital stock upon the conversion of any share of convertible capital stock outstanding on the date hereof or upon conversion of any share of convertible capital stock subsequently issued in respect of shares of convertible capital stock outstanding on the date hereof). Such notice shall specify the number and class of securities to be issued, the rights, terms and privileges thereof and the price at which such securities will be issued. By written notice to the Company given within fifteen (15) days of being notified of such New Issuance, each such Stockholder shall be entitled to purchase that percentage of the New Issuance determined by dividing (a) the total number of Shares owned by such Stockholder by (b) the sum of (i) the total number of Shares then owned by all Stockholders participating in such purchase (including such Stockholder's Shares) plus (ii) the total number of shares of Common Stock owned by other stockholders of the Company which have been granted preemptive rights which are similar to those provided to the Stockholders in this Section 3.4 and which are participating in such purchase, whether or not such conversion, exercise or exchange has actually been effective); provided, however, that no Stockholder shall have any right to purchase securities pursuant to this Section 3.4 if such securities to this Section 3.4 would be required to be registered under the Securities Act when the securities being issued in the New Issuance would not otherwise be required to be so registered. If any such Stockholder (or any other Person which has been granted preemptive rights which are similar to those provided to the Stockholders in this Section 3.4) does not fully subscribe for the number or amount of shares of capital stock or securities convertible for or exchangeable into capital stock that it is entitled to purchase (or that it would otherwise have been entitled to purchase but for -8- the proviso to the preceding sentence) pursuant to this Section 3.4, then each Stockholder participating in such purchase to the full extent provided for in the preceding sentence shall have the right to purchase that percentage of the New Issuance not so subscribed for, determined by dividing (a) the total number of Shares then owned by such fully participating Stockholder by (b) the total number of Shares then owned by all fully participating Stockholders who elect to purchase shares or other securities pursuant to this Section 3.4 (including such Stockholder's Shares). The closing of any purchase pursuant to this Section 3.4 shall be held at the time and place of the closing of, and on the same terms and conditions as, the New Issuance, or at such other time and place as the parties to the transaction may agree. 4. Corporate Governance. 4.1. Director and Observer; Voting. So long as the Rollover Stockholders, together with their Affiliates own in the aggregate Shares representing more than 10% of the outstanding Shares, the Rollover Stockholders shall be entitled to elect one member of the Company's Board of Directors and to designate one individual to attend (whether by person or by telephone) and observe any regular or special meeting of the Company's Board of Directors. The Company's Board of Directors shall be the operative decision making body of the Company and its Subsidiaries. All reasonable out-of-pocket expenses of such director and observer incurred in connection with attending any such meeting shall be paid by the Company. All of the Stockholders agree that all of the Common Stock will be voted and/or stockholder consents provided with respect thereto in order to effect the first sentence of this section and will be voted otherwise in such proportions as to provide voting power to each of the Stockholders (as so directed in writing by such Stockholder) in the same proportion as such Stockholder would have been entitled to vote the Common Stock if all warrants outstanding as of this date of this Agreement had been exercised in full, and each Stockholder hereby irrevocably appoints SK-TPG as its proxy for purposes of voting any shares of Common Stock held by such Stockholder in accordance with these provisions so long as this Agreement is effective; provided, however, that the provisions of this sentence shall terminate and be of no force or effect at such time as a majority of the outstanding shares of Common Stock of the Company are owned, collectively, by the owners of the warrants outstanding as of the date of this Agreement and their assigns; provided, further, that in connection with any merger or sale of assets involving the Company, the Company shall extend to all Stockholders such dissenters' rights as would have been available to an objecting stockholder under applicable Minnesota law. Notwithstanding the preceding sentence, each of Mellon Bank as Trustee of the General Motors Employes Domestic Group Pension Trust (and its successors and assigns to any Shares) and New York Life Insurance Company (and its successor and assigns to any Shares) does not appoint SK-TPG as its proxy but does agree to vote any shares of Common Stock as to which it is entitled to vote in the same manner as a majority of the shares of Common Stock voted by the other Stockholders in accordance with the foregoing so long as the provisions of the preceding sentence remain in effect. 4.2. Affiliated Transactions. The Company shall not conduct any business or enter into any transaction with or for the benefit of any Stockholder unless the terms of such business or transaction are not materially less favorable to the Company than those that could be obtained in a comparable arm's-length transaction with a non-affiliate and are approved by the Company's Board of Directors after full disclosure thereof. Notwithstanding the foregoing limitation, the Company may enter into any or all of the following: -9- 4.2.1. The payment of compensation for the personal services of officers, directors and employees, so long as the Company's Board of Directors in good faith shall have approved the terms thereof and deemed the services to be performed for such compensation to be fair consideration therefor. 4.2.2. The payment of reasonable fees to members of the Board of Directors. 4.2.3. Indemnities of officers and directors. 5. Registration Rights. 5.1. Right to Include in Initial Public Offering. Each Investor who owns more than 1% of the shares shall be permitted to include their Shares in an Initial Public Offering and subsequent Public Offerings of the Company on the same basis as SKC. Each Investor and SKC agrees that, in connection with each underwritten Public Offering of the Company, Investor or SKC, as applicable, shall not sell or transfer, or offer to sell or transfer, any equity securities of the Company for such period as the managing underwriter of such offering reasonably determines is necessary to effect the underwritten Public Offering not to exceed 120 days. 5.2. Underwriting Adjustment. If the Initial Public Offering referred to in Section 5.1 involves an underwritten offering, and the Company's managing underwriter shall advise the Company that, in its opinion, the number of Shares that are held by stockholders who have the right to register their Common Stock pursuant to such Initial Public Offering and that are requested to be included in such offering exceeds the number which can be sold in such offering, then the Company will include in such offering, to the extent of the number of Shares which the Company is so advised can be sold in such offering any Shares that each of the Investors proposes to include in such offering pro rata on the basis of the percentage of Shares requested by all stockholders to be included thereby in such offering. 5.3. Expenses. With respect to any Registration Statement that includes any Shares pursuant to Sections 5.1 and 5.2, the Company shall pay all reasonable expenses (other than underwriting discounts and commissions) whether or not such registration becomes effective. 5.4. Registration Procedures. 5.4.1. General. Whenever SKC requests that any shares of Common Stock ("Registrable Shares") be registered pursuant to this Agreement, the Company shall, as expeditiously as reasonably possible: (a) In connection with the preparation and filing of each registration statement registering Registrable Shares under this Agreement, the Company will give the holders of Registrable Shares on whose behalf such Registrable Shares are to be so registered and the underwriter and their respective counsel and accountants, a reasonable opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or -10- supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers, its counsel and the independent public accountants who have certified its financial statements, as shall be reasonably necessary, in the opinion of such holders or such underwriters or their respective counsel, in order to conduct a reasonable and diligent investigation within the meaning of the Securities Act. Without limiting the foregoing, each registration statement, prospectus, amendment, supplement or any other document filed with respect to a registration under this Agreement shall be subject to review and reasonable approval by the holders of Registrable Shares in such registration and by their counsel with respect to provisions relating to such holders. (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 120 days or such shorter period which will terminate when all Registrable Shares covered by such registration statement have been sold (but not before the expiration of the 90 day period referred to in Section 4(3) of the Securities Act and Rule 174 or other comparable provisions thereunder, if applicable), and comply with the provisions of the Securities Act applicable to it with respect to the disposition of all securities covered by such registration statement during the applicable period. (c) furnish to each holder of Registrable Shares included in such registration statement, upon request, and the managing underwriter or underwriters, without charge, at least one copy of the registration statement and any post-effective amendment thereto and such number of copies of the prospectus (including any preliminary prospectus) and any amendments or supplements thereto, as such holder of Registrable Shares or managing underwriter may reasonably request in order to facilitate the disposition of the Registrable Shares being sold by such holder. (d) notify any holder on whose behalf Registrable Shares are being registered under this Agreement of any stop order issued or threatened by the Commission and take all reasonable actions required to prevent the entry of such stop order or to remove it if entered and make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible moment. (e) enter into a written agreement with the managing underwriter or underwriters selected by the Company in such form and containing such representations and warranties by the Company and such other terms and provisions as are customarily contained in the underwriting agreements with respect to secondary distributions, including, without limitation, provisions relating to indemnification and contribution. The holders on whose behalf Registrable Shares are to be distributed by such underwriters shall be parties to any such underwriting agreement, and the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of such holders of Registrable Shares. The indemnity provisions of such underwriting agreement shall comply with the provisions of Section 5.4.2. (f) on or prior to the date on which the registration statement is declared effective, use its reasonable best efforts to register or qualify, and cooperate with the holders of Registrable Shares included in such registration statement, the underwriter or underwriters, and their counsel in -11- connection with the registration or qualification of, the Registrable Shares covered by the registration statement for offer and sale under the securities or blue sky laws of each state and other jurisdiction of the United States as any such underwriter reasonably requests in writing, to use its best efforts to keep each such registration or qualification effective, including through new filings, or amendments or renewals, during the period such registration statement is required to be kept effective and to do any and all acts or things necessary or advisable to enable the disposition in all such jurisdictions of the Registrable Shares covered by the applicable registration statement, provided, however, that the Company will not be required (i) to qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subsection (f), (ii) to subject itself to taxation in any such jurisdiction or (iii) to consent to general service of process in any such jurisdiction. (g) use its reasonable best efforts to cause all such Registrable Shares included in such registration statement to be listed by the date of the first sale of Registrable Shares pursuant to such registration statement on each securities exchange on which securities issued by the Company are then listed or proposed to be listed, if any. (h) make available for inspection, during normal business hours, by any holder on whose behalf Registrable Shares are being registered under this Agreement, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant, or other agent retained by any such holder or underwriter (collectively, the "Inspectors"), all financial and other records, pertinent corporate documents, and properties of the Company and its Subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Company's officers, directors, and employees to supply all information reasonably requested by any such Inspector in connection with such registration statement. Records which the Company determines, in good faith, to be confidential shall not be disclosed by the Inspectors unless (i) the disclosure of such Records is necessary to avoid or correct a material misstatement or omission in the registration statement or (ii) the release of such Records is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or is otherwise required by law or regulation. The holder on whose behalf Registrable Shares are being registered under this Agreement agrees that it will, upon learning that disclosure of such Records is sought in a court of competent jurisdiction, give notice, to the extent practicable, to the Company and allow the Company, at the Company's expense, to undertake appropriate action to prevent disclosure of the Records deemed confidential. (i) furnish, at the reasonable request of any holder of Registrable Shares sold in such offering, on any date that any Registrable Share is delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date from counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such holder, covering such matters with respect to the registration as are customarily covered in the opinions of issuers' counsel delivered to underwriters in connection with underwritten public offerings of securities (including with respect to such registration statement and the prospectus included therein), and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to such seller, covering such matters (including information with respect to events subsequent to the date of such financial statements) with respect to the registration (including with respect to such registration statement and the prospectus included therein) in respect of which -12- such letter is being given as are customarily covered in accountant's letters delivered to underwriters in connection with underwritten public offerings of securities. Each holder of Registrable Shares as to which registration is being effected pursuant hereto shall use its best efforts to cooperate with the Company, and the Company may require each seller of Registrable Shares as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing. 5.4.2. Indemnification. (a) Indemnification by Company. The Company agrees to indemnify and to save and hold harmless each holder of Registrable Shares and any underwriter, the officers, directors and partners and partners of partners, and each person who controls such holder or any such underwriter (within the meaning of the Securities Act or the Exchange Act) from and against any and all losses, claims, damages, liabilities, and expenses (including reasonable attorneys fees and expenses and reasonable costs of investigation) to which the holder or underwriter or any such other person may be subject, under the Securities Act or otherwise, arising out of or based on any untrue or alleged untrue statement of a material fact contained in any registration statement or prospectus relating to the Registrable Shares or in any amendment or supplement thereto or in any preliminary prospectus or any other document incident to the registration of Registrable Shares under the Securities Act or the qualification of the Registrable Shares under any state securities laws, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of or based upon any violation or alleged violation by the Company of the Securities Act, the Exchange Act or any other federal or state securities laws, rules or regulations applicable to the Company and relating to action or inaction by the Company in connection with any such registration or qualification, except insofar as the same arise out of reliance upon any untrue statement or omission furnished in writing to the Company by such holder (or, if it is an underwritten offering, an underwriter selected by such holders), expressly for use therein. The Company will, pursuant to a separate agreement, agree to indemnify the underwriters thereof, their officers, directors and partners and partners of partners, and each person who controls (within the meaning of the Securities Act) such underwriters (collectively, "Securities Professionals") to the same extent as provided above. (b) Indemnification by Holder of Registrable Shares. In connection with any registration statement in which a holder of Registrable Shares is participating, each such holder will furnish to the Company in writing such information and affidavits with respect to such holder as the Company reasonably requests for use in connection with any such registration statement or prospectus and agrees to indemnify, to the extent permitted by law, each of the Company's directors and officers, and each Person who controls the Company (within the meaning of the Securities Act) and, the underwriters, against any losses, claims, damages, liabilities, and expenses arising out of or based on any untrue statement of a material fact or any omission of a material fact required to be stated in the registration statement or prospectus or any amendment thereof or supplement thereto or necessary to make the statements therein not misleading, to the extent, but only to the extent, that such untrue statement or omission is made in reliance upon and in conformity with information with respect to such holder furnished in writing to the Company by such holder -13- specifically for use in such registration statement or prospectus or amendment thereof or supplement thereto; provided, however, that the liability of any such holder under this Section 5.4.2 (including, without limitation, subsection (c) below) shall in no event exceed the net proceeds of the sale of Registrable Shares being sold pursuant to said registration statement or prospectus by such holder. (c) Contribution. If the indemnification provided for in this Section 5.4.2 is unavailable to an indemnified under this Section 5.4.2 in respect of any losses, claims, party damages, liabilities, expenses or judgments referred to herein, then each such indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities, expenses and judgements (i) as between the Company and such holders on the one hand and the Securities Professionals on the other, in such proportion as is appropriate to reflect the relative benefits received by the Company and such holders on the one hand and the Securities Professionals on the other from the offering of the Registrable Shares, or if such allocation is not permitted by applicable law, in such proportion as is appropriate to reflect not only such relative benefits, but also the relative fault of the Company and such holders on the one hand and of the Securities Professionals on the other in connection with the statements or omissions which result in such losses, claims, damages, liabilities, expenses or judgements as well as any other relevant equitable considerations and (ii) as between the Company on the one hand and each such holder on the other, in such proportion as is appropriate to reflect the relative fault of the Company and of each such holder in connection with such statements or omissions, as well as any other relevant equitable considerations. The relative benefits received by the Company and such holders on the one hand and the Securities Professionals on the other shall be deemed to be in the same proportion as the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and such holders bear to the total underwriting discounts and commissions received by the Securities Professionals, in each case as set forth in the table on the cover page of the prospectus. The relative fault of the Company, of each such holder and of the Securities Professionals shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by such party, and the party's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and such holders agree that it would not be just and equitable if contribution pursuant to this Section 5.4.2 were determined by pro rata allocation (even if such holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities, expenses or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.4.2(c), no Securities Professional shall be required to contribute any amount in excess of the amount by which the total price at which the Registrable Shares of such holder were offered to the public exceeds the amount of any damages which such holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section 11(1) of the Securities Act) shall be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation. -14- 6. Stock Certificate Legend. A copy of this Agreement shall be filed with the Secretary of the Company and kept with the records of the Company. Each certificate representing Shares now held or hereafter acquired by any Stockholder shall, for as long as this Agreement is effective, bear legends substantially in the following forms: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS OR PURSUANT TO A WRITTEN OPINION OF COUNSEL FOR THE COMPANY THAT REGISTRATION IS NOT REQUIRED. THE SALE, ASSIGNMENT, HYPOTHECATION, PLEDGE, ENCUMBRANCE OR OTHER DISPOSITION (EACH A "TRANSFER") AND VOTING OF ANY OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE RESTRICTED BY THE TERMS OF THE STOCKHOLDERS AGREEMENT, DATED AS OF APRIL 21, 1998 (THE "STOCKHOLDERS AGREEMENT"), AMONG THE COMPANY AND THE STOCKHOLDERS NAMED THEREIN, A COPY OF WHICH MAY BE INSPECTED AT THE COMPANY'S PRINCIPAL OFFICE. THE COMPANY WILL NOT REGISTER THE TRANSFER OF SUCH SECURITIES ON THE BOOKS OF THE COMPANY UNLESS AND UNTIL THE TRANSFER HAS BEEN MADE IN COMPLIANCE WITH THE TERMS OF THE STOCKHOLDERS AGREEMENT. 7. Miscellaneous. 7.1. Notices. All notices or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telecopied or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally, telecopied or sent by certified, registered or express mail or, if mailed, five days after the date of deposit in the United States mail, as follows: (a) if to the Company: Diamond Brands Incorporated 1800 Cloquet Boulevard Cloquet, Minnesota 55720 Attention: Chief Executive Officer -15- with a copy to: McDermott, Will & Emery 227 West Monroe Street Chicago, Illinois 60606 Attn: Helen R. Friedli, P.C. Fax No.: (312) 984-3669 (b) if to the Rollover Stockholders: Hunter Keith Industries, Inc. 5100 IDS Center 80 South Eighth Street Attn: Andrew M. Hunter, III Fax No.: (612) 338-7079 with a copy to: Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Attn: Charles P. Moorse Fax No.: (612) 371-3207 (c) if to SKC: Seaver Kent & Company LLC 3000 Sand Hill Road Building 1-230 Menlo Park, CA 94025 Attn: Alexander M. Seaver & Bradley R. Kent Fax No.: (650) 233-9130 with a copy to: McDermott, Will & Emery 227 West Monroe Street Chicago, Illinois 60606 Attn: Helen R. Friedli, P.C. Fax No.: (312) 984-3669 -16- (d) if to any other Stockholder, at its address as it appears on the record books of the Company. Any party may by notice given in accordance with this Section 8.1 designate another address or person for receipt of notices hereunder. 7.2. Amendment and Waiver. (a) No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the parties hereto at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by any party from the terms of any provision of this Agreement, shall be effective (i) only if it is made or given in writing and signed by SKC and the parties holding a majority of the remaining Shares hereunder and (ii) only in the specific instance and for the specific purpose for which made or given; provided, however, that any such amendment, supplement or modification to this Agreement shall not be effective to withdraw, deny or adversely affect the rights of any Stockholder who has not consented in writing to such amendment, supplement or modification. 7.3. Specific Performance. The parties hereto intend that each of the parties have the right to seek damages or specific performance in the event that any other party hereto fails to perform such party's obligations hereunder. Therefore, if any party shall institute any action or proceeding to enforce the provisions hereof, any party against whom such action or proceeding is brought hereby waives any claim or defense therein that the plaintiff party has an adequate remedy at law. 7.4. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 7.5. Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 7.6. Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter; provided however that the Existing Stockholders Agreement shall remain in full force and effect except as specifically provided otherwise in this Agreement. -17- 7.7. Term of Agreement. This Agreement shall become effective upon the Closing of the transactions contemplated by the Recapitalization Agreement among the Company, Seaver Kent - TPG Partners, L.P., Seaver Kent I Parallel, L.P., and each of the owners of equity interests or options to purchase equity interests in the Company, dated March 3, 1998, and shall terminate upon the date upon which the Commission declares effective the Registration Statement relating to the Initial Public Offering; provided, however, that the provisions of Section 5 shall terminate on the second anniversary of the date upon which the Commission declares effective the Registration Statement relating to the Initial Public Offering and the provisions of Section 5.4.2 shall not terminate. 7.8. Variations in Pronouns. All pronouns and any variations thereof refer to the masculine, feminine or neuter, singular or plural, as the context may require. 7.9. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. 7.10. Further Assurances. Each of the parties shall, and shall cause their respective Affiliates to, execute such instruments and take such action as may be reasonably required or desirable to carry out the provisions hereof and the transactions contemplated hereby. 7.11. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors, heirs, legatees and legal representatives. 7.12. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. * * * -18- IN WITNESS WHEREOF, the undersigned have executed, or have cause to be executed, this Agreement on the date first written above. DIAMOND BRANDS INCORPORATED By:___________________________________ Name:____________________________ Title:___________________________ SEAVER KENT - TPG PARTNERS, L.P. By:___________________________________ Name:____________________________ Title:___________________________ SEAVER KENT I PARALLEL, L.P. By:__________________________________ Name:____________________________ Title:___________________________ ______________________________________ Naresh K. Nakra -19- ROLLOVER STOCKHOLDERS: Randall D. Barry Stewart M. Barry Walter R. Barry, Jr. Walter R. Barry III Andrew M. Hunter III Ashley L. Hunter 1993 Trust, John L. Morrison and Robert W. Horstman, Co-Trustees Jocelyn W. Hunter 1997 Trust, John L. Morrison and Robert W. Horstman, Co-Trustees Lacey M. Hunter 1995, Trust, John L. Morrison and Robert W. Horstman, Co-Trustees Laura Elizabeth Keith Michele R. Keith Robert J. Keith, Jr. Robert J. Keith, Jr. 1997 Irrevocable Annuity Trust, Robert J. Keith, Jr. and Robert W. Horstman, Co-Trustees Robert J. Keith III Christopher A. Mathews Alan S. McDowell Jeffrey M. McDowell Whitney W. McDowell Dawn Ekstrom Michael Edward A. Michael John L. Morrison John F. Young Richard Campbell Thomas Knuesel John Beach By:___________________________________ Andrew M. Hunter, III as Shareholders Representative -20- OTHER INVESTORS NEW YORK LIFE INSURANCE COMPANY BY:___________________________________ Its:__________________________________ MELLON BANK AS TRUSTEE FOR THE GENERAL MOTORS EMPLOYES DOMESTIC GROUP PENSION TRUST BY:___________________________________ Its:__________________________________ ______________________________________ Richard Campbell ______________________________________ Christopher Mathews ______________________________________ John Young ______________________________________ Thomas Knuesel ______________________________________ John Beach -21- Exhibit A --------- Rollover Stockholders: Randall D. Barry Stewart M. Barry Walter R. Barry, Jr. Walter R. Barry III Andrew M. Hunter III Ashley L. Hunter 1993 Trust, John L. Morrison and Robert W. Horstman, Co-Trustees Jocelyn W. Hunter 1997 Trust, John L. Morrison and Robert W. Horstman, Co-Trustees Lacey M. Hunter 1995, Trust, John L. Morrison and Robert W. Horstman, Co-Trustees Laura Elizabeth Keith Michele R. Keith Robert J. Keith, Jr. Robert J. Keith, Jr. 1997 Irrevocable Annuity Trust, Robert J. Keith, Jr. and Robert W. Horstman, Co-Trustees Robert J. Keith III Christopher A. Mathews Alan S. McDowell Jeffrey M. McDowell Whitney W. McDowell Dawn Ekstrom Michael Edward A. Michael John L. Morrison John F. Young Richard Campbell Thomas Knuesel John Beach -22- Exhibit B --------- Other Investors --------------- New York Life Insurance Company Mellon Bank as Trustee for the General Motors Employes Domestic Group Pension Trust Richard Campbell Christopher Mathews John Young Thomas Knuesel John Beach -23- EX-4.3 4 EXECUTION COPY ================================================================================ U.S. $105,000,000 CREDIT AGREEMENT DATED AS OF APRIL 21, 1998 AMONG DIAMOND BRANDS OPERATING CORP., as Borrower, THE LENDERS LISTED HEREIN, as Lenders, DLJ CAPITAL FUNDING, INC., as Syndication Agent, WELLS FARGO BANK, N.A., as Administrative Agent, and MORGAN STANLEY SENIOR FUNDING, INC., as Documentation Agent ARRANGED BY: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION ================================================================================ _______________________________ CREDIT AGREEMENT TABLE OF CONTENTS -----------------
PAGE SECTION 1. DEFINITIONS................................................... 3 1.1 Certain Defined Terms......................................... 3 1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement................................. 38 1.3 Other Definitional Provisions and Rules of Construction....... 39 SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS.................... 40 2.1 Commitments; Making of Loans; Notes........................... 40 2.2 Interest on the Loans......................................... 47 2.3 Fees.......................................................... 53 2.4 Repayments, Prepayments and Reductions in Revolving Loan Commitments; General Provisions Regarding Payments........... 54 2.5 Use of Proceeds............................................... 68 2.6 Special Provisions Governing Eurodollar Rate Loans............ 69 2.7 Increased Costs; Taxes; Capital Adequacy...................... 72 2.8 Obligation of Lenders and Issuing Lenders to Mitigate......... 77 2.9 Replacement of Lender......................................... 77 SECTION 3. LETTERS OF CREDIT............................................. 79 3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein....................................... 79 3.2 Letter of Credit Fees......................................... 85 3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit.................................................... 86 3.4 Obligations Absolute.......................................... 89 3.5 Indemnification; Nature of Issuing Lenders' Duties............ 90 3.6 Increased Costs and Taxes Relating to Letters of Credit....... 91 3.7 Conflict among Documents...................................... 92 3.8 Issuing Affiliate............................................. 92 SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT..................... 92 4.1 Conditions to Term Loans and Initial Revolving Loans and Swing Line Loans............................................. 93 4.2 Conditions to All Loans....................................... 102 4.3 Conditions to Letters of Credit............................... 103
(i)
PAGE ---- 4.4 Items to be Delivered After the Closing Date.................. 103 SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES...................... 104 5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries.................................... 104 5.2 Authorization of Borrowing, etc............................... 105 5.3 Financial Condition........................................... 107 5.4 No Material Adverse Change; No Restricted Junior Payments..... 108 5.5 Title to Properties; Liens; Real Property..................... 108 5.6 Litigation; Adverse Facts..................................... 109 5.7 Payment of Taxes.............................................. 109 5.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts........................................... 110 5.9 Governmental Regulation....................................... 110 5.10 Securities Activities......................................... 110 5.11 Employee Benefit Plans........................................ 111 5.12 Certain Fees.................................................. 111 5.13 Environmental Protection...................................... 112 5.14 Employee Matters.............................................. 113 5.15 Solvency...................................................... 113 5.16 Matters Relating to Collateral................................ 113 5.17 Disclosure.................................................... 114 SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS............................... 115 6.1 Financial Statements and Other Reports........................ 115 6.2 Legal Existence, etc.......................................... 122 6.3 Payment of Taxes and Claims; Tax Consolidation................ 122 6.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds............................. 123 6.5 Inspection Rights............................................. 124 6.6 Compliance with Laws, etc..................................... 124 6.7 Company's Actions Regarding Hazardous Materials Activities, Environmental Claims and Violations of Environmental Laws.... 124 6.8 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsidiaries and Future Subsidiaries; IP Collateral.................................. 127 6.9 Conforming Leasehold Interests; Matters Relating to Additional Real Property Collateral.......................... 128 6.10 Interest Rate Protection...................................... 131 6.11 Year 2000 Covenant............................................ 131 SECTION 7. COMPANY'S NEGATIVE COVENANTS.................................. 131 7.1 Indebtedness.................................................. 131 7.2 Liens and Related Matters..................................... 133
(ii)
PAGE ---- 7.3 Investments; Joint Ventures................................... 134 7.4 Contingent Obligations........................................ 135 7.5 Restricted Junior Payments.................................... 136 7.6 Financial Covenants........................................... 137 7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions................................................. 141 7.8 Consolidated Capital Expenditures............................. 143 7.9 Restriction on Leases......................................... 144 7.10 Sales and Lease-Backs......................................... 144 7.11 Sale or Discount of Receivables............................... 145 7.12 Transactions with Stockholders and Affiliates................. 145 7.13 Disposal of Subsidiary Equity................................. 145 7.14 Conduct of Business........................................... 145 7.15 Amendments of Documents Relating to Subordinated Indebtedness, Holdings Discount Debentures and Holdings Preferred Stock; Amendment to Recapitalization Agreement...................... 146 7.16 Fiscal Year................................................... 147 SECTION 8. EVENTS OF DEFAULT............................................. 147 8.1 Failure to Make Payments When Due............................. 147 8.2 Default in Other Agreements................................... 147 8.3 Breach of Certain Covenants................................... 148 8.4 Breach of Representations and Warranty........................ 148 8.5 Other Defaults Under Loan Documents........................... 148 8.6 Involuntary Bankruptcy; Appointment of Receiver, etc.......... 148 8.7 Voluntary Bankruptcy; Appointment of Receiver, etc............ 149 8.8 Judgments and Attachments..................................... 149 8.9 Dissolution................................................... 149 8.10 Employee Benefit Plans........................................ 149 8.11 Change in Control............................................. 150 8.12 Invalidity of Guaranties; Failure of Security; Repudiation of Obligations............................................... 150 8.13 Action Relating to Certain Subordinated Indebtedness of Company and Holdings Discount Debentures..................... 151 8.14 Failure to consummate the transactions under the Recapitalization Agreement................................... 151 SECTION 9. THE AGENTS.................................................... 152 9.1 Appointment................................................... 152 9.2 Powers and Duties; General Immunity........................... 154 9.3 Representations and Warranties; No Responsibility For Appraisal of Credit-worthiness............................... 156 9.4 Right to Indemnity............................................ 156 9.5 Successor Agents and Swing Line Lender........................ 157
(iii)
PAGE ---- 9.6 Collateral Documents and Guaranties........................... 158 SECTION 10. MISCELLANEOUS................................................. 159 10.1 Assignments and Participations in Loans and Letters of Credit. 159 10.2 Expenses...................................................... 162 10.3 Indemnity..................................................... 164 10.4 Set-Off; Security Interest in Deposit Accounts................ 165 10.5 Ratable Sharing............................................... 165 10.6 Amendments and Waivers........................................ 166 10.7 Independence of Covenants..................................... 168 10.8 Notices....................................................... 169 10.9 Survival of Representations, Warranties and Agreements........ 169 10.10 Failure or Indulgence Not Waiver; Remedies Cumulative......... 169 10.11 Marshalling; Payments Set Aside............................... 169 10.12 Severability.................................................. 170 10.13 Obligations Several; Independent Nature of Lenders' Rights.... 170 10.14 Headings...................................................... 170 10.15 Applicable Law................................................ 170 10.16 Successors and Assigns........................................ 171 10.17 Consent to Jurisdiction and Service of Process................ 171 10.18 Waiver of Jury Trial.......................................... 172 10.19 Confidentiality............................................... 172 10.20 Counterparts; Effectiveness................................... 173 Signature pages............................................... S-1
(iv) EXHIBITS I. FORM OF NOTICE OF BORROWING II. FORM OF NOTICE OF CONVERSION/CONTINUATION III. FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT IV. FORM OF TRANCHE A TERM NOTE V. FORM OF TRANCHE B TERM NOTE VI. FORM OF REVOLVING NOTE VII. FORM OF SWING LINE NOTE VIII. FORM OF COMPLIANCE CERTIFICATE IX. FORM OF OPINION OF COUNSEL TO COMPANY X. FORM OF OPINION OF O'MELVENY & MYERS LLP XI. FORM OF ASSIGNMENT AGREEMENT XII. FORM OF CERTIFICATE RE NON-BANK STATUS XIII. FORM OF COMPANY PLEDGE AGREEMENT XIV. FORM OF COMPANY SECURITY AGREEMENT XV. FORM OF COMPANY COPYRIGHT SECURITY AGREEMENT XVI. FORM OF COMPANY TRADEMARK SECURITY AGREEMENT XVII. FORM OF COMPANY PATENT SECURITY AGREEMENT XVIII. FORM OF SUBSIDIARY GUARANTY XIX. FORM OF SUBSIDIARY PLEDGE AGREEMENT XX. FORM OF SUBSIDIARY SECURITY AGREEMENT XXI. FORM OF SUBSIDIARY COPYRIGHT SECURITY AGREEMENT XXII. FORM OF SUBSIDIARY TRADEMARK SECURITY AGREEMENT XXIII. FORM OF SUBSIDIARY PATENT SECURITY AGREEMENT XXIV. FORM OF HOLDINGS PLEDGE AGREEMENT XXV. FORM OF HOLDINGS GUARANTY XXVI. FORM OF MORTGAGE XXVII. FORM OF SOLVENCY CERTIFICATE XXVIII. FORM OF OPINIONS OF LOCAL COUNSEL XXIX. FORM OF COLLATERAL ACCOUNT AGREEMENT (v) SCHEDULES 2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES 3.1 EXISTING LETTERS OF CREDIT 4.1C CLOSING DATE MORTGAGED PROPERTIES 5.1 SUBSIDIARIES OF COMPANY 5.5 REAL PROPERTY 5.6 LITIGATION 5.8 MATERIAL CONTRACTS 5.13 ENVIRONMENTAL MATTERS 7.1 CERTAIN EXISTING INDEBTEDNESS 7.2 CERTAIN EXISTING LIENS 7.3 CERTAIN EXISTING INVESTMENTS 7.4 CERTAIN EXISTING CONTINGENT OBLIGATIONS 7.12 AFFILIATE TRANSACTIONS (vi) DIAMOND BRANDS OPERATING CORP. CREDIT AGREEMENT This CREDIT AGREEMENT is dated as of April 21, 1998, and entered into by and among DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("COMPANY"), THE LENDERS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred to herein as a "LENDER" and collectively as "LENDERS"), DLJ CAPITAL FUNDING, INC. ("DLJ"), as syndication agent hereunder for Lenders (in such capacity, "SYNDICATION AGENT"), and WELLS FARGO BANK, N.A., as administrative agent for Lenders (in such capacity, "ADMINISTRATIVE AGENT"), and MORGAN STANLEY SENIOR FUNDING, INC., as documentation agent for Lenders (in such capacity, "DOCUMENTATION AGENT"). R E C I T A L S - - - - - - - - WHEREAS, Diamond Brands Incorporated, a Minnesota corporation ("Holdings"), proposes to effect a recapitalization (the "Recapitalization") by, among other things, redeeming all of its issued and outstanding common stock, $0.01 par value per share (the "Holdings Common Stock") (other than the Holdings Common Stock having an implied value, based on the per share price of the repurchase of Holdings Common Stock, of $15,000,000 (such shares of Holdings Common Stock not being redeemed, the "Retained Shares")) for an aggregate redemption price not exceeding $211,503,000 (subject to certain working capital and debt adjustments) from its existing shareholders (the "Existing Shareholders"); WHEREAS, the Retained Shares will represent 22.5% of the outstanding shares of Holdings Common Stock after giving effect to the full exercise of the Holdings Warrants (all capitalized terms used otherwise not defined shall have the meanings assigned to such terms in subsection 1.1) and will be continued to be held by certain of the Existing Shareholders; WHEREAS, in connection with the Recapitalization, Holdings established Company prior to the Closing Date; WHEREAS, in connection with the Recapitalization, Holdings proposes to (i) issue $84,000,000 aggregate principal amount at maturity of 12 7/8% Senior Discount Debentures due 2009 (the "Holdings Discount Debentures"), the aggregate gross proceeds of which will be $45,105,480; and (ii) issue 12% Paid-in-Kind Preferred Stock of Holdings par value $1,000 per share (the "Holdings Preferred Stock"), with a mandatory redemption date of October 15, 2009, to Seaver Kent- TPG Partners, L.P. and 1 Seaver Kent I Parallel, L.P. (collectively, the "Principals") and other investors for an aggregate purchase price equal to $47,000,000, together with warrants to purchase shares of Holdings Common Stock ("Holdings Warrants"); WHEREAS, the shares of Holdings Common Stock issuable upon the full exercise of the Holdings Warrants would represent 77.5% of the outstanding shares of Holdings Common Stock after giving effect to such issuance; WHEREAS, in connection with the Recapitalization, Holdings proposes to contribute all of its assets and the gross proceeds of the issuance of the Holdings Discount Debentures and the Holdings Preferred Stock to Company; WHEREAS, in connection with the Recapitalization, Company proposes to issue $100,000,000 in aggregate principal amount of 10 1/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"); WHEREAS, in connection with the Recapitalization, Holdings expects that it will repay substantially all of its and its Subsidiaries' funded debt obligations existing immediately prior to the consummation of the Recapitalization; WHEREAS, upon the consummation of the Recapitalization, Holdings will own all of the outstanding capital stock of Company and the Subsidiaries of Holdings prior to the Closing Date will become direct Subsidiaries of Company (the Recapitalization, the issuance of the Holdings Discount Debentures, the Holdings Preferred Stock and the Senior Subordinated Notes and the repayment of the prior Indebtedness of Holdings and its Subsidiaries being the "Transactions"); WHEREAS, Lenders have agreed to extend certain credit facilities to Company, the proceeds of which will be used by Company, together with the proceeds of the sale of the Senior Subordinated Notes, the Holdings Discount Debentures and the Holdings Preferred Stock to (i) cause the redemption of all of the issued and outstanding capital stock of Holdings (other than Retained Shares) for an aggregate redemption price not exceeding $211,503,000; (ii) to cause the payment in full of all of the existing indebtedness of Holdings and its Subsidiaries in an aggregate principal amount not exceeding $49,497,000, together with accrued interest and any prepayment penalties related thereto; (iii) to pay the transaction costs in connection with the Transactions (excluding those costs and expenses of the Existing Shareholders that will be paid by Holdings but which will result in a decrease in the redemption price to be paid to the Existing Shareholders by virtue of a working capital adjustment, the "Transaction Costs") in an aggregate amount not exceeding $12,500,000; and (iv) to provide for working capital and/or other general purposes of Company and its Subsidiaries; 2 WHEREAS, Company desires to secure all of the Obligations hereunder and under the other Loan Documents by granting to Administrative Agent, on behalf of Lenders, a first priority Lien on substantially all of its personal property and its real property including a pledge of all of the capital stock of its Domestic Subsidiaries and a pledge of 65% of the capital stock of its Foreign Subsidiaries that are owned by Company or a Domestic Subsidiary; WHEREAS, all of Company's Domestic Subsidiaries have agreed to guarantee the Obligations hereunder and under the other Loan Documents and each of the Domestic Subsidiaries has agreed to secure its guaranty by granting to Administrative Agent on behalf of Lenders, a first priority Lien on substantially all of its respective personal property and substantially all of its respective real property including a pledge of all of the capital stock of each of its Domestic Subsidiaries and 65% of the capital stock of each of its Foreign Subsidiaries that is owned by Company or a Domestic Subsidiary; and WHEREAS, Holdings has agreed to guarantee the Obligations hereunder and under the other Loan Documents and Holdings has further agreed to secure its guaranty by pledging to Administrative Agent on behalf of Lenders all of the capital stock of Company. NOW, THEREFORE, in consideration of the premises and the agreements, provisions and covenants herein contained, Company, Lenders, Syndication Agent and Administrative Agent agree as follows: SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. --------------------- The following terms used in this Agreement shall have the following meanings: "ADJUSTED EURODOLLAR RATE" means, for any Interest Rate Determination Date with respect to an Interest Period for a Eurodollar Rate Loan, the rate per annum obtained by dividing (i) the offered quotation to first class banks in the -------- London interbank eurodollar market by Administrative Agent for U.S. dollar deposits of amounts in same day funds comparable to the principal amount of the Eurodollar Rate Loan of Administrative Agent for which the Adjusted Eurodollar Rate is then being determined (which principal amount shall be deemed to be $1,000,000 in the event Administrative Agent is not making, converting to or continuing such a Eurodollar Rate Loan) with maturities comparable to such Interest Period as of approximately 11:00 a.m. (London time) on such Interest Rate Determination Date 3 by (ii) a percentage equal to 100% minus the stated maximum rate of all reserve - -- ----- requirements (including any marginal, emergency, supplemental, special or other reserves) applicable on such Interest Rate Determination Date to any member bank of the Federal Reserve System in respect of "Eurocurrency liabilities" as defined in Regulation D (or any successor category of liabilities under Regulation D). "ADMINISTRATIVE AGENT" has the meaning assigned to that term in the introduction to this Agreement and also means and includes any successor Administrative Agent appointed pursuant to subsection 9.5A. "AFFECTED LENDER" has the meaning assigned to that term in subsection 2.6C. "AFFILIATE", as applied to any Person, means any other Person directly or indirectly controlling, controlled by, or under common control with, that Person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlling", "controlled by" and "under common control with"), as applied to any Person, means (i) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that Person, whether through the ownership of voting securities or by contract or otherwise, or (ii) the ownership of more than 10% of the voting securities of that Person. "AFFILIATED FUND" means, with respect to any Lender that is a fund that invests in commercial loans, any other fund that invests in commercial loans and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "AGENTS" means, collectively, the Syndication Agent and Administrative Agent. "AGREEMENT" means this Credit Agreement dated as of April 21, 1998, as it may be amended, supplemented or otherwise modified from time to time. "APPLICABLE COMMITMENT FEE MARGIN" has the meaning assigned to such term in subsection 2.3A. "ARRANGER" means Donaldson, Lufkin & Jenrette Securities Corporation, as arranger of the credit facilities described herein. "ASSET SALE" means the sale by Company or any of its Subsidiaries to any Person other than Company or any of its wholly-owned Subsidiaries of (i) any of the equity ownership of any of Company's Subsidiaries (other than directors' qualifying shares), (ii) substantially all of the assets of any division or 4 line of business of Company or any of its Subsidiaries, or (iii) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries (other than (a) inventory sold in the ordinary course of business, (b) Cash Equivalents, (c) obsolete or surplus equipment sold for not in excess of $2,000,000 in the aggregate for each Fiscal Year but only to the extent of any Net Asset Sale Proceeds therefrom that are reinvested in any property, plant or equipment of Company or its Subsidiary, and (d) any such other assets to the extent that (i) the aggregate value of such assets sold in any single transaction or related series of transactions is equal to $1,000,000 or less and (ii) the aggregate value of such assets sold in any Fiscal Year is equal to $2,000,000 or less). "ASSIGNMENT AGREEMENT" means an Assignment Agreement in substantially the form of Exhibit XI annexed hereto. ---------- "BANKRUPTCY CODE" means Title 11 of the United States Code entitled "Bankruptcy", as now and hereafter in effect, or any successor statute. "BASE RATE" means, at any time, the higher of (x) the Prime Rate or (y) the rate which is 1/2 of 1% in excess of the Federal Funds Effective Rate. "BASE RATE LOANS" means Loans bearing interest at rates determined by reference to the Base Rate as provided in subsection 2.2A. "BASE RATE MARGIN" has the meaning assigned to such term in subsection 2.2A(i)(a)(I). "BUSINESS" means, at any time of determination, the business of Holdings and its Subsidiaries as conducted immediately prior to the Closing Date. Upon the consummation of the Transactions, Company and its Subsidiaries will engage in the Business and other activities to the extent permitted under subsection 7.14. "BUSINESS DAY" means for all purposes other than as covered by the definition of Eurodollar Business Day, any day excluding Saturday, Sunday and any day which is a legal holiday under the laws of New York, New York, Minneapolis, Minnesota, San Francisco, California or is a day on which banking institutions located in such state are authorized or required by law or other governmental action to close. "CAPITAL LEASE", as applied to any Person, means any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. 5 "CASH" means money, currency or a credit balance in a Deposit Account. "CASH EQUIVALENTS" means, as at any date of determination, (i) marketable securities (a) issued or directly and unconditionally guaranteed as to interest and principal by the United States Government or (b) issued by any agency of the United States the obligations of which are backed by the full faith and credit of the United States, in each case maturing within one year after such date; (ii) 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, in each case maturing within one year after such date and having, at the time of the acquisition thereof, the highest rating obtainable from either Standard & Poor's Ratings Group ("S&P") or Moody's Investors Service, Inc. ("MOODY'S"); (iii) commercial paper maturing no more than one year from the date of creation thereof and having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (a) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (b) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; and (v) shares of any money market mutual fund that (a) has at least 95% of its assets invested continuously in the types of investments referred to in clauses (i) and (ii) above, (b) has net assets of not less than $500,000,000, and (c) has the highest rating obtainable from either S&P or Moody's. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. (S)(S) 9601 et seq.), as amended. -- --- "CERTIFICATE RE NON-BANK STATUS" means a certificate substantially in the form of Exhibit XII annexed hereto delivered by a Lender to Administrative Agent ----------- pursuant to subsection 2.7B(iii). "CLOSING DATE" means April 21, 1998. "COLLATERAL" means, collectively, all of the real, personal and mixed property (including capital stock) in which Liens are purported to be granted pursuant to the Collateral Documents as security for the Obligations. "COLLATERAL DOCUMENTS" means the Holdings Pledge Agreement, the Company Copyright Security Agreement, the Company Pledge Agreement, the Company Security Agreement, the Company Patent Security Agreement, the Company Trademark Security 6 Agreement, the Subsidiary Pledge Agreements, the Subsidiary Security Agreements, the Subsidiary Copyright Security Agreements, the Subsidiary Patent Security Agreements, the Subsidiary Trademark Security Agreements, the Mortgages and all other instruments or documents delivered by any Loan Party pursuant to this Agreement or any of the other Loan Documents in order to grant to Administrative Agent, on behalf of Lenders, a Lien on any real, personal or mixed property of that Loan Party as security for the Obligations. "COMMERCIAL LETTER OF CREDIT" means any letter of credit payable on sight or similar instrument issued for the purpose of providing the primary payment mechanism in connection with the purchase of any materials, goods or services by Company or any of its Subsidiaries in the ordinary course of business of Company or such Subsidiary. "COMMITMENTS" means the commitments of Lenders to make Loans as set forth in subsection 2.1A. "COMPANY" has the meaning assigned to that term in the introduction to this Agreement. "COMPANY COPYRIGHT SECURITY AGREEMENT" means the Company Copyright Security Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit XV annexed hereto, as such Company Copyright Security ---------- Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "COMPANY PATENT SECURITY AGREEMENT" means the Company Patent Security Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit XVII annexed hereto, as such Company Patent Security ------------ Agreement may thereafter be amended, supplemented or otherwise modified from time to time. "COMPANY PLEDGE AGREEMENT" means the Company Pledge Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit ------- XIII annexed hereto, as such Company Pledge Agreement may thereafter be amended, - ---- supplemented or otherwise modified from time to time. "COMPANY SECURITY AGREEMENT" means the Company Security Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit XIV annexed hereto, as such Company Security Agreement may thereafter be - ----------- amended, supplemented or otherwise modified from time to time. "COMPANY TRADEMARK SECURITY AGREEMENT" means the Company Trademark Security Agreement executed and delivered by Company on the Closing Date, substantially in the form of Exhibit XVI annexed hereto, as such Company Trademark Security ----------- Agreement 7 may thereafter be amended, supplemented or otherwise modified from time to time. "COMPLIANCE CERTIFICATE" means a certificate substantially in the form of Exhibit VIII annexed hereto delivered to Administrative Agent and Lenders by - ------------ Company pursuant to subsection 6.1(iv). "CONFORMING LEASEHOLD INTEREST" means any Recorded Leasehold Interest as to which the lessor has agreed in writing for the benefit of Administrative Agent (which writing has been delivered to Administrative Agent), whether under the terms of the applicable lease, under the terms of a Landlord Consent and Estoppel, or otherwise, to the matters described in the definition of "Landlord Consent and Estoppel," which interest, if a subleasehold or sub-subleasehold interest, is not subject to any contrary restrictions contained in a superior lease or sublease. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the sum of (i) the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Leases which is capitalized on the consolidated balance sheet of Company and its Subsidiaries) by Company and its Subsidiaries during that period that, in conformity with GAAP, are included in "purchases of property, plant and equipment" or comparable items reflected in the consolidated statement of cash flows of Company and its Subsidiaries plus (ii) to the extent not covered by clause (i) of this ---- definition, the aggregate of all expenditures by Company and its Subsidiaries during that period to acquire (by purchase or otherwise) the business, property or fixed assets of any Person, or the stock or other evidence of beneficial ownership of any Person in accordance with the provisions of subsection 7.7(ii) that, as a result of such acquisition, becomes a Subsidiary of Company. "CONSOLIDATED CURRENT ASSETS" means, as at any date of determination, the total assets of Company and its Subsidiaries on a consolidated basis which may properly be classified as current assets in conformity with GAAP, excluding Cash and Cash Equivalents. "CONSOLIDATED CURRENT LIABILITIES" means, as at any date of determination, the total liabilities of Company and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP, excluding the current portion of any Indebtedness. "CONSOLIDATED EBITDA" means, for any period, without duplication, the sum of the amounts for such period of (i) Consolidated Net Income, (ii) Consolidated Interest Expense (excluding any interest income received by Company and its 8 Subsidiaries to the extent included in Consolidated Net Income), (iii) provisions for taxes based on income, (iv) total depreciation expense, (v) total amortization expense (including, without limitation, non-cash financing fees, goodwill, organization costs and expenses, inventory write-ups associated with purchase accounting pursuant to APB No. 16 or 17), and (vi) other non-cash items reducing Consolidated Net Income less other non-cash items increasing ---- Consolidated Net Income, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP. "CONSOLIDATED EXCESS CASH FLOW" means, for any period, an amount (if positive) equal to (i) the sum, without duplication, of the amounts for such period of (a) Consolidated EBITDA and (b) the Consolidated Working Capital Adjustment minus (ii) the sum, without duplication, of the amounts for such ----- period of (a) mandatory and scheduled repayments of Consolidated Total Debt (excluding repayments of Revolving Loans except to the extent the Revolving Loan Commitments are permanently reduced in connection with such repayments), (b) voluntary prepayments of Consolidated Total Debt permitted under this Agreement to the extent such Consolidated Total Debt is permanently reduced in connection with such repayments (excluding repayments of Revolving Loans except to the extent the Revolving Loan Commitments are permanently reduced in connection with such payments), (c) Consolidated Capital Expenditures paid in cash (without duplication, net of any proceeds of any related debt or equity financings with respect to such expenditures), (d) Consolidated Interest Expense, (e) the payment of or provision for current taxes of Holdings and its Subsidiaries on a consolidated basis, including those specified in the Tax Sharing Agreement, and payable in cash with respect to such period, and (f) fees and expenses incurred by Company relating to Hedge Agreements. "CONSOLIDATED FIXED CHARGES" means, for any period, the sum (without duplication) of the amounts for such period of (i) Consolidated Interest Expense, (ii) Consolidated Capital Expenditures, (iii) scheduled principal payments in respect of Consolidated Total Debt, and (iv) dividends made by Company to Holdings permitted under subsection 7.5(ii) to allow Holdings to make scheduled interest payments on the Holdings Discount Debentures after the fifth anniversary of the Closing Date, all of the foregoing as determined on a consolidated basis for Company and its Subsidiaries in conformity with GAAP; provided that for the purposes of calculating the Consolidated Fixed Charges in - -------- connection with the Minimum Fixed Charge Coverage Ratio in subsection 7.6A, Consolidated Capital Expenditures shall be reduced by the amount of any expenditures of Company or any of its Subsidiaries in connection with any Permitted Acquisition permitted under subsection 7.7(ii) to the extent that such expenditures are made at the time of such acquisition and constitute Consolidated Capital Expenditures and any and all 9 expenditures made in connection with such Permitted Acquisition thereafter shall constitute Consolidated Capital Expenditures for the purposes of the foregoing. "CONSOLIDATED INTEREST EXPENSE" means, for any period, total interest expense net of any interest income received by Company or any of its Subsidiaries (including that portion of interest expense attributable to Capital Leases in accordance with GAAP and capitalized interest) of Company and its Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of Company and its Subsidiaries, including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Interest Rate Agreements, but excluding, however, any amounts referred to in subsection 2.3 payable to Arranger and Agents on or before the Closing Date. "CONSOLIDATED LEVERAGE RATIO" means, for any period, the ratio of (a) Consolidated Total Debt to (b) Consolidated EBITDA for the consecutive four Fiscal Quarters ending on the last day of any Fiscal Quarter; provided that for -------- the calculation of the Consolidated Leverage Ratio under this Agreement for any purpose, to the extent that during the period for which calculation is being made, Company or any Subsidiary of Company has made a Permitted Acquisition permitted under subsection 7.7(ii) or has disposed of any assets or operations in an amount for any such transaction or series of related transactions exceeding $5,000,000, (i) such calculation shall be made as if such Permitted Acquisition or such disposition took place on the first day of such period on a pro forma basis for the portion of such period prior to the date of such - --- ----- Permitted Acquisition or after the date of such disposition and on an actual basis for the portion of such period after the date of such Permitted Acquisition or before the date of such disposition, (ii) such calculations shall be made after giving effect to the incurrence, assumption or repayment of any Indebtedness made in connection with such acquisition or disposition, and (iii) such calculation shall be made after giving retroactive effect to demonstrable net cost eliminations or net cost savings arising by virtue of such Permitted Acquisition (such as inflated employee owner compensation), which cost eliminations and cost savings are demonstrated in the Officer's Certificate required under subsection 7.7 and (A) are consistent with standards and practices for pro forma presentation pursuant to Regulation S-X as promulgated --- ----- by the Securities and Exchange Commission and are reviewed by Company's independent accountants, or (B) are reasonably satisfactory to Requisite Lenders. With respect to any such Permitted Acquisition, such pro forma --- ----- calculations shall be based on the audited or reviewed financial results delivered in compliance with clause (d)(3) of subsection 7.7(ii). "CONSOLIDATED NET INCOME" means, for any period, the net income (or loss) of Company and its Subsidiaries on a 10 consolidated basis for such period taken as a single accounting period determined in conformity with GAAP; provided that there shall be excluded (i) -------- the income (or loss) of any Person (other than a Subsidiary of Company) in which any other Person (other than Company or any of its Subsidiaries) has a joint interest, except to the extent of the amount of dividends or other distributions actually paid to Company or any of its Subsidiaries by such Person during such period, (ii) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of Company or is merged into or consolidated with Company or any of its Subsidiaries or that Person's assets are acquired by Company or any of its Subsidiaries, (iii) the income of any Subsidiary of Company to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that income is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary, (iv) any after-tax gains or losses attributable to Asset Sales or returned surplus assets of any Pension Plan, and (v) (to the extent not included in clauses (i) through (iv) above) any net extraordinary gains or net non-cash extraordinary losses. "CONSOLIDATED RENTAL PAYMENTS" means, for any period, the aggregate amount of all rents paid or payable by Company and its Subsidiaries on a consolidated basis during that period under all Capital Leases and Operating Leases to which Company or any of its Subsidiaries is a party as lessee. "CONSOLIDATED TOTAL DEBT" means, as at any date of determination, the aggregate stated balance sheet amount of all Indebtedness of Company and its Subsidiaries, determined on a consolidated basis in accordance with GAAP. "CONSOLIDATED WORKING CAPITAL" means, as at any date of determination, the excess (or deficit) of Consolidated Current Assets over Consolidated Current Liabilities. "CONSOLIDATED WORKING CAPITAL ADJUSTMENT" means, for any period on a consolidated basis, the amount (which may be a negative number) by which Consolidated Working Capital as of the beginning of such period exceeds (or is less than) Consolidated Working Capital as of the end of such period. "CONTINGENT OBLIGATION", as applied to any Person, means any direct or indirect liability, contingent or otherwise, of that Person (i) with respect to any Indebtedness, lease, dividend or other obligation of another if the primary purpose or intent thereof by the Person incurring the Contingent Obligation is to provide assurance to the obligee of such obligation of another that such obligation of another will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such obligation will be 11 protected (in whole or in part) against loss in respect thereof, (ii) with respect to any letter of credit issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings, or (iii) under Hedge Agreements. Contingent Obligations shall include (a) the direct or indirect guaranty, endorsement (otherwise than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of another, (b) the obligation to make take-or-pay or similar payments if required regardless of non-performance by any other party or parties to an agreement, and (c) any liability of such Person for the obligation of another through any agreement (contingent or otherwise) (X) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of loans, advances, stock purchases, capital contributions or otherwise) or (Y) to maintain the solvency or any balance sheet item, level of income or financial condition of another if, in the case of any agreement described under subclauses (X) or (Y) of this sentence, the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if less, the amount to which such Contingent Obligation is specifically limited. "CONTRACTUAL OBLIGATION", as applied to any Person, means any provision of any Security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement or other instrument to which that Person is a party or by which it or any of its properties is bound or to which it or any of its properties is subject. "CURRENCY AGREEMENT" means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "COMMODITY AGREEMENT" means any commodity swap agreement, futures contract, option contract or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "DEPOSIT ACCOUNT" means a demand, time, savings, passbook or like account with a bank, savings and loan association, credit union or like organization, other than an account evidenced by a negotiable certificate of deposit. "DLJ" has the meaning assigned to that term in the introduction to this Agreement. "DOLLARS" and the sign "$" mean the lawful money of the United States of America. 12 "DOMESTIC SUBSIDIARY" means a Subsidiary organized under the laws of the United States or any state or territory thereof or the District of Columbia. "ELIGIBLE ASSIGNEE" means (A) (i) a commercial bank organized under the laws of the United States or any state thereof; (ii) a savings and loan association or savings bank organized under the laws of the United States or any state thereof; (iii) a commercial bank organized under the laws of any other country or a political subdivision thereof; provided that such bank is acting -------- through a branch or agency located in the United States; and (iv) any other entity which is an "accredited investor" (as defined in Regulation D under the Securities Act) which extends credit or buys loans as one of its businesses including insurance companies, mutual funds and lease financing companies; and (B) any Lender and any Affiliate of any Lender; provided that no Affiliate of -------- Company shall be an Eligible Assignee. Notwithstanding the foregoing, no direct competitor of Holdings or any of its Subsidiaries should be an Eligible Assignee for purposes of this Agreement. "EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as defined in Section 3(3) of ERISA which is or was maintained or contributed to by Company, any of its Subsidiaries or any of their respective ERISA Affiliates. "ENVIRONMENTAL CLAIM" means any investigation, notice, notice of violation (including, without limitation, any notice of violation of or non-compliance with the terms of any permit, license, or other required approval from a governmental agency or notice of a failure to obtain any such permit, license, or other required approval), claim, action, suit, proceeding, demand, abatement order or other order or directive (conditional or otherwise), by any governmental authority or any other Person, arising (i) pursuant to or in connection with any actual or alleged violation of any Environmental Law, (ii) in connection with any Hazardous Materials or any actual or alleged Hazardous Materials Activity, or (iii) in connection with any actual or alleged damage, injury, threat or harm to health, safety, natural resources or the environment. "ENVIRONMENTAL LAWS" means any and all current or future statutes, ordinances, orders, rules, regulations, judgments, Governmental Authorizations, or any other requirements of governmental authorities relating to (i) environmental matters, including those relating to any Hazardous Materials Activity, (ii) the generation, use, storage, transportation or disposal of Hazardous Materials, or (iii) occupational safety and health, industrial hygiene, land use or the protection of human, plant or animal health or welfare, in any manner applicable to Company or any of its Subsidiaries or any Facility, including CERCLA, the Hazardous Materials Transportation Act (49 U.S.C. (S) 1801 et seq.), the Resource Conservation and Recovery Act (42 - -- --- 13 U.S.C. (S) 6901 et seq.), the Federal Water Pollution Control Act (33 U.S.C. (S) -- --- 1251 et seq.), the Clean Air Act (42 U.S.C. (S) 7401 et seq.), the Toxic -- --- -- --- Substances Control Act (15 U.S.C. (S) 2601 et seq.), the Federal Insecticide, -- --- Fungicide and Rodenticide Act (7 U.S.C. (S)136 et seq.), the Occupational Safety -- --- and Health Act (29 U.S.C. (S) 651 et seq.), the Oil Pollution Act (33 U.S.C. (S) -- --- 2701 et seq) and the Emergency Planning and Community Right-to-Know Act (42 ------ U.S.C. (S) 11001 et seq.)("EPCRA"), the Maine Toxics Use Reduction Act (38 Maine -- --- Rev'd Stat (S) 2303, et seq.), each as amended or supplemented, any analogous ------ present or future state or local statutes or laws, and any regulations promulgated pursuant to any of the foregoing. "EQUITY DISTRIBUTIONS" has the meaning assigned to such term in subsection 4.1.F(iii). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor thereto. "ERISA AFFILIATE" means, as applied to any Person, (i) any corporation which is a member of a controlled group of corporations within the meaning of Section 414(b) of the Internal Revenue Code of which that Person is a member; (ii) any trade or business (whether or not incorporated) which is a member of a group of trades or businesses under common control within the meaning of Section 414(c) of the Internal Revenue Code of which that Person is a member; and (iii) any member of an affiliated service group within the meaning of Section 414(m) or (o) of the Internal Revenue Code of which that Person, any corporation described in clause (i) above or any trade or business described in clause (ii) above is a member. Any former ERISA Affiliate of Company or any of its Subsidiaries shall continue to be considered an ERISA Affiliate of Company or such Subsidiary within the meaning of this definition with respect to the period such entity was an ERISA Affiliate of Company or such Subsidiary and with respect to liabilities arising after such period for which Company or such Subsidiary could be liable under the Internal Revenue Code or ERISA. "ERISA EVENT" means (i) a "reportable event" within the meaning of Section 4043 of ERISA and the regulations issued thereunder with respect to any Pension Plan (excluding those for which the provision for 30-day notice to the PBGC has been waived by regulation); (ii) the failure to meet the minimum funding standard of Section 412 of the Internal Revenue Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(d) of the Internal Revenue Code) or the failure to make by its due date a required installment under Section 412(m) of the Internal Revenue Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (iii) the provision by the administrator of any Pension Plan pursuant to Section 4041(a)(2) of ERISA of a notice of 14 intent to terminate such plan in a distress termination described in Section 4041(c) of ERISA; (iv) the withdrawal by Company, any of its Subsidiaries or any of their respective ERISA Affiliates from any Pension Plan with two or more contributing sponsors or the termination of any such Pension Plan resulting in liability pursuant to Section 4063 or 4064 of ERISA; (v) the institution by the PBGC of proceedings to terminate any Pension Plan, or the occurrence of any event or condition which might constitute grounds under ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (vi) the imposition of liability on Company, any of its Subsidiaries or any of their respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (vii) the withdrawal of Company, any of its Subsidiaries or any of their respective ERISA Affiliates in a complete or partial withdrawal (within the meaning of Sections 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability therefor, or the receipt by Company, any of its Subsidiaries or any of their respective ERISA Affiliates of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA, or that it intends to terminate or has terminated under Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or omission which could give rise to the imposition on Company, any of its Subsidiaries or any of their respective ERISA Affiliates of fines, penalties, taxes or related charges under Chapter 43 of the Internal Revenue Code or under Section 409, Section 502(c), (i) or (l), or Section 4071 of ERISA in respect of any Employee Benefit Plan which, individually or in the aggregate, will have a reasonable possibility of giving rise to a Material Adverse Effect; (ix) the assertion of a material claim (other than routine claims for benefits) against any Employee Benefit Plan other than a Multiemployer Plan or the assets thereof which could result in a claim against Company or any of its Subsidiaries, or against Company, any of its Subsidiaries or any of their respective ERISA Affiliates in connection with any Employee Benefit Plan; (x) receipt from the Internal Revenue Service of notice of the failure of any Pension Plan (or any other Employee Benefit Plan intended to be qualified under Section 401(a) of the Internal Revenue Code) to qualify under Section 401(a) of the Internal Revenue Code, or the failure of any trust forming part of any Pension Plan to qualify for exemption from taxation under Section 501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or pursuant to ERISA with respect to any Pension Plan. "EURODOLLAR BUSINESS DAY" means any day (i) excluding Saturday, Sunday and any day that is a legal holiday under the laws of the State of California or is a day on which banking institutions located in such State are authorized or required by law, or other governmental action to close and (ii) on which 15 commercial banks are open for trading in Dollar deposits in the London interbank eurodollar market. "EURODOLLAR RATE LOANS" means Loans bearing interest at rates determined by reference to the Adjusted Eurodollar Rate as provided in subsection 2.2A. "EURODOLLAR RATE MARGIN" has the meaning assigned to such term in subsection 2.2A(i)(a)(II). "EVENT OF DEFAULT" means each of the events set forth in Section 8. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute. "EXISTING CREDIT AGREEMENT" means that certain Credit Agreement dated as of March 2, 1995 by and between Holdings and First Bank National Association, as amended, supplemented or otherwise modified prior to the Closing Date. "EXISTING INDEBTEDNESS" means all Indebtedness of Holdings and its Subsidiaries outstanding under (i) the Existing Credit Agreement, (ii) Existing IRB Loan Agreement, (iii) the Existing Tax Increment Financing Agreement and (iv) Existing Smart E Bond Loan Agreement. "EXISTING LETTERS OF CREDIT" has the meaning assigned to such term in subsection 3.1B(v). "EXISTING SHAREHOLDERS" has the meaning assigned to such term in the recitals to this Agreement. "EXISTING IRB LOAN AGREEMENT" means that certain Loan Agreement dated as of December 1, 1986, by and between Holdings and City of Cloquet, as amended, supplemented or otherwise modified prior to the Closing Date. "EXISTING SMART E BOND LOAN AGREEMENT" means that certain Loan Agreement dated as of November 20, 1990, by and among Forster Mfg., Key Bank of Maine, Shawmut Bank and the Finance Authority of Maine, as amended, supplemented or otherwise modified prior to the Closing Date. "EXISTING TAX INCREMENT FINANCING AGREEMENT" means that certain Credit Agreement dated as of December 15, 1990 by and between Key Bank of Maine and Forster Mfg., as amended, supplemented or otherwise modified prior to the Closing Date. "FACILITIES" means any and all real property (including all buildings, fixtures or other improvements located thereon) now, hereafter or heretofore owned, leased, operated or used by 16 Company or any of its Subsidiaries or any of their respective predecessors. "FEDERAL FUNDS EFFECTIVE RATE" means, 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 Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent. "FINANCIAL PLAN" has the meaning assigned to that term in subsection 6.1(xiii). "FIRST PRIORITY" means, with respect to any Lien purported to be created in any Collateral pursuant to any Collateral Document, that (i) such Lien has priority over any other Lien on such Collateral (other than Permitted Encumbrances and Liens permitted pursuant to subsection 7.2A) and (ii) such Lien is the only Lien (other than Permitted Encumbrances and Liens permitted pursuant to subsection 7.2A) to which such Collateral is subject. "FISCAL QUARTER" means a fiscal quarter of any Fiscal Year. "FISCAL YEAR" means the fiscal year of Holdings and its Subsidiaries ending on December 31 of each calendar year. "FLOOD HAZARD PROPERTY" means a Mortgaged Property located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards. "FOREIGN SUBSIDIARY" means any Subsidiary that is not a Domestic Subsidiary. "FORSTER MFG." means Forster Mfg. Co., Inc., a Maine corporation and (i) prior to the Closing Date and the consummation of the Recapitalization, a direct wholly-owned Subsidiary of Holdings, and (ii) upon the consummation of the Recapitalization, a direct wholly-owned Subsidiary of Company. "FUNDING AND PAYMENT OFFICE" means (i) the office of Administrative Agent and Swing Line Lender located at 201 Third Street, 8th Floor, San Francisco, California 94103, or (ii) such other office of Administrative Agent and Swing Line Lender as may from time to time hereafter be designated as such in a written notice delivered by Administrative Agent and Swing Line Lender to Company and each Lender. 17 "FUNDING DATE" means the date of the funding of a Loan. "GAAP" means, subject to the limitations on the application thereof set forth in subsection 1.2, generally accepted accounting principles set forth in opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, in each case as the same are applicable to the circumstances as of the date of determination. "GOVERNMENTAL AUTHORIZATION" means any permit, license, authorization, plan, directive, consent order or consent decree of or from any federal, state or local governmental authority, agency or court. "GUARANTIES" means the Holdings Guaranty and the Subsidiary Guaranty. "HAZARDOUS MATERIALS" means (i) any chemical, material or substance at any time defined as or included in the definition of "hazardous substances", "hazardous wastes", "hazardous materials", "extremely hazardous waste", acutely hazardous waste", "radioactive waste", "biohazardous waste", "pollutant", "toxic pollutant", "contaminant", "restricted hazardous waste", "infectious waste", "toxic substances", or any other term or expression intended to define, list or classify substances by reason of properties harmful to health, safety or the indoor or outdoor environment (including harmful properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or "EP toxicity" or words of similar import under any applicable Environmental Laws); (ii) any oil, petroleum, petroleum fraction or petroleum derived substance; (iii) any drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (iv) any flammable substances or explosives; (v) any radioactive materials including radon; (vi) any asbestos- containing or lead-containing materials; (vii) urea formaldehyde foam insulation; (viii) electrical equipment which contains any oil or dielectric fluid containing polychlorinated biphenyls; (ix) pesticides; (x) any underground storage tank; (xi) any electromagnetic fields and (xii) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or which may or could pose a hazard to the health and safety of the owners, occupants or any Persons in the vicinity of any Facility or to the indoor or outdoor environment. "HAZARDOUS MATERIALS ACTIVITY" means any past, current, proposed or threatened activity, event or occurrence involving any Hazardous Materials, including the use, manufacture, 18 possession, storage, holding, presence, existence, location, Release, threatened Release, discharge, placement, generation, transportation, processing, construction, treatment, abatement, removal, remediation, disposal, disposition or handling of any Hazardous Materials, and any corrective action or response action with respect to any of the foregoing. "HEDGE AGREEMENT" means an Interest Rate Agreement, a Currency Agreement or a Commodity Agreement designed to hedge against fluctuations in interest rates, currency values or commodity prices, respectively, entered into by Company or any of its Subsidiaries in the ordinary course of business and not for purposes of speculation. "HOLDINGS" has the meaning assigned to such term in the recitals to this Agreement. "HOLDINGS CERTIFICATE OF DESIGNATION" means the Certificate of the Powers, Designations, Preferences and Rights of the Series A Cummulative Preferred Stock, par value $.01 per share, of Holdings Preferred Stock, as in effect on the Closing Date and as such Holdings Certificate of Designation may be amended from time to time to the extent permitted under subsection 7.15. "HOLDINGS COMMON STOCK" has the meaning assigned to such term in the recitals to this Agreement. "HOLDINGS GUARANTY" means the Holdings Guaranty executed and delivered by Holdings on the Closing Date, substantially in the form of Exhibit XXV annexed ----------- hereto, as such Holdings Guaranty may be amended, supplemented or otherwise modified from time to time. "HOLDINGS DISCOUNT DEBENTURES" has the meaning assigned to such term in the recitals to this Agreement and shall also include any notes evidencing such Indebtedness incurred to refinance the Holdings Discount Debentures to the extent permitted under subsection 7.1(viii). "HOLDINGS DISCOUNT DEBENTURES INDENTURE" means the Indenture dated as of April 21 between Holdings and State Street Bank and Trust Company, as trustee, in respect of the Holdings Discount Debentures, as in effect on the Closing Date and as such Holdings Discount Debentures Indenture may be amended from time to time to the extent permitted under subsection 7.15. "Holdings Discount Debentures Indenture" shall also include any other indenture or agreement in respect of any Indebtedness incurred to refinance the Holdings Discount Debentures pursuant to subsection 7.1(viii). 19 "HOLDINGS DISCOUNT DEBENTURES MATERIAL " means the Confidential Offering Memorandum dated April 15, 1998 relating to the Holdings Discount Debentures. "HOLDINGS PLEDGE AGREEMENT" means the Pledge Agreement executed and delivered by Holdings on the Closing Date, substantially in the form of Exhibit ------- XXIV annexed hereto, as such Holdings Pledge Agreement may be amended, - ---- supplemented or otherwise modified from time to time. "HOLDINGS PREFERRED STOCK" has the meaning assigned to such term in the recitals to this Agreement. "HOLDINGS WARRANTS" has the meaning assigned to such term in the recitals to this Agreement. "INDEBTEDNESS", as applied to any Person, means (i) all indebtedness for borrowed money, (ii) that portion of obligations with respect to Capital Leases that is properly classified as a liability on a balance sheet in conformity with GAAP, (iii) notes payable and drafts accepted representing extensions of credit whether or not representing obligations for borrowed money, (iv) any obligation owed for all or any part of the deferred purchase price of property or services (excluding any such obligations incurred under ERISA), which purchase price is (a) due more than six months from the date of incurrence of the obligation in respect thereof or (b) evidenced by a note or similar written instrument, and (v) all indebtedness secured by any Lien on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is nonrecourse to the credit of that Person. Obligations under Interest Rate Agreements, Currency Agreements and Commodity Agreements constitute (X) in the case of Hedge Agreements, Contingent Obligations, and (Y) in all other cases, Investments, and in neither case constitute Indebtedness. "INDEMNITEE" has the meaning assigned to that term in subsection 10.3. "INTELLECTUAL PROPERTY" means all patents, trademarks, tradenames, copyrights, technology, know-how and processes used in or necessary for the conduct of the business of Company and its Subsidiaries (as conducted on or after the date hereof by Holdings and its Subsidiaries) that are material to the condition (financial or otherwise), business or operations of Company and its Subsidiaries, taken as a whole. "INTEREST PAYMENT DATE" means (i) with respect to any Base Rate Loan, the last day of each March, June, September and December of each year, commencing on the first such date to occur after the Closing Date, and (ii) with respect to any Eurodollar Rate Loan, the last day of each Interest Period applicable to 20 such Loan; provided that in the case of each Interest Period of longer than -------- three months "Interest Payment Date" shall also include each date that is three months, or a multiple thereof, after the commencement of such Interest Period. "INTEREST PERIOD" has the meaning assigned to that term in subsection 2.2B. "INTEREST RATE AGREEMENT" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement to which Company or any of its Subsidiaries is a party. "INTEREST RATE DETERMINATION DATE" means, with respect to any Interest Period, the second Eurodollar Business Day prior to the first day of such Interest Period. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended to the date hereof and from time to time hereafter, and any successor statute. "INVENTORY" means, with respect to any Person as of any date of determination, all goods, merchandise and other personal property which are then held by such Person for sale or lease, including raw materials and work in process. "INVESTMENT" means (i) any direct or indirect purchase or other acquisition by Company or any of its Subsidiaries of, or of a beneficial interest in, any Securities of any other Person (other than a Person that, prior to such purchase or acquisition, was a Subsidiary of Company), (ii) any direct or indirect redemption, retirement, purchase or other acquisition for value, by any Subsidiary of Company from any Person other than Company or any of its Subsidiaries, of any equity Securities of such Subsidiary, (iii) any direct or indirect loan, advance (other than advances to employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by Company or any of its Subsidiaries to any other Person (other than to a wholly-owned Subsidiary of Company (in the case of Company) or to Company (in the case of Subsidiaries of Company)), including all indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business, or (iv) Interest Rate Agreements, Currency Agreements or Commodity Agreements not constituting Hedge Agreements. The amount of any Investment shall be the original cost of such Investment plus ---- the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "IP COLLATERAL" means, collectively, the Collateral under the Company Copyright Security Agreement, the Company 21 Patent Security Agreement, the Company Trademark Security Agreement, the Subsidiary Copyright Security Agreements, the Subsidiary Patent Security Agreements, and the Subsidiary Trademark Security Agreements. "IPO EVENT" means the public offering of Holdings Common Stock for an aggregate offering price of no less than $25,000,000 in a single transaction. "ISSUE" means, with respect to any Letter of Credit, to issue or to extend the expiry of, or to renew or increase the amount of, such Letter of Credit; and the terms "ISSUED," "ISSUING" and "ISSUANCE" have corresponding meanings. "ISSUING LENDER" means, with respect to any Letter of Credit, the Revolving Lender that agrees or is otherwise obligated to issue such Letter of Credit, determined as provided in subsection 3.1B(ii). "JOINT VENTURE" means a joint venture, partnership or other similar arrangement, whether in corporate, partnership or other legal form; provided -------- that in no event shall any corporate Subsidiary of any Person be considered to be a Joint Venture to which such Person is a party. "LANDLORD CONSENT AND ESTOPPEL" means, with respect to any Leasehold Property, a letter, certificate or other instrument in writing from the lessor under the related lease, reasonably satisfactory in form and substance to Syndication Agent (on or prior to the Closing Date) or Administrative Agent (after the Closing Date), pursuant to which such lessor agrees, for the benefit of Administrative Agent, (i) that without any further consent of such lessor or any further action on the part of the Loan Party holding such Leasehold Property, such Leasehold Property may be encumbered pursuant to a Mortgage and may be assigned to the purchaser at a foreclosure sale or in a transfer in lieu of such a sale (and to a subsequent third party assignee if Administrative Agent, any Lender, or an Affiliate of either so acquires such Leasehold Property), (ii) that such lessor shall not terminate such lease as a result of a default by such Loan Party thereunder without first giving Administrative Agent notice of such default and at least 30 days (or, if such default cannot reasonably be cured by Administrative Agent within such period, such longer period as may reasonably be required) to cure such default, and (iii) to such other matters relating to such Leasehold Property as Administrative Agent may reasonably request. "L/C AMENDMENT APPLICATION" means an application form for amendment of outstanding standby and commercial letters of credit as shall at any time be in use at the Issuing Lender, as the Issuing Lender shall request. 22 "L/C-RELATED DOCUMENTS" means the Letters of Credit, the Notice of Issuance of Letter of Credit, the L/C Amendment Applications and any other document relating to any Letter of Credit, including any of the Issuing Lender's standard form documents for letter of credit issuances. "LEASEHOLD PROPERTY" means any leasehold interest of any Loan Party as lessee under any lease of real property located in the United States of America. "LENDER" and "LENDERS" means the persons identified as "Lenders" and listed on the signature pages of this Agreement, together with their successors and permitted assigns pursuant to subsection 10.1, and the term "Lenders" shall include Swing Line Lender unless the context otherwise requires. "LETTER OF CREDIT" or "LETTERS OF CREDIT" means Commercial Letters of Credit and Standby Letters of Credit issued or to be issued by Issuing Lenders for the account of Company or any wholly-owned Subsidiary of Company pursuant to subsection 3.1. "LETTER OF CREDIT USAGE" means, as at any date of determination, the sum of (i) the maximum aggregate amount which is or at any time thereafter may become available for drawing under all Letters of Credit then outstanding plus (ii) the ---- aggregate amount of all drawings under Letters of Credit honored by Issuing Lenders and not theretofore reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B). "LIEN" means any lien, mortgage, pledge, assignment, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give any security interest) and any option, trust or other preferential arrangement having the practical effect of any of the foregoing. "LOAN" or "LOANS" means one or more of the Tranche A Term Loans, Tranche B Term Loans, Revolving Loans or Swing Line Loans or any combination thereof. "LOAN DOCUMENTS" means this Agreement, the Notes, the Letters of Credit (and any applications for, or reimbursement agreements or other documents or certificates executed by Company in favor of an Issuing Lender relating to, the Letters of Credit), the Guaranties and the Collateral Documents. "LOAN PARTY" means each of Company, Holdings and any of Company's Subsidiaries from time to time executing a Loan Document, and "LOAN PARTIES" means all such Persons, collectively. 23 "MARGIN DETERMINATION CERTIFICATE" means an Officer's Certificate of Company delivered pursuant to 6.1(iv) setting forth in reasonable detail the Consolidated Leverage Ratio for the four-Fiscal Quarter period ending as of the last day of the Fiscal Quarter during which such Officer's Certificate is delivered. "MARGIN STOCK" has the meaning assigned to that term in Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time. "MATERIAL ADVERSE EFFECT" means (i) a material adverse effect on the business, properties, financial condition, results of operation, assets, prospects of the Business or the liabilities of Holdings and its Subsidiaries, taken as a whole; provided that, in no event shall the foregoing apply with -------- respect to any matter which would not reasonably be likely to result in a net cost in excess of $5,000,000 following the Closing Date (excluding any cost reflected in the Working Capital Adjustment (as such term is defined in the Recapitalization Agreement)), or (ii) a material impairment of the operations of the Business or the right and ability of any Loan Party to perform, or of Administrative Agent or any Lender to enforce, the Obligations (other than any such impairment resulting from Administrative Agent's or any such Lender's actions or failure to act). "MATERIAL CONTRACT" means any contract or other arrangement to which Company or any of its Subsidiaries is a party (other than the Loan Documents) for which breach, nonperformance, cancellation or failure to renew could have a Material Adverse Effect. "MATERIAL LEASEHOLD PROPERTY" means a Leasehold Property reasonably determined by Syndication Agent (on or prior to the Closing Date) or Administrative Agent (after the Closing Date) to be of material value as Collateral or of material importance to the operations of Company or any of its Subsidiaries. "MORTGAGE" means (i) a security instrument (whether designated as a deed of trust or a mortgage or by any similar title) executed and delivered by any Loan Party, substantially in the form of Exhibit XXVI annexed hereto or in such other ------------ form as may be approved by Syndication Agent (on or prior to the Closing Date) or Administrative Agent (after the Closing Date) in its sole discretion, in each case with such changes thereto as may be recommended by Administrative Agent's local counsel based on local laws or customary local mortgage or deed of trust practices, or (ii) at the option of Administrative Agent, in the case of an Additional Mortgaged Property (as defined in subsection 6.9), an amendment to an existing Mortgage, in form satisfactory to Administrative Agent, adding such Additional Mortgaged Property to the Real Property Assets encumbered by such 24 existing Mortgage, in either case as such security instrument or amendment may be amended, supplemented or otherwise modified from time to time. "MORTGAGES" means all such instruments, including any Additional Mortgages (as defined in subsection 6.9), collectively. "MORTGAGED PROPERTY" means a Closing Date Mortgaged Property (as defined in subsection 4.1C) or an Additional Mortgaged Property (as defined in subsection 6.9). "MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is a "multiemployer plan" as defined in Section 3(37) of ERISA. "NET ASSET SALE PROCEEDS" means, with respect to any Asset Sale, Cash payments (including any Cash received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) received from such Asset Sale, net of any bona fide direct costs or expenses incurred in connection with such Asset Sale, including (i) income taxes reasonably estimated to be actually payable within two years of the date of such Asset Sale as a result of any gain recognized in connection with such Asset Sale, (ii) payment of the outstanding principal amount of, premium or penalty, if any, and interest on any Indebtedness (other than the Loans) that is secured by a Lien on the stock or assets in question and that is required to be repaid under the terms thereof, or by applicable law, as a result of such Asset Sale, (iii) all distributions and other payments required to be and actually made to minority interest holders in Subsidiaries of Company or Joint Ventures to which Company or any of its Subsidiaries is a party as a result of such Asset Sale, and (iv) any amounts held in an escrow account as a reserve against any liabilities of Company or its Subsidiaries associated with the asset disposed in such Asset Sale. "NET INSURANCE/CONDEMNATION PROCEEDS" means any Cash payments or proceeds received by Company or any of its Subsidiaries (i) under any business interruption or casualty insurance policy in respect of a covered loss thereunder or (ii) as a result of the taking of any assets of Company or any of its Subsidiaries by any Person pursuant to the power of eminent domain, condemnation or otherwise, or pursuant to a sale of any such assets to a purchaser with such power under threat of such a taking, in each case net of any actual and reasonable documented costs incurred by Company or any of its Subsidiaries in connection with the adjustment or settlement of any claims of Company or such Subsidiary in respect thereof. "NOTES" means one or more of the Tranche A Term Notes, Tranche B Term Notes, Revolving Notes or Swing Line Notes or any combination thereof. 25 "NOTICE OF BORROWING" means a notice substantially in the form of Exhibit I --------- annexed hereto delivered by Company to Administrative Agent pursuant to subsection 2.1B with respect to a proposed borrowing. "NOTICE OF CONVERSION/CONTINUATION" means a notice substantially in the form of Exhibit II annexed hereto delivered by Company to Administrative Agent ---------- pursuant to subsection 2.2D with respect to a proposed conversion or continuation of the applicable basis for determining the interest rate with respect to the Loans specified therein. "NOTICE OF ISSUANCE OF LETTER OF CREDIT" means a notice substantially in the form of Exhibit III annexed hereto delivered by Company to Administrative ----------- Agent pursuant to subsection 3.1B(i) with respect to the proposed issuance of a Letter of Credit. "OBLIGATIONS" means all obligations of every nature of each Loan Party from time to time owed to Arranger, Agents, Lenders or any of them under the Loan Documents, whether for principal, interest, reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnification or otherwise. "OFFICER'S CERTIFICATE" means, as applied to any corporation, a certificate executed on behalf of such corporation by its president, its chief financial officer (or if there is no chief financial officer, its chief accounting officer) or any one of its executive vice presidents; provided that every -------- Officer's Certificate with respect to the compliance with a condition precedent to the making of any Loans hereunder shall include (i) a statement that the officer or officers making or giving such Officer's Certificate have read such condition and any definitions or other provisions contained in this Agreement relating thereto, (ii) a statement that, in the opinion of the signers, they have made or have caused to be made such examination or investigation as is necessary to enable them to express an informed opinion as to whether or not such condition has been complied with, and (iii) a statement as to whether, in the opinion of the signers, such condition has been complied with. "OPERATING LEASE" means, as applied to any Person, any lease (including leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is not a Capital Lease in accordance with GAAP other than any such lease under which that Person is the lessor. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto. "PENSION PLAN" means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to Section 412 of the Internal Revenue Code or Section 302 of ERISA. 26 "PERMITTED ACQUIRED INDEBTEDNESS" means the Indebtedness of any of Company's Subsidiaries permitted under subsection 7.1(vii). "PERMITTED ACQUISITION" has the meaning assigned to that term in subsection 7.7(ii). "PERMITTED ENCUMBRANCES" means the following types of Liens (excluding any such Lien imposed pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code or by ERISA, any such Lien relating to or imposed in connection with any Environmental Claim, and any such Lien expressly prohibited by any applicable terms of any of the Collateral Documents): (i) Liens for taxes, assessments or governmental charges or claims the payment of which is not, at the time, required by subsection 6.3; (ii) statutory Liens of landlords, statutory Liens of banks and rights of set-off, statutory Liens of carriers, warehousemen, mechanics, repairmen, workmen and materialmen, and other Liens imposed by law, in each case incurred in the ordinary course of business (a) for amounts not yet overdue or (b) for amounts that are overdue and that (in the case of any such amounts overdue for a period in excess of 15 days) are being contested in good faith by appropriate proceedings, so long as (1) such reserves or other appropriate provisions, if any, as shall be required by GAAP shall have been made for any such contested amounts, and (2) in the case of a Lien with respect to any portion of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral on account of such Lien; (iii) Liens incurred or deposits made 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, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money), so long as no foreclosure, sale or similar proceedings have been commenced with respect to any portion of the Collateral on account thereof (unless such foreclosure, sale or similar proceedings are being contested in good faith by appropriate proceedings and such foreclosure, sale or similar proceedings have been stayed as a result thereof); (iv) any attachment or judgment Lien not constituting an Event of Default under subsection 8.8; 27 (v) leases or subleases granted to third parties in accordance with any applicable terms of the Collateral Documents and not interfering in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries, taken as a whole, or resulting in a material diminution in the value of any material portion of the Collateral as security for the Obligations; (vi) easements, rights-of-way, restrictions, encroachments, and other minor defects or irregularities in title, in each case which do not and will not interfere in any material respect with the ordinary conduct of the business of Company or any of its Subsidiaries, taken as a whole, or result in a material diminution in the value of any material portion of the Collateral as security for the Obligations; (vii) any (a) interest or title of a lessor or sublessor under any lease permitted by subsection 7.9, (b) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (c) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (b), so long as the holder of such restriction or encumbrance agrees to recognize the rights of such lessee or sublessee under such lease; (viii) Liens arising from filing UCC financing statements relating solely to leases not prohibited by this Agreement; (ix) Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties in connection with the importation of goods; (x) any zoning or similar law or right reserved to or vested in any governmental office or agency to control or regulate the use of any real property; (xi) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of Company and its Subsidiaries; and (xii) licenses of patents, trademarks and other intellectual property rights granted by Company or any of its Subsidiaries in the ordinary course of business and not interfering in any material respect with the ordinary conduct of the business of Company and its Subsidiaries, taken as a whole. "PERSON" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, joint stock 28 companies, Joint Ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts or other organizations, whether or not legal entities, and governments (whether federal, state or local, domestic or foreign, and including political subdivisions thereof) and agencies or other administrative or regulatory bodies thereof. "PLEDGED COLLATERAL" means, collectively, the "Pledged Collateral" as defined in the Company Pledge Agreement, the Holdings Pledge Agreement and the Subsidiary Pledge Agreements. "POTENTIAL EVENT OF DEFAULT" means a condition or event that, after notice or lapse of time or both, would constitute an Event of Default. "PRIME RATE" means the rate that Administrative Agent announces from time to time as its prime lending rate, as in effect from time to time. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Wells Fargo Bank, N.A. or any other Lender may make commercial loans or other loans at rates of interest at, above or below the Prime Rate. "PRINCIPALS" has the meaning assigned to such term in the recitals to this Agreement. "PRO RATA SHARE" means (i) with respect to all payments, computations and other matters relating to the Tranche A Term Loan Commitment or the Tranche A Term Loan of any Lender, the percentage obtained by dividing (x) the Tranche A -------- Term Loan Exposure of that Lender by (y) the aggregate Tranche A Term Loan -- Exposure of all Lenders, (ii) with respect to all payments, computations and other matters relating to the Tranche B Term Loan Commitment or the Tranche B Term Loan of any Lender, the percentage obtained by dividing (x) the Tranche B -------- Term Loan Exposure of that Lender by (y) the aggregate Tranche B Term Loan -- Exposure of all Lenders, (iii) with respect to all payments, computations and other matters relating to the Revolving Loan Commitment or the Revolving Loans of any Lender or any Letters of Credit issued or participations therein purchased by any Lender or any participations in any Swing Line Loans purchased or deemed purchased by any Revolving Lender, the percentage obtained by dividing -------- (x) the Revolving Loan Exposure of that Lender by (y) the aggregate Revolving -- Loan Exposure of all Lenders, and (iv) for all other purposes with respect to each Lender, the percentage obtained by dividing (x) the sum of the Tranche A -------- Term Loan Exposure of that Lender plus the Tranche B Term Loan Exposure of that ---- Lender plus the Revolving Loan Exposure of that Lender by (y) the sum of the ---- -- aggregate Tranche A Term Loan Exposure of all Lenders plus the aggregate Tranche ---- B Term Loan Exposure of all Lenders plus the aggregate Revolving Loan Exposure ---- of all Lenders, in any such case as the applicable percentage may be adjusted by assignments permitted pursuant to 29 subsection 10.1. The initial Pro Rata Share of each Lender for purposes of each of clauses (i), (ii) and (iii) of the preceding sentence is set forth opposite the name of that Lender in Schedule 2.1 annexed hereto. ------------ "PTO" means the United States Patent and Trademark Office or any successor or substitute office in which filings are necessary or, in the opinion of Administrative Agent, desirable in order to create or perfect Liens on any IP Collateral. "REAL PROPERTY ASSET" means, at any time of determination, any interest then owned by any Loan Party in any real property. "RECAPITALIZATION" has the meaning assigned to such term in the recitals to this Agreement. "RECAPITALIZATION AGREEMENT" means that certain recapitalization agreement dated as of March 3, 1998 by and among the Principals, Holdings and the equity holders set forth in Exhibit A thereto. "RECORDED LEASEHOLD INTEREST" means a Leasehold Property with respect to which a Record Document (as hereinafter defined) has been recorded in all places necessary or desirable, in the reasonable judgment of Syndication Agent (on or prior to the Closing Date) or Administrative Agent (after the Closing Date), to give constructive notice of such Leasehold Property to third-party purchasers and encumbrances of the affected real property. For purposes of this definition, the term "RECORD DOCUMENT" means, with respect to any Leasehold Property, (a) the lease evidencing such Leasehold Property or a memorandum thereof, executed and acknowledged by the owner of the affected real property, as lessor, or (b) if such Leasehold Property was acquired or subleased from the holder of a Recorded Leasehold Interest, the applicable assignment or sublease document, executed and acknowledged by such holder, in each case in form sufficient to give such constructive notice upon recordation and otherwise in form reasonably satisfactory to Administrative Agent. "REFUNDED SWING LINE LOANS" has the meaning assigned to that term in subsection 2.1A(iv). "REGULATION D" means Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT DATE" has the meaning assigned to that term in subsection 3.3B. "RELATED PARTIES" with respect to any Principal means (i) any controlling stockholder or a majority of (or more) owned 30 Subsidiary of such Principal or, in the case of an individual, any spouse or immediate family member of such Principal, or (ii) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners, owners or Persons beneficially holding a majority (or more) controlling interest of which consist of such Principal and/or such other Persons referred to in the immediately preceding clause (i). Without limiting the generality of the foregoing, each of SKC GenPar LLC, TPG Advisors II, Inc. and their respective Affiliates shall be deemed to be Related Parties of the Principals. "RELEASE" means any release, spill, emission, leaking, pumping, pouring, injection, escaping, deposit, disposal, discharge, dispersal, dumping, leaching or migration of Hazardous Materials into the indoor or outdoor environment (including the abandonment or disposal of any barrels, containers or other closed receptacles containing any Hazardous Materials), including the movement of any Hazardous Materials through the air, soil, sediment, surface water or groundwater. "REPLACED LENDER" has the meaning assigned to such term in subsection 2.9. "REPLACEMENT EVENT" has the meaning assigned to such term in subsection 2.9. "REPLACEMENT LENDER" has the meaning assigned to such term in subsection 2.9. "REQUISITE LENDERS" means Lenders having or holding at least 51% of the sum of (i) the aggregate Tranche A Term Loan Exposure of all Lenders plus ---- (ii) the aggregate Tranche B Term Loan Exposure of all Lenders plus (iii) the ---- aggregate Revolving Loan Exposure of all Lenders. "RESTRICTED JUNIOR PAYMENT" means (i) any distribution, direct or indirect, on account of any class of stock of Company now or hereafter outstanding, except a distribution payable solely in shares of that class of stock payable solely to holders of that class, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any class of stock of Company now or hereafter outstanding, (iii) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding, and (iv) any payment or prepayment of principal of, premium, if any, or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance), sinking fund or similar payment with respect to, any Subordinated Indebtedness that is not approved by Syndication Agent (on or prior to the Closing Date) or Administrative Agent (after the Closing Date) and Requisite Lenders. 31 "RETAINED SHARES" has the meaning assigned to such term in the recitals to this Agreement. "REVOLVING LENDER" means a Lender having a Revolving Loan Commitment. "REVOLVING LOAN COMMITMENT" means the commitment of a Lender to make Revolving Loans to Company pursuant to subsection 2.1A(iii), and "REVOLVING LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "REVOLVING LOAN COMMITMENT TERMINATION DATE" means March 31, 2004. "REVOLVING LOAN EXPOSURE" means, with respect to any Revolving Lender as of any date of determination (i) prior to the termination of the Revolving Loan Commitments, that Revolving Lender's Revolving Loan Commitment and (ii) after the termination of the Revolving Loan Commitments, the sum of (a) the aggregate outstanding principal amount of the Revolving Loans of that Revolving Lender plus (b) in the event that Revolving Lender is an Issuing Lender, the ---- aggregate Letter of Credit Usage in respect of all Letters of Credit issued by that Revolving Lender (in each case net of any participations purchased by other Revolving Lenders in such Letters of Credit or any unreimbursed drawings thereunder) plus (c) the aggregate amount of all participations purchased by ---- that Revolving Lender in any outstanding Letters of Credit or any unreimbursed drawings under any Letters of Credit plus (d) in the case of Swing Line Lender, ---- the aggregate outstanding principal amount of all Swing Line Loans (net of any participations therein purchased by other Revolving Lenders) plus (e) the ---- aggregate amount of all participations purchased by that Revolving Lender in any outstanding Swing Line Loans. "REVOLVING LOANS" means the Loans made by Revolving Lenders to Company pursuant to subsection 2.1A(iii). "REVOLVING NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(iii) on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Revolving Loan Commitments and Revolving Loans of any Revolving Lenders, in each case substantially in the form of Exhibit VI annexed hereto, as they may be amended, supplemented or otherwise - ---------- modified from time to time. "SECURITIES" means any stock, shares, partnership interests, voting trust certificates, certificates of interest or participation in any profit- sharing agreement or arrangement, options, warrants, bonds, debentures, notes, or other evidences of indebtedness, secured or unsecured, convertible, subordinated or otherwise, or in general any instruments commonly known as 32 "securities" or any certificates of interest, shares or participations in temporary or interim certificates for the purchase or acquisition of, or any right to subscribe to, purchase or acquire, any of the foregoing. "SECURITIES ACT" means the Securities Act of 1933, as amended from time to time, and any successor statute. "SENIOR SUBORDINATED INDENTURE" means the Indenture dated April 21 between Company and State Street Bank and Trust Company, as trustee, in respect of the Senior Subordinated Notes, as in effect on the Closing Date and as such indenture may be amended from time to time to the extent permitted under subsection 7.15. "SENIOR SUBORDINATED NOTE MATERIAL" means the Confidential Offering Memorandum dated April 15, 1998 relating to the Senior Subordinated Notes. "SENIOR SUBORDINATED NOTES" has the meaning assigned to such term in the recitals to this Agreement. "SKC" has the meaning assigned to such term in the recitals to this Agreement. "SOLVENCY CERTIFICATE" means an Officer's Certificate substantially in the form of Exhibit XXVII annexed hereto. ------------- "SOLVENT" means, with respect to any Person, that as of the date of determination both (A) (i) the then fair saleable value of the property of such Person is (y) greater than the total amount of liabilities (including contingent liabilities) of such Person and (z) not less than the amount that will be required to pay the probable liabilities on such Person's then existing debts as they become absolute and matured considering all financing alternatives and potential asset sales reasonably available to such Person; (ii) such Person's capital is not unreasonably small in relation to its business or any contemplated or undertaken transaction; and (iii) such Person does not intend to incur, or believe (nor should it reasonably believe) that it will incur, debts beyond its ability to pay such debts as they become due; and (B) such Person is "solvent" within the meaning given that term and similar terms under applicable laws relating to fraudulent transfers and conveyances. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that, in light of all of the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability (after giving effect to any limitation contained therein). "STANDBY LETTER OF CREDIT" means any standby letter of credit or similar instrument issued for the purpose of supporting 33 (i) Indebtedness of Company or any of its Subsidiaries in respect of industrial revenue or development bonds or financings, (ii) workers' compensation liabilities of Company or any of its Subsidiaries, (iii) the obligations of third party insurers of Company or any of its Subsidiaries, (iv) obligations with respect to Capital Leases or Operating Leases of Company or any of its Subsidiaries, and (v) performance, payment, deposit or surety obligations of Company or any of its Subsidiaries, in any case if required by law or governmental rule or regulation or in accordance with custom and practice in the industry; provided that Standby Letters of Credit may not be issued for the -------- purpose of supporting (a) trade payables or (b) any Indebtedness constituting "antecedent debt" (as that term is used in Section 547 of the Bankruptcy Code). "STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement dated as of the Closing Date by and among Holdings, the Principals, certain Related Parties and the holders of the Retained Shares. "SUBORDINATED INDEBTEDNESS" means Indebtedness of Company (i) represented by the Senior Subordinated Notes and (ii) any other Indebtedness subordinated in right of payment to the Obligations pursuant to documentation containing maturities, amortization schedules, covenants, defaults, remedies, subordination provisions and other material terms in form and substance reasonably satisfactory to Syndication Agent (on or prior to the Closing Date) or Administrative Agent (after the Closing Date) and Requisite Lenders. "SUBSIDIARY" means, with respect to any Person, any corporation, partnership, limited liability company, association, joint venture or other business entity of which more than 50% of the total voting power of shares of stock or other ownership interests entitled (without regard to the occurrence of any contingency) to vote in the election of the Person or Persons (whether directors, managers, trustees or other Persons performing similar functions) having the power to direct or cause the direction of the management and policies thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof. "SUBSIDIARY COPYRIGHT SECURITY AGREEMENT" means the Subsidiary Copyright Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.8, in each case substantially in the form attached as Exhibit XXI annexed ----------- hereto, as such Subsidiary Copyright Security Agreement may be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY COPYRIGHT SECURITY AGREEMENTS" means all such Subsidiary Copyright Security Agreements, collectively. 34 "SUBSIDIARY GUARANTOR" means any Subsidiary of Company that executes and delivers a counterpart of the Subsidiary Guaranty on the Closing Date or from time to time thereafter pursuant to subsection 6.8. "SUBSIDIARY GUARANTY" means the Subsidiary Guaranty executed and delivered by existing Subsidiaries of Company on the Closing Date and to be executed and delivered by additional Subsidiaries of Company from time to time thereafter in accordance with subsection 6.8, substantially in the form of Exhibit XVIII annexed hereto, as such Subsidiary Guaranty may hereafter be - ------------- amended, supplemented or otherwise modified from time to time. "SUBSIDIARY PATENT SECURITY AGREEMENT" means the Subsidiary Patent Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.8, in each case substantially in the forms attached as Exhibit XXIII annexed hereto, ------------- as such Subsidiary Patent Security Agreement may be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY PATENT SECURITY AGREEMENTS" means all such Subsidiary Patent Security Agreements, collectively. "SUBSIDIARY PLEDGE AGREEMENT" means each Subsidiary Pledge Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.8, in each case substantially in the form of Exhibit XVIII annexed hereto, as such Subsidiary Pledge Agreement ------------- may be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY PLEDGE AGREEMENTS" means all such Subsidiary Pledge Agreements, collectively. "SUBSIDIARY SECURITY AGREEMENT" means each Subsidiary Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.8, in each case substantially in the form of Exhibit XIX annexed hereto, as such Subsidiary ----------- Security Agreement may be amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY SECURITY AGREEMENTS" means all such Subsidiary Security Agreements, collectively. "SUBSIDIARY TRADEMARK SECURITY AGREEMENT" means the Subsidiary Trademark Security Agreement executed and delivered by an existing Subsidiary Guarantor on the Closing Date or executed and delivered by any additional Subsidiary Guarantor from time to time thereafter in accordance with subsection 6.8, in each case substantially in the forms attached as Exhibit XXII annexed ------------ hereto, as such Subsidiary Trademark Security Agreement may be 35 amended, supplemented or otherwise modified from time to time, and "SUBSIDIARY TRADEMARK SECURITY AGREEMENTS" means all such Subsidiary Trademark Security Agreements, collectively. "SUPPLEMENTAL COLLATERAL AGENT" has the meaning assigned to that term in subsection 9.1B. "SWING LINE LENDER" means Administrative Agent, or any Person serving as a successor Administrative Agent hereunder, in its capacity as Swing Line Lender hereunder. "SWING LINE LOAN COMMITMENT" means the commitment of Swing Line Lender to make Swing Line Loans to Company pursuant to subsection 2.1A(iv). "SWING LINE LOANS" means the Loans made by Swing Line Lender to Company pursuant to subsection 2.1A(iv). "SWING LINE NOTE" means (i) the promissory note of Company issued pursuant to subsection 2.1D(iv) on the Closing Date and (ii) any promissory note issued by Company to any successor Administrative Agent and Swing Line Lender pursuant to the last sentence of subsection 9.5B, in each case substantially in the form of Exhibit VII annexed hereto, as it may be amended, supplemented or ----------- otherwise modified from time to time. "SYNDICATION AGENT" has the meaning assigned to that term in the introduction to this Agreement. "TAX" or "TAXES" means any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by whomsoever, on whomsoever and wherever imposed, levied, collected, withheld or assessed; provided that "TAX ON THE OVERALL NET INCOME OR FRANCHISE" of a Person -------- shall be construed as a reference to a tax imposed by the jurisdiction in which that Person is organized or in which that Person's principal office (and/or, in the case of a Lender, its lending office) is located or in which that Person (and/or, in the case of a Lender, its lending office) is deemed to be doing business on all or part of the net income, profits or gains (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise) of that Person (and/or, in the case of a Lender, its lending office). "TAX SHARING AGREEMENT" means the Tax Sharing Agreement dated April 21, 1998 between Company and Holdings, in the form entered into on the Closing Date. "TERM LOANS" means, collectively, the Tranche A Term Loans and the Tranche B Term Loans. 36 "TITLE COMPANY" means one or more title insurance companies selected by Company and reasonably satisfactory to Syndication Agent (on or prior to the Closing Date) or Administrative Agent (after the Closing Date). "TOTAL UTILIZATION OF REVOLVING LOAN COMMITMENTS" means, as at any date of determination, the sum of (i) the aggregate principal amount of all outstanding Revolving Loans (other than Revolving Loans made, but not yet applied, for the purpose of repaying any Refunded Swing Line Loans or reimbursing the applicable Issuing Lender for any amount drawn under any Letter of Credit) plus (ii) the aggregate principal amount of all outstanding Swing ---- Line Loans plus (iii) the Letter of Credit Usage. ---- "TRANCHE A TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche A Term Loan to Company pursuant to subsection 2.1A(i), and "TRANCHE A TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE A TERM LOAN EXPOSURE" means, with respect to any Tranche A Term Loan Lender as of any date of determination (i) prior to the funding of the Tranche A Term Loans, that Lender's Tranche A Term Loan Commitment and (ii) after the funding of the Tranche A Term Loans, the outstanding principal amount of the Tranche A Term Loan of that Lender. "TRANCHE A TERM LOAN LENDER" means any Lender who holds a Tranche A Term Loan Commitment, or who has made a Tranche A Term Loan hereunder and any assignee of such Lender pursuant to subsection 10.1B. "TRANCHE A TERM LOANS" means the Tranche A Term Loans made by Tranche A Term Loan Lenders to Company pursuant to subsection 2.1A(i). "TRANCHE A TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(i) on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Tranche A Term Loan Commitments or Tranche A Term Loans of any Tranche A Term Loan Lenders, in each case substantially in the form of Exhibit IV annexed hereto, as they may be amended, ---------- supplemented or otherwise modified from time to time. "TRANCHE B TERM LOAN COMMITMENT" means the commitment of a Lender to make a Tranche B Term Loan to Company pursuant to subsection 2.1A(i), and "TRANCHE B TERM LOAN COMMITMENTS" means such commitments of all Lenders in the aggregate. "TRANCHE B TERM LOAN EXPOSURE" means, with respect to any Tranche B Term Loan Lender as of any date of determination 37 (i) prior to the funding of the Tranche B Term Loans, that Lender's Tranche B Term Loan Commitment and (ii) after the funding of the Tranche B Term Loans, the outstanding principal amount of the Tranche B Term Loan of that Lender. "TRANCHE B TERM LOAN LENDER" means any Lender who holds a Tranche B Term Loan Commitment or who has made a Tranche B Term Loan hereunder, and any assignee of such Lender pursuant to subsection 10.1B. "TRANCHE B TERM LOANS" means the Tranche B Term Loans made by Tranche B Term Loan Lenders to Company pursuant to subsection 2.1A(ii). "TRANCHE B TERM NOTES" means (i) the promissory notes of Company issued pursuant to subsection 2.1D(ii) on the Closing Date and (ii) any promissory notes issued by Company pursuant to the last sentence of subsection 10.1B(i) in connection with assignments of the Tranche B Term Loan Commitments or Tranche B Term Loans of any Tranche B Term Loan Lenders, in each case substantially in the form of Exhibit V annexed hereto, as they may be amended, --------- supplemented or otherwise modified from time to time. "TRANSACTION COSTS" has the meaning assigned to such term in the recitals to this Agreement. "TRANSACTIONS" has the meaning assigned to such term in the recitals to this Agreement. "UCC" means the Uniform Commercial Code (or any similar or equivalent legislation) as in effect in any applicable jurisdiction. 1.2 ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS ------------------------------------------------------------------ UNDER AGREEMENT. --------------- Except as otherwise expressly provided in this Agreement, all accounting terms not otherwise defined herein shall have the meanings assigned to them in conformity with GAAP. Financial statements and other information required to be delivered by Company to Lenders pursuant to clauses (i), (ii), (iii) and (xiii) of subsection 6.1 shall be prepared in accordance with GAAP as in effect at the time of such preparation (and delivered together with the reconciliation statements provided for in subsection 6.1(v)). Calculations in connection with the definitions, covenants and other provisions of this Agreement shall utilize (i) accounting principles and policies in conformity with those used to prepare the financial statements referred to in subsection 5.3, or (ii) if any amendments to the provisions set forth in Sections 1, 6 and 7 are made pursuant to negotiations conducted by operation of the following sentence, accounting principles and policies in effect at the time of the 38 effectiveness of such amendments. If any changes in accounting principles from those used in the preparation of the financial statements referred to in subsection 5.3 hereafter occasioned by the promulgation of rules, regulations, pronouncements or opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions) result in a change in the method of calculation of financial covenants, standards or terms found in Sections 1, 6 and 7 hereof, the parties hereto agree to enter into good faith negotiations in order to amend such provisions so as to equitably reflect such changes with the desired result that the criteria for evaluating Holdings', Company's and each of its Subsidiaries' financial conditions shall be the same after such changes as if such changes had not been made. During the period of such negotiations, but in no event for a period longer than 60 days after the effectiveness of any such change, Company shall not be required to deliver the additional financial statements required pursuant to subsection 6.1(v). After the earlier of (i) the effectiveness of any amendments to the provisions of Sections 1, 6, and 7 resulting from such negotiations or (ii) 60 days following the effectiveness of any such change, Company shall, if requested by Requisite Lenders, deliver the additional financial statements required pursuant to subsection 6.1(v) with respect to such changes. 1.3 OTHER DEFINITIONAL PROVISIONS AND RULES OF CONSTRUCTION. ------------------------------------------------------- A. Any of the terms defined herein may, unless the context otherwise requires, be used in the singular or the plural, depending on the reference. B. References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Agreement unless otherwise specifically provided. C. The use in any of the Loan Documents of the word "include" or "including", when following any general statement, term or matter, shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not nonlimiting language (such as "without limitation" or "but not limited to" or words of similar import) is used with reference thereto, but rather shall be deemed to refer to all other items or matters that fall within the broadest possible scope of such general statement, term or matter. 39 SECTION 2. AMOUNTS AND TERMS OF COMMITMENTS AND LOANS 2.1 COMMITMENTS; MAKING OF LOANS; NOTES. ----------------------------------- A. COMMITMENTS. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, each Tranche A Term Loan Lender hereby severally agrees to make the Tranche A Term Loans described in subsection 2.1A(i), each Tranche B Term Loan Lender hereby severally agrees to make the Tranche B Term Loans described in subsection 2.1A(ii), each Revolving Lender hereby severally agrees to make the Revolving Loans described in subsection 2.1A(iii) and Swing Line Lender hereby agrees to make the Swing Line Loans described in subsection 2.1A(iv). (i) Tranche A Term Loans. Each Tranche A Term Loan Lender severally -------------------- agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche A Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Tranche A Term Loan Lender's Tranche A Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the ------------ aggregate amount of the Tranche A Term Loan Commitments is $30,000,000; provided that the Tranche A Term Loan Commitments of the Tranche A Term -------- Loan Lenders shall be adjusted to give effect to any assignments of the Tranche A Term Loan Commitments pursuant to subsection 10.1B. Each Tranche A Term Loan Lender's Term Loan Commitment shall expire immediately and without further action on the Closing Date if the Tranche A Term Loans are not made on or before that date. Company may make only one borrowing under the Tranche A Term Loan Commitments. Amounts borrowed under this subsection 2.1A(i) and subsequently repaid or prepaid may not be reborrowed. (ii) Tranche B Term Loans. Each Tranche B Term Loan Lender severally -------------------- agrees to lend to Company on the Closing Date an amount not exceeding its Pro Rata Share of the aggregate amount of the Tranche B Term Loan Commitments to be used for the purposes identified in subsection 2.5A. The amount of each Tranche B Term Loan Lender's Tranche B Term Loan Commitment is set forth opposite its name on Schedule 2.1 annexed hereto and the ------------ aggregate amount of the Tranche B Term Loan Commitments is $50,000,000; provided that the Tranche B Term Loan Commitments of Tranche B Term Loan -------- Lenders shall be adjusted to give effect to any assignments of the Tranche B Term Loan Commitments pursuant to subsection 10.1B. Each Tranche B Term Loan Lender's Tranche B Term Loan Commitment shall expire immediately and without further action on the Closing Date, if the Tranche B Term Loans are not made on or before that date. Company may make only one borrowing under the Tranche B Term Loan Commitments. Amounts borrowed under this 40 subsection 2.1A(ii) and subsequently repaid or prepaid may not be reborrowed. (iii) Revolving Loans. Each Revolving Lender severally agrees, --------------- subject to the limitations set forth below with respect to the maximum amount of Revolving Loans permitted to be outstanding from time to time, to lend to Company from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date an aggregate amount not exceeding its Pro Rata Share of the aggregate amount of the Revolving Loan Commitments to be used for the purposes identified in subsections 2.5A and 2.5B. The original amount of each Revolving Lender's Revolving Loan Commitment is set forth opposite its name on Schedule 2.1 ------------ annexed hereto and the aggregate original amount of the Revolving Loan Commitments is $25,000,000; provided that the Revolving Loan Commitments of -------- the Revolving Lenders shall be adjusted to give effect to any assignments of the Revolving Loan Commitments pursuant to subsection 10.1B; and provided, further that the amount of the Revolving Loan Commitments shall -------- ------- be reduced from time to time by the amount of any reductions thereto made pursuant to subsections 2.4B(ii) and 2.4B(iii). Each Revolving Lender's Revolving Loan Commitment shall expire on the Revolving Loan Commitment Termination Date and all Revolving Loans and all other amounts owed hereunder with respect to the Revolving Loans and the Revolving Loan Commitments shall be paid in full no later than that date; provided that -------- each Revolving Lender's Revolving Loan Commitment shall expire immediately and without further action on the Closing Date, if the Tranche A Term Loans, the Tranche B Term Loans and the initial Revolving Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(iii) may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date. Anything contained in this Agreement to the contrary notwithstanding in no event shall the total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect. (iv) Swing Line Loans. Swing Line Lender hereby agrees, subject to ---------------- the limitations set forth below with respect to the maximum amount of Swing Line Loans permitted to be outstanding from time to time, to make a portion of the Revolving Loan Commitments available to Company from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date by making Swing Line Loans to Company in an aggregate amount not exceeding the amount of the Swing Line Loan Commitment to be used for the purposes identified in subsection 2.5B, notwithstanding the fact that such Swing Line Loans, when aggregated with Swing Line Lender's outstanding Revolving 41 Loans and Swing Line Lender's Pro Rata Share of the Letter of Credit Usage then in effect, may exceed Swing Line Lender's Revolving Loan Commitment. The original amount of the Swing Line Loan Commitment is $5,000,000; provided that any reduction of the Revolving Loan Commitments made pursuant -------- to subsection 2.4B(ii) or 2.4B(iii) which reduces the aggregate Revolving Loan Commitments to an amount less than the then current amount of the Swing Line Loan Commitment shall result in an automatic corresponding reduction of the Swing Line Loan Commitment to the amount of the Revolving Loan Commitments, as so reduced, without any further action on the part of Company, Administrative Agent or Swing Line Lender. The Swing Line Loan Commitment shall expire on the Revolving Loan Commitment Termination Date and all Swing Line Loans and all other amounts owed hereunder with respect to the Swing Line Loans shall be paid in full no later than that date; provided that the Swing Line Loan Commitment shall expire immediately and -------- without further action on the Closing Date, if the Tranche A Term Loans and the Tranche B Term Loans are not made on or before that date. Amounts borrowed under this subsection 2.1A(iv) may be repaid and reborrowed to but excluding the Revolving Loan Commitment Termination Date. Anything contained in this Agreement to the contrary notwithstanding, the Swing Line Loans and the Swing Line Loan Commitment shall be subject to the limitation that in no event shall the Total Utilization of Revolving Loan Commitments at any time exceed the Revolving Loan Commitments then in effect. With respect to any Swing Line Loans which have not been voluntarily prepaid by Company pursuant to subsection 2.4B(i)(a), Swing Line Lender may, at any time in its sole and absolute discretion, deliver to Administrative Agent (with a copy to Company), no later than 9:00 A.M. (San Francisco time) on the first Business Day in advance of the proposed Funding Date, a notice (which shall be deemed to be a Notice of Borrowing given by Company) requesting Revolving Lenders to make Revolving Loans that are Base Rate Loans on such Funding Date in an amount equal to the amount of such Swing Line Loans (the "REFUNDED SWING LINE LOANS") outstanding on the date such notice is given which Swing Line Lender requests Revolving Lenders to prepay. Anything contained in this Agreement to the contrary notwithstanding, (i) the proceeds of such Revolving Loans made by Revolving Lenders other than Swing Line Lender shall be immediately delivered by Administrative Agent to Swing Line Lender (and not to Company) and applied to repay a corresponding portion of the Refunded Swing Line Loans and (ii) on the day such Revolving Loans are made, Swing Line Lender's Pro Rata Share of the Refunded Swing Line Loans shall be deemed to be paid with the proceeds of a Revolving Loan made by Swing Line 42 Lender, and such portion of the Swing Line Loans deemed to be so paid shall no longer be outstanding as Swing Line Loans and shall no longer be due under the Swing Line Note of Swing Line Lender (if any) but shall instead constitute part of Swing Line Lender's outstanding Revolving Loans and shall be due under the Revolving Note (if any) of Swing Line Lender. Company hereby authorizes Administrative Agent and Swing Line Lender to charge Company's accounts with Administrative Agent and Swing Line Lender (up to the amount available in each such account) in order to immediately pay Swing Line Lender the amount of the Refunded Swing Line Loans to the extent the proceeds of such Revolving Loans made by Revolving Lenders, including the Revolving Loan deemed to be made by Swing Line Lender, are not sufficient to repay in full the Refunded Swing Line Loans. If any portion of any such amount paid (or deemed to be paid) to Swing Line Lender should be recovered by or on behalf of Company from Swing Line Lender in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared among all Revolving Lenders in the manner contemplated by subsection 10.5. If for any reason (a) Revolving Loans are not made upon the request of Swing Line Lender as provided in the immediately preceding paragraph in an amount sufficient to repay any amounts owed to Swing Line Lender in respect of any outstanding Swing Line Loans or (b) the Revolving Loan Commitments are terminated at a time when any Swing Line Loans are outstanding, each Revolving Lender shall be deemed to, and hereby agrees to, have purchased a participation in such outstanding Swing Line Loans in an amount equal to its Pro Rata Share (calculated, in the case of the foregoing clause (b), immediately prior to such termination of the Revolving Loan Commitments) of the unpaid amount of such Swing Line Loans together with accrued interest thereon. Upon one Business Day's notice from Swing Line Lender, each Revolving Lender shall deliver to Swing Line Lender an amount equal to its respective participation in same day funds at the Funding and Payment Office. In order to further evidence such participation (and without prejudice to the effectiveness of the participation provisions set forth above), each Revolving Lender agrees to enter into a separate participation agreement at the request of Swing Line Lender in form and substance reasonably satisfactory to Swing Line Lender and the other Revolving Lenders. In the event any Revolving Lender fails to make available to Swing Line Lender the amount of such Revolving Lender's participation as provided in this paragraph, Swing Line Lender shall be entitled to recover such amount on demand from such Revolving Lender together with interest thereon at the rate customarily used by Swing Line Lender for the correction of errors among banks for three Business Days and thereafter at 43 the Base Rate. In the event Swing Line Lender receives a payment of any amount in which other Revolving Lenders have purchased participations as provided in this paragraph, Swing Line Lender shall promptly distribute to each such other Revolving Lender its Pro Rata Share of such payment. Anything contained herein to the contrary notwithstanding, each Revolving Lender's obligation to make Revolving Loans for the purpose of repaying any Refunded Swing Line Loans pursuant to the second preceding paragraph and each Revolving Lender's obligation to purchase a participation in any unpaid Swing Line Loans pursuant to the immediately preceding paragraph shall be absolute and unconditional and shall not be affected by any circumstance, including (a) any set-off, counterclaim, recoupment, defense or other right which such Revolving Lender may have against Swing Line Lender, Company or any other Person for any reason whatsoever; (b) the occurrence or continuation of an Event of Default or a Potential Event of Default; (c) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (d) any breach of this Agreement or any other Loan Document by any party thereto; or (e) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing; provided that such obligations of each Revolving Lender -------- are subject to the condition that (X) Swing Line Lender believed in good faith that all conditions under Section 4 to the making of the applicable Refunded Swing Line Loans or other unpaid Swing Line Loans, as the case may be, were satisfied at the time such Refunded Swing Line Loans or unpaid Swing Line Loans were made or (Y) the satisfaction of any such condition not satisfied had been waived in accordance with subsection 10.6 prior to or at the time such Refunded Swing Line Loans or other unpaid Swing Line Loans were made. For the purposes of the immediately preceding proviso, the Swing Line Lender shall be entitled to rely on the representations made by Company in the applicable Notice of Borrowing for the related Swing Line Loans unless notified to the contrary by Company or Requisite Lenders prior to the funding of such Swing Line Loans. B. BORROWING MECHANICS. Tranche A Term Loans, Tranche B Term Loans or Revolving Loans made on any Funding Date (other than Revolving Loans made pursuant to a request by Swing Line Lender pursuant to subsection 2.1A(iv) for the purpose of repaying any Refunded Swing Line Loans or Revolving Loans made pursuant to subsection 3.3B for the purpose of reimbursing any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it) shall be in an aggregate minimum amount of $500,000 and multiples of $100,000 in excess of that amount. Swing Line Loans made on any Funding Date shall be in an aggregate minimum amount of $250,000 and multiples of $50,000 in 44 excess of that amount. Whenever Company desires that Lenders make Term Loans or Revolving Loans it shall deliver to Administrative Agent a Notice of Borrowing no later than 10:00 A.M. (San Francisco time) at least three Eurodollar Business Days in advance of the proposed Funding Date (in the case of a Eurodollar Rate Loan) or at least one Business Day in advance of the proposed Funding Date (in the case of a Base Rate Loan). Whenever Company desires that Swing Line Lender make a Swing Line Loan, it shall deliver to Administrative Agent a Notice of Borrowing no later than 10:00 A.M. (San Francisco time) on the proposed Funding Date. The Notice of Borrowing shall specify (i) the proposed Funding Date (which shall be a Business Day), (ii) the amount and type of Loans requested, (iii) in the case of Swing Line Loans and any Loans made on the Closing Date, that such Loans shall be Base Rate Loans, (iv) in the case of Revolving Loans not made on the Closing Date, whether such Loans shall be Base Rate Loans or Eurodollar Rate Loans, and (v) in the case of any Loans requested to be made as Eurodollar Rate Loans, the initial Interest Period requested therefor. Term Loans and Revolving Loans may be continued as or converted into Base Rate Loans and Eurodollar Rate Loans in the manner provided in subsection 2.2D. In lieu of delivering the above-described Notice of Borrowing, Company may give Administrative Agent telephonic notice by the required time of any proposed borrowing under this subsection 2.1B; provided that such notice shall be -------- promptly confirmed in writing by delivery of a Notice of Borrowing to Administrative Agent on or before the applicable Funding Date. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to borrow on behalf of Company, and upon funding of Loans by Lenders in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected Loans hereunder. Company shall notify Administrative Agent prior to the funding of any Loans in the event that any of the matters to which Company is required to certify in the applicable Notice of Borrowing is no longer true and correct as of the applicable Funding Date, and the acceptance by Company of the proceeds of any Loans shall constitute a re-certification by Company, as of the applicable Funding Date, as to the matters to which Company is required to certify in the applicable Notice of Borrowing. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to make a borrowing in accordance therewith. 45 C. DISBURSEMENT OF FUNDS. All Term Loans and Revolving Loans under this Agreement shall be made by Lenders simultaneously and proportionately to their respective Pro Rata Shares, it being understood that no Lender shall be responsible for any default by any other Lender in that other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender to make the particular type of Loan requested be increased or decreased as a result of a default by any other Lender in that other Lender's obligation to make a Loan requested hereunder. Promptly after receipt by Administrative Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic notice in lieu thereof), Administrative Agent shall notify each Lender or Swing Line Lender, as the case may be, of the proposed borrowing. Each Lender shall make the amount of its Loan available to Administrative Agent not later than 12:00 Noon (San Francisco time) on the applicable Funding Date, and Swing Line Lender shall make the amount of its Swing Line Loan available to Administrative Agent not later than 2:00 P.M.(San Francisco time) on the applicable Funding Date, in each case in same day funds in Dollars, at the Funding and Payment Office. Except as provided in subsection 2.1A(iv) or subsection 3.3B with respect to Revolving Loans used to repay Refunded Swing Line Loans or to reimburse any Issuing Lender for the amount of a drawing under a Letter of Credit issued by it, upon satisfaction or waiver of the conditions precedent specified in subsections 4.1 (in the case of Loans made on the Closing Date) and 4.2 (in the case of all Loans), Administrative Agent shall make the proceeds of such Loans available to Company on the applicable Funding Date by causing an amount of same day funds in Dollars equal to the proceeds of all such Loans received by Administrative Agent from Lenders or Swing Line Lender, as the case may be, to be credited to the account of Company at the Funding and Payment Office. Unless Administrative Agent shall have been notified by any Lender prior to the Funding Date for any Loans that such Lender does not intend to make available to Administrative Agent the amount of such Lender's Loan requested on such Funding Date, Administrative Agent may assume that such Lender has made such amount available to Administrative Agent on such Funding Date and Administrative Agent may, in its sole discretion, but shall not be obligated to, make available to Company a corresponding amount on such Funding Date. If such corresponding amount is not in fact made available to Administrative Agent by such Lender, Administrative Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the rate customarily used by Administrative Agent for the correction of errors among banks for three Business Days and thereafter at the Base Rate. If such Lender does not pay such corresponding amount forthwith upon Administrative Agent's demand therefor, Administrative Agent shall promptly notify Company and Company 46 shall immediately pay such corresponding amount to Administrative Agent together with interest thereon, for each day from such Funding Date until the date such amount is paid to Administrative Agent, at the rate payable under this Agreement for Base Rate Loans. Nothing in this subsection 2.1C shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights that Company may have against any Lender as a result of any default by such Lender hereunder. D. NOTE OPTION. If so requested by any Lender by written notice to Company (with a copy to Administrative Agent) at least two Business Days prior to the Closing Date or at any time thereafter, Company shall execute and deliver to such Lender (and/or, if so specified in such notice, any Person who is an assignee of such Lender pursuant to subsection 10.1 hereof) on the Closing Date (or, if such notice is delivered after the Closing Date, within three Business Days of Company's receipt of such notice) a promissory note or promissory notes to evidence such Lender's Tranche A Term Loans, Tranche B Term Loans, Revolving Loans or Swing Line Loans, substantially in the form of Exhibit IV, Exhibit V, ---------- --------- Exhibit VI or Exhibit VII hereto, respectively. - ---------- ----------- 2.2 INTEREST ON THE LOANS. --------------------- A. RATE OF INTEREST. Subject to the provisions of subsections 2.6 and 2.7, each Term Loan and each Revolving Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate or the Adjusted Eurodollar Rate. Subject to the provisions of subsection 2.7, each Swing Line Loan shall bear interest on the unpaid principal amount thereof from the date made through maturity (whether by acceleration or otherwise) at a rate determined by reference to the Base Rate. The applicable basis for determining the rate of interest with respect to any Term Loan or any Revolving Loan shall be selected by Company initially at the time a Notice of Borrowing is given (or telephonic notice followed by a Notice of Borrowing) with respect to such Loan pursuant to subsection 2.1B, and the basis for determining the interest rate with respect to any Term Loan or any Revolving Loan may be changed from time to time pursuant to subsection 2.2D. If on any day a Term Loan or Revolving Loan is outstanding with respect to which notice has not been delivered to Administrative Agent in accordance with the terms of this Agreement specifying the applicable basis for determining the rate of interest, then for that day that Loan shall bear interest determined by reference to the Base Rate. (i) (a) Subject to the provisions of subsections 2.2E and 2.7, the Tranche A Term Loans and the Revolving Loans shall bear interest through maturity as follows: 47 (I) if a Base Rate Loan, then at the sum of the Base Rate plus the base rate margin (the "BASE RATE MARGIN") set forth in the ---- table below opposite the Consolidated Leverage Ratio for the four- Fiscal Quarter period for which the applicable Margin Determination Certificate has been delivered pursuant to subsection 6.1(iv); (II) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus the Eurodollar rate margin (the ---- "EURODOLLAR RATE MARGIN") set forth in the table below opposite the Consolidated Leverage Ratio for the four-Fiscal Quarter period for which the applicable Margin Determination Certificate has been delivered pursuant to subsection 6.1(iv):
Applicable Eurodollar Applicable Rate Base Consolidated Leverage Ratio Margin Rate Margin - ----------------------------- ------------ ------------ Greater than or equal to 5.00:1.00 2.00% 1.00% Greater than or equal to 4.25:1.00 but less than 5.00:1.00 1.75% 0.75% Greater than or equal to 3.00:1.00 but less than 4.25:1.00 1.50% 0.50% Less than 3.00:1.00 1.25% 0.25%
provided that, for the first six months after the Closing Date, the applicable - -------- Eurodollar Rate Margin for Tranche A Term Loans and Revolving Loans shall be 2.00% per annum and the applicable Base Rate Margin for Tranche A Term Loans and Revolving Loans shall be 1.00% per annum. (b) Subject to the provisions of subsections 2.2E and 2.7, the Tranche B Term Loans shall bear interest through maturity as follows: (I) if a Base Rate Loan, then at the sum of the Base Rate plus the Base Rate Margin set forth in the table below opposite the ---- Consolidated Leverage Ratio for the four-Fiscal Quarter period for which the applicable Margin Determination Certificate has been delivered pursuant to subsection 6.1(iv); or 48 (II) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus the Eurodollar Rate Margin set forth in ---- the table below opposite the Consolidated Leverage Ratio for the four- Fiscal Quarter period for which the applicable Margin Determination Certificate has been delivered pursuant to subsection 6.1(iv):
Applicable Eurodollar Applicable Rate Base Consolidated Leverage Ratio Margin Rate Margin --------------------------- ------------ ------------- Greater than or equal to 4.50:1.00 2.25% 1.25% Less than 4.50:1.00 2.00% 1.00%
provided that, for the first six months after the Closing Date, the applicable - -------- Eurodollar Rate Margin for Tranche B Term Loans shall be 2.25% per annum and the applicable Base Rate Margin for Tranche B Term Loans shall be 1.25% per annum. Upon receipt of the Margin Determination Certificate by Administrative Agent delivered by Company pursuant to subsection 6.1(iv), the Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin shall automatically be adjusted in accordance with such Margin Determination Certificate, such adjustment to become effective on the next succeeding Business Day following the receipt by Administrative Agent of such Margin Determination Certificate; provided that for -------- the period commencing on the Business Day following the sixth month anniversary of the Closing Date, the Applicable Base Rate Margin and the Applicable Eurodollar Rate Margin shall be such percentage as determined using the information set forth in the most recent Margin Determination Certificate received by Administrative Agent pursuant to subsection 6.1(iv); and provided -------- further that, if at any time a Margin Determination Certificate is not delivered - ------- at the time required pursuant to subsection 6.1(iv), from the time such Margin Determination Certificate was required to be delivered until delivery of such Margin Determination Certificate, such applicable margins shall be the maximum percentage amount for the relevant Loan set forth above; and provided still -------- ----- further that the change in the Applicable Eurodollar Rate Margin as provided - ------- above shall not be applied retroactively to any Eurodollar Rate Loans within any Interest Period. (ii) Subject to the provisions of subsections 2.2E and 2.7, the Swing Line Loans shall bear interest through maturity at the sum of the Base Rate plus the Applicable Base Rate Margin for Revolving Loans minus a rate equal ---- ----- to 49 the Commitment Fee percentage then in effect as determined pursuant to subsection 2.3A. B. INTEREST PERIODS. In connection with each Eurodollar Rate Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, select an interest period (each an "INTEREST PERIOD") to be applicable to such Loan, which Interest Period shall be, at Company's option, either a one, two, three or six month period; provided -------- that: (i) the initial Interest Period for any Eurodollar Rate Loan shall commence on the Funding Date in respect of such Loan, in the case of a Loan initially made as a Eurodollar Rate Loan, or on the date specified in the applicable Notice of Conversion/Continuation, in the case of a Loan converted to a Eurodollar Rate Loan; (ii) in the case of immediately successive Interest Periods applicable to a Eurodollar Rate Loan continued as such pursuant to a Notice of Conversion/Continuation, each successive Interest Period shall commence on the day on which the next preceding Interest Period expires; (iii) if an Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that, if any Interest Period would -------- otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the next preceding Business Day; (iv) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (v) of this subsection 2.2B, end on the last Business Day of a calendar month; (v) no Interest Period with respect to any portion of the Tranche A Term Loans shall extend beyond March 31, 2005, no Interest Period with respect to any portion of the Tranche B Term Loans shall extend beyond March 31, 2006 and no Interest Period with respect to any portion of the Revolving Loans shall extend beyond the Revolving Loan Commitment Termination Date; (vi) no Interest Period with respect to any portion of the Tranche A Term Loans or the Tranche B Term Loans shall extend beyond a date on which Company is required to make a scheduled payment of principal of the Tranche A Term Loans or the Tranche B Term Loans, as the case may be, unless the sum of (a) the aggregate principal amount of Tranche A Term 50 Loans or Tranche B Term Loans, as the case may be, that are Base Rate Loans plus (b) the aggregate principal amount of Tranche A Term Loans or Tranche ---- B Term Loans, as the case may be, that are Eurodollar Rate Loans with Interest Periods expiring on or before such date equals or exceeds the principal amount required to be paid on the Tranche A Term Loans or Tranche B Term Loans, as the case may be, on such date; (vii) there shall be no more than 10 Interest Periods outstanding at any time; and (viii) in the event Company fails to specify an Interest Period for any Eurodollar Rate Loan in the applicable Notice of Borrowing or Notice of Conversion/Continuation, Company shall be deemed to have selected an Interest Period of one month. C. INTEREST PAYMENTS. Subject to the provisions of subsection 2.2E, interest on each Loan shall be payable in arrears on and to each Interest Payment Date applicable to that Loan, upon any prepayment of that Loan (to the extent accrued on the amount being prepaid) and at maturity (including final maturity and the Revolving Loan Commitment Termination Date); provided that in -------- the event any Swing Line Loans or any Revolving Loans that are Base Rate Loans are prepaid pursuant to subsection 2.4B(i)(a), interest accrued on such Swing Line Loans or Revolving Loans through the date of such prepayment shall be payable on the next succeeding Interest Payment Date applicable to Base Rate Loans (or, if earlier, at final maturity). D. CONVERSION OR CONTINUATION. Subject to the provisions of subsection 2.6, Company shall have the option (i) to convert at any time all or any part of its outstanding Tranche A Term Loans, Tranche B Term Loans or Revolving Loans equal to $500,000 and integral multiples of $100,000 in excess of that amount from Loans bearing interest at a rate determined by reference to one basis to Loans bearing interest at a rate determined by reference to an alternative basis or (ii) upon the expiration of any Interest Period applicable to a Eurodollar Rate Loan, to continue all or any portion of such Loan equal to $500,000 and integral multiples of $100,000 in excess of that amount as a Eurodollar Rate Loan; provided, however, that a Eurodollar Rate Loan may only be converted into --------- ------- a Base Rate Loan on the expiration date of an Interest Period applicable thereto. Company shall deliver a Notice of Conversion/Continuation to Administrative Agent no later than 10:00 A.M. (San Francisco time) at least one Business Day in advance of the proposed conversion date (in the case of a conversion to a Base Rate Loan) and at least three Eurodollar Business Days in advance of the proposed conversion/continuation date (in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan). A 51 Notice of Conversion/Continuation shall specify (i) the proposed conversion/continuation date (which shall be a Business Day), (ii) the amount and type of the Loan to be converted/continued, (iii) the nature of the proposed conversion/continuation, (iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, the requested Interest Period, and (v) in the case of a conversion to, or a continuation of, a Eurodollar Rate Loan, that no Potential Event of Default or Event of Default has occurred and is continuing. In lieu of delivering the above-described Notice of Conversion/Continuation, Company may give Administrative Agent telephonic notice by the required time of any proposed conversion/continuation under this subsection 2.2D; provided that -------- such notice shall be promptly confirmed in writing by delivery of a Notice of Conversion/Continuation to Administrative Agent on or before the proposed conversion/continuation date. Upon receipt of written or telephonic notice of any proposed conversion/continuation under this subsection 2.2D, Administrative Agent shall promptly transmit such notice by telefacsimile or telephone to each Lender. Neither Administrative Agent nor any Lender shall incur any liability to Company in acting upon any telephonic notice referred to above that Administrative Agent believes in good faith to have been given by a duly authorized officer or other person authorized to act on behalf of Company, and upon conversion or continuation of the applicable basis for determining the interest rate with respect to any Loans in accordance with this Agreement pursuant to any such telephonic notice Company shall have effected a conversion or continuation, as the case may be, hereunder. Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a Notice of Conversion/Continuation for conversion to, or continuation of, a Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and after the related Interest Rate Determination Date, and Company shall be bound to effect a conversion or continuation in accordance therewith. E. DEFAULT RATE. Upon the occurrence and during the continuation of any Event of Default, the outstanding principal amount of all Loans and, to the extent permitted by applicable law, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder, shall there- after bear interest (including post-petition interest in any proceeding under the Bankruptcy Code or other applicable bankruptcy laws) payable upon demand at a rate that is 2% per annum in excess of the interest rate otherwise payable under this Agreement with respect to the applicable Loans (or, in the case of any such fees and other amounts, at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans that are Tranche B Term Loans); provided that, in the case of Eurodollar Rate -------- Loans, upon the expiration of the Interest Period in effect at the time any such 52 increase in interest rate is effective such Eurodollar Rate Loans shall thereupon become Base Rate Loans and shall thereafter bear interest payable upon demand at a rate which is 2% per annum in excess of the interest rate otherwise payable under this Agreement for Base Rate Loans. Payment or acceptance of the increased rates of interest provided for in this subsection 2.2E is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of any Agent or any Lender. F. COMPUTATION OF INTEREST. Interest on the Loans shall be computed (i) in the case of Base Rate Loans, on the basis of a 365-day or 366-day year, as the case may be, and (ii) in the case of Eurodollar Rate Loans, on the basis of a 360-day year, in each case for the actual number of days elapsed in the period during which it accrues. In computing interest on any Loan, the date of the making of such Loan or the first day of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted from a Eurodollar Rate Loan, the date of conversion of such Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be included, and the date of payment of such Loan or the expiration date of an Interest Period applicable to such Loan or, with respect to a Base Rate Loan being converted to a Eurodollar Rate Loan, the date of conversion of such Base Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded; provided that if a Loan is repaid on the same -------- day on which it is made, one day's interest shall be paid on that Loan. 2.3 FEES. ---- A. COMMITMENT FEES. Company agrees to pay to Administrative Agent, for distribution to each Revolving Lender in proportion to that Lender's Pro Rata Share, commitment fees for the period from and including the Closing Date to and excluding the Revolving Loan Commitment Termination Date equal to the average of the daily excess of the Revolving Loan Commitments over the aggregate principal amount of outstanding Revolving Loans (but not including any outstanding Swing Line Loans) multiplied by the applicable commitment fee percentage (the ------------- "APPLICABLE COMMITMENT FEE PERCENTAGE") set forth in the table below opposite the Consolidated Leverage Ratio for the four-Fiscal Quarter period for which the applicable Margin Determination Certificate has been delivered pursuant to subsection 6.1(iv), such commitment fees to be calculated on the basis of a 360- day year and the actual number of days elapsed and to be payable quarterly in arrears on the last day of each March, June, September and December of each year, commencing on the first such date to occur after the Closing Date, and on the Revolving Loan Commitment Termination Date. 53
Applicable Commitment Fee Consolidated Leverage Ratio Percentage - --------------------------- ------------ Greater than or 3.50:1.00 0.500% equal to Less than 3.50:1.00 0.375%
Upon delivery of the Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1(iv), the Applicable Commitment Fee Percentage shall automatically be adjusted in accordance with such Margin Determination Certificate, such adjustment to become effective on the next succeeding Business Day following the receipt by Administrative Agent of such Margin Determination Certificate; provided that for the period commencing on the -------- Closing Date and ending on the date of delivery of the first Margin Determination Certificate by Company to Administrative Agent pursuant to subsection 6.1(iv), the Applicable Commitment Fee Percentage shall be such percentage as determined using the information set forth in the Margin Determination Certificate received by Administrative Agent pursuant to subsection 4.1Q; and provided further that, if at any time a Margin -------- ------- Determination Certificate is not delivered at the time required pursuant to subsection 6.1(iv), from the time such Margin Determination Certificate was required to be delivered until delivery of such Margin Determination Certificate, such percentage shall be 0.50%. B. OTHER FEES. Company agrees to pay to Arranger and Agents such other fees in the amounts and at the times separately agreed upon between Company, Agents and Arranger. 2.4 REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN REVOLVING LOAN COMMITMENTS; --------------------------------------------------------------------- GENERAL PROVISIONS REGARDING PAYMENTS. ------------------------------------- A. SCHEDULED PAYMENTS OF TRANCHE A TERM LOANS AND TRANCHE B TERM LOANS. (i) Scheduled Payments of Tranche A Term Loans. Company shall make ------------------------------------------ principal payments on the Tranche A Term Loans in installments on the dates and in the amounts set forth below: 54
Scheduled Repayment Date of Term Loans - ---- --------------------- June 30, 1999 $ 750,000 September 30, 1999 $ 750,000 December 31, 1999 $ 750,000 March 31, 2000 $ 750,000 June 30, 2000 $1,125,000 September 30, 2000 $1,125,000 December 31, 2000 $1,125,000 March 31, 2001 $1,125,000 June 30, 2001 $1,125,000 September 30, 2001 $1,125,000 December 31, 2001 $1,125,000 March 31, 2002 $1,125,000 June 30, 2002 $1,500,000 September 30, 2002 $1,500,000 December 31, 2002 $1,500,000 March 31, 2003 $1,500,000 June 30, 2003 $1,500,000 September 30, 2003 $1,500,000 December 31, 2003 $1,500,000 March 31, 2004 $1,500,000 June 30, 2004 $1,500,000 September 30, 2004 $1,500,000 December 31, 2004 $1,500,000 March 31, 2005 $1,500,000 Total $30,000,000
; provided that the scheduled installments of principal of the Tranche A -------- Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Tranche A Term Loans in accordance with subsection 2.4B(iv); and provided, further that the Tranche -------- ------- A Term Loans and all other amounts owed hereunder with respect to the Tranche A Term Loans shall be paid in full no later than March 31, 2005, and the final installment payable by Company in respect of the Tranche A Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche A Term Loans. (ii) Scheduled Payments of Tranche B Term Loans. Company shall make ------------------------------------------ principal payments on the Tranche B Term 55 Loans in installments on the dates and in the amounts set forth below:
Scheduled Repayment Date of Tranche B Term Loans - ------ --------------------------------- June 30, 1998 $ 125,000 September 30, 1998 $ 125,000 December 31, 1998 $ 125,000 March 31, 1999 $ 125,000 June 30, 1999 $ 125,000 September 30, 1999 $ 125,000 December 31, 1990 $ 125,000 March 31, 2000 $ 125,000 June 30, 2000 $ 125,000 September 30, 2000 $ 125,000 December 31, 2000 $ 125,000 March 31, 2001 $ 125,000 June 30, 2001 $ 125,000 September 30, 2001 $ 125,000 December 31, 2001 $ 125,000 March 31, 2002 $ 125,000 June 30, 2002 $ 125,000 September 30, 2002 $ 125,000 December 31, 2002 $ 125,000 March 31, 2003 $ 125,000 June 30, 2003 $ 125,000 September 30, 2003 $ 125,000 December 31, 2003 $ 125,000 March 31, 2004 $ 125,000 June 30, 2004 $ 125,000 September 30, 2004 $ 125,000 December 31, 2004 $ 125,000 March 31, 2005 $ 125,000 June 30, 2005 $11,625,000 September 30, 2005 $11,625,000 December 31, 2005 $11,625,000 March 31, 2006 $11,625,000 Total $50,000,000
; provided that the scheduled installments of principal of the Tranche B -------- Term Loans set forth above shall be reduced in connection with any voluntary or mandatory prepayments of the Tranche B Term Loans in accordance with 56 subsection 2.4B(iv); and provided, further that the Tranche B Term Loans -------- ------- and all other amounts owed hereunder with respect to the Tranche B Term Loans shall be paid in full no later than March 31, 2006, and the final installment payable by Company in respect of the Tranche B Term Loans on such date shall be in an amount, if such amount is different from that specified above, sufficient to repay all amounts owing by Company under this Agreement with respect to the Tranche B Term Loans. B. PREPAYMENTS AND UNSCHEDULED REDUCTIONS IN REVOLVING LOAN COMMITMENTS. (i) Voluntary Prepayments. --------------------- (a) Company may, upon written or telephonic notice to Administrative Agent on or prior to 10:00 A.M. (San Francisco time) on the date of prepayment, which notice, if telephonic, shall be promptly confirmed in writing, at any time and from time to time prepay any Swing Line Loan on any Business Day in whole or in part in an aggregate minimum amount of $250,000 and multiples of $50,000 in excess of that amount. Company may, upon not less than one Business Day's prior written or telephonic notice, in the case of Base Rate Loans, and three Business Days' prior written or telephonic notice, in the case of Eurodollar Rate Loans, in each case given to Administrative Agent by 10:00 A.M. (San Francisco time) on the date required and, if given by telephone, promptly confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Lender), at any time and from time to time prepay any Term Loans or Revolving Loans on any Business Day in whole or in part in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess of that amount; provided, however, that a Eurodollar Rate Loan may -------- ------- only be prepaid on the expiration of the Interest Period applicable thereto unless Company complies with subsection 2.6D with respect to any breakage costs resulting from such prepayment being made on a date prior to the expiration of the applicable Interest Period. Notice of prepayment having been given as aforesaid, the principal amount of the Loans specified in such notice shall become due and payable on the prepayment date specified therein. Any such voluntary prepayment shall be applied as specified in subsection 2.4B(iv). (b) In the event Company is entitled to replace a non-consenting Lender pursuant to subsection 10.6B, Company shall have the right, upon five Business Days' written notice to Administrative Agent (which notice Administrative Agent shall promptly transmit to each of the Lenders), to prepay all Loans, together with accrued and unpaid interest, 57 fees and other amounts owing to such Lender in accordance with subsection 10.6B so long as (1) in the case of the prepayment of the Revolving Loans of any Lender pursuant to this subsection 2.4B(i)(b), the Revolving Loan Commitment of such Lender is terminated concurrently with such prepayment pursuant to subsection 2.4B(ii)(b) (at which time Schedule 2.1 shall be ------------ deemed modified to reflect the changed Revolving Loan Commitments), and (2) in the case of the prepayment of the Loans of any Lender, the consents required by subsection 10.6B in connection with the prepayment pursuant to this subsection 2.4B(i)(b) shall have been obtained, and at such time, such Lender shall no longer constitute a "Lender" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, subsections 2.6D, 2.7, 3.6, 10.2, 10.3 and 10.5) and any obligations or liabilities of such Lender to Holdings or any of its Subsidiaries under this Agreement while it was a Lender, which shall survive as to such Lender. (ii) Voluntary Reductions of Revolving Loan Commitments. -------------------------------------------------- (a) Company may, upon not less than three Business Days' prior written or telephonic notice confirmed in writing to Administrative Agent (which original written or telephonic notice Administrative Agent will promptly transmit by telefacsimile or telephone to each Revolving Lender), at any time and from time to time terminate in whole or permanently reduce in part, without premium or penalty, the Revolving Loan Commitments in an amount up to the amount by which the Revolving Loan Commitments exceed the Total Utilization of Revolving Loan Commitments at the time of such proposed termination or reduction; provided that any such partial reduction -------- of the Revolving Loan Commitments shall be in an aggregate minimum amount of $500,000 and integral multiples of $100,000 in excess of that amount. Company's notice to Administrative Agent shall designate the date (which shall be a Business Day) of such termination or reduction and the amount of any partial reduction, and such termination or reduction of the Revolving Loan Commitments shall be effective on the date specified in Company's notice and shall reduce the Revolving Loan Commitment of each Revolving Lender proportionately to its Pro Rata Share. (b) In the event Company is entitled to replace a non-consenting Lender pursuant to subsection 10.6B, Company shall have the right, upon five Business Days' written notice to Administrative Agent (which notice Administrative Agent shall promptly transmit to each of the Lenders), to terminate the entire Revolving Loan Commitment of such Lender, so long as (1) all Loans, together with accrued and 58 unpaid interest, fees and other amounts owing to such Lender are repaid, including without limitation amounts owing to such Lender pursuant to subsection 2.6D pursuant to subsection 2.4B(i)(b) concurrently with the effectiveness of such termination (at which time Schedule 2.1 shall be ------------ deemed modified to reflect such changed amounts) and (2) the consents required by subsection 10.6B in connection with the prepayment pursuant to subsection 2.4B(i)(b) shall have been obtained, and at such time, such Lender shall no longer constitute a "Lender" for purposes of this Agreement, except with respect to indemnifications under this Agreement (including, without limitation, subsections 2.6D, 2.7, 3.6, 10.2, 10.3 and 10.5) and any obligations or liabilities of such Lender to Holdings or any of its Subsidiaries under this Agreement while it was a Lender, which shall survive as to such Lender. (iii) Mandatory Prepayments and Mandatory Reductions of Revolving ----------------------------------------------------------- Loan Commitments. The Loans shall be prepaid and/or the Revolving Loan ---------------- Commitments shall be permanently reduced in the amounts and under the circumstances set forth below, all such prepayments and/or reductions to be applied as set forth below or as more specifically provided in subsection 2.4B(iv): (a) Prepayments and Reductions From Net Asset Sale Proceeds. ------------------------------------------------------- Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to any Net Asset Sale Proceeds received by Company or any of its Subsidiaries in respect of any Asset Sale no later than the 271st day following the date thereof; provided that so long as no Event of Default or -------- Potential Event of Default shall have occurred and be continuing, any Net Asset Sale Proceeds to the extent that such Net Asset Sale Proceeds are reinvested in the same or similar assets or other assets useful in the Business of Company or its Subsidiaries having a comparable value, within 270 days of such sale need not be applied to the mandatory prepayment of the Loans pursuant to this subsection 2.4B(iii)(a). (b) Prepayments and Reductions from Net Insurance/Condemnation ---------------------------------------------------------- Proceeds. No later than the first Business Day following the date of -------- receipt by Administrative Agent or by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to the amount of such Net Insurance/Condemnation Proceeds; provided, however, that no such prepayment shall be required to the extent (i) under the terms of any lease or other agreement 59 existing on the date hereof such Net Insurance/Condemnation Proceeds are required to be used to replace, rebuild or repair the asset so damaged, destroyed or taken or (ii) Company determines to utilize such Net Insurance/Condemnation Proceeds to replace, rebuild or repair the asset damaged, destroyed or taken, and in each case referred to in clauses (i) and (ii) above, Company so utilizes such Net Insurance/Condemnation Proceeds within 18 months of the receipt thereof. (c) Prepayment and Reductions Due to Reversion of Surplus Assets ------------------------------------------------------------ of Pension Plans. On the date of return to Company or any of its ---------------- Subsidiaries of any surplus assets of any pension plan of Company or any of its Subsidiaries, Company shall repay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount (such amount being the "NET PENSION PROCEEDS") equal to 100% of such returned surplus assets, net of transaction costs and expenses incurred in obtaining such return, including incremental taxes payable as a result thereof. (d) Prepayments and Reductions Due to Issuance of Debt or Equity ------------------------------------------------------------ Securities. On the date of receipt by Holdings, Company or any of its ---------- Subsidiaries of the Cash proceeds (any such cash proceeds, net of under writing discounts and commissions and other reasonable costs and expenses associated therewith, including reasonable legal and accounting fees and expenses, being "NET SECURITIES PROCEEDS"), from the issuance of debt or equity Securities of Holdings, Company or any of its Subsidiaries after the Closing Date (other than the issuance of debt Securities by Holdings permitted under subsection 7.1(viii)), Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 100% (in case of debt Securities) or 50% (in case of equity Securities) of such Net Securities Proceeds; provided that the Net Securities Proceeds -------- received from the issuance of equity Securities of Holdings (including Holdings Common Stock) for the purposes of financing (in whole or in part) any Permitted Acquisition need not be applied to the mandatory prepayment of the Loans pursuant to this subsection 2.4B(iii)(d); and provided further that none of the Net Securities Proceeds from the -------- ------- issuance of equity Securities needs to be applied to the mandatory prepayment of the Loans pursuant to this subsection 2.4B(iii)(d) if, after giving effect to such issuance and all other transactions contemplated in connection therewith, the Consolidated Leverage Ratio of the Company and its Subsidiaries as of the end of the most 60 recent Fiscal Quarter for which a Compliance Certificate has been delivered pursuant to subsection 6.1(iv) is less than 4.00:1.00. (e) Prepayments and Reductions from Consolidated Excess Cash -------------------------------------------------------- Flow. In the event that there shall be Consolidated Excess Cash Flow ---- for any Fiscal Year (commencing with the Fiscal Year beginning January 1, 1998), Company shall, no later than 105 days after the end of such Fiscal Year, prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to 50% of such Consolidated Excess Cash Flow. (f) Calculations of Net Proceeds Amounts; Additional Prepayments ------------------------------------------------------------ and Reductions Based on Subsequent Calculations. Concurrently with ----------------------------------------------- any prepayment of the Loans and/or reduction of the Revolving Loan Commitments pursuant to subsections 2.4B(iii)(a)-(e), Company shall deliver to Administrative Agent an Officer's Certificate demonstrating the calculation of the amount (the "NET PROCEEDS AMOUNT") of the applicable Net Asset Sale Proceeds, Net Insurance/Condemnation Proceeds, Net Pension Proceeds, Net Securities Proceeds, or the applicable Consolidated Excess Cash Flow, as the case may be, that gave rise to such prepayment and/or reduction. In the event that Company shall subsequently determine that (i) the actual Net Proceeds Amount was greater than the amount set forth in such Officer's Certificate, Company shall promptly make an additional prepayment of the Loans (and/or, if applicable, the Revolving Loan Commitments shall be permanently reduced) in an amount equal to the amount of such excess, and Company shall concurrently therewith deliver to Administrative Agent an Officer's Certificate demonstrating the derivation of the additional Net Proceeds Amount resulting in such excess, or (ii) the actual Net Proceeds Amount was less than the amount set forth in such Officer's Certificate, Company may deliver to Administrative Agent, within 60 days of the date of related prepayment and/or reduction, a new Officer's Certificate setting forth the Net Proceeds Amount actually received by Company and its Subsidiaries and requesting that an amount equal to the excess of the original Net Proceeds Amount over the Net Proceeds Amount actually received by Company and its Subsidiaries (the "Overpaid Amount") be applied to the immediately succeeding mandatory or scheduled prepayment of the Loans pursuant to subsection 2.4A or 2.4B(iii) hereunder. Upon the receipt of such Officer's Certificate, Administrative Agent shall promptly notify the Lenders to such effect 61 and on the date of the immediately succeeding mandatory or scheduled payment of the Loans pursuant to subsection 2.4A or 2.4B(iii), as the case may be, only an amount equal to the amount otherwise due under the applicable subsection minus the Overpaid Amount shall become due ----- and payable under such subsection. (g) Prepayments Due to Reductions or Restrictions of Revolving ---------------------------------------------------------- Loan Commitments. Company shall from time to time prepay first the ---------------- ----- Swing Line Loans and second the Revolving Loans to the extent ------ necessary so that the Total Utilization of Revolving Loan Commitments shall not at any time exceed the Revolving Loan Commitments then in effect. Notwithstanding anything to the contrary stated herein, upon the receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds in an aggregate cumulative amount exceeding $5,000,000 (excluding such amounts which have been applied to (x) prepay the Loans under subsection 2.4B(iii)(a) or (y) reinvest in same, similar or useful assets within 270 days of the related Asset Sale as provided in subsection 2.4B(iii)(a)), Company shall, or shall cause such Subsidiary to, deposit such excess amount on the date of receipt thereof in an interest bearing account in the name of Company designated by Administrative Agent (which account may be at Administrative Agent) (such account being the "Asset Sale Proceeds Account") to be held by Administrative Agent for the benefit of Lenders (each such deposit being an "Asset Sale Deposit"). From time to time but in any event within 270 days of the deposit of each Asset Sale Deposit to the Asset Sale Proceeds Account pursuant to the immediately preceding sentence, Company may request Administrative Agent to deliver all or a portion of such Asset Sale Deposit to Company or its Subsidiaries for reinvestment as provided in subsection 2.4B(iii)(a); provided that Company and its Subsidiaries shall -------- reinvest such funds in accordance with subsection 2.4B(iii)(a). On the 271st day following the date of deposit of each Asset Sale Deposit, Administrative Agent shall withdraw from the Asset Sale Proceeds Account an amount equal to such Asset Sale Deposit minus the portion of such Asset Sale Deposit (if any) used by Company to reinvest in same, similar or useful assets as provided above and apply such amount for the prepayment of the Loans and the permanent reduction of the Revolving Loan Commitments pursuant to subsection 2.4B(iii)(a). Any and all interest earned in respect of such account shall be for the account of Company and be forwarded by 62 Administrative Agent to Company on the last day of every calendar quarter. Similarly, notwithstanding anything to the contrary stated herein, upon the receipt by Company or any of its Subsidiaries of any Net Insurance/Condemnation Proceeds in an aggregate cumulative amount exceeding $5,000,000 (excluding such amounts which have been applied to (x) prepay the Loans under subsection 2.4B(iii)(b) or (y) replace, rebuild or repair the related asset as provided in subsection 2.4B(iii)(b)), Company shall, or shall cause such Subsidiary to, deposit such excess amount on the date of receipt thereof in an interest bearing account in the name of Company designated by Administrative Agent (which account may be at Administrative Agent) (such account being the "Condemnation/Insurance Proceeds Account") to be held by Administrative Agent for the benefit of Lenders (each such deposit being an "Condemnation/Insurance Deposit"). From time to time but in any event within 18 months of the deposit of each Condemnation/Insurance Deposit to the Condemnation/Insurance Proceeds Account pursuant to the immediately preceding sentence, Company may request Administrative Agent to deliver all or a portion of such Condemnation/Insurance Deposit to Company or its Subsidiaries for application as provided in subsection 2.4B(iii)(b); provided that -------- Company and its Subsidiaries shall apply such funds in accordance with subsection 2.4B(iii)(b). On the first day of the 19th month following the date of deposit of each Condemnation/Insurance Deposit, Administrative Agent shall withdraw from the Condemnation/Insurance Proceeds Account an amount equal to such Condemnation/Insurance Deposit minus the portion of such Condemnation/Insurance Deposit (if any) used by Company to replace, rebuild or repair the related asset and apply such amount for the prepayment of the Loans and the permanent reduction of the Revolving Loan Commitments pursuant to subsection 2.4B(iii)(b). Any and all interest earned in respect of such account shall be for the account of Company and be forwarded by Administrative Agent to Company on the last day of every calendar quarter. If, following the receipt by Company or any of its Subsidiaries of Net Proceeds Amount, Company is required to apply or cause to be applied any portion of such Net Proceeds Amount to prepay any Subordinated Indebtedness, then, notwithstanding anything contained in this subsection 2.4B(iii), Company shall prepay the Loans and/or reduce the Revolving Loan Commitment in the order set forth in this subsection 2.4B(iii) so as 63 to eliminate any obligation to prepay such Subordinated Indebtedness. (iv) Application of Prepayments. -------------------------- (a) Application of Voluntary Prepayments by Type of Loans and --------------------------------------------------------- Order of Maturity. Any voluntary prepayments pursuant to subsection ----------------- 2.4B(i)(a) shall be applied as specified by Company in the applicable notice of prepayment; provided that in the event Company fails to -------- specify the Loans to which any such prepayment shall be applied, such prepayment shall be applied first to repay outstanding Swing Line ----- Loans to the full extent thereof, second to repay outstanding ------ Revolving Loans to the full extent thereof and third to repay ----- outstanding Term Loans to the full extent thereof. Any voluntary prepayments of the Term Loans pursuant to subsection 2.4B(i)(a) shall be applied to prepay the Tranche A Term Loans and the Tranche B Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) and to reduce the scheduled installments of principal of the Tranche A Term Loans and Tranche B Term Loans set forth in subsection 2.4A(i) and 2.4A(ii) in forward order of maturity for the first four quarterly scheduled payments to occur following such voluntary prepayment; provided that no voluntary -------- prepayments may be applied to reduce the scheduled installments of principal of the Tranche A Term Loans or the Tranche B Term Loans with respect to any quarterly period beyond the fourth quarterly period following such voluntary prepayment; and thereafter to reduce the scheduled installments of principal of the Tranche A Term Loans and Tranche B Term Loans set forth in subsection 2.4A(i) and 2.4A(ii) on a pro rata basis; (b) Application of Mandatory Prepayments by Type of Loans. Any ----------------------------------------------------- amount (the "APPLIED AMOUNT") required to be applied as a mandatory prepayment of the Loans and/or a reduction of the Revolving Loan Commitments pursuant to subsections 2.4B(iii)(a)-(g) shall be applied first to prepay the Term Loans to the full extent thereof, second, to ----- ------ the extent of any remaining portion of the Applied Amount, to prepay the Swing Line Loans to the full extent thereof and to permanently reduce the Revolving Loan Commitments by the amount of such prepayment, third, to the extent of any remaining portion of the ----- Applied Amount, to prepay the Revolving Loans to the full extent thereof and to further permanently reduce the Revolving Loan Commitments by the amount of such prepayment, fourth, to the extent of any remaining portion of the Applied Amount, to provide cash collateral for any outstanding Letters of Credit 64 to the full extent of the outstanding stated amounts thereof and to further permanently reduce the Revolving Loan Commitments by the amount of such cash collateral and, fifth, to the extent of any ----- remaining portion of the Applied Amount, to further permanently reduce the Revolving Loan Commitments to the full extent thereof. (c) Application of Mandatory Prepayments of Term Loans to Tranche ------------------------------------------------------------- A Term Loans and Tranche B Term Loans and the Scheduled Installments -------------------------------------------------------------------- of Principal Thereof. Any mandatory prepayments of the Term Loans -------------------- pursuant to subsection 2.4B(iii) shall be applied to prepay the Tranche A Term Loans and the Tranche B Term Loans on a pro rata basis (in accordance with the respective outstanding principal amounts thereof) and to reduce the scheduled installments of principal of the Tranche A Term Loans and Tranche B Term Loans set forth in subsection 2.4A(i) and 2.4A(ii) on a pro rata basis. Notwithstanding the foregoing, in the case of any mandatory prepayment of the Tranche B Term Loans, Company may elect to offer the Tranche B Term Loan Lenders the option to waive the right to receive the amount of such mandatory prepayment of the Tranche B Term Loans. If any Lender or Lenders elect to waive the right to receive the amount of such mandatory prepayment, 50% of the amount that otherwise would have been applied to mandatorily prepay the Tranche B Term Loans of such Lender or Lenders shall be applied instead to the further prepayment of the Tranche A Term Loans to the extent any are then outstanding and the remaining amount shall be retained by Company. (d) Application of Prepayments to Base Rate Loans and Eurodollar ------------------------------------------------------------ Rate Loans. Considering Tranche A Term Loans, Tranche B Term Loans ---------- and Revolving Loans being prepaid separately, any prepayment thereof shall be applied first to Base Rate Loans to the full extent thereof before application to Eurodollar Rate Loans, in each case in a manner which minimizes the amount of any payments required to be made by Company pursuant to subsection 2.6D. C. GENERAL PROVISIONS REGARDING PAYMENTS. (i) Manner and Time of Payment. All payments by Company of principal, -------------------------- interest, fees and other Obligations hereunder and under the Notes (if any) shall be made in Dollars in same day funds, without defense, setoff or counterclaim, free of any restriction or condition, and delivered to Administrative Agent not later than 10:00 A.M. (San Francisco time) on the date due at the Funding and Payment Office for the account of Lenders; funds received by Administrative Agent after that time on such due date shall 65 be deemed to have been paid by Company on the next succeeding Business Day. Company hereby authorizes Administrative Agent to charge its accounts with Administrative Agent in order to cause timely payment to be made to Administrative Agent of all principal, interest, fees and expenses due hereunder (subject to sufficient funds being available in its accounts for that purpose). (ii) Application of Payments to Principal and Interest. Except as ------------------------------------------------- provided in subsection 2.2C, all payments in respect of the principal amount of any Loan shall include payment of accrued interest on the principal amount being repaid or prepaid, and all such payments (and, in any event, any payments in respect of any Loan on a date when interest is due and payable with respect to such Loan) shall be applied to the payment of interest before application to principal. (iii) Apportionment of Payments. Aggregate principal and interest ------------------------- payments in respect of Term Loans and Revolving Loans shall be apportioned among all outstanding Loans to which such payments relate, in each case proportionately to Lenders' respective Pro Rata Shares. Administrative Agent shall promptly distribute to each Lender, at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Lender may request, its Pro Rata Share of all such payments received by Administrative Agent and the commitment fees of such Lender when received by Administrative Agent pursuant to subsection 2.3. Notwithstanding the foregoing provisions of this subsection 2.4C(iii), if, pursuant to the provisions of subsection 2.6C, any Notice of Conversion/Continuation is withdrawn as to any Affected Lender or if any Affected Lender makes Base Rate Loans in lieu of its Pro Rata Share of any Eurodollar Rate Loans, Administrative Agent shall give effect thereto in apportioning payments received thereafter. (iv) Payments on Business Days. Whenever any payment to be made ------------------------- hereunder shall be stated to be due on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder or of the commitment fees hereunder, as the case may be. (v) Notation of Payment. Each Lender agrees that before disposing ------------------- of any Note held by it, or any part thereof (other than by granting participations therein), that Lender will comply with the terms of this Agreement and will make a notation thereon of all Loans evidenced by that Note and all principal payments previously made thereon and of the date to which interest thereon has been paid; provided that the -------- 66 failure to make (or any error in the making of) a notation of any Loan made under such Note shall not limit or otherwise affect the obligations of Company hereunder or under such Note with respect to any Loan or any payments of principal or interest on such Note. D. APPLICATION OF PROCEEDS OF COLLATERAL AND PAYMENTS UNDER GUARANTIES (i) Application of Proceeds of Collateral. Except as provided in ------------------------------------- subsection 2.4B(iii)(a) with respect to prepayments from Net Asset Sale Proceeds, all proceeds received by Administrative Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral under any Collateral Document may, in the discretion of Administrative Agent, be held by Administrative Agent as Collateral for, and/or (then or at any time thereafter) applied in full or in part by Administrative Agent against, the applicable Secured Obligations (as defined in such Collateral Document) in the following order of priority: (a) To the payment of all costs and expenses of such sale, collection or other realization, including compensation to Administrative Agent and its agents and counsel, and all other expenses, liabilities and advances made or incurred by Administrative Agent in connection therewith, in each case to the extent payable under this Agreement or the Collateral Documents, and all amounts for which Administrative Agent is entitled to indemnification under such Collateral Document and all advances made by Administrative Agent thereunder for the account of the applicable Loan Party, and to the payment of all costs and expenses paid or incurred by Administrative Agent in connection with the exercise of any right or remedy under such Collateral Document, all in accordance with the terms of this Agreement and such Collateral Document; (b) thereafter, to the extent of any excess of such proceeds, to the payment of all other Secured Obligations for the ratable benefit of the holders thereof; (c) thereafter, to the extent of any excess of such proceeds, to the payment of cash collateral for Letters of Credit for the ratable benefit of the Issuing Lenders thereof and holders of participations therein; and (d) thereafter, to the extent of any excess of such proceeds, to the payment to or upon the order of 67 such Loan Party or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. (ii) Application of Payments Under Guaranties. All payments received ---------------------------------------- by Administrative Agent under any of the Guaranties shall be applied promptly from time to time by Administrative Agent in the following order of priority: (a) to the payment of all costs and expenses of any collection or other realization under the Guaranties, including compensation to Administrative Agent and its agents and counsel, and all expenses, liabilities and advances made or incurred by Administrative Agent in connection therewith, in each case to the extent payable under this Agreement or the Collateral Documents, all in accordance with the terms of this Agreement and such Guaranty; (b) thereafter, to the extent of any excess of such payments, to the payment of all other Guarantied Obligations (as defined in such Guaranty) for the ratable benefit of the holders thereof; (c) thereafter, to the extent of any excess of such payments, to the payment of cash collateral for Letters of Credit for the ratable benefit of the Issuing Lenders thereof and holders of participations therein; and (d) thereafter, to the extent of any excess of such payments, to the payment to Holdings or to the applicable Subsidiary Guarantor or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct. 2.5 USE OF PROCEEDS. --------------- A. TERM LOANS. The proceeds of the Term Loans, together with (i) the proceeds from the issuance of the Senior Subordinated Notes in an aggregate principal amount not exceeding $100,000,000, (ii) the proceeds from the issuance of the Holdings Discount Debentures in an aggregate principal amount not exceeding $45,105,480, (iii) the proceeds from the issuance of the Holdings Preferred Stock in an aggregate principal amount not exceeding $47,000,000 and (iv) the proceeds of the Revolving Loans in an aggregate principal amount not exceeding $7,000,000 shall be applied by Holdings or Company, as appropriate, (a) to redeem all of the issued and outstanding Holdings Common Stock (other than the Retained Shares) from the Existing Shareholders for an aggregate redemption price not exceeding $211,503,000, (b) to pay in full all of the Existing Indebtedness in an aggregate 68 principal amount not exceeding $49,497,000, together with accrued interest and any prepayment penalties incurred in connection therewith, and (c) to pay the Transaction Costs in an aggregate amount not exceeding $12,500,000. B. REVOLVING LOANS; SWING LINE LOANS. The proceeds of the Revolving Loans and any Swing Line Loans shall be applied by Company for working capital requirements and general corporate purposes. C. MARGIN REGULATIONS. No portion of the proceeds of any borrowing under this Agreement shall be used by Company or any of its Subsidiaries in any manner that might cause the borrowing or the application of such proceeds to violate Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System or any other regulation of such Board or to violate the Exchange Act, in each case as in effect on the date or dates of such borrowing and such use of proceeds. 2.6 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS. -------------------------------------------------- Notwithstanding any other provision of this Agreement to the contrary, the following provisions shall govern with respect to Eurodollar Rate Loans as to the matters covered: A. DETERMINATION OF APPLICABLE INTEREST RATE. As soon as practicable after 11:00 A.M. (London time) on each Interest Rate Determination Date, Administrative Agent shall determine (which determination shall, absent manifest error, be final, conclusive and binding upon all parties) the interest rate that shall apply to the Eurodollar Rate Loans for which an interest rate is then being determined for the applicable Interest Period and shall promptly give notice thereof (in writing or by telephone confirmed in writing) to Company and each Lender. B. INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event that Administrative Agent shall have determined (which determination shall be final and conclusive and binding upon all parties hereto), on any Interest Rate Determination Date with respect to any Eurodollar Rate Loans, that by reason of circumstances affecting the London interbank eurodollar market adequate and fair means do not exist for ascertaining the interest rate applicable to such Loans on the basis provided for in the definition of Adjusted Eurodollar Rate, Administrative Agent shall on such date give notice (by telefacsimile or by telephone confirmed in writing) to Company and each Lender of such determination, whereupon (i) no Loans may be made as, or converted to, Eurodollar Rate Loans until such time as Administrative Agent notifies Company and Lenders that the circumstances giving rise to such notice no longer exist and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to the Loans in respect of which such determination was made shall be deemed to be rescinded by 69 Company, and Company shall not incur any cost under subsection 2.6D with respect to such rescinded Loan. C. ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS. In the event that on any date any Lender shall have determined (which determination shall be final and conclusive and binding upon all parties hereto but shall be made only after consultation with Company and Administrative Agent) that the making, maintaining or continuation of its Eurodollar Rate Loans (i) has become unlawful as a result of compliance by such Lender in good faith with any law, treaty, governmental rule, regulation, guideline or order (or would conflict with any such treaty, governmental rule, regulation, guideline or order not having the force of law even though the failure to comply therewith would not be unlawful) or (ii) has become impracticable, or would cause such Lender material hardship, as a result of contingencies occurring after the date of this Agreement which materially and adversely affect the London interbank eurodollar market or the position of such Lender in that market, then, and in any such event, such Lender shall be an "AFFECTED LENDER" and it shall on that day give notice (by telefacsimile or by telephone confirmed in writing) to Company and Administrative Agent of such determination (which notice Administrative Agent shall promptly transmit to each other Lender). Thereafter (a) the obligation of the Affected Lender to make Loans as, or to convert Loans to, Eurodollar Rate Loans shall be suspended until such notice shall be withdrawn by the Affected Lender, (b) to the extent such determination by the Affected Lender relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, the Affected Lender shall make such Loan as (or convert such Loan to, as the case may be) a Base Rate Loan, (c) the Affected Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the "AFFECTED LOANS") shall be terminated at the earlier to occur of the expiration of the Interest Period then in effect with respect to the Affected Loans or when required by law; provided that Affected Lender shall not be -------- entitled to any compensation under subsection 2.6D if the Affected Loans have been terminated prior to the end of the related Interest Period, and (d) the Affected Loans shall automatically convert into Base Rate Loans on the date of such termination. Notwithstanding the foregoing, to the extent a determination by an Affected Lender as described above relates to a Eurodollar Rate Loan then being requested by Company pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation, Company shall have the option, subject to the provisions of subsection 2.6D, to rescind such Notice of Borrowing or Notice of Conversion/Continuation as to all Lenders by giving notice (by telefacsimile or by telephone confirmed in writing) to Administrative Agent of such rescission on the date on which the Affected Lender gives notice of its determination as described above (which notice of rescission Administrative Agent shall promptly transmit to each other Lender). Except as provided in 70 the immediately preceding sentence, nothing in this subsection 2.6C shall affect the obligation of any Lender other than an Affected Lender to make or maintain Loans as, or to convert Loans to, Eurodollar Rate Loans in accordance with the terms of this Agreement. D. COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST PERIODS. Company shall compensate each Lender, upon written request by that Lender (which request shall set forth in reasonable detail the basis for requesting such amounts), for all reasonable losses, expenses and liabilities (including any interest paid by that Lender to lenders of funds borrowed by it to make or carry its Eurodollar Rate Loans and any loss, expense or liability sustained by that Lender in connection with the liquidation or re-employment of such funds) which that Lender may sustain: (i) if for any reason (other than a default by that Lender or any rescinded borrowing under subsection 2.6B or 2.6C) a borrowing of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Borrowing or a telephonic request for borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does not occur on a date specified therefor in a Notice of Conversion/Continuation or a telephonic request for conversion or continuation, (ii) if any prepayment (including any prepayment pursuant to subsection 2.4B(i)(a)) or other principal payment or any conversion of any of its Eurodollar Rate Loans occurs on a date prior to the last day of an Interest Period applicable to that Loan, (iii) if any prepayment of any of its Eurodollar Rate Loans is not made on any date specified in a notice of prepayment given by Company, or (iv) as a consequence of any other default by Company in the repayment of its Eurodollar Rate Loans when required by the terms of this Agreement. E. BOOKING OF EURODOLLAR RATE LOANS. Any Lender may make, carry or transfer Eurodollar Rate Loans at, to, or for the account of any of its branch offices or the office of an Affiliate of that Lender. F. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS. Calculation of all amounts payable to a Lender under this subsection 2.6 and under subsection 2.7A shall be made as though that Lender had actually funded each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar deposit bearing interest at the rate obtained pursuant to clause (i) of the definition of Adjusted Eurodollar Rate in an amount equal to the amount of such Eurodollar Rate Loan and having a maturity comparable to the relevant Interest Period and through the transfer of such Eurodollar deposit from an offshore office of that Lender to a domestic office of that Lender in the United States of America; provided, however, that each Lender may fund each of its Eurodollar Rate Loans - -------- ------- in any manner it sees fit and the foregoing assumptions shall be utilized only for the purposes 71 of calculating amounts payable under this subsection 2.6 and under subsection 2.7A. G. EURODOLLAR RATE LOANS AFTER DEFAULT. After the occurrence of and during the continuation of a Potential Event of Default or an Event of Default, (i) Company may not elect to have a Loan be made or maintained as, or converted to, a Eurodollar Rate Loan after the expiration of any Interest Period then in effect for that Loan and (ii) subject to the provisions of subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation given by Company with respect to a requested borrowing or conversion/continuation that has not yet occurred shall be deemed to be rescinded by Company. 2.7 INCREASED COSTS; TAXES; CAPITAL ADEQUACY. ---------------------------------------- A. COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that any Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by such Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Lender (or its applicable lending office) to any additional Tax (other than any Tax on the overall net income of such Lender) with respect to this Agreement or any of its obligations hereunder or any payments to such Lender (or its applicable lending office) of principal, interest, fees or any other amount payable hereunder; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC insurance or similar requirement against assets held by, or deposits or other liabilities in or for the account of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender (other than any such reserve or other requirements with respect to Eurodollar Rate Loans that are reflected in the definition of Adjusted Eurodollar Rate); or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Lender (or its 72 applicable lending office) or its obligations hereunder or the London interbank eurodollar market; and the result of any of the foregoing is to increase the cost to such Lender of agreeing to make, making or maintaining Loans hereunder or to reduce any amount received or receivable by such Lender (or its applicable lending office) with respect thereto; then, in any such case, Company shall promptly pay to such Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts (in the form of an increased rate of, or a different method of calculating, interest or otherwise as such Lender in its sole discretion shall determine) as may be necessary to compensate such Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Lender under this subsection 2.7A, which statement shall be conclusive and binding upon all parties hereto absent manifest error. Such Lender agrees to provide any such request within 180 days of becoming aware of such costs and to use averaging and attribution methods which are reasonable. B. WITHHOLDING OF TAXES. (i) Payments to Be Free and Clear. All sums payable by Company under ----------------------------- this Agreement and the other Loan Documents shall (except to the extent required by law) be paid free and clear of, and without any deduction or withholding on account of, any Tax (other than a Tax on the overall net income or franchise of any Lender or any Lending Office) imposed, levied, collected, withheld or assessed by or within the United States of America or any political subdivision in or of the United States of America or any other jurisdiction from or to which a payment is made by or on behalf of Company or by any federation or organization of which the United States of America or any such jurisdiction is a member at the time of payment. (ii) Grossing-up of Payments. If Company or any other Person is ----------------------- required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by Company to Administrative Agent or any Lender under any of the Loan Documents: (a) Company shall notify Administrative Agent of any such requirement or any change in any such requirement promptly after Company becomes aware of it; (b) Company shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on Company) 73 for its own account or (if that liability is imposed on Administrative Agent or such Lender, as the case may be) on behalf of and in the name of Administrative Agent or such Lender; (c) the sum payable by Company in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, Administrative Agent or such Lender, as the case may be, receives on the due date a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and (d) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, Company shall deliver to Administrative Agent evidence reasonably satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant taxing or other authority; provided that no such additional amount shall be required to be paid to any -------- Lender under clause (c) above except to the extent that any change after the date hereof (in the case of each Lender listed on the signature pages hereof) or after the date of the Assignment Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is mentioned therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment Agreement, as the case may be, in respect of payments to such Lender. If any Lender receives a refund of any Taxes for a which payment has been made pursuant to this subsection 2.7 which, in the reasonable good faith judgment of such Lender, is allocable to such payment made under subsection 2.7, the amount of such refund shall be paid to Company to the extent payment has been made in full as and when required pursuant to this subsection 2.7. (iii) Evidence of Exemption from U.S. Withholding Tax. ----------------------------------------------- (a) Each Lender that is organized under the laws of any jurisdiction other than the United States or any state or other political subdivision thereof (for purposes of this subsection 2.7B(iii), a "NON-US LENDER") shall deliver to Administrative Agent for transmission to Company, on or prior to the Closing Date (in the case of each Lender listed on the 74 signature pages hereof) or on or prior to the date of the Assignment Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of Company or Administrative Agent (each in the reasonable exercise of its discretion), (1) two original copies of Internal Revenue Service Form 1001 or 4224 (or any successor forms), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents or (2) if such Lender is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (1) above, a Certificate re Non-Bank Status together with two original copies of Internal Revenue Service Form W-8 (or any successor form), properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required under the Internal Revenue Code or the regulations issued thereunder to establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to any payments to such Lender of interest payable under any of the Loan Documents. (b) Each Lender required to deliver any forms, certificates or other evidence with respect to United States federal income tax withholding matters pursuant to subsection 2.7B(iii)(a) hereby agrees, from time to time after the initial delivery by such Lender of such forms, certificates or other evidence, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence obsolete or inaccurate in any material respect, that such Lender shall promptly (1) deliver to Administrative Agent for transmission to Company two new original copies of Internal Revenue Service Form 1001 or 4224, or a Certificate re Non-Bank Status and two original copies of Internal Revenue Service Form W-8, as the case may be, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to deduction or withholding of United States federal income tax with respect to payments to such Lender under the Loan Documents or (2) notify Administrative Agent and 75 Company of its inability to deliver any such forms, certificates or other evidence. (c) Company shall not be required to pay any additional amount to any Non-US Lender under clause (c) of subsection 2.7B(ii) if such Lender shall have failed to satisfy the requirements of clause (a) or (b) (1) of this subsection 2.7B(iii); provided that if such Lender -------- shall have satisfied the requirements of subsection 2.7B(iii)(a) on the Closing Date (in the case of each Lender listed on the signature pages hereof) or on the date of the Assignment Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection 2.7B(iii)(c) shall relieve Company of its obligation to pay any additional amounts pursuant to clause (c) of subsection 2.7B(ii) in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in subsection 2.7B(iii)(a). C. CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have determined that the adoption, effectiveness, phase-in or applicability after the date hereof of any law, rule or regulation (or any provision thereof) regarding capital adequacy, or any change therein or 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 Lender (or its applicable lending office) with any guideline, request or directive regarding capital adequacy (whether or not having the force of law) of any such governmental authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on the capital of such Lender or any corporation controlling such Lender as a consequence of, or with reference to, such Lender's Loans or Commitments or Letters of Credit or participations therein or other obligations hereunder with respect to the Loans or the Letters of Credit to a level below that which such Lender or such controlling corporation could have achieved but for such adoption, effectiveness, phase-in, applicability, change or compliance (taking into consideration the policies of such Lender or such controlling corporation with regard to capital adequacy), then from time to time, within five Business Days after receipt by Company from such Lender of the statement referred to in the next sentence, Company shall pay to such Lender such additional amount or amounts as will compensate such Lender or such controlling corporation on an after-tax basis for such reduction. Such Lender shall deliver to Company (with a copy to Administrative Agent) a written statement, setting forth in 76 reasonable detail the basis of the calculation of such additional amounts, which statement shall be conclusive and binding upon all parties hereto absent manifest error. Such Lender agrees to provide any such request within 180 days of becoming aware of such costs and to use averaging and attribution methods which are reasonable. 2.8 OBLIGATION OF LENDERS AND ISSUING LENDERS TO MITIGATE. ----------------------------------------------------- Each Lender and Issuing Lender agrees that, as promptly as practicable after the officer of such Lender or Issuing Lender responsible for administering the Loans or Letters of Credit of such Lender or Issuing Lender, as the case may be, becomes aware of the occurrence of an event or the existence of a condition that would cause such Lender to become an Affected Lender or that would entitle such Lender or Issuing Lender to receive payments under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent with the internal policies of such Lender or Issuing Lender and any applicable legal or regulatory restrictions, use reasonable efforts (i) to make, issue, fund or maintain the Commitments of such Lender or the affected Loans or Letters of Credit of such Lender or Issuing Lender through another lending or letter of credit office of such Lender or Issuing Lender, or (ii) take such other measures as such Lender or Issuing Lender may deem reasonable, if as a result thereof the circumstances which would cause such Lender to be an Affected Lender would cease to exist or the additional amounts which would otherwise be required to be paid to such Lender or Issuing Lender pursuant to subsection 2.7 or subsection 3.6 would be materially reduced and if, as determined by such Lender or Issuing Lender in its sole discretion, the making, issuing, funding or maintaining of such Commitments or Loans or Letters of Credit through such other lending or letter of credit office or in accordance with such other measures, as the case may be, would not otherwise materially adversely affect such Commitments or Loans or Letters of Credit or the interests of such Lender or Issuing Lender; provided that such -------- Lender or Issuing Lender will not be obligated to utilize such other lending or letter of credit office pursuant to this subsection 2.8 unless Company agrees to pay all incremental expenses incurred by such Lender or Issuing Lender as a result of utilizing such other lending or letter of credit office as described in clause (i) above. A certificate as to the amount of any such expenses payable by Company pursuant to this subsection 2.8 (setting forth in reasonable detail the basis for requesting such amount) submitted by such Lender or Issuing Lender to Company (with a copy to Administrative Agent) shall be conclusive absent manifest error. 2.9 REPLACEMENT OF LENDER. --------------------- Upon the occurrence of a Replacement Event, Company shall have the right, prior to the sixtieth (60th) day following the date of the event giving rise to such right and if no 77 Potential Event of Default or Event of Default then exists, to replace such Lender (a "REPLACED LENDER") with one or more Eligible Assignees (collectively, the "REPLACEMENT LENDER") acceptable to Administrative Agent, provided that (i) -------- at the time of any replacement pursuant to this subsection 2.9 the Replacement Lender shall enter into one or more Assignment Agreements pursuant to subsection 10.1B (and with all fees payable pursuant to such subsection 10.1B to be paid by the Replacement Lender) pursuant to which the Replacement Lender shall acquire all of the outstanding Loans and Commitments of, and in each case participations in Letters of Credit and Swing Line Loans by, the Replaced Lender and, in connection therewith, shall pay to (x) the Replaced Lender in respect thereof an amount equal to the sum of (A) an amount equal to the principal of, and all accrued interest on, all outstanding Loans of the Replaced Lender, (B) an amount equal to all unpaid drawings with respect to Letters of Credit that have been funded by (and not reimbursed to) such Replaced Lender, together with all then unpaid interest with respect thereto at such time and (C) an amount equal to all accrued, but theretofore unpaid, fees owing to the Replaced Lender with respect thereto, (y) the appropriate Issuing Lender an amount equal to such Replaced Lender's Pro Rata Share of any unpaid drawings with respect to Letters of Credit (which at such time remains an unpaid drawing) issued by it to the extent such amount was not theretofore funded by such Replaced Lender, and (z) Swing Line Lender an amount equal to such Replaced Lender's Pro Rata Share of any Refunded Swing Line Loans to the extent such amount was not theretofore funded by such Replaced Lender, and (ii) all obligations (including without limitation all such amounts, if any, owing under subsection 2.6D) of Company owing to the Replaced Lender (other than those specifically described in clause (i) above in respect of which the assignment purchase price has been, or is concurrently being, paid), shall be paid in full to such Replaced Lender concurrently with such replacement. Upon the execution of the respective Assignment Agreements and the acceptance thereof by Administrative Agent pursuant to subsection 2.1D, the payment of amounts referred to in clauses (i) and (ii) above and, if so requested by the Replacement Lender, delivery to the Replacement Lender of the appropriate Note or Notes executed by Company, the Replacement Lender shall become a Lender hereunder and the Replaced Lender shall cease to constitute a Lender hereunder except with respect to indemnification provisions under this Agreement which by the terms of this Agreement survive the termination of this Agreement, which indemnification provisions shall survive as to such Replaced Lender, and any other obligations or liabilities to Holdings or its Subsidiaries relating to such time in which Replaced Lender was a Lender. Notwithstanding anything to the contrary contained above, no Issuing Lender may be replaced hereunder at any time while it has Letters of Credit outstanding hereunder unless arrangements reasonably satisfactory to such Issuing Lender (including the furnishing of a Standby Letter of Credit in form and substance, and issued by an issuer reasonably 78 satisfactory to such Issuing Lender or the furnishing of cash collateral in amounts and pursuant to arrangements reasonably satisfactory to such Issuing Lender) have been made with respect to such outstanding Letters of Credit. For the purposes of the foregoing, a "Replacement Event" with respect to a Lender means any one of the following: (i) Company receives a notice from such Lender pursuant to subsection 2.6C, 2.7A or 3.6, (ii) failure of such Lender to make the amount of its Loan available to Administrative Agent pursuant to subsection 2.1C or (iii) such Lender refuses to consent to a proposed change, waiver, discharge or termination with respect to this Agreement which has been approved by the Requisite Lenders and all other conditions set forth in subsection 10.6 have been satisfied for Company to replace such Lender. Section 3. LETTERS OF CREDIT 3.1 ISSUANCE OF LETTERS OF CREDIT AND LENDERS' PURCHASE OF PARTICIPATIONS --------------------------------------------------------------------- THEREIN. ------- A. LETTERS OF CREDIT. In addition to Company requesting that Revolving Lenders make Revolving Loans pursuant to subsection 2.1A(iii) and that Swing Line Lender make Swing Line Loans pursuant to subsection 2.1A(iv), Company may request, in accordance with the provisions of this subsection 3.1, from time to time during the period from the Closing Date to but excluding the Revolving Loan Commitment Termination Date, that one or more Revolving Lenders issue Letters of Credit for the account of Company for the purposes specified in the definitions of Commercial Letters of Credit and Standby Letters of Credit. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties of Company herein set forth, any one or more Revolving Lenders may, but (except as provided in subsection 3.1B(ii)) shall not be obligated to, issue such Letters of Credit in accordance with the provisions of this subsection 3.1; provided that Company shall not request that any Revolving -------- Lender issue (and no Revolving Lender shall issue): (i) any Letter of Credit if, after giving effect to such issuance, the Total Utilization of Revolving Loan Commitments would exceed the Revolving Loan Commitments then in effect; (ii) any Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage would exceed $10,000,000; (iii) any Standby Letter of Credit if, after giving effect to such issuance, the Letter of Credit Usage in respect of all other Standby Letters of Credit would exceed $5,000,000; 79 (iv) any Letter of Credit having an expiration date later than the earlier of (a) the Revolving Loan Commitment Termination Date and (b) the date which is one year from the date of issuance of such Letter of Credit; provided that the immediately preceding clause (b) shall not prevent any -------- Issuing Lender from agreeing that a Letter of Credit will automatically be extended for one or more successive periods not to exceed one year each unless such Issuing Lender elects not to extend for any such additional period; and provided, further that such Issuing Lender shall elect not to -------- ------- extend such Letter of Credit if it has knowledge that an Event of Default has occurred and is continuing (and has not been waived in accordance with subsection 10.6) at the time such Issuing Lender must elect whether or not to allow such extension; (v) any Commercial Letter of Credit having an expiration date (a) later than the earlier of (X) the date which is 30 days prior to the Revolving Loan Commitment Termination Date and (Y) the date which is 180 days from the date of issuance of such Letter of Credit or (b) that is otherwise unacceptable to the applicable Issuing Lender in its reasonable discretion; or (vi) any Letter of Credit denominated in a currency other than Dollars. An Issuing Lender is under no obligation to issue any Letter of Credit if at the time of request for such issuance: (a) any order, judgment or decree of any governmental authority or arbitrator shall by its terms purport to enjoin or restrain the Issuing Lender from issuing such Letter of Credit, or any requirement of law applicable to the Issuing Lender or any directive (whether or not having the force of law) from any governmental authority with jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular, or shall impose upon the Issuing Lender with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Lender is not otherwise compensated hereunder) not in effect on the Closing Date, or shall impose upon the Issuing Lender any unreimbursed loss, cost or expense which was not applicable on the Closing Date and which the Issuing Lender in good faith deems material to it; (b) any requested Letter of Credit does not provide for drafts, or is not otherwise in form and substance reasonably acceptable to the Issuing Lender, or the issuance of a Letter of Credit may violate any policies of the Issuing Lender applicable to customers similar to Company 80 and credits of a type similar to the transactions contemplated by this Agreement; or (c) the requested Letter of Credit provides for payment thereunder sooner than the Business Day following the presentation to the Issuing Lender of the documentation required thereunder. B. MECHANICS OF ISSUANCE. (i) Notice of Issuance. Whenever Company desires the issuance of a ------------------ Letter of Credit, it shall deliver to Administrative Agent a Notice of Issuance of Letter of Credit substantially in the form of Exhibit III ----------- annexed hereto no later than 10:00 A.M. (San Francisco time) at least three Business Days, or such shorter period as may be agreed to by the Issuing Lender in any particular instance, in advance of the proposed date of issuance. The Notice of Issuance of Letter of Credit shall specify (a) the proposed date of issuance (which shall be a Business Day), (b) the face amount of the Letter of Credit, (c) the expiration date of the Letter of Credit, (d) the name and address of the beneficiary, and (e) either the verbatim text of the proposed Letter of Credit or the proposed terms and conditions thereof, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of the Letter of Credit, would require the Issuing Lender to make payment under the Letter of Credit; provided that the -------- Issuing Lender, in its reasonable discretion, may require changes in the text of the proposed Letter of Credit or any such documents; and provided, -------- further that no Letter of Credit shall require payment against a conforming ------- draft to be made thereunder on the same business day (under the laws of the jurisdiction in which the office of the Issuing Lender to which such draft is required to be presented is located) that such draft is presented if such presentation is made after 12:00 Noon (in the time zone of such office of the Issuing Lender) on such business day. Company shall notify the applicable Issuing Lender (and Administrative Agent, if Administrative Agent is not such Issuing Lender) prior to the issuance of any Letter of Credit in the event that any of the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit is no longer true and correct as of the proposed date of issuance of such Letter of Credit, and upon the issuance of any Letter of Credit Company shall be deemed to have re-certified, as of the date of such issuance, as to the matters to which Company is required to certify in the applicable Notice of Issuance of Letter of Credit. 81 From time to time while a Letter of Credit is outstanding and before the Revolving Commitment Termination Date, the Issuing Lender will, upon the written request of Company received by the Issuing Lender (with a copy sent by Company to Administrative Agent) at least three days (or such shorter time as the Issuing Lender may agree in a particular instance in its sole discretion) before the proposed date of amendment, amend any Letter of Credit issued by it. Each such request for amendment of a Letter of Credit shall be made by an original writing or by facsimile, confirmed promptly in an original writing, made in the form of an L/C Amendment Application and shall specify in form and detail reasonably satisfactory to the Issuing Lender; (a) the Letter of Credit to be amended; (b) the proposed date of amendment of such Letter of Credit (which shall be a Business Day); (c) the nature of the proposed amendment; and (d) such other matters as the Issuing Lender reasonably requires. The Issuing Lender shall be under no obligation to amend any Letter of Credit if: (A) the Issuing Lender would have no obligation, or would be unable, at such time to issue such Letter of Credit in its amended form under the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit does not accept the proposed amendment to the Letter of Credit. While a Letter of Credit is outstanding and before the Revolving Loan Commitment Termination Date, upon the written request of Company received by the Issuing Lender (with a copy sent by Company to Administrative Agent) at least three days (or such shorter time as the Issuing Lender may agree in a particular instance in its sole discretion) before the proposed date of notification of renewal, the Issuing Lender shall be entitled to authorize the automatic renewal of any Letter of Credit issued by it. Each such request for renewal of a Letter of Credit shall be made by an original writing or by facsimile, confirmed promptly in an original writing, in the form of an L/C Amendment Application, and shall specify in form and detail satisfactory to the Issuing Lender: (I) the Letter of Credit to be renewed; (II) the proposed date of notification of renewal of such Letter of Credit (which shall be a Business Day); (III) the revised expiry date of such Letter of Credit; and 82 (IV) such other matters as the Issuing Lender may require. The Issuing Lender shall not renew any Letter of Credit if the Issuing Lender would have no obligation at such time to issue, or be unable to issue, or amend such Letter of Credit in its renewed form under the terms of this Agreement. If any outstanding Letter of Credit shall provide that it shall be automatically renewed unless the beneficiary thereof receives notice from the Issuing Lender that such Letter of Credit shall not be renewed, and if at the time of renewal the Issuing Lender would be entitled to authorize the automatic renewal of such Letter of Credit in accordance with this subsection 3.1B upon the request of Company, but the Issuing Lender has not received any L/C Amendment Application or other written direction from Company with respect to such renewal, the Issuing Lender shall nonetheless be permitted to allow such Letter of Credit to renew, and accordingly, the Issuing Lender shall be deemed to have received an L/C Amendment Application from Company requesting such renewal. The Issuing Lender may, at its election (or as required by Administrative Agent at the direction of Revolving Lenders having or holding a majority of the Revolving Loan Exposures of all Lenders), deliver any notices of termination or other communications permitted under any Letter of Credit to any Letter of Credit beneficiary or transferee, and take any other action permitted under any Letter of Credit as is necessary or appropriate, at any time and from time to time, in order to cause the expiry date of such Letter of Credit to be a date not later than 15 days before the Revolving Loan Commitment Termination Date. (ii) Determination of Issuing Lender. Upon receipt by Administrative ------------------------------- Agent of a Notice of Issuance of Letter of Credit pursuant to subsection 3.1B(i) requesting the issuance of a Letter of Credit, in the event Administrative Agent elects to issue such Letter of Credit, Administrative Agent shall promptly so notify Company, and Administrative Agent shall be the Issuing Lender with respect thereto. In the event that Administrative Agent, in its sole discretion, elects not to issue such Letter of Credit, Administrative Agent shall promptly so notify Company, whereupon Company may request any other Revolving Lender to issue such Letter of Credit by delivering to such Revolving Lender a copy of the applicable Notice of Issuance of Letter of Credit. Any Revolving Lender so requested to issue such Letter of Credit shall promptly notify Company and Administrative Agent whether or not, in its sole discretion, it has elected to issue such Letter of Credit, and any such Lender which so elects to issue such Letter of Credit shall be the Issuing Lender with respect thereto. In the event that all other Revolving Lenders shall have declined to issue such Letter 83 of Credit, notwithstanding the prior election of Administrative Agent not to issue such Letter of Credit, Administrative Agent shall be obligated to issue such Letter of Credit and shall be the Issuing Lender with respect thereto, notwithstanding the fact that the Letter of Credit Usage with respect to such Letter of Credit and with respect to all other Letters of Credit issued by Administrative Agent, when aggregated with Administrative Agent's outstanding Revolving Loans and Swing Line Loans, may exceed Administrative Agent's Revolving Loan Commitment then in effect. (iii) Issuance of Letter of Credit. Upon satisfaction or waiver (in ---------------------------- accordance with subsection 10.6) of the conditions set forth in subsection 4.3, the Issuing Lender shall issue the requested Letter of Credit in accordance with the Issuing Lender's standard operating procedures. (iv) Notification to Revolving Lenders. Upon the issuance of any --------------------------------- Letter of Credit, the applicable Issuing Lender shall promptly notify Administrative Agent and each other Revolving Lender of such issuance, which notice shall be accompanied by a copy of such Letter of Credit. Promptly after receipt of such notice (or, if Administrative Agent is the Issuing Lender, together with such notice), Administrative Agent shall notify each Revolving Lender of the amount of such Lender's respective participation in such Letter of Credit, determined in accordance with subsection 3.1C. (v) Letters of Credit Outstanding Under Existing Credit Agreement. ------------------------------------------------------------- The letters of credit issued pursuant to the Existing Credit Agreement that are outstanding on the Closing Date and listed on Schedule 3.1 (the "Existing Letters of Credit") shall be deemed Letters of Credit issued pursuant hereto and the Issuing Lender shall be the Lender identified on Schedule 3.1; provided that Company shall take any and all actions -------- necessary to terminate all such Existing Letters of Credit and replace them with new Letters of Credit issued under this Agreement within 30 days after the Closing Date. C. REVOLVING LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT. Immediately upon the issuance of each Letter of Credit, each Revolving Lender shall be deemed to, and hereby agrees to, have irrevocably purchased from the Issuing Lender a participation in such Letter of Credit and any drawings honored thereunder in an amount equal to such Revolving Lender's Pro Rata Share of the maximum amount which is or at any time may become available to be drawn thereunder. 84 3.2 LETTER OF CREDIT FEES. --------------------- Company agrees to pay the following amounts with respect to Letters of Credit issued hereunder: (i) with respect to each Standby Letter of Credit, (a) a fronting fee, payable directly to the applicable Issuing Lender for its own account, equal to 0.2 5% per annum of the daily amount available to be drawn under such Letter of Credit, such fronting fee to be payable in advance on the fifteenth day of each March, June, September and December of each year for the calendar quarterly period commencing on such date and (b) a letter of credit fee, payable to Administrative Agent for the account of Revolving Lenders (based upon their respective Pro Rata Shares), equal to (x) the applicable Eurodollar Rate Margin set forth in subsection 2.2A hereof for Revolving Loans multiplied by (y) the daily amount available from time to ---------- time to be drawn under such Letter of Credit, such letter of credit fee to be payable in arrears on and to (but excluding) the last day of each March, June, September and December of each year; and in any event each such fronting fee or letter of credit fee to be computed on the basis of a 360- day year for the actual number of days elapsed; (ii) with respect to each Commercial Letter of Credit, (a) to the applicable Issuing Lender, a fronting fee equal to 0.25% per annum of the daily maximum amount available to be drawn under such Commercial Letter of Credit, but in any event not less than $500 per year per Commercial Letter of Credit and (b) to Administrative Agent for the account of Revolving Lenders (based upon their Pro Rata Share), a letter of credit fee equal to (x) the applicable Eurodollar Rate Margin set forth in subsection 2.2A hereof for Revolving Loans multiplied by (y) the daily amount available ---------- from time to time to be drawn under such Letter of Credit, such letter of credit fee to be payable in arrears on and to (but excluding) the last day of each March, June, September and December of each year; and in any event each such fronting fee or letter of credit fee to be computed on the basis of a 360-day year for the actual number of days elapsed; and (iii) with respect to the issuance, amendment or transfer of each Letter of Credit and each payment of a drawing made thereunder (without duplication of the fees payable under clause (i) above), documentary and processing charges payable directly to the applicable Issuing Lender for its own account in accordance with such Issuing Lender's standard schedule for such charges in effect at the time of such issuance, amendment, transfer or payment, as the case may be. 85 For purposes of calculating any fees payable under clause (i) of this subsection 3.2, the daily amount available to be drawn under any Letter of Credit shall be determined as of the close of business on any date of determination. Promptly upon receipt by Administrative Agent of any amount described in clause (i)(b) of this subsection 3.2, Administrative Agent shall distribute to each Revolving Lender its Pro Rata Share of such amount. 3.3 DRAWINGS AND REIMBURSEMENT OF AMOUNTS PAID UNDER LETTERS OF CREDIT. ------------------------------------------------------------------ A. RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In determining whether to honor any drawing under any Letter of Credit by the beneficiary thereof, the Issuing Lender shall be responsible only to examine the documents delivered under such Letter of Credit with reasonable care so as to ascertain whether they appear on their face to be in accordance with the terms and conditions of such Letter of Credit. B. REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF CREDIT. In the event an Issuing Lender has determined to honor a drawing under a Letter of Credit issued by it, such Issuing Lender shall immediately notify Company and Administrative Agent, and Company shall reimburse such Issuing Lender on or before the Business Day immediately following the date on which such drawing is honored (the "REIMBURSEMENT DATE") in an amount in Dollars and in same day funds equal to the amount of such honored drawing; provided that, anything contained -------- in this Agreement to the contrary notwithstanding, (i) unless Company shall have notified Administrative Agent and such Issuing Lender prior to 10:00 A.M. (San Francisco time) on the date such drawing is honored that Company intends to reimburse such Issuing Lender for the amount of such honored drawing with funds other than the proceeds of Revolving Loans, Company shall be deemed to have given a timely Notice of Borrowing to Administrative Agent requesting Lenders to make Revolving Loans that are Base Rate Loans on the Reimbursement Date in an amount in Dollars equal to the amount of such honored drawing and (ii) subject to satisfaction or waiver of the conditions specified in subsection 4.2B, Revolving Lenders shall, on the Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount of such honored drawing, the proceeds of which shall be applied directly by Administrative Agent to reimburse such Issuing Lender for the amount of such honored drawing; and provided, further that if for -------- ------- any reason proceeds of Revolving Loans are not received by such Issuing Lender on the Reimbursement Date in an amount equal to the amount of such honored drawing, Company shall reimburse such Issuing Lender, on demand, in an amount in same day funds equal to the excess of the amount of such honored drawing over the aggregate amount of such Revolving Loans, if any, which are so received. Nothing in this subsection 3.3B shall be deemed to relieve any Revolving Lender from its obligation to make Revolving Loans on the terms and conditions set forth in this 86 Agreement, and Company shall retain any and all rights it may have against any Revolving Lender resulting from the failure of such Lender to make such Revolving Loans under this subsection 3.3B. C. PAYMENT BY REVOLVING LENDERS OF UNREIMBURSED AMOUNTS PAID UNDER LETTERS OF CREDIT. (i) Payment by Revolving Lenders. In the event that Company shall ---------------------------- fail for any reason to reimburse any Issuing Lender as provided in subsection 3.3B in an amount equal to the amount of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall promptly notify each other Revolving Lender of the unreimbursed amount of such honored drawing and of such other Revolving Lender's respective participation therein based on such Revolving Lender's Pro Rata Share. Each Revolving Lender shall make available to such Issuing Lender an amount equal to its respective participation, in Dollars and in same day funds, at the office of such Issuing Lender specified in such notice, not later than 12:00 Noon (San Francisco time) on the first business day (under the laws of the jurisdiction in which such office of such Issuing Lender is located) after the date notified by such Issuing Lender. In the event that any Revolving Lender fails to make available to such Issuing Lender on such business day the amount of such Revolving Lender's participation in such Letter of Credit as provided in this subsection 3.3C, such Issuing Lender shall be entitled to recover such amount on demand from such Revolving Lender together with interest thereon at the Federal Funds Effective Rate for three Business Days and thereafter at the Base Rate. Nothing in this subsection 3.3C shall be deemed to prejudice the right of any Revolving Lender to recover from any Issuing Lender any amounts made available by such Revolving Lender to such Issuing Lender pursuant to this subsection 3.3C in the event that it is determined by the final judgment of a court of competent jurisdiction that the payment with respect to a Letter of Credit by such Issuing Lender in respect of which payment was made by such Revolving Lender constituted gross negligence or willful misconduct on the part of such Issuing Lender. (ii) Distribution to Revolving Lenders of Reimbursements Received ------------------------------------------------------------ From Company. In the event any Issuing Lender shall have been reimbursed by ------------ other Revolving Lenders pursuant to subsection 3.3C(i) for all or any portion of any drawing honored by such Issuing Lender under a Letter of Credit issued by it, such Issuing Lender shall distribute to each other Revolving Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Revolving Lender's Pro Rata Share of all payments subsequently received by such 87 Issuing Lender from Company in reimbursement of such honored drawing when such payments are received. Any such distribution shall be made to a Revolving Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Revolving Lender may request. D. INTEREST ON AMOUNTS PAID UNDER LETTERS OF CREDIT. (i) Payment of Interest by Company. Company agrees to pay to each ------------------------------ Issuing Lender, with respect to drawings honored under any Letters of Credit issued by it, interest on the amount paid by such Issuing Lender in respect of each such honored drawing from the date such drawing is honored to but excluding the date such amount is reimbursed by Company (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B) at a rate equal to (a) for the period from the date such drawing is honored to but excluding the Reimbursement Date, the rate then in effect under this Agreement with respect to Revolving Loans that are Base Rate Loans and (b) thereafter, a rate which is 2% per annum in excess of the rate of interest otherwise payable under this Agreement with respect to Revolving Loans that are Base Rate Loans. Interest payable pursuant to this subsection 3.3D(i) shall be computed on the basis of a 360-day year for the actual number of days elapsed in the period during which it accrues and shall be payable on demand or, if no demand is made, on the date on which the related drawing under a Letter of Credit is reimbursed in full. (ii) Distribution of Interest Payments by Issuing Lender. Promptly --------------------------------------------------- upon receipt by any Issuing Lender of any payment of interest pursuant to subsection 3.3D(i) with respect to a drawing honored under a Letter of Credit issued by it, (a) such Issuing Lender shall distribute to each other Revolving Lender, out of the interest received by such Issuing Lender in respect of the period from the date such drawing is honored to but excluding the date on which such Issuing Lender is reimbursed for the amount of such drawing (including any such reimbursement out of the proceeds of Revolving Loans pursuant to subsection 3.3B), the amount that such other Revolving Lender would have been entitled to receive in respect of the letter of credit fee that would have been payable in respect of such Letter of Credit for such period pursuant to subsection 3.2 if no drawing had been honored under such Letter of Credit, and (b) in the event such Issuing Lender shall have been reimbursed by other Revolving Lenders pursuant to subsection 3.3C(i) for all or any portion of such honored drawing, such Issuing Lender shall distribute to each other Revolving Lender which has paid all amounts payable by it under subsection 3.3C(i) with respect to such honored drawing such other Revolving Lender's Pro Rata Share of any interest received by such 88 Issuing Lender in respect of that portion of such honored drawing so reimbursed by other Revolving Lenders for the period from the date on which such Issuing Lender was so reimbursed by other Revolving Lenders to but excluding the date on which such portion of such honored drawing is reimbursed by Company. Any such distribution shall be made to a Revolving Lender at its primary address set forth below its name on the appropriate signature page hereof or at such other address as such Revolving Lender may request. 3.4 OBLIGATIONS ABSOLUTE. -------------------- The obligation of Company to reimburse each Issuing Lender for drawings honored under the Letters of Credit issued by it and to repay any Revolving Loans made by Revolving Lenders pursuant to subsection 3.3B and the obligations of Revolving Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances including any of the following circumstances: (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, set-off, defense or other right which Company or any Revolving Lender may have at any time against a beneficiary or any transferee of any Letter of Credit (or any Persons for whom any such transferee may be acting), any Issuing Lender or other Lender or any other Person or, in the case of a Lender, against Company, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction (including any underlying transaction between Company or one of its Subsidiaries and the beneficiary for which any Letter of Credit was procured); (iii) any draft or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the applicable Issuing Lender under any Letter of Credit against presentation of a draft or other document which does not substantially comply with the terms of such Letter of Credit; (v) any adverse change in the business, operations, properties, assets, condition (financial or otherwise) or prospects of Company or any of its Subsidiaries; (vi) any breach of this Agreement or any other Loan Document by any party thereto; or 89 (vii) the fact that an Event of Default or a Potential Event of Default shall have occurred and be continuing. 3.5 INDEMNIFICATION; NATURE OF ISSUING LENDERS' DUTIES. -------------------------------------------------- A. INDEMNIFICATION. In addition to amounts payable as provided in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save harmless each Issuing Lender from and against any and all claims, demands, liabilities, damages, losses and reasonable out-of-pocket costs, charges and expenses (including reasonable fees, expenses and disbursements of counsel and allocated costs of internal counsel) which such Issuing Lender may incur or be subject to as a consequence, direct or indirect, of (i) the issuance of any Letter of Credit by such Issuing Lender, other than as a result of (a) the gross negligence or willful misconduct of such Issuing Lender as determined by a final judgment of a court of competent jurisdiction or (b) subject to the following clause (ii), the wrongful dishonor by such Issuing Lender of a proper demand for payment made under any Letter of Credit issued by it or (ii) the failure of such Issuing Lender to honor a drawing under any such Letter of Credit as a result of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government or governmental authority (all such acts or omissions herein called "GOVERNMENTAL ACTS"). B. NATURE OF ISSUING LENDERS' DUTIES. As between Company and any Issuing Lender, Company assumes all risks of the acts and omissions of, or misuse of the Letters of Credit issued by such Issuing Lender by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, such Issuing Lender shall not be responsible for: (i) the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for and issuance of any such Letter of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any such Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any such Letter of Credit to comply fully with any conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any such Letter of Credit or of the proceeds thereof; (vii) the misapplication by the beneficiary of any such Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (viii) any consequences arising from causes beyond 90 the control of such Issuing Lender, including any Governmental Acts, and none of the above shall affect or impair, or prevent the vesting of, any of such Issuing Lender's rights or powers hereunder. In furtherance and extension and not in limitation of the specific provisions set forth in the first paragraph of this subsection 3.5B, any action taken or omitted by any Issuing Lender under or in connection with the Letters of Credit issued by it or any documents and certificates delivered thereunder, if taken or omitted in good faith, shall not put such Issuing Lender under any resulting liability to Company. Notwithstanding anything to the contrary contained in this subsection 3.5, Company shall retain any and all rights it may have against any Issuing Lender for any liability arising out of the gross negligence or willful misconduct of such Issuing Lender, as determined by a final judgment of a court of competent jurisdiction. 3.6 INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT. ------------------------------------------------------- Subject to the provisions of subsection 2.7B (which shall be controlling with respect to the matters covered thereby), in the event that any Issuing Lender or Revolving Lender shall determine (which determination shall, absent manifest error, be final and conclusive and binding upon all parties hereto) that any law, treaty or governmental rule, regulation or order, or any change therein or in the interpretation, administration or application thereof (including the introduction of any new law, treaty or governmental rule, regulation or order), or any determination of a court or governmental authority, in each case that becomes effective after the date hereof, or compliance by any Issuing Lender or Revolving Lender with any guideline, request or directive issued or made after the date hereof by any central bank or other governmental or quasi-governmental authority (whether or not having the force of law): (i) subjects such Issuing Lender or Revolving Lender (or its applicable lending or letter of credit office) to any additional Tax (other than any Tax on the overall net income of such Issuing Lender or Revolving Lender) with respect to the issuing or maintaining of any Letters of Credit or the purchasing or maintaining of any participations therein or any other obligations under this Section 3, whether directly or by such being imposed on or suffered by any particular Issuing Lender; (ii) imposes, modifies or holds applicable any reserve (including any marginal, emergency, supplemental, special or other reserve), special deposit, compulsory loan, FDIC 91 insurance or similar requirement in respect of any Letters of Credit issued by any Issuing Lender or participations therein purchased by any Revolving Lender; or (iii) imposes any other condition (other than with respect to a Tax matter) on or affecting such Issuing Lender or Revolving Lender (or its applicable lending or letter of credit office) regarding this Section 3 or any Letter of Credit or any participation therein; and the result of any of the foregoing is to increase the cost to such Issuing Lender or Revolving Lender of agreeing to issue, issuing or maintaining any Letter of Credit or agreeing to purchase, purchasing or maintaining any participation therein or to reduce any amount received or receivable by such Issuing Lender or Revolving Lender (or its applicable lending or letter of credit office) with respect thereto; then, in any case, Company shall promptly pay to such Issuing Lender or Revolving Lender, upon receipt of the statement referred to in the next sentence, such additional amount or amounts as may be necessary to compensate such Issuing Lender or Revolving Lender for any such increased cost or reduction in amounts received or receivable hereunder. Such Issuing Lender or Revolving Lender shall deliver to Company a written statement, setting forth in reasonable detail the basis for calculating the additional amounts owed to such Issuing Lender or Revolving Lender under this subsection 3.6, which statement shall be conclusive and binding upon all parties hereto absent manifest error. Such Lender agrees to provide any such request within 180 days of becoming aware of such costs and to use averaging and attribution methods which are reasonable. 3.7 CONFLICT AMONG DOCUMENTS. ------------------------ This Agreement shall control in the event of any conflict with any L/C-Related Document. 3.8 ISSUING AFFILIATE. ----------------- The Issuing Lender may perform any or all of its obligations under this Agreement with respect to letters of Credit through one or more of its Affiliates and, if it exercises such option, each reference to "Issuing Lender" in this Agreement shall be deemed a reference to the Issuing Lender or such Affiliate, as appropriate. SECTION 4. CONDITIONS TO LOANS AND LETTERS OF CREDIT The obligations of Lenders to make Loans and the issuance of Letters of Credit hereunder are subject to the satisfaction of the following conditions. 92 4.1 CONDITIONS TO TERM LOANS AND INITIAL REVOLVING LOANS AND SWING LINE ------------------------------------------------------------------- LOANS. ----- The obligations of Lenders to make the Term Loans and any Revolving Loans and Swing Line Loans to be made on the Closing Date are, in addition to the conditions precedent specified in subsection 4.2, subject to prior or concurrent satisfaction (or waiver) of the following conditions: A. LOAN PARTY DOCUMENTS. On or before the Closing Date, Company shall, and shall cause each other Loan Party to, deliver to Lenders (or to Agents for Lenders with sufficient originally executed copies, where appropriate, for each Lender and counsel to the Agents) the following with respect to Company or such Loan Party, as the case may be, each, unless otherwise noted, dated the Closing Date: (i) Certified copies of the Certificate or Articles of Incorporation of such Person, together with a good standing certificate from the Secretary of State of its jurisdiction of incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each dated a recent date prior to the Closing Date; (ii) Copies of the Bylaws of such Person, certified as of the Closing Date by such Person's corporate secretary or an assistant secretary; (iii) Resolutions of the Board of Directors of such Person approving and authorizing the execution, delivery and performance of the Loan Documents to which it is a party, certified as of the Closing Date by the corporate secretary or an assistant secretary of such Person as being in full force and effect without modification or amendment; (iv) Signature and incumbency certificates of the officers of such Person executing the Loan Documents to which it is a party; (v) Executed originals of the Loan Documents to which such Person is a party; and (vi) The Notes to be issued by Company (if so requested in accordance with subsection 2.1D), drawn to the order of each requesting Lender with appropriate insertions; and (vii) Such other documents as Agents may reasonably request. 93 B. NO MATERIAL ADVERSE EFFECT. Since December 31, 1997, there has not occurred any event or a series of events which could reasonably be expected to have (i) a material adverse effect (in the sole opinion of Arranger and Syndication Agent) on the business, properties, financial condition, results of operation, assets, prospects of the Business for the twelve consecutive monthly period following the consummation of the Transactions or the liabilities of Holdings and its Subsidiaries, taken as a whole; provided that for purposes of -------- determining whether or not this condition has been satisfied, there shall be excluded from the basis of such determination any matter not reasonably likely to result in a net cost in excess of $5,000,000 following the Closing Date (excluding any cost reflected in the Working Capital Adjustment (as such term is defined in the Recapitalization Agreement)) or (ii) a material impairment of the operations of the Business or the right and ability of Company to borrow under this Agreement. C. MORTGAGES; MORTGAGE POLICIES; ETC. Syndication Agent shall have received from Company and each applicable Subsidiary Guarantor: (i) Mortgages. Fully executed and notarized Mortgages in proper --------- form for recording in all appropriate places in all applicable jurisdictions, encumbering each Real Property Asset listed in Schedule 4.1C ------------- annexed hereto (each a "CLOSING DATE MORTGAGED PROPERTY" and, collectively, the "CLOSING DATE MORTGAGED PROPERTIES"); (ii) Opinions of Local Counsel. An opinion of counsel (which ------------------------- counsel shall be reasonably satisfactory to Agents) in each state in which a Closing Date Mortgaged Property is located with respect to the enforceability of the form(s) of Mortgages to be recorded in such state and such other matters as Agents may reasonably request, in each case in form and substance reasonably satisfactory to Agents dated as of the Closing Date and setting forth substantially the matters in the opinion attached hereto as Exhibit XXIV and as to such other matters as Agents may ------------ reasonably require; (iii) Title Insurance. As determined by Syndication Agent in its --------------- sole discretion, (a) unconditional commitments for mortgagee title insurance policies (the "CLOSING DATE MORTGAGE POLICIES") issued by the Title Company with respect to the Closing Date Mortgaged Properties in amounts not less than the respective amounts designated therein with respect to any particular Closing Date Mortgaged Properties, insuring Administrative Agent that the applicable Mortgages create valid and enforceable First Priority mortgage Liens on the respective Closing Date Mortgaged Properties encumbered thereby, subject only to a standard survey exception, and such other exceptions approved by Agents, which Closing Date Mortgage Policies (1) shall include a 94 lenders aggregation endorsement, an endorsement for future advances under this Agreement and for any other matters reasonably requested by Syndication Agent and (2) shall provide for affirmative insurance and such reinsurance as Agents may reasonably request, all of the foregoing in form and substance reasonably satisfactory to Syndication Agent; and (b) evidence reasonably satisfactory to Syndication Agent that such Loan Party has (i) delivered to the Title Company all certificates and affidavits required by the Title Company in connection with the issuance of the Closing Date Mortgage Policies and (ii) paid to the Title Company or to the appropriate governmental authorities all expenses and premiums of the Title Company in connection with the issuance of the Closing Date Mortgage Policies and all recording and stamp taxes (including mortgage recording and intangible taxes) payable in connection with recording the Mortgages in the appropriate real estate records; (iv) Title Reports. With respect to each Closing Date Mortgaged ------------- Property, a title report issued by the Title Company with respect thereto, dated not more than 30 days prior to the Closing Date and satisfactory in form and substance to Syndication Agent; (v) Copies of Documents Relating to Title Exceptions. Copies of all ------------------------------------------------ recorded documents listed as exceptions to title or otherwise referred to in the Closing Date Mortgage Policies or in the title reports delivered pursuant to subsection 4.1C(iv) as may be requested by Syndication Agent; (vi) Matters Relating to Flood Hazard Properties. (a) Evidence, ------------------------------------------- which may be in the form of a letter from an insurance broker or a municipal engineer, as to whether (1) any Closing Date Mortgaged Property is a Flood Hazard Property and (2) the community in which any such Flood Hazard Property is located is participating in the National Flood Insurance Program, (b) if there are any such Flood Hazard Properties, such Loan Party's written acknowledgement of receipt of written notification from Administrative Agent (1) as to the existence of each such Flood Hazard Property and (2) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program, and (c) in the event any such Flood Hazard Property is located in a community that participates in the National Flood Insurance Program, evidence that Company has obtained flood insurance in respect of such Flood Hazard Property to the extent required under the applicable regulations of the Board of Governors of the Federal Reserve System; and (vii) Environmental Indemnity. If requested by Syndication Agent, an ----------------------- environmental indemnity agreement, 95 satisfactory in form and substance to Agents and their counsel, with respect to the indemnification of Agents and Lenders for any liabilities that may be imposed on or incurred by any of them as a result of any Hazardous Materials Activity. D. SECURITY INTERESTS IN PERSONAL AND MIXED PROPERTY. To the extent not otherwise satisfied pursuant to subsection 4.1C, Syndication Agent shall have received evidence reasonably satisfactory to it that Company, Holdings and Subsidiary Guarantors, as applicable, shall have taken or caused to be taken all such necessary actions, executed and delivered or caused to be executed and delivered all such agreements, documents and instruments, and made or caused to be made all such filings and recordings (other than the filing or recording of items described in clauses (iii), (iv) and (v) below) that may be necessary or, in the reasonable opinion of Syndication Agent, desirable in order to create in favor of Administrative Agent, for the benefit of Lenders, a valid and (upon such filing and recording) perfected First Priority security interest in the entire personal and mixed property Collateral. Such actions shall include the following: (i) Schedules to Collateral Documents. Delivery to Syndication --------------------------------- Agent of accurate and complete schedules to all of the applicable Collateral Documents; (ii) Stock Certificates and Instruments. Delivery to Administrative ---------------------------------- Agent of (a) certificates (which certificates shall be accompanied by irrevocable undated stock powers, duly endorsed in blank and otherwise reasonably satisfactory in form and substance to Syndication Agent) representing all capital stock pledged pursuant to the Company Pledge Agreement, the Holdings Pledge Agreement and the Subsidiary Pledge Agreements and (b) all promissory notes or other instruments (duly endorsed, where appropriate, in a manner reasonably satisfactory to Agents) evidencing any Collateral; (iii) Lien Searches and UCC Termination Statements. Subject to the -------------------------------------------- provisions of subsection 4.4, delivery to Syndication Agent of (a) the results of a recent search, by a Person satisfactory to Syndication Agent, of all effective UCC financing statements and fixture filings and all judgment and tax lien filings which may have been made with respect to any personal or mixed property of any Loan Party, together with copies of all such filings disclosed by such search, and (b) UCC termination statements duly executed by all applicable Persons for filing in all applicable jurisdictions as may be necessary to terminate any effective UCC financing statements or fixture filings disclosed in such search (other than any such financing statements or 96 fixture filings in respect of Liens permitted to remain outstanding pursuant to the terms of this Agreement); (iv) UCC Financing Statements and Fixture Filings. Delivery to -------------------------------------------- Syndication Agent of UCC financing statements and, where appropriate, fixture filings, duly executed by each applicable Loan Party with respect to all personal and mixed property Collateral of such Loan Party, for filing in all jurisdictions as may be necessary or, in the opinion of Syndication Agent, necessary to perfect the security interests created in such Collateral pursuant to the Collateral Documents; (v) PTO Cover Sheets, Etc. Delivery to Syndication Agent of all --------------------- cover sheets or other documents or instruments required to be filed with the PTO in order to create or perfect Liens in respect of any IP Collateral; (vi) Opinions of Local Counsel. Delivery to Agents of an opinion of ------------------------- counsel (which counsel shall be reasonably satisfactory to Syndication Agent) under the laws of each jurisdiction in which any Loan Party or any personal or mixed property Collateral is located with respect to the creation and perfection of the security interests in favor of Administrative Agent in such Collateral and such other matters governed by the laws of such jurisdiction regarding such security interests as Agents may reasonably request, in each case in form and substance reasonably satisfactory to Agents dated as of the Closing Date and setting forth substantially the matters in the form of opinion annexed hereto as Exhibit ------- XXIV and as to such other matters as Agents may reasonably require. ---- (vii) Officer's Certificate from Holdings. Delivery to Agents of an ----------------------------------- Officer's Certificate of Holdings stating that after the consummation of the Transactions, it will not own any assets other than the capital stock of Company. E. EVIDENCE OF INSURANCE. Syndication Agent shall have received a certificate from Company's insurance broker or other evidence reasonably satisfactory to it that all insurance required to be maintained pursuant to subsection 6.4 is in full force and effect and that Administrative Agent on behalf of Lenders has been named as additional insured and/or loss payee thereunder to the extent required under subsection 6.4. F. DEBT AND EQUITY CAPITALIZATION OF HOLDINGS AND COMPANY. (i) Redemption of Holdings Common Stock. On or prior to the Closing Date, ----------------------------------- (a) Holdings shall have obtained the requisite approval of the Existing Shareholders regarding the Recapitalization Agreement and the transactions contemplated thereby and (b) Holdings shall have redeemed all of the issued 97 and outstanding Holdings Common Stock (other than the Retained Shares) from the Existing Shareholders for an aggregate redemption price not exceeding $211,503,000. Subsequent to the redemption of the Holdings Common Stock as described above, the Existing Shareholders shall own the Retained Shares representing 22.5% of the outstanding shares of Holdings Common Stock (after giving effect to the full exercise of the Holdings Warrants). The redemption of the Holdings Common Stock shall be in form and substance reasonably satisfactory to Syndication Agent and Arranger. (ii) Issuance of Holdings Preferred Stock. On or prior to the Closing ------------------------------------ Date, Holdings shall have issued the Holdings Preferred Stock and Holdings Warrants and shall have received at least $47,000,000 in gross cash proceeds therefrom. The terms and conditions of the Holdings Preferred Stock in the Holdings Certificate of Designation shall be reasonably satisfactory in form and substance to Syndication Agent and Arranger; provided that in any event the -------- Holdings Preferred Stock shall not become subject to any mandatory redemption prior to the final redemption date thereof; and provided further that the -------- ------- Holdings Preferred Stock shall not provide or require for any cash distributions by way of dividends or otherwise prior to the tenth anniversary of the Closing Date. On or prior to the Closing Date, Principals and investment funds directly managed by SKC shall have purchased from Holdings, for an aggregate purchase price of $47,000,000, shares of Holdings Preferred Stock, together with the Holdings Warrants. On the Closing Date, the shares of Holdings Common Stock issuable upon the full exercise of the Holdings Warrants shall represent 77.5% of the outstanding shares of Holdings Common Stock after giving effect to such issuance. (iii) Issuance of Holdings Discount Debentures. On or prior to the Closing ---------------------------------------- Date, Holdings shall have issued the Holdings Discount Debentures and shall have received at least $45,105,480 in gross proceeds therefrom (such gross cash proceeds, together with the gross cash proceeds of the Holdings Preferred Stock, the "EQUITY CONTRIBUTIONS"). The terms and conditions of the Holdings Discount Debentures shall be substantially as described in the Holdings Discount Debentures Material and shall be satisfactory in form and substance to Syndication Agent and Arranger; provided that in any event the Holdings Discount -------- Debentures shall be unsecured and shall not mature or provide for or require any payments of accrued interest thereon or accreted value thereof prior to the fifth anniversary of the Closing Date. Company shall have delivered to Agents a fully executed or conformed copy of the Holdings Discount Debentures Indenture and a copy of the Holdings Discount Debentures Material. (iv) Issuance of Senior Subordinated Notes. On or prior to the Closing ------------------------------------- Date, Company shall have issued the Senior Subordinated Notes and shall have received at least $100,000,000 in gross proceeds therefrom. The terms and conditions of the 98 Senior Subordinated Notes shall be substantially as described in the Senior Subordinated Notes Material and shall be in form and substance satisfactory to Syndication Agent and Arranger; provided that in any event the Senior -------- Subordinated Notes shall be unsecured and shall not mature or provide for any scheduled principal payments prior to the tenth anniversary of the Closing Date; and provided further that the negative covenants and default provisions shall be -------- ------- less restrictive than those contained in this Agreement. Company shall have delivered to Administrative Agent a fully executed or conformed copy of the Senior Subordinated Notes Indenture and a copy of the Senior Subordinated Notes Material. (v) Capital Contribution to Company. On or prior to the Closing Date, as ------------------------------- capital contributions to Company, Holdings shall (a) transfer all of its assets to Company and (b) provide cash to Company in an amount equal to the Equity Contributions in exchange for the Holdings Preferred Stock. On the Closing Date, Holdings shall own 100% of all issued and outstanding capital stock of Company. Agents shall have received an Officer's Certificate of Holdings stating that after giving effect to the transactions described in this subsection 4.1F(v), Holdings will own no assets other than the capital stock of Company. (vi) Repayment of Indebtedness under the Existing Credit Agreement and ----------------------------------------------------------------- Existing IRB Loan Agreement. On or prior to the Closing Date, Holdings shall - --------------------------- have (a) repaid in full all Indebtedness outstanding under the Existing Credit Agreement and the Existing IRB Loan Agreement (the aggregate principal amount of all such Indebtedness not to exceed $45,091,767.60), including accrued interest and any prepayment penalties related thereto, (b) terminated any commitments to lend or make other extensions of credit thereunder, (c) delivered to Syndication Agent all documents or instruments necessary to release all Liens securing such Indebtedness or other obligations of Holdings and its Subsidiaries thereunder, and (d) made arrangements reasonably satisfactory to Syndication Agent and Arranger with respect to the cancellation of any letters of credit outstanding thereunder or the issuance of Letters of Credit to support the obligations of Holdings and its Subsidiaries with respect thereto. (vii) Repayment of Indebtedness under the Existing Tax Increment Financing -------------------------------------------------------------------- Agreement and Existing Smart E Bonds Loan Agreement. On or prior to the Closing - --------------------------------------------------- Date, Forster Mfg. shall have (a) repaid in full all Indebtedness outstanding under the Existing Tax Increment Financing Agreement and the Existing Smart E Bonds Loan Agreement (the aggregate principal amount of all such Indebtedness not to exceed $770,951.11), including accrued interest and any prepayment penalties related thereto, and (b) delivered to Administrative Agent all documents or instruments necessary to release all Liens securing such Indebtedness or other obligations of Holdings and its Subsidiaries thereunder. 99 G. FINANCIAL STATEMENTS; PRO FORMA BALANCE SHEET. On or before the Closing Date, the Lenders shall have received from Holdings (i) audited financial statements of Holdings and its Subsidiaries for Fiscal Years 1995, 1996 and 1997, consisting of balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows for such Fiscal Years, (ii) if available, unaudited financial statements of Holdings and its Subsidiaries as at March 31, 1998, consisting of a balance sheet and the related consolidated statements of operations, stockholders' equity and cash flows for the three-month period ending on such date, all in reasonable detail and certified by the chief financial officer of Holdings that they fairly represent the financial condition of Holdings and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the period indicated, subject to changes resulting from audit and normal year-end adjustments, and (iii) pro forma consolidated balance sheets of Holdings and its Subsidiaries and Company and its Subsidiaries as at the Closing Date, prepared in accordance with GAAP and giving effect to the consummation of the Transactions and the other transactions contemplated by the Loan Documents and reflecting the legal and capital structure as agreed to by Syndication Agent and Arranger, which pro forma financial statements shall be in form and substance reasonably satisfactory to the Lenders. H. TRANSACTION COSTS. Transaction Costs shall not exceed $12,500,000. I. OPINIONS OF COUNSEL TO LOAN PARTIES. Agents, Lenders and counsel to the Agents shall have received (i) originally executed copies of one or more favorable written opinions of (A) McDermott, Will & Emery, special counsel for Loan Parties, (B) Lindquist & Vennum P.L.L.P., Minnesota counsel for Holdings, (C) Shook, Hardy & Bacon L.L.P., Kansas counsel for Empire Candle, Inc., and (D) Bernstein, Shur, Sawyer & Nelson, Maine counsel for Forster Inc., in each case in form and substance reasonably satisfactory to Agents and Arranger and their counsel, dated as of the Closing Date and setting forth substantially the matters in the opinions designated in Exhibit IX annexed hereto, as appropriate, ---------- and as to such other matters as Agents and Arranger acting on behalf of Lenders may reasonably request and (ii) evidence satisfactory to Syndication Agent and Arranger that Company has requested such counsel to deliver such opinions to Lenders. J. OPINIONS OF SYNDICATION AGENT'S COUNSEL. Lenders shall have received originally executed copies of one or more favorable written opinions of O'Melveny & Myers LLP, counsel to Syndication Agent, dated as of the Closing Date, substantially in the form of Exhibit X annexed hereto and as to such other --------- matters as Syndication Agent acting on behalf of Lenders may reasonably request. 100 K. OPINIONS OF COUNSEL DELIVERED UNDER RELATED AGREEMENTS. Agents and their counsel shall have received copies of each of the opinions of counsel delivered on behalf of or to any Loan Party under or in respect of the Holdings Discount Debentures Indenture, Holdings Preferred Stock and Senior Subordinated Indenture, together with a letter from each such counsel authorizing Agents and Lenders to rely upon such opinion to the same extent as though it were addressed to Agents and Lenders. L. FEES. Company shall have paid to Administrative Agent and Arranger the fees payable on the Closing Date referred to in subsection 2.3. M. SOLVENCY CERTIFICATE. Company shall have delivered to Arranger and Agents a Solvency Certificate dated the Closing Date. N. ENVIRONMENTAL MATTERS. Arranger and Syndication Agent shall have received reports and other information in form, scope and substance reasonably satisfactory to Arranger and Syndication Agent regarding environmental matters related to the Facilities. O. REPRESENTATIONS AND WARRANTIES; PERFORMANCE OF AGREEMENTS. Company shall have delivered to Agents an Officer's Certificate, in form and substance satisfactory to Syndication Agent, to the effect that the representations and warranties in Section 5 hereof are true, correct and complete in all material respects on and as of the Closing Date to the same extent as though made on and as of that date (or, to the extent such representations and warranties specifically relate to an earlier date, that such representations and warranties were true, correct and complete in all material respects on and as of such earlier date) and that Company shall have performed in all material respects all agreements and satisfied all conditions which this Agreement provides shall be performed or satisfied by it on or before the Closing Date except as otherwise disclosed to and agreed to in writing by Syndication Agent. P. NECESSARY GOVERNMENTAL AUTHORIZATIONS AND CONSENTS; EXPIRATION OF WAITING PERIODS, ETC. Holdings and Company shall have obtained all Governmental Authorizations and all consents of other Persons, in each case that are necessary or advisable in connection with the Transactions and all other transactions contemplated by the Loan Documents and each of the foregoing shall be in full force and effect, in each case other than those the failure to obtain or maintain which, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. All applicable waiting periods shall have expired without any action being taken or threatened by any competent authority which would restrain, prevent or otherwise impose material adverse conditions on all transactions contemplated by the Loan Documents. No action, request for stay, petition for review or rehearing, reconsideration, or appeal with 101 respect to any of the foregoing shall be pending, and the time for any applicable agency to take action to set aside its consent on its own motion shall have expired. Q. MARGIN DETERMINATION CERTIFICATE. Company shall have delivered to Arranger and Agents a Margin Determination Certificate demonstrating in reasonable detail the Consolidated Leverage Ratios for the four consecutive Fiscal Quarters ending on the last day of most recently ended Fiscal Quarter. R. LITIGATION. There shall exist no pending or threatened in writing material litigation, proceedings or investigations which (i) would contest the consummation of the Transactions or (ii) would reasonably be expected to have a Material Adverse Effect. 4.2 CONDITIONS TO ALL LOANS. ----------------------- The obligations of Lenders to make Loans on each Funding Date are subject to the following further conditions precedent: A. Administrative Agent shall have received before that Funding Date, in accordance with the provisions of subsection 2.1B, an originally executed Notice of Borrowing, in each case signed by the chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent. B. As of that Funding Date: (i) The representations and warranties contained herein and in the other Loan Documents shall be true, correct and complete in all material respects on and as of that Funding Date to the same extent as though made on and as of that date, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties shall have been true, correct and complete in all material respects on and as of such earlier date; (ii) No event shall have occurred and be continuing or would result from the consummation of the borrowing contemplated by such Notice of Borrowing that would constitute an Event of Default or a Potential Event of Default; (iii) Each Loan Party shall have performed in all material respects all agreements and satisfied in all material respects all conditions which this Agreement 102 provides shall be performed or satisfied by it on or before that Funding Date; (iv) No order, judgment or decree of any court, arbitrator or governmental authority shall purport to enjoin or restrain any Lender from making the Loans to be made by it on that Funding Date; and (v) The making of the Loans requested on such Funding Date shall not violate any applicable law including Regulation T, Regulation U or Regulation X of the Board of Governors of the Federal Reserve System. 4.3 CONDITIONS TO LETTERS OF CREDIT. ------------------------------- The issuance of any Letter of Credit hereunder (whether or not the applicable Issuing Lender is obligated to issue such Letter of Credit) is subject to the following conditions precedent: A. On or before the date of issuance of the initial Letter of Credit pursuant to this Agreement, the initial Loans shall have been made. B. On or before the date of issuance of such Letter of Credit, Administrative Agent shall have received, in accordance with the provisions of subsection 3.1B(i), an originally executed Notice of Issuance of Letter of Credit, in each case signed by the chief executive officer, the chief financial officer or the treasurer of Company or by any executive officer of Company designated by any of the above-described officers on behalf of Company in a writing delivered to Administrative Agent, together with all other information specified in subsection 3.1B(i) and such other documents or information as the applicable Issuing Lender may reasonably require in connection with the issuance of such Letter of Credit. C. On the date of issuance of such Letter of Credit, all conditions precedent described in subsection 4.2B shall be satisfied to the same extent as if the issuance of such Letter of Credit were the making of a Loan and the date of issuance of such Letter of Credit were a Funding Date. 4.4 ITEMS TO BE DELIVERED AFTER THE CLOSING DATE. -------------------------------------------- Company, Agents and Lenders recognize that it may be impractical for Company to deliver certain of the items listed in subsection 4.1D(iii) on the Closing Date. Company, Agents and Lenders agree, to the extent that any of such items are not so delivered on the Closing Date with the consent of Syndication Agent, Company shall deliver such items within 30 days of the Closing Date. In addition, Company agrees (i) to use all reasonable efforts to deliver a Mortgage on Leasehold Property 103 located in Kansas City, Kansas, which, due to inability of Company to obtain the Landlord Consent and Estoppel with respect to such Mortgage, cannot be delivered on the Closing Date; and (ii) within 30 days following the Closing Date, either to deliver (A) such Mortgage and the applicable items specified in subsection 4.1C that are required to be delivered in connection with a Mortgage, each in form and substance satisfactory to Syndication Agent, in which case such Mortgage shall be deemed a Closing Date Mortgage, (B) a written notice to Syndication Agent, indicating that it is impractical to deliver such Mortgage and other items by such 30th day and that Company intends to deliver such Mortgage and other items on a specified future date (which shall not be later than the 90th day following the Closing Date), in which case such Mortgage and other items shall be delivered on or prior to such date or (C) a written notice to Syndication Agent indicating that, having used all reasonable efforts, Company is unable to deliver such Mortgage and such other items. If Company is not able to deliver the Mortgage on the Leasehold Property located in Kansas City, Kansas, and Company has provided the written notice referred to in clause (C) to Administrative Agent, then, within 15 days of the date of such notice, Company shall cause to be filed a Memorandum of Negative Pledge with respect to such Leasehold Property with the appropriate county recorder's office. SECTION 5. COMPANY'S REPRESENTATIONS AND WARRANTIES In order to induce Lenders and the Agents to enter into this Agreement and to make the Loans, to induce Issuing Lenders to issue Letters of Credit and to induce other Lenders to purchase participations therein, Company represents and warrants to each Lender and the Agents, on the date of this Agreement, on each Funding Date and on the date of issuance of each Letter of Credit, that the following statements are true, correct and complete: 5.1 ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS AND ---------------------------------------------------------------- SUBSIDIARIES. ------------ A. ORGANIZATION AND POWERS. Each Loan Party is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation as specified in Schedule 5.1 annexed hereto. Each ------------ Loan Party has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted, to enter into the Loan Documents to which it is a party and to carry out the transactions contemplated thereby. B. QUALIFICATION AND GOOD STANDING. Each Loan Party is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, except in jurisdictions 104 where the failure to be so qualified or in good standing has not had and would not reasonably be expected to have a Material Adverse Effect. C. CONDUCT OF BUSINESS. Company and its Subsidiaries are engaged only in the businesses permitted to be engaged in pursuant to subsection 7.14. D. SUBSIDIARIES. All of the Subsidiaries of Company are identified in Schedule 5.1 annexed hereto, as said Schedule 5.1 may be supplemented from time - ------------ ------------ to time pursuant to the provisions of subsection 6.1(xvi). The capital stock of each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto ------------ (as so supplemented) is duly authorized, validly issued, fully paid and nonassessable and none of such capital stock constitutes Margin Stock. Each of the Subsidiaries of Company identified in Schedule 5.1 annexed hereto (as so ------------ supplemented) is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation set forth therein, has all requisite corporate power and authority to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted, and is qualified to do business and in good standing in every jurisdiction where its assets are located and wherever necessary to carry out its business and operations, in each case except where failure to be so qualified or in good standing or a lack of such corporate power and authority has not had and will not have a Material Adverse Effect. Schedule 5.1 annexed ------------ hereto (as so supplemented) correctly sets forth the ownership interest of Company and each of its Subsidiaries in each of the Subsidiaries of Company identified therein. Holdings owns all of the capital stock of Company and no other asset, other than the leasehold interests described in subsection 7.14. 5.2 AUTHORIZATION OF BORROWING, ETC. -------------------------------- A. AUTHORIZATION OF BORROWING. The execution, delivery and performance of the Loan Documents have been duly authorized by all necessary actions on the part of each Loan Party that is a party thereto. B. NO CONFLICT. The execution, delivery and performance by Loan Parties of the Loan Documents and the consummation of the transactions contemplated by the Loan Documents do not and will not (i) violate any provision of any law or any governmental rule or regulation applicable to Holdings or any of its Subsidiaries, the Certificate or the Articles of Incorporation or Bylaws of Holdings, Company or any of Company's Subsidiaries or any order, judgment or decree of any court or other agency of government binding on Holdings, Company or any of Company's Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any Contractual Obligation of Holdings, Company or any of its Subsidiaries, which 105 conflict, breach or default would reasonably be expected to have a Material Adverse Effect, (iii) result in or require the creation or imposition of any Lien upon any of the properties or assets of Holdings, Company or any of Company's Subsidiaries (other than any Liens created under any of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv) require any approval of or consent of any Person under any Contractual Obligation of Holdings, Company or any of Company's Subsidiaries, except for such approvals or consents which will be obtained on or before the Closing Date and disclosed in writing to Lenders, or the failure to so obtain would reasonably be expected to have a Material Adverse Effect. C. GOVERNMENTAL CONSENTS. The execution, delivery and performance by Loan Parties of the Loan Documents and the consummation of the transactions contemplated by the Loan Documents do not and will not require any registration with, consent or approval of, or notice to, or other action to, with or by, any federal, state or other governmental authority or regulatory body which, if not obtained, would reasonably be expected to have a Material Adverse Effect. D. BINDING OBLIGATION. Each of the Loan Documents has been duly executed and delivered by each Loan Party that is a party thereto and is the legally valid and binding obligation of such Loan Party, enforceable against such Loan Party in accordance with its respective terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. E. VALID ISSUANCE OF HOLDINGS COMMON STOCK, HOLDINGS PREFERRED STOCK, HOLDINGS DISCOUNT DEBENTURES AND THE SENIOR SUBORDINATED NOTES. (i)(A) Holdings Common Stock. As of the Closing Date, there are 16,112,500 --------------------- shares of issued and outstanding Holdings Common Stock. Such shares of Holdings Common Stock have been duly and validly issued, fully paid and nonassessable. Except as provided in the Holdings Certificate of Designation, the Holdings Warrants or the Stockholders' Agreement, no stockholder of Holdings has or will have any preemptive rights to subscribe for any additional equity Securities of Holdings. Any issuance and sale of Holdings Common Stock, upon such issuance and sale, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. (B) Holdings Preferred Stock. As of the Closing Date, there are 47,000 ------------------------ shares of issued and outstanding Holdings Preferred Stock. Such shares of Holdings Preferred Stock have been duly and validly issued, fully paid and nonassessable. Except as provided in the Holdings Certificate of Designation, the Holdings Warrants or the Stockholders' Agreement, no 106 stockholder of Holdings has or will have any preemptive rights to subscribe for any additional equity Securities of Holdings. Any issuance and sale of Holdings Preferred Stock, upon such issuance and sale, will either (a) have been registered and qualified under applicable federal and state securities laws or (b) be exempt therefrom. (C) Holdings Discount Debentures. Holdings has the corporate power ---------------------------- and authority to issue the Holdings Discount Debentures. The Holdings Discount Debentures, when issued and paid for, will be the legally valid and binding obligations of Holdings, enforceable against Holdings in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The Holdings Discount Debentures, when issued and sold, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. (ii) The Senior Subordinated Notes. Company has the corporate power and ----------------------------- authority to issue the Senior Subordinated Notes. The Senior Subordinated Notes, when issued and paid for, will be the legally valid and binding obligations of Company, enforceable against Company in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. The subordination provisions of the Senior Subordinated Notes will be enforceable against the holders thereof in accordance with their terms (except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability) and the Loans and all other monetary Obligations hereunder are and will be within the definitions of "Bank Indebtedness", "Senior Indebtedness" and "Designated Senior Indebtedness" included in such provisions. The Senior Subordinated Notes, when issued and sold, will either (a) have been registered or qualified under applicable federal and state securities laws or (b) be exempt therefrom. 5.3 FINANCIAL CONDITION. ------------------- Company has heretofore delivered to Lenders, at Lenders' request, the following financial statements and information: (i) the audited consolidated balance sheet of Holdings and its Subsidiaries as at December 31, 1995, December 31, 1996 and December 31, 1997 and the related consolidated statements of operations, stockholders' equity and cash flows of Holdings and its Subsidiaries for the Fiscal Years then ended and (ii) the unaudited consolidated balance sheet of Holdings and its Subsidiaries as of March 31, 1998 and the related unaudited 107 consolidated statements of operations, stockholders' equity and cash flows of Holdings and its Subsidiaries for the three months then ended. All such statements were prepared in conformity with GAAP and fairly present, in all material respects, the financial position (on a consolidated basis) of the entities described in such financial statements as at the respective dates thereof and the results of operations and cash flows (on a consolidated basis) of the entities described therein for each of the periods then ended, subject, in the case of any such unaudited financial statements, to changes resulting from normal year-end adjustments. Company does not (and will not following the funding of the initial Loans) have any Contingent Obligation, contingent liability or liability for taxes, long-term lease or unusual forward or long- term commitment that is not reflected in the foregoing financial statements or the notes thereto and which in any such case would reasonably be expected to have a Material Adverse Effect. 5.4 NO MATERIAL ADVERSE CHANGE; NO RESTRICTED JUNIOR PAYMENTS. --------------------------------------------------------- Since December 31, 1997, no event or change has occurred that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect. Neither Company nor any of its Subsidiaries has directly or indirectly declared, ordered, paid or made, or set apart any sum or property for, any Restricted Junior Payment or agreed to do so except as permitted by subsection 7.5. 5.5 TITLE TO PROPERTIES; LIENS; REAL PROPERTY. ----------------------------------------- A. TITLE TO PROPERTIES; LIENS. Company and its Subsidiaries have (i) good, sufficient and legal title to (in the case of fee interests in real property), (ii) valid leasehold interests in (in the case of leasehold interests in real or personal property), or (iii) good title to (in the case of all other personal property), all of their respective properties and assets reflected in the financial statements referred to in subsection 5.3 or in the most recent financial statements delivered pursuant to subsection 6.1, in each case except for assets disposed of since the date of such financial statements in the ordinary course of business or as otherwise permitted under subsection 7.7. Except as permitted by this Agreement, all such properties and assets are free and clear of Liens. B. REAL PROPERTY. As of the Closing Date, Schedule 5.5 annexed hereto ------------ contains a true, accurate and complete list of (i) all real property owned by Company or any Subsidiary and (ii) all leases, subleases or assignments of leases (together with all amendments, modifications, supplements, renewals or extensions of any thereof) affecting each Real Property Asset of any Loan Party, regardless of whether such Loan Party is the landlord or tenant (whether directly or as an assignee or 108 successor in interest) under such lease, sublease or assignment. Except as specified in Schedule 5.5 annexed hereto, each agreement listed in clause (ii) ------------ of the immediately preceding sentence is in full force and effect and Company does not have knowledge of any default that has occurred and is continuing thereunder, and each such agreement constitutes the legally valid and binding obligation of each applicable Loan Party, enforceable against such Loan Party in accordance with its terms, except as enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles. 5.6 LITIGATION; ADVERSE FACTS. ------------------------- Except as set forth in Schedule 5.6 annexed hereto, there are no ------------ actions, suits, proceedings, arbitrations or governmental investigations (whether or not purportedly on behalf of Company or any of its Subsidiaries) at law or in equity, or before or by any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign (including any Environmental Claims) that are pending or, to the knowledge of any officer of Company, threatened in writing against or affecting Company or any of its Subsidiaries or any property of Company or any of its Subsidiaries and that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. Neither Company nor any of its Subsidiaries (i) is in violation of any applicable laws (including Environmental Laws) that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect, or (ii) is subject to or in default with respect to any final judgments, writs, injunctions, decrees, rules or regulations of any court or any federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. 5.7 PAYMENT OF TAXES. ---------------- Except to the extent permitted by subsection 6.3, all tax returns and reports of Holdings and its Subsidiaries required to be filed by any of them have been timely filed, and all taxes shown on such tax returns to be due and payable and all assessments, fees and other governmental charges upon Holdings and its Subsidiaries and upon their respective properties, assets, income, businesses and franchises which are due and payable have been paid when due and payable. Company knows of no proposed tax assessment against Holdings or any of its Subsidiaries which is not being actively contested by Holdings or such Subsidiary in good faith and by appropriate proceedings; provided that such -------- reserves or other appropriate provisions, if any, as shall be required in conformity with GAAP shall have been made or provided therefor. 109 5.8 PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS; MATERIAL ------------------------------------------------------------------ CONTRACTS. --------- A. Neither Holdings nor any of its Subsidiaries is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any of its Contractual Obligations, and no condition exists that, with the giving of notice or the lapse of time or both, would constitute such a default, except where the consequences, direct or indirect, of such default or defaults, if any, would not reasonably be expected to have a Material Adverse Effect. B. Neither Holdings nor any of its Subsidiaries is a party to or is otherwise subject to any agreements or instruments or any charter or other internal restrictions which, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. C. Schedule 5.8 contains a true, correct and complete list of all the ------------ Material Contracts in effect on the Closing Date. Except as described on Schedule 5.8, all such Material Contracts are in full force and effect and no - ------------ material defaults currently exist thereunder. 5.9 GOVERNMENTAL REGULATION. ----------------------- Neither Holdings nor any of its Subsidiaries is subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act or the Investment Company Act of 1940 or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable. 5.10 SECURITIES ACTIVITIES. --------------------- A. Neither Holdings nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. B. Following application of the proceeds of each Loan, not more than 25% of the value of the assets (either of Company only or of Company and its Subsidiaries on a consolidated basis) subject to the provisions of subsection 7.2 or 7.7 or subject to any restriction contained in any agreement or instrument, between Company and any Lender or any Affiliate of any Lender, relating to Indebtedness and within the scope of subsection 8.2, will be Margin Stock. 110 5.11 EMPLOYEE BENEFIT PLANS. ---------------------- A. Holdings, each of its Subsidiaries and each of their respective ERISA Affiliates are in material compliance with all applicable provisions and requirements of ERISA and the regulations and published interpretations thereunder with respect to each Employee Benefit Plan, and have performed all their material obligations under each Employee Benefit Plan. Each Employee Benefit Plan which is intended to qualify under Section 401(a) of the Internal Revenue Code is so qualified. B. No ERISA Event has occurred or is reasonably expected to occur. C. Except to the extent required under Section 4980B of the Internal Revenue Code or as provided pursuant to a collective bargaining agreement, no Employee Benefit Plan provides health or welfare benefits (through the purchase of insurance or otherwise) for any retired or former employee of Company, any of its Subsidiaries or any of their respective ERISA Affiliates. D. As of the most recent valuation date for any Pension Plan, the amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities), does not exceed $500,000. E. As of the most recent valuation date for each Multiemployer Plan for which the actuarial report is available, the potential liability of Holdings, its Subsidiaries and their respective ERISA Affiliates for a complete withdrawal from such Multiemployer Plan (within the meaning of Section 4203 of ERISA), when aggregated with such potential liability for a complete withdrawal from all Multiemployer Plans, based on information available pursuant to Section 4221(e) of ERISA, does not exceed $500,000. 5.12 CERTAIN FEES. ------------ No broker's fee or commission will be payable with respect to this Agreement or any of the transactions contemplated hereby, and Company hereby indemnifies Lenders against, and agrees that it will hold Lenders harmless from, any claim, demand or liability for any such broker's fees alleged to have been incurred in connection herewith or therewith and any expenses (including reasonable fees, expenses and disbursements of counsel) arising in connection with any such claim, demand or liability. 111 5.13 ENVIRONMENTAL PROTECTION. ------------------------ Except as set forth in Schedule 5.13 annexed hereto: ------------- (i) neither Holdings nor any of its Subsidiaries nor any of their respective Facilities or operations are subject to any outstanding written order, consent decree, settlement agreement, indemnity agreement or similar agreement allocating responsibility or liability to Company, with any Person relating to (a) any Environmental Law, (b) any Environmental Claim, or (c) any Hazardous Materials Activity, except any of the foregoing which would not reasonably be expected to have a Material Adverse Effect; (ii) neither Holdings nor any of its Subsidiaries has received any letter or request for information under Section 104 of CERCLA (42 U.S.C. (S) 9604) or any comparable state law, nor has Holdings nor any of its Subsidiaries been notified that it is or may be a potentially responsible party for remediation of any site under such laws; (iii) there are and, to Company's knowledge, have been no conditions, occurrences, or Hazardous Materials Activities which would reasonably be expected to form the basis of an Environmental Claim against Holdings or any of its Subsidiaries, which Environmental Claim, if adversely determined, would reasonably be expected to have a Material Adverse Effect; (iv) neither Holdings nor any of its Subsidiaries nor, to Company's knowledge, any predecessor of Company or any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment of Hazardous Materials at any Facility, and none of Holdings' or any of its Subsidiaries' operations involves the transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent which would reasonably be expected to have a Material Adverse Effect; (v) to the knowledge of Holdings and Subsidiaries, no off-site waste disposal facility used by Holdings or any of its Subsidiaries, or by any predecessor of Company or any of its Subsidiaries, has been the subject of an investigation into its compliance with Environmental Laws, or the subject of a claim that it is non-compliant with Environmental Laws, or that remediation is required at such off-site waste disposal facility which would reasonably be expected to have a Material Adverse Effect; (vi) compliance with all current or reasonably foreseeable future requirements pursuant to or under Environmental Laws would not, individually or in the 112 aggregate, reasonably be expected to have a Material Adverse Effect. Notwithstanding anything in this subsection 5.13 to the contrary, no event or condition has occurred or is occurring with respect to Holdings or any of its Subsidiaries relating to any Environmental Law, any Release of Hazardous Materials, or any Hazardous Materials Activity, including any matter disclosed on Schedule 5.13 annexed hereto, which individually or in the aggregate has had ------------- or would reasonably be expected to have a Material Adverse Effect. 5.14 EMPLOYEE MATTERS. ---------------- There is no strike or work stoppage in existence or threatened involving Holdings or any of its Subsidiaries that would reasonably be expected to have a Material Adverse Effect. 5.15 SOLVENCY. -------- Each Loan Party is and, upon the incurrence of any Obligations by such Loan Party on any date on which this representation is made, will be, Solvent. 5.16 MATTERS RELATING TO COLLATERAL. ------------------------------ A. CREATION, PERFECTION AND PRIORITY OF LIENS. The execution and delivery of the Collateral Documents by Loan Parties, together with (i) the actions taken on or prior to the date hereof pursuant to subsections 4.1C, 4.1D, 6.8 and 6.9 and (ii) the delivery to Administrative Agent of any Pledged Collateral not delivered to Administrative Agent at the time of execution and delivery of the applicable Collateral Document (all of which Pledged Collateral has been so delivered) are, assuming continuous possession of such Pledged Collateral by Administrative Agent or any Supplemental Collateral Agent, if any, effective to create in favor of Administrative Agent for the benefit of Lenders, as security for the respective Secured Obligations (as defined in the applicable Collateral Document in respect of any Collateral), a valid and perfected First Priority Lien on all of the Collateral, and all filings and other actions necessary to perfect and maintain the perfection and First Priority status of such Liens have been duly made or taken and remain in full force and effect, other than the filing of any UCC financing statements delivered to Administrative Agent for filing (but not yet filed), the periodic filing of UCC continuation statements in respect of UCC financing statements filed by or on behalf of Administrative Agent and the filing of certain UCC termination statements relating to the Liens under Existing Indebtedness (which have been delivered to Administrative Agent and which will be promptly filed after the Closing Date). 113 B. GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge or grant by any Loan Party of the Liens purported to be created in favor of Administrative Agent pursuant to any of the Collateral Documents or (ii) the exercise by Administrative Agent of any rights or remedies in respect of any Collateral (whether specifically granted or created pursuant to any of the Collateral Documents or created or provided for by applicable law), except for filings or recordings contemplated by subsection 5.16A and except as may be required, in connection with the disposition of any Pledged Collateral, by laws generally affecting the offering and sale of securities. C. ABSENCE OF THIRD-PARTY FILINGS. Except such as may have been filed in favor of Administrative Agent as contemplated by subsection 5.16A, (i) no effective UCC financing statement, fixture filing or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office and (ii) no effective filing covering all or any part of the IP Collateral is on file in the PTO, in each case other than those UCC financing statements relating to Existing Indebtedness which will be terminated upon the filing of the UCC termination statements delivered to Syndication Agent pursuant to subsections 4.1F(vi) and (vii) with the appropriate filing offices. D. MARGIN REGULATIONS. The pledge of the Pledged Collateral pursuant to the Collateral Documents does not violate Regulation T, U or X of the Board of Governors of the Federal Reserve System. E. INFORMATION REGARDING COLLATERAL. All information supplied to either Agent by or on behalf of any Loan Party with respect to any of the Collateral (in each case taken as a whole with respect to any particular Collateral) is accurate and complete in all material respects. 5.17 DISCLOSURE. ---------- No representation or warranty of any Loan Party contained in any Loan Document or in any other document, certificate or written statement furnished to Lenders by or on behalf of Company or any of its Subsidiaries for use in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact (known to Company, in the case of any document not furnished by it) necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made. Any projections and pro forma financial information contained in such materials are based upon good faith estimates and assumptions believed by Company to be reasonable at the time made, it being recognized by Lenders that such projec- 114 tions as to future events are not to be viewed as facts and that actual results during the period or periods covered by any such projections may differ from the projected results. There are no facts known (or which should upon the reasonable exercise of diligence be known) to Company (other than matters of a general economic nature) that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect and that have not been disclosed herein or in such other documents, certificates and statements furnished to Lenders for use in connection with the transactions contemplated hereby. SECTION 6. COMPANY'S AFFIRMATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause Holdings and each of its Subsidiaries to perform, all covenants in this Section 6. 6.1 FINANCIAL STATEMENTS AND OTHER REPORTS. -------------------------------------- Company will maintain, and cause each of its Subsidiaries to maintain, a system of accounting established and administered in accordance with sound business practices to permit preparation of financial statements in conformity with GAAP. Company will deliver to Administrative Agent for distribution to Lenders: (i) Monthly Financials: as soon as available and in any event within ------------------ 30 days after the end of each month ending after the Closing Date, the consolidated statements of operations of Company and its Subsidiaries for such month and for the period from the beginning of the then current Fiscal Year to the end of such month, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year, to the extent prepared on a monthly basis, all in reasonable detail and certified by the chief financial officer, chief accounting officer or controller of Company that they fairly present, in all material respects, the financial condition of Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments; provided that such -------- consolidated statements of operations shall be prepared in a manner consistent with the Company's internal procedures as they exist on the Closing Date and current practice in all material respects and that such consolidated statements of operations shall provide the required information separately for each product group (as such groups are determined by 115 Company from time to time; provided that to the extent any such product -------- group is changed in any material respect, Company shall promptly provide an explanation therefor to Administrative Agent); provided further that the -------- ------- requirement set forth in this clause (i) of this subsection 6.1 shall cease and no longer be of any force or effect on the date of delivery of the Margin Determination Certificate pursuant to clause (iv) of this subsection 6.1 which shows that the Consolidated Leverage Ratio is less than 4.5:1.00; (ii) Quarterly Financials: as soon as available and in any event -------------------- within 45 days after the end of each Fiscal Quarter, (a) the consolidated balance sheets of Holdings and its Subsidiaries and of Company and its Subsidiaries as at the end of such Fiscal Quarter and the related consolidated statements of operations, stockholders' equity and cash flows of Holdings and its Subsidiaries and of Company and its Subsidiaries for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods of the previous Fiscal Year and the corresponding figures from the Financial Plan for the current Fiscal Year, all in reasonable detail and certified by the chief financial officer of Holdings or Company, as the case may be, that they fairly present, in all material respects, the financial condition of Holdings and its Subsidiaries and Company and its Subsidiaries, as the case may be, as at the dates indicated and the results of their operations and their cash flows for the periods indicated, subject to changes resulting from audit and normal year-end adjustments, and (b) a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to senior management for such Fiscal Quarter and for the period from the beginning of the then current Fiscal Year to the end of such Fiscal Quarter; provided that if Company delivers an Quarterly Report on Form 10-Q -------- for such Fiscal Quarter as filed with the Securities and Exchange Commission to Administrative Agent within 60 days after the end of such Fiscal Quarter, such Form 10-Q shall satisfy all requirements of clause (b) of this subsection 6.1(ii); (iii) Year-End Financials: as soon as available and in any event ------------------- within 90 days after the end of each Fiscal Year, (a) the consolidated balance sheet of Holdings and its Subsidiaries and of Company and its Subsidiaries as at the end of such Fiscal Year and the related consolidated statements of operations, stockholders' equity and cash flows of Holdings and its Subsidiaries and of Company and its Subsidiaries for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the previous Fiscal Year and the corresponding figures from the 116 Financial Plan for the Fiscal Year covered by such financial statements, all in reasonable detail and certified by the chief financial officer, chief accounting officer or controller of Holdings or Company, as the case may be, that they fairly present, in all material respects, the financial condition of Holdings and its Subsidiaries or Company and its Subsidiaries, as the case may be, as at the dates indicated and the results of their operations and their cash flows for the periods indicated, (b) a narrative report describing the operations of Company and its Subsidiaries in the form prepared for presentation to senior management for such Fiscal Year; provided that if Company delivers an Annual Report on Form 10-K for such -------- Fiscal Quarter as filed with the Securities and Exchange Commission to Administrative Agent within 105 days after the end of such Fiscal Quarter, such Form 10-K shall satisfy all requirements of clause (b) of this subsection 6.1(iii); and (c) in the case of such consolidated financial statements, a report thereon of Arthur Andersen LLP or other independent certified public accountants of recognized national standing selected by Company and satisfactory to Administrative Agent, which report shall be unqualified, shall express no doubts about the ability of Holdings and its Subsidiaries and Company and its Subsidiaries to continue as a going concern, and shall state that such consolidated financial statements fairly present, in all material respects, the consolidated financial position of Holdings and its Subsidiaries and Company and its Subsidiaries as at the dates indicated and the results of their operations and their cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as otherwise disclosed in such financial statements) and that the examination by such accountants in connection with such consolidated financial statements has been made in accordance with generally accepted auditing standards; (iv) Officer's, Margin Determination and Compliance Certificates: ----------------------------------------------------------- together with each delivery of financial statements of Holdings and its Subsidiaries and of Company and its Subsidiaries pursuant to subdivisions (ii) and (iii) above, (a) an Officer's Certificate of Company stating that the signers have reviewed the terms of this Agreement and have made, or caused to be made under their supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by such financial statements and that such review has not disclosed the existence during or at the end of such accounting period, and that the signers do not have knowledge of the existence as at the date of such Officer's Certificate, of any condition or event that constitutes an Event of Default or Potential Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence 117 thereof and what action Company has taken, is taking and proposes to take with respect thereto; (b) a Margin Determination Certificate demonstrating in reasonable detail the Consolidated Leverage Ratios for the four consecutive Fiscal Quarters ending on the day of the accounting period covered by such financial statements; and (c) a Compliance Certificate demonstrating in reasonable detail compliance during and at the end of the applicable accounting periods with the restrictions contained in Section 7, in each case to the extent compliance with such restrictions is required to be tested at the end of the applicable accounting period; (v) Reconciliation Statements: if, (A) as a result of any change in ------------------------- accounting principles and policies from those used in the preparation of the audited financial statements referred to in subsection 5.3, the consolidated financial statements of Holdings and its Subsidiaries or Company and its Subsidiaries delivered pursuant to subdivisions (ii), (iii) or (xiii) of this subsection 6.1 will differ in any material respect from the consolidated financial statements that would have been delivered pursuant to such subdivisions had no such change in accounting principles and policies been made and (B) Requisite Lenders so request, then (a) together with the first delivery of financial statements pursuant to subdivision (ii), (iii) or (xiii) of this subsection 6.1 following such change, consolidated financial statements of Holdings and its Subsidiaries and Company and its Subsidiaries for (y) the current Fiscal Year to the effective date of such change and (z) the two full Fiscal Years immediately preceding the Fiscal Year in which such change is made, in each case prepared on a pro forma basis as if such change had been in effect during such periods, and (b) together with each delivery of financial statements pursuant to subdivision (ii), (iii) or (xiii) of this subsection 6.1 following such change, a written statement of the chief accounting officer or chief financial officer of Holdings or Company, as the case may be, setting forth the differences (including any differences that would affect any calculations relating to the financial covenants set forth in subsection 7.6) which would have resulted if such financial statements had been prepared without giving effect to such change; (vi) Accountants' Certification: together with each delivery of -------------------------- consolidated financial statements of Holdings and its Subsidiaries and Company and its Subsidiaries pursuant to subdivision (iii) above, a written statement by the independent certified public accountants giving the report thereon (a) stating that their audit examination has included a review of the terms of subsections 7.5, 7.6, 7.8 and 7.9 of this Agreement as they relate to accounting matters, (b) stating whether, in connection with their audit examination, any condition or event that constitutes an 118 Event of Default or Potential Event of Default has come to their attention and, if such a condition or event has come to their attention, specifying the nature and period of existence thereof; provided that such accountants -------- shall not be liable by reason of any failure to obtain knowledge of any such Event of Default or Potential Event of Default that would not be disclosed in the course of their audit examination, and (c) stating that based on their audit examination nothing has come to their attention that causes them to believe either or both that the information contained in the certificates delivered therewith pursuant to subdivision (iv) above is not correct or that the matters set forth in the Compliance Certificates delivered therewith pursuant to clause (c) of subdivision (iv) above for the applicable Fiscal Year are not stated in accordance with the terms of this Agreement; (vii) Accountants' Reports: promptly upon receipt thereof (unless -------------------- restricted by applicable professional standards), copies of all reports submitted to Holdings or Company by independent certified public accountants in connection with each annual, interim or special audit of the financial statements of Holdings and its Subsidiaries or Company and its Subsidiaries, as the case may be, made by such accountants, including any comment letter submitted by such accountants to management in connection with their annual audit; (viii) SEC Filings and Press Releases: promptly upon their becoming ------------------------------ available, copies of (a) all financial statements, reports, notices and proxy statements sent or made available generally by Holdings to its security holders or by any Subsidiary of Holdings to its security holders other than Holdings or another Subsidiary of Holdings, (b) all regular and periodic reports and all registration statements (other than on Form S-8 or a similar form) and prospectuses, if any, filed by Holdings or any of its Subsidiaries with any securities exchange or with the Securities and Exchange Commission or any governmental or private regulatory authority, and (c) all press releases and other statements made available generally by Holdings or any of its Subsidiaries to the public concerning material developments in the business of Holdings or any of its Subsidiaries; (ix) Events of Default, etc.: promptly upon any officer of Company ----------------------- obtaining knowledge (a) of any condition or event that constitutes an Event of Default or Potential Event of Default, or becoming aware that any Lender has given any notice (other than to Administrative Agent) or taken any other action with respect to a claimed Event of Default or Potential Event of Default, (b) that any Person has given any notice to Holdings or any of its Subsidiaries 119 or taken any other action with respect to a claimed default or event or condition of the type referred to in subsection 8.2, (c) of any condition or event that would be required to be disclosed in a current report filed by Company with the Securities and Exchange Commission on Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date hereof) if Company were required to file such reports under the Exchange Act, or (d) of the occurrence of any event or change that has caused or evidences, either in any case or in the aggregate, a Material Adverse Effect, an Officer's Certificate specifying the nature and period of existence of such condition, event or change, or specifying the notice given or action taken by any such Person and the nature of such claimed Event of Default, Potential Event of Default, default, event or condition, and what action Company has taken, is taking and proposes to take with respect thereto; (x) Litigation or Other Proceedings: (a) promptly upon any executive ------------------------------- officer of Company obtaining actual knowledge of (X) the institution of, or non-frivolous threat of, any action, suit, proceeding (whether administrative, judicial or otherwise), governmental investigation or arbitration against or affecting Holdings or any of its Subsidiaries or any property of Holdings or any of its Subsidiaries (collectively, "PROCEEDINGS") not previously disclosed in writing by Company to Lenders or (Y) any material development in any Proceeding that, in any case: (1) if adversely determined, would reasonably be expected to have a Material Adverse Effect; or (2) seeks to enjoin or otherwise prevent the consummation of, or to recover any damages or obtain relief as a result of, the transactions contemplated hereby; written notice thereof together with such other information as may be reasonably available to Company to enable Lenders and their respective counsel to evaluate such matters; and (b) within twenty days after the end of each Fiscal Quarter, a schedule of all Proceedings involving an alleged liability of, or claims against or affecting, Holdings or any of its Subsidiaries equal to or greater than $1,000,000, and promptly after request by Administrative Agent such other information as may be reasonably requested by Administrative Agent to enable Administrative Agent and its counsel to evaluate any of such Proceedings; (xi) ERISA Events: promptly upon becoming aware of the occurrence of ------------ or forthcoming occurrence of any ERISA Event, a written notice specifying the nature thereof, what action Holdings, any of its Subsidiaries or any of their respective ERISA Affiliates has taken, is taking or proposes to take 120 with respect thereto and, when known, any action taken or threatened by the Internal Revenue Service, the Department of Labor or the PBGC with respect thereto; (xii) ERISA Notices: with reasonable promptness, copies of (a) all ------------- notices received by Holdings, any of its Subsidiaries or any of their respective ERISA Affiliates from a Multiemployer Plan sponsor concerning an ERISA Event; and (b) copies of such other documents or governmental reports or filings relating to any Employee Benefit Plan as Administrative Agent shall reasonably request; (xiii) Financial Plans: as soon as practicable and in any event no --------------- later than ten days after the beginning of each Fiscal Year, a consolidated plan and financial forecast for such Fiscal Year and the next four succeeding Fiscal Years (the "FINANCIAL PLAN" for such Fiscal Years), including (a) a forecasted consolidated balance sheet and forecasted consolidated statements of operations and cash flows of Company and its Subsidiaries for each such Fiscal Year, together with pro forma financial --- ----- covenant calculations for each such Fiscal Year determined in a manner consistent with financial covenant calculations shown in a Compliance Certificate and an explanation of the assumptions on which such forecasts are based; provided that such forecasted consolidated balance sheet, -------- statements of operations and cash flows (1) shall be prepared in a manner consistent with Company's internal procedures as they exist on the Closing Date and past practice and (2) shall contain information separately for each product line, and (b) such other information and projections as any Lender may reasonably request; (xiv) Insurance: as soon as practicable and in any event by March 1 --------- of each year, a report in form and substance satisfactory to Administrative Agent outlining all material insurance coverage maintained as of the date of such report by Company and its Subsidiaries and all material insurance coverage planned to be maintained by Company and its Subsidiaries in the twelve months ending on the next succeeding March 1; (xv) Board of Directors: with reasonable promptness, written ------------------ notice of any change in the Board of Directors of Company or of Holdings; (xvi) New Subsidiaries: promptly upon any Person becoming a ---------------- Subsidiary of Holdings or of Company, a written notice setting forth with respect to such Person (a) the date on which such Person became a Subsidiary of Company and (b) all of the data required to be set forth in Schedule 5.1 annexed hereto with respect to all Subsidiaries of Company (it ------------ being understood that such written notice shall be 121 deemed to supplement Schedule 5.1 annexed hereto for all purposes of this ------------ Agreement); (xvii) Material Contracts: promptly, and in any event within ten ------------------ Business Days after any Material Contract of Company or any of its Subsidiaries is terminated or amended in a manner that is materially adverse to Company or such Subsidiary, as the case may be, or any new Material Contract is entered into, a written statement describing such event with copies of such material amendments or new contracts, and an explanation of any actions being taken with respect thereto; (xviii) UCC Search Report: As promptly as practicable after the date ----------------- of delivery to Administrative Agent of any UCC financing statement executed by any Loan Party pursuant to subsection 4.1D(iv) or 6.8A, copies of completed UCC searches evidencing the proper filing, recording and indexing of all such UCC financing statement and listing all other effective financing statements that name such Loan Party as debtor, together with copies of all such other financing statements not previously delivered to Administrative Agent by or on behalf of Company or such Loan Party; (xix) Other Information: with reasonable promptness, such other ----------------- information and data with respect to Company or any of its Subsidiaries as from time to time may be reasonably requested by any Lender. 6.2 LEGAL EXISTENCE, ETC. --------------------- Except as permitted under subsection 7.7, Company will, and will cause each of Holdings and its Subsidiaries to, at all times preserve and keep in full force and effect its legal existence and all rights and franchises material to its business; provided, however that neither Company nor any of its Subsidiaries -------- ------- shall be required to preserve any such right or franchise if the Board of Directors of Company or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of Company or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to Company or such Subsidiary, taken as a whole, or Lenders. 6.3 PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION. ---------------------------------------------- A. Company will, and will cause each of Holdings and its Subsidiaries to, pay all taxes, assessments and other governmental charges imposed upon it or any of its properties or assets or in respect of any of its income, businesses or franchises before any penalty accrues thereon, and all claims (including claims for labor, services, materials and supplies) 122 for sums that have become due and payable and that by law have or may become a Lien upon any of its properties or assets, prior to the time when any penalty or fine shall be incurred with respect thereto; provided that no such charge or -------- claim need be paid if it is being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as (1) such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor and (2) in the case of a charge or claim which has or may become a Lien against any of the Collateral, such contest proceedings conclusively operate to stay the sale of any portion of the Collateral to satisfy such charge or claim. B. Company will not, nor will it permit any of Holdings or its Subsidiaries to, file or consent to the filing of any consolidated income tax return with any Person (other than Holdings, Company or any of its Subsidiaries). 6.4 MAINTENANCE OF PROPERTIES; INSURANCE; APPLICATION OF NET -------------------------------------------------------- INSURANCE/CONDEMNATION PROCEEDS. ------------------------------- A. MAINTENANCE OF PROPERTIES. Company will, and will cause each of its Subsidiaries to, maintain or cause to be maintained in good repair, working order and condition, ordinary wear and tear excepted, all material properties used or useful in the business of Company and its Subsidiaries (including all Intellectual Property) and from time to time will make or cause to be made all appropriate repairs, renewals and replacements thereof. B. INSURANCE. Company will maintain or cause to be maintained, with financially sound and reputable insurers, such public liability insurance, third party property damage insurance, business interruption insurance and casualty insurance with respect to liabilities, losses or damage in respect of the assets, properties and businesses of Company and its Subsidiaries as may customarily be carried or maintained under similar circumstances by corporations of established reputation engaged in similar businesses, in each case in such amounts (giving effect to self-insurance), with such deductibles, covering such risks and otherwise on such terms and conditions as shall be customary for corporations similarly situated in the industry. Without limiting the generality of the foregoing, Company will maintain or cause to be maintained (i) flood insurance with respect to each Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, in each case in compliance with any applicable regulations of the Board of Governors of the Federal Reserve System, and (ii) replacement value casualty insurance on the Collateral under such policies of insurance, with such insurance companies, in such amounts, with such deductibles, and covering such risks as are at all times satisfactory to Administrative Agents in its commercially reasonable judgment. Each such policy 123 of insurance shall (a) name Administrative Agent for the benefit of Lenders as an additional insured thereunder as its interests may appear and (b) in the case of each business interruption and casualty insurance policy, contain a loss payable clause or endorsement, satisfactory in form and substance to Administrative Agent, that names Administrative Agent for the benefit of Lenders as the loss payee thereunder for any covered loss in excess of $1,000,000 and provides for at least 30 days prior written notice to Administrative Agent of any modification or cancellation of such policy. 6.5 INSPECTION RIGHTS. ----------------- Company shall, and shall cause each of its Subsidiaries to, permit any authorized representatives designated by Administrative Agent to visit and inspect any of the properties of Company or of any of its Subsidiaries, to inspect, copy and take extracts from its and their financial and accounting records, and to discuss its and their affairs, finances and accounts with its and their officers and independent public accountants (provided that Company may, if it so chooses, be present at or participate in any such discussion), all upon reasonable notice and at such reasonable times during normal business hours; provided that Administrative Agent shall conduct not more than one -------- physical audit in any one Fiscal Year; and provided further, that upon the -------- ------- occurrence and during the continuance of an Event of Default, Administrative Agent may engage in any number of physical audits which Administrative Agent reasonably deems necessary. 6.6 COMPLIANCE WITH LAWS, ETC. -------------------------- Company shall comply, and shall cause each of its Subsidiaries and all other Persons on or occupying any Facilities to comply, with the requirements of all applicable laws, rules, regulations and orders of any governmental authority (including all Environmental Laws), noncompliance with which would reasonably be expected to cause, individually or in the aggregate, a Material Adverse Effect. 6.7 COMPANY'S ACTIONS REGARDING HAZARDOUS MATERIALS ACTIVITIES, ----------------------------------------------------------- ENVIRONMENTAL CLAIMS AND VIOLATIONS OF ENVIRONMENTAL LAWS. --------------------------------------------------------- A. ENVIRONMENTAL DISCLOSURE. Company will deliver to Administrative Agent and Lenders: (i) Environmental Audits and Reports. As soon as practicable -------------------------------- following receipt thereof, copies of all environmental audits, investigations, analyses and reports of any kind or character, whether prepared by personnel of 124 Company or any of its Subsidiaries or by independent consultants, governmental authorities or any other Persons, with respect to environmental matters at any Facility which would reasonably be expected to have a Material Adverse Effect; (ii) Notice of Certain Releases, Remedial Actions, Etc. Promptly -------------------------------------------------- upon the occurrence thereof, written notice describing in reasonable detail (a) any Release required to be reported to any federal, state or local governmental or regulatory agency under CERCLA or EPCRA which would reasonably be expected to have a Material Adverse Effect, (b) any remedial action taken by Company or any other Person in response to (1) any Hazardous Materials Activities the existence of Environmental Claims which would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, or (2) any Environmental Claims that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, and (c) Company's discovery of any occurrence or condition on any real property adjoining or in the vicinity of any Facility that would reasonably be expected to have a Material Adverse Effect. (iii) Written Communications Regarding Environmental Claims, ------------------------------------------------------ Releases, Etc. As soon as practicable following the sending or receipt -------------- thereof by Company or any of its Subsidiaries, a copy of any and all written communications with respect to (a) any Environmental Claims that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, (b) any Release required to be reported to any federal, state or local governmental or regulatory agency which would reasonably be expected to have a Material Adverse Effect, and (c) any request for information from any governmental agency that suggests such agency is investigating whether Company or any of its Subsidiaries may be potentially responsible for any Hazardous Materials Activity which would reasonably be expected to have a Material Adverse Effect. (iv) Notice of Certain Proposed Actions Having Environmental Impact. -------------------------------------------------------------- Prompt written notice describing in reasonable detail (a) any proposed acquisition of stock, assets, or property by Company or any of its Subsidiaries that would reasonably be expected to (1) expose Company or any of its Subsidiaries to, or result in, Environmental Claims that could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect or (2) affect the ability of Company or any of its Subsidiaries to maintain in full force and effect all Governmental Authorizations required under any Environmental Laws for their respective operations the failure to so maintain would reasonably be expected to have a Material 125 Adverse Effect and (b) any proposed action to be taken by Company or any of its Subsidiaries to modify current operations in a manner that would reasonably be expected to subject Company or any of its Subsidiaries to any additional obligations or requirements under any Environmental Laws which would reasonably be expected to have a Material Adverse Effect. (v) Other Information. With reasonable promptness, such other ----------------- documents and information as from time to time may be reasonably requested by Administrative Agent or Requisite Lenders in relation to any matters disclosed pursuant to this subsection 6.7. B. COMPANY'S ACTIONS REGARDING HAZARDOUS MATERIALS ACTIVITIES, ENVIRONMENTAL CLAIMS AND VIOLATIONS OF ENVIRONMENTAL LAWS. (i) Remedial Actions Relating to Hazardous Materials Activities. ----------------------------------------------------------- Company shall promptly undertake, and shall cause each of its Subsidiaries promptly to undertake, any and all investigations, studies, sampling, testing, abatement, cleanup, removal, remediation or other response actions necessary to remove, remediate, clean up or abate any Hazardous Materials Activity on, under or about any Facility that is in violation of any Environmental Laws or that presents a material risk of giving rise to an Environmental Claim to the extent required by law and the failure to take such action would reasonably be expected to have a Material Adverse Effect. In the event Company or any of its Subsidiaries undertakes any such action with respect to any Hazardous Materials, Company or such Subsidiary shall conduct and complete such action in compliance with all applicable Environmental Laws and in accordance with the policies, orders and directives of all federal, state and local governmental authorities except when, and only to the extent that, Company's or such Subsidiary's liability with respect to such Hazardous Materials Activity is being contested in good faith by Company or such Subsidiary. (ii) Actions with Respect to Environmental Claims and Violations of -------------------------------------------------------------- Environmental Laws. Company shall promptly take, and shall cause each of ------------------ its Subsidiaries promptly to take, any and all actions necessary to (a) cure any violation of applicable Environmental Laws by Company or its Subsidiaries if the failure to cure such violation would not reasonably be expected to have a Material Adverse Effect; and (b) make an appropriate response to any Environmental Claim against Company or any of its Subsidiaries and discharge any obligations it may have to any Person thereunder. 126 (iii) Actions Relating to Landfills. Company shall promptly ----------------------------- undertake, and cause each of its Subsidiaries to undertake, any and all sampling, testing, maintenance, investigation, or other actions related to any landfill or other disposal site at any Facility that is required by (i) any applicable statute or regulation; and (ii) order or directive from or agreement with any federal, state or local governmental or regulatory agency. 6.8 EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL ----------------------------------------------------------------- DOCUMENTS BY CERTAIN SUBSIDIARIES AND FUTURE SUBSIDIARIES; IP ------------------------------------------------------------- COLLATERAL. ---------- A. EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL DOCUMENTS. In the event that any Person becomes a Subsidiary of Company after the date hereof, Company will promptly notify Administrative Agent of that fact and cause such Subsidiary to execute and deliver to Administrative Agent a counterpart of the Subsidiary Guaranty and a Subsidiary Pledge Agreement and a Subsidiary Security Agreement and to take all such further actions and execute all such further documents and instruments (including actions, documents and instruments comparable to those described in subsection 4.1D) as may be necessary or, in the opinion of Administrative Agent, desirable to create in favor of Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority Lien (subject to Permitted Encumbrances) on all of the personal and mixed property assets of such Subsidiary described in the applicable forms of Collateral Documents. B. SUBSIDIARY CHARTER DOCUMENTS, LEGAL OPINIONS, ETC. Company shall deliver to Administrative Agent, together with such Loan Documents, (i) certified copies of such Subsidiary's Certificate or Articles of Incorporation, together with a good standing certificate from the Secretary of State of the jurisdiction of its incorporation and each other state in which such Person is qualified as a foreign corporation to do business and, to the extent generally available, a certificate or other evidence of good standing as to payment of any applicable franchise or similar taxes from the appropriate taxing authority of each of such jurisdictions, each to be dated a recent date prior to their delivery to Administrative Agent, (ii) a copy of such Subsidiary's Bylaws certified by its secretary or an assistant secretary as of a recent date prior to their delivery to Administrative Agent, (iii) a certificate executed by the secretary or an assistant secretary of such Subsidiary as to (a) the fact that the attached resolutions of the Board of Directors of such Subsidiary approving and authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Subsidiary executing such Loan Documents, and (iv) a favorable 127 opinion of counsel to such Subsidiary, in form and substance reasonably satisfactory to Administrative Agent and its counsel, as to (a) the due organization and good standing of such Subsidiary, (b) the due authorization, execution and delivery by such Subsidiary of such Loan Documents, (c) the enforceability of such Loan Documents against such Subsidiary, (d) such other matters (including matters relating to the creation and perfection of Liens in any Collateral pursuant to such Loan Documents) as Administrative Agent may reasonably request, all of the foregoing to be satisfactory in form and substance to Administrative Agent and its counsel. C. IP COLLATERAL. If any Subsidiary becomes an owner of any Intellectual Property, Company shall cause such Subsidiary to promptly execute and deliver to Administrative Agent a copyright security agreement or a trademark security agreement, or such other security agreement as Administrative Agent shall deem appropriate and take such further action and execute such further documents and instruments as may be necessary, or in the opinion of Administrative Agent, desirable to create in favor of Administrative Agent, for the benefit of Lenders, a valid and perfected First Priority Lien on such Intellectual Property. 6.9 CONFORMING LEASEHOLD INTERESTS; MATTERS RELATING TO ADDITIONAL REAL ------------------------------------------------------------------- PROPERTY COLLATERAL. ------------------- A. CONFORMING LEASEHOLD INTERESTS. If Company or any of its Subsidiaries acquires any Leasehold Property, Company shall, or shall cause such Subsidiary to, cause such Leasehold Property to be a Conforming Leasehold Interest. B. ADDITIONAL MORTGAGES, ETC. From and after the Closing Date, in the event that (i) Company or any Subsidiary Guarantor acquires any fee interest in real property or any Material Leasehold Property or (ii) at the time any Person becomes a Subsidiary Guarantor, such Person owns or holds any fee interest in real property or any Material Leasehold Property, in either case excluding any such Real Property Asset the encumbrancing of which requires the consent of any applicable lessor or (in the case of clause (ii) above) then-existing senior lienholder, where Company and its Subsidiaries are unable to obtain such lessor's or senior lienholder's consent (any such non-excluded Real Property Asset described in the foregoing clause (i) or (ii) being an "ADDITIONAL MORTGAGED PROPERTY"), Company or such Subsidiary Guarantor shall deliver to Administrative Agent, as soon as practicable after such Person acquires such Additional Mortgaged Property or becomes a Subsidiary Guarantor, as the case may be, the following: (i) Additional Mortgage. A fully executed and notarized Mortgage (an ------------------- "ADDITIONAL MORTGAGE"), duly recorded in all appropriate places in all applicable jurisdictions, 128 encumbering the interest of such Loan Party in such Additional Mortgaged Property; (ii) Opinions of Counsel. (a) A favorable opinion of counsel to ------------------- such Loan Party, in form and substance satisfactory to Administrative Agent and its counsel, as to the due authorization, execution and delivery by such Loan Party of such Additional Mortgage and such other matters as Administrative Agent may reasonably request, and (b) if required by Administrative Agent, an opinion of counsel (which counsel shall be reasonably satisfactory to Administrative Agent) in the state in which such Additional Mortgaged Property is located with respect to the enforceability of the form of Additional Mortgage recorded in such state and such other matters (including any matters governed by the laws of such state regarding personal property security interests in respect of any Collateral) as Administrative Agent may reasonably request, in each case in form and substance reasonably satisfactory to Administrative Agent; (iii) Landlord Consent and Estoppel; Recorded Leasehold Interest. In ---------------------------------------------------------- the case of an Additional Mortgaged Property consisting of a Leasehold Property, (a) a Landlord Consent and Estoppel, unless Company or such Subsidiary is unable to obtain the Landlord Consent and Estoppel after using commercially reasonable efforts to obtain the same and (b) evidence that such Leasehold Property is a Recorded Leasehold Interest; (iv) Title Insurance. (a) If required by Administrative Agent, an --------------- ALTA mortgagee title insurance policy or an unconditional commitment therefor (an "ADDITIONAL MORTGAGE POLICY") issued by the Title Company with respect to such Additional Mortgaged Property, in an amount satisfactory to Administrative Agent, insuring fee simple title to, or a valid leasehold interest in, such Additional Mortgaged Property vested in such Loan Party and assuring Administrative Agent that such Additional Mortgage creates a valid and enforceable First Priority mortgage Lien on such Additional Mortgaged Property, subject only to a standard survey exception, which Additional Mortgage Policy (1) shall include an endorsement for mechanics' liens, for future advances under this Agreement and for any other matters reasonably requested by Administrative Agent and (2) shall provide for affirmative insurance and such reinsurance as Administrative Agent may reasonably request, all of the foregoing in form and substance reasonably satisfactory to Administrative Agent; and (b) evidence satisfactory to Administrative Agent that such Loan Party has (i) delivered to the Title Company all certificates and affidavits required by the Title Company in connection with the issuance of the Additional Mortgage Policy and (ii) paid to 129 the Title Company or to the appropriate governmental authorities all expenses and premiums of the Title Company in connection with the issuance of the Additional Mortgage Policy and all recording and stamp taxes (including mortgage recording and intangible taxes) payable in connection with recording the Additional Mortgage in the appropriate real estate records; (v) Title Report. If no Additional Mortgage Policy is required ------------ with respect to such Additional Mortgaged Property, a title report issued by the Title Company with respect thereto, dated not more than 30 days prior to the date such Additional Mortgage is to be recorded and satisfactory in form and substance to Administrative Agent; (vi) Copies of Documents Relating to Title Exceptions. Copies of ------------------------------------------------ all recorded documents listed as exceptions to title or otherwise referred to in the Additional Mortgage Policy or title report delivered pursuant to clause (iv) or (v) above as may be requested by Administrative Agent; and (vii) Matters Relating to Flood Hazard Properties. (a) Evidence, ------------------------------------------- which may be in the form of a letter from an insurance broker or a municipal engineer, as to (1) whether such Additional Mortgaged Property is a Flood Hazard Property and (2) if so, whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, (b) if such Additional Mortgaged Property is a Flood Hazard Property, such Loan Party's written acknowledgement of receipt of written notification from Administrative Agent (1) that such Additional Mortgaged Property is a Flood Hazard Property and (2) as to whether the community in which such Flood Hazard Property is located is participating in the National Flood Insurance Program, and (c) in the event such Additional Mortgaged Property is a Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, evidence that Company has obtained flood insurance in respect of such Flood Hazard Property to the extent required under the applicable regulations of the Board of Governors of the Federal Reserve System. (viii) Environmental Audit. If required by Administrative Agent, ------------------- reports and other information, in form, scope and substance satisfactory to Administrative Agent concerning any environmental hazards or liabilities to which Company or any of its Subsidiaries may be subject with respect to such Additional Mortgaged Property. After consultation with Company, Administrative Agent may request for, and Company shall deliver, such reports and other information that are prepared by environmental consultants satisfactory to Administrative Agent. 130 6.10 INTEREST RATE PROTECTION. ------------------------ Within 90 days after the Closing Date and continuing for a period of two years, Company shall at all times maintain in effect one or more Interest Rate Agreements with respect to the Loans, in an aggregate notional principal amount of not less than 25% of the aggregate principal amount of the Term Loans outstanding from time to time, which Interest Rate Agreements shall have the effect of establishing a maximum interest rate to the satisfaction of Administrative Agent per annum with respect to such notional principal amount, each such Interest Rate Agreement to be in form and substance satisfactory to Administrative Agent and with a term of not less than two years. 6.11 YEAR 2000 COVENANT. ------------------ Company shall perform all acts reasonably necessary to ensure that Company and its Subsidiaries become Year 2000 Compliant. Such acts shall include, without limitation, performing a comprehensive review and assessment of all of Company's systems (including the interface of those systems with the systems of material suppliers, vendors and customers) and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this subsection 6.11, "Year 2000 Compliant" shall mean, in regard to Company and its Subsidiaries, that all software, hardware, firmware, equipment, goods or systems utilized by Company and its Subsidiaries, the failure of which would reasonably be expected to have a Material Adverse Effect, will properly perform date sensitive functions before, during and after the year 2000. Company shall, promptly upon request, provide to Administrative Agent such certifications or other reasonable evidence of Company's compliance with the terms of this paragraph as Administrative Agent may from time to time reasonably require. SECTION 7. COMPANY'S NEGATIVE COVENANTS Company covenants and agrees that, so long as any of the Commitments hereunder shall remain in effect and until payment in full of all of the Loans and other Obligations and the cancellation or expiration of all Letters of Credit, unless Requisite Lenders shall otherwise give prior written consent, Company shall perform, and shall cause Holdings and each of its Subsidiaries to perform, all covenants in this Section 7. 7.1 INDEBTEDNESS. ------------ Holdings shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or guaranty, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except: 131 (i) Company may become and remain liable with respect to the Obligations; (ii) Holdings and its Subsidiaries may become and remain liable with respect to Contingent Obligations permitted by subsection 7.4 and, upon any matured obligations actually arising pursuant thereto, the Indebtedness corresponding to the Contingent Obligations so extinguished; (iii) Company and its Subsidiaries may become and remain liable with respect to Indebtedness in respect of Capital Leases in an aggregate amount not exceeding $5,000,000; provided that such Capital Leases are permitted -------- under the terms of subsections 7.6, 7.8 and 7.9; (iv) Company may become and remain liable with respect to Indebtedness to any of its wholly-owned Subsidiaries, and any wholly-owned Subsidiary of Company may become and remain liable with respect to Indebtedness to Company or any other wholly-owned Subsidiary of Company; provided that (a) all such intercompany Indebtedness shall be evidenced by -------- promissory notes, (b) all such intercompany Indebtedness owed by Company to any of its Subsidiaries shall be subordinated in right of payment to the payment in full of the Obligations pursuant to the terms of the applicable promissory notes or an intercompany subordination agreement, and (c) any payment by any Subsidiary of Company under any guaranty of the Obligations shall result in a pro tanto reduction of the amount of any intercompany --- ----- Indebtedness owed by such Subsidiary to Company or to any of its Subsidiaries for whose benefit such payment is made; (v) Company and its Subsidiaries, as applicable, may remain liable with respect to Indebtedness described in Schedule 7.1 annexed hereto; ------------ (vi) Company may become and remain liable with respect to Indebtedness evidenced by the Senior Subordinated Notes; (vii) Subsidiaries of Company acquired after the Closing Date, the acquisition of which is permitted under the provisions of subsection 7.7(ii), may remain liable with respect to Indebtedness existing immediately prior to the time any such entity became a Subsidiary of Company in an aggregate amount for all such Subsidiaries not to exceed $17,000,000 at any time outstanding; provided that (i) no Event of Default -------- or a Potential Event of Default shall have occurred and be continuing or shall be caused thereby, and (ii) such Indebtedness is not incurred in contemplation of such acquisition; 132 (viii) Holdings may become and remain liable with respect to Indebtedness evidenced by the Holdings Discount Debentures and any Indebtedness incurred to refinance such Indebtedness; provided that after -------- giving effect to such refinancing Indebtedness and the repayment of the corresponding Indebtedness with the proceeds thereof, (a) the aggregate offering price of the refinancing Indebtedness shall not be greater than the aggregate accreted value of such refinanced Indebtedness immediately prior to such refinancing; (b) the weighted average life to maturity of such refinancing Indebtedness shall be no shorter than the Indebtedness being refinanced; (c) the interest rate applicable to such refinancing Indebtedness shall not be higher than the interest rate applicable to the Indebtedness being refinanced or such refinancing Indebtedness shall not provide for a cash current-pay feature earlier than the scheduled interest payment with respect to the Indebtedness being refinanced, and (d) such refinancing Indebtedness shall not be secured by any property of Holdings; and (ix) Company and its Subsidiaries may become and remain liable with respect to other Indebtedness in an aggregate principal amount not to exceed $10,000,000 at any time outstanding. 7.2 LIENS AND RELATED MATTERS. ------------------------- A. PROHIBITION ON LIENS. Holdings shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit to exist any Lien on or with respect to any property or asset of any kind (including any document or instrument in respect of goods or accounts receivable) of Holdings or any of its Subsidiaries, whether now owned or hereafter acquired, or any income or profits therefrom, or file or permit the filing of, or permit to remain in effect, any financing statement or other similar notice of any Lien with respect to any such property, asset, income or profits under the Uniform Commercial Code of any State or under any similar recording or notice statute, except: (i) Permitted Encumbrances; (ii) Liens granted pursuant to the Collateral Documents; (iii) Liens described in Schedule 7.2 annexed hereto; ------------ (iv) Liens securing Indebtedness permitted under subsection 7.1(vii), which Liens are existing prior to the time the entity which incurred such Indebtedness became a Subsidiary of Company; provided that such Liens were -------- not incurred in connection with, or in contemplation of, the acquisition of such Subsidiary and such Liens extend to or 133 cover only the property and assets of such entity which were covered by such Liens and which were owned by such entity, in each case at the time such entity became a Subsidiary of Company; and (v) Other Liens securing Indebtedness in an aggregate amount not to exceed $1,000,000 at any time outstanding. B. EQUITABLE LIEN IN FAVOR OF LENDERS. If Holdings or any of its Subsidiaries shall create or assume any Lien upon any of its properties or assets, whether now owned or hereafter acquired, other than Liens excepted by the provisions of subsection 7.2A, it shall make or cause to be made effective provision whereby the Obligations will be secured by such Lien equally and ratably with any and all other Indebtedness secured thereby as long as any such Indebtedness shall be so secured; provided that, notwithstanding the foregoing, -------- this covenant shall not be construed as a consent by Requisite Lenders to the creation or assumption of any such Lien not permitted by the provisions of subsection 7.2A. C. NO FURTHER NEGATIVE PLEDGES. Except with respect to specific property encumbered to secure payment of particular Indebtedness or to be sold pursuant to an executed agreement with respect to an Asset Sale, neither Holdings nor any of its Subsidiaries shall enter into any agreement (other than an agreement prohibiting only the creation of Liens securing Subordinated Indebtedness) prohibiting the creation or assumption of any Lien upon any of its properties or assets, whether now owned or hereafter acquired. D. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO COMPANY OR OTHER SUBSIDIARIES. Except as provided herein, Holdings will not, and will not permit any of its Subsidiaries to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any such Subsidiary to (i) pay dividends or make any other distributions on any of such Subsidiary's capital stock owned by Company or any other Subsidiary of Holdings, (ii) repay or prepay any Indebtedness owed by such Subsidiary to Holdings or any other Subsidiary of Holdings, (iii) make loans or advances to Holdings or any other Subsidiary of Holdings, or (iv) transfer any of its property or assets to Holdings or any other Subsidiary of Holdings. 7.3 INVESTMENTS; JOINT VENTURES. --------------------------- Holdings shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, make or own any Investment in any Person, including any Joint Venture, except: (i) Company and its Subsidiaries may make and own Investments in Cash Equivalents; 134 (ii) Company and its Subsidiaries may make intercompany loans to the extent permitted under subsection 7.1(iv); (iii) Company and its Subsidiaries may make Consolidated Capital Expenditures permitted by subsections 7.6, 7.8 and 7.9; (iv) Company and its Subsidiaries may continue to own the Investments owned by them and described in Schedule 7.3 annexed hereto; ------------ (v) Company and its wholly-owned Domestic Subsidiaries may make and own Investments in Persons that, as a result of such Investments, become additional wholly-owned Domestic Subsidiaries, and Company may make and own Investments in Persons that, as a result of such Investments, become additional direct wholly-owned Foreign Subsidiaries, in each case to the extent such Investments are permitted under subsection 7.7(ii); and (vi) Company and its Subsidiaries may make and own other Investments in an aggregate amount not to exceed at any time $8,000,000. 7.4 CONTINGENT OBLIGATIONS. ---------------------- Holdings shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, create or become or remain liable with respect to any Contingent Obligation, except: (i) Holdings may become and remain liable with respect to Contingent Obligations in respect of the Holdings Guaranty and Subsidiaries of Company may become and remain liable with respect to Contingent Obligations in respect of the Subsidiary Guaranty; (ii) Company may become and remain liable with respect to Contingent Obligations in respect of Letters of Credit and Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of other letters of credit in an aggregate amount at any time not to exceed $5,000,000; (iii) Company may become and remain liable with respect to Contingent Obligations under Hedge Agreements entered into by Company with respect to Obligations under this Agreement, including, without limitation, the Hedge Agreement required under subsection 6.10; (iv) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations under guarantees in the ordinary course of business of the obligations of suppliers, customers, franchisees and 135 licensees of Company and its Subsidiaries in an aggregate amount not to exceed at any time $5,000,000; (v) Company and its Subsidiaries may become and remain liable with respect to Contingent Obligations in respect of any Indebtedness of Company or any of its Subsidiaries permitted by subsection 7.1; and (vi) Company and its Subsidiaries, as applicable, may remain liable with respect to Contingent Obligations described in Schedule 7.4 annexed ------------ hereto. 7.5 RESTRICTED JUNIOR PAYMENTS. -------------------------- Holdings shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, declare, order, pay, make or set apart any sum for any Restricted Junior Payment; provided that any Subsidiary may pay dividends or -------- make other distributions to Company; and provided further that, so long as no -------- ------- Event of Default or Potential Event of Default shall have occurred and be continuing or shall be caused thereby, (i) Company may make dividend payments to Holdings on or immediately prior to April 15, 2003 for the sole purpose of allowing Holdings to make a one-time partial redemption of the Holdings Discount Debentures in accordance with the terms of and to the extent required by the Holdings Discount Debentures Indenture in effect as of the Closing Date in an aggregate amount not exceeding the amount required thereunder; provided that for -------- such dividend payment to be permitted to be made to Holdings by Company, immediately after giving effect to such payment, (I) the excess of the Revolving Loan Commitments over the aggregate principal amount of outstanding Revolving Loans shall be at least $10,000,000 and (II) Company delivers an Officer's Certificate demonstrating that the pro forma Consolidated Leverage Ratio after --- ----- taking into account the proposed payment under subsection 7.5(i) is equal to or less than 3.0:1.00; (ii) Company may make dividend payments to Holdings for the purpose of allowing Holdings to make the scheduled interest payments on the Holdings Discount Debentures accruing after April 15, 2003 in accordance with the terms of and to the extent required by the Holdings Discount Debentures Indenture if Company delivers an Officer's Certificate demonstrating pro forma --- ----- compliance with subsection 7.6, with the assumption that the dividends permitted pursuant to this subsection 7.5(ii) were made at the beginning of the fiscal period for which the calculations are being made and such distributions are included in Consolidated Fixed Charges, for purposes of calculation pursuant to subsection 7.6A; (iii) Company may make payments of regularly scheduled interest in respect of the Senior Subordinated Notes in accordance with the terms of and to the extent required by the Senior Subordinated Indenture; (iv) Company may make cash dividends to Holdings for the sole purposes of allowing Holdings to pay for its general operating expenses, franchise tax obligations, accounting, legal, 136 corporate reporting and administrative expenses incurred in the ordinary course of its business in an amount not to exceed $250,000 in the aggregate in any Fiscal Year; and (v) Company may make cash dividends to Holdings for the sole purpose of allowing Holdings to pay income taxes of Holdings and its Subsidiaries on a consolidated based as contemplated by the Tax Sharing Agreement. Notwithstanding anything to the contrary in this subsection 7.5, Company may make dividend payments to Holdings (A) on the Closing Date as necessary to consummate the Transactions and (B) after the Closing Date to satisfy payment of the working capital adjustment required by the Recapitalization Agreement in an amount not to exceed $2,000,000. 7.6 FINANCIAL COVENANTS. ------------------- With respect to the calculation of the financial covenants contained in this subsection 7.6, to the extent that during the period for which compliance is being determined, Company or any Subsidiary of Company has made a Permitted Acquisition permitted under subsection 7.7(ii) or has disposed of any assets or operations in an amount for any such transaction or series of related transactions exceeding 5,000,000, (i) such calculations shall be made as if such Permitted Acquisition or such disposition took place on the first day of such period on a pro forma basis for the portion of such period prior to the date of --- ----- such Permitted Acquisition or after the date of such disposition and on an actual basis for the portion of such period after the date of such Permitted Acquisition or before the date of such disposition, (ii) such calculations shall be made after giving effect to the incurrence, assumption or repayment of any Indebtedness made in connection with such acquisition or disposition and (iii) such calculation shall be made after giving retroactive effect to demonstrable net cost eliminations or net cost savings arising by virtue of such Permitted Acquisition (such as inflated employee owner compensation), which cost eliminations and cost savings are (A) consistent with standards and practices for pro forma presentation pursuant to Regulation S-X as promulgated by the --- ----- Securities and Exchange Commission and are reviewed by Company's independent accountants or (B) are demonstrated in the Officer's Certificate required under subsection 7.7 and are reasonably satisfactory to Requisite Lenders. With respect to any such Permitted Acquisition, such pro forma calculations shall be --- ----- based on the audited or reviewed financial results delivered in compliance with clause (d)(3) of subsection 7.7(ii). A. MINIMUM FIXED CHARGE COVERAGE RATIO. Company shall not permit the ratio of (i)(A) Consolidated EBITDA for the consecutive four-Fiscal Quarter period ending June 30, 1998, September 30, 1998, and December 31, 1998, respectively, to (B) Consolidated Fixed Charges multiplied by (a) for the Fiscal ---------- -- Quarter ending June 30, 1998, 4.0, (b) for the two-Fiscal Quarter period ending September 30, 1998, 2.0 and (c) for the three- 137 Fiscal Quarter period ending December 31, 1998, 1.33, (x) for the Fiscal Quarter ending June 30, 1998, to be less than 1.2:1.00, (y) for the two-Fiscal Quarter period ending September 30, 1998, to be less than 1.2:1.00, and (z) for the three-Fiscal Quarter period ending December 31, 1998, to be less than 1.2:1.00, and (ii)(A) Consolidated EBITDA to (B) Consolidated Fixed Charges for any consecutive four-Fiscal Quarter period ending on the dates set forth below to be less than the correlative ratio indicated:
MINIMUM FIXED FISCAL QUARTER ENDING DATE CHARGE COVERAGE RATIO ----------------------------------------------------------------- March 31, 1999 1.2:1.0 June 30, 1999 1.2:1.0 September 30, 1999 1.2:1.0 December 31, 1999 1.2:1.0 March 31, 2000 1.2:1.0 June 30, 2000 1.2:1.0 September 30, 2000 1.2:1.0 December 31, 2000 1.2:1.0 March 31, 2001 1.2:1.0 June 30, 2001 1.3:1.0 September 30, 2001 1.3:1.0 December 31, 2001 1.3:1.0 March 31, 2002 1.3:1.0 June 30, 2002 1.4:1.0 September 30, 2002 1.4:1.0 December 31, 2002 1.4:1.0 March 31, 2003 1.3:1.0 June 30, 2003 1.3:1.0 September 30, 2003 1.3:1.0 December 31, 2003 1.2:1.0 March 31, 2004 1.2:1.0 June 30, 2004 1.2:1.0 September 30, 2004 1.2:1.0 December 31, 2004 1.2:1.0 March 31, 2005 0.5:1.0 June 30, 2005 0.5:1.0 September 30, 2005 0.5:1.0 December 31, 2005 0.5:1.0 March 31, 2006 0.5:1.0
138 B. MAXIMUM LEVERAGE RATIO. Company shall not permit the Consolidated Leverage Ratio at any time during any of the periods set forth below to exceed the correlative ratio indicated:
PERIOD MAXIMUM LEVERAGE RATIO - ------------------------------------------------------------------------------- June 30, 1998 6.6:1.0 September 30, 1998 6.6:1.0 December 31, 1998 6.6:1.0 March 31, 1999 6.5:1.0 June 30, 1999 6.5:1.0 September 30, 1999 6.3:1.0 December 31, 1999 6.2:1.0 March 31, 2000 6.0:1.0 June 30, 2000 5.9:1.0 September 30, 2000 5.7:1.0 December 31, 2000 5.6:1.0 March 31, 2001 5.4:1.0 June 30, 2001 5.3:1.0 September 30, 2001 5.1:1.0 December 31, 2001 5.0:1.0 March 31, 2002 4.9:1.0 June 30, 2002 4.7:1.0 September 30, 2002 4.6:1.0 December 31, 2002 4.5:1.0 March 31, 2003 4.4:1.0 June 30, 2003 4.3:1.0 September 30, 2003 4.2:1.0 December 31, 2003 4.1:1.0 March 31, 2004 4.0:1.0 June 30, 2004 4.0:1.0 September 30, 2004 4.0:1.0 December 31, 2004 4.0:1.0 March 31, 2005 4.0:1.0 June 30, 2005 4.0:1.0 September 30, 2005 4.0:1.0 December 31, 2005 4.0:1.0 March 31, 2006 4.0:1.0
C. INTEREST COVERAGE RATIO. Company shall not permit the ratio of (i)(A) Consolidated EBITDA for the consecutive four-Fiscal Quarter period ending June 30, 1998, September 30, 1998, and December 31, 1998, respectively, to (B) Consolidated Interest Expense multiplied by (a) for the Fiscal Quarter ending ---------- -- June 30, 139 1998, 4.0, (b) for the two-Fiscal Quarter period ending September 30, 1998, 2.0 and (c) for the three-Fiscal Quarter period ending December 31, 1998, 1.33, (x) for the Fiscal Quarter ending June 30, 1998, to be less than 1.5:1.00, (y) for the two-Fiscal Quarter period ending September 30, 1998, to be less than 1.5:1.00, and (z) for the three-Fiscal Quarter period ending December 31, 1998, to be less than 1.5:1.00, and (ii)(A) Consolidated EBITDA to (B) Consolidated Interest Expense for any consecutive four-Fiscal Quarter period ending on the dates set forth below to be less than the correlative ratio indicated: 140
MINIMUM INTEREST FISCAL QUARTER ENDING DATE EXPENSE RATIO - ----------------------------------------------------- ------------- March 31, 1999 1.60:1.0 June 30, 1999 1.60:1.0 September 30, 1999 1.70:1.0 December 31, 1999 1.70:1.0 March 31, 2000 1.70:1.0 June 30, 2000 1.80:1.0 September 30, 2000 1.80:1.0 December 31, 2000 1.90:1.0 March 31, 2001 1.90:1.0 June 30, 2001 2.00:1.0 September 30, 2001 2.00:1.0 December 31, 2001 2.10:1.0 March 31, 2002 2.20:1.0 June 30, 2002 2.20:1.0 September 30, 2002 2.30:1.0 December 31, 2002 2.40:1.0 March 31, 2003 2.50:1.0 June 30, 2003 2.60:1.0 September 30, 2003 2.70:1.0 December 31, 2003 2.75:1.0 March 31, 2004 2.75:1.0 June 30, 2004 2.75:1.0 September 30, 2004 2.75:1.0 December 31, 2004 2.75:1.0 March 31, 2005 2.75:1.0 June 30, 2005 2.75:1.0 September 30, 2005 2.75:1.0 December 31, 2005 2.75:1.0 March 31, 2006 2.75:1.0
7.7 RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS. ---------------------------------------------------------------- Holdings shall not, and shall not permit any of its Subsidiaries to, alter the corporate, capital or legal structure of Holdings or Company or any of Company's Subsidiaries, or enter into any transaction of merger or consolidation, or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor), transfer or otherwise dispose of, in one transaction 141 or a series of transactions, all or any part of its business, property or assets, whether now owned or hereafter acquired, or acquire by purchase or otherwise all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person or any division or line of business of any Person, except: (i) any Subsidiary of Company may be merged with or into Company or any wholly-owned Subsidiary Guarantor, or be liquidated, wound up or dissolved, or all or any part of its business, property or assets may be conveyed, sold, leased, transferred or otherwise disposed of, in one transaction or a series of transactions, to Company or any wholly-owned Subsidiary Guarantor; provided that, in the case of such a merger, Company -------- or such wholly-owned Subsidiary Guarantor shall be the continuing or surviving corporation; (ii) Company and its wholly-owned Subsidiaries may acquire all or substantially all the business, property or fixed assets of, or stock or other evidence of beneficial ownership of, any Person, or any division or line of business of any Person, in the Business or a business incidental or related thereto (collectively, "PERMITTED ACQUISITION"); provided that (a) -------- such Person becomes a wholly-owned Subsidiary of Company, or such business, property or other assets are acquired by Company or a wholly-owned Subsidiary of Company, and any such wholly-owned Subsidiary which is a Foreign Subsidiary shall be a direct Subsidiary of Company; (b) the aggregate consideration paid by Company or any of its Subsidiaries does not exceed (1) for any single Permitted Acquisition, an amount equal to $25,000,000 consisting of cash consideration, Indebtedness and other liabilities incurred or assumed plus an equal or lesser amount equal to the ---- aggregate amount received by Company as cash capital contributions from Holdings after the Closing Date to finance such transaction and/or equity issued as consideration in such transaction, and (2) for all such Permitted Acquisitions during the term of this Agreement, $75,000,000 consisting of cash consideration, Indebtedness and other liabilities incurred or assumed plus an equal or lesser amount equal to the aggregate amount received by ---- Company as cash capital contributions from Holdings after the Closing Date and/or equity issued as consideration in such transactions; (c) concurrently with the consummation of such Permitted Acquisition, Company shall, and shall cause its Subsidiaries to, comply with the requirements of subsections 6.8 and 6.9 with respect to such Permitted Acquisitions; and (d) prior to the consummation of such Permitted Acquisition, Company shall deliver to Administrative Agent an Officer's Certificate (1) certifying that no Potential Event of Default or Event of Default under this Agreement or under the Senior Subordinated Notes shall 142 then exist or shall occur as a result of such Permitted Acquisition, (2) demonstrating that after giving effect to such Permitted Acquisition and to all Indebtedness to be incurred or assumed or repaid in connection with or as consideration for such Permitted Acquisition, that Company is in pro --- forma compliance with the financial covenants referred to in subsection 7.6 ----- for the four consecutive Fiscal Quarter period ending immediately prior to the date of the proposed Permitted Acquisition and that, giving effect to such Permitted Acquisition, Company is in compliance with the clause (b) of this subsection 7.7(ii) on a cumulative basis for all Permitted Acquisitions, and (3) delivering a copy, prepared in conformity with GAAP, of (i) financial statements of the Person or business so acquired for the immediately preceding four consecutive Fiscal Quarter period corresponding to the calculation period for the financial covenants in the immediately preceding clause, and (ii) audited or reviewed financial statements of the Person or business so acquired for the fiscal year ended within such period; (iii) Company and its Subsidiaries may dispose of obsolete, worn out or surplus property in the ordinary course of business; (iv) Company and its Subsidiaries may sell or otherwise dispose of assets in transactions that do not constitute Asset Sales; provided that -------- the consideration received for such assets shall be in an amount at least equal to the fair market value thereof; and (v) Company and its Subsidiaries may make Asset Sales of assets having a fair market value not in excess of $3,000,000 in any Fiscal Year; provided that (x) the consideration received for such asset shall be in an -------- amount at least equal to the fair market value thereof; (y) at least 75% of the consideration received therefor is in the form of Cash (provided that -------- any liabilities which are assumed by the transferee of such Assets pursuant to a customary novation agreement that releases Company or such Subsidiary from further liability, and any promissory notes received that are converted into Cash, shall be deemed to be cash for purposes of this provision); and (z) the proceeds of such Asset Sales shall be applied as required by subsection 2.4B(iii)(a). 7.8 CONSOLIDATED CAPITAL EXPENDITURES. --------------------------------- Holdings shall not, and shall not permit its Subsidiaries to make or incur Consolidated Capital Expenditures in any Fiscal Year in an aggregate amount exceeding the amount equal to the sum of (i) $5,000,000 plus (ii) the ---- amount of Net 143 Sale Proceeds received in such Fiscal Year not required to be prepaid under subsection 2.4B(iii)(a); provided that such amount for any Fiscal Year shall be -------- increased by an amount equal to the excess, if any, of the amount permitted for the preceding Fiscal Year over the actual amount of Consolidated Capital Expenditures for such previous Fiscal Year (but such increase shall not exceed $2,500,000); provided, however, to the extent that any expenditures of Company -------- ------- or any of its Subsidiaries constitute a Permitted Acquisition permitted under subsection 7.7(ii), then for purposes of this subsection 7.8 such expenditures made at the time of such acquisition shall not constitute or be deemed to be Consolidated Capital Expenditures under this subsection 7.8 but any and all expenditures made in connection with such Permitted Acquisition thereafter shall constitute Consolidated Capital Expenditures under this subsection 7.8. 7.9 RESTRICTION ON LEASES. --------------------- Holdings shall not, and shall not permit any of its Subsidiaries to, become liable in any way, whether directly or by assignment or as a guarantor or other surety, for the obligations of the lessee under any lease, whether an Operating Lease or a Capital Lease (other than intercompany leases between Company and its wholly-owned Subsidiaries); unless, immediately after giving effect to the incurrence of liability with respect to such lease, the Consolidated Rental Payments at the time in effect during the then current Fiscal Year shall not exceed $3,000,000. 7.10 SALES AND LEASE-BACKS. --------------------- Holdings shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, become or remain liable as lessee or as a guarantor or other surety with respect to any lease, whether an Operating Lease or a Capital Lease, of any property (whether real, personal or mixed), whether now owned or hereafter acquired, (i) which Company or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person (other than Company or any of its Subsidiaries) or (ii) which Company or any of its Subsidiaries intends to use for substantially the same purpose as any other property which has been or is to be sold or transferred by Company or any of its Subsidiaries to any Person (other than Company or any of its Subsidiaries) in connection with such lease; provided that Company and its Subsidiaries may become and remain -------- liable as lessee, guarantor or other surety with respect to any such lease with respect to any such lease if and to the extent that Company or any of its Subsidiaries would be permitted to enter into, and remain liable under, such lease to the extent that the transaction would be permitted under subsection 7.1, assuming the sale and lease back transaction constituted Indebtedness in a principal amount equal to the gross proceeds of the sale. 144 7.11 SALE OR DISCOUNT OF RECEIVABLES. ------------------------------- Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly, sell with recourse, or discount or otherwise sell for less than the face value thereof, any of its notes or accounts receivable. 7.12 TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES. --------------------------------------------- Except for the transactions described on Schedule 7.12, Company shall ------------- not, and shall not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate of Company, on terms that are less favorable to Company or that Subsidiary, as the case may be, than those that might be obtained at the time from Persons who are not such an Affiliate; provided that the foregoing -------- restriction shall not apply to (i) any transaction between Company and any of its wholly-owned Subsidiaries or between any of its wholly-owned Subsidiaries or (ii) reasonable and customary fees paid to members of the Boards of Directors of Company and its Subsidiaries. 7.13 DISPOSAL OF SUBSIDIARY EQUITY. ----------------------------- Except for any sale of 100% of the capital stock or other equity Securities of any of its Subsidiaries in compliance with subsection 7.7(i), Company shall not: (i) directly or indirectly sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries, except to qualify directors if required by applicable law; or (ii) permit any of its Subsidiaries directly or indirectly to sell, assign, pledge or otherwise encumber or dispose of any shares of capital stock or other equity Securities of any of its Subsidiaries (including such Subsidiary), except to Company, another Subsidiary of Company, or to qualify directors if required by applicable law. 7.14 CONDUCT OF BUSINESS. ------------------- From and after the Closing Date, Company shall not, and shall not permit any of its Subsidiaries to, engage in any business other than (i) the Business and similar or related businesses and (ii) such other lines of business as may be consented to by Requisite Lenders (which consent shall not be unreasonably withheld or delayed). From and after the Closing Date, Holdings shall not engage in any business other than owning the capital stock of Company and entering into and performing its 145 obligations under and in accordance with the Loan Documents and the Holdings Discount Debenture Indenture, and shall not own any assets other than the capital stock of Company; provided that Holdings may retain leasehold interests with respect to certain items of personal property pursuant to leases identified as items 1 and 10 on Schedule 5.8 until the consent of the lessor is obtained to ------------ transfer such interests and related leases to Company; provided, further, that -------- Company agrees to use all reasonable efforts to effect the transfer of such leasehold interests and leases to it as soon as practicable. 7.15 AMENDMENTS OF DOCUMENTS RELATING TO SUBORDINATED INDEBTEDNESS, -------------------------------------------------------------- HOLDINGS DISCOUNT DEBENTURES AND HOLDINGS PREFERRED STOCK; AMENDMENT -------------------------------------------------------------------- TO RECAPITALIZATION AGREEMENT. ----------------------------- A. Company shall not, and shall not permit any of its Subsidiaries to, amend or otherwise change the terms of any Subordinated Indebtedness, any of the guaranties entered into by any Loan Party in connection with any Subordinated Indebtedness or make any payment consistent with an amendment thereof or change thereto, if the effect of such amendment or change is to increase the interest rate on such Subordinated Indebtedness, change (to earlier dates) any dates upon which payments of principal or interest are due thereon, change any event of default or condition to an event of default with respect thereto (other than to eliminate any such event of default or increase any grace period related thereto), change the redemption, prepayment or defeasance provisions thereof, change the subordination provisions thereof (or of any guaranty thereof), or change any collateral therefor (other than to release such collateral), or if the effect of such amendment or change, together with all other amendments or changes made, is to increase materially the obligations of the obligor thereunder or invalidity to confer any additional rights on the holders of such Subordinated Indebtedness (or a trustee or other representative on their behalf) which, in any such case, would be materially adverse to any Loan Party or Lenders. Company shall not amend, waive or change any of its rights under or otherwise change the terms of the Tax Sharing Agreement or the Tax Sharing Agreement dated April 21, 1998, by and among Company and its Subsidiaries, in each case as in effect on the Closing Date, without the prior written consent of the Requisite Lenders, if such amendment, waiver or change would increase materially the obligations of Company or confer additional rights on any other party under any such agreement that would be materially adverse to Company. B. Holdings shall not amend, waive any of its rights under, or otherwise change the terms of any of the Recapitalization Agreement, Holdings Discount Debentures, Holdings Discount Debentures Indenture, Holdings Preferred Stock, the Tax Sharing Agreement and Holdings Certificate of Designation, in each case as in effect on the Closing Date, 146 without the prior written consent of the Requisite Lenders, if such amendment, waiver or change would increase materially the obligations of Holdings or confer additional rights on any other party to any such agreement which, in any such case, would be materially adverse to Holdings. 7.16 FISCAL YEAR ----------- Company shall not change its Fiscal Year-end from December 31 of each calendar year. SECTION 8. EVENTS OF DEFAULT If any of the following conditions or events ("Events of Default") shall occur: 8.1 FAILURE TO MAKE PAYMENTS WHEN DUE. --------------------------------- Failure by Company to pay any installment of principal of any Loan when due, whether at stated maturity, by acceleration, by notice of voluntary prepayment, by mandatory prepayment or otherwise; failure by Company to pay when due any amount payable to an Issuing Lender in reimbursement of any drawing under a Letter of Credit; or failure by Company to pay any interest on any Loan or any fee or any other amount due under this Agreement within five days after the date due; or 8.2 DEFAULT IN OTHER AGREEMENTS. --------------------------- (i) Failure of Holdings or any of its Subsidiaries to pay when due any principal of or interest on or any other amount payable in respect of one or more items of Indebtedness (other than Indebtedness referred to in subsection 8.1) or Contingent Obligations in either an individual or an aggregate principal amount of $7,500,000 or more, in each case beyond the end of any grace period provided therefor; or (ii) breach or default by Holdings or any of its Subsidiaries with respect to any other material term of (a) one or more items of Indebtedness or Contingent Obligations in the individual or aggregate principal amounts referred to in clause (i) above or (b) any loan agreement, mortgage, indenture or other agreement relating to such item(s) of Indebtedness or Contingent Obligation(s), if the effect of such breach or default is to cause, or to permit the holder or holders of that Indebtedness or Contingent Obligation(s) (or a trustee on behalf of such holder or holders) to cause, that Indebtedness or Contingent Obligation(s) to become or be declared due and payable prior to its stated maturity or the stated maturity of any underlying obligation, as the case may be (upon the giving or receiving of notice, lapse of time, both, or otherwise); or 147 8.3 BREACH OF CERTAIN COVENANTS. --------------------------- Failure of Company to perform or comply with any term or condition contained in subsection 2.5 or 6.2 or Section 7 of this Agreement; or 8.4 BREACH OF REPRESENTATIONS AND WARRANTY. -------------------------------------- Any representation, warranty, certification or other statement made by Company or any of its Subsidiaries in any Loan Document or in any statement or certificate at any time given by Company or any of its Subsidiaries in writing pursuant hereto or thereto or in connection herewith or therewith shall be false in any material respect on the date as of which made; or 8.5 OTHER DEFAULTS UNDER LOAN DOCUMENTS. ----------------------------------- Any Loan Party shall default in the performance of or compliance with any term contained in this Agreement or any of the other Loan Documents, other than any such term referred to in any other subsection of this Section 8, and such default shall not have been remedied or waived within twenty days after the earlier of (i) an executive officer of Company or such Loan Party obtaining actual knowledge of such default or (ii) receipt by Company and such Loan Party of notice from any Agent of such default; or 8.6 INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. ----------------------------------------------------- (i) A court having jurisdiction in the premises shall enter a decree or order for relief in respect of Holdings or any of its Subsidiaries in an involuntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, which decree or order is not stayed; or any other similar relief shall be granted under any applicable federal or state law; or (ii) an involuntary case shall be commenced against Holdings or any of its Subsidiaries under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect; or a decree or order of a court having jurisdiction in the premises for the appointment of a receiver, liquidator, sequestrator, trustee, custodian or other officer having similar powers over Holdings or any of its Subsidiaries, or over all or a substantial part of its property, shall have been entered; or there shall have occurred the involuntary appointment of an interim receiver, trustee or other custodian of Holdings or any of its Subsidiaries for all or a substantial part of its property; or a warrant of attachment, execution or similar process shall have been issued against any substantial part of the property of Holdings or any of its Subsidiaries, and any such event described in this subsection 8.6 shall continue for 60 days unless dismissed, bonded or discharged; or 148 8.7 VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC. --------------------------------------------------- (i) Holdings or any of its Subsidiaries shall have an order for relief entered with respect to it or commence a voluntary case under the Bankruptcy Code or under any other applicable bankruptcy, insolvency or similar law now or hereafter in effect, or shall consent to the entry of an order for relief in an involuntary case, or to the conversion of an involuntary case to a voluntary case, under any such law, or shall consent to the appointment of or taking possession by a receiver, trustee or other custodian for all or a substantial part of its property; or Holdings or any of its Subsidiaries shall make any assignment for the benefit of creditors; or (ii) Holdings or any of its Subsidiaries shall be unable, or shall fail generally, or shall admit in writing its inability, to pay its debts as such debts become due; or the Board of Directors of Holdings or any of its Subsidiaries (or any committee thereof) shall adopt any resolution or otherwise authorize any action to approve any of the actions referred to in clause (i) above or this clause (ii); or 8.8 JUDGMENTS AND ATTACHMENTS. ------------------------- Any money judgment, writ or warrant of attachment or similar process involving either in any individual case or in the aggregate at any time an amount in excess of $7,500,000 (in either case not adequately covered by insurance as to which a solvent and unaffiliated insurance company has acknowledged coverage) shall be entered or filed against Holdings or any of its Subsidiaries or any of their respective assets and shall remain undischarged, unvacated, unbonded or unstayed for a period of 60 days (or in any event later than five days prior to the date of any proposed sale thereunder); or 8.9 DISSOLUTION. ----------- Any order, judgment or decree shall be entered against Holdings or any of its Subsidiaries decreeing the dissolution or split up of Holdings or that Subsidiary and such order shall remain undischarged or unstayed for a period in excess of 30 days; or 8.10 EMPLOYEE BENEFIT PLANS. ---------------------- There shall occur one or more ERISA Events which individually or in the aggregate results in or might reasonably be expected to result in liability of Holdings, any of its Subsidiaries or any of their respective ERISA Affiliates in excess of $5,000,000 during the term of this Agreement; or there shall exist an amount of unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding for purposes of such 149 computation any Pension Plans with respect to which assets exceed benefit liabilities), which exceeds $5,000,000; or 8.11 CHANGE IN CONTROL. ----------------- (i) Prior to the IPO Event, (a) Principals and Related Parties shall at any time fail to collectively and beneficially own and control and to have economic ownership of, directly, or indirectly, at least 51% of all of the issued and outstanding Holdings Common Stock on a fully diluted basis, or (b) any "Change of Control" as such term is defined in the Senior Subordinated Indenture has occurred and be continuing; and (ii) upon and after the IPO Event, (a) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which is that (A) any "person" (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such rights is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), other than the Principals and their Related Parties, becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is currently exercisable or is exercisable only upon the occurrence of a subsequent condition), directly or indirectly, of 35% or more of the voting stock of Company (measured by voting power rather than number of shares) and (B) the Principals and their Related Parties beneficially own, directly or indirectly, in the aggregate a lesser percentage of the voting stock of Company than such other "person," or (b) any "Change of Control" as such term is defined in the Senior Subordinated Indenture has occurred and be continuing; or 8.12 INVALIDITY OF GUARANTIES; FAILURE OF SECURITY; REPUDIATION OF ------------------------------------------------------------- OBLIGATIONS. ----------- At any time after the execution and delivery thereof, (i) any Guaranty for any reason, other than the satisfaction in full of all Obligations, shall cease to be in full force and effect (other than in accordance with its terms) or shall be declared to be null and void, (ii) any Collateral Document shall cease to be in full force and effect with respect to any material portion of the Collateral (other than by reason of a release of Collateral thereunder in accordance with the terms hereof or thereof, the satisfaction in full of the Obligations or any other termination of such Collateral Document in accordance with the terms hereof or thereof or as the result of the action or inaction of Administrative Agent or the Lenders imposed thereunder) or shall be declared null and void, or Administrative Agent shall not have or shall cease to have a valid and perfected First Priority Lien in any Collateral purported to be covered 150 thereby, in each case for any reason other than the failure of any Agent or any Lender to take any action within its control, or (iii) any Loan Party shall contest the validity or enforceability of any Loan Document in writing or deny in writing that it has any further liability, including with respect to future advances by Lenders, under any Loan Document to which it is a party; or 8.13 ACTION RELATING TO CERTAIN SUBORDINATED INDEBTEDNESS OF COMPANY AND ------------------------------------------------------------------- HOLDINGS DISCOUNT DEBENTURES. ---------------------------- Any holder of any Subordinated Indebtedness evidenced by the Senior Subordinated Notes shall file an action seeking the rescission thereof or damages or injunctive relief relating thereto; or any event shall occur which, under the terms of the Senior Subordinated Note Indenture or the Holdings Discount Debentures Indenture, as the case may be, shall require Holdings, Company or any of its Subsidiaries to purchase, redeem or otherwise acquire or offer to purchase, redeem or otherwise acquire all or any portion of any such Subordinated Indebtedness or the Holdings Discount Debentures; or Holdings or any of its Subsidiaries shall for any other reason purchase, redeem or otherwise acquire or offer to purchase, redeem or otherwise acquire, or make any other payments in respect of, all or any portion of any such Subordinated Indebtedness or the Holdings Discount Debentures, except to the extent expressly permitted by subsection 7.5; 8.14 FAILURE TO CONSUMMATE THE TRANSACTIONS UNDER THE RECAPITALIZATION ----------------------------------------------------------------- AGREEMENT. --------- Holdings shall have failed to consummate the transactions contemplated under the Recapitalization Agreement; THEN (i) upon the occurrence of any Event of Default described in subsection 8.6 or 8.7, each of (a) the unpaid principal amount of and accrued interest on the Loans, (b) an amount equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding (whether or not any beneficiary under any such Letter of Credit shall have presented, or shall be entitled at such time to present, the drafts or other documents or certificates required to draw under such Letter of Credit), and (c) all other Obligations shall automatically become immediately due and payable, without presentment, demand, protest or other requirements of any kind, all of which are hereby expressly waived by Company, and the obligation of each Lender to make any Loan, the obligation of Administrative Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate, and (ii) upon the occurrence and during the continuation of any other Event of Default, Administrative Agent shall, upon the written request or with the written consent of Requisite Lenders, by written notice to Company, declare all or any portion of the amounts described 151 in clauses (a) through (c) above to be, and the same shall forthwith become, immediately due and payable, and the obligation of each Lender to make any Loan, the obligation of Administrative Agent to issue any Letter of Credit and the right of any Lender to issue any Letter of Credit hereunder shall thereupon terminate; provided that the foregoing shall not affect in any way the -------- obligations of Revolving Lenders under subsection 3.3C(i) or the obligations of Revolving Lenders to purchase participations in any unpaid Swing Line Loans as provided in subsection 2.1A(iv). Any amounts described in clause (b) above, when received by Administrative Agent, shall be held by Administrative Agent pursuant to the terms of the Collateral Agency Agreement and shall be applied as therein provided. Notwithstanding anything contained in the second preceding paragraph, if at any time within 60 days after an acceleration of the Loans pursuant to clause (ii) of such paragraph Company shall pay all arrears of interest and all payments on account of principal which shall have become due otherwise than as a result of such acceleration (with interest on principal and, to the extent permitted by law, on overdue interest, at the rates specified in this Agreement) and all Events of Default and Potential Events of Default (other than non- payment of the principal of and accrued interest on the Loans, in each case which is due and payable solely by virtue of acceleration) shall be remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by written notice to Company, may at their option rescind and annul such acceleration and its consequences; but such action shall not affect any subsequent Event of Default or Potential Event of Default or impair any right consequent thereon. The provisions of this paragraph are intended merely to bind Lenders to a decision which may be made at the election of Requisite Lenders and are not intended, directly or indirectly, to benefit Company, and such provisions shall not at any time be construed so as to grant Company the right to require Lenders to rescind or annul any acceleration hereunder or to preclude Administrative Agent or Lenders from exercising any of the rights or remedies available to them under any of the Loan Documents, even if the conditions set forth in this paragraph are met. SECTION 9. THE AGENTS 9.1 APPOINTMENT. ----------- A. APPOINTMENT OF AGENTS. Wells Fargo Bank, N.A. is hereby appointed Administrative Agent hereunder and under the other Loan Documents and each Lender hereby authorizes Administrative Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents. DLJ is 152 hereby appointed Syndication Agent hereunder and under the other Loan Documents and each Lender hereby authorizes Syndication Agent to act as its agent in accordance with the terms of this Agreement and the other Loan Documents. Each of Syndication Agent and Administrative Agent agrees to act upon the express conditions contained in this Agreement and the other Loan Documents, as applicable. The provisions of this Section 9 are solely for the benefit of each of Syndication Agent and Administrative Agent, and Lenders and Company shall have no rights as a third party beneficiary of any of the provisions thereof. In performing its functions and duties under this Agreement, each of Syndication Agent and Administrative Agent shall act solely as an agent of Lenders and does not assume and shall not be deemed to have assumed any obligation towards or relationship of agency or trust with or for Company or any of its Subsidiaries. Notwithstanding anything to the contrary stated in this Agreement, an Agent (or any of its Affiliates) shall at all times be a Lender under this Agreement, and at such time as such Agent (or such Affiliate) shall no longer be a Lender under this Agreement, such Agent shall promptly resign pursuant to subsection 9.5A hereof. B. APPOINTMENT OF SUPPLEMENTAL COLLATERAL AGENTS. It is the purpose of this Agreement and the other Loan Documents that there shall be no violation of any law of any jurisdiction denying or restricting the right of banking corporations or associations to transact business as agent or trustee in such jurisdiction. It is recognized that in case of litigation under this Agreement or any of the other Loan Documents, and in particular in case of the enforcement of any of the Loan Documents, or in case Administrative Agent deems that by reason of any present or future law of any jurisdiction it may not exercise any of the rights, powers or remedies granted herein or in any of the other Loan Documents or take any other action which may be desirable or necessary in connection therewith, it may be necessary that Administrative Agent appoint an additional individual or institution as a separate trustee, co-trustee, collateral agent or collateral co-agent (any such additional individual or institution being referred to herein individually as a "SUPPLEMENTAL COLLATERAL AGENT" and collectively as "SUPPLEMENTAL COLLATERAL AGENTS"). In the event that Administrative Agent appoints a Supplemental Collateral Agent with respect to any Collateral, (i) each and every right, power, privilege or duty expressed or intended by this Agreement or any of the other Loan Documents to be exercised by or vested in or conveyed to Administrative Agent with respect to such Collateral shall be exercisable by and vest in such Supplemental Collateral Agent to the extent, and only to the extent, necessary to enable such Supplemental Collateral Agent to exercise such rights, powers and privileges with respect 153 to such Collateral and to perform such duties with respect to such Collateral, and every covenant and obligation contained in the Loan Documents and necessary to the exercise or performance thereof by such Supplemental Collateral Agent shall run to and be enforceable by either Administrative Agent or such Supplemental Collateral Agent, and (ii) the provisions of this Section 9 and of subsections 10.2 and 10.3 that refer to Administrative Agent shall inure to the benefit of such Supplemental Collateral Agent and all references therein to Administrative Agent shall be deemed to be references to Administrative Agent and/or such Supplemental Collateral Agent, as the context may require. Should any instrument in writing from Company or any other Loan Party be required by any Supplemental Collateral Agent so appointed by Administrative Agent for more fully and certainly vesting in and confirming to him or it such rights, powers, privileges and duties, Company shall, or shall cause such Loan Party to, execute, acknowledge and deliver any and all such instruments promptly upon request by Administrative Agent. In case any Supplemental Collateral Agent, or a successor thereto, shall die, become incapable of acting, resign or be removed, all the rights, powers, privileges and duties of such Supplemental Collateral Agent, to the extent permitted by law, shall vest in and be exercised by Administrative Agent until the appointment of a new Supplemental Collateral Agent. 9.2 POWERS AND DUTIES; GENERAL IMMUNITY. ----------------------------------- A. POWERS; DUTIES SPECIFIED. Each Lender irrevocably authorizes each Agent to take such action on such Lender's behalf and to exercise such powers, rights and remedies hereunder and under the other Loan Documents as are specifically delegated or granted to such Agent by the terms hereof and thereof, together with such powers, rights and remedies as are reasonably incidental thereto. Each Agent shall have only those duties and responsibilities that are expressly specified in this Agreement and the other Loan Documents. Each Agent may exercise such powers, rights and remedies and perform such duties by or through its agents or employees. No Agent shall have, by reason of this Agreement or any of the other Loan Documents, a fiduciary relationship in respect of any Lender; and nothing in this Agreement or any of the other Loan Documents, expressed or implied, is intended to or shall be so construed as to impose upon any Agent any obligations in respect of this Agreement or any of the other Loan Documents except as expressly set forth herein or therein. B. NO RESPONSIBILITY FOR CERTAIN MATTERS. No Agent shall be responsible to any Lender for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of this Agreement or any other Loan Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statements or in 154 any financial or other statements, instruments, reports or certificates or any other documents furnished or made by such Agent to Lenders or by or on behalf of Company to such Agent or any Lender in connection with the Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall such Agent be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or the use of the Letters of Credit or as to the existence or possible existence of any Event of Default or Potential Event of Default. Anything contained in this Agreement to the contrary notwithstanding, Administrative Agent shall not have any liability arising from confirmations of the amount of outstanding Loans or the Letter of Credit Usage or the component amounts thereof. C. EXCULPATORY PROVISIONS. Neither of the Agents nor any of their respective officers, directors, employees or agents shall be liable to Lenders for any action taken or omitted by any such Agent under or in connection with any of the Loan Documents except to the extent caused by such Agent's gross negligence or willful misconduct. Each Agent shall be entitled to refrain from any act or the taking of any action (including the failure to take an action) in connection with this Agreement or any of the other Loan Documents or from the exercise of any power, discretion or authority vested in it hereunder or thereunder unless and until such Agent shall have received instructions in respect thereof from Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6) and, upon receipt of such instructions from Requisite Lenders (or such other Lenders, as the case may be), such Agent shall be entitled to act or (where so instructed) refrain from acting, or to exercise such power, discretion or authority, in accordance with such instructions. Without prejudice to the generality of the foregoing, (i) each Agent shall be entitled to rely, and shall be fully protected in relying, upon any communication, instrument or document believed by it to be genuine and correct and to have been signed or sent by the proper person or persons, and shall be entitled to rely and shall be protected in relying on opinions and judgments of attorneys (who may be attorneys for Company and its Subsidiaries), accountants, experts and other professional advisors selected by it; and (ii) no Lender shall have any right of action whatsoever against any Agent as a result of such Agent acting or (where so instructed) refraining from acting under this Agreement or any of the other Loan Documents in accordance with the instructions of Requisite Lenders (or such other Lenders as may be required to give such instructions under subsection 10.6). D. AGENTS ENTITLED TO ACT AS LENDER. The agency hereby created shall in no way impair or affect any of the rights and 155 powers of, or impose any duties or obligations upon, any Agent in its individual capacity as a Lender hereunder. With respect to its participation in the Loans and the Letters of Credit, each Agent shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not performing the duties and functions delegated to it hereunder, and the term "Lender" or "Lenders" or any similar term shall, unless the context clearly otherwise indicates, include such Agent in its individual capacity. Any Agent and its Affiliates may accept deposits from, lend money to and generally engage in any kind of banking, trust, financial advisory or other business with Company or any of its Affiliates as if it were not performing the duties specified herein, and may accept fees and other consideration from Company for services in connection with this Agreement and otherwise without having to account for the same to Lenders. 9.3 REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF ------------------------------------------------------------------ CREDITWORTHINESS. ---------------- Each Lender represents and warrants that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the making of the Loans and the issuance of Letters of Credit hereunder and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. No Agent shall have any duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Lenders or to provide any Lender with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter, and no Agent shall have any responsibility with respect to the accuracy of or the completeness of any information provided to Lenders. 9.4 RIGHT TO INDEMNITY. ------------------ Each Lender, in proportion to its Pro Rata Share, severally agrees to indemnify each Agent, to the extent that such Agent shall not have been reimbursed by Company, for and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including counsel fees and disbursements) or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against such Agent in exercising its powers, rights and remedies or performing its duties hereunder or under the other Loan Documents or otherwise in its capacity as Administrative Agent or Syndication Agent, as the case may be, in any way relating to or arising out of this Agreement or the other Loan Documents; provided that no Lender shall be liable for any portion of such liabilities, - -------- obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from any Agent's gross negligence or willful misconduct. If any 156 indemnity furnished to any Agent for any purpose shall, in the opinion of such Agent, be insufficient or become impaired, such Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. 9.5 SUCCESSOR AGENTS AND SWING LINE LENDER. -------------------------------------- A. SUCCESSOR AGENTS. The Syndication Agent may resign at any time upon ten Business Days' prior notice thereof to Company and Administrative Agent. Administrative Agent may resign at any time by giving 30 days' prior written notice thereof to Syndication Agent, Lenders and Company, and Administrative Agent may be removed at any time with or without cause by an instrument or concurrent instruments in writing delivered to Company and Administrative Agent and signed by Requisite Lenders. Upon any such notice of resignation of Administrative Agent or any such removal of Administrative Agent, Requisite Lenders shall have the right, upon five Business Days' notice to Company, to appoint a successor Administrative Agent. If for any reason Requisite Lenders cannot agree on a successor Administrative Agent, the resigning Administrative Agent shall have the right to designate a successor Administrative Agent after consulting with Company. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent that successor Administrative Agent, shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Administrative Agent and the retiring or removed Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's or Syndication Agent's resignation hereunder as Administrative Agent or Syndication Agent, as the case may be, the provisions of this Section 9 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent or Syndication Agent, as the case may be, under this Agreement. B. SUCCESSOR SWING LINE LENDER. Any resignation or removal of Administrative Agent pursuant to subsection 9.5A shall also constitute the resignation or removal of Wells Fargo Bank, N.A. or its successor as Swing Line Lender, and any successor Administrative Agent appointed pursuant to subsection 9.5A shall, upon its acceptance of such appointment, become the successor Swing Line Lender for all purposes hereunder. In such event (i) Company shall prepay any outstanding Swing Line Loans made by the retiring or removed Administrative Agent in its capacity as Swing Line Lender, (ii) upon such prepayment, the retiring or removed Administrative Agent and Swing Line Lender shall surrender the Swing Line Note held by it to Company for cancellation, and (iii) Company shall issue a new Swing Line Note to the successor Administrative Agent and Swing Line Lender substantially in the form of Exhibit VII annexed hereto, in ----------- the 157 principal amount of the Swing Line Loan Commitment then in effect and with other appropriate insertions. 9.6 COLLATERAL DOCUMENTS AND GUARANTIES. ----------------------------------- Each Lender hereby further authorizes Administrative Agent, on behalf of and for the benefit of Lenders, to enter into each Collateral Document as secured party and to be the agent for and representative of Lenders under each Guaranty, and each Lender agrees to be bound by the terms of each Collateral Document and Guaranty; provided that Administrative Agent shall not (i) enter -------- into or consent to any material amendment, modification, termination or waiver of any provision contained in any Collateral Document or Guaranty or (ii) release any Collateral (except as otherwise expressly permitted or required pursuant to the terms of this Agreement or the applicable Collateral Document), in each case without the prior consent of Requisite Lenders (or, if required pursuant to subsection 10.6, all Lenders); provided further, however, that, -------- ------- ------- without further written consent or authorization from Lenders, Administrative Agent may execute any documents or instruments necessary to (a) release any Lien encumbering any item of Collateral that is the subject of a sale or other disposition of assets permitted by this Agreement or to which Requisite Lenders have otherwise consented, (b) release any Lien of the stock of any Subsidiary of Company if all of the equity Securities of such Subsidiary is sold to any Person (other than an Affiliate of Company) pursuant to a sale or other disposition permitted hereunder (including pursuant to a merger of such Subsidiary where such Subsidiary is the disappearing entity) or to which Requisite Lenders have otherwise consented, or (c) release any Subsidiary Guarantor from the Subsidiary Guaranty if all of the equity Securities of such Subsidiary Guarantor is sold to any Person (other than an Affiliate of Company) pursuant to a sale or other disposition permitted hereunder or to which Requisite Lenders have otherwise consented. Anything contained in any of the Loan Documents to the contrary notwithstanding, Company, each Agent and each Lender hereby agree that (X) no Lender shall have any right individually to realize upon any of the Collateral under any Collateral Document or to enforce any Guaranty, it being understood and agreed that all rights and remedies under the Collateral Documents and the Guaranties may be exercised solely by Administrative Agent for the benefit of Lenders in accordance with the terms thereof, and (Y) in the event of a foreclosure by Administrative Agent on any of the Collateral pursuant to a public or private sale, any Agent or any Lender may be the purchaser of any or all of such Collateral at any such sale and Administrative Agent, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing) shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to 158 use and apply any of the Obligations as a credit on account of the purchase price for any collateral payable by Administrative Agent at such sale. SECTION 10. MISCELLANEOUS 10.1 ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF CREDIT. ------------------------------------------------------------- A. GENERAL. Subject to subsection 10.1B, each Lender shall have the right at any time to (i) sell, assign or transfer to any Eligible Assignee, or (ii) sell participations to any Person in, all or any part of its Commitments or any Loan or Loans made by it or its Letters of Credit or participations therein or any other interest herein or in any other Obligations owed to it; provided -------- that no such sale, assignment, transfer or participation shall, without the consent of Company, require Company to file a registration statement with the Securities and Exchange Commission or apply to qualify such sale, assignment, transfer or participation under the securities laws of any state; provided, -------- further that no such sale, assignment, transfer or participation of any Letter - ------- of Credit or any participation therein may be made separately from a sale, assignment, transfer or participation of a corresponding interest in the Revolving Loan Commitment and the Revolving Loans of the Revolving Lender effecting such sale, assignment, transfer or participation; and provided, -------- further that, anything contained herein to the contrary notwithstanding, the - ------- Swing Line Loan Commitment and the Swing Line Loans of Swing Line Lender may not be sold, assigned or transferred as described in clause (i) above to any Person other than a successor Administrative Agent and Swing Line Lender to the extent contemplated by subsection 9.5. Except as otherwise provided in this subsection 10.1, no Lender shall, as between Company and such Lender, be relieved of any of its obligations hereunder as a result of any sale, assignment or transfer of, or any granting of participations in, all or any part of its Commitments or the Loans, the Letters of Credit or participations therein, or the other Obligations owed to such Lender. B. ASSIGNMENTS. (i) Amounts and Terms of Assignments. Each Commitment, Loan, -------------------------------- Letter of Credit or participation therein, or other Obligation may (a) be assigned in any amount to another Lender or any Agent, or to an Affiliate or Affiliated Fund of the assigning Lender or another Lender or any Agent, with the giving of notice to Company and Administrative Agent or (b) be assigned in an aggregate amount of not less than $5,000,000 (or such lesser amount as shall constitute the aggregate amount of the Commitments, Loans, Letters of Credit and participations therein, and other Obligations of the assigning Lender or as may be consented to by Company and Administrative Agent) to any 159 other Eligible Assignee (treating all Affiliated Funds as a single Eligible Assignee and a single Lender) with the consent of Company (which consent shall only be required so long as no Event of Default has occurred and is continuing) and Administrative Agent (which consent of Company and Administrative Agent shall not be unreasonably withheld or delayed). To the extent of any such assignment in accordance with either clause (a) or (b) above, the assigning Lender shall be relieved of its obligations with respect to its Commitments, Loans, Letters of Credit or participations therein, or other Obligations or the portion thereof so assigned. The parties to each such assignment shall execute and deliver to Administrative Agent, for its acceptance, an Assignment Agreement, together with a processing fee of $2,500 (to be assessed only if the assignee is not a Lender or Affiliate or Affiliated Fund of a Lender and otherwise at Administrative Agent's discretion) and such forms, certificates or other evidence, if any, with respect to United States federal income tax withholding matters as the assignee under such Assignment Agreement may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a). Upon such execution, delivery and acceptance from and after the effective date specified in such Assignment Agreement, (y) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (z) the assigning Lender thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, relinquish its rights (other than any rights which survive the termination of this Agreement under subsection 10.9B) and be released from its obligations under this Agreement (and, in the case of an Assignment Agreement covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto; provided that, anything contained in any of the Loan -------- Documents to the contrary notwithstanding, if such Lender is the Issuing Lender with respect to any outstanding Letters of Credit such Lender shall continue to have all rights and obligations of an Issuing Lender with respect to such Letters of Credit until the cancellation or expiration of such Letters of Credit and the reimbursement of any amounts drawn thereunder). The Commitments hereunder shall be modified to reflect the Commitment of such assignee and any remaining Commitment of such assigning Lender and, if any such assignment occurs after the issuance of the Notes hereunder, if requested pursuant to subsection 2.1E, the assigning Lender shall, upon the effectiveness of such assignment or as promptly thereafter as practicable, surrender its applicable Notes to Administrative Agent for cancellation, and thereupon new Notes shall be issued to the 160 assignee and to the assigning Lender, substantially in the form of Exhibit ------- IV, Exhibit V, or Exhibit VI annexed hereto, as the case may be, with -- --------- ---------- appropriate insertions, to reflect the new Commitments and/or outstanding Term Loans, as the case may be, of the assignee and the assigning Lender. (ii) Acceptance by Administrative Agent. Upon its receipt of an ---------------------------------- Assignment Agreement executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with the processing fee referred to in subsection 10.1B(i) and any forms, certificates or other evidence with respect to United States federal income tax withholding matters that such assignee may be required to deliver to Administrative Agent pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if Administrative Agent and Company have consented to the assignment evidenced thereby (in each case to the extent such consent is required pursuant to subsection 10.1B(i)), (a) accept such Assignment Agreement by executing a counterpart thereof as provided therein (which acceptance shall evidence any required consent of Administrative Agent to such assignment) and (b) give prompt notice thereof to Company. Administrative Agent shall maintain a copy of each Assignment Agreement delivered to and accepted by it as provided in this subsection 10.1B(ii). C. PARTICIPATIONS. The holder of any participation, other than an Affiliate of the Lender granting such participation, shall not be entitled to require such Lender to take or omit to take any action hereunder except action directly affecting (i) the extension of the scheduled final maturity date of any Loan allocated to such participation or (ii) a reduction of the principal amount of or the rate of interest payable on any Loan allocated to such participation, and all amounts payable by Company hereunder shall be determined as if such Lender had not sold such participation. Company and each Lender hereby acknowledge and agree that, solely for purposes of subsections 2.6D, 2.7A, 2.7C, 3.6, 6.1, 10.4 and 10.5, (a) any participation will give rise to a direct obligation of Company to the participant and (b) the participant shall be considered to be a "Lender". D. ASSIGNMENTS TO FEDERAL RESERVE BANKS; ASSIGNMENTS TO TRUSTEES. In addition to the assignments and participations permitted under the foregoing provisions of this subsection 10.1, (i) any Lender may assign and pledge all or any portion of its Loans, the other Obligations owed to such Lender, and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any operating circular issued by such Federal Reserve Bank, (ii) any Lender that is an investment fund that invests in bank loans may, without the consent of Administrative Agent or Company, pledge all or any portion of its interest, rights and obligations to any trustee or any other representative of holders 161 of obligations owed or securities issued by such investment fund as security for such obligations or securities, and (iii) such assignment or pledge referred to in clause (i) and (ii) above shall not be subject to the provisions of subsection 10.1B above; provided that (x) no Lender shall, as between Company -------- and such Lender, be relieved of any of its obligations hereunder as a result of any such assignment and pledge and (y) in no event shall such Federal Reserve Bank be considered to be a "Lender" or be entitled to require the assigning Lender to take or omit to take any action hereunder. E. INFORMATION. Each Lender may furnish any information concerning Company and its Subsidiaries in the possession of that Lender from time to time to assignees and participants (including prospective assignees and participants), subject to subsection 10.19. F. REPRESENTATIONS OF LENDERS. Each Lender listed on the signature pages hereof hereby represents and warrants (i) that it is an Eligible Assignee described in clause (A) of the definition thereof; (ii) that it has experience and expertise in the making of loans such as the Loans; and (iii) that it will make its Loans for its own account in the ordinary course of its business and without a view to distribution of such Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of this subsection 10.1, the disposition of such Loans or any interests therein shall at all times remain within its exclusive control). Each Lender that becomes a party hereto pursuant to an Assignment Agreement shall be deemed to agree that the representations and warranties of such Lender contained in Section 2(c) of such Assignment Agreement are incorporated herein by this reference. 10.2 EXPENSES. -------- Whether or not the transactions contemplated hereby shall be consummated, Company agrees to pay promptly (i) all the actual and reasonable out-of-pocket costs and expenses of preparation of the Loan Documents and any consents, amendments, waivers or other modifications thereto; (ii) all the costs of furnishing all opinions by counsel for Company (including any opinions requested by either Agent under this Agreement as to any legal matters arising hereunder) and of Company's performance of and compliance with all agreements and conditions on its part to be performed or complied with under this Agreement and the other Loan Documents including with respect to confirming compliance with environmental, insurance and solvency requirements; (iii) the reasonable fees, expenses and disbursements of O'Melveny & Myers LLP, counsel to Arranger and Syndication Agent in connection with the negotiation, preparation and execution of the Loan Documents, (iv) the reasonable fees, expenses and disbursements of Administrative Agent in connection with the 162 development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable attorneys' fees (including allocated costs of internal counsel) incurred by Administrative Agent with respect thereto; provided, however, that the costs and expenses recoverable by -------- ------- Administrative Agent under this clause (iv) with respect to administration of the Loan Documents incurred on or prior to the Closing Date shall be limited to reasonable attorneys' fees not exceeding $10,000 and reasonable out-of-pocket costs and expenses, (v) all the actual costs and reasonable expenses (including the reasonable fees, expenses and disbursements of any environmental or other consultants, advisors and agents employed or retained by Administrative Agent or its counsel) of obtaining and reviewing any environmental audits or reports provided for under subsection 4.1N or 6.9B(viii), (vi) all the actual reasonable out-of-pocket costs and reasonable expenses of creating and perfecting Liens in favor of Administrative Agent on behalf of Lenders pursuant to any Collateral Document, including filing and recording fees, expenses and taxes, stamp or documentary taxes, search fees, title insurance premiums, and reasonable fees, expenses and disbursements of counsel to Agents and of counsel providing any opinions that Agents may request in respect of the Collateral Documents or the Liens created pursuant thereto; (vii) the custody or preservation of any of the Collateral; (viii) all other actual and reasonable out-of-pocket costs and expenses incurred by Arranger or Agents in connection with the syndication of the Commitments and any due diligence investigation performed by Agents and Arranger, and the negotiation, preparation and execution of the Loan Documents and any consents, amendments, waivers or other modifications thereto and the transactions contemplated thereby; and (ix) after the occurrence of an Event of Default, all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees (including allocated costs of internal counsel) and costs of settlement, incurred by Administrative Agent and Lenders in enforcing any Obligations of or in collecting any payments due from any Loan Party hereunder or under the other Loan Documents by reason of such Event of Default (including in connection with the sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranties or in connection with any refinancing or restructuring of the credit arrangements provided under this Agreement in the nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings). 10.3 INDEMNITY. --------- In addition to the payment of expenses pursuant to subsection 10.2, whether or not the transactions contemplated hereby shall be consummated, Company agrees to defend (subject to 163 Indemnitees' selection of counsel), indemnify, pay and hold harmless Arranger, Agents and Lenders and the officers, directors, trustees, employees, agents and affiliates of Arranger, Agents and Lenders (collectively called the "INDEMNITEES"), from and against any and all Indemnified Liabilities (as hereinafter defined); provided that Company shall not have any obligation to any -------- Indemnitee hereunder with respect to any Indemnified Liabilities to the extent such Indemnified Liabilities arise from the gross negligence or willful misconduct of that Indemnitee as determined by a final judgment of a court of competent jurisdiction. As used herein, "INDEMNIFIED LIABILITIES" means, collectively, any and all liabilities, obligations, losses, damages (including natural resource damages), penalties, actions, judgments, suits, claims (including Environmental Claims), costs (including the reasonable out-of-pocket costs of any investigation, study, sampling, testing, abatement, cleanup, removal, remediation or other response action necessary to remove, remediate, clean up or abate any Hazardous Materials Activity), expenses and disbursements of any kind or nature whatsoever (including the reasonable fees and disbursements of counsel for Indemnitees in connection with any investigative, administrative or judicial proceeding commenced or threatened by any Person, whether or not any such Indemnitee shall be designated as a party or a potential party thereto, and any reasonable fees or expenses incurred by Indemnitees in enforcing this indemnity), whether direct, indirect or consequential and whether based on any federal, state or foreign laws, statutes, rules or regulations (including securities and commercial laws, statutes, rules or regulations and Environmental Laws), on common law or equitable cause or on contract or otherwise, that may be imposed on, incurred by, or asserted against any such Indemnitee, in any manner relating to or arising out of (i) this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby (including Lenders' agreement to make the Loans hereunder or the use or intended use of the proceeds thereof or the issuance of Letters of Credit hereunder or the use or intended use of any thereof, or any enforcement of any of the Loan Documents (including any sale of, collection from, or other realization upon any of the Collateral or the enforcement of the Guaranties), (ii) the statements contained in the commitment letter delivered by any Lender to Company with respect thereto, or (iii) any Environmental Claim or any Hazardous Materials Activity relating to or arising from, directly or indirectly, any past or present activity, operation, land ownership, or practice of Company or any of its Subsidiaries. To the extent that the undertakings to defend, indemnify, pay and hold harmless set forth in this subsection 10.3 may be unenforceable in whole or in part because they are violative of any law or public policy, Company shall contribute the maximum portion that it is permitted to pay and satisfy under 164 applicable law to the payment and satisfaction of all Indemnified Liabilities incurred by Indemnitees or any of them. 10.4 SET-OFF; SECURITY INTEREST IN DEPOSIT ACCOUNTS. ---------------------------------------------- In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon the occurrence and continuance of any Event of Default each Lender is hereby authorized by Company at any time or from time to time, without notice to Company or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and to apply any and all deposits (general or special, including Indebtedness evidenced by certificates of deposit, whether matured or unmatured, but not including trust accounts) and any other Indebtedness at any time held or owing by that Lender to or for the credit or the account of Company against and on account of the obligations and liabilities of Company to that Lender under this Agreement, the Letters of Credit and participations therein and the other Loan Documents, including all claims of any nature or description arising out of or connected with this Agreement, the Letters of Credit and participations therein or any other Loan Document, irrespective of whether or not (i) that Lender shall have made any demand hereunder or (ii) the principal of or the interest on the Loans or any amounts in respect of the Letters of Credit or any other amounts due hereunder shall have become due and payable pursuant to Section 8 and although said obligations and liabilities, or any of them, may be contingent or unmatured. Company hereby further grants to each Agent and each Lender a security interest in all deposits and accounts maintained with such Agent or such Lender as security for the Obligations. Notwithstanding the foregoing, no Lender shall exercise, or attempt to exercise, any right of set- off, banker's lien or the like, against any deposit account or property of Company or any Subsidiary of Company held or maintained by such Lender without the prior written consent of Administrative Agent and Requisite Lenders. 10.5 RATABLE SHARING. --------------- Lenders hereby agree among themselves that if any of them shall, whether by voluntary payment (other than a voluntary prepayment of Loans made and applied in accordance with the terms of this Agreement), by realization upon security, through the exercise of any right of set-off or banker's lien, by counterclaim or cross action or by the enforcement of any right under the Loan Documents or otherwise, or as adequate protection of a deposit treated as cash collateral under the Bankruptcy Code, receive payment or reduction of a proportion of the aggregate amount of principal, interest, amounts payable in respect of Letters of Credit, fees and other amounts then due and owing to that Lender hereunder or under the other Loan Documents (collectively, the "AGGREGATE AMOUNTS DUE" to such Lender) which 165 is greater than the proportion received by any other Lender in respect of the Aggregate Amounts Due to such other Lender, then the Lender receiving such proportionately greater payment shall (i) notify Administrative Agent and each other Lender of the receipt of such payment and (ii) apply a portion of such payment to purchase participations (which it shall be deemed to have purchased from each seller of a participation simultaneously upon the receipt by such seller of its portion of such payment) in the Aggregate Amounts Due to the other Lenders so that all such recoveries of Aggregate Amounts Due shall be shared by all Lenders in proportion to the Aggregate Amounts Due to them; provided that if -------- all or part of such proportionately greater payment received by such purchasing Lender is thereafter recovered from such Lender upon the bankruptcy or reorganization of Company or otherwise, those purchases shall be rescinded and the purchase prices paid for such participations shall be returned to such purchasing Lender ratably to the extent of such recovery, but without interest. Company expressly consents to the foregoing arrangement and agrees that any holder of a participation so purchased may exercise any and all rights of banker's lien, set-off or counterclaim with respect to any and all monies owing by Company to that holder with respect thereto as fully as if that holder were owed the amount of the participation held by that holder. 10.6 AMENDMENTS AND WAIVERS. ---------------------- A. No amendment, modification, termination or waiver of any provision of this Agreement or of the Notes, and no consent to any departure by Company therefrom, shall in any event be effective without the written concurrence of Requisite Lenders, the receipt of which shall be acknowledged in writing by Administrative Agent; provided that any such amendment, modification, -------- termination, waiver or consent which: increases the amount of any of the Commitments or reduces or forgives the principal amount of any of the Loans; changes in any manner the definition of "Pro Rata Share" or the definition of "Requisite Lenders"; changes in any manner any provision of this Agreement which, by its terms, expressly requires the approval or concurrence of all Lenders; postpones the scheduled final maturity date or the date of any scheduled installment of principal of any of the Loans; postpones the date on which any interest or any fees are payable; decreases the interest rate borne by any of the Loans (other than any waiver of any increase in the interest rate applicable to any of the Loans pursuant to subsection 2.2E) or the amount of any fees payable hereunder; increases the maximum duration of Interest Periods permitted hereunder; reduces the amount or postpones the due date of any amount payable in respect of, or extends the required expiration date of, any Letter of Credit; changes in any manner the obligations of Lenders relating to the purchase of participations in Letters of Credit; releases any Lien granted in favor of Administrative Agent with respect to 25% or more in aggregate 166 fair market value of the Collateral, other than in accordance with the Loan Documents; releases Holdings or any Subsidiary Guarantor from its obligations under a Guaranty, other than in accordance with the terms of the Loan Documents; or changes in any manner the provisions contained in subsection 8.1, or this subsection 10.6 shall be effective only if evidenced by a writing signed by or on behalf of all Lenders with receipt acknowledged by Administrative Agent; provided, further, that if any matter described in the foregoing proviso relates - -------- ------- only to a Revolving Loan, the approval of all Revolving Lenders shall be sufficient; if any matter described in the foregoing proviso relates only to a Tranche A Term Loan, the approval of Tranche A Term Loan Lenders shall be sufficient; if any matter described in the foregoing proviso relates only to a Tranche B Term Loan, the approval of all Tranche B Term Loan Lenders shall be sufficient; provided, still further that any amendment or modification of this -------- ----- ------- Agreement which creates one or more additional tranches of term loans (without increasing the Commitment of any Lender to make such additional term loans) shall only require the consent of the Requisite Lenders. In addition, (i) any amendment, modification, termination or waiver of any of the provisions contained in Section 4 shall be effective only if evidenced by a writing signed by or on behalf of Agents and Requisite Lenders (the receipt of which shall be acknowledged in writing by Agents), (ii) no amendment, modification, termination or waiver of any provision of any Note shall be effective without the written concurrence of the Lender which is the holder of that Note, (iii) no amendment, modification, termination or waiver of any provision of any Letter of Credit shall be effective without the consent of the Issuing Lender of such Letter of Credit and no amendment, modification, termination or waiver of Section 3 that changes in any manner the rights and obligations of an Issuing Lender with respect to an outstanding Letter of Credit shall be effective without the consent of that Issuing Lender, (iv) no amendment, modification, termination or waiver of subsection 2.1A(iv) or of any other provision of this Agreement relating to the Swing Line Loan Commitment or the Swing Line Loans shall be effective without the written concurrence of Swing Line Lender, and (v) no amendment, modification, termination or waiver of any provision of Section 9 or of any other provision of this Agreement which, by its terms, expressly requires the approval or concurrence of Agents shall be effective to limit the rights or increase the obligation of either Agent without the written concurrence of such Agent. Administrative Agent may, but shall have no obligation to, with the concurrence of any Lender, execute amendments, modifications, waivers or consents on behalf of that Lender. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. No notice to or demand on Company in any case shall entitle Company to any other or further notice or demand in similar or other circumstances. Any amendment, modification, termination, waiver or consent effected in accordance with this subsection 10.6 shall be binding upon each Lender at the time 167 outstanding, each future Lender and, if signed by Company, on Company. B. If, in connection with any proposed amendment, modification, termination or waiver to any of the provisions of this Agreement or the Notes as contemplated by the first proviso of subsection 10.6A, the consent of the Requisite Lenders is obtained but the consent of one or more of such other Lenders whose consent is required is not obtained, then Company shall have the right, so long as all non-consenting Lenders whose individual consent is required are treated as described in either clause (i) or (ii) below, to either (i) replace each such non-consenting Lender or Lenders with one or more Replacement Lenders pursuant to subsection 2.9 so long as at the time of such replacement, each such Replacement Lender consents to the proposed amendment, modification, termination or waiver, or (ii) terminate such non-consenting Lender's Commitments and repay in full its outstanding Loans in accordance with subsections 2.4B(i)(b) and 2.4B(ii)(b); provided that unless the Commitments -------- that are terminated and the Loans that are repaid pursuant to the preceding clause (ii) are immediately replaced in full at such time through the addition of new Lenders or the increase of the Commitments and/or outstanding Loans of existing Lenders (who in each case must specifically consent thereto), then in the case of any action pursuant to the preceding clause (ii), the Requisite Lenders (determined before giving effect to the proposed action) shall specifically consent thereto; provided further that Company shall not have the -------- ------- right to terminate such non-consenting Lender's Commitment and repay in full its outstanding Loans pursuant to clause (ii) of this subsection 10.6B if, immediately after the termination of such Lender's Revolving Loan Commitment in accordance with subsection 2.4B(ii)(b), the Revolving Loan Exposure of all Lenders would exceed the Revolving Loan Commitments of all Lenders; provided -------- still further that Company shall not have the right to replace a Lender solely - ----- ------- as a result of the exercise of such Lender's rights (and the withholding of any required consent by such Lender) pursuant to the second sentence of subsection 10.6A. 10.7 INDEPENDENCE OF COVENANTS. ------------------------- All covenants hereunder shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or would otherwise be within the limitations of, another covenant shall not avoid the occurrence of an Event of Default or Potential Event of Default if such action is taken or condition exists. 10.8 NOTICES. ------- Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be 168 given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed; provided that notices -------- to Agents shall not be effective until received. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or (i) as to Company and Agents, such other address as shall be designated by such Person in a written notice delivered to the other parties hereto and (ii) as to each other party, such other address as shall be designated by such party in a written notice delivered to Administrative Agent. 10.9 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. ------------------------------------------------------ A. All representations, warranties and agreements made herein shall survive the execution and delivery of this Agreement and the making of the Loans and the issuance of the Letters of Credit hereunder. B. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7, 3.5A, 3.6, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the cancellation or expiration of the Letters of Credit and the reimbursement of any amounts drawn thereunder, and the termination of this Agreement. 10.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. ----------------------------------------------------- No failure or delay on the part of any Agent or any Lender in the exercise of any power, right or privilege hereunder or under any other Loan Document shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement and the other Loan Documents are cumulative to, and not exclusive of, any rights or remedies otherwise available. 10.11 MARSHALLING; PAYMENTS SET ASIDE. ------------------------------- None of Agents or Lenders shall be under any obligation to marshal any assets in favor of Company or any other party or against or in payment of any or all of the Obligations. To the extent that Company makes a payment or payments to Administrative Agent or Lenders (or to Administrative Agent for the benefit of Lenders), or any of Agents or Lenders enforce any security interests or exercise their rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any 169 part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, any other state or federal law, common law or any equitable cause, then, to the extent of such recovery, the obligation or part thereof originally intended to be satisfied, and all Liens, rights and remedies therefor or related thereto, shall be revived and continued in full force and effect as if such payment or payments had not been made or such enforcement or setoff had not occurred. 10.12 SEVERABILITY. ------------ In case any provision in or obligation under this Agreement or the Notes shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 10.13 OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS. ---------------------------------------------------------- The obligations of Lenders hereunder are several and no Lender shall be responsible for the obligations or Commitments of any other Lender hereunder. Nothing contained herein or in any other Loan Document, and no action taken by Lenders pursuant hereto or thereto, shall be deemed to constitute Lenders as a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose. 10.14 HEADINGS. -------- Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. 10.15 APPLICABLE LAW. -------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 170 10.16 SUCCESSORS AND ASSIGNS. ---------------------- This Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of the parties hereto and the successors and assigns of Lenders (it being understood that Lenders' rights of assignment are subject to subsection 10.1). Neither Company's rights or obligations hereunder nor any interest therein may be assigned or delegated by Company without the prior written consent of all Lenders. 10.17 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, COMPANY, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 10.8; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT LENDERS RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 10.17 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. 10.18 WAIVER OF JURY TRIAL. -------------------- EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO 171 THE SUBJECT MATTER OF THIS LOAN TRANSACTION OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims and all other common law and statutory claims. Each party hereto acknowledges that this waiver is a material inducement to enter into a business relationship, that each has already relied on this waiver in entering into this Agreement, and that each will continue to rely on this waiver in their related future dealings. Each party hereto further warrants and represents that it has reviewed this waiver with its legal counsel and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 10.19 CONFIDENTIALITY. --------------- Each Lender shall hold all non-public information obtained pursuant to the requirements of this Agreement which has been identified as confidential by Company in accordance with such Lender's customary procedures for handling confidential information of this nature and in accordance with safe and sound banking practices, it being understood and agreed by Company that in any event a Lender may make disclosures to Affiliates and professional advisors of such Lender or disclosures reasonably required by (a) any bona fide assignee, transferee or participant in connection with the contemplated assignment or transfer by such Lender of any Loans or any participations therein or (b) by any direct or indirect contractual counterparties in swap agreements or such contractual counterparties' professional advisors provided that such contractual counterparty or professional advisor to such contractual counterparty agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder, or disclosures required or requested by any governmental agency or representative thereof or pursuant to legal process; provided that, -------- unless specifically prohibited by applicable law or court order, each Lender shall notify Company of any request by any governmental agency or representative thereof (other than any such request in connection with any examination of the financial condition of such Lender by such governmental agency) for disclosure of any such non-public information prior to disclosure of such information; and provided, further that in no event shall any Lender be obligated - -------- ------- 172 or required to return any materials furnished by Company or any of its Subsidiaries. 10.20 COUNTERPARTS; EFFECTIVENESS. --------------------------- This Agreement and any amendments, waivers, consents or supplements hereto or in connection herewith may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and receipt by Company and Agents of written or telephonic notification of such execution and authorization of delivery thereof. [Remainder of page intentionally left blank] 173 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. COMPANY: DIAMOND BRANDS OPERATING CORP. By: _____________________________________ Title: Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel S-1 LENDERS: WELLS FARGO BANK, N.A., individually and as Administrative Agent By: ________________________________________ Title: _____________________________________ Notice Address: Capital Markets Group 555 Montgomery Street, 17th Floor San Francisco, CA 94111 Attention: Alan W. Wray S-2 DLJ CAPITAL FUNDING, INC., individually and as Syndication Agent By: ________________________________________ Title: _____________________________________ Notice Address: 2121 Avenue of the Stars Fox Plaza, 30th Floor Los Angeles, CA 90067-5014 Attention: Eric Swanson With a copy to: 277 Park Avenue, 17th Floor New York, NY 10172 Attention: Dana Klein S-3 MORGAN STANLEY SENIOR FUNDING, INC., individually and as Documentation Agent By: ________________________________________ Title: _____________________________________ Notice Address: 1585 Broadway, 10th Floor New York, NY 10036 Attention: James Morgan With a copy to: 1585 Broadway, 10th Floor New York, NY 10036 Attention: Michael Hart S-4 BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: ________________________________________ Title: _____________________________________ Notice Address: 231 S. LaSalle Street Chicago, IL 60697 Attention: William Stafeil S-5 BANQUE PARIBAS By: ________________________________________ Title: _____________________________________ Notice Address: 227 West Monroe Street, Suite 3300 Chicago, IL 60606 Attention: Karen E. Coons S-6 BHF-BANK AKTIENGESELLSCHAFT By: ________________________________________ Title: _____________________________________ By: ________________________________________ Title: _____________________________________ Notice Address: 111 West Ocean Blvd., Suite 1325 Long Beach, CA 90802-4645 Attention: L. John Stewart With a copy to: 590 Madison Avenue New York, NY 10022-2540 Attention: Dan Dobrjanskyj S-7 CREDIT LYONNAIS NEW YORK BRANCH By: ________________________________________ Title: _____________________________________ Notice Address: 1301 Avenue of Americas New York, NY 10019 Attention: Olivier Tabouret S-8 THE FIRST NATIONAL BANK OF CHICAGO By: ________________________________________ Title: _____________________________________ Notice Address: One First National Plaza Suite 0323 1-15 Chicago, IL 60670 Attention: Christina Zautcke S-9 U.S. BANK, NATIONAL ASSOCIATION By: ________________________________________ Title: _____________________________________ Notice Address: 601 Second Avenue South Minneapolis, MN 55402 Attention: David A. Shapiro S-10 SCHEDULES Schedules to the Credit Agreement (the "Agreement") Among DIAMOND BRANDS OPERATING CORP., as Borrower THE LENDERS LISTED THEREIN, as Lenders, DLJ CAPITAL FUNDING, INC., as Syndication Agent, WELLS FARGO BANK, N.A., as Administrative Agent and MORGAN STANLEY SENIOR FUNDING, INC., as Documentation Agent These are the Schedules referred to in the Agreement. The schedule numbers herein set forth to the corresponding schedule numbers in the Agreement. The inclusion of any item in a section of this Agreement shall not constitute an admission that a violation, right of termination, default, liability or other obligation of any kind exists with respect to such item, but rather is intended only to qualify certain rerpesentations and warranties contained in the Agreement and to set forth other information required by the Agreement. The headings with respect to each item are included for convenience only, and are not a party of the responses to requirements or a qualification of the representations and warranties set forth in the Agreement. Capitalized terms not otherwise defined herein shall have the meanings assigned to them in the Agreement. Schedule 2.1 ------------ LENDERS' COMMITMENTS AND PRO RATA SHARES ---------------------------------------- ================================================================================ Lender Revolving Pro Rata Tranche A Loan Pro Rata Share - ------ --------- -------- -------------- -------------- Loan Shares (re: Commitment (re: Tranche A ---- ----------- ---------- --------------- Commitment Revolving Loans) ---------- --------- ------ Loan ---- Commitment) ----------- - -------------------------------------------------------------------------------- Morgan Stanley $ 2,272,727.27 9.090909% $ 2,727,272.73 9.090909% - -------------------------------------------------------------------------------- US Bancorp $ 2,272,727.27 9.090909% $ 2,727,272.73 9.090909% - -------------------------------------------------------------------------------- Banque Paribas $ 2,727,272.73 10.90909% $ 3,272,727.27 10.90909% - -------------------------------------------------------------------------------- BHF Bank $ 2,727,272.73 10.90909% $ 3,272,727.27 10.90909% - -------------------------------------------------------------------------------- Bank of America $ 2,727,272.73 10.90909% $ 3,272,727.27 10.90909% - -------------------------------------------------------------------------------- Credit Lyonnais $ 2,727,272.73 10.90909% $ 3,272,727.27 10.90909% - -------------------------------------------------------------------------------- First Chicago $ 2,727,272.73 10.90909% $ 3,272,727.27 10.90909% - -------------------------------------------------------------------------------- Wells Fargo $ 3,409,090.91 13.63640% $ 4,090,909.09 13.63636% - -------------------------------------------------------------------------------- DLJ $ 3,409,090.90 13.63636% $ 4,090,909.10 13.63640% - -------------------------------------------------------------------------------- TOTAL $25,000,000.0 100% $30,000,000.00 100% - ----- 0 ================================================================================ Tranche B Pro Rata Shares Pro Rata Total --------- --------------- -------- ----- Loan (re: Tranche B Shares Commitment ---- -------------- ------- ---------- Commitment Loans) ---------- ------ - -------------------------------------------------------------------------------- Morgan Stanley 0 0 4.7619047% $ 5,000,000.00 - -------------------------------------------------------------------------------- US Bancorp 0 0 4.7619047% $ 5,000,000.00 - -------------------------------------------------------------------------------- Banque Paribas 0 0 5.7142857% $ 6,000,000.00 - -------------------------------------------------------------------------------- BHF Bank 0 0 5.7142857% $ 6,000,000.00 - -------------------------------------------------------------------------------- Bank of America 0 0 5.7142857% $ 6,000,000.00 - -------------------------------------------------------------------------------- Credit Lyonnais 0 0 5.7142857% $ 6,000,000.00 - -------------------------------------------------------------------------------- First Chicago 0 0 5.7142857% $ 6,000,000.00 - -------------------------------------------------------------------------------- Wells Fargo $ 40% 9.0476190% $ 2,000,000.00 9,500,000.00 - -------------------------------------------------------------------------------- DLJ $48,000,000.0 96% 52.8571429 $ 0 % 55,500,000.00 - -------------------------------------------------------------------------------- TOTAL $50,000,000.0 100% 100% $105,000,000. - ----- 0 00 ================================================================================ SCHEDULE 3.1 EXISTING LETTERS OF CREDIT Issuing Lender: U.S. Bank National Association (formerly known as First Bank National Association) Standby Letters of Credit: ======================================================================= L/C Number Beneficiary Amount - ---------- ----------- ------ - ----------------------------------------------------------------------- 75760 Central Maine Power Company $75,861.56 - ----------------------------------------------------------------------- 75882 North River Insurance Company $690,000.00 ======================================================================= Commercial Letters of Credit: ======================================================================= L/C Number Beneficiary Amount - ---------- ----------- ------ - ----------------------------------------------------------------------- ILCMMSP00677 Associated Merchandise, Inc. $56,062.95 - ----------------------------------------------------------------------- ILCMMSP00669 DAFU Group Go. Zhejiang $30,000.00 - ----------------------------------------------------------------------- MSP000571 Associated Merchansie, Inc. $53,343.15 - ----------------------------------------------------------------------- MSP000563 D'Claribel Marketing Corp. $75,865.44 ======================================================================= Schedule 4.1C Closing Date Mortgaged Properties --------------------------------- Maine Forster Inc. Depot Street Strong, Maine 04983 Forster Inc. Mill Street East Wilton, Maine 04234 Forster Inc. Munson Rd. Wilton, Maine 04294 The parties to this Credit Agreement agree that the Maine real estate properties set forth above secure $5,906,250 of the Obligations. Minnesota Diamond Brands 1800 Cloquet Avenue Cloquet, MN 55720 The parties to this Credit Agreement agree that the Minnesota real estate properties set forth above secure $2,312,500 of the Obligations. Note The properties set forth hereon are more particularly described in the Mortgages to be delivered to the Agent pursuant to Section 4.1 of the Credit Agreement. Schedule 5.1 Subsidiaries ------------ - ---------------------------------------------------------------------------- Corporation Stock Issued Percentage of Common Stock Owned by Company - ---------------------------------------------------------------------------- Forster Inc., a Maine 100 shares of Common 100% corporation Stock - ---------------------------------------------------------------------------- Empire Candle, Inc., a 1,000 shares of Common 100% Kansas corporation Stock - ---------------------------------------------------------------------------- Schedule 5.5 Real Estate ----------- Maine Forster Inc. Depot Street Strong, Maine 04983 Forster Inc. Mill Street East Wilton, Maine 04234 Forster Inc. Munson Rd. Wilton, Maine 04294 Minnesota Diamond Brands 1800 Cloquet Avenue Cloquet, MN 55720 Diamond Brands 1660 South Highway 100; Suite 590 Minneapolis, MN 55416 Kansas Empire Candle, Inc. 2925 Fairfax Trafficway Kansas City, KS 66115-1317 Schedule 5.6 Litigation ---------- 1. Consolidated Freightways Corporation has threatened to file suit against Holdings for unpaid motor freight in an amount totaling $100,043.07. Upon such a filing, Holdings has contemplated counterclaiming in an amount totaling $268,371. In addition, at least a portion of Consolidated Freightways Corporation's claim may be barred by applicable statutes of limitations. 2. Agnes Marie Simmons v. Diamond Brands Incorporated, Sixth Judicial District, Carlton County, Minnesota. Simmons, a former employee, alleges she was fired in retaliation for seeking workers' compensation benefits. 3. Brad Engh, a former employee of Holdings, has filed an OSHA retaliation claim against Holdings based on his dismissal following a safety infraction which caused an injury to another employee. 4. Holdings and its Subsidiaries incur claims in the ordinary course related to products sold. These claims are covered by insurance. 5. Holdings and its Subsidiaries incur workers compensation claims in the ordinary course. These claims are covered by insurance. 6. The Minnesota Pollution Control Agency (the "MPCA") has cited Holdings for exceeding the opacity limits of its air permit during the second and fourth quarters of 1996 and the first and second quarters of 1997 and for excessive downtime of its emissions monitoring equipment during the second and fourth quarters of 1995. On February 19, 1998, the MPCA proposed a penalty to be assessed for the violations in the amount of $22,137. Holdings is presently negotiating the resolution of these alleged violations with the MPCA. Holdings also received letters of warning from the MPCA for emissions in excess of its permit limits during the fourth quarter of 1993 and for other minor violations of its air permit in 1994 and second quarter 1995. These violations were resolved without further action by the MPCA. Schedule 5.8 Material Contracts ------------------ 1. Term Lease Master Agreement dated July 10, 1991 between Holdings and IBM Credit Corporation, as supplemented and amended. 2. Toyota Motor Credit Corporation Lease Agreement (Equipment) dated January 20, 1995 between Empire Manufacturing Co., and Toyota Midamerica, Inc. 3. Memorandum of Agreement dated March 8, 1995 between Forster Inc. and Solon Manufacturing Company, as amended October 7, 1997. 4. Lease dated March 17, 1995 between Holdings and MEPC American Properties Inc. 5. Memorandum of Agreement dated August 29, 1995 between Forster Inc. and Penly Corporation of W. Paris, Maine, as amended November 11, 1996. 6. Master Equipment Lease Agreement dated December 7, 1995 between Forster Inc. and KeyCorp Leasing Ltd. 7. Purchase Order Agreement dated January 1, 1996 between Holdings and Crow Rope Company. 8. Agreement dated April 3, 1996 between Empire Manufacturing Company and Libbey Glass, Inc. 9. Supply Proposal dated October 1, 1996 from Huntsman Corporation to Foster Inc. 10. Master Lease Agreement dated November 22, 1996 between Holdings and Meridian Leasing Corporation. 11. U.S. Can Company Customer Supply Agreement dated September 19, 1996 between Empire Manufacturing Company and U.S. Can Company. 12. Commercial and Industrial Lease Agreement dated June 23, 1997 between Empire Candle, Inc. and LNPJ, L.L.C. ("LNPJ"). Guaranty of Commercial and Industrial Lease Agreement dated June 23, 1997 in favor of LNPJ. 13. Purchase Order Agreement between Holdings and D.D. Beans & Sons Co., undated, unexecuted, as amended. Note ---- Holdings' rights under the contracts described in items 1, 4, 7, 10 and 13 of this Schedule 5.8 will be transferred to the Company concurrently with the closing of the Credit Agreement, subject to possible contractual restrictions upon the assignment, transfer etc. of Holdings' contractual rights. Schedule 5.13 Environmental Matters --------------------- All matters disclosed in any of the following documents: 1. Holdings (Cloquet). A. Phase One Environmental Site Assessment dated February 28, 1995. B. Phase I Environmental Assessment dated March 8, 1991. C. Ash disposal area closure letter by Minnesota Pollution Control Agency dated May 17, 1996. D. Phase I Environmental Assessment dated February 3, 1998. E. See item 6 of Schedule 5.6. 2. Empire Candle, Inc. A. Phase I Environmental Site Assessment dated January 30, 1997 (Kansas City, Missouri). B. Phase I Environmental Site Assessment dated January 31, 1997 (Kansas City, Kansas). C. KDHE's Corrective Action Decision For Soil and Ground Water Remediation dated February, 1996 (Draft). 3. Forster Inc. A. Phase 1 - Environmental Compliance Audit dated August, 1992 (Wilton). B. Phase 2 - Environmental Site Evaluation dated August, 1992 (Wilton). C. Environmental Site Evaluation Update dated February, 1995 (Wilton). D. Phase I Environmental Site Assessment/Environmental Compliance Audit Update dated February 3, 1998 (Wilton Plant, Wilton). E. Phase I Environmental Site Assessment/Environmental Compliance Audit Updated dated February 3, 1998 (Distribution Center, Wilton). F. Phase I Environmental Site Evaluation /Evaluative Compliance Audit dated August, 1998 (East Wilton). G. Phase 2 Environmental Site Evaluation dated August, 1992 (East Wilton). H. Environmental Site Evaluation Update dated February, 1995 (East Wilton). I. Notice of Landfill Closure dated August 28, 1997 (East Wilton). J. October 1997 Closed Landfills Inspection dated November 11, 1997 (East Wilton and Strong). K. Post-Closure Water Quality Monitoring Report dated November 25, 1997 (East Wilton). L. Phase I Environmental Site Assessment/Environmental Compliance Audit Updated dated February 3, 1998 (East Wilton). M. Phase I Environmental Site Evaluation Compliance Audit dated August, 1992 (Strong). N. Phase 2 Environmental Site Evaluation dated August, 1992 (Strong). O. Environmental Site Evaluation Update dated February, 1995 (Strong). P. Letter Reported by Sevee & Maher Engineers, Inc. dated January 11, 1996 (Strong). Q. Notice of Landfill Closure dated August 28, 1997 (Strong). R. Post-Closure Water Quality Monitoring Reported dated November 25, 1997 (Strong). S. Phase I Environmental Site Assessment/Environmental Compliance Audit Updated dated February 4, 1998 (strong). T. Memorandum regarding review of Landfill Construction, Maintenance and Monitoring Cost Estimates dated February 24, 1995. U. Revised Summary of Results Environmental Regulatory Compliance Audits dated February 27, 1995. V. Bark Pile Closure Plan dated February, 1994 (Mattawamkeag). W. Closed Bark Pile Water Quality Monitoring Report dated September 23, 1997 (Matawamkeag). X. October 1997 Closed Landfill Inspection dated November 11, 1997 (Mattawamkeag). Y. Forester was alleged to have sent hazardous substances to the Union Chemical, Superfund Site in South Hope, Maine. Memorandum dated April, 1996, indicating that Forster contributed $21,598.68 toward the remediation costs at the site. Schedule 7.1 Indebtedness ------------ 1. Any Indebtedness described in the financial statements delivered to the Lenders pursuant to Section 5.3 of the Credit Agreement, except for the existing indebtedness of Holdings and its Subsidiaries satisfied concurrently with the closing of the Credit Agreement. Schedule 7.2 Liens ----- 1. UCC-1 Financing Statements -------------------------- MISSOURI - -------- Debtor Secured Party Filing #/Date - ------ ------------- ------------- Empire Candle, Inc. Business Credit Leasing 2817224 115 W. College Drive 08/04/97 Marshall, MN 56258 Refco Investments, Inc. 2839882 313 S. Rohlwing Rd. 10/10/97 Addison, IL 60101 MINNESOTA - --------- Debtor Secured Party Filing #/Date - ------ ------------- ------------- Diamond Brands, Inc. IBM Credit Corp. 1630732 11/17/93 Debt C4E MS 222 1634479 12/06/93 250 Harbor Drive 1758492 05/04/95 Stamford, CT 06904 1758494 05/04/95 Meridian Leasing Corp. 1917012 570 Lake Cook Rd. #300 02/14/97 Deerfield, IL 60015 IBM Credit Corp. 1960403 07/24/97 1133 Westchester Ave. 1963013 08/04/97 White Plains, NY 10604 MAINE - ----- Debtor Secured Party Filing #/Date - ------ ------------- ------------- Forster, Inc. Keycorp Leasing, Ltd. 1950001154365 54 State Street 12/26/95 Albany, NY 12207 2. [Copy list of encumbrances set forth on Closing Date Mortgage Policies to be delivered to the Agent pursuant to Section 4.1C(iii).] Schedule 7.3 Investments ----------- US Bank Investment Services P.O. Box 1674 Minneapolis, MN 55480-9815 Money Market Account - 13048194 (there are currently no funds in this account) Schedule 7.4 Contingent Obligations ---------------------- 1. Any Contingent Obligations set forth in the financial statements delivered to the Lenders pursuant to Section 5.3 of the Credit Agreement, except for Contingent Obligations terminated in connection with the satisfaction of the existing indebtedness of Holdings and its Subsidiaries upon the closing of the Credit Agreement. Schedule 7.12 Affiliate Transactions ---------------------- 1. Employment (Change of Control) Agreement dated November 1, 1997 between Holdings and Thomas Kneusel, as amended on February 27, 1998 to extend the term of the Agreement through May 31, 1998. 2. Employment (Change of Control) Agreement dated November 1, 1997 between Holdings and John Young, as amended on February 27, 1998 to extend the terms of the Agreement through May 31, 1998. 3. Employment (Change of Control) Agreement dated November 1, 1997 between Holdings and Christopher Mathews, as amended on February 27, 1998 to extend the term of the Agreement through May 31, 1998. 4. Employment Agreement dated February 28, 1997 between Empire Candle, Inc. and A. Drummon Crews. Letter Agreement between Holding and A. Drummon Crews providing for a bonus of $300,000, payable 50% at closing and 50% six months after closing. 5. Employment, Non-Competition and Confidentiality Agreement dated May 26, 1992 between Forster Mfg. Co., now known as Forster Inc., and Richard S. Campbell, as amended April 27, 1994. Letter Agreement between Forster and Richard S. Campbell, providing for a bonus of $175,000, payable 50% at closing and 50% one year after closing. 6. Non-Qualified Stock Option Agreement dated January 1, 1997 between Holdings and John Beach. 7. Non-Qualified Stock Option Agreement dated January 1, 1997 between Holdings and Richard Campbell. 8. Non-Qualified Stock Option Agreement dated January 1, 1997 between Holdings and Thomas Kneusel. 9. Non-Qualified Stock Option Agreement dated January 1, 1997 between Holdings and Christopher Mathews. 10. Non-Qualified Stock Option Agreement dated January 1, 1997 between Holdings and John Young. 11. Holdings 1997 Non-Qualified Stock Option Plan. 12. Holdings has a bonus program pursuant to which officers participate at a 30% plus level and mid-management at a 6-20% range. Bonuses are paid based on achievement of annual target goals. Note - ---- The obligations and rights of Holdings under the agreements described in this Schedule 7.12 will be transferred to the Company concurrently with the closing of the Credit Agreement. EXHIBIT I [FORM OF NOTICE OF BORROWING] NOTICE OF BORROWING Pursuant to that certain Credit Agreement dated as of April [___], 1998, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Company"), the financial institutions listed therein as Lenders ("Lenders"), DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent, this represents Company's request to borrow as follows: 1. Date of borrowing: ________, _________ 2. Amount of borrowing: $___________________ 3. Lenders: |_| a. Lenders, in accordance with their applicable Pro Rata shares |_| b. Swing Line Lender 4. Type of Loans: |_| a. Tranche A Term Loans |_| b. Tranche B Term Loans |_| c. Revolving Loans |_| d. Swing Line Loan 5. Interest rate option: |_| a. Base Rate Loan(s) |_| b. Eurodollar Rate Loans with an initial Interest Period of ____________ month(s) The proceeds of such Loans are to be deposited in Company's account at Administrative Agent. The undersigned officer, to the best of his or her knowledge, and Company certify that: (i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true, correct and complete in all material respects on and as of such earlier date; (ii) No event has occurred and is continuing or would result from the consummation of the borrowing contemplated hereby that would constitute an Event of Default or a Potential Event of Default; (iii) Each Loan Party has performed in all material respects all agreements and satisfied all conditions which the Credit Agreement provides shall be performed or satisfied by it on or before the date hereof; (iv) Each of the other conditions to funding set forth in subsection 4.2B has been satisfied; and (v) After giving effect to the [Revolving/Swing Line] Loans requested hereby, the Total utilization of Revolving Loan Commitments does not exceed the Revolving Loan Commitments. DATED: ____________________ DIAMOND BRANDS OPERATING CORP. By: __________________________ Title: ________________________ EXHIBIT II [FORM OF NOTICE OF CONVERSION/CONTINUATION] NOTICE OF CONVERSION/CONTINUATION Pursuant to that certain Credit Agreement dated as of April [___], 1998, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Company"), the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent, this represents Company's request to convert or continue Loans as follows: 1. Date of conversion/continuation: __________________, _______ 2. Amount of Loans being converted/continued: $__________________ _ 3. Type of Loans being |_| a. Tranche A Term Loans converted/continued |_| b. Tranche B:Term Loans |_| c. Revolving Loans 4. Nature of conversion/continuation: |_| a. Conversion of Base Rate Loans to Eurodollar Rate Loans |_| b. Conversion of Eurodollar Rate Loans to Base Rate Loans |_| c. Continuation of Eurodollar Rate Loans as such 5. If Loans are being continued as or converted to Eurodollar Rate Loans, the duration of the new Interest Period that commences on the conversion/ continuation date: |_______________ month(s) In the case of a conversion to or continuation of Eurodollar Rate Loans, the undersigned officer, to the best of his or her knowledge, and Company certify that no Event of Default or Potential Event of Default has occurred and is continuing under the Credit Agreement. DATED: _____________________ DIAMOND BRANDS OPERATING CORP. By: __________________________ Title: ________________________ EXHIBIT III [FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT] DIAMOND BRANDS OPERATING CORP. NOTICE OF ISSUANCE OF LETTER OF CREDIT Pursuant to that certain Credit Agreement dated as of April [___], 1998, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined), by and among DIAMOND BRANDS OPERATING CORP., a Delaware corporation, the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent and Morgan Stanley Senior Funding, Inc., as Documentation Agent, this represents the Company's request that [Administrative Agent/_________________] issue a [Commercial/Standby] Letter of Credit on __________, ____ in the face amount of _________________ with an expiration date of ____________, ____. The beneficiary of such proposed Letter of Credit shall be ______________________________________________ and such Person's address is _____________________________________. Attached hereto is [the verbatim text of such proposed Letter of Credit] [a description of the proposed terms and conditions of such Letter of Credit, including a precise description of any documents to be presented by the beneficiary which, if presented by the beneficiary prior to the expiration date of such Letter of Credit, would require the Issuing Lender to make payment under such Letter of Credit]. The undersigned officer, in his/her capacity as an officer of Company and to the best of his/her knowledge, and Company certify that: (i) The representations and warranties contained in the Credit Agreement and the other Loan Documents are true, correct and complete in all material respects on and as of the date hereof to the same extent as though made on and as of the date hereof, except to the extent such representations and warranties specifically relate to an earlier date, in which case such representations and warranties were true, correct and complete in all material respects on and as of such earlier date; (ii) No event has occurred and is continuing or would result from the issuance of the Letter of Credit contemplated hereby that would constitute an Event of Default or a Potential Event of Default; (iii) Each Loan Party has performed in all material respects all agreements and satisfied all conditions which the Credit Agreement provides shall be performed or satisfied by it on or before the date hereof; (iv) Each of the other conditions to the issuance of the Letter of Credit contemplated hereby described in subsection 4.3C has been satisfied; and (v) After giving effect to the issuance of the Letter of Credit requested hereby, (a) the Total Utilization of Revolving Loan Commitments does not exceed the Revolving Loan Commitments and (b) the Letter of Credit Usage does not exceed $10,000,000. DATED: ____________________ DIAMOND BRANDS OPERATING CORP. By: _________________________ Title: _______________________ EXHIBIT IV [FORM OF TRANCHE A TERM NOTE] DIAMOND BRANDS OPERATING CORP. PROMISSORY NOTE DUE APRIL [___], 2005 $_______________ 1 April [___], 1998 FOR VALUE RECEIVED, DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Company"), promises to pay to 2 ("Payee") or its registered assigns the principal amount of 3 ($___________) on April [___], 2005 in the installments referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of April [___], 1998 by and among Company, the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined). Company shall make principal payments on this Note in consecutive quarterly installments, commencing on ____________, 1999 and ending on ____________, 2005. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; provided that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. This Note is one of Company's "Tranche A Term Notes" in the aggregate principal amount of $30,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Tranche A Term Loan evidenced hereby was made and is to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement - -------- 1 Insert place of delivery of Note. 2 Insert Lender's name in capital letters. 3 Insert amount of Lender's Term Loan in words. effecting the assignment or transfer of this Note shall have been accepted by Administrative Agent as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Administrative Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. DIAMOND BRANDS OPERATING CORP. By: __________________________ Title: ________________________ EXHIBIT V [FORM OF TRANCHE B TERM NOTE] DIAMOND BRANDS OPERATING CORP. PROMISSORY NOTE DUE APRIL [___], 2006 $_______________ 4 April [___], 1998 FOR VALUE RECEIVED, DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Company"), promises to pay to 5 ("Payee") or its registered assigns the principal amount of 6 ($_____________) on April [___], 2006 in the installments referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of April [___], 1998 by and among Company, the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent and Morgan Stanley Senior Funding, Inc., as Documentation Agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined). Company shall make principal payments on this Note in consecutive quarterly installments, commencing on ____________, 1998 and ending on ____________, 2006. Each such installment shall be due on the date specified in the Credit Agreement and in an amount determined in accordance with the provisions thereof; provided that the last such installment shall be in an amount sufficient to repay the entire unpaid principal balance of this Note, together with all accrued and unpaid interest thereon. This Note is one of Company's "Tranche B Term Notes" in the aggregate principal amount of $50,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Term Loan evidenced hereby was made and is to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement - -------- 4 Insert place of delivery of Note. 5 Insert Lender's name in capital letters. 6 Insert amount of Lender's Term Loan in words. effecting the assignment or transfer of this Note shall have been accepted by Administrative Agent as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Administrative Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loan evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. DIAMOND BRANDS OPERATING CORP. By: __________________________ Title: ________________________ EXHIBIT VI [FORM OF REVOLVING NOTE] DIAMOND BRANDS OPERATING CORP. PROMISSORY NOTE DUE APRIL [___], 2004 7 $ 8 April [___], 1998 FOR VALUE RECEIVED, DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Company"), promises to pay to 9 ("Payee") or its registered assigns, on or before April [___], 2004, the lesser of (x) 10 ($[1]) and (y) the unpaid principal amount of all advances made by Payee to Company as Revolving Loans under the Credit Agreement referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of April [___], 1998 by and among Company, the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined). This Note is one of Company's "Revolving Notes" in the aggregate principal amount of $25,000,000 and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Revolving Loans evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Unless and until an Assignment Agreement effecting the assignment or transfer of this Note shall have been accepted by Administrative Agent as provided in subsection 10.1B(ii) of the Credit Agreement, Company and Administrative Agent shall be entitled to deem and treat Payee as the owner and holder of this Note and the Loans evidenced hereby. Payee hereby agrees, by its acceptance hereof, that before disposing of this Note or any part hereof it will make a notation hereon of all principal - -------- 7 Insert amount of Lender's Revolving Loan Commitment in numbers. 8 Insert place of delivery of Note. 9 Insert Lender's name in capital letters. 10 Insert amount of Lender's Revolving Loan Commitment in words. payments previously made hereunder and of the date to which interest hereon has been paid; provided, however, that the failure to make a notation of any payment made on this Note shall not limit or otherwise affect the obligations of Company hereunder with respect to payments of principal of or interest on this Note. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. DIAMOND BRANDS OPERATING CORP. By: __________________________ Title: ________________________ TRANSACTIONS ON REVOLVING NOTE Outstanding Type of Amount of Amount of Principal Loan Made Loan Made Principal Paid Balance Notation Date This Date This Date This Date This Date Made By - ---- ---------- ------------- --------------- --------------- ------- EXHIBIT VII [FORM OF SWING LINE NOTE] DIAMOND BRANDS OPERATING CORP. PROMISSORY NOTE DUE APRIL [___], 2004 $5,000,000 Los Angeles, California April [___], 1998 FOR VALUE RECEIVED, DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Company"), promises to pay to WELLS FARGO BANK, N.A. ("Payee"), on or before April [___], 2004, the lesser of (x) FIVE MILLION AND NO/100 DOLLARS ($5,000,000.00) and (y) the unpaid principal amount of all advances made by Payee to Company as Swing Line Loans under the Credit Agreement referred to below. Company also promises to pay interest on the unpaid principal amount hereof, from the date hereof until paid in full, at the rates and at the times which shall be determined in accordance with the provisions of that certain Credit Agreement dated as of April [___], 1998 by and among Company, the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent (said Credit Agreement, as it may be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined). This Note is Company's "Swing Line Note" and is issued pursuant to and entitled to the benefits of the Credit Agreement, to which reference is hereby made for a more complete statement of the terms and conditions under which the Swing Line Loans evidenced hereby were made and are to be repaid. All payments of principal and interest in respect of this Note shall be made in lawful money of the United States of America in same day funds at the Funding and Payment Office or at such other place as shall be designated in writing for such purpose in accordance with the terms of the Credit Agreement. Whenever any payment on this Note shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest on this Note. This Note is subject to mandatory prepayment as provided in subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of Company as provided in subsection 2.4B(i) of the Credit Agreement. THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. Upon the occurrence of an Event of Default, the unpaid balance of the principal amount of this Note, together with all accrued and unpaid interest thereon, may become, or may be declared to be, due and payable in the manner, upon the conditions and with the effect provided in the Credit Agreement. The terms of this Note are subject to amendment only in the manner provided in the Credit Agreement. This Note is subject to restrictions on transfer or assignment as provided in subsections 10.1 and 10.16 of the Credit Agreement. No reference herein to the Credit Agreement and no provision of this Note or the Credit Agreement shall alter or impair the obligations of Company, which are absolute and unconditional, to pay the principal of and interest on this Note at the place, at the respective times, and in the currency herein prescribed. Company promises to pay all reasonable out-of-pocket costs and expenses, including reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit Agreement, incurred in the collection and enforcement of this Note. Company and any endorsers of this Note hereby consent to renewals and extensions of time at or after the maturity hereof, without notice, and hereby waive diligence, presentment, protest, demand and notice of every kind. IN WITNESS WHEREOF, Company has caused this Note to be duly executed and delivered by its officer thereunto duly authorized as of the date and at the place first written above. DIAMOND BRANDS OPERATING CORP. By: _________________________ Title: _______________________ TRANSACTIONS ON SWING LINE NOTE Outstanding Amount of Amount of Principal Loan Made Principal Paid Balance Notation Date This Date This Date This Date Made By - ---- --------- --------- --------- ------- EXHIBIT VIII [FORM OF COMPLIANCE CERTIFICATE] COMPLIANCE CERTIFICATE THE UNDERSIGNED HEREBY CERTIFY THAT: (1) We are the duly elected [Title] and [Title] of DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Company"); (2) We have reviewed the terms of that certain Credit Agreement dated as of April [___], 1998, as amended, supplemented or otherwise modified to the date hereof (said Credit Agreement, as so amended, supplemented or otherwise modified, being the "Credit Agreement", the terms defined therein and not otherwise defined in this Certificate (including Attachment No. 1 annexed hereto and made a part hereof) being used in this Certificate as therein defined), by and among Company, the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent and the terms of the other Loan Documents, and we have made, or have caused to be made under our supervision, a review in reasonable detail of the transactions and condition of Company and its Subsidiaries during the accounting period covered by the attached financial statements; and (3) The examination described in paragraph (2) above did not disclose, and we have no knowledge of, the existence of any condition or event which constitutes an Event of Default or Potential Event of Default during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate[, except as set forth below]. [Set forth [below] [in a separate attachment to this Certificate] are all exceptions to paragraph (3) above listing, in detail, the nature of the condition or event, the period during which it has existed and the action which Company has taken, is taking, or proposes to take with respect to each such condition or event: - ----------------------------------------------------------------- The foregoing certifications, together with the computations set forth in Attachment No. 1 annexed hereto and made a part hereof and the financial statements delivered with this Certificate in support hereof, are made and delivered this __________ day of _____________, ______ pursuant to subsection 6.1(iv) of the Credit Agreement. DIAMOND BRANDS OPERATING CORP. By: __________________________ Title: ________________________ By: __________________________ Title: ________________________ ATTACHMENT NO. 1 TO COMPLIANCE CERTIFICATE This Attachment No. 1 is attached to and made a part of a Compliance Certificate dated as of ____________, ______ and pertains to the period from ____________, ______ to ____________, ______. Subsection references herein relate to subsections of the Credit Agreement. A. Indebtedness 1. Indebtedness in respect of Capital Leases permitted under subsection 7.1(iii): $_____________ 2. Maximum permitted under subsection 7.1(iii): $5,000,000 3. Indebtedness of Subsidiaries acquired after the the Closing Date permitted under subsection 7.1(vii): $_____________ 4. Maximum permitted under subsection 7.1(vii): $17,000,000 5. Indebtedness permitted under subsection 7.1(ix): $_____________ 6. Maximum permitted under subsection 7.1(ix): $10,000,000 B. Liens 1. Indebtedness secured by Liens permitted under subsection 7.2A(v): $_____________ 2. Maximum permitted under subsection 7.2A(v): $ 1,000,000 C. Investments 1. Investments permitted under subsection 7.3(vi): $_____________ 2. Maximum permitted under subsection 7.3(vi): $ 8,000,000 D. Contingent Obligations 1. Contingent Obligations in respect of Letters of Credit permitted under subsection 7.4(ii): $_____________ 2. Contingent Obligations in respect of other letters of credit permitted under subsection 7.4(ii): $_____________ 3. Maximum permitted under subsection 7.4(ii) with respect to other letters of credit: $ 5,000,000 4. Contingent Obligations under guarantees of obligations of suppliers, customers, franchisees and licensees permitted under subsection 7.4(iv): $_____________ 5. Maximum permitted under subsection 7.4(iv): $ 5,000,000 E. Minimum Interest Coverage Ratio (for the four-Fiscal Quarter period ending _____________, ______) 1. Consolidated Net Income: $_____________ 2. Consolidated Interest Expense: $_____________ 3. Interest income included in Consolidated Net Income: $_____________ 4. Provisions for taxes based on income: $_____________ 5. Total depreciation expense: $_____________ 6. Total amortization expense: $_____________ 7. Other non-cash items reducing Consolidated Net Income: $_____________ 8. Other non-cash items increasing Consolidated Net Income: $_____________ 9. Consolidated EBITDA (1+2-3+4+5+6+7-8): $_____________ 10. Interest Coverage Ratio (9):(2): ____:1.00 11. Minimum ratio required under subsection 7.6C: ____:1.00 F. Minimum Fixed Charge Coverage Ratio (for the four-Fiscal Quarter period ending _____________, ______) 1. Consolidated EBITDA (E.9 above): $_____________ 2. Consolidated Interest Expense (E.2 above): $_____________ 3. Consolidated Capital Expenditures: $_____________ 4. Scheduled principal payments in respect of Consolidated Total Debt: $_____________ 5. Dividends made by Company to Holdings permitted under subsection 7.5(ii): $_____________ 6. Expenditures made at the time of the transaction constituting Consolidated Capital Expenditures in connections with any Permitted Acquisition permitted under subsection 7.7(ii): $_____________ 7. Consolidated Fixed Charges (2+3+4+5-6): $_____________ 8. Fixed Charge Coverage Ratio (1):(7): ____:1.00 9. Minimum ratio required under subsection 7.6A: ____:1.00 G. Maximum Leverage Ratio (for the four-Fiscal Quarter period ending _____________, ______) 1. Consolidated EBITDA (E.9 above): $_____________ 2. Consolidated Interest Expense (E.2 above): $_____________ 3. Consolidated Leverage Ratio (1):(2): ____:1.00 4. Maximum ratio permitted under subsection 7.6B: ____:1.00 H. Fundamental Changes 1. Cash consideration, Indebtedness and other liabilities incurred or assumed in connection with Permitted Acquisitions closed during the Fiscal Quarter pursuant to subsection 7.7(ii) $_____________ 2. Maximum amount of cash consideration, Indebtedness and other liabilities for any single Permitted Acquisition: $ 25,000,000 3. Cash capital contributions to Company used in connection with Permitted Acquisition plus value of Holdings equity issued as consideration in Permitted Acquisition: $_____________ 4. Maximum permitted cash capital contributions or Holdings equity (H.1 above): $_____________ 5. Cumulative amount of cash consideration, Indebtedness and other liabilities incurred or assumed in connection with all Permitted Acquisitions under subsection 7.7(ii): $_____________ 6. Maximum cumulative amount of cash consideration, Indebtedness and other liabilities for all Permitted Acquisitions: $ 75,000,000 7. Cumulative capital contributions used in connection with Permitted Acquisitions plus value of all Holdings equity issued as consideration for Permitted Acquisitions: $_____________ 8. Maximum cumulative permitted cash capital contributions or Holdings equity (H.5 above): $_____________ 9. Aggregate fair market value of assets sold in any one or more Asset Sales after Closing Date in one or more transactions permitted under subsection 7.7(v): $_____________ 10. Maximum permitted under subsection 7.7(v): $ 3,000,000 I. Consolidated Capital Expenditures 1. Consolidated Capital Expenditures for Fiscal Year-to-date (excluding expenditures made in connection with, and at time of, Permitted Acquisitions): $_____________ 2. Net Sale Proceeds received in Fiscal Year-to-Date: $_____________ 3. Amount of Net Sale Proceeds received in Fiscal Year applied to mandatory prepayments: $_____________ 4. Difference between Maximum Consolidated Capital Expenditures for prior Fiscal Year and actual Consolidated Capital Expenditures for prior Fiscal Year (0 for Fiscal Years ending prior to the Closing Date and not to exceed $2,500,000 in each Fiscal Year thereafter): $_____________ 5. Maximum amount of Consolidated Capital Expenditures permitted under subsection 7.8 for Fiscal Year ($5,000,000+2-3+4): $_____________ J. Leases 1. Consolidated Rental Payments in effect during current Fiscal Year: $_____________ 2. Maximum permitted under subsection 7.9: $ 3,000,000 EXHIBIT IX [FORM OF OPINION OF MCDERMOTT, WILL & EMERY] We have acted as counsel to [Name of Company], a Delaware corporation ("Company"), in connection with that certain Credit Agreement dated as of April [___], 1998 (the "Credit Agreement") among Company, the financial institutions listed therein as Lenders ("Lenders"), DLJ Capital Funding, Inc., as Syndication Agent ("Syndication Agent"), Wells Fargo Bank, N.A., as Administrative Agent ("Administrative Agent"), and [__________________], as Documentation Agent ("Documentation Agent"). This opinion is rendered to you in compliance with subsection 4.1I of the Credit Agreement. Capitalized terms used herein without definition have the same meanings as in the Credit Agreement. The Credit Agreement, the Notes, the Guaranties, the Security Documents and the Intellectual Property Security Agreements are referred to collectively herein as the "Loan Documents." In our examination, we have assumed the genuineness of all signatures other than those of the Loan Parties, the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as copies. We have been furnished with, and with your consent have relied upon, certificates of officers of certain Loan Parties with respect to certain factual matters. In addition, we have obtained and relied upon such certificates and assurances from public officials as we have deemed necessary. We have made such legal and factual inquiries for the purpose of rendering this opinion as we have deemed necessary. We are opining herein as to the effect on the subject transaction of only United States Federal law, the laws of the State of New York and the General Corporation Law of the State of Delaware (the "Delaware GCL"), and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction, or, in the case of Delaware, any other laws, or as to any matters of municipal law or the laws of any local agencies within any state. [Assume reliance regarding local counsel opinions re: Minnesota, Maine and Kansas law.] On the basis of the foregoing, and in reliance thereon, and subject to the limitations, qualifications, assumptions, exceptions and other matters set forth herein, we are of the opinion that, as of the date hereof: 1. Borrower (i) is a duly incorporated and validly existing corporation in good standing under the Delaware GCL and (ii) has the corporate power and authority to own and operate its property, to lease the property it operates as lessee and to carry on its businesses as now conducted. 2. Each of the other Loan Parties (i) is duly incorporated and validly existing corporation in good standing under laws and statutes of their respective jurisdiction of incorporation and (ii) has the corporate power and authority to own and operate its property, to lease the property it operates as lessee and to carry on its respective businesses as now conducted. 3. Each of the Borrower and the other Loan Parties has the corporate power and authority to execute and deliver each of the Loan Documents to which it is a party and to perform its respective obligations thereunder. Each of the Borrower and the other Loan Parties has taken all necessary corporate action to grant the security interests contemplated by the Security Documents to which it is a party and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. 4. Each of the Borrower and the other Loan Parties has duly executed and delivered each Loan Document to which it is a party. Each Loan Document constitutes the legally valid and binding obligation of the Loan Parties party thereto, as applicable, enforceable against such Loan Party in accordance with its terms. 5. Neither the execution nor the delivery by any Loan Party of any of the Loan Documents to which it is a party, nor the performance by any Loan Party of its respective obligations thereunder, nor the consummation of the transactions provided for therein, violates any applicable provision of any law, statute, rule or regulation to which any Loan Party or any of its respective properties is subject of the United States of America or the State of New York or any federal or New York state governmental or regulatory body (including, without limitation, Regulations T, U and X of the Board of Governors of the Federal Reserve System) or of the Delaware GCL (except with respect to any state securities or "blue sky" laws, as to which we express no opinion), which violation would have a material adverse effect on (i) the business or condition (financial or otherwise) of the Borrower and the other Loan Parties, in each case taken as a whole, (ii) the validity or enforceability of the Loan Documents or (iii) the rights and remedies of the Administrative Agent, the Syndication Agent and the Lenders thereunder. Neither the execution nor the delivery by any Loan Party of any of the Loan Documents to which it is a party, nor the performance by any Loan Party of its respective obligations thereunder, nor the consummation of the transactions provided for therein, violates any provision of its Certificate of Incorporation or Bylaws. 6. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or regulatory authority pursuant to any law or regulation of the United States of America or the State of New York or pursuant to the Delaware GCL (except, in each case (i) as required to perfect, or maintain the perfection of, security interests created under the Security Documents or (ii) as have otherwise been obtained or made) is required to be obtained or made by any Loan Party in connection with any action to be taken pursuant to any Loan Document by any Loan Party on or prior to the date hereof. 7. To the best of our knowledge, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or threatened by or against any Loan Party or against any of their respective properties or revenues with respect to the Credit Agreement or any of the other Loan Documents. 8. The execution and delivery of the Credit Agreement and the other Loan Documents to which any Loan Party is a party, the performance by each Loan Party of its respective obligations thereunder, the consummation of the transactions provided for therein, the compliance by such Loan Party with any of the provisions thereof, the borrowings under the Credit Agreement and the use of proceeds thereof, all as provided therein, (a) will not, to the best of our knowledge, violate, or constitute a default under, any Contractual Obligations of any Loan Party and (b) will not, to the best of our knowledge, result in or require the creation or imposition of any Lien on any of its respective properties or revenues, except the security interests created pursuant to the Security Documents. 9. No Loan Party is an "investment company" within the meaning of, nor is any Loan Party subject to regulation under, the Investment Company Act of 1940, as amended. 10. The capital stock of each of Loan Party (other than Holdings) (collectively, the "Subsidiaries") listed on Schedule IV annexed hereto has been duly authorized and validly issued, is fully paid and nonassessable and constitutes all of the issued and outstanding shares of capital stock of the Subsidiaries, and such capital stock is owned of record by the Persons designated on Schedule IV hereto. To the best of our knowledge, there are no outstanding subscriptions, options, warrants, calls, rights (including preemptive rights) or any other agreement or commitment of any nature with respect to the capital stock of the Subsidiaries. 11. The provisions of the Pledge Agreements are effective to create valid security interests for the benefit of the Administrative Agent for the ratable benefit of the Lenders in all of the rights of the Pledgors (as defined in the Pledge Agreements) in the Pledged Shares and the proceeds (as such term is defined in the Uniform Commercial Code as in effect in the State of New York (the "NY UCC")) thereof. Assuming (a) the repayment in full of all amounts owing under the Existing Credit Agreement and the release of the liens created under the Existing Loan Documents, (b) delivery to the Administrative Agent pursuant to the respective Pledge Agreements of the certificates representing the Pledged Shares referred to in each of the Pledge Agreements, along with undated stock powers duly endorsed in blank and (c) the Administrative Agent takes and continuously holds the certificates representing the Pledged Shares in good faith and without notice of any adverse claim, the security interests created in favor of the Administrative Agent under each of the Pledge Agreements in such Pledged Shares will constitute valid and perfected security interests subject to no equal or prior consensual security interest in favor of any other Person. No filings or recordings are required in order to perfect the security interests created under the Pledge Agreements in such Pledged Shares. 12. The provisions of the Company Security Agreement and the Subsidiary Security Agreements are effective to create in favor of the Administrative Agent valid security interests in the Collateral (as defined in each such agreement) to the extent security interests in such Collateral may be created under the NY UCC. The Financing Statements, upon their proper filing in the Filing Offices, are sufficient in form to perfect such security interests to the extent security interests in such Collateral may be perfected by filing a financing statement under the NY UCC. [13. The obligations of the Borrower under the Credit Agreement and the Loan Documents constitute "Senior Indebtedness" and "Designated Senior Indebtedness" as such terms are defined in the Senior Subordinated Indenture, and the obligations of the Borrower under the Senior Subordinated Notes are subordinated in right of payment to all amounts payable by the Borrower under the Credit Agreement and the Loan Documents and under any refinancing of such amounts.] [Check Credit Agreement] This opinion is rendered only to the Administrative Agent, the Syndication Agent and the Lenders and is solely for their benefit in connection with the above transactions. This opinion may not be relied upon by the Administrative Agent, the Syndication Agent or the Lenders for any other purpose, or relied upon by any other person, firm or corporation for any purpose, without our prior written consent. At your request, we hereby consent to reliance hereon by any future participants or assigns of your interest in the Credit Agreement. Very truly yours, SCHEDULE A [INSERT NAMES OF LENDERS] EXHIBIT X [FORM OF OPINION OF O'MELVENY & MYERS LLP] [O'M&M Letterhead] April [___] 1 9 9 8 [doc ID] DLJ Capital Funding, Inc. [Address of Syndication Agent] Wells Fargo Bank, N.A. [Address of Administrative Agent] Morgan Stanley Senior Funding, Inc. [Address of Documentation Agent] and The Lenders Party to the Credit Agreement Referenced Below Re: Loans to Diamond Brands Operating Corp. --------------------------------------- Ladies and Gentlemen: We have acted as counsel to DLJ Capital Funding, Inc., as Syndication Agent (in such capacity, "Syndication Agent"), in connection with the preparation and delivery of a Credit Agreement dated as of April [___], 1998 (the "Credit Agreement") among Diamond Brands Operating Corp., a Delaware corporation ("Company"), the financial institutions listed therein as lenders, Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent and in connection with the preparation and delivery of certain related documents. We have participated in various conferences with representatives of Company, Holdings and its Subsidiaries, Syndication Agent, Administrative Agent and Documentation Agent, and conferences and telephone calls with McDermott, Will & Emery, counsel to Company and with your representatives, during which the Credit Agreement and related matters have been discussed, and we have also participated in the meeting held on the date hereof (the "Closing") incident to the funding of the initial loans made under the Credit Agreement. We have reviewed the forms of the Credit Agreement and the exhibits thereto, including the forms of the promissory notes annexed thereto (the "Notes"), and the opinions of McDermott, Will & Emery and [LOCAL COUNSEL] (collectively, the "Opinions") and the officers' certificates and other documents delivered at the Closing. We have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals or copies and the due authority of all persons executing the same, and we have relied as to factual matters on the documents that we have reviewed. Although we have not independently considered all of the matters covered by the Opinions to the extent necessary to enable us to express the conclusions therein stated, we believe that the Credit Agreement and the exhibits thereto are in substantially acceptable legal form and that the Opinions and the officers' certificates and other documents delivered in connection with the execution and delivery of, and as conditions to the making of the initial loans under, the Credit Agreement and the Notes are substantially responsive to the requirements of the Credit Agreement. Respectfully submitted, EXHIBIT XI [FORM OF ASSIGNMENT AGREEMENT] ASSIGNMENT AGREEMENT This ASSIGNMENT AGREEMENT (this "Agreement") is entered into by and between the parties designated as Assignor ("Assignor") and Assignee ("Assignee") above the signatures of such parties on the Schedule of Terms attached hereto and hereby made an integral part hereof (the "Schedule of Terms") and relates to that certain Credit Agreement described in the Schedule of Terms (said Credit Agreement, as amended, supplemented or otherwise modified to the date hereof and as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined). IN CONSIDERATION of the agreements, provisions and covenants herein contained, the parties hereto hereby agree as follows: SECTION 1. Assignment and Assumption. ------------------------- (a) Effective upon the Settlement Date specified in Item 4 of the Schedule of Terms (the "Settlement Date"), Assignor hereby sells and assigns to Assignee, without recourse, representation or warranty (except as expressly set forth herein), and Assignee hereby purchases and assumes from Assignor, that percentage interest in all of Assignor's rights and obligations as a Lender arising under the Credit Agreement and the other Loan Documents with respect to Assignor's Commitments and outstanding Loans, if any, which represents, as of the Settlement Date, the percentage interest specified in Item 3 of the Schedule of Terms of all rights and obligations of Lenders arising under the Credit Agreement and the other Loan Documents with respect to the Commitments and any outstanding Loans (the "Assigned Share"). Without limiting the generality of the foregoing, the parties hereto hereby expressly acknowledge and agree that any assignment of all or any portion of Assignor's rights and obligations relating to Assignor's Revolving Loan Commitment shall include (i) in the event Assignor is an Issuing Lender with respect to any outstanding Letters of Credit (any such Letters of Credit being "Assignor Letters of Credit"), the sale to Assignee of a participation in the Assignor Letters of Credit and any drawings thereunder as contemplated by subsection 3.1C of the Credit Agreement and (ii) the sale to Assignee of a ratable portion of any participations previously purchased by Assignor pursuant to said subsection 3.1C with respect to any Letters of Credit other than the Assignor Letters of Credit. (b) In consideration of the assignment described above, Assignee hereby agrees to pay to Assignor, on the Settlement Date, the principal amount of any outstanding Loans included within the Assigned Share, such payment to be made by wire transfer of immediately available funds in accordance with the applicable payment instructions set forth in Item 5 of the Schedule of Terms. (c) Assignor hereby represents and warrants that Item 3 of the Schedule of Terms correctly sets forth the amount of the Commitments, the outstanding Term Loans and the Pro Rata Share corresponding to the Assigned Share. (d) Assignor and Assignee hereby agree that, upon giving effect to the assignment and assumption described above, (i) Assignee shall be a party to the Credit Agreement and shall have all of the rights and obligations under the Loan Documents, and shall be deemed to have made all of the covenants and agreements contained in the Loan Documents, arising out of or otherwise related to the Assigned Share, and (ii) Assignor shall be absolutely released from any of such obligations, covenants and agreements assumed or made by Assignee in respect of the Assigned Share. Assignee hereby acknowledges and agrees that the agreement set forth in this Section 1(d) is expressly made for the benefit of Company, Administrative Agent, Assignor and the other Lenders and their respective successors and permitted assigns. (e) Assignor and Assignee hereby acknowledge and confirm their understanding and intent that (i) this Agreement shall effect the assignment by Assignor and the assumption by Assignee of Assignor's rights and obligations with respect to the Assigned Share, (ii) any other assignments by Assignor of a portion of its rights and obligations with respect to the Commitments and any outstanding Loans shall have no effect on the Commitments, the outstanding Term Loans and the Pro Rata Share corresponding to the Assigned Share as set forth in Item 3 of the Schedule of Terms or on the interest of Assignee in any outstanding Revolving Loans corresponding thereto, and (iii) from and after the Settlement Date, Administrative Agent shall make all payments under the Credit Agreement in respect of the Assigned Share (including all payments of principal and accrued but unpaid interest and commitment fees with respect thereto) (A) in the case of any such interest and fees that shall have accrued prior to the Settlement Date, to Assignor, and (B) in all other cases, to Assignee; provided that Assignor and Assignee shall make payments directly to each other to the extent necessary to effect any appropriate adjustments in any amounts distributed to Assignor and/or Assignee by Administrative Agent under the Loan Documents in respect of the Assigned Share in the event that, for any reason whatsoever, the payment of consideration contemplated by Section 1(b) occurs on a date other than the Settlement Date. SECTION 2. Certain Representations, Warranties and Agreements. ------------------------------------ (a) Assignor represents and warrants that it is the legal and beneficial owner of the Assigned Share, free and clear of any adverse claim. (b) Assignor shall not be responsible to Assignee for the execution, effectiveness, genuineness, validity, enforceability, collectibility or sufficiency of any of the Loan Documents or for any representations, warranties, recitals or statements made therein or made in any written or oral statements or in any financial or other statements, instruments, reports or certificates or any other documents furnished or made by Assignor to Assignee or by or on behalf of Company or any of its Subsidiaries to Assignor or Assignee in connection with the Loan Documents and the transactions contemplated thereby or for the financial condition or business affairs of Company or any other Person liable for the payment of any Obligations, nor shall Assignor be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained in any of the Loan Documents or as to the use of the proceeds of the Loans or as to the existence or possible existence of any Event of Default or Potential Event of Default. (c) Assignee represents and warrants that it is an Eligible Assignee; that it has experience and expertise in the making of loans such as the Loans; that it has acquired the Assigned Share for its own account in the ordinary course of its business and without a view to distribution of the Loans within the meaning of the Securities Act or the Exchange Act or other federal securities laws (it being understood that, subject to the provisions of subsection 10.1 of the Credit Agreement, the disposition of the Assigned Share or any interests therein shall at all times remain within its exclusive control); and that it has received, reviewed and approved a copy of the Credit Agreement (including all Exhibits and Schedules thereto). (d) Assignee represents and warrants that it has received from Assignor such financial information regarding Company and its Subsidiaries as is available to Assignor and as Assignee has requested, that it has made its own independent investigation of the financial condition and affairs of Company and its Subsidiaries in connection with the assignment evidenced by this Agreement, and that it has made and shall continue to make its own appraisal of the creditworthiness of Company and its Subsidiaries. Assignor shall have no duty or responsibility, either initially or on a continuing basis, to make any such investigation or any such appraisal on behalf of Assignee or to provide Assignee with any other credit or other information with respect thereto, whether coming into its possession before the making of the initial Loans or at any time or times thereafter, and Assignor shall not have any responsibility with respect to the accuracy of or the completeness of any information provided to Assignee. (e) Each of Assignor and Assignee represents and warrants to the other party hereto that it has full power and authority to enter into this Agreement and to perform its obligations hereunder in accordance with the provisions hereof, that this Agreement has been duly authorized, executed and delivered by such party and that this Agreement constitutes a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity. SECTION 3. Miscellaneous. ------------- (a) Each of Assignor and Assignee hereby agrees from time to time, upon request of the other such party hereto, to take such additional actions and to execute and deliver such additional documents and instruments as such other party may reasonably request to effect the transactions contemplated by, and to carry out the intent of, this Agreement. (b) Neither this Agreement nor any term hereof may be changed, waived, discharged or terminated, except by an instrument in writing signed by the party (including, if applicable, any party required to evidence its consent to or acceptance of this Agreement) against whom enforcement of such change, waiver, discharge or termination is sought. (c) Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telexed or sent by telefacsimile or United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telefacsimile or telex, or three Business Days after depositing it in the United States mail with postage prepaid and properly addressed. For the purposes hereof, the notice address of each of Assignor and Assignee shall be as set forth on the Schedule of Terms or, as to either such party, such other address as shall be designated by such party in a written notice delivered to the other such party. In addition, the notice address of Assignee set forth on the Schedule of Terms shall serve as the initial notice address of Assignee for purposes of subsection 10.8 of the Credit Agreement. (d) In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. (e) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. (f) This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and assigns. (g) This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. (h) This Agreement shall become effective upon the date (the "Effective Date") upon which all of the following conditions are satisfied: (i) the execution of a counterpart hereof by each of Assignor and Assignee, (ii) the execution of a counterpart hereof by Company as evidence of its consent hereto to the extent required under subsection 10.1B(i) of the Credit Agreement, (iii) the receipt by Administrative Agent of the processing and recordation fee referred to in subsection 10.1B(i) of the Credit Agreement, (iv) in the event Assignee is a Non-US Lender (as defined in subsection 2.7B(iii)(a) of the Credit Agreement), the delivery by Assignee to Administrative Agent of such forms, certificates or other evidence with respect to United States federal income tax withholding matters as Assignee may be required to deliver to Administrative Agent pursuant to said subsection 2.7B(iii)(a), (v) the execution of a counterpart hereof by Administrative Agent as evidence of its acceptance hereof in accordance with subsection 10.1B(ii) of the Credit Agreement and (vi) the receipt by Administrative Agent of originals or telefacsimiles of the counterparts described above and authorization of delivery thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized, such execution being made as of the Effective Date in the applicable spaces provided on the Schedule of Terms. [Remainder of page intentionally left blank] SCHEDULE OF TERMS 1. Borrower: DIAMOND BRANDS OPERATING CORP. 2. Name and Date of Credit Agreement: Credit Agreement dated as of April [___], 1998 by and among Diamond Brands Operating Corp., the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent. 3. Amounts: Re: Tranche A Re: Tranche B Re: Revolving Term Loans Term Loans Loans (a) Aggregate Commitments of $________ $________ $________ all Lenders: (b) Assigned Share/Pro Rata _____% _____% _____% Share; (c) Amount of Assigned Share $________ $________ $________ of Commitments: (d) Amount of Assigned Share $________ $________ of Term Loans: 4. Settlement Date: ____________, 199_ 5. Payment Instructions: ASSIGNOR: ASSIGNEE: ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ___________________________ Attention: __________________ Attention: __________________ Reference: _________________ Reference: _________________ 6. Notice Addresses: ASSIGNOR: ASSIGNEE: ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ 7. Signatures: __________ [NAME OF ASSIGNOR], [NAME OF ASSIGNEE], as Assignor as Assignee By:______________________ By:______________________ Title:___________________ Title:___________________ [Consented to in accordance with Accepted in accordance with subsection subsection 10.1B(i) of the Credit 10.1B(ii) of the Credit Agreement Agreement DIAMOND BRANDS OPERATING CORP. WELLS FARGO BANK, N.A., as Administrative Agent By:_____________________ By:______________________ Title:__________________] Title:___________________ EXHIBIT XII [FORM OF CERTIFICATE RE NON-BANK STATUS] CERTIFICATE RE NON-BANK STATUS Reference is hereby made to that certain Credit Agreement dated as of April [___], 1998 (said Credit Agreement, as amended, supplemented or otherwise modified to the date hereof, being the "Credit Agreement") by and among DIAMOND BRANDS OPERATING CORP., a Delaware corporation, the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent. Pursuant to subsection 2.7B(iii) of the Credit Agreement, the undersigned hereby certifies that it is not a "bank" or other Person described in Section 881(c)(3) of the Internal Revenue Code of 1986, as amended. [NAME OF LENDER] By: ____________________ Title: __________________ EXHIBIT XIII [FORM OF COMPANY PLEDGE AGREEMENT] COMPANY PLEDGE AGREEMENT This COMPANY PLEDGE AGREEMENT (this "Agreement") is dated as of April 21, 1998 and entered into by and between DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Pledgor" or "Company"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "Secured Party") the financial institutions ("Lenders") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Pledgor is the legal and beneficial owner of (i) the shares of stock or other equity Securities (the "Pledged Shares") described in Part A of Schedule I annexed hereto and issued by the companies named therein and (ii) the indebtedness (the "Pledged Debt") described in Part B of said Schedule I and issued by the obligors named therein. B. Secured Party and Lenders have entered into a Credit Agreement dated as of April 21, 1998 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Company, pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "Lender Interest Rate Agreements") with one or more Lenders (in such capacity, collectively, "Interest Rate Exchangers"). D. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: SECTION 1. Pledge of Security. Pledgor hereby pledges and assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the following (the "Pledged Collateral"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or other rights; provided, however, that, Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any direct or indirect Subsidiary of Pledgor which is incorporated in a jurisdiction other than the states of the United States and the District of Columbia ("Foreign Subsidiary") hereunder; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, however, that Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary hereunder; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes proceeds of any indemnity or guaranty payable to Pledgor or Secured Party from time to time with respect to any of the Pledged Collateral. SECTION 2. Security for Obligations. This Agreement secures, and the Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Credit Agreement and the other Loan Documents and all extensions or renewals thereof, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "Underlying Debt"), and all obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor, together with the Underlying Debt, being the "Secured Obligations"). SECTION 3. Delivery of Pledged Collateral. All certificates or instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Upon the occurrence and during the continuation of an Event of Default (as defined in the Credit Agreement) or the occurrence of an Early Termination Date (as defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement (either such occurrence being an "Event of Default" for purposes of this Agreement), Secured Party shall have the right, without notice to Pledgor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 7(a). In addition, upon the occurrence and during the continuance of an Event of Default, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 4. Representations and Warranties. Pledgor represents and warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the Pledged Shares have been duly authorized and validly issued and are fully paid and non-assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares constitute (i) all of the issued and outstanding shares of stock or other equity Securities of each of the Subsidiaries of Pledgor which are incorporated in a state of the United States or in the District of Columbia, and (ii) 66.6% of the issued and outstanding shares of stock or other equity Securities of each Foreign Subsidiary of Pledgor, and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record and beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. (d) Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge by Pledgor of the Pledged Collateral pursuant to this Agreement and the grant by Pledgor of the security interest granted hereby, or (ii) the execution, delivery or performance of this Agreement by Pledgor, or (iii) the exercise by Secured Party of the voting or other rights, or the remedies in respect of the Pledged Collateral, provided for in this Agreement (except as may be required in connection with a disposition of Pledged Collateral by laws affecting the offering and sale of securities generally). (e) Perfection. The pledge of the Pledged Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Pledged Collateral, securing the payment of the Secured Obligations; provided that Secured Party retains physical possession of such Pledged Collateral. (f) Margin Regulations. The pledge of the Pledged Collateral pursuant to this Agreement does not violate Regulation T, U or X of the Board of Governors of the Federal Reserve System. (g) Other Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Pledgor with respect to the Pledged Collateral is accurate and complete in all material respects. SECTION 5. Transfers and Other Liens; Additional Pledged Collateral; etc. Pledgor shall: (a) not, except as expressly permitted by the Credit Agreement, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement and the Permitted Encumbrances, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock or other equity Security of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; provided that Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary; provided, further, that in the event Pledgor makes an Asset Sale permitted by the Credit Agreement and the assets subject to such Asset Sale are Pledged Shares, Secured Party shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, further that, as a condition precedent to such release, Secured Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Secured Party of the Net Asset Sale Proceeds of such Asset Sale if required under the Credit Agreement; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor; provided that Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary hereunder; (c) (i) pledge hereunder, within 5 days upon their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, within 5 days of their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor; (d) promptly notify Secured Party of any event of which Pledgor becomes aware causing material loss or depreciation in the value of the Pledged Collateral; (e) promptly deliver to Secured Party all material written notices received by it with respect to the Pledged Collateral; and (f) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent permitted by the terms of the Credit Agreement. SECTION 6. Further Assurances; Pledge Amendments. (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may reasonably be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral. (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 5(b) or (c), promptly (and in any event within five Business Days) deliver to Secured Party a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "Pledge Amendment"), in respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Secured Party to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Secured Party shall for all purposes hereunder be considered Pledged Collateral; provided that the failure of Pledgor to execute a Pledge Amendment with respect to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Secured Party therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto. SECTION 7. Voting Rights; Dividends; Etc. (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement and as long as such action would not have a material adverse effect on the value of the Pledged Collateral or any part thereof. It is understood, however, that neither (A) the voting by Pledgor of any Pledged Shares for or Pledgor's consent to the election of directors at a regularly scheduled annual or other meeting of stockholders or members or with respect to incidental matters at any such meeting nor (B) Pledgor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section 7(a)(i), and no notice of any such voting or consent need be given to Secured Party; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal or in redemption of or in exchange for any Pledged Collateral, shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor and be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with all necessary indorsements); provided, however, that to the extent that property distributed to Pledgor in respect of the Pledged Collateral continues or becomes, after such distribution, to be otherwise subject to a Lien in favor of Secured Party under the Loan Documents, such property shall not be otherwise required to be forthwith delivered to Secured Party pursuant to clause (ii) above; and (iii) Secured Party shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Secured Party to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii)all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall forthwith be paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary indorsements). (c) In order to permit Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 7(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 7(a)(ii) or Section 7(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies, dividend payment orders and other instruments as Secured Party may from time to time reasonably request, including without limitation to the extent necessary so that the pledge of any shares of stock of any Foreign Subsidiary is registered (if not already so registered) on the appropriate books and records of the issuer of the applicable Pledged Shares if such registration is required under applicable law in order to permit Secured Party to exercise such rights or to receive such dividends and other distributions, and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the written notice of an Event of Default from Secured Party delivered at any time, including at a member or shareholder meeting, and which proxy shall only terminate upon cure of the circumstances which gave rise to the Event of Default. SECTION 8. Secured Party Appointed Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time during the continuation of an Event of Default in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Pledged Collateral. SECTION 9. Secured Party May Perform. If Pledgor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13(b). SECTION 10. Standard of Care. The powers conferred on Secured Party hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Pledged Collateral, it being understood that Secured Party shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Secured Party accords its own property consisting of negotiable securities. SECTION 11. Remedies. (a) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Pledged Collateral), or any other applicable laws whether of the United States or any state thereof or any other foreign jurisdiction, and Secured Party may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Secured Party or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Lenders and Interest Rate Exchangers (but not any Lender or Lenders or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Lenders or Requisite Obligees (as defined in Section 15(a)) shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Secured Party determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Secured Party all such information as Secured Party may request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 12. Application of Proceeds. All proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 13. Indemnity and Expenses. (a) Pledgor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. SECTION 14. Continuing Security Interest; Transfer of Loans. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 15. Secured Party as Administrative Agent. (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "Requisite Obligees"). In furtherance of the foregoing provisions of this Section 15(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 15(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 16. Amendments; Etc. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 17. Notices. Any notice or other communication herein required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 18. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 19. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 20. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 21. Governing Law; Terms; Rules of Construction. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. SECTION 22. Consent to Jurisdiction and Service of Process. (a) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III)AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 17; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 22 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. (b) Without limiting the generality of the last sentence of Section 22(a), any judicial proceedings brought against Pledgor arising out of or relating to the pledge of shares of capital stock of any Foreign Subsidiary hereunder may be brought in any court of competent jurisdiction in the jurisdiction in which such Foreign Subsidiary is organized, and by execution and delivery of this Agreement, Pledgor accepts for itself and in connection with its properties (including without limitation the applicable Pledged Shares), generally and unconditionally, the nonexclusive jurisdiction of any such court and waives any defense of forum non conveniens (or any similar defense under the laws of such jurisdiction) and irrevocably agrees to be bound by any judgement rendered thereby in connection with such pledge or the enforcement thereof. SECTION 23. Waiver of Jury Trial. PLEDGOR AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgor and Secured Party each acknowledge that this waiver is a material inducement for Pledgor and Secured Party to enter into a business relationship, that Pledgor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Pledgor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 23 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 24. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. DIAMOND BRANDS OPERATING CORP., as Pledgor By: __________________________ Name:__________________________ Title: ________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name:__________________________ Title:_________________________ Notice Address: Attention: SCHEDULE I Attached to and forming a part of the Pledge Agreement dated as of April 21, 1998 between Diamond Brands Operating Corp., as Pledgor, and Wells Fargo Bank, N.A., as Secured Party. Part A Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ ----- ----------- ----- ------ Part B Debt Issuer Amount of Indebtedness SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, _____, is delivered pursuant to Section 6(b) of the Pledge Agreement referred to below. The undersigned hereby agrees that this Subsidiary Pledge Amendment may be attached to the Subsidiary Pledge Agreement dated April 21, 1998, between the undersigned and Wells Fargo Bank, N.A., as Secured Party (the "Pledge Agreement," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. DIAMOND BRANDS OPERATING CORP. By: ___________________________ Title: Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ ----- ----------- ----- ------ Debt Issuer Amount of Indebtedness - ----------- ---------------------- EXHIBIT XIV [FORM OF COMPANY SECURITY AGREEMENT] COMPANY SECURITY AGREEMENT This COMPANY SECURITY AGREEMENT (this "Agreement") is dated as of April 21, 1998, and entered into by and between DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Grantor" or "Borrower"), and Wells Fargo Bank, N.A., as administrative agent for and representative of (in such capacity herein called "Secured Party") the financial institutions ("Lenders") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Secured Party and Lenders have entered into a Credit Agreement dated as of April 21, 1998 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Grantor, pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Borrower. B. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Grantor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Secured Party as follows: SECTION 1. Grant of Security. Grantor hereby assigns for security purposes to Secured Party, and hereby grants to Secured Party a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "Collateral"): (a) all equipment in all of its forms, all parts thereof and all accessions thereto (any and all such equipment, parts and accessions being the "Equipment"); (b) all inventory in all of its forms (including (i) all goods held by Grantor for sale or lease or to be furnished under contracts of service or so leased or furnished, (ii) all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Grantor's business, (iii) all goods in which Grantor has an interest in mass or a joint or other interest or right of any kind, and (iv) all goods which are returned to or repossessed by Grantor) and all accessions thereto and products thereof (all such inventory, accessions and products being the "Inventory") and all negotiable documents of title (including warehouse receipts, dock receipts and bills of lading) issued by any Person covering any Inventory (any such negotiable document of title being a "Negotiable Document of Title"); (c) all accounts, contract rights, chattel paper, documents, instruments, general intangibles and other rights and obligations of any kind and all rights in, to and under all security agreements, leases and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, general intangibles or other obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, general intangibles and other obligations being the "Accounts", and any and all such security agreements, leases and other contracts being the "Related Contracts"); (d) the agreements listed in Schedule I annexed hereto, and any other agreement between Grantor, or a Subsidiary of Grantor, with a franchisee or developer, now or hereafter existing, as each such agreement may be amended, supplemented or otherwise modified from time to time (said agreements, as so amended, supplemented or otherwise modified, being referred to herein individually as an "Assigned Agreement" and collectively as the "Assigned Agreements"), including (i) all rights of Grantor to receive moneys due or to become due under or pursuant to the Assigned Agreements, (ii) all rights of Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to the Assigned Agreements, (iii) all claims of Grantor for damages arising out of any breach of or default under the Assigned Agreements, and (iv) all rights of Grantor to terminate, amend, supplement, modify or exercise rights or options under the Assigned Agreements, to perform thereunder and to compel performance and otherwise exercise all remedies thereunder; (e) all deposit accounts, including the deposit accounts listed on Schedule II annexed hereto and all other deposit accounts maintained with Secured Party; (f) all trademarks, tradenames, tradesecrets, business names, patents, patent applications, licenses, copyrights, registrations and franchise rights, and all goodwill associated with any of the foregoing; (g) all licenses to conduct the Business and other special licenses, including but not limited to the licenses listed on Schedule III, and to the extent not included in any other paragraph of this Section 1, all other general intangibles (including tax refunds, rights to payment or performance, choses in action and judgments taken on any rights or claims included in the Collateral); (h) all plant fixtures, business fixtures and other fixtures and storage and office facilities, and all accessions thereto and products thereof; (i) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (j) the shares of stock owned by Grantor as described in Schedule I to the Company Pledge Agreement (as such Schedule I may be amended from time to time in accordance with the terms thereof) (the "Pledged Shares") and the certificates representing the Pledged Shares and any interest of Grantor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (k) the indebtedness owed to the Grantor as described in Schedule I to the Company Pledge Agreement (as such Schedule I may be amended from time to time in accordance with the terms thereof) (the "Pledged Debt") and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (l) all of Grantor's right, title and interest as a member of any Person that is organized as a limited liability company and that may hereafter become a Subsidiary of Grantor, including, without limitation, (A) all rights of Grantor to receive distributions of any kind, in cash or otherwise, due or to become due under or pursuant to any limited liability company agreement or otherwise in respect of any such Person, (B) all rights of Grantor to receive proceeds of any insurance, indemnity, warranty or guaranty with respect to any such Person, (C) all claims of Grantor for damages arising out of, or for the breach of, or for a default under, any limited liability company agreement of any such Person, (D) any certificated or uncertificated security evidencing any of the foregoing issued by any such Person to Grantor and (E) to the extent not included in the foregoing, all proceeds of any and all of the foregoing (all of the foregoing being referred to herein collectively as the "LLC Interests"); (m) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Grantor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Grantor in the entries on the books of any financial intermediary pertaining to such additional shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or other rights; provided, however, that Grantor shall not be required to pledge more than 66.6% of any class of capital stock of any direct or indirect Subsidiary of Grantor which is incorporated in a jurisdiction other than the states of the United States and the District of Columbia ("Foreign Subsidiary"); (n) all additional indebtedness from time to time owed to Grantor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (o) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the Closing Date, becomes, as a result of any occurrence, a direct Subsidiary of Grantor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Grantor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, however, that Grantor shall not be required to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary; (p) all indebtedness from time to time owed to Grantor by any Person that, after the Closing Date becomes, as a result of any occurrence, a direct or indirect Subsidiary of Grantor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (q) all of Grantor's right, title and interest as a general partner in partnerships only to the extent of the right to receive distributions on its partnership interest, a limited partner in partnerships and each partnership in which Grantor acquires an interest after the Closing Date (collectively, the "Partnerships"), whether now owned or hereafter acquired, including without limitation all of Grantor's right, title and interest in, to and under the agreements pursuant to which the Partnerships are established (collectively, the "Partnership Agreements"), and any "certificate of interest" or "certificates of interest" (or other certificates or instruments however designated or titled) issued by any Partnership and evidencing Grantor's interest as a limited partner or general partner in such Partnership and any interest of Grantor in the entries on the books of any financial intermediary pertaining to Grantor's interest as a limited partner or general partner in any Partnership together with all other rights, interests, claims and other property of Grantor in any manner arising out of or relating to a limited partnership interest or general partnership interest in any Partnership, whatever their respective kind or character, whether they are tangible or intangible property, and wheresoever they may exist or be located, and further including, without limitation, all of the rights of Grantor as a limited or general partner: (i) to (x) receive money due and to become due (including without limitation dividends, distributions, interest, income from partnership properties and operations, proceeds of sale of partnership assets and returns of capital) under or pursuant to any Partnership Agreement, (y) receive payments upon termination of any Partnership Agreement, and (z) receive any other payments or distributions, whether cash or noncash, in respect of any limited partnership interest or general partnership interest of Grantor evidenced by any Partnership Agreement; (ii) in and with respect to claims and causes of action arising out of or relating to the Partnerships; and (iii) to have access to the Partnerships' books and records and to other information concerning or affecting the Partnerships; and (r) all proceeds, products, rents and profits of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. Notwithstanding the foregoing, Collateral shall exclude any intellectual property right contracts and agreements or equipment leases to the extent, and only to the extent, that such Intellectual Property, contract or agreement or equipment lease contains a provision enforceable at law and in equity that would be breached by (or would result in the termination of such intellectual property, contract, or agreement or equipment lease upon) the grant of the security interest created herein pursuant to the terms of this Agreement; provided, however, that if and when any prohibition on the assignment, pledge or grant of a security interest in such intellectual property right, contract or agreement or equipment lease is removed, the Secured Party will be deemed to have been granted a security interest in such intellectual property right, contract or agreement or equipment lease as of the date hereof, and the Collateral will be deemed to include such intellectual property right, contract or agreement or equipment lease. SECTION 2. Security for Obligations. This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss.362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Credit Agreement and the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "Underlying Debt"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "Secured Obligations"). SECTION 3. Grantor Remains Liable. Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. Representations and Warranties. Grantor represents and warrants as follows: (a) Ownership of Collateral. Except for the security interest created by this Agreement and Permitted Encumbrances, Grantor owns the Collateral free and clear of any Lien. (b) Location of Equipment and Inventory. All of the Equipment and Inventory is, as of the date hereof, located at the places specified in Schedule IV annexed hereto. (c) Negotiable Documents of Title. No Negotiable Documents of Title are outstanding with respect to any of the Inventory. (d) Office Locations; Other Names. The chief place of business, the chief executive office and the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts is, and has been for the four month period preceding the date hereof, located at 1800 Cloquet Avenue, Cloquet, MN 55720-2141. Grantor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name) except the names listed in Schedule V annexed hereto. (e) Delivery of Certain Collateral. All notes and other instruments (excluding checks) comprising any and all items of Collateral have been delivered to Secured Party duly endorsed and accompanied by duly executed instruments of transfer or assignment in blank. (f) Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Grantor of the security interest granted hereby, (ii) the execution, delivery or performance of this Agreement by Grantor, or (iii) the perfection of or the exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Grantor or Secured Party). (g) Perfection. This Agreement, together with the filing of UCC-1 financing statements, which have been made, creates a valid, perfected and first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly made or taken; provided that Secured Party retains physical possession of any Collateral, the possession of which is required for perfection. (h) Other Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 5. Further Assurances. (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) mark conspicuously each item of chattel paper included in the Accounts, each Related Contract and, at the request of Secured Party, each of its records pertaining to the Collateral, with a legend, in form and substance satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) if any Account shall be evidenced by a promissory note or other instrument (excluding checks), at the request of Secured Party, deliver and pledge to Secured Party hereunder such note or instrument, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party, and at the request of Secured Party, deliver and pledge to Secured Party hereunder all original counterparts of chattel paper constituting Collateral, duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Secured Party, (iii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iv) promptly after the acquisition by Grantor of any item of material Equipment which is covered by a certificate of title under a statute of any jurisdiction under the law of which indication of a security interest on such certificate is required as a condition of perfection thereof, at the request of Secured Party, execute and file with the registrar of motor vehicles or other appropriate authority in such jurisdiction an application or other document requesting the notation or other indication of the security interest created hereunder on such certificate of title, (v) at the request of Secured Party, deliver to Secured Party copies of all such applications or other documents filed during such calendar quarter and copies of all such certificates of title issued during such calendar quarter indicating the security interest created hereunder in the items of Equipment covered thereby, (vi) at any reasonable time, upon request by Secured Party, exhibit the Collateral to and allow inspection of the Collateral by Secured Party, or persons designated by Secured Party, and (vii) at Secured Party's request, appear in and defend any action or proceeding that may affect Grantor's title to or Secured Party's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Secured Party to file (to the extent permitted by law) one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. SECTION 6. Certain Covenants of Grantor. Grantor shall: (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Secured Party of any change in Grantor's name, identity or corporate structure within 15 days after such change; (c) give Secured Party at least 30 days prior written notice of any change in Grantor's chief place of business, chief executive office or residence or the office where Grantor keeps its records regarding the Accounts and all originals of all chattel paper that evidence Accounts; (d) if Secured Party gives value to enable Grantor to acquire rights in or the use of any Collateral, use such value for such purposes; and (e) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement. SECTION 7. Special Covenants With Respect to Equipment and Inventory. Grantor shall: (a) keep the Equipment and Inventory at the places therefor specified on Schedule IV annexed hereto or, upon at least 30 days prior written notice to Secured Party, at such other places in jurisdictions where all action that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Equipment and Inventory shall have been taken; (b) cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with Grantor's past practices, and shall forthwith make or cause to be made all repairs, replacements and other improvements in connection therewith that are necessary or desirable to such end other than any obsolete or surplus Equipment or Equipment which is no longer useful. Grantor shall promptly furnish to Secured Party a statement respecting any material loss or damage to any of the Equipment which involves loss or damage exceeding $1,000,000 in the aggregate during any Fiscal Year; (c) keep correct and accurate records of the Inventory, itemizing and describing the kind, type and quantity thereof, Grantor's cost therefor and (where applicable) the current list prices for the Inventory; provided that nothing in this Section 7 with respect to Inventory being sold in the ordinary course shall require Grantor to maintain records in any manner different from those being maintained by Grantor as of the date hereof (as such manner may be revised in the good faith business judgment of Grantor); (d) promptly upon the issuance and delivery to Grantor of any Negotiable Document of Title deliver such Negotiable Document of Title to Secured Party; and (e) promptly upon the issuance and delivery to Grantor of any Negotiable Document of Title, deliver such Negotiable Document of Title to Secured Party. SECTION 8. Insurance. (a) Grantor shall, at its own expense, maintain insurance with respect to the Equipment and Inventory in accordance with the terms of the Credit Agreement. Such insurance shall include, without limitation, property damage insurance and liability insurance. Subject to Section 2.4(B) of the Credit Agreement, each policy for property damage insurance shall provide for all losses (except for losses of less than $1,000,000 per occurrence) to be paid directly to Secured Party. Each policy shall in addition name Grantor and Secured Party as insured parties thereunder (without any representation or warranty by or obligation upon Secured Party) as their interests may appear and have attached thereto a loss payable clause acceptable to Secured Party that shall (i) contain an agreement by the insurer that any loss thereunder shall be payable to Secured Party notwithstanding any action, inaction or breach of representation or warranty by Grantor, (ii) provide that there shall be no recourse against Secured Party for payment of premiums or other amounts with respect thereto, and (iii) provide that at least 30 days' prior written notice of cancellation, material amendment, reduction in scope or limits of coverage or of lapse shall be given to Secured Party by the insurer. Grantor shall, if so requested by Secured Party, deliver to Secured Party original or duplicate policies of such insurance and, as often as Secured Party may reasonably request, a report of a reputable insurance broker with respect to such insurance. Further, Grantor shall, at the request of Secured Party, duly execute and deliver instruments of assignment of such insurance policies to comply with the requirements of Section 5(a) and cause the respective insurers to acknowledge notice of such assignment. (b) Reimbursement under any liability insurance maintained by Grantor pursuant to this Section 8 may be paid directly to the Person who shall have incurred liability covered by such insurance. In case of any loss involving damage to Equipment or Inventory when subsection (c) of this Section 8 is not applicable and subject to the provisions of subsection 2.4B(iii)(b) of the Credit Agreement, Grantor shall make or cause to be made the necessary repairs to or replacements of such Equipment or Inventory, and any proceeds of insurance maintained by Grantor pursuant to this Section 8 shall be paid to Grantor as reimbursement for the costs of such repairs or replacements. (c) Subject to the provisions of subsection 2.4B(iii)(b) of the Credit Agreement, upon (i) the occurrence and during the continuation of any Event of Default or (ii) the actual or constructive loss (in excess of $1,000,000 per occurrence) of any Equipment or Inventory, all insurance payments in respect of such Equipment or Inventory shall be paid to and applied by Secured Party as specified in Section 18. SECTION 9. Special Covenants with respect to Accounts and Related Contracts. (a) Grantor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Accounts and Related Contracts, and all originals of all chattel paper that evidence Accounts, at the location therefor specified in Section 4 or, upon at least 30 days prior written notice to Secured Party, at such other location in a jurisdiction where all action that may be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby, or to enable Secured Party to exercise and enforce its rights and remedies hereunder, with respect to such Accounts and Related Contracts shall have been taken. Subject to the terms of the Credit Agreement, Grantor will hold and preserve such records and chattel paper and will permit representatives of Secured Party at any time during normal business hours to inspect and make abstracts from such records and chattel paper, and Grantor agrees to render to Secured Party, at Grantor's cost and expense, such clerical and other assistance as may be reasonably requested with regard thereto. Promptly upon the request of Secured Party, Grantor shall deliver to Secured Party complete and correct copies of each Related Contract. (b) Except as otherwise provided in this subsection (b), Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor under the Accounts and Related Contracts. In connection with such collections, Grantor may take (and, after the occurrence and during the continuation of an Event of Default, at Secured Party's direction, shall take) such action as Grantor or Secured Party may deem necessary or advisable to enforce collection of amounts due or to become due under the Accounts; provided, however, that Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default or a Potential Event of Default and upon written notice to Grantor of its intention to do so, to notify the account debtors or obligors under any Accounts of the assignment of such Accounts to Secured Party and to direct such account debtors or obligors to make payment of all amounts due or to become due to Grantor thereunder directly to Secured Party, to notify each Person maintaining a lockbox or similar arrangement to which account debtors or obligors under any Accounts have been directed to make payment to remit all amounts representing collections on checks and other payment items from time to time sent to or deposited in such lockbox or other arrangement directly to Secured Party and, upon such notification and at the expense of Grantor, to enforce collection of any such Accounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of the Accounts and the Related Contracts shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and either (A) be released to Grantor so long as no Event of Default shall have occurred and be continuing or (B) if any Event of Default shall have occurred and be continuing, be applied as provided by Section 18, and (ii) Grantor shall not adjust, settle or compromise the amount or payment of any Account, or release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. SECTION 10. Special Provisions With Respect to the Assigned Agreements. Grantor shall at its expense: (a) perform and observe all terms and provisions of the Assigned Agreements to be performed or observed by it in all material respects, maintain the Assigned Agreements in full force and effect, enforce the Assigned Agreements in accordance with their terms, and take all such action to such end as may be from time to time requested by Secured Party; and (b) from time to time (A) furnish to Secured Party such information and reports regarding the Assigned Agreements as Secured Party may reasonably request and (B) upon request of Secured Party make to any party to the Assigned Agreements listed in Schedule I annexed hereto such demands and requests for information and reports or for action as Grantor is entitled to make under the Assigned Agreements. SECTION 11. Deposit Accounts. Upon the occurrence and during the continuation of an Event of Default, Secured Party may exercise dominion and control over, and refuse to permit further withdrawals (whether of money, securities, instruments or other property) from any deposit accounts maintained with Secured Party constituting part of the Collateral. SECTION 12. License of Patents, Trademarks, Copyrights, Etc. Grantor hereby grants to Secured Party, effective upon the occurrence and during the continuation of any Event of Default, the nonexclusive right and license to use all trademarks, tradenames, copyrights, patents or technical processes owned or used by Grantor that relate to the Collateral and any other collateral granted by Grantor as security for the Secured Obligations, together with any goodwill associated therewith, all to the extent necessary to enable Secured Party to use, possess and realize on the Collateral and to enable any successor or assign to enjoy the benefits of the Collateral. This right and license shall inure to the benefit of all successors, assigns and transferees of Secured Party and its successors, assigns and transferees, whether by voluntary conveyance, operation of law, assignment, transfer, foreclosure, deed in lieu of foreclosure or otherwise. Such right and license is granted free of charge, without requirement that any monetary payment whatsoever be made to Grantor. SECTION 13. Transfers and Other Liens. Grantor shall not: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; or (b) except for the security interest created by this Agreement and the Permitted Encumbrances, create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person. SECTION 14. Secured Party Appointed Attorney-in-Fact. Grantor hereby irrevocably appoints Secured Party as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable, consistent with the provisions of the Agreement, to accomplish the purposes of this Agreement, including without limitation: (a) during the continuation of an Event of Default, to obtain and adjust insurance required to be maintained by Grantor or paid to Secured Party pursuant to Section 8; (b) during the continuation of any Event of Default, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clauses (a) and (b) above; (d) during the continuation of any Event of Default, to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (e) during the continuation of an Event of Default, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Grantor to Secured Party, due and payable immediately without demand; (f) during the continuation of an Event of Default, to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with Accounts and other documents relating to the Collateral; and (g) upon the occurrence and during the continuation of an Event of Default, generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Grantor's expense, at any time or from time to time, all acts and things that Secured Party deems reasonably necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. SECTION 15. Secured Party May Perform. If Grantor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantor under Section 19. SECTION 16. Standard of Care. The powers conferred on Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property. SECTION 17. Remedies. If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral), and also may (a) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (b) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (c) prior to the disposition of the Collateral, store, process, repair or recondition the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, (d) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same and any of Grantor's equipment for the purpose of completing any work in process, taking any actions described in the preceding clause (c) and collecting any Secured Obligation, and (e) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party or any Lender may be the purchaser of any or all of the Collateral at any such sale and Secured Party, as agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. SECTION 18. Application of Proceeds. Except as expressly provided elsewhere in this Agreement, all proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of Secured Party, be held by Secured Party as Collateral for, and/or then, or at any other time thereafter, applied in full or in part by Secured Party against, the Secured Obligations in the following order of priority: FIRST: To the payment of all reasonable out-of-pocket costs and expenses of such sale, collection or other realization, including reasonable compensation to Secured Party and its agents and counsel, and all other reasonable out-of-pocket expenses, liabilities and advances made or incurred by Secured Party in connection therewith, and all amounts for which Secured Party is entitled to indemnification hereunder and all advances made by Secured Party hereunder for the account of Grantor, and to the payment of all costs and expenses paid or incurred by Secured Party in connection with the exercise of any right or remedy hereunder, all in accordance with Section 19; SECOND: To the payment of all other Secured Obligations in such order as Secured Party shall elect; and THIRD: To the payment to or upon the order of Grantor, or to whosoever may be lawfully entitled to receive the same or as a court of competent jurisdiction may direct, of any surplus then remaining from such proceeds. SECTION 19. Indemnity and Expenses. (a) Grantor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 20. Continuing Security Interest; Transfer of Loans. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its permitted successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Secured Party will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. SECTION 21. Secured Party as Administrative Agent. (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 17 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "Requisite Obligees"). In furtherance of the foregoing provisions of this Section 21(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 21(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 22. Amendments; Etc. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 23. Notices. Any notice or other communication herein required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 24. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 25. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 26. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 27. Governing Law; Terms. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 28. Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT GRANTOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. Grantor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Grantor at its address provided in Section 23, such service being hereby acknowledged by Grantor to be sufficient for personal jurisdiction in any action against Grantor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of Secured Party to bring proceedings against Grantor in the courts of any other jurisdiction. SECTION 29. Waiver of Jury Trial. TO THE EXTENT PERMITTED BY LAW, GRANTOR AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Secured Party each acknowledge that this waiver is a material inducement for Grantor and Secured Party to enter into a business relationship, that Grantor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 30. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. (Remainder of page intentionally left blank) IN WITNESS WHEREOF, Grantor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. DIAMOND BRANDS OPERATING CORP. By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Notice Address: Attention: SCHEDULE I TO SECURITY AGREEMENT Assigned Agreements ------------------- SCHEDULE II TO SECURITY AGREEMENT Deposit Accounts ---------------- - ----------------------------------------------------------------- Bank Name Location Account Number --------- -------- -------------- - ----------------------------------------------------------------- - ----------------------------------------------------------------- - ----------------------------------------------------------------- SCHEDULE III TO SECURITY AGREEMENT Licenses -------- [Please list all of Grantor's licenses] SCHEDULE IV TO SECURITY AGREEMENT Equipment and Inventory Location -------------------------------- [Please list all locations where Grantor maintains equipment or inventory] SCHEDULE V TO SECURITY AGREEMENT Tradenames ---------- [Please list all tradenames of Grantor] EXHIBIT XV [FORM OF COMPANY COPYRIGHT SECURITY AGREEMENT] COMPANY COPYRIGHT SECURITY AGREEMENT THIS COMPANY COPYRIGHT SECURITY AGREEMENT dated as of April 21, 1998 (this "Agreement") is made by DIAMOND BRANDS OPERATING CORP., a Delaware Corporation ("Grantor"), to WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "Administrative Agent") financial institutions ("Lenders") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Grantor, Administrative Agent and Lenders have entered into the Credit Agreement dated as of April 21, 1998 with DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (said Credit Agreement and any successor agreement, as it may be amended, amended and restated, modified or otherwise supplemented from time to time, being the "Credit Agreement"; the terms defined therein and not otherwise defined herein being used herein as therein defined). B. Grantor may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "Lender Interest Rate Agreements") with one ore more Lenders (in such capacity, collectively, "Interest Rate Exchangers"). C. Grantor owns and uses in its business and will in the future, adopt and so use various published and unpublished works of authorship (collectively, the "Copyrights"). D. Administrative Agent, for its benefit and the ratable benefit of Lenders, desires to become a secured creditor with respect to and, under the circumstances described herein, an assignee of all of the existing and future Copyrights, all copyright registrations and applications for copyright registration which have heretofore been or may hereafter be issued thereon or applied for with the United States Copyright Office and throughout the world (the "Registrations"), all common law and other rights in and to the Copyrights throughout the world, including all copyright licenses (the "Copyright Rights") and all proceeds of the Copyrights, the Registrations and the Copyright Rights, and Grantor agrees to create a secured and protected interest in the Copyrights, the Registrations, the Copyright Rights and all the proceeds thereof as provided herein. E. Upon the occurrence of and during the continuance of an Event of Default under the Credit Agreement and to permit Administrative Agent to continue operating Grantor's business without interruption and to use the Copyrights, Registrations and Copyright Rights in conjunction therewith, Grantor is willing to grant to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers the conditional assignment of Grantor's entire right, title and interest in and to the Collateral (as hereinafter defined) and to appoint Administrative Agent or Administrative Agent's designee as Grantor's attorney-in-law and attorney-in-fact to execute documents and take actions to confirm said assignments. F. The Credit Agreement requires that Grantor grant the security interest and make the conditional assignment contemplated by this Agreement as a condition precedent to the availability of the credit facilities thereunder. NOW THEREFORE, in consideration of the premises, and in order to induce Lenders to extend the credit facilities under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements, Grantor hereby agrees with Administrative Agent for Administrative Agent's benefit and the ratable benefit of Lenders and Interest Rate Exchangers as follows: SECTION 1. Grant of Security. Grantor hereby grants a first priority security interest in, pledges and mortgages, but does not transfer title, to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers, all of Grantor's right, title and interest in and to the following (the "Collateral") to secure the Secured Obligations (as hereinafter defined): (a) Each of the Copyrights, rights, titles and interests in and to the Copyrights and works protectable by copyright, which are presently, or in the future may be, owned, created, authored (as a work for hire), acquired or used (whether pursuant to a license or otherwise) by Grantor, in whole or in part, and all Copyright Rights with respect thereto and all Registrations therefor, heretofore or hereafter granted or applied for, and all renewals and extensions thereof, throughout the world, including all proceeds thereof (such as, by way of example and not by limitation, license royalties and proceeds of infringement suits), the right (but not the obligation) to renew and extend such Copyrights, Registrations and Copyright Rights and to register works protectable by copyright and the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Administrative Agent or Lenders or Interest Rate Exchangers for past, present and future infringements of the Copyrights and Copyright Rights, including, without limitation: (i) all of Grantor's right, title and interest, to the extent that it has the same, in and to all copyrights or rights or interests in copyrights registered or recorded in the United States Copyright Office, including, without limitation, the Registrations listed on Schedule A attached hereto, as the same may be amended pursuant hereto from time to time; (ii) all of Grantor's right, title and interest, to the extent that it has the same, in and to all renewals and extensions of any such copyrights that may be secured under the law now or hereafter in force and effect; and (iii) all of Grantor's right, title and interest, to the extent that it has the same, to make and exploit all derivative works based on or adopted from all works covered by the copyrights referred to herein; 2 it being understood and agreed that the Collateral assigned hereby shall include, without limitation, rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to copyrights and works protectable by copyright presently or in the future owned or used by third-parties, but in the case of third-parties which are not Affiliates of Grantor only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third-parties; (b) All general intangibles (as defined in Article 9 of the Uniform Commercial Code as in effect in the State of New York (the "Code") relating to the Collateral; and (c) All proceeds of any and all of the foregoing Collateral (including, without limitation, license royalties and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Administrative Agent or any Lender or Interest Rate Exchanger is the loss payee thereof) or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto. It is the intention of Grantor and Administrative Agent that the security interest granted hereby shall attach to the Collateral as of the date hereof and shall remain in effect until the indefeasible payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letter of Credit. In addition to, and not by way of limitation of, the pledge and mortgage of the Collateral set forth above, Grantor hereby, effective upon the occurrence of an Event of Default, assigns, grants, sells, conveys, transfers and sets over to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers all of Grantor's rights, title and interest in and to the Collateral as security for the Secured Obligations. SECURED 2. Security for Obligations. This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Credit Agreement, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations, whether or not a claim is allowed against Grantor for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, 3 direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "Underlying Debt"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "Secured Obligations"). SECTION 3. Representations and Warranties. Grantor represents, warrants and covenants as follows: (a) A true and complete list of all Registrations and applications for Registrations owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, in conducting its business is set forth in Schedule A attached hereto. (b) Grantor has full power, authority and legal right to pledge all of the Collateral pursuant to this Agreement and none of Grantor's Affiliates has any right, title or interest in any Collateral. (c) Each of the Copyrights and Copyright Rights are subsisting and none of the Copyrights, Registrations or Copyright Rights have been adjudged invalid or unenforceable. (d) Each material Copyright and each material Copyright Right are believed to be valid and enforceable and Grantor is not presently aware of any past, present or prospective claim by any third party that any material Copyright or material Copyright Right is invalid or unenforceable or of any basis for any such claim. (e) No claim known to Grantor has been made that the works of any material Copyright, material Registration or material Copyright Right does or may violate the rights of any third person. (f) Grantor has taken and will continue to take all reasonable steps to protect the secrecy of all trade secrets relating to unpublished Collateral. (g) Except as may be prohibited by law, Grantor will use statutory notice in connection with its use of each material Copyright, material Registration and material Copyright Right. (h) The execution, delivery and performance of this Agreement by Grantor does not conflict with, result in a breach of, constitute (with due notice or lapse of time or both) a default under, or require the limitation of or consent under, any Contractual Obligation of Grantor, including, without limitation, any agreement pursuant to which Grantor licenses or has the right to use any Collateral. 4 (i) Grantor is the legal and beneficial owner of each material Copyright, material Registration and material Copyright Right, free and clear of any Lien, including, without limitation, pledges, assignments, licenses and covenants by Grantor not to sue third persons, except for the Lien and conditional assignment created by this Agreement and Permitted Liens. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of Administrative Agent relating to the Credit Agreement or this Agreement or for which duly executed termination statements have been recorded or delivered to Administrative Agent. No effective filing with the United States Copyright Office covering all or any part of the Collateral is on file with the United States Copyright Office, except such as may be filed in favor of Grantor evidencing Grantor's right, title and interest in the Copyrights or in favor of Administrative Agent relating to this Agreement or for which duly executed termination statements have been delivered to Administrative Agent. (j) Grantor's chief executive office is located at the address specified on the signature page to this Agreement which address qualifies as its "location" under the Code. (k) This Agreement will create in favor of Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers a valid and perfected first priority security interest in the Collateral upon making the filings referred to in clause (l) below. (l) Except for the filing of financing statements with the Secretary of State of the State of Minnesota under the Code and filings with the United States Copyright Office necessary to perfect the security interest created hereunder, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by Grantor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Grantor or (ii) for the perfection of or the exercise by Administrative Agent of its rights and remedies hereunder to the Collateral in the United States of America. (m) All information heretofore, herein or hereafter supplied to Administrative Agent and Lenders by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 4. Inspection Rights. Subject to the terms of the Credit Agreement, Grantor hereby grants to Administrative Agent and any and all of its employees, representatives and agents the right to visit Grantor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered utilizing any of the Copyrights, Registrations or Copyright Rights (or which were so utilized during the prior six month period), and to inspect the records relating thereto upon reasonable notice to Grantor and as often as may be reasonably requested. SECTION 5. New Copyrights, Registrations and Copyright Rights. If Grantor shall obtain rights to any new works protectable by copyright, or become entitled to the benefit of any Registration, application for Registration or renewals or extension of any 5 Copyright, the provisions of this Agreement shall automatically apply thereto. With respect to any such Registration, applications for Registration or renewal or extension of any Copyright, Grantor shall give prompt notice thereof in writing to Administrative Agent. Concurrently with the filing of an application for any Registration for any Copyright, Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Copyright Security Agreement, substantially in the form hereof, with appropriate insertions or an amendment to this Agreement, in form and substance satisfactory to Administrative Agent, pursuant to which Grantor shall grant a security interest and conditional assignment to the extent of its interest in such Registration as provided herein to Administrative Agent on its behalf and on behalf of Lenders and Interest Rate Exchangers unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Registration in the name of Administrative Agent, in which event Grantor shall give written notice to Administrative Agent as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Registration. SECTION 6. Copyright Registration, Renewal and Litigation. (a) Grantor shall have the duty diligently to make any application for Registration on any existing or future unregistered but copyrightable works (except for works of nominal commercial value) and to do any and all acts which are reasonably necessary or desirable to preserve, renew and maintain all rights in all Copyrights, Registrations and Copyright Rights which are material to Grantor's business. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Copyright, Registration or Copyright Right which is material to Grantor's business. (b) Except as provided in Section 9 and notwithstanding Section 1, Grantor shall have the right and obligation to commence and diligently prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement or other damage as are in its reasonable business judgment necessary to protect the Collateral. Grantor shall provide to Administrative Agent any information with respect thereto requested by Administrative Agent. Administrative Agent shall provide at Grantor's expense all and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Grantor shall promptly, following its becoming aware thereof, notify Administrative Agent of the institution of, or any adverse determination in, any proceeding in the United States Copyright Office or any United States or foreign court described in Section 6(a) or 6(b) or regarding Grantor's claim of ownership in any material Copyright, material Registration or material Copyright Right, its right to register the same, or its right to keep and maintain such registration; SECTION 7. Grantor's Covenants. On a continuing basis, Grantor shall make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments and documents, including, without limitation, appropriate financing and continuation statements and security agreements, and take all such 6 action as may be necessary or advisable or may be requested by Administrative Agent or (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "Requisite Obligees") to carry out the intent and purposes of this Agreement, or for assuring, confirming or protecting the grant or perfection of security interest and the conditional assignment granted or purported to be granted hereby, to ensure Grantor's compliance with this Agreement or to enable Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to the Collateral. Without limiting the generality of the foregoing sentence, Grantor: (a) authorizes Administrative Agent in its sole discretion to modify this Agreement without first obtaining Grantor's approval of or signature to such modification by amending Schedule A thereof to include a reference to any right, title or interest in any existing Copyright, Registration or Copyright Right or any Copyright, Registration or Copyright Right acquired by Grantor after the execution hereof or to delete any reference to any right, title or interest in any Copyright, Registration or Copyright Right in which Grantor no longer has or claims any right, title or interest; (b) shall, from time to time, cause its books and records to be marked with such legends or segregated in such manner as Administrative Agent may reasonably specify, and take or cause to be taken such other action and adopt such procedures as Administrative Agent may reasonably specify to give notice of or to perfect the security interest and assignment in the Collateral intended to be created hereby; (c) hereby authorizes Administrative Agent, in its sole discretion, to file one or more financing or continuation statements, and amendments thereto, relative to all or any portion of the Collateral without the signature of Grantor where permitted by law; (d) shall diligently keep reasonable records respecting the Collateral; (e) shall at all times keep at least one complete set of its records concerning substantially all of the Copyrights, Registrations and Copyright Rights at its chief executive office as set forth above and will not change the location of its chief executive office or such records without giving Administrative Agent at least 30 days' prior written notice thereof; (f) shall notify Administrative Agent promptly of any change in Grantor's name, identity or corporate structure; (g) shall not enter into any agreement that would or might in any material way impair or conflict with Grantor's obligations hereunder; 7 (h) shall use its best efforts to obtain any necessary consents of third parties to the grant or perfection of a security interest and assignment to Administrative Agent with respect to the Collateral; (i) shall not permit the inclusion in any contract to which it becomes a party of any provision that could impair or prevent the creation of a security interest in Grantor's rights and interest in any property included within definitions of the Copyrights, Copyright Registrations and Copyright Rights acquired under such contracts; (j) shall properly maintain and care for the Collateral; (k) shall not grant or permit to exist any Lien in the Collateral or any portion thereof except for Permitted Liens; (l) upon any officer of Grantor obtaining knowledge thereof, shall promptly notify Administrative Agent in writing of any event that may materially adversely affect the value of the Collateral, the ability of Grantor or Administrative Agent to dispose of the Collateral or any portion thereof or the rights and remedies of Administrative Agent in relation thereto including, without limitation, the levy of any legal process against the Collateral or any portion thereof; (m) shall not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement, or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (n) shall pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement. (o) shall furnish to Administrative Agent from time to time statements and schedules further identifying and describing the Collateral and such other materials evidencing or reports pertaining to the Collateral as Administrative Agent may reasonably request, all in reasonable detail; (p) shall not do any act or omit to do any act whereby any of the Collateral may become abandoned; (q) shall notify Administrative Agent immediately and in writing of any claim of infringement of any of the Collateral by any third party and of all steps, including the commencement and course of litigation, taken to remedy such infringement; and (r) shall use proper statutory copyright notice with respect to all copies or phonorecords of the works which are the subject of the Collateral. SECTION 8. Amounts Payable in Respect of the Collateral. Except as otherwise provided in this Section 8 and in the Credit Agreement, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor in respect of the 8 Collateral or any portion thereof. Upon the occurrence and during the continuance of an Event of Default, Administrative Agent is hereby given full power and authority, on its behalf and on behalf of Lenders and Interest Rate Exchangers without notice or demand, (a) to notify any and all obligors with respect to the Collateral or any portion thereof of the existence of the security interest created and the conditional assignment effected hereby and (b) to demand, take, collect, sue for and receive for its own use all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof and (c) in connection therewith, to enforce all rights and remedies with respect to the Collateral or any portion thereof which Grantor could enforce if this Agreement had not been made. Grantor hereby ratifies any action which Administrative Agent shall lawfully take to enforce Administrative Agent's rights hereunder. Whether or not Administrative Agent shall have so notified any obligors, Grantor shall at its expense render all reasonable assistance to Administrative Agent in enforcing claims against such obligors. SECTION 9. Copyright Litigation After Default. Upon the occurrence and during the continuance of an Event of Default, Administrative Agent shall have the right but shall in no way be obligated to bring suit in the name of Grantor, Administrative Agent or Lenders or Interest Rate Exchangers to enforce any Copyright, Registration, Copyright Right and any license thereunder, in which event Grantor shall, at the request of Administrative Agent, do any and all lawful acts and execute any and all documents required by Administrative Agent in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Administrative Agent and any other Indemnitee as provided in Section 16 or 17 in connection with the exercise of their rights under this Section 9. To the extent that Administrative Agent shall elect not to bring suit to enforce any Copyright, Registration, Copyright Rights or any license thereunder, Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Copyrights, Registrations or Copyright Rights by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 10. Certain Remedies. If any Event of Default has occurred and is continuing: (a) Administrative Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Administrative Agent forthwith, assemble all or part of the Collateral as directed by Administrative Agent and make it available to Administrative Agent at a place to be designated by Administrative Agent that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Administrative Agent deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any 9 Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Administrative Agent may deem commercially reasonable. Administrative Agent or any Lender or any Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Administrative Agent, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Administrative Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Administrative Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Administrative Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Administrative Agent to collect such deficiency. (b) Upon the written demand of Administrative Agent, Grantor shall execute and deliver to Administrative Agent an assignment or assignments of the Copyrights, Registrations and Copyright Rights and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; provided that the failure of Grantor to comply with such demand will not impair or affect the validity of the conditional assignment effected by Section 1. Grantor agrees that such an assignment (including, without limitation, the conditional assignment effected by Section 1) and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Administrative Agent (or any Lender or Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days of written notice from Administrative Agent, Grantor shall make available to Administrative Agent, to the extent within Grantor's 10 power and authority, such personnel in Grantor's employ on the date of the Event of Default as Administrative Agent may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Copyrights, Registrations and Copyrights, such persons to be available to perform their prior functions on Administrative Agent's behalf and to be compensated by Administrative Agent at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. All cash proceeds received by Administrative Agent (or any Lender or Interest Rate Exchanger) in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral, in the discretion of Administrative Agent (at the request of Requisite Lenders or Requisite Obligees, shall be held by Administrative Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to Administrative Agent pursuant to Sections 16 and 17 hereof) in whole or in part by Administrative Agent at the request of Requisite Lenders or Requisite Obligees against all or any part of the Secured Obligations in the order required after an Event of Default as set forth in subsection 2.4D of the Credit Agreement. SECTION 11. Decisions Relating to Exercise of Remedies; Amendments, Non-Disturbance Agreement etc. Administrative Agent shall exercise, or shall refrain from exercising, any remedy provided for in Section 10 in accordance with the instructions of Requisite Lenders or Requisite Obligees. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Requisite Lenders or Requisite Obligees, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, except as provided in Section 7, in which case the writing need only be signed by Administrative Agent. If and to the extent that Grantor is permitted to license the Collateral, at Grantor's request and expense, Administrative Agent shall enter into a non-disturbance agreement or other similar arrangement with Grantor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Administrative Agent pursuant to which (a) Administrative Agent, on behalf of Lenders and Interest Rate Exchangers, shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Administrative Agent on its behalf and on behalf of Lenders and Interest Rate Exchangers and the other terms of this Agreement. SECTION 12. Grantor Remains Liable. Anything herein to the contrary notwithstanding, (a) Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Administrative Agent or any Lender or Interest Rate Exchanger of any of the rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, (c) neither Administrative Agent nor any 11 Lender nor Interest Rate Exchanger shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement nor shall Administrative Agent or any Lender or Interest Rate Exchanger be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder and (d) the powers conferred on Administrative Agent and Lenders and Interest Rate Exchangers hereunder are solely to protect their interests in the Collateral and shall not impose any duty upon Administrative Agent or any Lender or Interest Rate Exchanger to exercise any such powers. SECTION 13. Administrative Agent Appointed Attorney- in-Fact. Grantor hereby irrevocably appoints Administrative Agent Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Administrative Agent or otherwise, from time to time in Administrative Agent's discretion while an Event of Default exists to take any action and to execute any instrument which Administrative Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (a) to endorse Grantor's name on all applications, documents, papers and instruments necessary for Administrative Agent in the use or maintenance of the Collateral, (b) to ask, demand, collect, sue for, recover, impound, receive and give acquittance and receipts for money due and to become due under or in respect of any of the Collateral, (c) to file any claims or take any action or institute any proceedings that Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Administrative Agent with respect to any of the Collateral and, upon the occurrence and during the continuance of an Event of Default, to execute and deliver any of the assignments or documents requested by Administrative Agent pursuant to Section 10(b) of this Agreement, to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, or to assign, pledge, convey or otherwise transfer title in or dispose of the Collateral to any Person. Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. SECTION 14. Administrative Agent May Perform. If Grantor fails to perform any agreement contained herein, Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses so incurred in connection therewith, including the fees and expenses of Administrative Agent's counsel, shall be payable by Grantor under Section 16 hereof. SECTION 15. Administrative Agent and Lenders Duties and Liabilities. (a) The powers conferred on Administrative Agent and Lenders and Interest Rate Exchangers hereunder are solely to protect their interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral constituting tangible personal property in its possession and the accounting for moneys actually received by it hereunder, neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall have any duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Administrative Agent shall be deemed to exercise reasonable care in the custody and preservation of such Collateral if such Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property. 12 (b) Neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall be liable to the Grantor (i) for any loss or damage sustained by it, or (ii) for any loss, damage, depreciation or other diminution in the value of any of the Collateral, that may occur as a result of, in connection with or that is in any way related to (x) any exercise by Administrative Agent or any Lender or Interest Rate Exchanger of any right or remedy under this Agreement or (y) any other act of or failure to act by Administrative Agent or any Lender or Interest Rate Exchanger, except to the extent that the same shall be determined by a judgment of a court or competent jurisdiction that is final and not subject to review on appeal, to be the result of acts or omissions on the part of Administrative Agent or such Lender constituting gross negligence or willful misconduct. (c) NO CLAIM MAY BE MADE BY THE GRANTOR AGAINST ADMINISTRATIVE AGENT, ANY LENDER OR ITS AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR INTEREST RATE EXCHANGERS OR AGENTS FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY BREACH OR WRONGFUL CONDUCT (WHETHER THE CLAIM THEREFOR IS BASED ON CONTRACT, TORT OR DUTY IMPOSED BY LAW) IN CONNECTION WITH, ARISING OUT OF OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED AND RELATIONSHIP ESTABLISHED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH; AND THE GRANTOR HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY SUCH CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. SECTION 16. Expenses. Grantor will, upon demand, pay to Administrative Agent the amount of any and all reasonable out-of-pocket fees and expenses, including, without limitation, fees and disbursements of its counsel (including foreign counsel) and of any experts and agents, that Administrative Agent may incur in connection with (a) the administration of this Agreement (including, without limitation, any amendments, modifications or waivers hereto and the filing or recording of any documents), (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (c) the exercise or enforcement of any of the rights of Administrative Agent or any other Lender or any Interest Rate Exchanger hereunder, or (d) the failure by the Grantor to perform or observe any of the provisions hereof. SECTION 17. Indemnification. Grantor hereby agrees to indemnify, pay and hold Administrative Agent, Lenders and Interest Rate Exchangers and any of their officers, directors, employees, agents and affiliates (collectively called the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses or disbursements of any kind and nature whatsoever (including, without limitation, the fees and disbursements of counsel for such Indemnitees (including foreign counsel and experts in connection with any matter, including any investigative, administrative or judicial proceeding commenced or threatened described in Section 6 or otherwise, whether or not such Indemnitee shall be designated a party thereto)) which may be imposed on, incurred by or asserted against that Indemnitee in any way relating to or arising out of this Agreement or any other documents contemplated by or 13 referred to herein or the transactions contemplated hereby or the enforcement of the terms hereof or of any such other documents (the "indemnified liabilities"); provided, however, that Grantor shall not be liable to an Indemnitee for any indemnified liability to the extent arising from the gross negligence or willful misconduct of that Indemnitee. Notwithstanding anything herein to the contrary, no Indemnitee shall have any duty to Grantor to undertake any affirmative action in connection with this Agreement or the Collateral and any failure by any Indemnitee to undertake any action hereunder shall not constitute gross negligence or willful misconduct of such Indemnitee. SECTION 18. No Waiver; Cumulative Remedies. No failure on the part of Administrative Agent to exercise, and no course of dealing with respect to and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by Administrative Agent of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are to the fullest extent permitted by law cumulative of any remedies provided by law. SECTION 19. Addresses for Notices. All notices and other communications to any party provided for hereunder shall be given as provided in the Credit Agreement. SECTION 20. Continuing Security Interest and Transfer of Loans. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Administrative Agent hereunder, to the benefit of Administrative Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Administrative Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination and Grantor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Administrative Agent, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 21. Reassignment. If (a) an Event of Default shall have occurred and, by reason of waiver, modification, amendment or otherwise, no longer be continuing, (b) no other Event of Default shall be continuing, (c) an assignment to the Administrative Agent shall have been previously made pursuant to Sections 1, 10(b) or Section 13 hereof, and (d) the Secured Obligations shall not have become immediately due and payable, upon the written request of Grantor and the written consent of Administrative Agent or the written 14 election of Requisite Lenders or Requisite Obligees, Administrative Agent shall promptly execute and deliver to Grantor such assignments as may be necessary to reassign to Grantor any rights, title and interests as may have been assigned pursuant to Sections 1, 10(b) or 13 hereof, subject to any disposition thereof that may have been made by Administrative Agent pursuant hereto; provided that, after giving effect to such reassignment, Administrative Agent's security interest and conditional assignment granted pursuant to Section 1 hereof, as well as all other rights and remedies of Administrative Agent granted hereunder, shall continue to be in full force and effect; and provided, further, that the rights, title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Administrative Agent and Permitted Liens. SECTION 22. Waiver. Grantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Secured Obligations and this Agreement and any requirement that Administrative Agent protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or take any action against Grantor or any other person or entity or any of the Collateral. SECTION 23. Governing Law; Terms; Rules of Construction. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. SECTION 24. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 25. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. 15 SECTION 26. Credit Agreement Controls. In case of any irreconcilable conflict between the provisions of this Agreement and the Credit Agreement, the provisions of the Credit Agreement shall control. SECTION 27. Consent to Jurisdiction; Waiver of Immunities. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 18; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT ADMINISTRATIVE AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 27 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 28. Waiver of Jury Trial. GRANTOR AND ADMINISTRATIVE AGENT HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Administrative Agent each acknowledge that this waiver is a material inducement for Grantor and Administrative Agent to enter into a 16 business relationship, that Grantor and Administrative Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Administrative Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. DIAMOND BRANDS OPERATING CORP., as Grantor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: Attention: 18 SCHEDULE A U.S. COPYRIGHTS Date Copyright Reg. No. Of Issue - --------- -------- -------- 19 SCHEDULE A FOREIGN COPYRIGHT REGISTRATIONS Date Country Copyright Registration No. Of Issue ------- --------- ---------------- -------- 20 SCHEDULE A - ---------- PENDING U.S. COPYRIGHTS Date Of Copyright Ref. No. Application --------- -------- ----------- 21 SCHEDULE A - ---------- LICENSES 22 STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, __________, a Notary Public in and for said State, personally appeared __________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) 23 EXHIBIT XVI [FORM OF COMPANY TRADEMARK SECURITY AGREEMENT] COMPANY TRADEMARK SECURITY AGREEMENT This COMPANY TRADEMARK SECURITY AGREEMENT (this "Agreement") is dated as of April 21, 1998 and entered into by and between DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Grantor" or "Company"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "Secured Party") the financial institutions ("Lenders") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Grantor has entered into that certain Credit Agreement dated as of April 21, 1998 with DLJ Capital Funding, Inc., as Syndication Agent, Secured Party, Morgan Stanley Senior Funding Inc., as Documentation Agent, and Lenders (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement"; capitalized terms defined therein and not otherwise defined herein being used herein as therein defined). B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "Lender Interest Rate Agreements") with or one or more Lenders (in such capacity, collectively, "Interest Rate Exchangers"). C. Grantor owns and uses in its business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "Trademarks"). D. Secured Party desires Grantor to assign and grant to it a lien on and security interest in all of Grantor's existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof and in foreign countries (the "Registrations"), all common law and other rights in and to the Trademarks in the United States and any state thereof and in foreign countries (the "Trademark Rights"), all goodwill of Grantor's business symbolized by the Trademarks and associated therewith, including without limitation the documents and things described in Section 1(b) (the "Associated Goodwill"), and all proceeds of the Trademarks, the Registrations, the Trademark Rights and the Associated Goodwill, and Grantor agrees to assign and grant to Secured Party a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and all the proceeds thereof as provided herein. E. Pursuant to the Company Security Agreement, Grantor has assigned and granted to Secured Party a lien on and security interest in, among other assets, all of Grantor's equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default, Secured Party would be able to exercise its remedies consistent with the Company Security Agreement, this Agreement and applicable law to foreclose upon Grantor's business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantor, and benefit from the Associated Goodwill. F. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Grantor shall have assigned and granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Secured Party as follows: SECTION 1. Assignment and Grant of Security. Grantor hereby assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "Collateral"): (a) each of the Trademarks and rights and interests in Trademarks that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part (including, without limitation, the Trademarks specifically identified in Schedule A annexed hereto, as the same may be amended pursuant hereto from time to time), and including all Trademark Rights with respect thereto and all federal, state and foreign Registrations therefor heretofore or hereafter granted or applied for, the right (but not the obligation) to register claims under any state or federal trademark law or regulation or any trademark law or regulation of any foreign country and to apply for, renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Secured Party or otherwise for past, present and future infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States and any foreign country, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; 2 (b) the following documents and things in Grantor's possession, or subject to Grantor's right to possession, related to (Y) the production, sale and delivery by Grantor, or by any Affiliate, licensee or subcontractor of Grantor, of products or services sold or delivered by or under the authority of Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by Grantor or any Affiliate, licensee or subcontractor of Grantor: (i) all lists and ancillary documents that identify and describe any of Grantor's customers, or those of its Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering products or services of the kind supplied by Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; (ii) all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; (iii) all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and (iv) all documents constituting or concerning the then current or proposed advertising and promotion by Grantor or its Affiliates, licensees or subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (d) to the extent not included in the foregoing clauses (a) - (c), all general intangibles relating to the Collateral; and 3 (e) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. Security for Obligations. This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss.362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Credit Agreement, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "Underlying Debt"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "Secured Obligations"). SECTION 3. Grantor Remains Liable. Anything contained herein to the contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. Representations and Warranties. Grantor represents and warrants as follows: (a) Description of Collateral. A true and complete list of all Trademarks, Registrations and Trademark Rights owned, held (whether pursuant to a license or otherwise) 4 or used by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule A annexed hereto. Each Trademark, Registration or Trademark Right designated on Schedule A annexed hereto as a Material Trademark Property, each other Trademark, Registration or Trademark Right that uses or incorporates the name "Diamond Brands" or any other identifiers or symbols derived from or associated with the name "Diamond Brands" hereafter arising or otherwise owned, held or used by Grantor, and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by Grantor is referred to herein as a "Material Trademark Property". (b) Validity and Enforceability of Collateral. Each Material Trademark Property is valid, subsisting and enforceable. As of the Closing Date, Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property is invalid or unenforceable or that the use of any Material Trademark Property violates the rights of any third person or of any basis for any such claim, and there is no such pending or, to the knowledge of Grantor, threatened claim that could reasonably be expected to have a Material Adverse Effect. (c) Ownership of Collateral. Except for the security interest assigned and created by this Agreement, Grantor is the sole legal and beneficial owner of the entire right, title and interest in and to each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for Registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "Permitted Trademark Liens"). Except such as may have been filed in favor of Secured Party relating to this Agreement, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. (d) Office Locations; Other Names. The chief place of business, the chief executive office and the office where Grantor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at 1800 Cloquet Avenue, Cloquet, MN 55720. Grantor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the assignment and grant by Grantor of the security interest created hereby, (ii) the execution, delivery or performance of this Agreement by Grantor, or (iii) the perfection or exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Grantor). (f) Perfection. This Agreement, together with the filing of a financing statement describing the Collateral with the Secretary of State of the State of Minnesota and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, assigns and creates a valid, perfected and First Priority security interest in the Collateral (subject only to Permitted Trademark Liens), securing the payment of the Secured 5 Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. (g) Other Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 5. Further Assurances; New Trademarks, Registrations and Trademark Rights; Certain Inspection Rights. (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest assigned or granted or purported to be assigned or granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) at the request of Secured Party, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the assignment and perfection of a security interest to Secured Party with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any reasonable time and upon request by Secured Party, exhibit the Collateral to and allow inspection of the Collateral by Secured Party, or persons designated by Secured Party, and (v) at Secured Party's request, appear in and defend any action or proceeding that may affect Grantor's title to or Secured Party's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Grantor hereby authorizes Secured Party to modify this Agreement without obtaining Grantor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or interest in any existing Trademark, Registration or Trademark Right or any Trademark, Registration or Trademark Right acquired or developed by Grantor after the execution hereof or to delete any reference to any right, title or interest in any Trademark, Registration or Trademark Right in which Grantor no longer has or claims any right, title or interest. (d) Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in 6 connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (e) If Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, the provisions of this Agreement shall automatically apply thereto. Grantor shall promptly notify Secured Party in writing of any rights to any new Trademarks or Trademark Rights acquired by Grantor after the date hereof and of any Registrations issued or applications for Registration made after the date hereof, which notice shall state whether such Trademark, Registration or Trademark Right constitutes a Material Trademark Property. Concurrently with the filing of an application for Registration for any Trademark, Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Secured Party, pursuant to which Grantor shall assign and grant a security interest to the extent of its interest in such Registration as provided herein to Secured Party unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Registration in the name of Secured Party, in which event Grantor shall give written notice to Secured Party as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Registration. (f) Grantor hereby grants to Secured Party and its employees, representatives and agents the right to visit Grantor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Trademarks, Registrations or Trademark Rights (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Grantor and as often as may be reasonably requested. SECTION 6. Certain Covenants of Grantor. Grantor shall: (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Secured Party of any change in Grantor's name, identity or corporate structure within 15 days of such change; (c) give Secured Party 30 days' prior written notice of any change in Grantor's chief place of business or chief executive office or the office where Grantor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; 7 (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for Permitted Trademark Liens and the security interest assigned and created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Trademarks, Registrations and Trademark Rights at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way conflict with this Agreement or impair or prevent the assignment and creation of a security interest in Grantor's rights and interests in any property included within the definitions of any Trademarks, Registrations, Trademark Rights and Associated Goodwill; (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Trademarks and Trademark Rights, including without limitation entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each Material Trademark Property to the extent reasonably necessary for the protection of such Material Trademark Property; (k) use consistent standards of high quality (which may be consistent with Grantor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations; and (l) upon any officer of Grantor obtaining knowledge thereof, promptly notify Secured Party in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Grantor or Secured Party to dispose of the Collateral or any portion thereof, or the rights and remedies of Secured Party in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 7. Amounts Payable in Respect of the Collateral. Except as otherwise provided in this Section 7, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof. In connection with such collections, Grantor may take (and, at Secured Party's direction, shall take) such action as Grantor or Secured Party may deem necessary or advisable to enforce collection of such amounts; provided, however, that Secured Party shall have the right at any time, upon the occurrence and during the continuation of an Event of Default and upon 8 written notice to Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest assigned and created hereby, and to direct such obligors to make payment of all such amounts directly to Secured Party, and, upon such notification and at the expense of Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of amounts due to Grantor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 14, and (ii) Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. SECTION 8. Trademark Applications and Litigation. (a) Grantor shall have the duty diligently to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgment of Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Material Trademark Property. (b) Except as provided in Section 8(d), Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Secured Party shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Grantor shall promptly, following its becoming aware thereof, notify Secured Party of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 8(a) or 8(b) or regarding Grantor's claim of ownership in or right to use any material Trademark, material Registration or material Trademark Right, its right to register the same, or its right to keep and maintain such Registration. Grantor shall provide to Secured Party any information with respect thereto requested by Secured Party. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right (but not the obligation) to bring suit, in the name of Grantor, Secured Party or otherwise, 9 to enforce any Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event Grantor shall, at the request of Secured Party, do any and all lawful acts and execute any and all documents required by Secured Party in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Secured Party as provided in Section 15 in connection with the exercise of its rights under this Section 8. To the extent that Secured Party shall elect not to bring suit to enforce any Trademark, Registration, Trademark Right, Associated Goodwill or any license thereunder as provided in this Section 8(d), Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 9. Non-Disturbance Agreements, etc. If and to the extent that Grantor is permitted to license the Collateral, Secured Party shall enter into a non-disturbance agreement or other similar arrangement, at Grantor's request and expense, with Grantor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Secured Party pursuant to which (a) Secured Party shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest assigned and created in favor of Secured Party and the other terms of this Agreement. SECTION 10. Secured Party Appointed Attorney-in-Fact. Grantor hereby irrevocably appoints Secured Party as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Grantor's name on all applications, documents, papers and instruments necessary for Secured Party in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; 10 (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Grantor to Secured Party, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Secured Party pursuant to Section 13(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Grantor's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. SECTION 11. Secured Party May Perform. If Grantor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantor under Section 15. SECTION 12. Standard of Care. The powers conferred on Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property. SECTION 13. Remedies. If any Event of Default shall have occurred and be continuing: (a) Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, 11 (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Secured Party, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Upon written demand from Secured Party, Grantor shall execute and deliver to Secured Party an assignment or assignments of the Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Secured Party. Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Secured Party (or any Lender or Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days after written notice from Secured Party, Grantor shall make available to Secured Party, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of such Event of Default as 12 Secured Party may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Secured Party's behalf and to be compensated by Secured Party at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. SECTION 14. Application of Proceeds. All proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 15. Indemnity and Expenses. (a) Grantor agrees to indemnify Secured Party and each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 16. Continuing Security Interest; Transfer of Loans. This Agreement shall assign and create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest assigned and granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Secured Party will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. 13 SECTION 17. Secured Party as Administrative Agent. (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "Requisite Obligees"). In furtherance of the foregoing provisions of this Section 17(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 17(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. 14 SECTION 18. Amendments; Etc. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 19. Notices. Any notice or other communication herein required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 20. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 21. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 22. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 23. Governing Law; Terms. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 24. Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION 15 IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 19; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 24 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 25. Waiver of Jury Trial. GRANTOR AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Secured Party each acknowledge that this waiver is a material inducement for Grantor and Secured Party to enter into a business relationship, that Grantor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO 16 THIS SECTION 25 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 26. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 17 IN WITNESS WHEREOF, Grantor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. DIAMOND BRANDS OPERATING CORP., as Grantor By: __________________________ Name: _________________________ Title: ________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: ___________________________ Name: _________________________ Title: ________________________ Notice Address: Attention: 18 SCHEDULE A TO TRADEMARK SECURITY AGREEMENT United States Registered Trademark Registration Registration Owner Description Number Date - ---------- ------------- ------------ ------------ 19 STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ________, 19___, before me, ________, a Notary Public in and for said State, personally appeared __________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) 20 EXHIBIT XVII [FORM OF COMPANY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT] COMPANY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT This COMPANY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT (this "Agreement") is dated as of April 21, 1998 and entered into by and between DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Assignor"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "Assignee") the financial institutions ("Lenders") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Assignee and Lenders have entered into a Credit Agreement dated as of April 21, 1998 with DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Assignor ("Company"), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "Lender Interest Rate Agreements") with one or more Lenders (in such capacity, collectively, "Interest Rate Exchangers"). C. Assignor has and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). D. Assignor is willing to grant to Assignee (i) a security interest in all such Collateral for the purpose of securing the complete and timely satisfaction of all of the Secured Obligations (as hereinafter defined) and (ii) effective upon the occurrence and during the continuation of an Event of Default, an assignment of Assignor's entire rights, title and interest in and to all such Collateral. E. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Assignor shall have granted the security interests and made the conditional assignment and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor hereby agrees with Assignee as follows: SECTION 1. Grant of Security. Assignor hereby assigns to Assignee, and hereby grants to Assignee a security interest in, all of Assignor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Assignor now has or hereafter acquires an interest and wherever the same may be located (the "Collateral"): (a) all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, owned by Assignor and all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, held or used by Assignor in whole or in part (including, without limitation, the patents and patent applications listed in Schedule A annexed hereto, as the same may be amended pursuant hereto from time to time), all rights (but not obligations) corresponding thereto (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of Assignor or in the name of Assignee or Lenders or Interest Rate Exchangers), and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "Patents"); it being understood that the rights and interest assigned hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Assignor pertaining to patent applications and patents presently or in the future owned or used by third parties but, in the case of third parties which are not Affiliates of Assignor, only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third parties; (b) all general intangibles relating to the Patents; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (d) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Assignee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. Conditional Assignment. In addition to, and not by way of limitation of, the granting of a security interest in the Collateral pursuant to Section 1, Assignor hereby, effective upon the occurrence of an Event of Default and upon written notice from Assignee, grants, sells, conveys, transfers, assigns and sets over to Assignee, for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers, all of Assignor's right, title and interest in and to the Collateral, including without limitation Assignor's right, title and interest in and to the Patents identified in Schedule A annexed hereto. 2 SECTION 3. Security for Obligations. This Agreement secures, and the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss.362(a)), of all obligations and liabilities of every nature of Company now or hereafter existing under or arising out of or in connection with the Credit Agreement, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Assignee or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "Underlying Debt"), and all obligations of every nature of Assignor now or hereafter existing under this Agreement (all such obligations of Assignor, together with the Underlying Debt, being the "Secured Obligations"). SECTION 4. Assignor Remains Liable. Anything contained herein to the contrary notwithstanding, (a) Assignor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Assignee of any of its rights hereunder shall not release Assignor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Assignee shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Assignee be obligated to perform any of the obligations or duties of Assignor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 5. Representations and Warranties. Assignor represents and warrants as follows: (a) Description of Collateral. A true and complete list of all Patents owned, held (whether pursuant to a license or otherwise) or used by Assignor, in whole or in part, as of the date of this Agreement is set forth in Schedule A annexed hereto. (b) Validity and Enforceability of Collateral. Each Patent that is material to Assignor's business is valid, subsisting and enforceable and Assignor is not aware of any pending or threatened claim by any third party that any such material Patent is invalid or unenforceable or that the use of any such material Patent violates the rights of any third person or of any basis for any such claim. 3 (c) Ownership of Collateral. Except for the security interest and conditional assignment created by this Agreement, Assignor owns each material Patent free and clear of any Lien. Except such as may have been filed in favor of Assignee relating to this Agreement and of Foothill Capital Corporation (a release of which has been delivered to Administrative Agent), (i) no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office and (ii) no effective filing covering all or any part of the Collateral is on file in the United States Patent and Trademark Office. (d) Office Locations; Other Names. The chief place of business, the chief executive office and the office where Assignor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at 1800 Cloquet Avenue, Cloquet, MN 55720. Assignor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Assignor of the security interest and conditional assignment granted hereby, (ii) the execution, delivery or performance of this Agreement by Assignor, or (iii) the perfection of or the exercise by Assignee of its rights and remedies hereunder (except as may have been taken by or at the direction of Assignor). (f) Perfection. This Agreement, together with the filing of a financing statement describing the Collateral with the Secretary of State of the State of Minnesota and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, creates a valid, perfected and first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. (g) Other Information. All information heretofore, herein or hereafter supplied to Assignee by or on behalf of Assignor with respect to the Collateral is accurate and complete in all material respects. SECTION 6. Further Assurances; New Patents and Patent Applications. (a) Assignor agrees that from time to time, at the expense of Assignor, Assignor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Assignee may request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Assignee to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Assignor will: (i) at the request of Assignee, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Assignee, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Assignee may request, in order 4 to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest and assignment to Assignee with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any reasonable time and upon request by Assignee, exhibit the Collateral to and allow inspection of the Collateral by Assignee, or persons designated by Assignee, and (v) at Assignee's request, appear in and defend any action or proceeding that may affect Assignor's title to or Assignee's security interest in all or any part of the Collateral. (b) Assignor hereby authorizes Assignee to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Assignor. Assignor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Assignor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Assignor hereby authorizes Assignee to modify this Agreement without obtaining Assignor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or interest in any existing Patent or any Patent acquired or developed by Assignor after the execution hereof or to delete any reference to any right, title or interest in any Patent in which Assignor no longer has or claims any right, title or interest. (d) Assignor will furnish to Assignee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Assignee may reasonably request, all in reasonable detail. (e) If Assignor shall hereafter obtain rights to any patentable inventions, or become entitled to the benefit of any patent application or patent or any reissue, division, continuation, renewal, extension, or continuation-in-part of any Patent or any improvement on any Patent, the provisions of this Agreement shall automatically apply thereto. Assignor shall promptly notify Assignee in writing of any of the foregoing rights or benefits acquired by Assignor after the date hereof. Concurrently with the filing of an application for any Patent, Assignor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Company Patent Collateral Assignment and Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Assignee, pursuant to which Assignor shall grant a security interest and conditional assignment to the extent of its interest in such Patent as provided herein to Assignee unless so doing would, in the reasonable judgment of Assignor, after due inquiry, result in the grant of a patent in the name of Assignee, in which event Assignor shall give written notice to Assignee as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Patent. SECTION 7. Certain Covenants of Assignor. Assignor shall: 5 (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Assignee of any change in Assignor's name, identity or corporate structure within 15 days of such change; (c) give Assignee 30 days' prior written notice of any change in Assignor's chief place of business or chief executive office or the office where Assignor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way impair or prevent the creation of a security interest in, or the assignment of, Assignor's rights and interests in any property included within the definition of any Patents acquired under such contracts; (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, including without limitation entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each material Patent; (k) use consistent standards of high quality (which may be consistent with Assignor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Patents, including, to the extent applicable, in the operation and maintenance of its retail stores and other merchandising operations; and (l) upon any officer of Assignor obtaining knowledge thereof, promptly notify Assignee in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Assignor or Assignee to dispose of the 6 Collateral or any portion thereof, or the rights and remedies of Assignee in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 8. Certain Inspection Rights. Subject to the terms of the Credit Agreement, Assignor hereby grants to Assignee and any and all of its employees, representatives and agents the right to visit Assignor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Patents (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Assignor and as often as may be reasonably requested. SECTION 9. Amounts Payable in Respect of the Collateral. Except as otherwise provided in this Section 9, Assignor shall continue to collect, at its own expense, all amounts due or to become due to Assignor in respect of the Collateral or any portion thereof. In connection with such collections, Assignor may take (and, at Assignee's direction, shall take) such action as Assignor or Assignee may deem necessary or advisable to enforce collection of such amounts; provided, however, that Assignee shall have the right at any time, upon the occurrence and during the continuation of an Event of Default and upon written notice to Assignor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest created, and the conditional assignment effected hereby, and to direct such obligors to make payment of all such amounts directly to Assignee, and, upon such notification and at the expense of Assignor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Assignor might have done. After receipt by Assignor of the notice from Assignee referred to in the proviso to the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by Assignor in respect of amounts due to Assignor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Assignee hereunder, shall be segregated from other funds of Assignor and shall be forthwith paid over or delivered to Assignee in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 17, and (ii) Assignor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. SECTION 10. Patent Applications and Litigation. (a) Assignor shall have the duty diligently to prosecute any patent application relating to any of the Patents specifically identified in Schedule A annexed hereto that is pending as of the date of this Agreement, to make application on any existing or future unpatented but patentable invention that is material to Assignor's business, and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all material Patents. Any expenses incurred in connection therewith shall be borne solely by Assignor. Assignor shall not abandon any right to file a patent application or any pending patent application or any material Patent without the prior written consent of Assignee. 7 (b) Except as provided in Section 10(d) and notwithstanding Section 2, Assignor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, or other damage or reexamination or reissue proceedings as are in its reasonable business judgment necessary to protect the Collateral. Assignee shall provide, at Assignor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Assignor shall promptly, following its becoming aware thereof, notify Assignee of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 10(a) or 10(b) or regarding Assignor's interests in any material Collateral. Assignor shall provide to Assignee any information with respect thereto requested by Assignee. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Assignee shall have the right (but not the obligation) to bring suit, in the name of Assignor, Assignee or otherwise, to enforce any Patent and any license thereunder, in which event Assignor shall, at the request of Assignee, do any and all lawful acts and execute any and all documents required by Assignee in aid of such enforcement and Assignor shall promptly, upon demand, reimburse and indemnify Assignee as provided in Section 18 in connection with the exercise of its rights under this Section 10. To the extent that Assignee shall elect not to bring suit to enforce any Patent or any license thereunder as provided in this Section 10(d), Assignor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Patents by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 11. Non-Disturbance Agreements, etc. If and to the extent that Assignor is permitted to license the Collateral, Assignee shall enter into a non-disturbance agreement or other similar arrangement, at Assignor's request and expense, with Assignor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Assignee pursuant to which (a) Assignee shall agree not to disturb or interfere with such licensee's rights under its license agreement with Assignor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Assignee and the other terms of this Agreement. SECTION 12. Reassignment of Collateral. If (a) an Event of Default shall have occurred and, by reason of cure, waiver, modification, amendment or otherwise, no longer be continuing, (b) no other Event of Default shall have occurred and be continuing, (c) an assignment to Assignee of any rights, title and interests in and to the Collateral shall have been previously made and shall have become absolute and effective pursuant to Section 2, Section 13(f) or Section 16(b), and (d) the Secured Obligations shall not have become immediately due and payable, upon the written request of Assignor and the written consent of 8 Assignee, Assignee shall promptly execute and deliver to Assignor such assignments as may be necessary to reassign to Assignor any such rights, title and interests as may have been assigned to Assignee as aforesaid, subject to any disposition thereof that may have been made by Assignee pursuant hereto; provided that, after giving effect to such reassignment, Assignee's security interest and conditional assignment granted pursuant to Section 1 and Section 2, as well as all other rights and remedies of Assignee granted hereunder, shall continue to be in full force and effect; and provided, further that the rights, title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Assignee and Permitted Liens. SECTION 13. Assignee Appointed Attorney-in-Fact. Assignor hereby irrevocably appoints Assignee as Assignor's attorney-in-fact, with full authority in the place and stead of Assignor and in the name of Assignor, Assignee or otherwise, from time to time in Assignee's discretion to take any action and to execute any instrument that Assignee may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Assignor's name on all applications, documents, papers and instruments necessary for Assignee in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Assignee may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Assignee with respect to any of the Collateral; (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Assignee in its sole discretion, any such payments made by Assignee to become obligations of Assignor to Assignee, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Assignee pursuant to Section 16(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Assignee were the absolute owner thereof for all purposes, and to do, at Assignee's option and Assignor's expense, at any time or from time to 9 time, all acts and things that Assignee deems necessary to protect, preserve or realize upon the Collateral and Assignee's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Assignor might do. SECTION 14. Assignee May Perform. If Assignor fails to perform any agreement contained herein, Assignee may itself perform, or cause performance of, such agreement, and the expenses of Assignee incurred in connection therewith shall be payable by Assignor under Section 18. SECTION 15. Standard of Care. The powers conferred on Assignee hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Assignee shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Assignee shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Assignee accords its own property. SECTION 16. Remedies. If any Event of Default shall have occurred and be continuing: (a) Assignee may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral), and also may (i) require Assignor to, and Assignor hereby agrees that it will at its expense and upon request of Assignee forthwith, assemble all or part of the Collateral as directed by Assignee and make it available to Assignee at a place to be designated by Assignee that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Assignee deems appropriate, (iv) take possession of Assignor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Assignor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Assignor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Assignee's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Assignee may deem commercially reasonable. Assignee or any Lender or any Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Assignee, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be 10 entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Assignee at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Assignor, and Assignor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Assignor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Assignor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Assignee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Assignee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Assignor hereby waives any claims against Assignee arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Assignee accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Assignor shall be liable for the deficiency and the fees of any attorneys employed by Assignee to collect such deficiency. (b) Upon written demand from Assignee, Assignor shall execute and deliver to Assignee an assignment or assignments of the Patents and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; provided that the failure of Assignor to comply with such demand will not impair or affect the validity of the conditional assignment effected by Section 2 or its effectiveness upon notice by Assignee as specified in Section 2. Assignor agrees that such an assignment (including without limitation the conditional assignment effected by Section 2) and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Assignee (or any Lender or any Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. SECTION 17. Application of Proceeds. All proceeds received by Assignee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 18. Indemnity and Expenses. (a) Assignor agrees to indemnify Assignee and each Lender and Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Assignee's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. 11 (b) Assignor shall pay to Assignee upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Assignee may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Assignee hereunder, or (iv) the failure by Assignor to perform or observe any of the provisions hereof. SECTION 19. Continuing Assignment and Security Interest; Transfer of Loans. This Agreement shall create a continuing security interest in, and conditional assignment of, the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Assignor, its successors and assigns, and (c) inure, together with the rights and remedies of Assignee hereunder, to the benefit of Assignee and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to Assignor. Upon any such termination Assignee will, at Assignor's expense, execute and deliver to Assignor such documents as Assignor shall reasonably request to evidence such termination. SECTION 20. Assignee as Administrative Agent. (a) Assignee has been appointed to act as Assignee hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Assignee shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Assignee shall exercise, or refrain from exercising, any remedies provided for in Section 16 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "Requisite Obligees"). In furtherance of the foregoing provisions of this Section 20(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Assignee for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 20(a). 12 (b) Assignee shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Assignee under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Assignee under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Assignee under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Assignee under this Agreement, and the retiring or removed Assignee under this Agreement shall promptly (i) transfer to such successor Assignee all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Assignee under this Agreement, and (ii) execute and deliver to such successor Assignee such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Assignee of the security interests created hereunder, whereupon such retiring or removed Assignee shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Assignee, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Assignee hereunder. SECTION 21. Amendments; Etc. No amendment, modification, termination or waiver of any provision of this Agreement, and no consent to any departure by Assignor therefrom, shall in any event be effective unless the same shall be in writing and signed by Assignee and, in the case of any such amendment or modification, by Assignor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 22. Notices. Any notice or other communication herein required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 23. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Assignee in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 24. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality 13 and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 25. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 26. Governing Law; Terms. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 27. Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST ASSIGNOR ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT ASSIGNOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. Assignor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Assignor at its address provided in Section 22, such service being hereby acknowledged by Assignor to be sufficient for personal jurisdiction in any action against Assignor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of Assignee to bring proceedings against Assignor in the courts of any other jurisdiction. SECTION 28. Waiver of Jury Trial. ASSIGNOR AND ASSIGNEE HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Assignor and Assignee each acknowledge that this waiver is a material inducement for Assignor and Assignee to enter into a business relationship, that 14 Assignor and Assignee have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Assignor and Assignee further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 29. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 15 IN WITNESS WHEREOF, Assignor and Assignee have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. DIAMOND BRANDS OPERATING CORP., as Assignor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: Attention: 16 SCHEDULE A TO PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention Inventor - ---------- ---------- --------- -------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor - --------- ------- ----------- --------- -------- 17 STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, , a Notary Public in and for said State, personally appeared _______________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) 18 EXHIBIT XVIII [FORM OF SUBSIDIARY GUARANTY] (included as filed Exhibit 4.4) EXHIBIT XIX [FORM OF SUBSIDIARY PLEDGE ASSIGNMENT] (included as filed Exhibit 4.5) EXHIBIT XX [FORM OF SUBSIDIARY SECURITY AGREEMENT] (included as filed Exhibit 4.6) EXHIBIT XXI [FORM OF SUBSIDIARY COPYRIGHT SECURITY AGREEMENT] (included as filed Exhibit 4.7) EXHIBIT XXII [FORM OF SUBSIDIARY TRADEMARK SECURITY AGREEMENT] (included as filed Exhibit 4.8) EXHIBIT XXIII [FORM OF SUBSIDIARY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT] (included as filed Exhibit 4.9) EXHIBIT XXIV [FORM OF HOLDINGS PLEDGE AGREEMENT] (included as filed Exhibit 4.10) EXHIBIT XXV [FORM OF HOLDINGS GUARANTY] (included as filed Exhibit 4.11) Exhibit XXVI [Form of Deed of Trust] MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (MINNESOTA) by and from DIAMOND BRANDS OPERATING CORP., A DELAWARE CORPORATION, "Mortgagor" to WELLS FARGO BANK, N.A., A NATIONAL BANKING ASSOCIATION, in its capacity as Agent, "Mortgagee" Dated as of April 21, 1998 Location: Municipality: County: State: THE SECURED PARTY (MORTGAGEE) DESIRES THIS FIXTURE FILING TO BE INDEXED AGAINST THE RECORD OWNER OF THE REAL ESTATE DESCRIBED HEREIN THIS MORTGAGE SECURES AN INDEBTEDNESS OF $2,312,500.00, PURSUANT TO THE TERMS OF THAT CERTAIN CREDIT AGREEMENT DATED AS OF APRIL 21, 1998 AMONG MORTGAGOR, MORTGAGEE AND OTHER LENDERS. PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 400 South Hope Street Los Angeles, California 90071-2899 Attention: Melissa Joe, Esq. File #218,107-012 MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (MINNESOTA) THIS MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (MINNESOTA) (this "Mortgage") is dated as of April 21, 1998 by and from DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Mortgagor"), whose address is 1800 Cloquet Avenue, Cloquet, Minnesota 55720 to WELLS FARGO BANK, N.A., a national banking association, as agent (in such capacity, "Agent") for the lenders party to the Credit Agreement (defined below) (such lenders, together with their respective successors and assigns, collectively, the "Lenders"), having an address at 555 Montgomery Street, 17th Floor, San Francisco, California 94111 (Agent, together with its successors and assigns, "Mortgagee"). ARTICLE 1 DEFINITIONS ----------- Section 1.1. Definitions. All capitalized terms used herein without definition shall have the respective meanings ascribed to them in that certain Credit Agreement dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among Mortgagor, Mortgagee, the Lenders, DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent. As used herein, the following terms shall have the following meanings: (a) "Indebtedness": (1) All indebtedness of Mortgagor to Mortgagee and the Lenders, including, without limitation, the sum of all (a) principal, interest and other amounts evidenced or secured by the Loan Documents as advances in protection of the Mortgaged Property, (b) principal, interest and other amounts which may hereafter be loaned by Mortgagee or any of the Lenders under or in connection with the Credit Agreement or any of the other Loan Documents, whether evidenced by a promissory note or other instrument which, by its terms, is secured hereby, and (2) all other indebtedness, obligations and liabilities now or hereafter existing of any kind of Mortgagor to Mortgagee or any of the Lenders under documents which recite that they are intended to be secured by this Mortgage. (b) "Mortgaged Property": All of Mortgagor's interest in (1) the fee interest in the real property described in Exhibit A attached hereto and incorporated herein by this reference, together with any greater estate therein as hereafter may be acquired by Mortgagor (the "Land"), (2) all improvements now owned or hereafter acquired by Mortgagor, now or at any time situated, placed or constructed upon the Land (the "Improvements"; the Land and Improvements are collectively referred to as the "Premises"), (3) all materials, supplies, equipment, apparatus and other items of personal property now owned or hereafter acquired by Mortgagor and now or hereafter attached to, installed in or used in connection with any of the Improvements or the Land, and water, gas, electrical, telephone, storm and sanitary sewer facilities and all other utilities whether or not situated in easements (the "Fixtures"), (4) all right, title and interest of Mortgagor in and to all goods, accounts, general intangibles, instruments, documents, chattel paper and all other personal property of any kind or character, including such items of personal property as defined in the UCC (defined below), now owned or hereafter acquired by Mortgagor and now or hereafter affixed to, placed upon, used in connection with, arising from or otherwise related to the Premises (the "Personalty"), (5) all reserves, escrows or impounds required under the Credit Agreement and all deposit accounts maintained by Mortgagor with respect to the Mortgaged Property (the "Deposit Accounts"), (6) all leases, licenses, concessions, occupancy agreements or other agreements (written or oral, now or at any time in effect) which grant to any Person a possessory interest in, or the right to use, all or any part of the Mortgaged Property, together with all related security and other deposits (the "Leases"), (7) all of the rents, revenues, royalties, income, proceeds, profits, security and other types of deposits, and other benefits paid or payable by parties to the Leases for using, leasing, licensing possessing, operating from, residing in, selling or otherwise enjoying the Mortgaged Property (the "Rents"), (8) all other agreements, such as construction contracts, architects' agreements, engineers' contracts, utility contracts, maintenance agreements, management agreements, service contracts, listing agreements, guaranties, warranties, permits, licenses, certificates and entitlements in any way relating to the construction, use, occupancy, operation, maintenance, enjoyment or ownership of the Mortgaged Property (the "Property Agreements"), (9) all rights, privileges, tenements, hereditaments, rights-of-way, easements, appendages and appurtenances appertaining to the foregoing, (10) all property tax refunds (the "Tax Refunds"), (11) all accessions, replacements and substitutions for any of the foregoing and all proceeds thereof (the "Proceeds"), (12) all insurance policies, unearned premiums therefor and proceeds from such policies covering any of the above property now or hereafter acquired by Mortgagor (the "Insurance"), and (13) all of Mortgagor's right, title and interest in and to any awards, damages, remunerations, reimbursements, settlements or compensation heretofore made or hereafter to be made by any governmental authority pertaining to the Land, Improvements, Fixtures or Personalty (the "Condemnation Awards"). As used in this Mortgage, the term "Mortgaged Property" shall mean all or, where the context permit or requires, any portion of the above or any interest therein. (c) "Obligations": All of the agreements, covenants, conditions, warranties, representations and other obligations of Mortgagor (including, without limitation, the obligation to repay the Indebtedness) under the Credit Agreement and the other Loan Documents. The final maturity date of all of the Obligations is March 31, 2006. (d) "UCC": The Uniform Commercial Code of Minnesota or, if the creation, perfection and enforcement of any security interest herein granted is governed by the laws of a state other than Minnesota, then, as to the matter in question, the Uniform Commercial Code in effect in that state. ARTICLE 2 GRANT ----- Section 2.1. Grant. To secure the full and timely payment of the Indebtedness and the full and timely performance of the Obligations, Mortgagor MORTGAGES, GRANTS, BARGAINS, ASSIGNS, SELLS and CONVEYS, to Mortgagee the Mortgaged Property, WITH POWER OF SALE, subject, however, to the Permitted Encumbrances, TO HAVE AND TO HOLD the Mortgaged Property to Mortgagee, and Mortgagor does hereby bind itself, its successors and assigns to WARRANT AND FOREVER DEFEND the title to the Mortgaged Property unto Mortgagee. ARTICLE 3 WARRANTIES, REPRESENTATIONS AND COVENANTS ----------------------------------------- Mortgagor warrants, represents and covenants to Mortgagee as follows: Section 3.1. Statutory Covenants. Mortgagor makes and includes in this Mortgage the statutory covenants and other provisions set forth in Minnesota Statutes " 507.15, or in any future Minnesota Statute providing for a statutory form of real estate mortgage and Mortgagor covenants with Mortgagee the following statutory covenants: (a) to warrant the title to the Mortgaged Property subject only to the Permitted Encumbrances. Mortgagor is lawfully seized of fee title to the Mortgaged Property and has good right to convey the same; (b) to pay the Indebtedness as evidenced by the Notes; 2 (c) to pay (or compel the payment of) all taxes and assessments before penalty attaches for non-payment, and to pay in a timely manner all insurance premiums for coverage required pursuant to this Mortgage; (d) to keep all buildings insured against fire for an amount not less than the full replacement value but in any case not less than the unpaid amount of the Notes secured by this Mortgage and all prior, if any, mortgages and contract for deed balances and against other hazards for the amounts specified by Mortgagee for the protection of the Mortgagee, said other hazards being lightning, hazards under the usual extended coverage endorsement, and all other hazards and risks of direct physical loss occasioned by any cause whatsoever, subject only to the exception and exclusions, if any, agreed to by Mortgagee. All such policies shall name Mortgagee as Loss Payee under the so-called Standard Mortgage Clause, contain no pro rata reduction provisions and provide for not less than thirty (30) days notice to Mortgagee of cancellation or alteration of said policy; (e) that the Mortgaged Property and any improvements thereon shall be kept in repair and no waste shall be committed; and (f) that the whole of the principal sum evidenced by the Notes shall become due after default in the payment of any installment of principal or interest, or any tax, or in the performance of any other covenant, at the option of the Mortgagee. Section 3.2. Title to Mortgaged Property and Lien of this Instrument. Mortgagor owns the Mortgaged Property free and clear of any liens, claims or interests, except the Permitted Encumbrances. This Mortgage creates valid, enforceable first priority liens and security interests against the Mortgaged Property. Section 3.3. First Lien Status. Mortgagor shall preserve and protect the first lien and security interest status of this Mortgage and the other Loan Documents. If any lien or security interest other than the Permitted Encumbrances is asserted against the Mortgaged Property, Mortgagor shall promptly, and at its expense, (a) give Mortgagee a detailed written notice of such lien or security interest (including origin, amount and other terms), and (b) pay the underlying claim in full or take such other action so as to cause it to be released or contest the same in compliance with the requirements of the Credit Agreement (including the requirement of providing a bond or other security satisfactory to Mortgagee). Section 3.4. Payment and Performance. Mortgagor shall pay the Indebtedness when due under the Loan Documents and shall perform the Obligations in full when they are required to be performed. Section 3.5. Replacement of Fixtures and Personalty. Mortgagor shall not, without the prior written consent of Mortgagee, permit any of the Fixtures or Personalty to be removed at any time from the Land or Improvements, unless the removed item is removed temporarily for maintenance and repair or, if removed permanently, is obsolete and is replaced by an article of equal or better suitability and value, owned by Mortgagor subject to the liens and security interests of this Mortgage and the other Loan Documents, and free and clear of any other lien or security interest except such as may be permitted under the Credit Agreement or first approved in writing by Mortgagee. Section 3.6. Inspection. Mortgagor shall permit Mortgagee and the Lenders, and their respective agents, representatives and employees, upon reasonable prior notice to Mortgagor, to inspect the Mortgaged Property and all books and records of Mortgagor located thereon, and to conduct such 3 environmental and engineering studies as Mortgagee or the Lenders may require, provided that such inspections and studies shall not materially interfere with the use and operation of the Mortgaged Property. Section 3.7. Other Covenants. All of the covenants in the Credit Agreement are incorporated herein by reference and, together with covenants in this Article 3, shall be covenants running with the land. Section 3.8. Condemnation Awards and Insurance Proceeds. (a) Condemnation Awards. Mortgagor assigns all awards and compensation to which it is entitled for any condemnation or other taking, or any purchase in lieu thereof, to Mortgagee and authorizes Mortgagee to collect and receive such awards and compensation and to give proper receipts and acquittances therefor, subject to the terms of the Credit Agreement. (b) Insurance Proceeds. Mortgagor assigns to Mortgagee all proceeds of any insurance policies insuring against loss or damage to the Mortgaged Property. Mortgagor authorizes Mortgagee to collect and receive such proceeds and authorizes and directs the issuer of each of such insurance policies to make payment for all such losses directly to Mortgagee, instead of to Mortgagor and Mortgagee jointly. ARTICLE 4 [Intentionally Omitted] ARTICLE 5 DEFAULT AND FORECLOSURE ----------------------- Section 5.1. Remedies. If an Event of Default exists, Mortgagee may, at Mortgagee's election, exercise any or all of the following rights, remedies and recourses: (a) Acceleration. Declare the Indebtedness to be immediately due and payable, without further notice, presentment, protest, notice of intent to accelerate, notice of acceleration, demand or action of any nature whatsoever (each of which hereby is expressly waived by Mortgagor), whereupon the same shall become immediately due and payable. (b) Entry on Mortgaged Property. Enter the Mortgaged Property and take exclusive possession thereof and of all books, records and accounts relating thereto or located thereon. If Mortgagor remains in possession of the Mortgaged Property after an Event of Default and without Mortgagee's prior written consent, Mortgagee may invoke any legal remedies to dispossess Mortgagor. (c) Operation of Mortgaged Property. Hold, lease, develop, manage, operate or otherwise use the Mortgaged Property upon such terms and conditions as Mortgagee may deem reasonable under the circumstances (making such repairs, alterations, additions and improvements and taking other actions, from time to time, as Mortgagee deems necessary or desirable), and apply all Rents and other amounts collected by Mortgagee in connection therewith in accordance with the provisions of Section 5.7. (d) Foreclosure and Sale. Institute proceedings for the complete foreclosure of this Mortgage, either by judicial action or by power of sale, in which case the Mortgaged Property may be sold for cash or credit in one or more parcels. At any such sale by virtue of any judicial proceedings, power of sale, or any other legal right, remedy or recourse, the title to and right of possession of any such 4 property shall pass to the purchaser thereof, and to the fullest extent permitted by law, Mortgagor shall be completely and irrevocably divested of all of its right, title, interest, claim, equity, equity of redemption, and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law and in equity against Mortgagor, and against all other Persons claiming or to claim the property sold or any part thereof, by, through or under Mortgagor. Mortgagee or any of the Lenders may be a purchaser at such sale. If Mortgagee or any of the Lenders is the highest bidder, Mortgagee or any such Lender may credit the portion of the purchase price that would be distributed to Mortgagee or any such Lender against the Indebtedness in lieu of paying cash. In the event this Mortgage is foreclosed by judicial action, appraisement of the Mortgaged Property is waived. At maturity, whether at the stated time or prior thereof by the acceleration of maturity pursuant hereto, including by reason of the occurrence of an Event of Default, Mortgagee (in addition to any other remedies provided for herein or which it may have at law or equity) shall have the statutory power of sale and on foreclosure may retain statutory costs and attorneys' fees. Mortgagee is hereby empowered to foreclose this Mortgage by judicial proceedings or to sell the Mortgaged Property at public auction and to convey the same to the purchaser in fee simple absolute in accordance with the statute, and out of the moneys arising from such sale to retain the sums secured hereby. MORTGAGOR HEREBY EXPRESSLY CONSENTS TO THE FORECLOSURE AND SALE OF THE MORTGAGED PROPERTY BY ACTION PURSUANT TO MINNESOTA STATUTES CHAPTER 581 OR BY ADVERTISEMENT PURSUANT TO MINNESOTA STATUTES CHAPTER 580, WHICH PROVIDES FOR SALE AFTER SERVICE OF NOTICE THEREOF UPON THE OCCUPANT OF THE MORTGAGED PROPERTY AND PUBLICATION OF SAID NOTICE IN THE COUNTY IN MINNESOTA WHERE THE MORTGAGED PROPERTY IS SITUATED; ACKNOWLEDGES THAT SERVICE NEED NOT BE MADE UPON MORTGAGOR PERSONALLY (UNLESS MORTGAGOR IS AN OCCUPANT) AND THAT NO HEARING OF ANY TYPE IS REQUIRED IN CONNECTION WITH THE SALE; AND EXPRESSLY WAIVES ANY AND ALL RIGHT TO PRIOR NOTICE OF SALE OF THE MORTGAGED PROPERTY AND ANY AND ALL RIGHTS TO A PRIOR HEARING OF ANY TYPE IN CONNECTION WITH THE SALE OF THE MORTGAGED PROPERTY MORTGAGOR FURTHER UNDERSTANDS THAT UPON THE OCCURRENCE OF AN EVENT OF DEFAULT MORTGAGEE MAY TAKE POSSESSION OF THE PERSONAL PROPERTY INCLUDED IN THE MORTGAGED PROPERTY AND DISPOSE OF THE SAME BY SALE OR OTHERWISE IN ONE OR MORE PARCELS PROVIDED THAT AT LEAST TEN (10) DAYS PRIOR NOTICE OF SUCH DISPOSITION IS GIVEN TO THE MORTGAGOR, ALL AS PROVIDED FOR BY THE MINNESOTA UNIFORM COMMERCIAL CODE, AS THE SAME MAY HEREAFTER BE AMENDED, OR BY ANY LAW OR STATUTE HEREAFTER ENACTED IN SUBSTITUTION THEREOF. MORTGAGOR HEREBY RELINQUISHES, WAIVES ND GIVES UP ITS RIGHTS, IF ANY, UNDER THE CONSTITUTION OF THE UNITED STATES (AND ANY SIMILAR RIGHTS WHICH IT MAY HAVE UNDER THE CONSTITUTION OF THE STATE OF MINNESOTA) TO NOTICE AND HEARING BEFORE SALE OF THE MORTGAGED PROPERTY AND THE PERSONAL PROPERTY INCLUDED THEREIN, AND EXPRESSLY CONSENTS AND AGREES THAT THE PERSONAL PROPERTY INCLUDED THEREIN MAY BE DISPOSED OF PURSUANT TO THE UNIFORM COMMERCIAL CODE, ALL AS DESCRIBED ABOVE. (e) Receiver. Make application to a court of competent jurisdiction for, and obtain from such court as a matter of strict right and without notice to Mortgagor or regard to the adequacy of the Mortgaged Property for the repayment of the Indebtedness, the appointment of a receiver of the 5 Mortgaged Property, and Mortgagor irrevocably consents to such appointment. Any such receiver shall have all the usual powers and duties of receivers in similar cases, including the full power to rent, maintain and otherwise operate the Mortgaged Property upon such terms as may be approved by the court, and shall apply such Rents in accordance with the provisions of Section 5.7. (f) Other. Exercise all other rights, remedies and recourses granted under the Loan Documents or otherwise available at law or in equity. Section 5.2. Separate Sales. The Mortgaged Property may be sold in one or more parcels and in such manner and order as Mortgagee in its sole discretion may elect. To the extent permitted by applicable law, the right of sale arising out of any Event of Default shall not be exhausted by any one or more sales. Section 5.3. Remedies Cumulative, Concurrent and Nonexclusive. Mortgagee and the Lenders shall have all rights, remedies and recourses granted in the Loan Documents and available at law or equity (including the UCC), which rights (a) shall be cumulated and concurrent, (b) may be pursued separately, successively or concurrently against Mortgagor or others obligated under the Loan Documents, or against the Mortgaged Property, or against any one or more of them, at the sole discretion of Mortgagee or the Lenders, (c) may be exercised as often as occasion therefor shall arise, and the exercise or failure to exercise any of them shall not be construed as a waiver or release thereof or of any other right, remedy or recourse, and (d) are intended to be, and shall be, nonexclusive. No action by Mortgagee or the Lenders in the enforcement of any rights, remedies or recourses under the Loan Documents or otherwise at law or equity shall be deemed to cure any Event of Default. Section 5.4. Release of and Resort to Collateral. Mortgagee may, to the fullest extent permitted by applicable law, release, regardless of consideration and without the necessity for any notice to or consent by the holder of any subordinate lien on the Mortgaged Property, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by the Loan Documents or their status as a first and prior lien and security interest in and to the Mortgaged Property. For payment of the Indebtedness, Mortgagee may, to the fullest extent permitted by applicable law, resort to any other security in such order and manner as Mortgagee may elect. Section 5.5. Waiver of Redemption, Notice and Marshalling of Assets. To the fullest extent permitted by law, Mortgagor hereby irrevocably and unconditionally waives and releases (a) all benefit that might accrue to Mortgagor by virtue of any present or future statute of limitations or law or judicial decision exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any stay of execution, exemption from civil process, redemption or extension of time for payment, (b) all notices of any Event of Default or of Mortgagee's election to exercise or the actual exercise of any right, remedy or recourse provided for under the Loan Documents, and (c) any right to a marshalling of assets or a sale in inverse order of alienation. Section 5.6. Discontinuance of Proceedings. If Mortgagee or the Lenders shall have proceeded to invoke any right, remedy or recourse permitted under the Loan Documents and shall thereafter elect to discontinue or abandon it for any reason, Mortgagee or the Lenders shall have the unqualified right to do so and, in such an event, Mortgagor, Mortgagee and the Lenders shall be restored to their former positions with respect to the Indebtedness, the Obligations, the Loan Documents, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Mortgagee and the Lenders shall continue as if the right, remedy or recourse had never been invoked, but no such discontinuance or abandonment shall waive any Event of Default which may then exist or the right of Mortgagee or the Lenders thereafter to exercise any right, remedy or recourse under the Loan Documents 6 for such Event of Default. Section 5.7. Application of Proceeds. The proceeds of any sale of, and the Rents and other amounts generated by the holding, leasing, management, operation or other use of the Mortgaged Property, shall be applied by Mortgagee (or the receiver, if one is appointed) in the following order unless otherwise required by applicable law: (a) to the payment of the costs and expenses of taking possession of the Mortgaged Property and of holding, using, leasing, repairing, improving and selling the same, including, without limitation (1) receiver's fees and expenses, including the repayment of the amounts evidenced by any receiver's certificates, (2) court costs, (3) attorneys' and accountants' fees and expenses, and (4) costs of advertisement; (b) to the payment of the Indebtedness and performance of the Obligations in such manner and order of preference as Mortgagee in its sole discretion may determine; and (c) the balance, if any, to the payment of the Persons legally entitled thereto. Section 5.8. Occupancy After Foreclosure. Any sale of the Mortgaged Property or any part thereof in accordance with Section 5.1(d) will divest all right, title and interest of Mortgagor in and to the property sold. Subject to applicable law, any purchaser at a foreclosure sale will receive immediate possession of the property purchased. If Mortgagor retains possession of such property or any part thereof subsequent to such sale, Mortgagor will be considered a tenant at sufferance of the purchaser, and will, if Mortgagor remains in possession after demand to remove, be subject to eviction and removal, forcible or otherwise, with or without process of law. Section 5.9. Additional Advances and Disbursements; Costs of Enforcement. (a) If any Event of Default exists, Mortgagee and each of the Lenders shall have the right, but not the obligation, to cure such Event of Default in the name and on behalf of Mortgagor. All sums advanced and expenses incurred at any time by Mortgagee or any Lender under this Section 5.9, or otherwise under this Mortgage or any of the other Loan Documents or applicable law, shall bear interest from the date that such sum is advanced or expense incurred, to and including the date of reimbursement, computed at the rate or rates at which interest is then computed on the Indebtedness, and all such sums, together with interest thereon, shall be secured by this Mortgage as advances in protection of the Mortgaged Property. (b) Subject to the amount of attorneys' fees for which Mortgagee may be entitled to receive reimbursement pursuant to Minnesota Statutes " 582.01, Mortgagor shall pay all expenses (including reasonable attorneys' fees and expenses) of or incidental to the perfection and enforcement of this Mortgage and the other Loan Documents, or the enforcement, compromise or settlement of the Indebtedness or any claim under this Mortgage and the other Loan Documents, and for the curing thereof, or for defending or asserting the rights and claims of Mortgagee in respect thereof, by litigation or otherwise. Section 5.10. No Mortgagee in Possession. Neither the enforcement of any of the remedies under this Article 5, the assignment of the Rents and Leases under Article 6, the security interests under Article 7, nor any other remedies afforded to Mortgagee or any Lender under the Loan Documents, at law or in equity shall cause Mortgagee or any Lender to be deemed or construed to be a mortgagee in possession of the Mortgaged Property, to obligate Mortgagee or any Lender to lease the Mortgaged Property or attempt to do so, or to take any action, incur any expense, or perform or discharge 7 any obligation, duty or liability whatsoever under any of the Leases or otherwise. ARTICLE 6 ASSIGNMENT OF RENTS AND LEASES ------------------------------ Section 6.1. Assignment. To the extent permitted by law, Mortgagor hereby assigns to Mortgagee all Leases now or hereafter affecting the Mortgaged Property and all Rents and profits due or to become due to Mortgagor with respect to the Mortgaged Property, whether before or after foreclosure or during any redemption period after sheriff's foreclosure sale, as additional security for the repayment of the Notes and Mortgagor hereby further agrees that Mortgagee shall have the power pursuant to this Mortgage irrevocably to manage, control and lease the Mortgaged Property. Upon the occurrence of an Event of Default, and without regard to waste, adequacy of the security or solvency of Mortgagor, Mortgagee may, at its option, either: (a) apply to the Minnesota District Court for the County wherein the Mortgaged Property hereunder are located for the appointment of a receiver under Minnesota statutes " 559.17, it being understood and agreed that Mortgagee shall be entitled to the appointment of a receiver upon a showing that an Event of Default has occurred under the terms of this Mortgage, a receiver so appointed shall apply all Rents and profits collected first as provided in Minnesota Statutes " 576.01, Subd. 2, and thereafter shall apply the Rents to the payment of the following items in the order first indicated: first, to the payment of principal and interest on any prior mortgages; second, to the payment of any other prior liens or encumbrances; and third, to the payment of principal and interest on the Notes; or (b) collect all Rents and profits from the occupiers of the Mortgage Property upon the filing by Mortgagee, in (i) the office of the County Recorder or (ii) in the case of registered property in the office of the Registrar of Titles, for the county in which the Mortgaged Property are located, of a notice of the occurrence of an Event of Default in the terms and conditions of this Mortgage and the service of said notice of default upon the occupiers of the Mortgaged Property. Mortgagee shall apply all Rents and profits so collected in the same manner as is provided in Section 6.1(a) above where the Rents are collected pursuant to the appointment of a receiver. In the event Mortgagee exercises its rights under this Section 6.1(b), it shall not solely by reason hereof, be deemed to be a mortgagee-in-possession of the Mortgaged Property. Section 6.2. Perfection Upon Recordation. Mortgagor acknowledges that Mortgagee has taken all actions necessary to obtain, and that upon recordation of this Mortgage Mortgagee shall have, to the extent permitted under applicable law, a valid and fully perfected, first priority, present assignment of the Rents arising out of the Leases and all security for such Leases. Mortgagor acknowledges and agrees that upon recordation of this Mortgage Mortgagee's interest in the Rents shall be deemed to be fully perfected, "choate" and enforced as to Mortgagor and all third parties, including, without limitation, any subsequently appointed trustee in any case under Title 11 of the United States Code (the "Bankruptcy Code"), without the necessity of commencing a foreclosure action with respect to this Mortgage, making formal demand for the Rents, obtaining the appointment of a receiver or taking any other affirmative action. Section 6.3. Bankruptcy Provisions. Without limitation of the absolute nature of the assignment of the Rents hereunder, Mortgagor and Mortgagee agree that (a) this Mortgage shall constitute a "security agreement" for purposes of Section 552(b) of the Bankruptcy Code, (b) the security interest created by this Mortgage extends to property of Mortgagor acquired before the commencement of a case in bankruptcy and to all amounts paid as Rents and (c) such security interest shall extend to all Rents acquired by the estate after the commencement of any case in bankruptcy. 8 Section 6.4. No Merger of Estates. So long as part of the Indebtedness and the Obligations secured hereby remain unpaid and undischarged, the fee and leasehold estates to the Mortgaged Property shall not merge, but shall remain separate and distinct, notwithstanding the union of such estates either in Mortgagor, Mortgagee, any tenant or any third party by purchase or otherwise. ARTICLE 7 SECURITY AGREEMENT ------------------ Section 7.1. Security Interest. This Mortgage constitutes a "security agreement" on personal property within the meaning of the UCC and other applicable law and with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards. To this end, Mortgagor grants to Mortgagee a first and prior security interest in the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance, Condemnation Awards and all other Mortgaged Property which is personal property to secure the payment of the Indebtedness and performance of the Obligations, and agrees that Mortgagee shall have all the rights and remedies of a secured party under the UCC with respect to such property. Any notice of sale, disposition or other intended action by Mortgagee with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards sent to Mortgagor at least five (5) days prior to any action under the UCC shall constitute reasonable notice to Mortgagor. Section 7.2. Financing Statements. Mortgagor shall execute and deliver to Mortgagee, in form and substance satisfactory to Mortgagee, such financing statements and such further assurances as Mortgagee may, from time to time, reasonably consider necessary to create, perfect and preserve Mortgagee's security interest hereunder and Mortgagee may cause such statements and assurances to be recorded and filed, at such times and places as may be required or permitted by law to so create, perfect and preserve such security interest. Mortgagor's chief executive office is in the State of Minnesota at the address set forth in the first paragraph of this Mortgage. Section 7.3. Fixture Filing. This Mortgage shall also constitute a "fixture filing" for the purposes of the UCC against all of the Mortgaged Property which is or is to become fixtures. Information concerning the security interest herein granted may be obtained at the addresses of Debtor (Mortgagor) and Secured Party (Mortgagee) as set forth in the first paragraph of this Mortgage. ARTICLE 8 [Intentionally Omitted] ARTICLE 9 MISCELLANEOUS ------------- Section 9.1. Notices. Any notice required or permitted to be given under this Mortgage shall be given in accordance with Section 10.8 of the Credit Agreement. Section 9.2. Covenants Running with the Land. All Obligations contained in this Mortgage are intended by Mortgagor and Mortgagee to be, and shall be construed as, covenants running with the Mortgaged Property. As used herein, "Mortgagor" shall refer to the party named in the first paragraph of this Mortgage and to any subsequent owner of all or any portion of the Mortgaged Property. All Persons who may have or acquire an interest in the Mortgaged Property shall be deemed to have notice of, and be bound by, the terms of the Credit Agreement and the other Loan Documents; however, no such party shall be entitled to any rights thereunder without the prior written consent of Mortgagee. 9 Section 9.3. Attorney-in-Fact. Mortgagor hereby irrevocably appoints Mortgagee and its successors and assigns, as its attorney-in-fact, which agency is coupled with an interest and with full power of substitution, (a) to execute and/or record any notices of completion, cessation of labor or any other notices that Mortgagee deems appropriate to protect Mortgagee's interest, if Mortgagor shall fail to do so within ten (10) days after written request by Mortgagee, (b) upon the issuance of a deed pursuant to the foreclosure of this Mortgage or the delivery of a deed in lieu of foreclosure, to execute all instruments of assignment, conveyance or further assurance with respect to the Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards in favor of the grantee of any such deed and as may be necessary or desirable for such purpose, (c) to prepare, execute and file or record financing statements, continuation statements, applications for registration and like papers necessary to create, perfect or preserve Mortgagee's security interests and rights in or to any of the Mortgaged Property, and (d) while any Event of Default exists, to perform any obligation of Mortgagor hereunder, however: (1) Mortgagee shall not under any circumstances be obligated to perform any obligation of Mortgagor; (2) any sums advanced by Mortgagee in such performance shall be added to and included in the Indebtedness and shall bear interest at the rate or rates at which interest is then computed on the Indebtedness; (3) Mortgagee as such attorney-in-fact shall only be accountable for such funds as are actually received by Mortgagee; and (4) Mortgagee shall not be liable to Mortgagor or any other person or entity for any failure to take any action which it is empowered to take under this Section 9.3. Section 9.4. Successors and Assigns. This Mortgage shall be binding upon and inure to the benefit of Mortgagee, the Lenders, and Mortgagor and their respective successors and assigns. Mortgagor shall not, without the prior written consent of Mortgagee, assign any rights, duties or obligations hereunder. Section 9.5. No Waiver. Any failure by Mortgagee to insist upon strict performance of any of the terms, provisions or conditions of the Loan Documents shall not be deemed to be a waiver of same, and Mortgagee or the Lenders shall have the right at any time to insist upon strict performance of all of such terms, provisions and conditions. Section 9.6. Credit Agreement. If any conflict or inconsistency exists between this Mortgage and the Credit Agreement, the Credit Agreement shall govern. Section 9.7. Release or Reconveyance. Upon payment in full of the Indebtedness and performance in full of the Obligations, Mortgagee, at Mortgagor's expense, shall release the liens and security interests created by this Mortgage or reconvey the Mortgaged Property to Mortgagor. Section 9.8. Waiver of Stay, Moratorium and Similar Rights. Mortgagor agrees, to the full extent that it may lawfully do so, that it will not at any time insist upon or plead or in any way take advantage of any stay, marshalling of assets, extension, redemption or moratorium law now or hereafter in force and effect so as to prevent or hinder the enforcement of the provisions of this Mortgage or the Indebtedness secured hereby, or any agreement between Mortgagor and Mortgagee or any rights or remedies of Mortgagee or the Lenders. Section 9.9. Applicable Law. The provisions of this Mortgage regarding the creation, perfection and enforcement of the liens and security interests herein granted shall be governed by and construed under the laws of the state in which the Mortgaged Property is located. All other provisions of this Mortgage shall be governed by the laws of the State of New York (including, without limitation, Section 5-1401 of the General Obligations Law of the State of New York), without regard to conflicts of laws principles. 10 Section 9.10. Headings. The Article, Section and Subsection titles hereof are inserted for convenience of reference only and shall in no way alter, modify or define, or be used in construing, the text of such Articles, Sections or Subsections. Section 9.11. Entire Agreement. This Mortgage and the other Loan Documents embody the entire agreement and understanding between Mortgagee and Mortgagor and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. Section 9.12. Mortgagee as Agent; Successor Agents. (a) Agent has been appointed to act as Agent hereunder by the Lenders. Agent shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of the Mortgaged Property) in accordance with the terms of the Credit Agreement, any related agency agreement among Agent and the Lenders (collectively, as amended, supplemented or otherwise modified or replaced from time to time, the "Agency Documents") and this Mortgage. Mortgagor and all other persons shall be entitled to rely on releases, waivers, consents, approvals, notifications and other acts of Agent, without inquiry into the existence of required consents or approvals of the Lenders therefor. (b) Mortgagee shall at all times be the same Person that is Agent under the Agency Documents. Written notice of resignation by Agent pursuant to the Agency Documents shall also constitute notice of resignation as Agent under this Mortgage. Removal of Agent pursuant to any provision of the Agency Documents shall also constitute removal as Agent under this Mortgage. Appointment of a successor Agent pursuant to the Agency Documents shall also constitute appointment of a successor Agent under this Mortgage. Upon the acceptance of any appointment as Agent by a successor Agent under the Agency Documents, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent as the Mortgagee under this Mortgage, and the retiring or removed Agent shall promptly (i) assign and transfer to such successor Agent all of its right, title and interest in and to this Mortgage and the Mortgaged Property, and (ii) execute and deliver to such successor Agent such assignments and amendments and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Agent of the liens and security interests created hereunder, whereupon such retiring or removed Agent shall be discharged from its duties and obligations under this Mortgage. After any retiring or removed Agent's resignation or removal hereunder as Agent, the provisions of this Mortgage and the Agency Documents shall inure to its benefit as to any actions taken or omitted to be taken by it under this Mortgage while it was the Agent hereunder. [The remainder of this page has been intentionally left blank] 11 IN WITNESS WHEREOF, Mortgagor has on the date set forth in the acknowledgement hereto, effective as of the date first above written, caused this instrument to be duly EXECUTED AND DELIVERED by authority duly given. DIAMOND BRANDS OPERATING CORP., a Delaware corporation By:____________________________ Name: Title: S-1 ACKNOWLEDGEMENT STATE OF ILLINOIS ) ) SS.: COUNTY OF __________ ) THE FOREGOING INSTRUMENT WAS ACKNOWLEDGED BEFORE ME THIS _____ DAY OF APRIL, 1998, BY ___________________________________, THE _____________________________, OF DIAMOND BRANDS OPERATING CORP., A DELAWARE CORPORATION, ON BEHALF OF THE CORPORATION. ___________________________________________ (SIGNATURE AND OFFICE OF INDIVIDUAL TAKING ACKNOWLEDGEMENT) MY COMMISSION EXPIRES: __________________________ (NOTARIAL SEAL) N-1 EXHIBIT A Mortgaged Property [See Attached] Exh. A-1 [a] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By:__________________________ Name: Title: [b] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By: [17], a [18] [19] its General Partner By:________________________ Name: Title: [c] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By:___________________________ Name: Title: General Partner [d] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By: [20], a [21][22] its Managing Member By:_______________________ Name: Title: [e] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By:____________________________ Name: Title: Managing Member [f] MORTGAGOR: ________________________ [FULL NAME OF MORTGAGOR] FORM OF MORTGAGE WITH AGENT PROVISIONS The following information will be requested in completing this form: [1] State in which Property is Located [2] Full Name of Mortgagor (In capital letters) [3] Full Name of Mortgagee (In capital letters) [4] "As of" Date of Mortgage (document assumes same date as Credit Agreement [5] O'Melveny & Myers Attorney Name [6] O'Melveny & Myers File Number [7] Mortgagor's State of Organization [8] Mortgagor Entity Type (corporation, individual, etc.) (If Mortgagor's entity type is a corporation, then [a]) (If Mortgagor's entity type is either a partnership or a limited partnership, then ask:) Is its general partner a corporation? (If yes, then [b]) (If no, then [c]) (If Mortgagor's entity type is a limited liability company, then ask:) Is its Managing member a corporation? (If yes, then [d]) (If no, then [e]) (If Mortgagor is an individual, then [f]) [9] Mortgagor's Address [10] Mortgagee's State of Organization [11] Mortgagee's Entity Type (national association, corporation, etc.) [12] Mortgagee's Address [13] Title of Credit Agreement [14] Are there parties to the Credit Agreement other than Agent, Lenders, Mortgagor and Mortgagee? If no, skip. (Insert "between Mortgagor, Mortgagee and the Lenders") If yes, is there more than one party? If no, provide the full name of the other party. (Insert into "among Mortgagor, Mortgagee, the Lenders and _______________") If yes, provide the full names of all other parties. (Insert into "among Mortgagor, Mortgagee, the Lenders, __________ and __________")(Add additional ________," as necessary before "and".) [15] State in which Mortgagor's Chief Executive Office is located [16] Section of Credit Agreement on Notices [17] Full Name of General Partner [18] General Partner's State of Organization [19] General Partner's Entity Type [20] Full Name of Managing Member [21] Managing Member's State of Organization [22] Managing Member's Entity Type [23] Full Address of Property [A1] Full name of Agent [A2] Agent's State of Organization [A3] Agent's Entity Type (corporation, individual, etc.) [A4] Agent's Address [a] Corporation (without a seal) [b] Partnership or Limited Partnership with Corporate General Partner [c] Partnership or Limited Partnership with Individual General Partner [d] Limited Liability Company with Corporate Managing Member [e] Limited Liability Company with Individual Managing Member [f] Individual DRAFT 8/07/98 FORM OF LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (KANSAS) by and from [EMPIRE CANDLE, INC.], "Mortgagor" to WELLS FARGO BANK, N.A., in its capacity as Agent, "Mortgagee" Dated as of April ___, 1998 Location: Municipality: County: State: THE SECURED PARTY (MORTGAGEE) DESIRES THIS FIXTURE FILING TO BE INDEXED AGAINST THE RECORD OWNER OF THE REAL ESTATE DESCRIBED HEREIN PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 400 South Hope Street Los Angeles, California 90071-2899 Attention: Melissa Joe, Esq. File #218,107-012 LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (KANSAS) THIS LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (KANSAS) (this "Mortgage") is dated as of April ___, 1998 by and from [EMPIRE CANDLE, INC.], a [Missouri corporation] ("Mortgagor"), whose address is [2925 Fairfax Trafficway, Kansas City, Kansas 66115] to WELLS FARGO BANK, N.A., a national banking association, as agent (in such capacity, "Agent") for the lenders party to the Credit Agreement (defined below) (such lenders, together with their respective successors and assigns, collectively, the "Lenders"), having an address at [Agent's address] (Agent, together with its successors and assigns, "Mortgagee"). ARTICLE 1 DEFINITIONS ----------- Section 1.1. Definitions. All capitalized terms used herein without definition shall have the respective meanings ascribed to them in that certain Credit Agreement dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among Mortgagor, Mortgagee, the Lenders, DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent. As used herein, the following terms shall have the following meanings: (a) "Indebtedness": (1) All indebtedness of Mortgagor to Mortgagee and the Lenders, including, without limitation, all of the following (but subject, however, to the provisions of Section 10.2 below with respect to the maximum principal amount secured by this Mortgage): (a) principal, interest and other amounts evidenced or secured by the Loan Documents, including without limitation the Tranche A Term Notes, Tranche B Term Notes, Revolving Notes and Swing Line Notes, and (b) principal, interest and other amounts which may hereafter be loaned by Mortgagee or any of the Lenders under or in connection with the Credit Agreement or any of the other Loan Documents, whether evidenced by a promissory note or other instrument which, by its terms, is secured hereby; (2) all other indebtedness, obligations and liabilities now or hereafter existing of any kind of Mortgagor to Mortgagee or any of the Lenders under documents which recite that they are intended to be secured by this Mortgage; and (3) any and all judgments enforcing all such amounts and liabilities described in items (1) and (2) immediately above. The interest rate on the Indebtedness is a variable rate as more particularly provided in the Credit Agreement. (b) "Mortgaged Property": All of Mortgagor's interest in (1) the leasehold interest in the real property described in Exhibit A created by the Subject Lease (defined below), together with any greater estate therein as hereafter may be acquired by Mortgagor (the "Land"), (2) all improvements now owned or hereafter acquired by Mortgagor, now or at any time situated, placed or constructed upon the Land (the "Improvements"; the Land and Improvements are collectively referred to as the "Premises"), (3) all materials, supplies, equipment, apparatus and other items of personal property now owned or hereafter acquired by Mortgagor and now or hereafter attached to, installed in or used in connection with any of the Improvements or the Land, and water, gas, electrical, telephone, storm and sanitary sewer facilities and all other utilities whether or not situated in easements (the "Fixtures"), (4) all right, title and interest of Mortgagor in and to all goods, accounts, general intangibles, instruments, documents, chattel paper and all other personal property of any kind or character, including such items of personal property as defined in the UCC (defined below), now owned or hereafter acquired by Mortgagor and now or hereafter affixed to, placed upon, used in connection with, arising from or otherwise related to the Premises (the "Personalty"), (5) all reserves, escrows or impounds required under the Credit Agreement and all deposit accounts maintained by Mortgagor with respect to the Mortgaged Property (the "Deposit Accounts"), (6) all leases, licenses, concessions, occupancy agreements or other agreements (written or oral, now or at any time in effect) which grant to any Person a possessory interest in, or the right to use, all or any part of the Mortgaged Property, together with all related security and other deposits (the "Leases"), (7) all of the rents, revenues, royalties, income, proceeds, profits, security and other types of deposits, and other benefits paid or payable by parties to the Leases for using, leasing, licensing possessing, operating from, residing in, selling or otherwise enjoying the Mortgaged Property (the "Rents"), (8) all other agreements, such as construction contracts, architects' agreements, engineers' contracts, utility contracts, maintenance agreements, management agreements, service contracts, listing agreements, guaranties, warranties, permits, licenses, certificates and entitlements in any way relating to the construction, use, occupancy, operation, maintenance, enjoyment or ownership of the Mortgaged Property (the "Property Agreements"), (9) all rights, privileges, tenements, hereditaments, rights-of-way, easements, appendages and appurtenances appertaining to the foregoing, (10) all property tax refunds (the "Tax Refunds"), (11) all accessions, replacements and substitutions for any of the foregoing and all proceeds thereof (the "Proceeds"), (12) all insurance policies, unearned premiums therefor and proceeds from such policies covering any of the above property now or hereafter acquired by Mortgagor (the "Insurance"), and (13) all of Mortgagor's right, title and interest in and to any awards, damages, remunerations, reimbursements, settlements or compensation heretofore made or hereafter to be made by any governmental authority pertaining to the Land, Improvements, Fixtures or Personalty (the "Condemnation Awards"). As used in this Mortgage, the term "Mortgaged Property" shall mean all or, where the context permit or requires, any portion of the above or any interest therein. (c) "Obligations": All of the agreements, covenants, conditions, warranties, representations and other obligations of Mortgagor (including, without limitation, the obligation to repay the Indebtedness) under the Credit Agreement and the other Loan Documents. (d) "Subject Lease": That certain Commercial and Industrial Lease Agreement dated June 23, 1997, pursuant to which Mortgagor leases all or a portion of the Land from LNPJ, L.L.C., a memorandum of which was recorded with the County Clerk of [county and state in which the memorandum was recorded], in [Book/Libor/Reel] [Book/Libor/Reel number], Page [page number of Book/Libor/Reel on which the memorandum was recorded]. (e) "UCC": The Uniform Commercial Code of Kansas or, if the creation, perfection and enforcement of any security interest herein granted is governed by the laws of a state other than Kansas, then, as to the matter in question, the Uniform Commercial Code in effect in that state. ARTICLE 2 GRANT ----- Section 2.1. Grant. To secure the full and timely payment of the Indebtedness and the full and timely performance of the Obligations, Mortgagor MORTGAGES AND WARRANTS, GRANTS, BARGAINS, ASSIGNS, SELLS and CONVEYS, to Mortgagee the Mortgaged Property, subject, however, to the Permitted Encumbrances, TO HAVE AND TO HOLD the Mortgaged Property to Mortgagee, and Mortgagor does hereby bind itself, its successors and assigns to WARRANT AND FOREVER DEFEND the title to the Mortgaged Property unto Mortgagee. ARTICLE 3 WARRANTIES, REPRESENTATIONS AND COVENANTS ----------------------------------------- Mortgagor warrants, represents and covenants to Mortgagee as follows: 2 Section 3.1. Title to Mortgaged Property and Lien of this Instrument. Mortgagor owns the Mortgaged Property free and clear of any liens, claims or interests, except the Permitted Encumbrances. This Mortgage creates valid, enforceable first priority liens and security interests against the Mortgaged Property. Section 3.2. First Lien Status. Mortgagor shall preserve and protect the first lien and security interest status of this Mortgage and the other Loan Documents. If any lien or security interest other than the Permitted Encumbrances is asserted against the Mortgaged Property, Mortgagor shall promptly, and at its expense, (a) give Mortgagee a detailed written notice of such lien or security interest (including origin, amount and other terms), and (b) pay the underlying claim in full or take such other action so as to cause it to be released or contest the same in compliance with the requirements of the Credit Agreement (including the requirement of providing a bond or other security satisfactory to Mortgagee). Section 3.3. Payment and Performance. Mortgagor shall pay the Indebtedness when due under the Loan Documents and shall perform the Obligations in full when they are required to be performed. Section 3.4. Replacement of Fixtures and Personalty. Mortgagor shall not, without the prior written consent of Mortgagee, permit any of the Fixtures or Personalty to be removed at any time from the Land or Improvements, unless the removed item is removed temporarily for maintenance and repair or, if removed permanently, is obsolete and is replaced by an article of equal or better suitability and value, owned by Mortgagor subject to the liens and security interests of this Mortgage and the other Loan Documents, and free and clear of any other lien or security interest except such as may be permitted under the Credit Agreement or first approved in writing by Mortgagee. Section 3.5. Inspection. Mortgagor shall permit Mortgagee and the Lenders, and their respective agents, representatives and employees, upon reasonable prior notice to Mortgagor, and in compliance with the Subject Lease, to inspect the Mortgaged Property and all books and records of Mortgagor located thereon, and to conduct such environmental and engineering studies as Mortgagee or the Lenders may require, provided that such inspections and studies shall not materially interfere with the use and operation of the Mortgaged Property. Section 3.6. Other Covenants. All of the covenants in the Credit Agreement are incorporated herein by reference and, together with covenants in this Article 3, shall be covenants running with the land. Section 3.7. Condemnation Awards and Insurance Proceeds. (a) Condemnation Awards. Mortgagor assigns all awards and compensation to which it is entitled for any condemnation or other taking, or any purchase in lieu thereof, to Mortgagee and authorizes Mortgagee to collect and receive such awards and compensation and to give proper receipts and acquittances therefor, subject to the terms of the Credit Agreement. (b) Insurance Proceeds. Mortgagor assigns to Mortgagee all proceeds of any insurance policies insuring against loss or damage to the Mortgaged Property. Mortgagor authorizes Mortgagee to collect and receive such proceeds and authorizes and directs the issuer of each of such insurance policies to make payment for all such losses directly to Mortgagee, instead of to Mortgagor and Mortgagee jointly. 3 ARTICLE 4 LEASEHOLD MORTGAGE PROVISIONS ----------------------------- Section 4.1. Representations; Warranties; Covenants. Mortgagor hereby represents, warrants and covenants to Mortgagee and to the Lenders, with respect to the Subject Lease, that: (a) (1) Such Subject Lease is unmodified and in full force and effect, (2) all rent and other charges therein have been paid to the extent they are payable to the date hereof, (3) Mortgagor enjoys the quiet and peaceful possession of the property demised thereby, (4) to the best of its knowledge, Mortgagor is not in default under any of the terms thereof and there are no circumstances which, with the passage of time or the giving of notice or both, would constitute an event of default thereunder, (5) to the best of Mortgagor's knowledge, the lessor thereunder is not in default under any of the terms or provisions thereof on the part of the lessor to be observed or performed; (b) Mortgagor shall promptly pay, when due and payable, the rent and other charges payable pursuant to such Subject Lease, and will timely perform and observe all of the other terms, covenants and conditions required to be performed and observed by Mortgagor as lessee under such Subject Lease; (c) Mortgagor shall notify Mortgagee and the Lenders in writing of any default by Mortgagor in the performance or observance of any terms, covenants or conditions on the part of Mortgagor to be performed or observed under such Subject Lease within three (3) days after Mortgagor knows of such default; (d) Mortgagor shall, immediately upon receipt thereof, deliver a copy of each notice given to Mortgagor by the lessor pursuant to such Subject Lease and promptly notify Mortgagee and the Lenders in writing of any default by the lessor in the performance or observance of any of the terms, covenants or conditions on the part of the lessor to be performed or observed thereunder; (e) Unless required under the terms of such Subject Lease, Mortgagor shall not, without the prior written consent of Mortgagee and the Lenders (which may be granted or withheld in Mortgagee's and the Lenders' sole and absolute discretion) terminate, modify or surrender such Subject Lease, and any such attempted termination, modification or surrender without Mortgagee's and the Lenders' written consent shall be void; and (f) Mortgagor shall, within twenty (20) days after written request from Mortgagee, use its best efforts to obtain from the lessor and deliver to Mortgagee a certificate setting forth the name of the tenant thereunder and stating that such Subject Lease is in full force and effect, is unmodified or, if the Subject Lease has been modified, the date of each modification (together with copies of each such modification), that no notice of termination thereon has been served on Mortgagor, stating that no default or event which with notice or lapse of time (or both) would become a default is existing under the Subject Lease, stating the date to which rent has been paid, and specifying the nature of any defaults, if any, and containing such other statements and representations as may be requested by Mortgagee. Section 4.2. No Merger. So long as any of the Indebtedness or the Obligations remain unpaid or unperformed, the fee title to and the leasehold estate in the premises subject to each Subject Lease shall not merge but shall always be kept separate and distinct notwithstanding the union of such estates in the lessor or Mortgagor, or in a third party, by purchase or otherwise. If Mortgagor acquires the fee title or any other estate, title or interest in the property demised by the Subject Lease, or any part thereof, the lien of this Mortgage shall attach to, cover and be a lien upon such acquired estate, title or 4 interest and the same shall thereupon be and become a part of the Mortgaged Property with the same force and effect as if specifically encumbered herein. Mortgagor agrees to execute all instruments and documents that Mortgagee may reasonably require to ratify, confirm and further evidence the lien of this Mortgage on the acquired estate, title or interest. Furthermore, Mortgagor hereby appoints Mortgagee as its true and lawful attorney-in-fact to execute and deliver, following an Event of Default, all such instruments and documents in the name and on behalf of Mortgagor. This power, being coupled with an interest, shall be irrevocable as long as any portion of the Indebtedness remains unpaid. Section 4.3. Mortgagee or the Lenders as Lessee. If the Subject Lease shall be terminated prior to the natural expiration of its term due to default by Mortgagor or any tenant thereunder, and if, pursuant to the provisions of such Subject Lease, Mortgagee or the Lenders, or their respective designees, shall acquire from the lessor a new lease of the premises subject to the Subject Lease, Mortgagor shall have no right, title or interest in or to such new lease or the leasehold estate created thereby, or renewal privileges therein contained. Section 4.4. No Assignment. Notwithstanding anything to the contrary contained herein, this Mortgage shall not constitute an assignment of any Subject Lease within the meaning of any provision thereof prohibiting its assignment and Mortgagee and the Lenders shall have no liability or obligation thereunder by reason of their acceptance of this Mortgage. Mortgagee and the Lenders shall be liable for the obligations of the tenant arising out of any Subject Lease for only that period of time for which Mortgagee and the Lenders are in possession of the premises demised thereunder or has acquired, by foreclosure or otherwise, and are holding all of Mortgagor's right, title and interest therein. ARTICLE 5 DEFAULT AND FORECLOSURE ----------------------- Section 5.1. Remedies. If an Event of Default exists, Mortgagee, or a judicially appointed receiver, may, at Mortgagee's election, exercise any or all of the following rights, remedies and recourses: (a) Acceleration. Declare the Indebtedness to be immediately due and payable, without further notice, presentment, protest, notice of intent to accelerate, notice of acceleration, demand or action of any nature whatsoever (each of which hereby is expressly waived by Mortgagor), whereupon the same shall become immediately due and payable. (b) Entry on Mortgaged Property. Enter the Mortgaged Property and take exclusive possession thereof and of all books, records and accounts relating thereto or located thereon. If Mortgagor remains in possession of the Mortgaged Property after an Event of Default and without Mortgagee's prior written consent, Mortgagee may invoke any legal remedies to dispossess Mortgagor. (c) Operation of Mortgaged Property. Hold, lease, develop, manage, operate or otherwise use the Mortgaged Property upon such terms and conditions as Mortgagee may deem reasonable under the circumstances (making such repairs, alterations, additions and improvements and taking other actions, from time to time, as Mortgagee deems necessary or desirable), and apply all Rents and other amounts collected by Mortgagee in connection therewith in accordance with the provisions of Section 5.7. (d) Foreclosure and Sale. Foreclose this Mortgage and, subject to the limitations of this Mortgage with respect to the aggregate principal amount of the Obligations and interest thereon secured by this Mortgage, obtain a judgment in the amount of the Obligations, including all sums advanced, paid, or expended pursuant to this Mortgage and, to the extent permitted by applicable law, attorneys' fees and 5 expenses and all costs and expenses of enforcing this Mortgage and such judgment, and Mortgagee shall be entitled to a decree for the sale of the Mortgaged Property in satisfaction of the judgment foreclosing all rights and equities of Mortgagor in and to the Mortgaged Property as well as all persons claiming under Mortgagor. In addition, Mortgagee shall be entitled to collect from Mortgagor the deficiency, if any, between the amount of the judgment and all sums owing thereunder and the amount of the proceeds of the foreclosure sale of the Mortgaged Property after deducting all fees, costs and expenses of such sale. With respect to any notices required or permitted under the UCC, Mortgagor agrees that ten (10) days' prior written notice shall be deemed commercially reasonable. At any such sale by virtue of any judicial proceedings, power of sale, or any other legal right, remedy or recourse, the title to and right of possession of any such property shall pass to the purchaser thereof, and to the fullest extent permitted by law, Mortgagor shall be completely and irrevocably divested of all of its right, title, interest, claim, equity, equity of redemption, and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law and in equity against Mortgagor, and against all other Persons claiming or to claim the property sold or any part thereof, by, through or under Mortgagor. Mortgagee or any of the Lenders may be a purchaser at such sale and if Mortgagee or any of the Lenders is the highest bidder, Mortgagee or any such Lender may credit the portion of the purchase price that would be distributed to Mortgagee or any such Lender against the Indebtedness in lieu of paying cash. In the event this Mortgage is foreclosed by judicial action, appraisement of the Mortgaged Property is waived. (e) Receiver. Make application to a court of competent jurisdiction for, and obtain from such court as a matter of strict right and without notice to Mortgagor or regard to the adequacy of the Mortgaged Property for the repayment of the Indebtedness, the appointment of a receiver of the Mortgaged Property, and Mortgagor irrevocably consents to such appointment. Any such receiver shall have all the usual powers and duties of receivers in similar cases, including the full power to rent, maintain and otherwise operate the Mortgaged Property upon such terms as may be approved by the court, and shall apply such Rents in accordance with the provisions of Section 5.7. (f) Other. Exercise all other rights, remedies and recourses granted under the Loan Documents or otherwise available at law or in equity. Section 5.2. Separate Sales. The Mortgaged Property may be sold in one or more parcels and in such manner and order as Mortgagee in its sole discretion may elect; the right of sale arising out of any Event of Default shall not be exhausted by any one or more sales. Section 5.3. Remedies Cumulative, Concurrent and Nonexclusive. Mortgagee and the Lenders shall have all rights, remedies and recourses granted in the Loan Documents and available at law or equity (including the UCC), which rights (a) shall be cumulated and concurrent, (b) may be pursued separately, successively or concurrently against Mortgagor or others obligated under the Loan Documents, or against the Mortgaged Property, or against any one or more of them, at the sole discretion of Mortgagee or the Lenders, (c) may be exercised as often as occasion therefor shall arise, and the exercise or failure to exercise any of them shall not be construed as a waiver or release thereof or of any other right, remedy or recourse, and (d) are intended to be, and shall be, nonexclusive. No action by Mortgagee or the Lenders in the enforcement of any rights, remedies or recourses under the Loan Documents or otherwise at law or equity shall be deemed to cure any Event of Default. Section 5.4. Release of and Resort to Collateral. Mortgagee may release, regardless of consideration and without the necessity for any notice to or consent by the holder of any subordinate lien on the Mortgaged Property, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by the Loan Documents or their status as a first and prior lien and security interest in and to the Mortgaged 6 Property. For payment of the Indebtedness, Mortgagee may resort to any other security in such order and manner as Mortgagee may elect. Section 5.5. Waiver of Redemption, Notice and Marshalling of Assets. To the fullest extent permitted by law, Mortgagor hereby irrevocably and unconditionally waives and releases (a) all benefit that might accrue to Mortgagor by virtue of any present or future statute of limitations or law or judicial decision exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any stay of execution, exemption from civil process, period of redemption or redemption rights, or extension of time for payment, (b) all notices of any Event of Default or of Mortgagee's election to exercise or the actual exercise of any right, remedy or recourse provided for under the Loan Documents, and (c) any right to a marshalling of assets or a sale in inverse order of alienation. Section 5.6. Discontinuance of Proceedings. If Mortgagee or the Lenders shall have proceeded to invoke any right, remedy or recourse permitted under the Loan Documents and shall thereafter elect to discontinue or abandon it for any reason, Mortgagee or the Lenders shall have the unqualified right to do so and, in such an event, Mortgagor and Mortgagee and the Lenders shall be restored to their former positions with respect to the Indebtedness, the Obligations, the Loan Documents, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Mortgagee and the Lenders shall continue as if the right, remedy or recourse had never been invoked, but no such discontinuance or abandonment shall waive any Event of Default which may then exist or the right of Mortgagee or the Lenders thereafter to exercise any right, remedy or recourse under the Loan Documents for such Event of Default. Section 5.7. Application of Proceeds. The proceeds of any sale of, and the Rents and other amounts generated by the holding, leasing, management, operation or other use of the Mortgaged Property, shall be applied by Mortgagee (or the receiver, if one is appointed) in the following order unless otherwise required by applicable law: (a) to the payment of the costs and expenses of taking possession of the Mortgaged Property and of holding, using, leasing, repairing, improving and selling the same, including, without limitation (1) receiver's fees and expenses, including the repayment of the amounts evidenced by any receiver's certificates, (2) court costs, (3) reasonable attorneys' and accountants' fees and expenses, (4) costs of advertisement, (5) the payment of all rent and other charges under the Subject Lease, (6) statutory foreclosure costs, and (7) costs of title evidence, appraisals and environmental reports; (b) to the payment of the Indebtedness and performance of the Obligations in such manner and order of preference as Mortgagee in its sole discretion may determine; and (c) the balance, if any, to the payment of the Persons legally entitled thereto. Section 5.8. Occupancy After Foreclosure. Any sale of the Mortgaged Property or any part thereof in accordance with Section 5.1(d) will divest all right, title and interest of Mortgagor in and to the property sold. Subject to applicable law, any purchaser at a foreclosure sale will receive immediate possession of the property purchased. If Mortgagor retains possession of such property or any part thereof subsequent to such sale, Mortgagor will be considered a tenant at sufferance of the purchaser, and will, if Mortgagor remains in possession after demand to remove, be subject to eviction and removal, forcible or otherwise, with or without process of law. 7 Section 5.9. Additional Advances and Disbursements; Costs of Enforcement. (a) If any Event of Default exists, Mortgagee and each of the Lenders shall have the right, but not the obligation, to cure such Event of Default in the name and on behalf of Mortgagor. All sums advanced and expenses incurred at any time by Mortgagee or any Lender under this Section 5.9, or otherwise under this Mortgage or any of the other Loan Documents or applicable law, shall bear interest from the date that such sum is advanced or expense incurred, to and including the date of reimbursement, computed at the rate or rates at which interest is then computed on the Indebtedness, and all such sums, together with interest thereon, shall be secured by this Mortgage. (b) Mortgagor shall pay all expenses (including reasonable attorneys' fees and expenses) of or incidental to the perfection and enforcement of this Mortgage and the other Loan Documents, or the enforcement, compromise or settlement of the Indebtedness or any claim under this Mortgage and the other Loan Documents, and for the curing thereof, or for defending or asserting the rights and claims of Mortgagee in respect thereof, by litigation or otherwise. Section 5.10. No Mortgagee in Possession. Neither the enforcement of any of the remedies under this Article 5, the assignment of the Rents and Leases under Article 6, the security interests under Article 7, nor any other remedies afforded to Mortgagee or any Lender under the Loan Documents, at law or in equity shall cause Mortgagee or any Lender to be deemed or construed to be a mortgagee in possession of the Mortgaged Property, to obligate Mortgagee or any Lender to lease the Mortgaged Property or attempt to do so, or to take any action, incur any expense, or perform or discharge any obligation, duty or liability whatsoever under any of the Leases or otherwise. ARTICLE 6 ASSIGNMENT OF RENTS AND LEASES ------------------------------ Section 6.1. Assignment. In furtherance of and in addition to the assignment made by Mortgagor in Section 2.1 of this Mortgage, Mortgagor hereby absolutely and unconditionally assigns, sells, transfers and conveys to Mortgagee all of its right, title and interest in and to all Leases, whether now existing or hereafter entered into, and all of its right, title and interest in and to all Rents. This assignment is an absolute assignment and not an assignment for additional security only. So long as no Event of Default shall have occurred and be continuing, Mortgagor shall have a revocable license from Mortgagee to exercise all rights extended to the landlord under the Leases, including the right to receive and collect all Rents and to hold the Rents in trust for use in the payment and performance of the Obligations and to otherwise use the same. The foregoing license is granted subject to the conditional limitation that no Event of Default shall have occurred and be continuing. Upon the occurrence and during the continuance of an Event of Default, whether or not legal proceedings have commenced, and without regard to waste, adequacy of security for the Obligations or solvency of Mortgagor, the license herein granted shall automatically expire and terminate, without notice by Mortgagee (any such notice being hereby expressly waived by Mortgagor). Section 6.2. Perfection Upon Recordation. Mortgagor acknowledges that Mortgagee has taken all actions necessary to obtain, and that upon recordation of this Mortgage Mortgagee shall have, to the extent permitted under applicable law, a valid and fully perfected, first priority, present assignment of the Rents arising out of the Leases and all security for such Leases. Mortgagor acknowledges and agrees that upon recordation of this Mortgage Mortgagee's interest in the Rents shall be deemed to be fully perfected, "choate" and enforced as to Mortgagor and all third parties, including, without limitation, any subsequently appointed trustee in any case under Title 11 of the United States Code (the "Bankruptcy Code"), without the necessity of commencing a foreclosure action with respect to this Mortgage, making formal demand for the Rents, obtaining the appointment of a receiver or taking any 8 other affirmative action. Section 6.3. Bankruptcy Provisions. Without limitation of the absolute nature of the assignment of the Rents hereunder, Mortgagor and Mortgagee agree that (a) this Mortgage shall constitute a "security agreement" for purposes of Section 552(b) of the Bankruptcy Code, (b) the security interest created by this Mortgage extends to property of Mortgagor acquired before the commencement of a case in bankruptcy and to all amounts paid as Rents and (c) such security interest shall extend to all Rents acquired by the estate after the commencement of any case in bankruptcy. Section 6.4. No Merger of Estates. So long as part of the Indebtedness and the Obligations secured hereby remain unpaid and undischarged, the fee and leasehold estates to the Mortgaged Property shall not merge, but shall remain separate and distinct, notwithstanding the union of such estates either in Mortgagor, Mortgagee, any tenant or any third party by purchase or otherwise. ARTICLE 7 SECURITY AGREEMENT ------------------ Section 7.1. Security Interest. This Mortgage constitutes a "security agreement" on personal property within the meaning of the UCC and other applicable law and with respect to the leasehold interest created by the Subject Lease, the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards. To this end, Mortgagor grants to Mortgagee a first and prior security interest in the leasehold interest created by the Subject Lease, the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance, Condemnation Awards and all other Mortgaged Property which is personal property to secure the payment of the Indebtedness and performance of the Obligations, and agrees that Mortgagee shall have all the rights and remedies of a secured party under the UCC with respect to such property. Any notice of sale, disposition or other intended action by Mortgagee with respect to the leasehold interest created by the Subject Lease, the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards sent to Mortgagor at least five (5) days prior to any action under the UCC shall constitute reasonable notice to Mortgagor. Section 7.2. Financing Statements. Mortgagor shall execute and deliver to Mortgagee, in form and substance satisfactory to Mortgagee, such financing statements and such further assurances as Mortgagee may, from time to time, reasonably consider necessary to create, perfect and preserve Mortgagee's security interest hereunder and Mortgagee may cause such statements and assurances to be recorded and filed, at such times and places as may be required or permitted by law to so create, perfect and preserve such security interest. Mortgagor's chief executive office is in the State of [state in which Mortgagor's Chief Executive Office is located] at the address set forth in the first paragraph of this Mortgage. Section 7.3. Fixture Filing. This Mortgage shall also constitute a "fixture filing" for the purposes of the UCC against all of the Mortgaged Property which is or is to become fixtures. Information concerning the security interest herein granted may be obtained at the addresses of Debtor (Mortgagor) and Secured Party (Mortgagee) as set forth in the first paragraph of this Mortgage. ARTICLE 8 [Intentionally Omitted] ARTICLE 9 9 MISCELLANEOUS ------------- Section 9.1. Notices. Any notice required or permitted to be given under this Mortgage shall be given in accordance with Section [10.8] of the Credit Agreement. Section 9.2. Covenants Running with the Land. All Obligations contained in this Mortgage are intended by Mortgagor and Mortgagee to be, and shall be construed as, covenants running with the Mortgaged Property. As used herein, "Mortgagor" shall refer to the party named in the first paragraph of this Mortgage and to any subsequent owner of all or any portion of the Mortgaged Property. All Persons who may have or acquire an interest in the Mortgaged Property shall be deemed to have notice of, and be bound by, the terms of the Credit Agreement and the other Loan Documents; however, no such party shall be entitled to any rights thereunder without the prior written consent of Mortgagee. Section 9.3. Attorney-in-Fact. Mortgagor hereby irrevocably appoints Mortgagee and its successors and assigns, as its attorney-in-fact, which agency is coupled with an interest and with full power of substitution, (a) to execute and/or record any notices of completion, cessation of labor or any other notices that Mortgagee deems appropriate to protect Mortgagee's interest, if Mortgagor shall fail to do so within ten (10) days after written request by Mortgagee, (b) upon the issuance of a deed pursuant to the foreclosure of this Mortgage or the delivery of a deed in lieu of foreclosure, to execute all instruments of assignment, conveyance or further assurance with respect to the Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards in favor of the grantee of any such deed and as may be necessary or desirable for such purpose, (c) to prepare, execute and file or record financing statements, continuation statements, applications for registration and like papers necessary to create, perfect or preserve Mortgagee's security interests and rights in or to any of the Mortgaged Property, and (d) while any Event of Default exists, to perform any obligation of Mortgagor hereunder, however: (1) Mortgagee shall not under any circumstances be obligated to perform any obligation of Mortgagor; (2) any sums advanced by Mortgagee in such performance shall be added to and included in the Indebtedness and shall bear interest at the rate or rates at which interest is then computed on the Indebtedness; (3) Mortgagee as such attorney-in-fact shall only be accountable for such funds as are actually received by Mortgagee; and (4) Mortgagee shall not be liable to Mortgagor or any other person or entity for any failure to take any action which it is empowered to take under this Section 9.3. Section 9.4. Successors and Assigns. This Mortgage shall be binding upon and inure to the benefit of Mortgagee, the Lenders, and Mortgagor and their respective successors and assigns. Mortgagor shall not, without the prior written consent of Mortgagee, assign any rights, duties or obligations hereunder. Section 9.5. No Waiver. Any failure by Mortgagee to insist upon strict performance of any of the terms, provisions or conditions of the Loan Documents shall not be deemed to be a waiver of same, and Mortgagee or the Lenders shall have the right at any time to insist upon strict performance of all of such terms, provisions and conditions. Section 9.6. Credit Agreement. If any conflict or inconsistency exists between this Mortgage and the Credit Agreement, the Credit Agreement shall govern. Section 9.7. Release or Reconveyance. Upon payment in full of the Indebtedness and performance in full of the Obligations, Mortgagee, at Mortgagor's expense, shall release the liens and security interests created by this Mortgage or reconvey the Mortgaged Property to Mortgagor. Section 9.8. Waiver of Stay, Moratorium and Similar Rights. Mortgagor agrees, to the full extent that it may lawfully do so, that it will not at any time insist upon or plead or in any way take 10 advantage of any stay, marshalling of assets, extension, redemption or moratorium law now or hereafter in force and effect so as to prevent or hinder the enforcement of the provisions of this Mortgage or the Indebtedness secured hereby, or any agreement between Mortgagor and Mortgagee or any rights or remedies of Mortgagee or the Lenders. Section 9.9. Applicable Law. The provisions of this Mortgage regarding the creation, perfection and enforcement of the liens and security interests herein granted shall be governed by and construed under the laws of the state in which the Mortgaged Property is located. All other provisions of this Mortgage shall be governed by the laws of the State of New York (including, without limitation, Section 5-1401 of the General Obligations Law of the State of New York), without regard to conflicts of laws principles. Section 9.10. Headings. The Article, Section and Subsection titles hereof are inserted for convenience of reference only and shall in no way alter, modify or define, or be used in construing, the text of such Articles, Sections or Subsections. Section 9.11. Entire Agreement. This Mortgage and the other Loan Documents embody the entire agreement and understanding between Mortgagee and Mortgagor and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. Section 9.12. Mortgagee as Agent; Successor Agents. (a) Agent has been appointed to act as Agent hereunder by the Lenders. Agent shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of the Mortgaged Property) in accordance with the terms of the Credit Agreement, any related agency agreement among Agent and the Lenders (collectively, as amended, supplemented or otherwise modified or replaced from time to time, the "Agency Documents") and this Mortgage. Mortgagor and all other persons shall be entitled to rely on releases, waivers, consents, approvals, notifications and other acts of Agent, without inquiry into the existence of required consents or approvals of the Lenders therefor; except as required in Section 4.1 herein. (b) Mortgagee shall at all times be the same Person that is Agent under the Agency Documents. Written notice of resignation by Agent pursuant to the Agency Documents shall also constitute notice of resignation as Agent under this Mortgage. Removal of Agent pursuant to any provision of the Agency Documents shall also constitute removal as Agent under this Mortgage. Appointment of a successor Agent pursuant to the Agency Documents shall also constitute appointment of a successor Agent under this Mortgage. Upon the acceptance of any appointment as Agent by a successor Agent under the Agency Documents, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent as the Mortgagee under this Mortgage, and the retiring or removed Agent shall promptly (i) assign and transfer to such successor Agent all of its right, title and interest in and to this Mortgage and the Mortgaged Property, and (ii) execute and deliver to such successor Agent such assignments and amendments and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Agent of the liens and security interests created hereunder, whereupon such retiring or removed Agent shall be discharged from its duties and obligations under this Mortgage. After any retiring or removed Agent's resignation or removal hereunder as Agent, the provisions of this Mortgage and the Agency Documents shall inure to its benefit as to any actions taken or omitted to be taken by it under this Mortgage while it 11 was the Agent hereunder. ARTICLE 10 LOCAL LAW PROVISIONS Section 10.1. Limitation on Maximum Principal Amount of Obligations Secured. Anything in this Mortgage to the contrary notwithstanding, this Mortgage is made upon the condition that this Mortgage and the lien granted and created hereby shall not secure the entire amount of the Obligations, but shall only secure (a) the aggregate principal amount of $_______________, such aggregate principal amount being the last such principal amount constituting the Indebtedness, and (b) interest on such aggregate principal amount, together with all sums expended or incurred for the reasonable protection of the security created in the Mortgaged Property and the enforcement of the terms of this Mortgage, the Credit Agreement or any of the other Loan Documents, as applicable. Section 10.2. Priority of Future Advances. This Mortgage and the lien granted and created hereby secures all future advances and re-advances under the Credit Agreement (and guarantied by Mortgagor) or otherwise and future advances and re-advances under this Mortgage, all of such future advances and re-advances shall have the same priority as all advances made pursuant to this Mortgage and in accordance with K.S.A.? 58-2336; provided, however, that as provided in Section 10.1 above, the entire amount of the Obligations is not secured by this Mortgage, but this Mortgage only secures (a) the aggregate principal amount of $_______________, such aggregate principal amount being the last such principal amount constituting the Indebtedness, and (b) interest on such aggregate principal amount, together with all sums expended or incurred for the reasonable protection of the security of the Mortgaged Property and the enforcement of the terms of this Mortgage, the Credit Agreement or any of the other Loan Documents, as applicable. [The remainder of this page has been intentionally left blank] 12 IN WITNESS WHEREOF, Mortgagor has on the date set forth in the acknowledgement hereto, effective as of the date first above written, caused this instrument to be duly EXECUTED AND DELIVERED by authority duly given. [EMPIRE CANDLE, INC.], a [Missouri corporation] By:______________________ Name: Title: ACKNOWLEDGEMENT STATE OF ILLINOIS ) ) SS.: COUNTY OF __________ ) THE FOREGOING INSTRUMENT WAS ACKNOWLEDGED BEFORE ME THIS _____ DAY OF APRIL, 1998, BY ___________________________________, THE _____________________________, OF [EMPIRE CANDLE INC., A MISSOURI CORPORATION], ON BEHALF OF THE CORPORATION. __________________________________________________ (SIGNATURE AND OFFICE OF INDIVIDUAL TAKING ACKNOWLEDGEMENT) MY COMMISSION EXPIRES: __________________________ (NOTARIAL SEAL) EXHIBIT A Legal Description of premises located at [full address of property]: [a] MORTGAGOR: [2], a [7] [8] By:________________________________ Name: Title: [b] MORTGAGOR: [2], a [7] [8] By: [17], a [18] [19] its General Partner By:_______________________ Name: Title: [c] MORTGAGOR: [2], a [7] [8] By:______________________ Name: Title: General Partner [d] MORTGAGOR: [2], a [7] [8] By: [20], a [21] [22] its Managing Member By:_______________________ Name: Title: [e] MORTGAGOR: [2], a [7] [8] By:_________________________ Name: Title: Managing Member [f] MORTGAGOR: ________________________ [2] FORM OF MORTGAGE WITH LEASEHOLD PROVISIONS The following information will be requested in completing this form: [1] State in which Property is Located [2] Full Name of Mortgagor (In capital letters) [3] Full Name of Mortgagee (In capital letters) [4] "As of" Date of Mortgage (document assumes same date as Credit Agreement [5] O'Melveny & Myers Attorney Name [6] O'Melveny & Myers File Number [7] Mortgagor's State of Organization [8] Mortgagor Entity Type (corporation, individual, etc.) (If Mortgagor's entity type is a corporation, then [a]) (If Mortgagor's entity type is either a partnership or a limited partnership, then ask:) Is its general partner a corporation? (If yes, then [b]) (If no, then [c]) (If Mortgagor's entity type is a limited liability company, then ask:) Is its Managing member a corporation? (If yes, then [d]) (If no, then [e]) (If Mortgagor is an individual, then [f]) [9] Mortgagor's Address [10] Mortgagee's State of Organization [11] Mortgagee's Entity Type (national association, corporation, etc.) [12] Mortgagee's Address [13] Title of Credit Agreement [14] Are there parties to the Credit Agreement other than Mortgagor and Mortgagee? If no, skip. (Insert "between Mortgagor and Mortgagee") If yes, is there more than one party? If no, provide the full name of the other party. (Insert into "among Mortgagor, Mortgagee and _______________") If yes, provide the full names of all other parties. (Insert into "among Mortgagor, Mortgagee, __________ and __________")(Add additional ________," as necessary before "and".) [15] State in which Mortgagor's Chief Executive Office is located [16] Section of Credit Agreement on Notices [17] Full Name of General Partner [18] General Partner's State of Organization [19] General Partner's Entity Type [20] Full Name of Managing Member [21] Managing Member's State of Organization [22] Managing Member's Entity Type [23] Full Address of Property [L1] Title of Lease [L2] Date of Lease [L3] Full Name of Lessor [L4] County and State in which the memorandum was recorded [L5] The memorandum of lease was recorded in which one of the following? a) Book b) Libor c) Reel [L6] Book/Libor/Reel number [L7] Page number of the Book/Libor/Reel on which the memorandum was recorded [a] Corporation (without a seal) [b] Partnership or Limited Partnership with Corporate General Partner [c] Partnership or Limited Partnership with Individual General Partner [d] Limited Liability Company with Corporate Managing Member [e] Limited Liability Company with Individual Managing Member [f] Individual MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (MAINE) by and from FORSTER, INC., "Mortgagor" to WELLS FARGO BANK, N.A., in its capacity as Agent, "Mortgagee" Dated as of April 21, 1998 Location: Municipality: County: State: THE SECURED PARTY (MORTGAGEE) DESIRES THIS FIXTURE FILING TO BE INDEXED AGAINST THE RECORD OWNER OF THE REAL ESTATE DESCRIBED HEREIN PREPARED BY, RECORDING REQUESTED BY, AND WHEN RECORDED MAIL TO: O'Melveny & Myers LLP 400 South Hope Street Los Angeles, California 90071-2899 Attention: Melissa Joe, Esq. File #218,107-012 MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (MAINE) THIS MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF RENTS AND LEASES AND FIXTURE FILING (MAINE) (this "Mortgage") is dated as of April 21, 1998 by and from FORSTER, INC., a Maine corporation ("Mortgagor"), whose address is Mill Street, East Wilton, Maine 04234 to WELLS FARGO BANK, N.A., a national banking association, as agent (in such capacity, "Agent") for the lenders party to the Credit Agreement (defined below) (such lenders, together with their respective successors and assigns, collectively, the "Lenders"), having an address at 555 Montgomery Street, 17th Floor, San Francisco, California 94111 (Agent, together with its successors and assigns, "Mortgagee"). ARTICLE 1 DEFINITIONS ----------- Section 1.1. Definitions. All capitalized terms used herein without definition shall have the respective meanings ascribed to them in that certain Credit Agreement dated as of even date herewith (as amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among Mortgagor, Mortgagee, the Lenders, DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent. As used herein, the following terms shall have the following meanings: (a) "Indebtedness": (1) All indebtedness of Mortgagor to Mortgagee and the Lenders, including, without limitation, the sum of all (a) principal, interest and other amounts evidenced or secured by the Loan Documents, including a Subsidiary Guaranty of even date herewith given by Mortgagor to Mortgagee which guarantees an original principal indebtedness as set forth in the Loan Documents of $105,000,000.00, and (b) principal, interest and other amounts which may hereafter be loaned by Mortgagee or any of the Lenders under or in connection with the Credit Agreement or any of the other Loan Documents, whether evidenced by a promissory note or other instrument which, by its terms, is secured hereby, and (2) all other indebtedness, obligations and liabilities now or hereafter existing of any kind of Mortgagor to Mortgagee or any of the Lenders under documents which recite that they are intended to be secured by this Mortgage. Notwithstanding anything to the contrary herein, the maximum Indebtedness shall not exceed $105,000,000.00, subject to all other provisions of this Mortgage and the Credit Agreement. (b) "Mortgaged Property": All of Mortgagor's interest in (1) the fee interest in the real property described in Exhibit A attached hereto and incorporated herein by this reference, together with any greater estate therein as hereafter may be acquired by Mortgagor (the "Land"), (2) all improvements now owned or hereafter acquired by Mortgagor, now or at any time situated, placed or constructed upon the Land (the "Improvements"; the Land and Improvements are collectively referred to as the "Premises"), (3) all materials, supplies, equipment, apparatus and other items of personal property now owned or hereafter acquired by Mortgagor and now or hereafter attached to, installed in or used in connection with any of the Improvements or the Land, and water, gas, electrical, telephone, storm and sanitary sewer facilities and all other utilities whether or not situated in easements (the "Fixtures"), (4) all right, title and interest of Mortgagor in and to all goods, accounts, general intangibles, instruments, documents, chattel paper and all other personal property of any kind or character, including such items of personal property as defined in the UCC (defined below), now owned or hereafter acquired by Mortgagor and now or hereafter affixed to, placed upon, used in connection with, arising from or otherwise related to the Premises (the "Personalty"), (5) all reserves, escrows or impounds required under the Credit Agreement and all deposit accounts maintained by Mortgagor with respect to the Mortgaged Property (the "Deposit Accounts"), (6) all leases, licenses, concessions, occupancy agreements or other agreements (written or oral, now or at any time in effect) which grant to any Person a possessory interest in, or the right to use, all or any part of the Mortgaged Property, together with all related security and other deposits (the "Leases"), (7) all of the rents, revenues, royalties, income, proceeds, profits, security and other types of deposits, and other benefits paid or payable by parties to the Leases for using, leasing, licensing possessing, operating from, residing in, selling or otherwise enjoying the Mortgaged Property (the "Rents"), (8) all other agreements, such as construction contracts, architects' agreements, engineers' contracts, utility contracts, maintenance agreements, management agreements, service contracts, listing agreements, guaranties, warranties, permits, licenses, certificates and entitlements in any way relating to the construction, use, occupancy, operation, maintenance, enjoyment or ownership of the Mortgaged Property (the "Property Agreements"), (9) all rights, privileges, tenements, hereditaments, rights-of-way, easements, appendages and appurtenances appertaining to the foregoing, (10) all property tax refunds (the "Tax Refunds"), (11) all accessions, replacements and substitutions for any of the foregoing and all proceeds thereof (the "Proceeds"), (12) all insurance policies, unearned premiums therefor and proceeds from such policies covering any of the above property now or hereafter acquired by Mortgagor (the "Insurance"), and (13) all of Mortgagor's right, title and interest in and to any awards, damages, remunerations, reimbursements, settlements or compensation heretofore made or hereafter to be made by any governmental authority pertaining to the Land, Improvements, Fixtures or Personalty (the "Condemnation Awards"). As used in this Mortgage, the term "Mortgaged Property" shall mean all or, where the context permit or requires, any portion of the above or any interest therein. (c) "Obligations": All of the agreements, covenants, conditions, warranties, representations and other obligations of Mortgagor (including, without limitation, the obligation to repay the Indebtedness) under the Credit Agreement and the other Loan Documents. (d) "UCC": The Uniform Commercial Code of Maine or, if the creation, perfection and enforcement of any security interest herein granted is governed by the laws of a state other than Maine, then, as to the matter in question, the Uniform Commercial Code in effect in that state. (e) "Event of Default": Any one or more of the following conditions or events: (1) Failure by Company or Mortgagor to pay as and when due and payable any sums to be paid by Company or Mortgagor under this Mortgage and continuance of such failure following any and all notice and cure periods contained in the Credit Agreement; or (2) Failure by Company or Mortgagor to duly observe or perform any other term, covenant, condition or agreement of this Mortgage and continuance of such failure following any and all notice and cure periods contained in the Credit Agreement; or (3) Any representation or warranty of Company or Mortgagor contained in this Mortgage shall prove to have been false or incorrect in any material respect upon the date when made; or (4) The filing by Company or Mortgagor or any guarantor of a voluntary petition in bankruptcy under Title 11 of the United States Code, or the issuing of an order for relief against Company or Mortgagor or any guarantor in any involuntary petition in bankruptcy under Title 11 of the United States Code, or the filing by Company or Mortgagor or any guarantor of any petition or answer seeking or acquiescing in any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief for itself under any present or future federal, state or other law or regulation relating to bankruptcy, insolvency or other relief for debtors, or Company's or Mortgagor's or any guarantor's seeking or consenting to or acquiescing in the appointment of any custodian, trustee, 2 receiver, conservator or liquidator of Company or Mortgagor or such guarantor, respectively, or of all or any substantial part of its respective property, or the making by Company or Mortgagor or any guarantor of any assignment for the benefit of creditors, or Company's or Mortgagor's or any guarantor's failure generally to pay its debts, as such debts become due, or Company's or Mortgagor's or any guarantor's giving of notice to any governmental authority or body of insolvency or pending insolvency or suspension of operations; or (5) The entry by a court of competent jurisdiction of any order, judgment or decree approving a petition filed against Company or Mortgagor or any guarantor seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future federal, state or other law or regulation relating to bankruptcy, insolvency or other relief for debtors, or appointing any custodian, trustee, receiver, conservator or liquidator of all or any substantial part of Company's or Mortgagor's or any guarantor's property; or (6) The occurrence of any "Event of Default" as defined in any of the other Loan Documents, including without limitation the Credit Agreement. ARTICLE 2 GRANT ----- Section 2.1. Grant. To secure the full and timely payment of the Indebtedness and the full and timely performance of the Obligations, Mortgagor MORTGAGES, GRANTS, BARGAINS, ASSIGNS, SELLS and CONVEYS, to Mortgagee the Mortgaged Property, subject, however, to the Permitted Encumbrances, TO HAVE AND TO HOLD the Mortgaged Property to Mortgagee, and Mortgagor does hereby bind itself, its successors and assigns to WARRANT AND FOREVER DEFEND the title to the Mortgaged Property unto Mortgagee. ARTICLE 3 WARRANTIES, REPRESENTATIONS AND COVENANTS ----------------------------------------- Mortgagor warrants, represents and covenants to Mortgagee as follows: Section 3.1. Title to Mortgaged Property and Lien of this Instrument. Mortgagor owns the Mortgaged Property free and clear of any liens, claims or interests, except the Permitted Encumbrances. This Mortgage creates valid, enforceable first priority liens and security interests against the Mortgaged Property. Section 3.2. First Lien Status. Mortgagor shall preserve and protect the first lien and security interest status of this Mortgage and the other Loan Documents. If any lien or security interest other than the Permitted Encumbrances is asserted against the Mortgaged Property, Mortgagor shall promptly, and at its expense, (a) give Mortgagee a detailed written notice of such lien or security interest (including origin, amount and other terms), and (b) pay the underlying claim in full or take such other action so as to cause it to be released or contest the same in compliance with the requirements of the Credit Agreement (including the requirement of providing a bond or other security satisfactory to Mortgagee). Section 3.3. Payment and Performance. Mortgagor shall pay the Indebtedness when due under the Loan Documents and shall perform the Obligations in full when they are required to be performed. Section 3.4. Replacement of Fixtures and Personalty. Mortgagor shall not, without 3 the prior written consent of Mortgagee, permit any of the Fixtures or Personalty to be removed at any time from the Land or Improvements, unless the removed item is removed temporarily for maintenance and repair or, if removed permanently, is obsolete and is replaced by an article of equal or better suitability and value, owned by Mortgagor subject to the liens and security interests of this Mortgage and the other Loan Documents, and free and clear of any other lien or security interest except such as may be permitted under the Credit Agreement or first approved in writing by Mortgagee. Section 3.5. Inspection. Mortgagor shall permit Mortgagee and the Lenders, and their respective agents, representatives and employees, upon reasonable prior notice to Mortgagor, to inspect the Mortgaged Property and all books and records of Mortgagor located thereon, and to conduct such environmental and engineering studies as Mortgagee or the Lenders may require, provided that such inspections and studies shall not materially interfere with the use and operation of the Mortgaged Property. Section 3.6. Other Covenants. All of the covenants in the Credit Agreement are incorporated herein by reference and, together with covenants in this Article 3, shall be covenants running with the land. Section 3.7. Condemnation Awards and Insurance Proceeds. (a) Condemnation Awards. Mortgagor assigns all awards and compensation to which it is entitled for any condemnation or other taking, or any purchase in lieu thereof, to Mortgagee and authorizes Mortgagee to collect and receive such awards and compensation and to give proper receipts and acquittances therefor, subject to the terms of the Credit Agreement. (b) Insurance Proceeds. Mortgagor assigns to Mortgagee all proceeds of any insurance policies insuring against loss or damage to the Mortgaged Property. Mortgagor authorizes Mortgagee to collect and receive such proceeds and authorizes and directs the issuer of each of such insurance policies to make payment for all such losses directly to Mortgagee, instead of to Mortgagor and Mortgagee jointly. ARTICLE 4 [Intentionally Omitted] ARTICLE 5 DEFAULT AND FORECLOSURE ----------------------- Section 5.1. Remedies. If an Event of Default exists, Mortgagee may, at Mortgagee's election, exercise any or all of the following rights, remedies and recourses: (a) Acceleration. Declare the Indebtedness to be immediately due and payable, without further notice, presentment, protest, notice of intent to accelerate, notice of acceleration, demand or action of any nature whatsoever (each of which hereby is expressly waived by Mortgagor), whereupon the same shall become immediately due and payable. (b) Entry on Mortgaged Property. Enter the Mortgaged Property and take exclusive possession thereof and of all books, records and accounts relating thereto or located thereon. If Mortgagor remains in possession of the Mortgaged Property after an Event of Default and without Mortgagee's prior written consent, Mortgagee may invoke any legal remedies to dispossess Mortgagor. (c) Operation of Mortgaged Property. Hold, lease, develop, manage, operate or 4 otherwise use the Mortgaged Property upon such terms and conditions as Mortgagee may deem reasonable under the circumstances (making such repairs, alterations, additions and improvements and taking other actions, from time to time, as Mortgagee deems necessary or desirable), and apply all Rents and other amounts collected by Mortgagee in connection therewith in accordance with the provisions of Section 5.7. (d) Foreclosure and Sale. Institute proceedings for the complete foreclosure of this Mortgage, either by judicial action or by power of sale, in which case the Mortgaged Property may be sold for cash or credit in one or more parcels. Mortgagee shall have the authority to foreclose this Mortgage by any legal or equitable method of foreclosure existing at the time of execution of this Mortgage or thereafter, including without limitation the Statutory Power of Sale as provided in 33 M.R.S.A. ? 501. With respect to any notices required or permitted under the UCC, Mortgagor agrees that five (5) days' prior written notice shall be deemed commercially reasonable. At any such sale by virtue of any judicial proceedings, power of sale, or any other legal right, remedy or recourse, the title to and right of possession of any such property shall pass to the purchaser thereof, and to the fullest extent permitted by law, Mortgagor shall be completely and irrevocably divested of all of its right, title, interest, claim, equity, equity of redemption, and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law and in equity against Mortgagor, and against all other Persons claiming or to claim the property sold or any part thereof, by, through or under Mortgagor. Mortgagee or any of the Lenders may be a purchaser at such sale. If Mortgagee or any of the Lenders is the highest bidder, Mortgagee or any such Lender may credit the portion of the purchase price that would be distributed to Mortgagee or any such Lender against the Indebtedness in lieu of paying cash. In the event this Mortgage is foreclosed by judicial action, appraisement of the Mortgaged Property is waived. (e) Receiver. Make application to a court of competent jurisdiction for, and obtain from such court as a matter of strict right and without notice to Mortgagor or regard to the adequacy of the Mortgaged Property for the repayment of the Indebtedness, the appointment of a receiver of the Mortgaged Property, and Mortgagor irrevocably consents to such appointment. Any such receiver shall have all the usual powers and duties of receivers in similar cases, including the full power to rent, maintain and otherwise operate the Mortgaged Property upon such terms as may be approved by the court, and shall apply such Rents in accordance with the provisions of Section 5.7. (f) Other. Exercise all other rights, remedies and recourses granted under the Loan Documents or otherwise available at law or in equity. Section 5.2. Separate Sales. The Mortgaged Property may be sold in one or more parcels and in such manner and order as Mortgagee in its sole discretion may elect; the right of sale arising out of any Event of Default shall not be exhausted by any one or more sales. Section 5.3. Remedies Cumulative, Concurrent and Nonexclusive. Mortgagee and the Lenders shall have all rights, remedies and recourses granted in the Loan Documents and available at law or equity (including the UCC), which rights (a) shall be cumulated and concurrent, (b) may be pursued separately, successively or concurrently against Mortgagor or others obligated under the Loan Documents, or against the Mortgaged Property, or against any one or more of them, at the sole discretion of Mortgagee or the Lenders, (c) may be exercised as often as occasion therefor shall arise, and the exercise or failure to exercise any of them shall not be construed as a waiver or release thereof or of any other right, remedy or recourse, and (d) are intended to be, and shall be, nonexclusive. No action by Mortgagee or the Lenders in the enforcement of any rights, remedies or recourses under the Loan Documents or otherwise at law or equity shall be deemed to cure any Event of Default. Additionally, Mortgagor agrees for itself, its successors and assigns, that the acceptance, before the expiration of any 5 right of redemption and after the commencement of foreclosure proceedings of this Mortgage, of insurance proceeds, eminent domain awards, Rents or anything else of value to be applied on or to the Indebtedness by Mortgagee or any person or party holding under it shall not constitute a waiver of any right of foreclosure, and this agreement by Mortgagor shall be that agreement referred to in 14 M.R.S.A. " 6204, as the same may be amended or replaced, as necessary to prevent such waiver of foreclosure. This agreement by Mortgagor is intended to apply to the acceptance and such application of any such proceeds, awards, rents and other sums or anything else of value whether the same shall be accepted from, or for the account of, Mortgagor or from any other source whatsoever by Mortgagee or by any person or party holding under Mortgagee at any time or times in the future while any of the Indebtedness or other Obligations secured hereby shall remain outstanding. Section 5.4. Release of and Resort to Collateral. Mortgagee may release, regardless of consideration and without the necessity for any notice to or consent by the holder of any subordinate lien on the Mortgaged Property, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by the Loan Documents or their status as a first and prior lien and security interest in and to the Mortgaged Property. For payment of the Indebtedness, Mortgagee may resort to any other security in such order and manner as Mortgagee may elect. Section 5.5. Waiver of Redemption, Notice and Marshalling of Assets. To the fullest extent permitted by law, Mortgagor hereby irrevocably and unconditionally waives and releases (a) all benefit that might accrue to Mortgagor by virtue of any present or future statute of limitations or law or judicial decision exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any stay of execution, exemption from civil process, redemption or extension of time for payment, (b) all notices of any Event of Default or of Mortgagee's election to exercise or the actual exercise of any right, remedy or recourse provided for under the Loan Documents, and (c) any right to a marshalling of assets or a sale in inverse order of alienation. Section 5.6. Discontinuance of Proceedings. If Mortgagee or the Lenders shall have proceeded to invoke any right, remedy or recourse permitted under the Loan Documents and shall thereafter elect to discontinue or abandon it for any reason, Mortgagee or the Lenders shall have the unqualified right to do so and, in such an event, Mortgagor, Mortgagee and the Lenders shall be restored to their former positions with respect to the Indebtedness, the Obligations, the Loan Documents, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Mortgagee and the Lenders shall continue as if the right, remedy or recourse had never been invoked, but no such discontinuance or abandonment shall waive any Event of Default which may then exist or the right of Mortgagee or the Lenders thereafter to exercise any right, remedy or recourse under the Loan Documents for such Event of Default. Section 5.7. Application of Proceeds. The proceeds of any sale of, and the Rents and other amounts generated by the holding, leasing, management, operation or other use of the Mortgaged Property, shall be applied by Mortgagee (or the receiver, if one is appointed) in the following order unless otherwise required by applicable law: (a) to the payment of the costs and expenses of taking possession of the Mortgaged Property and of holding, using, leasing, repairing, improving and selling the same, including, without limitation (1) receiver's fees and expenses, including the repayment of the amounts evidenced by any receiver's certificates, (2) court costs, (3) attorneys' and accountants' fees and expenses, and (4) costs of advertisement; (b) to the payment of the Indebtedness and performance of the Obligations in such 6 manner and order of preference as Mortgagee in its sole discretion may determine; and (c) the balance, if any, to the payment of the Persons legally entitled thereto. Section 5.8. Occupancy After Foreclosure. Any sale of the Mortgaged Property or any part thereof in accordance with Section 5.1(d) will divest all right, title and interest of Mortgagor in and to the property sold. Subject to applicable law, any purchaser at a foreclosure sale will receive immediate possession of the property purchased. If Mortgagor retains possession of such property or any part thereof subsequent to such sale, Mortgagor will be considered a tenant at sufferance of the purchaser, and will, if Mortgagor remains in possession after demand to remove, be subject to eviction and removal, forcible or otherwise, with or without process of law. Section 5.9. Additional Advances and Disbursements; Costs of Enforcement. (a) If any Event of Default exists, Mortgagee and each of the Lenders shall have the right, but not the obligation, to cure such Event of Default in the name and on behalf of Mortgagor. All sums advanced and expenses incurred at any time by Mortgagee or any Lender under this Section 5.9, or otherwise under this Mortgage or any of the other Loan Documents or applicable law, shall bear interest from the date that such sum is advanced or expense incurred, to and including the date of reimbursement, computed at the rate or rates at which interest is then computed on the Indebtedness, and all such sums, together with interest thereon, shall be secured by this Mortgage. (b) Mortgagor shall pay all expenses (including reasonable attorneys' fees and expenses) of or incidental to the perfection and enforcement of this Mortgage and the other Loan Documents, or the enforcement, compromise or settlement of the Indebtedness or any claim under this Mortgage and the other Loan Documents, and for the curing thereof, or for defending or asserting the rights and claims of Mortgagee in respect thereof, by litigation or otherwise. (c) Upon request of Mortgagor, however subject to the terms, conditions and limitations under the Credit Agreement, Mortgagee may, at its sole option, from time to time make Future Advances (as defined below) to Mortgagor, in such amounts as are permitted under the terms of the Credit Agreement. This Mortgage shall also secure Contingent Obligations (as defined below) in such amounts as are permitted under the terms of the Credit Agreement. Future Advances, Contingent Obligations and Protective Advances (as referenced below) shall have the meanings given them in 33 M.R.S.A. ? 505, as the same may be amended or replaced form time to time. At Mortgagee's request, Mortgagor shall execute and deliver to Mortgagee promissory notes or other agreements or documents evidencing each and every Future Advance which Mortgagee may make, which promissory notes or other agreements or documents shall contain such terms and conditions as Mortgagee may require. Mortgagor shall pay when due all Future Advances with interest and other charges thereon, as applicable, and the same, and each promissory note and agreement or document evidencing the same, shall be secured hereby. All provisions of this Mortgage shall apply to each Future Advance as well as to all other Indebtedness secured hereby. Nothing herein contained, however, shall limit the amount secured by this Mortgage if such amount is increased by Protective Advances made by Mortgagee, as herein elsewhere provided. Section 5.10. No Mortgagee in Possession. Neither the enforcement of any of the remedies under this Article 5, the assignment of the Rents and Leases under Article 6, the security interests under Article 7, nor any other remedies afforded to Mortgagee or any Lender under the Loan Documents, at law or in equity shall cause Mortgagee or any Lender to be deemed or construed to be a mortgagee in possession of the Mortgaged Property, to obligate Mortgagee or any Lender to lease the Mortgaged Property or attempt to do so, or to take any action, incur any expense, or perform or discharge 7 any obligation, duty or liability whatsoever under any of the Leases or otherwise. ARTICLE 6 ASSIGNMENT OF RENTS AND LEASES ------------------------------ Section 6.1. Assignment. In furtherance of and in addition to the assignment made by Mortgagor in Section 2.1 of this Mortgage, Mortgagor hereby absolutely and unconditionally assigns, sells, transfers and conveys to Mortgagee all of its right, title and interest in and to all Leases, whether now existing or hereafter entered into, and all of its right, title and interest in and to all Rents. This assignment is an absolute assignment and not an assignment for additional security only. So long as no Event of Default shall have occurred and be continuing, Mortgagor shall have a revocable license from Mortgagee to exercise all rights extended to the landlord under the Leases, including the right to receive and collect all Rents and to hold the Rents in trust for use in the payment and performance of the Obligations and to otherwise use the same. The foregoing license is granted subject to the conditional limitation that no Event of Default shall have occurred and be continuing. Upon the occurrence and during the continuance of an Event of Default, whether or not legal proceedings have commenced, and without regard to waste, adequacy of security for the Obligations or solvency of Mortgagor, the license herein granted shall automatically expire and terminate, without notice by Mortgagee (any such notice being hereby expressly waived by Mortgagor). Section 6.2. Perfection Upon Recordation. Mortgagor acknowledges that Mortgagee has taken all actions necessary to obtain, and that upon recordation of this Mortgage Mortgagee shall have, to the extent permitted under applicable law, a valid and fully perfected, first priority, present assignment of the Rents arising out of the Leases and all security for such Leases. Mortgagor acknowledges and agrees that upon recordation of this Mortgage Mortgagee's interest in the Rents shall be deemed to be fully perfected, "choate" and enforced as to Mortgagor and all third parties, including, without limitation, any subsequently appointed trustee in any case under Title 11 of the United States Code (the "Bankruptcy Code"), without the necessity of commencing a foreclosure action with respect to this Mortgage, making formal demand for the Rents, obtaining the appointment of a receiver or taking any other affirmative action. Section 6.3. Bankruptcy Provisions. Without limitation of the absolute nature of the assignment of the Rents hereunder, Mortgagor and Mortgagee agree that (a) this Mortgage shall constitute a "security agreement" for purposes of Section 552(b) of the Bankruptcy Code, (b) the security interest created by this Mortgage extends to property of Mortgagor acquired before the commencement of a case in bankruptcy and to all amounts paid as Rents and (c) such security interest shall extend to all Rents acquired by the estate after the commencement of any case in bankruptcy. Section 6.4. No Merger of Estates. So long as part of the Indebtedness and the Obligations secured hereby remain unpaid and undischarged, the fee and leasehold estates to the Mortgaged Property shall not merge, but shall remain separate and distinct, notwithstanding the union of such estates either in Mortgagor, Mortgagee, any tenant or any third party by purchase or otherwise. 8 ARTICLE 7 SECURITY AGREEMENT ------------------ Section 7.1. Security Interest. This Mortgage constitutes a "security agreement" on personal property within the meaning of the UCC and other applicable law and with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards. To this end, Mortgagor grants to Mortgagee a first and prior security interest in the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance, Condemnation Awards and all other Mortgaged Property which is personal property to secure the payment of the Indebtedness and performance of the Obligations, and agrees that Mortgagee shall have all the rights and remedies of a secured party under the UCC with respect to such property. Any notice of sale, disposition or other intended action by Mortgagee with respect to the Personalty, Fixtures, Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards sent to Mortgagor at least five (5) days prior to any action under the UCC shall constitute reasonable notice to Mortgagor. Section 7.2. Financing Statements. Mortgagor shall execute and deliver to Mortgagee, in form and substance satisfactory to Mortgagee, such financing statements and such further assurances as Mortgagee may, from time to time, reasonably consider necessary to create, perfect and preserve Mortgagee's security interest hereunder and Mortgagee may cause such statements and assurances to be recorded and filed, at such times and places as may be required or permitted by law to so create, perfect and preserve such security interest. Mortgagor's chief executive office is in the State of Maine at the address set forth in the first paragraph of this Mortgage. Section 7.3. Fixture Filing. This Mortgage shall also constitute a "fixture filing" for the purposes of the UCC against all of the Mortgaged Property which is or is to become fixtures. Information concerning the security interest herein granted may be obtained at the addresses of Debtor (Mortgagor) and Secured Party (Mortgagee) as set forth in the first paragraph of this Mortgage. ARTICLE 8 [Intentionally Omitted] ARTICLE 9 MISCELLANEOUS ------------- Section 9.1. Notices. Any notice required or permitted to be given under this Mortgage shall be given in accordance with Section 10.8 of the Credit Agreement. Section 9.2. Covenants Running with the Land. All Obligations contained in this Mortgage are intended by Mortgagor and Mortgagee to be, and shall be construed as, covenants running with the Mortgaged Property. As used herein, "Mortgagor" shall refer to the party named in the first paragraph of this Mortgage and to any subsequent owner of all or any portion of the Mortgaged Property. All Persons who may have or acquire an interest in the Mortgaged Property shall be deemed to have notice of, and be bound by, the terms of the Credit Agreement and the other Loan Documents; however, no such party shall be entitled to any rights thereunder without the prior written consent of Mortgagee. Section 9.3. Attorney-in-Fact. Mortgagor hereby irrevocably appoints Mortgagee and its successors and assigns, as its attorney-in-fact, which agency is coupled with an interest and with full power of substitution, (a) to execute and/or record any notices of completion, cessation of labor or any 9 other notices that Mortgagee deems appropriate to protect Mortgagee's interest, if Mortgagor shall fail to do so within ten (10) days after written request by Mortgagee, (b) upon the issuance of a deed pursuant to the foreclosure of this Mortgage or the delivery of a deed in lieu of foreclosure, to execute all instruments of assignment, conveyance or further assurance with respect to the Leases, Rents, Deposit Accounts, Property Agreements, Tax Refunds, Proceeds, Insurance and Condemnation Awards in favor of the grantee of any such deed and as may be necessary or desirable for such purpose, (c) to prepare, execute and file or record financing statements, continuation statements, applications for registration and like papers necessary to create, perfect or preserve Mortgagee's security interests and rights in or to any of the Mortgaged Property, and (d) while any Event of Default exists, to perform any obligation of Mortgagor hereunder, however: (1) Mortgagee shall not under any circumstances be obligated to perform any obligation of Mortgagor; (2) any sums advanced by Mortgagee in such performance shall be added to and included in the Indebtedness and shall bear interest at the rate or rates at which interest is then computed on the Indebtedness; (3) Mortgagee as such attorney-in-fact shall only be accountable for such funds as are actually received by Mortgagee; and (4) Mortgagee shall not be liable to Mortgagor or any other person or entity for any failure to take any action which it is empowered to take under this Section 9.3. Section 9.4. Successors and Assigns. This Mortgage shall be binding upon and inure to the benefit of Mortgagee, the Lenders, and Mortgagor and their respective successors and assigns. Mortgagor shall not, without the prior written consent of Mortgagee, assign any rights, duties or obligations hereunder. Section 9.5. No Waiver. Any failure by Mortgagee to insist upon strict performance of any of the terms, provisions or conditions of the Loan Documents shall not be deemed to be a waiver of same, and Mortgagee or the Lenders shall have the right at any time to insist upon strict performance of all of such terms, provisions and conditions. Section 9.6. Credit Agreement. If any conflict or inconsistency exists between this Mortgage and the Credit Agreement, the Credit Agreement shall govern. Section 9.7. Release or Reconveyance. Upon payment in full of the Indebtedness and performance in full of the Obligations, Mortgagee, at Mortgagor's expense, shall release the liens and security interests created by this Mortgage or reconvey the Mortgaged Property to Mortgagor. Section 9.8. Waiver of Stay, Moratorium and Similar Rights. Mortgagor agrees, to the full extent that it may lawfully do so, that it will not at any time insist upon or plead or in any way take advantage of any stay, marshalling of assets, extension, redemption or moratorium law now or hereafter in force and effect so as to prevent or hinder the enforcement of the provisions of this Mortgage or the Indebtedness secured hereby, or any agreement between Mortgagor and Mortgagee or any rights or remedies of Mortgagee or the Lenders. Section 9.9. Applicable Law. The provisions of this Mortgage regarding the creation, perfection and enforcement of the liens and security interests herein granted shall be governed by and construed under the laws of the state in which the Mortgaged Property is located. All other provisions of this Mortgage shall be governed by the laws of the State of New York (including, without limitation, Section 5-1401 of the General Obligations Law of the State of New York), without regard to conflicts of laws principles. Section 9.10. Headings. The Article, Section and Subsection titles hereof are inserted for convenience of reference only and shall in no way alter, modify or define, or be used in construing, the text of such Articles, Sections or Subsections. 10 Section 9.11. Entire Agreement. This Mortgage and the other Loan Documents embody the entire agreement and understanding between Mortgagee and Mortgagor and supersede all prior agreements and understandings between such parties relating to the subject matter hereof and thereof. Accordingly, the Loan Documents may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. Section 9.12. Mortgagee as Agent; Successor Agents. (a) Agent has been appointed to act as Agent hereunder by the Lenders. Agent shall have the right hereunder to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of the Mortgaged Property) in accordance with the terms of the Credit Agreement, any related agency agreement among Agent and the Lenders (collectively, as amended, supplemented or otherwise modified or replaced from time to time, the "Agency Documents") and this Mortgage. Mortgagor and all other persons shall be entitled to rely on releases, waivers, consents, approvals, notifications and other acts of Agent, without inquiry into the existence of required consents or approvals of the Lenders therefor. (b) Mortgagee shall at all times be the same Person that is Agent under the Agency Documents. Written notice of resignation by Agent pursuant to the Agency Documents shall also constitute notice of resignation as Agent under this Mortgage. Removal of Agent pursuant to any provision of the Agency Documents shall also constitute removal as Agent under this Mortgage. Appointment of a successor Agent pursuant to the Agency Documents shall also constitute appointment of a successor Agent under this Mortgage. Upon the acceptance of any appointment as Agent by a successor Agent under the Agency Documents, that successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Agent as the Mortgagee under this Mortgage, and the retiring or removed Agent shall promptly (i) assign and transfer to such successor Agent all of its right, title and interest in and to this Mortgage and the Mortgaged Property, and (ii) execute and deliver to such successor Agent such assignments and amendments and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Agent of the liens and security interests created hereunder, whereupon such retiring or removed Agent shall be discharged from its duties and obligations under this Mortgage. After any retiring or removed Agent's resignation or removal hereunder as Agent, the provisions of this Mortgage and the Agency Documents shall inure to its benefit as to any actions taken or omitted to be taken by it under this Mortgage while it was the Agent hereunder. Section 9.13. Variable Rate Notice. Under the terms and provisions of the Notes which this Mortgage secures and under the terms and provisions of any future or further advances secured hereby, the interest rate payable thereunder, and the amount of each principal payment, may be variable. THE PURPOSE OF THIS PARAGRAPH IS TO PROVIDE RECORD NOTICE OF THE RIGHT OF AGENT ON BEHALF OF THE LENDERS UNDER THE TERMS OF THE CREDIT AGREEMENT, ITS SUCCESSORS AND ASSIGNS, TO INCREASE OR DECREASE THE INTEREST RATE ON ANY OBLIGATION SECURED HEREBY, AND THE AMOUNT OF EACH PRINCIPAL PAYMENT, WHERE THE TERMS AND PROVISIONS OF SUCH OBLIGATION PROVIDE FOR A VARIABLE INTEREST RATE. Section 9.14. Commercial Purpose. Company and Mortgagor warrant and represent to Agent that the proceeds of the Notes will be used solely for business or commercial purposes, and in no way will the proceeds be used for personal, family or household purposes. 11 IN WITNESS WHEREOF, Mortgagor has on the date set forth in the acknowledgement hereto, effective as of the date first above written, caused this instrument to be duly EXECUTED AND DELIVERED by authority duly given. WITNESS: FORSTER, INC., a Maine corporation ____________________ Name: By:____________________ Name: Title: S-1 ACKNOWLEDGEMENT STATE OF ILLINOIS ) ) SS.: COUNTY OF __________ ) THE FOREGOING INSTRUMENT WAS ACKNOWLEDGED BEFORE ME THIS _____ DAY OF APRIL, 1998, BY ___________________________________, THE _____________________________, OF FORSTER, INC., A MAINE CORPORATION, ON BEHALF OF THE CORPORATION. __________________________________________________ (SIGNATURE AND OFFICE OF INDIVIDUAL TAKING ACKNOWLEDGEMENT) MY COMMISSION EXPIRES: __________________________ (NOTARIAL SEAL) N-1 EXHIBIT A Mortgaged Property [See Attached] Exh. A-1 [a] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By:______________________________ Name: Title: [b] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By: [17], a [18] [19] its General Partner By:___________________________ Name: Title: [c] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By:______________________________ Name: Title: General Partner [d] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By: [20], a [21] [22] its Managing Member By:_________________________ Name: Title: [e] MORTGAGOR: [FULL NAME OF MORTGAGOR], a [Mortgagor's state of organization] [Mortgagor's entity type] By:_________________________ Name: Title: Managing Member [f] MORTGAGOR: _________________________ [FULL NAME OF MORTGAGOR] FORM OF MORTGAGE WITH AGENT PROVISIONS The following information will be requested in completing this form: [1] State in which Property is Located [2] Full Name of Mortgagor (In capital letters) [3] Full Name of Mortgagee (In capital letters) [4] "As of" Date of Mortgage (document assumes same date as Credit Agreement [5] O'Melveny & Myers Attorney Name [6] O'Melveny & Myers File Number [7] Mortgagor's State of Organization [8] Mortgagor Entity Type (corporation, individual, etc.) (If Mortgagor's entity type is a corporation, then [a]) (If Mortgagor's entity type is either a partnership or a limited partnership, then ask:) Is its general partner a corporation? (If yes, then [b]) (If no, then [c]) (If Mortgagor's entity type is a limited liability company, then ask:) Is its Managing member a corporation? (If yes, then [d]) (If no, then [e]) (If Mortgagor is an individual, then [f]) [9] Mortgagor's Address [10] Mortgagee's State of Organization [11] Mortgagee's Entity Type (national association, corporation, etc.) [12] Mortgagee's Address [13] Title of Credit Agreement [14] Are there parties to the Credit Agreement other than Agent, Lenders, Mortgagor and Mortgagee? If no, skip. (Insert "between Mortgagor, Mortgagee and the Lenders") If yes, is there more than one party? If no, provide the full name of the other party. (Insert into "among Mortgagor, Mortgagee, the Lenders and _______________") If yes, provide the full names of all other parties. (Insert into "among Mortgagor, Mortgagee, the Lenders, __________ and __________")(Add additional ________," as necessary before "and".) [15] State in which Mortgagor's Chief Executive Office is located [16] Section of Credit Agreement on Notices [17] Full Name of General Partner [18] General Partner's State of Organization [19] General Partner's Entity Type [20] Full Name of Managing Member [21] Managing Member's State of Organization [22] Managing Member's Entity Type [23] Full Address of Property [A1] Full name of Agent [A2] Agent's State of Organization [A3] Agent's Entity Type (corporation, individual, etc.) [A4] Agent's Address [a] Corporation (without a seal) [b] Partnership or Limited Partnership with Corporate General Partner [c] Partnership or Limited Partnership with Individual General Partner [d] Limited Liability Company with Corporate Managing Member [e] Limited Liability Company with Individual Managing Member [f] Individual EXHIBIT XXVII [FORM OF SOLVENCY CERTIFICATE] SOLVENCY CERTIFICATE This FINANCIAL CONDITION CERTIFICATE (this "Certificate") is delivered in connection with the Credit Agreement dated as of April 21, 1998 among Diamond Brands Operating Corp., a Delaware corporation ("Company"), the financial institutions listed therein as Lenders, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (the "Credit Agreement"). Capitalized terms used herein without definition have the same meanings as in the Credit Agreement. A. I am, and at all pertinent times mentioned herein have been, the duly qualified and chief financial officer of Company. In such capacity I have participated actively in the management of its financial affairs and am familiar with its financial statements and those of its Subsidiaries. I have, together with other officers of Company, acted on behalf of Company in connection with the negotiation of the Credit Agreement and I am familiar with the terms and conditions thereof. B. I have carefully reviewed the contents of this Certificate, and I have conferred with counsel for Company for the purpose of discussing the meaning of its contents. C. In connection with preparing for the consummation of the transactions and financings contemplated by the Credit Agreement (the "Proposed Transactions"), I have participated in the preparation of, and I have reviewed, pro forma projections of net income and cash flows for Company and its Subsidiaries for the Fiscal Years of Company ending December 31, 1998 through December 31, 2002 inclusive (the "Projected Financial Statements"). The Projected Financial Statements, attached hereto as Exhibit A, give effect to the consummation of the Proposed Transactions and assume that the debt obligations of Company will be paid from the cash flow generated by the operations of Company and its Subsidiaries, the proceeds of certain debt financings to be entered into by Company and its Subsidiaries and other cash resources. The Projected Financial Statements were prepared on the basis of information available at March 27, 1998. I know of no facts that have occurred since such date that would lead me to believe that the Projected Financial Statements are inaccurate in any material respect. The Projected Financial Statements do not reflect (i) any potential changes in interest rates from those assumed in the Projected Financial Statements, (ii) any potential material, adverse changes in general business conditions, or (iii) any potential changes in income tax laws. D. I have also participated in the preparation of, and I have reviewed, a pro forma summary balance sheet of Company and its Subsidiaries (the "Fair Value Summary Balance Sheet") as of April 21, 1998, giving effect to the Proposed Transactions. The Fair Value Summary Balance Sheet is attached hereto as Exhibit B and has been prepared as described in paragraph F and G below and not in accordance with GAAP. E. In connection with the preparation of the Projected Financial Statements, I have made such investigations and inquiries as I have deemed necessary and prudent therefor and, specifically, have relied on historical information with respect to revenues, expenses and other relevant items supplied by the supervisory personnel of Company and its Subsidiaries directly responsible for the various operations involved. The assumptions upon which the Projected Financial Statements are based are stated therein. Although any assumption and any projections by necessity involve uncertainties and approximations, I believe, based on my discussions with other members of management, that the assumptions on which the Project Financial Statements are based are reasonable. Based thereon, I believe that the projections for Company and its Subsidiaries, taken as a whole, reflected in the Projected Financial Statements provide reasonable estimations of future performance, subject, as stated above, to the uncertainties and approximations inherent in any projections. F. The Fair Value Summary Balance Sheet has been prepared in a manner which I believe reflects a conservative estimate of the fair value of the assets of Company and its Subsidiaries on a consolidated basis and the probable liability on all of their debts, contingent or otherwise. For purposes of this Certificate, I understand "fair value" of any assets to mean the amount which may be realized within a reasonable time, either through collection of such assets or through sale of such assets at the regular market value thereof, conceiving of the latter as the amount which could be obtained for the property in question within such period by a capable and diligent businessman from an interested buyer who is willing to purchase under ordinary selling conditions. The specific methodology used by management for valuing Company and its Subsidiaries is set forth in paragraph G below. G. For purposes of constructing the Fair Value Summary Balance Sheet, I have utilized the following procedures: I have separately estimated the fair value of the stock of each of Company's Subsidiaries by calculating the difference between the fair value of the assets of such Subsidiary and the probable liability on all of its debts, contingent or otherwise. With respect to the asset values reflected in the Fair Value Summary Balance Sheet (including the asset values used to calculate the fair value of the stock of each of Company's Subsidiaries), I have included the net working capital of Company and each of its Subsidiaries, calculated as the difference between the current assets and current liabilities reported in their April 21, 1998 financial statements, and I have relied on the capitalization of earnings methodology -- whereby earnings before interest, taxes, depreciation and amortization (EBITDA) are capitalized at a specified EBITDA multiple -- to arrive at the estimated fair value of the long-term assets of Company and each of its Subsidiaries. For these purposes I have utilized an EBITDA multiplier of 8.7, which reflects a conservative estimate of the EBITDA multiplier reflected in acquisition prices paid for total ownership positions in companies whose lines of business are similar to those of Company and its Subsidiaries. With respect to liabilities reflected in the Fair Value Summary Balance Sheet (including liabilities used to calculate the fair value of the stock of each of Company's Subsidiaries), I have included long-term liabilities reported by Company and each of its Subsidiaries in their April 21, 1998 financial statements and debts to be incurred or assumed by Company and each of its Subsidiaries under the Credit Agreement and the Proposed Transactions. In addition, with respect to contingent liabilities (such as litigation, guaranties and pension plan liabilities), I have consulted with legal, financial and other personnel of Company and each of its Subsidiaries and have reflected as liabilities our best judgment as to the maximum exposure that can reasonably be expected to result therefrom in light of all the facts and circumstances existing at this time, recognizing that any such estimation is inherently subject to uncertainties. Based on the foregoing, I have reached the following conclusions: 1. Company is not now, nor will the incurrence of the Obligations under the Credit Agreement and the incurrence of the other obligations contemplated by the Proposed Transactions render Company "insolvent" as defined in this paragraph 1. The recipients of this Certificate and I have agreed that, in this context, "insolvent" means that the present fair value of assets is less than the amount that will be required to pay the probable liability on existing debts as they become absolute and matured. We have also agreed that the term "debts" includes any legal liability, whether matured or unmatured, liquidated or unliquidated, absolute, fixed or contingent. My conclusion expressed above is supported by a valuation of Company on a basis which reflects the net value of Company as $30,005,000 representing the difference between the fair value of $276,000,000 and liabilities of $245,995,000. 2. By the incurrence of the Obligations under the Credit Agreement and the incurrence of the other obligations contemplated by the Proposed Transactions, Company will not incur debts beyond its ability to pay as such debts mature. I have based my conclusion in part on the Projected Financial Statements, which demonstrate that Company will have positive cash flow after paying all of its scheduled anticipated indebtedness (including scheduled payments under the Credit Agreement, the other obligations contemplated by the Proposed Transactions and other permitted indebtedness). I have concluded that the realization of current assets in the ordinary course of business will be sufficient to pay recurring current debt and short-term and long-term debt service as such debts mature, and that the cash flow (including earnings plus non-cash charges to earnings and the disposition of surplus fixed assets held for sale) will be sufficient to provide cash necessary to repay the Loans and other Obligations under the Credit Agreement, the other obligations contemplated by the Proposed Transactions and other long-term indebtedness as such debt matures. 3. The incurrence of the Obligations under the Credit Agreement and the incurrence of the other obligations contemplated by the Proposed Transactions will not leave Company with property remaining in its hands constituting "unreasonably small capital." In reaching this conclusion, I understand that "unreasonably small capital" depends upon the nature of the particular business or businesses conducted or to be conducted, and I have reached my conclusion based on the needs and anticipated needs for capital of the businesses conducted or anticipated to be conducted by Company and its Subsidiaries in light of the Projected Financial Statements and available credit capacity. 4. To the best of my knowledge, Company has not executed the Credit Agreement or any documents mentioned therein, or made any transfer or incurred any obligations thereunder, with actual intent to hinder, delay or defraud either present or future creditors. I understand that Agents and Lenders are relying on the truth and accuracy of the foregoing in connection with the extension of credit to Company pursuant to the Credit Agreement. (Remainder of page intentionally left blank) I represent the foregoing information to be, to the best of my knowledge and belief, true and correct and execute this Certificate this 21st day of April 1998. DIAMOND BRANDS OPERATING CORP. By: __________________________ Name: __________________________ Title: __________________________ EXHIBIT XXVIII [FORM OF OPINIONS OF LOCAL COUNSEL] EXHIBIT XXIX [FORM OF COLLATERAL ACCOUNT AGREEMENT] COLLATERAL ACCOUNT AGREEMENT This COLLATERAL ACCOUNT AGREEMENT (this "Agreement") is dated as of April 21, 1998 and entered into by and between DIAMOND BRANDS OPERATING CORP., a Delaware corporation ("Pledgor"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "Secured Party") the financial institutions ("Lenders") party to the Credit Agreement referred to below. PRELIMINARY STATEMENTS A. Secured Party and Lenders have entered into a Credit Agreement dated as of April 21, 1998 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "Credit Agreement", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Pledgor, DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Pledgor. B. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: SECTION 1. Definitions. The following terms used in this Agreement shall have the following meanings: "Collateral" means (i) the Collateral Account and all amounts from time to time on deposit therein, (ii) all interest, cash, instruments and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Collateral, and (iii) to the extent not covered by clauses (i) through (iv) above, all proceeds of any or all of the foregoing Collateral. "Collateral Account" means the deposit account established and maintained by Pledgor with Secured Party pursuant to Section 2. "Secured Obligations" means all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Credit Agreement and the other Loan Documents and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Pledgor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement. SECTION 2. Collateral Account; Cash Collateralization of Letters of Credit. a. Pledgor hereby authorizes and directs Secured Party to establish and maintain at its office, as a blocked account in the name of Pledgor but under the sole dominion and control of Secured Party, a deposit account designated as "Diamond Brands Operating Corp. Collateral Account." The Collateral Account shall be established by Secured Party upon the occurrence of an Event of Default and be operated in accordance with the terms of this Agreement. Notwithstanding anything to the contrary stated herein or in the Credit Agreement, Pledgor shall have no right to withdraw, transfer or, except as expressly set forth herein, otherwise received any funds deposited into the Collateral Account. Secured Party shall be fully protected and shall suffer no liability in acting in accordance with any written instructions reasonably believed by it to have been given by a duly authorized officer of Pledgor with respect to any aspect of the operation of the Collateral Account. b. If an Event of Default has occurred and is continuing and, in accordance with Section 8 of the Credit Agreement, Pledgor is required to pay to Secured Party an amount (the "Aggregate Available Amount") equal to the maximum amount that may at any time be drawn under all Letters of Credit then outstanding under the Credit Agreement, Pledgor shall deliver funds in such an amount for deposit in the Collateral Account by wire transfer (or, if applicable, by intra-bank transfer from another account of Pledgor) of immediately available funds, addressed as directed by Secured Party. If for any reason the aggregate amount delivered by Pledgor to Secured Party for deposit in the Collateral Account as aforesaid is less than the Aggregate Available Amount, the aggregate amount so delivered by Pledgor to Secured Party shall be apportioned among all outstanding Letters of Credit for purposes of this Section 2(b) in accordance with the ratio of the maximum amount available for drawing under each such Letter of Credit (as to such Letter of Credit, the "Maximum Available Amount") to the Aggregate Available Amount. Upon any drawing under any outstanding Letter of Credit in respect of which Pledgor has deposited in the Collateral Account any amounts described above, Secured Party shall apply such amounts to reimburse the respective Issuing Lender for the amount of such drawing. In the event of cancellation or expiration of any Letter of Credit in respect of which Pledgor has deposited in the Collateral Account any amounts described above, or in the event of any reduction in the Maximum Available Amount under such Letter of Credit, Secured Party shall apply the amount then on deposit in the Collateral Account in respect of such Letter of Credit (less in the case of such a reduction, the Maximum Available Amount under such Letter of Credit immediately after such reduction) first, to the payment of any amounts payable to Secured Party pursuant to Section 13, second, to the extent of any excess, to the cash collateralization pursuant to the terms of this Agreement of any outstanding Letters of Credit in respect of which Pledgor has failed to pay all or a portion of the amounts described above (such cash collateralization to be apportioned among all such Letters of Credit in the manner described above), third, to the extent of any further excess, to the payment of any other outstanding Secured Obligations, and fourth, to the extent of any further excess, to the payment to whomsoever shall be lawfully entitled to receive such funds. SECTION 3. Pledge of Security for Secured Obligations. Pledgor hereby pledges and assigns to Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the Collateral as collateral security for the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss.362(a)), of all Secured Obligations. SECTION 4. No Investment of Amounts in the Collateral Account; Interest on Amounts in the Collateral Account. a. Cash held by Secured Party in the Collateral Account shall not be invested by Secured Party but instead shall be maintained as a cash deposit in the Collateral Account pending application thereof as elsewhere provided in this Agreement. b. To the extent permitted under Regulation Q of the Board of Directors of the Federal Reserve System, any cash held in the Collateral Account shall bear interest at the standard rate paid by Secured Party to its customers for deposits of like amounts and terms. c. Subject to Secured Party's rights under Section 11, any interest earned on deposit of cash in the Collateral Account in accordance with Section 4(b) shall be deposited directly in, and held in the Collateral Account. d. The Collateral Account shall be subject to such applicable laws, and such applicable regulations of the Board of Governors of the Federal Reserve System and of any other appropriate banking or governmental authority, as may now or hereafter be in effect. SECTION 5. Representations and Warranties. Pledgor represents and warrants as follows: a. Ownership of Collateral. Pledgor is (or at the time of transfer to Secured Party thereof will be) the legal and beneficial owner of the Collateral from time to time transferred by Pledgor to Secured Party, free and clear of any Lien except for the security interest created by this Agreement. b. Governmental Authorizations. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Pledgor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Pledgor or (ii) the perfection of or the exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Pledgor). c. Perfection. The pledge and assignment of the Collateral pursuant to this Agreement creates a valid and perfected first priority security interest in the Collateral, securing the payment of the Secured Obligations. d. Other Information. All information heretofore, herein or hereafter supplied to Secured Party by or on behalf of Pledgor with respect to the Collateral is accurate and complete in all respects. SECTION 6. Further Assurances. Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Collateral. SECTION 7. Transfers and other Liens. Pledgor agrees that it will not (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral or (b) create or suffer to exist any Lien upon or with respect to any of the Collateral, except for the security interest under this Agreement. SECTION 8. Secured Party Appointed Attorney-in-Fact. Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time in Secured Party's discretion while an Event of Default exists to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Collateral without the signature of Pledgor. SECTION 9. Secured Party May Perform. If Pledgor fails to perform any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13. SECTION 10. Standard of Care. The powers conferred on Secured Party hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral, it being understood that Secured Party shall have no responsibility for (a) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Collateral) to preserve rights against any parties with respect to any Collateral or (b) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property consisting of negotiable securities. SECTION 11. Remedies. If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "Code") (whether or not the Code applies to the affected Collateral). Without limiting the generality of the foregoing, if any Event of Default shall have occurred and be continuing, subject to the provisions of Section 2(b), Secured Party may (i) transfer any or all of the Collateral to an account established in Secured Party's name (whether at Secured Party or otherwise) or (ii) otherwise register title to any Collateral in the name of Secured Party or one of its nominees or agents, without reference to any interest of Pledgor. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. Anything contained herein to the contrary notwithstanding, any of the Collateral consisting of cash held by Secured Party in the Collateral Account shall be subject to Secured Party's rights of set-off under subsection 10.4 of the Credit Agreement. SECTION 12. Application of Proceeds. Subject to the provisions of Section 2(b), if any Event of Default shall have occurred and be continuing, all cash held by Secured Party as Collateral may, in the discretion of Secured Party, be held by Secured Party as Collateral for, and/or then, or at any other time thereafter, applied in full or in part by Secured Party against, the Secured Obligations in accordance with subsection 2.4D of the Credit Agreement. SECTION 13. Indemnity and Expenses. a. Pledgor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. b. Pledgor will pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. SECTION 14. Continuing Security Interest; Transfer of Loans. This Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the indefeasible payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Pledgor. Upon any such termination Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 15. Secured Party as Administrative Agent. a. Secured Party has been appointed to act as Secured Party hereunder by Lenders. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including, without limitation, the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement. b. Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 16. Amendments; Etc. No amendment or waiver of any provision of this Agreement, or consent to any departure by Pledgor herefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 17. Notices. Any notice or other communication herein required or permitted to be given shall be in writing and may be personally served, telecopied, telexed or sent by United States mail or courier service and shall be deemed to have been given when delivered in person or by courier service, upon receipt of telecopy or telex, or four Business Days after depositing it in the United States mail, registered or certified, with postage prepaid and properly addressed. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 18. Failure or Indulgence Not Waiver; Remedies Cumulative. No failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 19. Severability. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 20. Headings. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 21. Governing Law; Terms. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 22. Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT PLEDGOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. Pledgor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Pledgor at its address provided in Section 18, such service being hereby acknowledged by Pledgor to be sufficient for personal jurisdiction in any action against Pledgor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of Secured Party to bring proceedings against Pledgor in the courts of any other jurisdiction. SECTION 23. Waiver of Jury Trial. PLEDGOR AND SECURED PARTY HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgor and Secured Party each acknowledge that this waiver is a material inducement for Pledgor and Secured Party to enter into a business relationship, that Pledgor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Pledgor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 24. Counterparts. This Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. DIAMOND BRANDS OPERATING CORP., as Pledgor By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Notice Address: Diamond Brands Operating Corp. 1800 Cloquet Avenue Cloquet, Minnesota 55720 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Secured Party By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Notice Address: Attention: EX-4.5 5 [FORM OF SUBSIDIARY PLEDGE AGREEMENT] SUBSIDIARY PLEDGE AGREEMENT This SUBSIDIARY PLEDGE AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between [NAME OF SUBSIDIARY], a [_____________] corporation ("PLEDGOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "SECURED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Pledgor is the legal and beneficial owner of (i) the shares of stock or other equity Securities (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto and issued by the companies named therein and (ii) the - ---------- indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and ---------- issued by the obligors named therein. B. Secured Party and Lenders have entered into a Credit Agreement dated as of April 21, 1998 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). D. Pledgor has executed and delivered that certain Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Secured Party for the benefit of Lenders and any Interest Rate Exchangers, pursuant to which Pledgor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and all obligations of Company under the Lender Interest Rate Agreements, including the obligation of Company to make payments thereunder in the event of early termination thereof. XIX-1 E. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: SECTION 1. PLEDGE OF SECURITY. Pledgor hereby pledges and assigns to ------------------ Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or other rights; provided, however, that, -------- ------- Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any direct or indirect Subsidiary of Pledgor which is incorporated in a jurisdiction other than the states of the United States and the District of Columbia ("Foreign Subsidiary") hereunder; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; XIX-2 (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, however, that Pledgor shall not be required -------- ------- to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary hereunder; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes proceeds of any indemnity or guaranty payable to Pledgor or Secured Party from time to time with respect to any of the Pledged Collateral. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty and all extensions or renewals thereof, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or XIX-3 hereafter existing under this Agreement (all such obligations of Pledgor being the "SECURED OBLIGATIONS"). SECTION 3. DELIVERY OF PLEDGED COLLATERAL. All certificates or ------------------------------ instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Upon the occurrence and during the continuation of an Event of Default (as defined in the Credit Agreement) or the occurrence of an Early Termination Date (as defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement (either such occurrence being an "EVENT OF DEFAULT" for purposes of this Agreement), Secured Party shall have the right, without notice to Pledgor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 7(a). In addition, upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and ------------------------------ warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the Pledged --------------------------------------------- Shares have been duly authorized and validly issued and are fully paid and non- assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares constitute --------------------------------- (i) all of the issued and outstanding shares of stock or other equity Securities of each of the Subsidiaries of Pledgor which are incorporated in a state of the United States or in the District of Columbia, and (ii) 66.6% of the issued and outstanding shares of stock or other equity Securities of each Foreign Subsidiary of Pledgor, and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record and ------------------------------- beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. XIX-4 (d) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge by Pledgor of the Pledged Collateral pursuant to this Agreement and the grant by Pledgor of the security interest granted hereby, or (ii) the execution, delivery or performance of this Agreement by Pledgor, or (iii) the exercise by Secured Party of the voting or other rights, or the remedies in respect of the Pledged Collateral, provided for in this Agreement (except as may be required in connection with a disposition of Pledged Collateral by laws affecting the offering and sale of securities generally). (e) Perfection. The pledge of the Pledged Collateral pursuant to this ---------- Agreement creates a valid and perfected first priority security interest in the Pledged Collateral, securing the payment of the Secured Obligations; provided -------- that Secured Party retains physical possession of such Pledged Collateral. (f) Margin Regulations. The pledge of the Pledged Collateral pursuant ------------------ to this Agreement does not violate Regulation T, U or X of the Board of Governors of the Federal Reserve System. (g) Other Information. All information heretofore, herein or hereafter ----------------- supplied to Secured Party by or on behalf of Pledgor with respect to the Pledged Collateral is accurate and complete in all material respects. SECTION 5. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; --------------------------------------------------------- ETC. Pledgor shall: - ---- (a) not, except as expressly permitted by the Credit Agreement, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement and the Permitted Encumbrances, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock or other equity Security of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; provided -------- that Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary; provided, further, that in the event -------- ------- Pledgor makes an Asset Sale permitted by the Credit Agreement and the assets subject to such Asset Sale are Pledged Shares, Secured Party shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, further that, as a condition -------- ------- precedent to such release, Secured Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Secured Party of the Net Asset Sale Proceeds of such Asset Sale if required under the Credit Agreement; XIX-5 (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor; provided that Pledgor shall not be required to pledge more than 66.6% -------- of any class of capital stock of any Foreign Subsidiary hereunder; (c) (i) pledge hereunder, within 5 days of their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, within 5 days of their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor; (d) promptly notify Secured Party of any event of which Pledgor becomes aware causing material loss or depreciation in the value of the Pledged Collateral; (e) promptly deliver to Secured Party all material written notices received by it with respect to the Pledged Collateral; and (f) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent permitted by the terms of the Credit Agreement. SECTION 6. FURTHER ASSURANCES; PLEDGE AMENDMENTS. ------------------------------------- (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may reasonably be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral. (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section XIX-6 5(b) or (c), promptly (and in any event within five Business Days) deliver to Secured Party a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), in respect of the ----------- additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Secured Party to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Secured Party shall for all purposes hereunder be considered Pledged Collateral; provided that the failure of Pledgor -------- to execute a Pledge Amendment with respect to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Secured Party therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto. SECTION 7. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement and as long as such action would not have a material adverse effect on the value of the Pledged Collateral. It is understood, however, that neither (A) the voting by Pledgor of any Pledged Shares for or Pledgor's consent to the election of directors at a regularly scheduled annual or other meeting of stockholders or members or with respect to incidental matters at any such meeting nor (B) Pledgor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section 7(a)(i), and no notice of any such voting or consent need be given to Secured Party; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that -------- ------- any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal or in redemption of or in exchange for any Pledged Collateral, XIX-7 shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor and be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with all necessary indorsements); provided, however, that to the extent that property -------- ------- distributed to Pledgor in respect of the Pledged Collateral continues or becomes, after such distribution, to be otherwise subject to a Lien in favor of Secured Party under the Loan Documents, such property shall not be otherwise required to be forthwith delivered to Secured Party pursuant to clause (ii); and (iii) Secured Party shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Secured Party to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall forthwith be paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary indorsements). (c) In order to permit Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 7(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 7(a)(ii) or Section 7(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies, dividend payment orders and other instruments as Secured Party may from time to time reasonably request, including without limitation to the extent necessary so that the pledge of any shares of XIX-8 stock of any Foreign Subsidiary is registered (if not already so registered) on the appropriate books and records of the issuer of the applicable Pledged Shares if such registration is required under applicable law in order to permit Secured Party to exercise such rights or to receive such dividends and other distributions, and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled (including giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the written notice of an Event of Default from Secured Party delivered at any time, including at a member or shareholder meeting, and which proxy shall only terminate upon cure of the circumstances which gave rise to the Event of Default. SECTION 8. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Pledgor hereby ---------------------------------------- irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time during the continuation of an Event of Default in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Pledged Collateral. SECTION 9. SECURED PARTY MAY PERFORM. If Pledgor fails to perform any ------------------------- agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13(b). XIX-9 SECTION 10. STANDARD OF CARE. The powers conferred on Secured Party ---------------- hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Pledged Collateral, it being understood that Secured Party shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Pledged Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Secured Party accords its own property consisting of negotiable securities. SECTION 11. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), or any other applicable laws whether of the United States or any state thereof or any other foreign jurisdiction, and Secured Party may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Secured Party or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Lenders and Interest Rate Exchangers (but not any Lender or Lenders or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Lenders or Requisite Obligees (as defined in Section 15(a)) shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the XIX-10 future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Secured Party determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Secured Party all such information as Secured Party may request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 12. APPLICATION OF PROCEEDS. All proceeds received by Secured ----------------------- Party in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. XIX-11 SECTION 13. INDEMNITY AND EXPENSES. ---------------------- (a) Pledgor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. SECTION 14. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This ----------------------------------------------- Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 15. SECURED PARTY AS ADMINISTRATIVE AGENT. ------------------------------------- (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party -------- XIX-12 shall exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 15(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 15(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 16. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. XIX-13 SECTION 17. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 18. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 19. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 20. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 21. GOVERNING LAW; TERMS; RULES OF CONSTRUCTION. THIS ------------------------------------------- AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. SECTION 22. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- (A) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR XIX-14 FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 17; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 22 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. (b) Without limiting the generality of the last sentence of Section 22(a), any judicial proceedings brought against Pledgor arising out of or relating to the pledge of shares of capital stock of any Foreign Subsidiary hereunder may be brought in any court of competent jurisdiction in the jurisdiction in which such Foreign Subsidiary is organized, and by execution and delivery of this Agreement, Pledgor accepts for itself and in connection with its properties (including without limitation the applicable Pledged Shares), generally and unconditionally, the nonexclusive jurisdiction of any such court and waives any defense of forum non conveniens (or any similar defense under the laws of such jurisdiction) and irrevocably agrees to be bound by any judgement rendered thereby in connection with such pledge or the enforcement thereof. SECTION 23. WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY -------------------- AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR XIX-15 ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all- encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgor and Secured Party each acknowledge that this waiver is a material inducement for Pledgor and Secured Party to enter into a business relationship, that Pledgor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Pledgor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 23 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 24. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] XIX-16 IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. [NAME OF SUBSIDIARY], as Pledgor By: ____________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: _____________________________ Name: __________________________ Title: __________________________ Notice Address: Attention: S-1 SCHEDULE I Attached to and forming a part of the Pledge Agreement dated as of April 21, 1998 between [_______________], as Pledgor, and Wells Fargo Bank, N.A., as Secured Party. Part A Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ ----- ----------- ----- ------- Part B Debt Issuer Amount of Indebtedness - ----------- ---------------------- SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, _____, is delivered pursuant to Section 6(b) of the Subsidiary Pledge Agreement referred to below. The undersigned hereby agrees that this Subsidiary Pledge Amendment may be attached to the Subsidiary Pledge Agreement dated April 21, 1998, between the undersigned and Wells Fargo Bank, N.A., as Secured Party (the "SUBSIDIARY PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. [NAME OF PLEDGOR] By: ___________________________ Title: Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ ----- ----------- ----- ------ Debt Issuer Amount of Indebtedness - ----------- ---------------------- SUBSIDIARY PLEDGE AGREEMENT This SUBSIDIARY PLEDGE AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between EMPIRE CANDLE, INC., a Kansas corporation ("PLEDGOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "SECURED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Pledgor is the legal and beneficial owner of (i) the shares of stock or other equity Securities (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto and issued by the companies named therein and (ii) the - ---------- indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and ---------- issued by the obligors named therein. B. Secured Party and Lenders have entered into a Credit Agreement dated as of April 21, 1998 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). D. Pledgor has executed and delivered that certain Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Secured Party for the benefit of Lenders and any Interest Rate Exchangers, pursuant to which Pledgor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and all obligations of Company under the Lender Interest Rate Agreements, including the obligation of Company to make payments thereunder in the event of early termination thereof. E. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. 1 NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: SECTION 1. PLEDGE OF SECURITY. Pledgor hereby pledges and assigns to ------------------ Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or other rights; provided, however, that, -------- ------- Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any direct or indirect Subsidiary of Pledgor which is incorporated in a jurisdiction other than the states of the United States and the District of Columbia ("Foreign Subsidiary") hereunder; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any 2 interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, -------- however, that Pledgor shall not be required to pledge more than 66.6% of any - ------- class of capital stock of any Foreign Subsidiary hereunder; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes proceeds of any indemnity or guaranty payable to Pledgor or Secured Party from time to time with respect to any of the Pledged Collateral. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty and all extensions or renewals thereof, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "SECURED OBLIGATIONS"). SECTION 3. DELIVERY OF PLEDGED COLLATERAL. All certificates or ------------------------------ instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for 3 transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Upon the occurrence and during the continuation of an Event of Default (as defined in the Credit Agreement) or the occurrence of an Early Termination Date (as defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement (either such occurrence being an "EVENT OF DEFAULT" for purposes of this Agreement), Secured Party shall have the right, without notice to Pledgor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 7(a). In addition, upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and ------------------------------ warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the Pledged --------------------------------------------- Shares have been duly authorized and validly issued and are fully paid and non- assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares constitute --------------------------------- (i) all of the issued and outstanding shares of stock or other equity Securities of each of the Subsidiaries of Pledgor which are incorporated in a state of the United States or in the District of Columbia, and (ii) 66.6% of the issued and outstanding shares of stock or other equity Securities of each Foreign Subsidiary of Pledgor, and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record and ------------------------------- beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. (d) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge by Pledgor of the Pledged Collateral pursuant to this Agreement and the grant by Pledgor of the security interest granted hereby, or (ii) the execution, delivery or performance of this Agreement by Pledgor, or (iii) the exercise by Secured Party of the voting or other rights, or the remedies in respect of the Pledged Collateral, provided for in this Agreement (except as may be required in connection with 4 a disposition of Pledged Collateral by laws affecting the offering and sale of securities generally). (e) Perfection. The pledge of the Pledged Collateral pursuant to this ---------- Agreement creates a valid and perfected first priority security interest in the Pledged Collateral, securing the payment of the Secured Obligations; provided -------- that Secured Party retains physical possession of such Pledged Collateral. (f) Margin Regulations. The pledge of the Pledged Collateral pursuant ------------------ to this Agreement does not violate Regulation T, U or X of the Board of Governors of the Federal Reserve System. (g) Other Information. All information heretofore, herein or hereafter ----------------- supplied to Secured Party by or on behalf of Pledgor with respect to the Pledged Collateral is accurate and complete in all material respects. SECTION 5. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; --------------------------------------------------------- ETC. Pledgor shall: - ---- (a) not, except as expressly permitted by the Credit Agreement, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement and the Permitted Encumbrances, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock or other equity Security of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; provided -------- that Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary; provided, further, that in the event -------- ------- Pledgor makes an Asset Sale permitted by the Credit Agreement and the assets subject to such Asset Sale are Pledged Shares, Secured Party shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, further that, as a condition -------- ------- precedent to such release, Secured Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Secured Party of the Net Asset Sale Proceeds of such Asset Sale if required under the Credit Agreement; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of 5 Pledgor; provided that Pledgor shall not be required to pledge more than 66.6% -------- of any class of capital stock of any Foreign Subsidiary hereunder; (c) (i) pledge hereunder, within 5 days of their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, within 5 days of their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor; (d) promptly notify Secured Party of any event of which Pledgor becomes aware causing material loss or depreciation in the value of the Pledged Collateral; (e) promptly deliver to Secured Party all material written notices received by it with respect to the Pledged Collateral; and (f) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent permitted by the terms of the Credit Agreement. SECTION 6. FURTHER ASSURANCES; PLEDGE AMENDMENTS. ------------------------------------- (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may reasonably be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral. (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 5(b) or (c), promptly (and in any event within five Business Days) deliver to Secured Party a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), in ----------- respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Secured Party to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Secured Party shall for all purposes hereunder be considered Pledged Collateral; 6 provided that the failure of Pledgor to execute a Pledge Amendment with respect - -------- to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Secured Party therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto. SECTION 7. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement and as long as such action would not have a material adverse effect on the value of the Pledged Collateral. It is understood, however, that neither (A) the voting by Pledgor of any Pledged Shares for or Pledgor's consent to the election of directors at a regularly scheduled annual or other meeting of stockholders or members or with respect to incidental matters at any such meeting nor (B) Pledgor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section 7(a)(i), and no notice of any such voting or consent need be given to Secured Party; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that -------- ------- any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal or in redemption of or in exchange for any Pledged Collateral, shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor and be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with all necessary indorsements); provided, however, that to the extent that property -------- ------- distributed to Pledgor in respect of the Pledged Collateral continues or becomes, after such distribution, to be otherwise subject to a Lien in favor of 7 Secured Party under the Loan Documents, such property shall not be otherwise required to be forthwith delivered to Secured Party pursuant to clause (ii); and (iii) Secured Party shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Secured Party to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall forthwith be paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary indorsements). (c) In order to permit Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 7(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 7(a)(ii) or Section 7(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies, dividend payment orders and other instruments as Secured Party may from time to time reasonably request, including without limitation to the extent necessary so that the pledge of any shares of stock of any Foreign Subsidiary is registered (if not already so registered) on the appropriate books and records of the issuer of the applicable Pledged Shares if such registration is required under applicable law in order to permit Secured Party to exercise such rights or to receive such dividends and other distributions, and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled 8 (including giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the written notice of an Event of Default from Secured Party delivered at any time, including at a member or shareholder meeting, and which proxy shall only terminate upon cure of the circumstances which gave rise to the Event of Default. SECTION 8. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Pledgor hereby ---------------------------------------- irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time during the continuation of an Event of Default in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Pledged Collateral. SECTION 9. SECURED PARTY MAY PERFORM. If Pledgor fails to perform any ------------------------- agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13(b). SECTION 10. STANDARD OF CARE. The powers conferred on Secured Party ---------------- hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Pledged Collateral, it being understood that Secured Party shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, 9 maturities, tenders or other matters relating to any Pledged Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Secured Party accords its own property consisting of negotiable securities. SECTION 11. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), or any other applicable laws whether of the United States or any state thereof or any other foreign jurisdiction, and Secured Party may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Secured Party or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Lenders and Interest Rate Exchangers (but not any Lender or Lenders or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Lenders or Requisite Obligees (as defined in Section 15(a)) shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further 10 notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Secured Party determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Secured Party all such information as Secured Party may request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 12. APPLICATION OF PROCEEDS. All proceeds received by Secured ----------------------- Party in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 13. INDEMNITY AND EXPENSES. ---------------------- (a) Pledgor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, 11 losses or liabilities result from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. SECTION 14. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This ----------------------------------------------- Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 15. SECURED PARTY AS ADMINISTRATIVE AGENT. ------------------------------------- (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party shall -------- exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early 12 termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 15(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 15(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 16. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 17. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. 13 SECTION 18. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 19. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 20. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 21. GOVERNING LAW; TERMS; RULES OF CONSTRUCTION. THIS ------------------------------------------- AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. SECTION 22. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- (A) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY 14 (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 17; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 22 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. (b) Without limiting the generality of the last sentence of Section 22(a), any judicial proceedings brought against Pledgor arising out of or relating to the pledge of shares of capital stock of any Foreign Subsidiary hereunder may be brought in any court of competent jurisdiction in the jurisdiction in which such Foreign Subsidiary is organized, and by execution and delivery of this Agreement, Pledgor accepts for itself and in connection with its properties (including without limitation the applicable Pledged Shares), generally and unconditionally, the nonexclusive jurisdiction of any such court and waives any defense of forum non conveniens (or any similar defense under the laws of such jurisdiction) and irrevocably agrees to be bound by any judgement rendered thereby in connection with such pledge or the enforcement thereof. SECTION 23. WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY -------------------- AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgor and Secured Party each acknowledge that this waiver is a material inducement for Pledgor and Secured Party 15 to enter into a business relationship, that Pledgor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Pledgor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 23 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 24. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 16 IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. EMPIRE CANDLE, INC. as Pledgor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 555 Montgomery Street 17th Floor San Francisco, California 94111 Attention: Alan Wray S-1 SCHEDULE I Attached to and forming a part of the Pledge Agreement dated as of April 21, 1998 between [_______________], as Pledgor, and Wells Fargo Bank, N.A., as Secured Party. Part A Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ -------- ------------ ----- --------- Part B Debt Issuer Amount of Indebtedness - ----------- ---------------------- SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, _____, is delivered pursuant to Section 6(b) of the Subsidiary Pledge Agreement referred to below. The undersigned hereby agrees that this Subsidiary Pledge Amendment may be attached to the Subsidiary Pledge Agreement dated April 21, 1998, between the undersigned and Wells Fargo Bank, N.A., as Secured Party (the "SUBSIDIARY PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. [NAME OF PLEDGOR] By:_____________________ Title: Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ -------- ------------ ----- --------- Debt Issuer Amount of Indebtedness - ----------- ---------------------- SUBSIDIARY PLEDGE AGREEMENT This SUBSIDIARY PLEDGE AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between FORSTER, INC., a Maine corporation ("PLEDGOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "SECURED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Pledgor is the legal and beneficial owner of (i) the shares of stock or other equity Securities (the "PLEDGED SHARES") described in Part A of Schedule I annexed hereto and issued by the companies named therein and (ii) the - ---------- indebtedness (the "PLEDGED DEBT") described in Part B of said Schedule I and ---------- issued by the obligors named therein. B. Secured Party and Lenders have entered into a Credit Agreement dated as of April 21, 1998 (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined) with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. C. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). D. Pledgor has executed and delivered that certain Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Secured Party for the benefit of Lenders and any Interest Rate Exchangers, pursuant to which Pledgor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and all obligations of Company under the Lender Interest Rate Agreements, including the obligation of Company to make payments thereunder in the event of early termination thereof. E. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Pledgor shall have granted the security interests and undertaken the obligations contemplated by this Agreement. 1 NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Pledgor hereby agrees with Secured Party as follows: SECTION 1. PLEDGE OF SECURITY. Pledgor hereby pledges and assigns to ------------------ Secured Party, and hereby grants to Secured Party a security interest in, all of Pledgor's right, title and interest in and to the following (the "PLEDGED COLLATERAL"): (a) the Pledged Shares and the certificates representing the Pledged Shares and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; (b) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; (c) all additional shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any issuer of the Pledged Shares from time to time acquired by Pledgor in any manner (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such additional shares, securities, warrants, options or other rights and any interest of Pledgor in the entries on the books of any financial intermediary pertaining to such additional shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such additional shares, securities, warrants, options or other rights; provided, however, that, -------- ------- Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any direct or indirect Subsidiary of Pledgor which is incorporated in a jurisdiction other than the states of the United States and the District of Columbia ("Foreign Subsidiary") hereunder; (d) all additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt and the instruments evidencing such indebtedness, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (e) all shares of, and all securities convertible into and warrants, options and other rights to purchase or otherwise acquire, stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of Pledgor (which shares shall be deemed to be part of the Pledged Shares), the certificates or other instruments representing such shares, securities, warrants, options or other rights and any 2 interest of Pledgor in the entries on the books of any financial intermediary pertaining to such shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such shares, securities, warrants, options or other rights; provided, -------- however, that Pledgor shall not be required to pledge more than 66.6% of any - ------- class of capital stock of any Foreign Subsidiary hereunder; (f) all indebtedness from time to time owed to Pledgor by any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of such indebtedness; (g) to the extent not covered by clauses (a) through (f) above, all proceeds of any or all of the foregoing Pledged Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Pledged Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes proceeds of any indemnity or guaranty payable to Pledgor or Secured Party from time to time with respect to any of the Pledged Collateral. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Pledged Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S) 362(a)), of all obligations and liabilities of every nature of Pledgor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty and all extensions or renewals thereof, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to Company, would accrue on such obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise, and all obligations of every nature of Pledgor now or hereafter existing under this Agreement (all such obligations of Pledgor being the "SECURED OBLIGATIONS"). SECTION 3. DELIVERY OF PLEDGED COLLATERAL. All certificates or ------------------------------ instruments representing or evidencing the Pledged Collateral shall be delivered to and held by or on behalf of Secured Party pursuant hereto and shall be in suitable form for 3 transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, where necessary, or duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. Upon the occurrence and during the continuation of an Event of Default (as defined in the Credit Agreement) or the occurrence of an Early Termination Date (as defined in a Master Agreement or an Interest Rate Swap Agreement or Interest Rate and Currency Exchange Agreement in the form prepared by the International Swap and Derivatives Association Inc. or a similar event under any similar swap agreement) under any Lender Interest Rate Agreement (either such occurrence being an "EVENT OF DEFAULT" for purposes of this Agreement), Secured Party shall have the right, without notice to Pledgor, to transfer to or to register in the name of Secured Party or any of its nominees any or all of the Pledged Collateral, subject only to the revocable rights specified in Section 7(a). In addition, upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Pledged Collateral for certificates or instruments of smaller or larger denominations. SECTION 4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and ------------------------------ warrants as follows: (a) Due Authorization, etc. of Pledged Collateral. All of the Pledged --------------------------------------------- Shares have been duly authorized and validly issued and are fully paid and non- assessable. All of the Pledged Debt has been duly authorized, authenticated or issued, and delivered and is the legal, valid and binding obligation of the issuers thereof and is not in default. (b) Description of Pledged Collateral. The Pledged Shares constitute --------------------------------- (i) all of the issued and outstanding shares of stock or other equity Securities of each of the Subsidiaries of Pledgor which are incorporated in a state of the United States or in the District of Columbia, and (ii) 66.6% of the issued and outstanding shares of stock or other equity Securities of each Foreign Subsidiary of Pledgor, and there are no outstanding warrants, options or other rights to purchase, or other agreements outstanding with respect to, or property that is now or hereafter convertible into, or that requires the issuance or sale of, any Pledged Shares. The Pledged Debt constitutes all of the issued and outstanding intercompany indebtedness evidenced by a promissory note of the respective issuers thereof owing to Pledgor. (c) Ownership of Pledged Collateral. Pledgor is the legal, record and ------------------------------- beneficial owner of the Pledged Collateral free and clear of any Lien except for the security interest created by this Agreement. (d) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the pledge by Pledgor of the Pledged Collateral pursuant to this Agreement and the grant by Pledgor of the security interest granted hereby, or (ii) the execution, delivery or performance of this Agreement by Pledgor, or (iii) the exercise by Secured Party of the voting or other rights, or the remedies in respect of the Pledged Collateral, provided for in this Agreement (except as may be required in connection with 4 a disposition of Pledged Collateral by laws affecting the offering and sale of securities generally). (e) Perfection. The pledge of the Pledged Collateral pursuant to this ---------- Agreement creates a valid and perfected first priority security interest in the Pledged Collateral, securing the payment of the Secured Obligations; provided -------- that Secured Party retains physical possession of such Pledged Collateral. (f) Margin Regulations. The pledge of the Pledged Collateral pursuant ------------------ to this Agreement does not violate Regulation T, U or X of the Board of Governors of the Federal Reserve System. (g) Other Information. All information heretofore, herein or hereafter ----------------- supplied to Secured Party by or on behalf of Pledgor with respect to the Pledged Collateral is accurate and complete in all material respects. SECTION 5. TRANSFERS AND OTHER LIENS; ADDITIONAL PLEDGED COLLATERAL; --------------------------------------------------------- ETC. Pledgor shall: - ---- (a) not, except as expressly permitted by the Credit Agreement, (i) sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, (ii) create or suffer to exist any Lien upon or with respect to any of the Pledged Collateral, except for the security interest under this Agreement and the Permitted Encumbrances, or (iii) permit any issuer of Pledged Shares to merge or consolidate unless all the outstanding capital stock or other equity Security of the surviving or resulting corporation is, upon such merger or consolidation, pledged hereunder and no cash, securities or other property is distributed in respect of the outstanding shares of any other constituent corporation; provided -------- that Pledgor shall not be required to pledge more than 66.6% of any class of capital stock of any Foreign Subsidiary; provided, further, that in the event -------- ------- Pledgor makes an Asset Sale permitted by the Credit Agreement and the assets subject to such Asset Sale are Pledged Shares, Secured Party shall release the Pledged Shares that are the subject of such Asset Sale to Pledgor free and clear of the lien and security interest under this Agreement concurrently with the consummation of such Asset Sale; provided, further that, as a condition -------- ------- precedent to such release, Secured Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Secured Party of the Net Asset Sale Proceeds of such Asset Sale if required under the Credit Agreement; (b) (i) cause each issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by such issuer, except to Pledgor, (ii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of each issuer of Pledged Shares, and (iii) pledge hereunder, within 5 days of its acquisition (directly or indirectly) thereof, any and all shares of stock of any Person that, after the date of this Agreement, becomes, as a result of any occurrence, a direct Subsidiary of 5 Pledgor; provided that Pledgor shall not be required to pledge more than 66.6% -------- of any class of capital stock of any Foreign Subsidiary hereunder; (c) (i) pledge hereunder, within 5 days of their issuance, any and all instruments or other evidences of additional indebtedness from time to time owed to Pledgor by any obligor on the Pledged Debt, and (ii) pledge hereunder, within 5 days of their issuance, any and all instruments or other evidences of indebtedness from time to time owed to Pledgor by any Person that after the date of this Agreement becomes, as a result of any occurrence, a direct or indirect Subsidiary of Pledgor; (d) promptly notify Secured Party of any event of which Pledgor becomes aware causing material loss or depreciation in the value of the Pledged Collateral; (e) promptly deliver to Secured Party all material written notices received by it with respect to the Pledged Collateral; and (f) pay promptly when due all taxes, assessments and governmental charges or levies imposed upon, and all claims against, the Pledged Collateral, except to the extent permitted by the terms of the Credit Agreement. SECTION 6. FURTHER ASSURANCES; PLEDGE AMENDMENTS. ------------------------------------- (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action, that may reasonably be necessary or desirable, or that Secured Party may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may reasonably request, in order to perfect and preserve the security interests granted or purported to be granted hereby and (ii) at Secured Party's reasonable request, appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in all or any part of the Pledged Collateral. (b) Pledgor further agrees that it will, upon obtaining any additional shares of stock or other securities required to be pledged hereunder as provided in Section 5(b) or (c), promptly (and in any event within five Business Days) deliver to Secured Party a Pledge Amendment, duly executed by Pledgor, in substantially the form of Schedule II annexed hereto (a "PLEDGE AMENDMENT"), in ----------- respect of the additional Pledged Shares or Pledged Debt to be pledged pursuant to this Agreement. Pledgor hereby authorizes Secured Party to attach each Pledge Amendment to this Agreement and agrees that all Pledged Shares or Pledged Debt listed on any Pledge Amendment delivered to Secured Party shall for all purposes hereunder be considered Pledged Collateral; 6 provided that the failure of Pledgor to execute a Pledge Amendment with respect - -------- to any additional Pledged Shares or Pledged Debt pledged pursuant to this Agreement shall not impair the security interest of Secured Party therein or otherwise adversely affect the rights and remedies of Secured Party hereunder with respect thereto. SECTION 7. VOTING RIGHTS; DIVIDENDS; ETC. ------------------------------ (a) So long as no Event of Default shall have occurred and be continuing: (i) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Pledged Collateral or any part thereof for any purpose not inconsistent with the terms of this Agreement or the Credit Agreement and as long as such action would not have a material adverse effect on the value of the Pledged Collateral. It is understood, however, that neither (A) the voting by Pledgor of any Pledged Shares for or Pledgor's consent to the election of directors at a regularly scheduled annual or other meeting of stockholders or members or with respect to incidental matters at any such meeting nor (B) Pledgor's consent to or approval of any action otherwise permitted under this Agreement and the Credit Agreement shall be deemed inconsistent with the terms of this Agreement or the Credit Agreement within the meaning of this Section 7(a)(i), and no notice of any such voting or consent need be given to Secured Party; (ii) Pledgor shall be entitled to receive and retain, and to utilize free and clear of the lien of this Agreement, any and all dividends and interest paid in respect of the Pledged Collateral; provided, however, that -------- ------- any and all (A) dividends and interest paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Pledged Collateral, (B) dividends and other distributions paid or payable in cash in respect of any Pledged Collateral in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in-surplus, and (C) cash paid, payable or otherwise distributed in respect of principal or in redemption of or in exchange for any Pledged Collateral, shall be, and shall forthwith be delivered to Secured Party to hold as, Pledged Collateral and shall, if received by Pledgor, be received in trust for the benefit of Secured Party, be segregated from the other property or funds of Pledgor and be forthwith delivered to Secured Party as Pledged Collateral in the same form as so received (with all necessary indorsements); provided, however, that to the extent that property -------- ------- distributed to Pledgor in respect of the Pledged Collateral continues or becomes, after such distribution, to be otherwise subject to a Lien in favor of 7 Secured Party under the Loan Documents, such property shall not be otherwise required to be forthwith delivered to Secured Party pursuant to clause (ii); and (iii) Secured Party shall promptly execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies, dividend payment orders and other instruments as Pledgor may from time to time reasonably request for the purpose of enabling Pledgor to exercise the voting and other consensual rights which it is entitled to exercise pursuant to paragraph (i) above and to receive the dividends, principal or interest payments which it is authorized to receive and retain pursuant to paragraph (ii) above. (b) Upon the occurrence and during the continuation of an Event of Default: (i) upon written notice from Secured Party to Pledgor, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to exercise such voting and other consensual rights; (ii) all rights of Pledgor to receive the dividends and interest payments which it would otherwise be authorized to receive and retain pursuant to Section 7(a)(ii) shall cease, and all such rights shall thereupon become vested in Secured Party who shall thereupon have the sole right to receive and hold as Pledged Collateral such dividends and interest payments; and (iii) all dividends, principal and interest payments which are received by Pledgor contrary to the provisions of paragraph (ii) of this Section 7(b) shall be received in trust for the benefit of Secured Party, shall be segregated from other funds of Pledgor and shall forthwith be paid over to Secured Party as Pledged Collateral in the same form as so received (with any necessary indorsements). (c) In order to permit Secured Party to exercise the voting and other consensual rights which it may be entitled to exercise pursuant to Section 7(b)(i) and to receive all dividends and other distributions which it may be entitled to receive under Section 7(a)(ii) or Section 7(b)(ii), (i) Pledgor shall promptly execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies, dividend payment orders and other instruments as Secured Party may from time to time reasonably request, including without limitation to the extent necessary so that the pledge of any shares of stock of any Foreign Subsidiary is registered (if not already so registered) on the appropriate books and records of the issuer of the applicable Pledged Shares if such registration is required under applicable law in order to permit Secured Party to exercise such rights or to receive such dividends and other distributions, and (ii) without limiting the effect of the immediately preceding clause (i), Pledgor hereby grants to Secured Party an irrevocable proxy to vote the Pledged Shares and to exercise all other rights, powers, privileges and remedies to which a holder of the Pledged Shares would be entitled 8 (including giving or withholding written consents of shareholders, calling special meetings of shareholders and voting at such meetings), which proxy shall be effective, automatically and without the necessity of any action (including any transfer of any Pledged Shares on the record books of the issuer thereof) by any other Person (including the issuer of the Pledged Shares or any officer or agent thereof), upon the written notice of an Event of Default from Secured Party delivered at any time, including at a member or shareholder meeting, and which proxy shall only terminate upon cure of the circumstances which gave rise to the Event of Default. SECTION 8. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Pledgor hereby ---------------------------------------- irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time during the continuation of an Event of Default in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including: (a) to file one or more financing or continuation statements, or amendments thereto, relative to all or any part of the Pledged Collateral without the signature of Pledgor; (b) to ask, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Pledged Collateral; (c) to receive, endorse and collect any instruments made payable to Pledgor representing any dividend, principal or interest payment or other distribution in respect of the Pledged Collateral or any part thereof and to give full discharge for the same; and (d) to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Pledged Collateral. SECTION 9. SECURED PARTY MAY PERFORM. If Pledgor fails to perform any ------------------------- agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Pledgor under Section 13(b). SECTION 10. STANDARD OF CARE. The powers conferred on Secured Party ---------------- hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Pledged Collateral, it being understood that Secured Party shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, 9 maturities, tenders or other matters relating to any Pledged Collateral, whether or not Secured Party has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Pledged Collateral) to preserve rights against any parties with respect to any Pledged Collateral, (c) taking any necessary steps to collect or realize upon the Secured Obligations or any guarantee therefor, or any part thereof, or any of the Pledged Collateral, or (d) initiating any action to protect the Pledged Collateral against the possibility of a decline in market value. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Secured Party accords its own property consisting of negotiable securities. SECTION 11. REMEDIES. -------- (a) If any Event of Default shall have occurred and be continuing, Secured Party may exercise in respect of the Pledged Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Pledged Collateral), or any other applicable laws whether of the United States or any state thereof or any other foreign jurisdiction, and Secured Party may also in its sole discretion, without notice except as specified below, sell the Pledged Collateral or any part thereof in one or more parcels at public or private sale, at any exchange or broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Pledged Collateral. Secured Party or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Pledged Collateral at any such sale and Secured Party, as agent for and representative of Lenders and Interest Rate Exchangers (but not any Lender or Lenders or Interest Rate Exchanger or Interest Rate Exchangers in its or their respective individual capacities unless Requisite Lenders or Requisite Obligees (as defined in Section 15(a)) shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Pledged Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Pledged Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further 10 notice, be made at the time and place to which it was so adjourned. Pledgor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Pledged Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Pledged Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Pledged Collateral are insufficient to pay all the Secured Obligations, Pledgor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws, Secured Party may be compelled, with respect to any sale of all or any part of the Pledged Collateral conducted without prior registration or qualification of such Pledged Collateral under the Securities Act and/or such state securities laws, to limit purchasers to those who will agree, among other things, to acquire the Pledged Collateral for their own account, for investment and not with a view to the distribution or resale thereof. Pledgor acknowledges that any such private sales may be at prices and on terms less favorable than those obtainable through a public sale without such restrictions (including a public offering made pursuant to a registration statement under the Securities Act) and, notwithstanding such circumstances, Pledgor agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that Secured Party shall have no obligation to engage in public sales and no obligation to delay the sale of any Pledged Collateral for the period of time necessary to permit the issuer thereof to register it for a form of public sale requiring registration under the Securities Act or under applicable state securities laws, even if such issuer would, or should, agree to so register it. (c) If Secured Party determines to exercise its right to sell any or all of the Pledged Collateral, upon written request, Pledgor shall and shall cause each issuer of any Pledged Shares to be sold hereunder from time to time to furnish to Secured Party all such information as Secured Party may request in order to determine the number of shares and other instruments included in the Pledged Collateral which may be sold by Secured Party in exempt transactions under the Securities Act and the rules and regulations of the Securities and Exchange Commission thereunder, as the same are from time to time in effect. SECTION 12. APPLICATION OF PROCEEDS. All proceeds received by Secured ----------------------- Party in respect of any sale of, collection from, or other realization upon all or any part of the Pledged Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 13. INDEMNITY AND EXPENSES. ---------------------- (a) Pledgor agrees to indemnify Secured Party and each Lender from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, 11 losses or liabilities result from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Pledgor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Pledgor to perform or observe any of the provisions hereof. SECTION 14. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This ----------------------------------------------- Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Pledgor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Pledged Collateral shall revert to Pledgor. Upon any such termination Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination and Pledgor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Secured Party, of such of the Pledged Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 15. SECURED PARTY AS ADMINISTRATIVE AGENT. ------------------------------------- (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Pledged Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party shall -------- exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early 12 termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 15(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Pledged Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 15(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 16. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Pledgor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Pledgor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 17. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. 13 SECTION 18. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 19. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 20. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 21. GOVERNING LAW; TERMS; RULES OF CONSTRUCTION. THIS ------------------------------------------- AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. SECTION 22. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ---------------------------------------------- (A) ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST PLEDGOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, PLEDGOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY 14 (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO PLEDGOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 17; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER PLEDGOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST PLEDGOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 22 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. (b) Without limiting the generality of the last sentence of Section 22(a), any judicial proceedings brought against Pledgor arising out of or relating to the pledge of shares of capital stock of any Foreign Subsidiary hereunder may be brought in any court of competent jurisdiction in the jurisdiction in which such Foreign Subsidiary is organized, and by execution and delivery of this Agreement, Pledgor accepts for itself and in connection with its properties (including without limitation the applicable Pledged Shares), generally and unconditionally, the nonexclusive jurisdiction of any such court and waives any defense of forum non conveniens (or any similar defense under the laws of such jurisdiction) and irrevocably agrees to be bound by any judgement rendered thereby in connection with such pledge or the enforcement thereof. SECTION 23. WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY -------------------- AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Pledgor and Secured Party each acknowledge that this waiver is a material inducement for Pledgor and Secured Party 15 to enter into a business relationship, that Pledgor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Pledgor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 23 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 24. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 16 IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. FORSTER INC., as Pledgor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 555 Montgomery Street 17th Floor San Francisco, California 94111 Attention: Alan Wray S-1 SCHEDULE I Attached to and forming a part of the Pledge Agreement dated as of April 21, 1998 between [_______________], as Pledgor, and Wells Fargo Bank, N.A., as Secured Party. Part A Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ -------- ------------ ----- --------- Part B Debt Issuer Amount of Indebtedness - ----------- ---------------------- SCHEDULE II PLEDGE AMENDMENT This Pledge Amendment, dated ____________, _____, is delivered pursuant to Section 6(b) of the Subsidiary Pledge Agreement referred to below. The undersigned hereby agrees that this Subsidiary Pledge Amendment may be attached to the Subsidiary Pledge Agreement dated April 21, 1998, between the undersigned and Wells Fargo Bank, N.A., as Secured Party (the "SUBSIDIARY PLEDGE AGREEMENT," capitalized terms defined therein being used herein as therein defined), and that the [Pledged Shares] [Pledged Debt] listed on this Pledge Amendment shall be deemed to be part of the [Pledged Shares] [Pledged Debt] and shall become part of the Pledged Collateral and shall secure all Secured Obligations. [NAME OF PLEDGOR] By:___________________________ Title: Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ -------- ------------ ----- --------- Debt Issuer Amount of Indebtedness - ----------- ---------------------- EX-4.7 6 [Form of Subsidiary Copyright Security Agreement] SUBSIDIARY COPYRIGHT SECURITY AGREEMENT THIS SUBSIDIARY COPYRIGHT SECURITY AGREEMENT dated as of April 21, 1998 (this "AGREEMENT") is made by [SUBSIDIARY], a [___________________] Corporation ("GRANTOR"), to WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "ADMINISTRATIVE AGENT") financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Administrative Agent and Lenders have entered into the Credit Agreement dated as of April 21, 1998 with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY" or "BORROWER"), DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (said Credit Agreement and any successor agreement, as it may be amended, amended and restated, modified or otherwise supplemented from time to time, being the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined). B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one ore more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Grantor has executed and delivered the Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Administrative Agent for the benefit of Lenders and Interest Rate Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all Obligations of the Borrower under the Credit Agreement and under any Lender Interest Rate Agreements. D. Grantor owns and uses in its business and will in the future, adopt and so use various published and unpublished works of authorship (collectively, the "COPYRIGHTS"). 1 E. Administrative Agent, for its benefit and the ratable benefit of Lenders, desires to become a secured creditor with respect to and, under the circumstances described herein, an assignee of all of the existing and future Copyrights, all copyright registrations and applications for copyright registration which have heretofore been or may hereafter be issued thereon or applied for with the United States Copyright Office and throughout the world (the "REGISTRATIONS"), all common law and other rights in and to the Copyrights throughout the world, including all copyright licenses (the "COPYRIGHT RIGHTS") and all proceeds of the Copyrights, the Registrations and the Copyright Rights, and Grantor agrees to create a secured and protected interest in the Copyrights, the Registrations, the Copyright Rights and all the proceeds thereof as provided herein. F. Upon the occurrence of and during the continuance of an Event of Default under the Credit Agreement and to permit Administrative Agent to continue operating Grantor's business without interruption and to use the Copyrights, Registrations and Copyright Rights in conjunction therewith, Grantor is willing to grant to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers the conditional assignment of Grantor's entire right, title and interest in and to the Collateral (as hereinafter defined) and to appoint Administrative Agent or Administrative Agent's designee as Grantor's attorney-in-law and attorney-in-fact to execute documents and take actions to confirm said assignments. G. The Credit Agreement requires that Grantor grant the security interest and make the conditional assignment contemplated by this Agreement as a condition precedent to the availability of the credit facilities thereunder. NOW THEREFORE, in consideration of the premises, and in order to induce Lenders to extend the credit facilities under the Credit Agreement and to induce Interest Rate Exchangers to enter into Interest Rate Agreements, Grantor hereby agrees with Administrative Agent for Administrative Agent's benefit and the ratable benefit of Lenders and Interest Rate Exchangers as follows: SECTION 1. GRANT OF SECURITY. Grantor hereby grants a first priority ----------------- security interest in, pledges and mortgages, but does not transfer title, to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers, all of Grantor's right, title and interest in and to the following (the "COLLATERAL") to secure the Secured Obligations (as hereinafter defined): (a) Each of the Copyrights, rights, titles and interests in and to the Copyrights and works protectable by copyright, which are presently, or in the future may be, owned, created, authored (as a work for hire), acquired or used (whether pursuant to a license or otherwise) by Grantor, in whole or in part, and all Copyright Rights with respect thereto and all Registrations therefor, heretofore or hereafter granted or applied for, and all renewals and extensions thereof, throughout the world, including all proceeds thereof (such as, by way of example and not by limitation, license royalties and proceeds of infringement suits), the right (but not the obligation) to renew and extend such Copyrights, Registrations and Copyright Rights and to register works protectable by copyright and the right (but not 2 the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Administrative Agent or Lenders or Interest Rate Exchangers for past, present and future infringements of the Copyrights and Copyright Rights, including, without limitation: (i) all of Grantor's right, title and interest, to the extent that it has the same, in and to all copyrights or rights or interests in copyrights registered or recorded in the United States Copyright Office, including, without limitation, the Registrations listed on Schedule A attached hereto, as the same may be amended pursuant hereto from time to time; (ii) all of Grantor's right, title and interest, to the extent that it has the same, in and to all renewals and extensions of any such copyrights that may be secured under the law now or hereafter in force and effect; and (iii) all of Grantor's right, title and interest, to the extent that it has the same, to make and exploit all derivative works based on or adopted from all works covered by the copyrights referred to herein; it being understood and agreed that the Collateral assigned hereby shall include, without limitation, rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to copyrights and works protectable by copyright presently or in the future owned or used by third-parties, but in the case of third-parties which are not Affiliates of Grantor only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third-parties; (b) All general intangibles (as defined in Article 9 of the Uniform Commercial Code as in effect in the State of New York (the "CODE") relating to the Collateral; and (c) All proceeds of any and all of the foregoing Collateral (including, without limitation, license royalties and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Administrative Agent or any Lender or Interest Rate Exchanger is the loss payee thereof) or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto. It is the intention of Grantor and Administrative Agent that the security interest granted hereby shall attach to the Collateral as of the date hereof and shall remain in effect until the indefeasible payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letter of Credit. 3 In addition to, and not by way of limitation of, the pledge and mortgage of the Collateral set forth above, Grantor hereby, effective upon the occurrence of an Event of Default, assigns, grants, sells, conveys, transfers and sets over to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers all of Grantor's rights, title and interest in and to the Collateral as security for the Secured Obligations. SECURED 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. Section 362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations, whether or not a claim is allowed against Grantor for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). SECTION 3. REPRESENTATIONS AND WARRANTIES. Grantor represents, ------------------------------ warrants and covenants as follows: (a) A true and complete list of all Registrations and applications for Registrations owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, in conducting its business is set forth in Schedule A attached hereto. (b) Grantor has full power, authority and legal right to pledge all of the Collateral pursuant to this Agreement and none of Grantor's Affiliates has any right, title or interest in any Collateral. (c) Each of the Copyrights and Copyright Rights are subsisting and none of the Copyrights, Registrations or Copyright Rights have been adjudged invalid or unenforceable. (d) Each material Copyright and each material Copyright Right are believed to be valid and enforceable and Grantor is not presently aware of any past, present or 4 prospective claim by any third party that any material Copyright or material Copyright Right is invalid or unenforceable or of any basis for any such claim. (e) No claim known to Grantor has been made that the works of any material Copyright, material Registration or material Copyright Right does or may violate the rights of any third person. (f) Grantor has taken and will continue to take all reasonable steps to protect the secrecy of all trade secrets relating to unpublished Collateral. (g) Except as may be prohibited by law, Grantor will use statutory notice in connection with its use of each material Copyright, material Registration and material Copyright Right. (h) The execution, delivery and performance of this Agreement by Grantor does not conflict with, result in a breach of, constitute (with due notice or lapse of time or both) a default under, or require the limitation of or consent under, any Contractual Obligation of Grantor, including, without limitation, any agreement pursuant to which Grantor licenses or has the right to use any Collateral. (i) Grantor is the legal and beneficial owner of each material Copyright, material Registration and material Copyright Right, free and clear of any Lien, including, without limitation, pledges, assignments, licenses and covenants by Grantor not to sue third persons, except for the Lien and conditional assignment created by this Agreement and Permitted Liens. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of Administrative Agent relating to the Credit Agreement or this Agreement or for which duly executed termination statements have been recorded or delivered to Administrative Agent. No effective filing with the United States Copyright Office covering all or any part of the Collateral is on file with the United States Copyright Office, except such as may be filed in favor of Grantor evidencing Grantor's right, title and interest in the Copyrights or in favor of Administrative Agent relating to this Agreement or for which duly executed termination statements have been delivered to Administrative Agent. (j) Grantor's chief executive office is located at the address specified on the signature page to this Agreement which address qualifies as its "location" under the Code. (k) This Agreement will create in favor of Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers a valid and perfected first priority security interest in the Collateral upon making the filings referred to in clause (l) below. (l) Except for the filing of financing statements with the Secretary of State of the State of [___________] under the Code and filings with the United States Copyright Office necessary to perfect the security interest created hereunder, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory 5 body is required either (i) for the grant by Grantor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Grantor or (ii) for the perfection of or the exercise by Administrative Agent of its rights and remedies hereunder to the Collateral in the United States of America. (m) All information heretofore, herein or hereafter supplied to Administrative Agent and Lenders by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 4. INSPECTION RIGHTS. Subject to the terms of the Credit ----------------- Agreement, Grantor hereby grants to Administrative Agent and any and all of its employees, representatives and agents the right to visit Grantor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered utilizing any of the Copyrights, Registrations or Copyright Rights (or which were so utilized during the prior six month period), and to inspect the records relating thereto upon reasonable notice to Grantor and as often as may be reasonably requested. SECTION 5. NEW COPYRIGHTS, REGISTRATIONS AND COPYRIGHT RIGHTS. If -------------------------------------------------- Grantor shall obtain rights to any new works protectable by copyright, or become entitled to the benefit of any Registration, application for Registration or renewals or extension of any Copyright, the provisions of this Agreement shall automatically apply thereto. With respect to any such Registration, applications for Registration or renewal or extension of any Copyright, Grantor shall give prompt notice thereof in writing to Administrative Agent. Concurrently with the filing of an application for any Registration for any Copyright, Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Copyright Security Agreement, substantially in the form hereof, with appropriate insertions or an amendment to this Agreement, in form and substance satisfactory to Administrative Agent, pursuant to which Grantor shall grant a security interest and conditional assignment to the extent of its interest in such Registration as provided herein to Administrative Agent on its behalf and on behalf of Lenders and Interest Rate Exchangers unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Registration in the name of Administrative Agent, in which event Grantor shall give written notice to Administrative Agent as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Registration. SECTION 6. COPYRIGHT REGISTRATION, RENEWAL AND LITIGATION. ---------------------------------------------- (a) Grantor shall have the duty diligently to make any application for Registration on any existing or future unregistered but copyrightable works (except for works of nominal commercial value) and to do any and all acts which are reasonably necessary or desirable to preserve, renew and maintain all rights in all Copyrights, Registrations and Copyright Rights which are material to Grantor's business. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Copyright, Registration or Copyright Right which is material to Grantor's business. 6 (b) Except as provided in Section 9 and notwithstanding Section 1, Grantor shall have the right and obligation to commence and diligently prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement or other damage as are in its reasonable business judgment necessary to protect the Collateral. Grantor shall provide to Administrative Agent any information with respect thereto requested by Administrative Agent. Administrative Agent shall provide at Grantor's expense all and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Grantor shall promptly, following its becoming aware thereof, notify Administrative Agent of the institution of, or any adverse determination in, any proceeding in the United States Copyright Office or any United States or foreign court described in Section 6(a) or 6(b) or regarding Grantor's claim of ownership in any material Copyright, material Registration or material Copyright Right, its right to register the same, or its right to keep and maintain such registration; SECTION 7. GRANTOR'S COVENANTS. On a continuing basis, Grantor shall ------------------- make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments and documents, including, without limitation, appropriate financing and continuation statements and security agreements, and take all such action as may be necessary or advisable or may be requested by Administrative Agent or (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES") to carry out the intent and purposes of this Agreement, or for assuring, confirming or protecting the grant or perfection of security interest and the conditional assignment granted or purported to be granted hereby, to ensure Grantor's compliance with this Agreement or to enable Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to the Collateral. Without limiting the generality of the foregoing sentence, Grantor: (a) authorizes Administrative Agent in its sole discretion to modify this Agreement without first obtaining Grantor's approval of or signature to such modification by amending Schedule A thereof to include a reference to any right, title or interest in any existing Copyright, Registration or Copyright Right or any Copyright, Registration or Copyright Right acquired by Grantor after the execution hereof or to delete any reference to any right, title or interest in any Copyright, Registration or Copyright Right in which Grantor no longer has or claims any right, title or interest; (b) shall, from time to time, cause its books and records to be marked with such legends or segregated in such manner as Administrative Agent may reasonably specify, and take or cause to be taken such other action and adopt such procedures as Administrative Agent may reasonably specify to give notice of or to perfect the security interest and 7 assignment in the Collateral intended to be created hereby; (c) hereby authorizes Administrative Agent, in its sole discretion, to file one or more financing or continuation statements, and amendments thereto, relative to all or any portion of the Collateral without the signature of Grantor where permitted by law; (d) shall diligently keep reasonable records respecting the Collateral; (e) shall at all times keep at least one complete set of its records concerning substantially all of the Copyrights, Registrations and Copyright Rights at its chief executive office as set forth above and will not change the location of its chief executive office or such records without giving Administrative Agent at least 30 days' prior written notice thereof; (f) shall notify Administrative Agent promptly of any change in Grantor's name, identity or corporate structure; (g) shall not enter into any agreement that would or might in any material way impair or conflict with Grantor's obligations hereunder; (h) shall use its best efforts to obtain any necessary consents of third parties to the grant or perfection of a security interest and assignment to Administrative Agent with respect to the Collateral; (i) shall not permit the inclusion in any contract to which it becomes a party of any provision that could impair or prevent the creation of a security interest in Grantor's rights and interest in any property included within definitions of the Copyrights, Copyright Registrations and Copyright Rights acquired under such contracts; (j) shall properly maintain and care for the Collateral; (k) shall not grant or permit to exist any Lien in the Collateral or any portion thereof except for Permitted Liens; (l) upon any officer of Grantor obtaining knowledge thereof, shall promptly notify Administrative Agent in writing of any event that may materially adversely affect the value of the Collateral, the ability of Grantor or Administrative Agent to dispose of the Collateral or any portion thereof or the rights and remedies of Administrative Agent in relation thereto including, without limitation, the levy of any legal process against the Collateral or any portion thereof; (m) shall not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement, or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (n) shall pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, 8 materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement. (o) shall furnish to Administrative Agent from time to time statements and schedules further identifying and describing the Collateral and such other materials evidencing or reports pertaining to the Collateral as Administrative Agent may reasonably request, all in reasonable detail; (p) shall not do any act or omit to do any act whereby any of the Collateral may become abandoned; (q) shall notify Administrative Agent immediately and in writing of any claim of infringement of any of the Collateral by any third party and of all steps, including the commencement and course of litigation, taken to remedy such infringement; and (r) shall use proper statutory copyright notice with respect to all copies or phonorecords of the works which are the subject of the Collateral. SECTION 8. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 8 and in the Credit Agreement, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof. Upon the occurrence and during the continuance of an Event of Default, Administrative Agent is hereby given full power and authority, on its behalf and on behalf of Lenders and Interest Rate Exchangers without notice or demand, (a) to notify any and all obligors with respect to the Collateral or any portion thereof of the existence of the security interest created and the conditional assignment effected hereby and (b) to demand, take, collect, sue for and receive for its own use all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof and (c) in connection therewith, to enforce all rights and remedies with respect to the Collateral or any portion thereof which Grantor could enforce if this Agreement had not been made. Grantor hereby ratifies any action which Administrative Agent shall lawfully take to enforce Administrative Agent's rights hereunder. Whether or not Administrative Agent shall have so notified any obligors, Grantor shall at its expense render all reasonable assistance to Administrative Agent in enforcing claims against such obligors. SECTION 9. COPYRIGHT LITIGATION AFTER DEFAULT. Upon the occurrence ---------------------------------- and during the continuance of an Event of Default, Administrative Agent shall have the right but shall in no way be obligated to bring suit in the name of Grantor, Administrative Agent or Lenders or Interest Rate Exchangers to enforce any Copyright, Registration, Copyright Right and any license thereunder, in which event Grantor shall, at the request of Administrative Agent, do any and all lawful acts and execute any and all documents required by Administrative Agent in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Administrative Agent and any other Indemnitee as provided in Section 16 or 17 in connection with the exercise of their rights under this Section 9. To the extent that Administrative Agent shall elect not to bring suit to enforce any Copyright, Registration, Copyright Rights or any license thereunder, Grantor agrees to use all reasonable 9 measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Copyrights, Registrations or Copyright Rights by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 10. CERTAIN REMEDIES. If any Event of Default has occurred ---------------- and is continuing: (a) Administrative Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Administrative Agent forthwith, assemble all or part of the Collateral as directed by Administrative Agent and make it available to Administrative Agent at a place to be designated by Administrative Agent that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Administrative Agent deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Administrative Agent may deem commercially reasonable. Administrative Agent or any Lender or any Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Administrative Agent, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Administrative Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Administrative Agent may 10 adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Administrative Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Administrative Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Administrative Agent to collect such deficiency. (b) Upon the written demand of Administrative Agent, Grantor shall execute and deliver to Administrative Agent an assignment or assignments of the Copyrights, Registrations and Copyright Rights and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; provided that the failure of Grantor to comply with such demand will not impair - -------- or affect the validity of the conditional assignment effected by Section 1. Grantor agrees that such an assignment (including, without limitation, the conditional assignment effected by Section 1) and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Administrative Agent (or any Lender or Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days of written notice from Administrative Agent, Grantor shall make available to Administrative Agent, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of the Event of Default as Administrative Agent may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Copyrights, Registrations and Copyrights, such persons to be available to perform their prior functions on Administrative Agent's behalf and to be compensated by Administrative Agent at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. All cash proceeds received by Administrative Agent (or any Lender or Interest Rate Exchanger) in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral, in the discretion of Administrative Agent (at the request of Requisite Lenders or Requisite Obligees, shall be held by Administrative Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to Administrative Agent pursuant to Sections 16 and 17 hereof) in whole or in part by Administrative Agent at the request of Requisite Lenders or Requisite Obligees against all or any part of the Secured Obligations in the order required after an Event of Default as set forth in subsection 2.4D of the Credit Agreement. SECTION 11. DECISIONS RELATING TO EXERCISE OF REMEDIES; AMENDMENTS, ------------------------------------------------------- NON-DISTURBANCE AGREEMENT ETC. Administrative Agent shall exercise, or shall - ------------------------------ refrain from exercising, any remedy provided for in Section 10 in accordance with 11 the instructions of Requisite Lenders or Requisite Obligees. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Requisite Lenders or Requisite Obligees, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, except as provided in Section 7, in which case the writing need only be signed by Administrative Agent. If and to the extent that Grantor is permitted to license the Collateral, at Grantor's request and expense, Administrative Agent shall enter into a non-disturbance agreement or other similar arrangement with Grantor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Administrative Agent pursuant to which (a) Administrative Agent, on behalf of Lenders and Interest Rate Exchangers, shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Administrative Agent on its behalf and on behalf of Lenders and Interest Rate Exchangers and the other terms of this Agreement. SECTION 12. GRANTOR REMAINS LIABLE. Anything herein to the contrary ----------------------- notwithstanding, (a) Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Administrative Agent or any Lender or Interest Rate Exchanger of any of the rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, (c) neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement nor shall Administrative Agent or any Lender or Interest Rate Exchanger be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder and (d) the powers conferred on Administrative Agent and Lenders and Interest Rate Exchangers hereunder are solely to protect their interests in the Collateral and shall not impose any duty upon Administrative Agent or any Lender or Interest Rate Exchanger to exercise any such powers. SECTION 13. ADMINISTRATIVE AGENT APPOINTED ATTORNEY-IN-FACT. Grantor ----------------------------------------------- hereby irrevocably appoints Administrative Agent Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Administrative Agent or otherwise, from time to time in Administrative Agent's discretion while an Event of Default exists to take any action and to execute any instrument which Administrative Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (a) to endorse Grantor's name on all applications, documents, papers and instruments necessary for Administrative Agent in the use or maintenance of the Collateral, (b) to ask, demand, collect, sue for, recover, impound, receive and give acquittance and receipts for money due and to become due under or in respect of any of the Collateral, (c) to file any claims or take any action or institute any proceedings that Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Administrative Agent with respect to any of the Collateral and, upon the 12 occurrence and during the continuance of an Event of Default, to execute and deliver any of the assignments or documents requested by Administrative Agent pursuant to Section 10(b) of this Agreement, to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, or to assign, pledge, convey or otherwise transfer title in or dispose of the Collateral to any Person. Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. SECTION 14. ADMINISTRATIVE AGENT MAY PERFORM. If Grantor fails to -------------------------------- perform any agreement contained herein, Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses so incurred in connection therewith, including the fees and expenses of Administrative Agent's counsel, shall be payable by Grantor under Section 16 hereof. SECTION 15. ADMINISTRATIVE AGENT AND LENDERS DUTIES AND LIABILITIES. ------------------------------------------------------- (a) The powers conferred on Administrative Agent and Lenders and Interest Rate Exchangers hereunder are solely to protect their interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral constituting tangible personal property in its possession and the accounting for moneys actually received by it hereunder, neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall have any duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Administrative Agent shall be deemed to exercise reasonable care in the custody and preservation of such Collateral if such Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property. (b) Neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall be liable to the Grantor (i) for any loss or damage sustained by it, or (ii) for any loss, damage, depreciation or other diminution in the value of any of the Collateral, that may occur as a result of, in connection with or that is in any way related to (x) any exercise by Administrative Agent or any Lender or Interest Rate Exchanger of any right or remedy under this Agreement or (y) any other act of or failure to act by Administrative Agent or any Lender or Interest Rate Exchanger, except to the extent that the same shall be determined by a judgment of a court or competent jurisdiction that is final and not subject to review on appeal, to be the result of acts or omissions on the part of Administrative Agent or such Lender constituting gross negligence or willful misconduct. (c) NO CLAIM MAY BE MADE BY THE GRANTOR AGAINST ADMINISTRATIVE AGENT, ANY LENDER OR ITS AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR INTEREST RATE EXCHANGERS OR AGENTS FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY BREACH OR WRONGFUL CONDUCT (WHETHER THE CLAIM THEREFOR IS BASED ON CONTRACT, TORT OR DUTY IMPOSED BY LAW) IN CONNECTION WITH, ARISING OUT OF OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED AND RELATIONSHIP ESTABLISHED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION 13 THEREWITH; AND THE GRANTOR HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY SUCH CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. SECTION 16. EXPENSES. Grantor will, upon demand, pay to -------- Administrative Agent the amount of any and all reasonable out-of-pocket fees and expenses, including, without limitation, fees and disbursements of its counsel (including foreign counsel) and of any experts and agents, that Administrative Agent may incur in connection with (a) the administration of this Agreement (including, without limitation, any amendments, modifications or waivers hereto and the filing or recording of any documents), (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (c) the exercise or enforcement of any of the rights of Administrative Agent or any other Lender or any Interest Rate Exchanger hereunder, or (d) the failure by the Grantor to perform or observe any of the provisions hereof. SECTION 17. INDEMNIFICATION. Grantor hereby agrees to indemnify, pay --------------- and hold Administrative Agent, Lenders and Interest Rate Exchangers and any of their officers, directors, employees, agents and affiliates (collectively called the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses or disbursements of any kind and nature whatsoever (including, without limitation, the fees and disbursements of counsel for such Indemnitees (including foreign counsel and experts in connection with any matter, including any investigative, administrative or judicial proceeding commenced or threatened described in Section 6 or otherwise, whether or not such Indemnitee shall be designated a party thereto)) which may be imposed on, incurred by or asserted against that Indemnitee in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby or the enforcement of the terms hereof or of any such other documents (the "indemnified liabilities"); provided, however, that Grantor shall -------- ------- not be liable to an Indemnitee for any indemnified liability to the extent arising from the gross negligence or willful misconduct of that Indemnitee. Notwithstanding anything herein to the contrary, no Indemnitee shall have any duty to Grantor to undertake any affirmative action in connection with this Agreement or the Collateral and any failure by any Indemnitee to undertake any action hereunder shall not constitute gross negligence or willful misconduct of such Indemnitee. SECTION 18. NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of ------------------------------- Administrative Agent to exercise, and no course of dealing with respect to and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by Administrative Agent of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are to the fullest extent permitted by law cumulative of any remedies provided by law. SECTION 19. ADDRESSES FOR NOTICES. All notices and other --------------------- communications to any party provided for hereunder shall be given as provided in the Credit Agreement. 14 SECTION 20. CONTINUING SECURITY INTEREST AND TRANSFER OF LOANS. This -------------------------------------------------- Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Administrative Agent hereunder, to the benefit of Administrative Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Administrative Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination and Grantor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Administrative Agent, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 21. REASSIGNMENT. If (a) an Event of Default shall have ------------ occurred and, by reason of waiver, modification, amendment or otherwise, no longer be continuing, (b) no other Event of Default shall be continuing, (c) an assignment to the Administrative Agent shall have been previously made pursuant to Sections 1, 10(b) or Section 13 hereof, and (d) the Secured Obligations shall not have become immediately due and payable, upon the written request of Grantor and the written consent of Administrative Agent or the written election of Requisite Lenders or Requisite Obligees, Administrative Agent shall promptly execute and deliver to Grantor such assignments as may be necessary to reassign to Grantor any rights, title and interests as may have been assigned pursuant to Sections 1, 10(b) or 13 hereof, subject to any disposition thereof that may have been made by Administrative Agent pursuant hereto; provided that, after giving -------- effect to such reassignment, Administrative Agent's security interest and conditional assignment granted pursuant to Section 1 hereof, as well as all other rights and remedies of Administrative Agent granted hereunder, shall continue to be in full force and effect; and provided, further, that the rights, -------- ------- title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Administrative Agent and Permitted Liens. SECTION 22. WAIVER. Grantor hereby waives promptness, diligence, ------ notice of acceptance and any other notice with respect to any of the Secured Obligations and this Agreement and any requirement that Administrative Agent protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or take any action against Grantor or any other person or entity or any of the Collateral. SECTION 23. GOVERNING LAW; TERMS; RULES OF CONSTRUCTION. THIS ------------------------------------------- AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES 15 HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. SECTION 24. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 25. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. SECTION 26. CREDIT AGREEMENT CONTROLS. In case of any irreconcilable ------------------------- conflict between the provisions of this Agreement and the Credit Agreement, the provisions of the Credit Agreement shall control. SECTION 27. CONSENT TO JURISDICTION; WAIVER OF IMMUNITIES. ALL --------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 18; 16 (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT ADMINISTRATIVE AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 27 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 28. WAIVER OF JURY TRIAL. GRANTOR AND ADMINISTRATIVE AGENT -------------------- HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Administrative Agent each acknowledge that this waiver is a material inducement for Grantor and Administrative Agent to enter into a business relationship, that Grantor and Administrative Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Administrative Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [NAME OF SUBSIDIARY], as Grantor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: Attention: S-1 SCHEDULE A ---------- U.S. COPYRIGHTS DATE COPYRIGHT REG. NO. OF ISSUE - --------- -------- -------- SCHEDULE A ---------- FOREIGN COPYRIGHT REGISTRATIONS DATE COUNTRY COPYRIGHT REGISTRATION NO. OF ISSUE - ------- --------- ---------------- -------- SCHEDULE A ---------- PENDING U.S. COPYRIGHTS DATE OF COPYRIGHT REF. NO. APPLICATION - --------- -------- ----------- SCHEDULE A ---------- LICENSES STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared __________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) SUBSIDIARY COPYRIGHT SECURITY AGREEMENT THIS SUBSIDIARY COPYRIGHT SECURITY AGREEMENT dated as of April 21, 1998 (this "AGREEMENT") is made by Empire Candle, Inc., a Kansas Corporation ("GRANTOR"), to WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "ADMINISTRATIVE AGENT") financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Administrative Agent and Lenders have entered into the Credit Agreement dated as of April 21, 1998 with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY" or "BORROWER"), DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (said Credit Agreement and any successor agreement, as it may be amended, amended and restated, modified or otherwise supplemented from time to time, being the "CREDIT AGREEMENT"; the terms defined therein and not otherwise defined herein being used herein as therein defined). B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one ore more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Grantor has executed and delivered the Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Administrative Agent for the benefit of Lenders and Interest Rate Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all Obligations of the Borrower under the Credit Agreement and under any Lender Interest Rate Agreements. D. Grantor owns and uses in its business and will in the future, adopt and so use various published and unpublished works of authorship (collectively, the "COPYRIGHTS"). E. Administrative Agent, for its benefit and the ratable benefit of Lenders, desires to become a secured creditor with respect to and, under the circumstances described herein, an assignee of all of the existing and future Copyrights, all copyright registrations and applications for copyright registration which have heretofore been or may hereafter be issued thereon or applied for with the United States Copyright Office and throughout the world (the "REGISTRATIONS"), all common law and other rights in and to the 1 Copyrights throughout the world, including all copyright licenses (the "COPYRIGHT RIGHTS") and all proceeds of the Copyrights, the Registrations and the Copyright Rights, and Grantor agrees to create a secured and protected interest in the Copyrights, the Registrations, the Copyright Rights and all the proceeds thereof as provided herein. F. Upon the occurrence of and during the continuance of an Event of Default under the Credit Agreement and to permit Administrative Agent to continue operating Grantor's business without interruption and to use the Copyrights, Registrations and Copyright Rights in conjunction therewith, Grantor is willing to grant to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers the conditional assignment of Grantor's entire right, title and interest in and to the Collateral (as hereinafter defined) and to appoint Administrative Agent or Administrative Agent's designee as Grantor's attorney-in-law and attorney-in-fact to execute documents and take actions to confirm said assignments. G. The Credit Agreement requires that Grantor grant the security interest and make the conditional assignment contemplated by this Agreement as a condition precedent to the availability of the credit facilities thereunder. NOW THEREFORE, in consideration of the premises, and in order to induce Lenders to extend the credit facilities under the Credit Agreement and to induce Interest Rate Exchangers to enter into Interest Rate Agreements, Grantor hereby agrees with Administrative Agent for Administrative Agent's benefit and the ratable benefit of Lenders and Interest Rate Exchangers as follows: SECTION 1. GRANT OF SECURITY. Grantor hereby grants a first priority ----------------- security interest in, pledges and mortgages, but does not transfer title, to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers, all of Grantor's right, title and interest in and to the following (the "COLLATERAL") to secure the Secured Obligations (as hereinafter defined): (a) Each of the Copyrights, rights, titles and interests in and to the Copyrights and works protectable by copyright, which are presently, or in the future may be, owned, created, authored (as a work for hire), acquired or used (whether pursuant to a license or otherwise) by Grantor, in whole or in part, and all Copyright Rights with respect thereto and all Registrations therefor, heretofore or hereafter granted or applied for, and all renewals and extensions thereof, throughout the world, including all proceeds thereof (such as, by way of example and not by limitation, license royalties and proceeds of infringement suits), the right (but not the obligation) to renew and extend such Copyrights, Registrations and Copyright Rights and to register works protectable by copyright and the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Administrative Agent or Lenders or Interest Rate Exchangers for past, present and future infringements of the Copyrights and Copyright Rights, including, without limitation: (i) all of Grantor's right, title and interest, to the extent that it has the 2 same, in and to all copyrights or rights or interests in copyrights registered or recorded in the United States Copyright Office, including, without limitation, the Registrations listed on Schedule A attached hereto, as the same may be amended pursuant hereto from time to time; (ii) all of Grantor's right, title and interest, to the extent that it has the same, in and to all renewals and extensions of any such copyrights that may be secured under the law now or hereafter in force and effect; and (iii) all of Grantor's right, title and interest, to the extent that it has the same, to make and exploit all derivative works based on or adopted from all works covered by the copyrights referred to herein; it being understood and agreed that the Collateral assigned hereby shall include, without limitation, rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to copyrights and works protectable by copyright presently or in the future owned or used by third-parties, but in the case of third-parties which are not Affiliates of Grantor only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third-parties; (b) All general intangibles (as defined in Article 9 of the Uniform Commercial Code as in effect in the State of New York (the "CODE") relating to the Collateral; and (c) All proceeds of any and all of the foregoing Collateral (including, without limitation, license royalties and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Administrative Agent or any Lender or Interest Rate Exchanger is the loss payee thereof) or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto. It is the intention of Grantor and Administrative Agent that the security interest granted hereby shall attach to the Collateral as of the date hereof and shall remain in effect until the indefeasible payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letter of Credit. In addition to, and not by way of limitation of, the pledge and mortgage of the Collateral set forth above, Grantor hereby, effective upon the occurrence of an Event of Default, assigns, grants, sells, conveys, transfers and sets over to Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers all of Grantor's rights, title and interest in and to the Collateral as security for the Secured 3 Obligations. SECURED 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. Section 362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations, whether or not a claim is allowed against Grantor for such interest in the related bankruptcy proceeding), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). SECTION 3. REPRESENTATIONS AND WARRANTIES. Grantor represents, ------------------------------ warrants and covenants as follows: (a) A true and complete list of all Registrations and applications for Registrations owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, in conducting its business is set forth in Schedule A attached hereto. (b) Grantor has full power, authority and legal right to pledge all of the Collateral pursuant to this Agreement and none of Grantor's Affiliates has any right, title or interest in any Collateral. (c) Each of the Copyrights and Copyright Rights are subsisting and none of the Copyrights, Registrations or Copyright Rights have been adjudged invalid or unen forceable. (d) Each material Copyright and each material Copyright Right are believed to be valid and enforceable and Grantor is not presently aware of any past, present or prospective claim by any third party that any material Copyright or material Copyright Right is invalid or unenforceable or of any basis for any such claim. (e) No claim known to Grantor has been made that the works of any 4 material Copyright, material Registration or material Copyright Right does or may violate the rights of any third person. (f) Grantor has taken and will continue to take all reasonable steps to protect the secrecy of all trade secrets relating to unpublished Collateral. (g) Except as may be prohibited by law, Grantor will use statutory notice in connection with its use of each material Copyright, material Registration and material Copyright Right. (h) The execution, delivery and performance of this Agreement by Grantor does not conflict with, result in a breach of, constitute (with due notice or lapse of time or both) a default under, or require the limitation of or consent under, any Contractual Obligation of Grantor, including, without limitation, any agreement pursuant to which Grantor licenses or has the right to use any Collateral. (i) Grantor is the legal and beneficial owner of each material Copyright, material Registration and material Copyright Right, free and clear of any Lien, including, without limitation, pledges, assignments, licenses and covenants by Grantor not to sue third persons, except for the Lien and conditional assignment created by this Agreement and Permitted Liens. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of Administrative Agent relating to the Credit Agreement or this Agreement or for which duly executed termination statements have been recorded or delivered to Administrative Agent. No effective filing with the United States Copyright Office covering all or any part of the Collateral is on file with the United States Copyright Office, except such as may be filed in favor of Grantor evidencing Grantor's right, title and interest in the Copyrights or in favor of Administrative Agent relating to this Agreement or for which duly executed termination statements have been delivered to Administrative Agent. (j) Grantor's chief executive office is located at the address specified on the signature page to this Agreement which address qualifies as its "location" under the Code. (k) This Agreement will create in favor of Administrative Agent for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers a valid and perfected first priority security interest in the Collateral upon making the filings referred to in clause (l) below. (l) Except for the filing of financing statements with the Secretary of State of the State of [___________] under the Code and filings with the United States Copyright Office necessary to perfect the security interest created hereunder, no authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by Grantor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by 5 Grantor or (ii) for the perfection of or the exercise by Administrative Agent of its rights and remedies hereunder to the Collateral in the United States of America. (m) All information heretofore, herein or hereafter supplied to Administrative Agent and Lenders by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 4. INSPECTION RIGHTS. Subject to the terms of the Credit ----------------- Agreement, Grantor hereby grants to Administrative Agent and any and all of its employees, representatives and agents the right to visit Grantor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered utilizing any of the Copyrights, Registrations or Copyright Rights (or which were so utilized during the prior six month period), and to inspect the records relating thereto upon reasonable notice to Grantor and as often as may be reasonably requested. SECTION 5. NEW COPYRIGHTS, REGISTRATIONS AND COPYRIGHT RIGHTS. If -------------------------------------------------- Grantor shall obtain rights to any new works protectable by copyright, or become entitled to the benefit of any Registration, application for Registration or renewals or extension of any Copyright, the provisions of this Agreement shall automatically apply thereto. With respect to any such Registration, applications for Registration or renewal or extension of any Copyright, Grantor shall give prompt notice thereof in writing to Administrative Agent. Concurrently with the filing of an application for any Registration for any Copyright, Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Copyright Security Agreement, substantially in the form hereof, with appropriate insertions or an amendment to this Agreement, in form and substance satisfactory to Administrative Agent, pursuant to which Grantor shall grant a security interest and conditional assignment to the extent of its interest in such Registration as provided herein to Administrative Agent on its behalf and on behalf of Lenders and Interest Rate Exchangers unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Registration in the name of Administrative Agent, in which event Grantor shall give written notice to Administrative Agent as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Registration. SECTION 6. COPYRIGHT REGISTRATION, RENEWAL AND LITIGATION. ---------------------------------------------- (a) Grantor shall have the duty diligently to make any application for Registration on any existing or future unregistered but copyrightable works (except for works of nominal commercial value) and to do any and all acts which are reasonably necessary or desirable to preserve, renew and maintain all rights in all Copyrights, Registrations and Copyright Rights which are material to Grantor's business. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Copyright, Registration or Copyright Right which is material to Grantor's business. 6 (b) Except as provided in Section 9 and notwithstanding Section 1, Grantor shall have the right and obligation to commence and diligently prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement or other damage as are in its reasonable business judgment necessary to protect the Collateral. Grantor shall provide to Administrative Agent any information with respect thereto requested by Administrative Agent. Administrative Agent shall provide at Grantor's expense all and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Grantor shall promptly, following its becoming aware thereof, notify Administrative Agent of the institution of, or any adverse determination in, any proceeding in the United States Copyright Office or any United States or foreign court described in Section 6(a) or 6(b) or regarding Grantor's claim of ownership in any material Copyright, material Registration or material Copyright Right, its right to register the same, or its right to keep and maintain such registration; SECTION 7. GRANTOR'S COVENANTS. On a continuing basis, Grantor shall ------------------- make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments and documents, including, without limitation, appropriate financing and continuation statements and security agreements, and take all such action as may be necessary or advisable or may be requested by Administrative Agent or (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES") to carry out the intent and purposes of this Agreement, or for assuring, confirming or protecting the grant or perfection of security interest and the conditional assignment granted or purported to be granted hereby, to ensure Grantor's compliance with this Agreement or to enable Administrative Agent to exercise and enforce its rights and remedies hereunder with respect to the Collateral. Without limiting the generality of the foregoing sentence, Grantor: (a) authorizes Administrative Agent in its sole discretion to modify this Agreement without first obtaining Grantor's approval of or signature to such modification by amending Schedule A thereof to include a reference to any right, title or interest in any existing Copyright, Registration or Copyright Right or any Copyright, Registration or Copyright Right acquired by Grantor after the execution hereof or to delete any reference to any right, title or interest in any Copyright, Registration or Copyright Right in which Grantor no longer has or claims any right, title or interest; (b) shall, from time to time, cause its books and records to be marked with such legends or segregated in such manner as Administrative Agent may reasonably 7 specify, and take or cause to be taken such other action and adopt such procedures as Administrative Agent may reasonably specify to give notice of or to perfect the security interest and assignment in the Collateral intended to be created hereby; (c) hereby authorizes Administrative Agent, in its sole discretion, to file one or more financing or continuation statements, and amendments thereto, relative to all or any portion of the Collateral without the signature of Grantor where permitted by law; (d) shall diligently keep reasonable records respecting the Collateral; (e) shall at all times keep at least one complete set of its records concerning substantially all of the Copyrights, Registrations and Copyright Rights at its chief executive office as set forth above and will not change the location of its chief executive office or such records without giving Administrative Agent at least 30 days' prior written notice thereof; (f) shall notify Administrative Agent promptly of any change in Grantor's name, identity or corporate structure; (g) shall not enter into any agreement that would or might in any material way impair or conflict with Grantor's obligations hereunder; (h) shall use its best efforts to obtain any necessary consents of third parties to the grant or perfection of a security interest and assignment to Administrative Agent with respect to the Collateral; (i) shall not permit the inclusion in any contract to which it becomes a party of any provision that could impair or prevent the creation of a security interest in Grantor's rights and interest in any property included within definitions of the Copyrights, Copyright Registrations and Copyright Rights acquired under such contracts; (j) shall properly maintain and care for the Collateral; (k) shall not grant or permit to exist any Lien in the Collateral or any portion thereof except for Permitted Liens; (l) upon any officer of Grantor obtaining knowledge thereof, shall promptly notify Administrative Agent in writing of any event that may materially adversely affect the value of the Collateral, the ability of Grantor or Administrative Agent to dispose of the Collateral or any portion thereof or the rights and remedies of Administrative Agent in relation thereto including, without limitation, the levy of any legal process against the Collateral or any portion thereof; (m) shall not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement, or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; 8 (n) shall pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement. (o) shall furnish to Administrative Agent from time to time statements and schedules further identifying and describing the Collateral and such other materials evidencing or reports pertaining to the Collateral as Administrative Agent may reasonably request, all in reasonable detail; (p) shall not do any act or omit to do any act whereby any of the Collateral may become abandoned; (q) shall notify Administrative Agent immediately and in writing of any claim of infringement of any of the Collateral by any third party and of all steps, including the commencement and course of litigation, taken to remedy such infringement; and (r) shall use proper statutory copyright notice with respect to all copies or phonorecords of the works which are the subject of the Collateral. SECTION 8. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 8 and in the Credit Agreement, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof. Upon the occurrence and during the continuance of an Event of Default, Administrative Agent is hereby given full power and authority, on its behalf and on behalf of Lenders and Interest Rate Exchangers without notice or demand, (a) to notify any and all obligors with respect to the Collateral or any portion thereof of the existence of the security interest created and the conditional assignment effected hereby and (b) to demand, take, collect, sue for and receive for its own use all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof and (c) in connection therewith, to enforce all rights and remedies with respect to the Collateral or any portion thereof which Grantor could enforce if this Agreement had not been made. Grantor hereby ratifies any action which Administrative Agent shall lawfully take to enforce Administrative Agent's rights hereunder. Whether or not Administrative Agent shall have so notified any obligors, Grantor shall at its expense render all reasonable assistance to Administrative Agent in enforcing claims against such obligors. SECTION 9. COPYRIGHT LITIGATION AFTER DEFAULT. Upon the occurrence ---------------------------------- and during the continuance of an Event of Default, Administrative Agent shall have the right but shall in no way be obligated to bring suit in the name of Grantor, Administrative Agent or Lenders or Interest Rate Exchangers to enforce any Copyright, Registration, Copyright Right and any license thereunder, in which event Grantor shall, at the request of Administrative Agent, do any and all lawful acts and execute any and all documents required by Administrative Agent in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Administrative Agent and any other Indemnitee as provided in Section 16 or 17 in connection with the exercise of their rights under this 9 Section 9. To the extent that Administrative Agent shall elect not to bring suit to enforce any Copyright, Registration, Copyright Rights or any license thereunder, Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Copyrights, Registrations or Copyright Rights by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 10. CERTAIN REMEDIES. If any Event of Default has occurred ---------------- and is continuing: (a) Administrative Agent may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Administrative Agent forthwith, assemble all or part of the Collateral as directed by Administrative Agent and make it available to Administrative Agent at a place to be designated by Administrative Agent that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Administrative Agent deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Administrative Agent's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Administrative Agent may deem commercially reasonable. Administrative Agent or any Lender or any Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Administrative Agent, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Administrative Agent at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall 10 constitute reasonable notification. Administrative Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Administrative Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Administrative Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Administrative Agent accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Administrative Agent to collect such deficiency. (b) Upon the written demand of Administrative Agent, Grantor shall execute and deliver to Administrative Agent an assignment or assignments of the Copyrights, Registrations and Copyright Rights and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; provided that the failure of Grantor to comply with such demand will not impair - -------- or affect the validity of the conditional assignment effected by Section 1. Grantor agrees that such an assignment (including, without limitation, the conditional assignment effected by Section 1) and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Administrative Agent (or any Lender or Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days of written notice from Administrative Agent, Grantor shall make available to Administrative Agent, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of the Event of Default as Administrative Agent may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Copyrights, Registrations and Copyrights, such persons to be available to perform their prior functions on Administrative Agent's behalf and to be compensated by Administrative Agent at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. All cash proceeds received by Administrative Agent (or any Lender or Interest Rate Exchanger) in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral, in the discretion of Administrative Agent (at the request of Requisite Lenders or Requisite Obligees, shall be held by Administrative Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to Administrative Agent pursuant to Sections 16 and 17 hereof) in whole or in part by Administrative Agent at the request of Requisite Lenders or Requisite Obligees against all or any part of the Secured Obligations in the order required after an Event of Default as set forth in subsection 2.4D of the Credit Agreement. SECTION 11. DECISIONS RELATING TO EXERCISE OF REMEDIES; ------------------------------------------- 11 AMENDMENTS, NON-DISTURBANCE AGREEMENT ETC. Administrative Agent shall exercise, - ------------------------------------------ or shall refrain from exercising, any remedy provided for in Section 10 in accordance with the instructions of Requisite Lenders or Requisite Obligees. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Requisite Lenders or Requisite Obligees, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given, except as provided in Section 7, in which case the writing need only be signed by Administrative Agent. If and to the extent that Grantor is permitted to license the Collateral, at Grantor's request and expense, Administrative Agent shall enter into a non-disturbance agreement or other similar arrangement with Grantor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Administrative Agent pursuant to which (a) Administrative Agent, on behalf of Lenders and Interest Rate Exchangers, shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Administrative Agent on its behalf and on behalf of Lenders and Interest Rate Exchangers and the other terms of this Agreement. SECTION 12. GRANTOR REMAINS LIABLE. Anything herein to the contrary ----------------------- notwithstanding, (a) Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Administrative Agent or any Lender or Interest Rate Exchanger of any of the rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, (c) neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement nor shall Administrative Agent or any Lender or Interest Rate Exchanger be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder and (d) the powers conferred on Administrative Agent and Lenders and Interest Rate Exchangers hereunder are solely to protect their interests in the Collateral and shall not impose any duty upon Administrative Agent or any Lender or Interest Rate Exchanger to exercise any such powers. SECTION 13. ADMINISTRATIVE AGENT APPOINTED ATTORNEY-IN-FACT. Grantor ----------------------------------------------- hereby irrevocably appoints Administrative Agent Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Administrative Agent or otherwise, from time to time in Administrative Agent's discretion while an Event of Default exists to take any action and to execute any instrument which Administrative Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (a) to endorse Grantor's name on all applications, documents, papers and instruments necessary for Administrative Agent in the use or maintenance of the Collateral, (b) to ask, demand, collect, sue for, recover, impound, receive and give acquittance and receipts for money due and to become due under or in respect of any of the Collateral, (c) to file any claims or take any action or institute any proceedings that 12 Administrative Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Administrative Agent with respect to any of the Collateral and, upon the occurrence and during the continuance of an Event of Default, to execute and deliver any of the assignments or documents requested by Administrative Agent pursuant to Section 10(b) of this Agreement, to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, or to assign, pledge, convey or otherwise transfer title in or dispose of the Collateral to any Person. Grantor hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. SECTION 14. ADMINISTRATIVE AGENT MAY PERFORM. If Grantor fails to -------------------------------- perform any agreement contained herein, Administrative Agent may itself perform, or cause performance of, such agreement, and the expenses so incurred in connection therewith, including the fees and expenses of Administrative Agent's counsel, shall be payable by Grantor under Section 16 hereof. SECTION 15. ADMINISTRATIVE AGENT AND LENDERS DUTIES AND LIABILITIES. ------------------------------------------------------- (a) The powers conferred on Administrative Agent and Lenders and Interest Rate Exchangers hereunder are solely to protect their interests in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral constituting tangible personal property in its possession and the accounting for moneys actually received by it hereunder, neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall have any duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Administrative Agent shall be deemed to exercise reasonable care in the custody and preservation of such Collateral if such Collateral is accorded treatment substantially equal to that which the Administrative Agent accords its own property. (b) Neither Administrative Agent nor any Lender nor Interest Rate Exchanger shall be liable to the Grantor (i) for any loss or damage sustained by it, or (ii) for any loss, damage, depreciation or other diminution in the value of any of the Collateral, that may occur as a result of, in connection with or that is in any way related to (x) any exercise by Administrative Agent or any Lender or Interest Rate Exchanger of any right or remedy under this Agreement or (y) any other act of or failure to act by Administrative Agent or any Lender or Interest Rate Exchanger, except to the extent that the same shall be determined by a judgment of a court or competent jurisdiction that is final and not subject to review on appeal, to be the result of acts or omissions on the part of Administrative Agent or such Lender constituting gross negligence or willful misconduct. (c) NO CLAIM MAY BE MADE BY THE GRANTOR AGAINST ADMINISTRATIVE AGENT, ANY LENDER OR ITS AFFILIATES, DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS OR INTEREST RATE EXCHANGERS OR AGENTS FOR ANY SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY BREACH OR WRONGFUL CONDUCT (WHETHER THE CLAIM THEREFOR IS BASED ON CONTRACT, TORT OR DUTY IMPOSED BY LAW) IN 13 CONNECTION WITH, ARISING OUT OF OR IN ANY WAY RELATED TO THE TRANSACTIONS CONTEMPLATED AND RELATIONSHIP ESTABLISHED BY THIS AGREEMENT, OR ANY ACT, OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH; AND THE GRANTOR HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE UPON ANY SUCH CLAIM FOR ANY SUCH DAMAGES, WHETHER OR NOT ACCRUED AND WHETHER OR NOT KNOWN OR SUSPECTED TO EXIST IN ITS FAVOR. SECTION 16. EXPENSES. Grantor will, upon demand, pay to -------- Administrative Agent the amount of any and all reasonable out-of-pocket fees and expenses, including, without limitation, fees and disbursements of its counsel (including foreign counsel) and of any experts and agents, that Administrative Agent may incur in connection with (a) the administration of this Agreement (including, without limitation, any amendments, modifications or waivers hereto and the filing or recording of any documents), (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (c) the exercise or enforcement of any of the rights of Administrative Agent or any other Lender or any Interest Rate Exchanger hereunder, or (d) the failure by the Grantor to perform or observe any of the provisions hereof. SECTION 17. INDEMNIFICATION. Grantor hereby agrees to indemnify, pay --------------- and hold Administrative Agent, Lenders and Interest Rate Exchangers and any of their officers, directors, employees, agents and affiliates (collectively called the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses or disbursements of any kind and nature whatsoever (including, without limitation, the fees and disbursements of counsel for such Indemnitees (including foreign counsel and experts in connection with any matter, including any investigative, administrative or judicial proceeding commenced or threatened described in Section 6 or otherwise, whether or not such Indemnitee shall be designated a party thereto)) which may be imposed on, incurred by or asserted against that Indemnitee in any way relating to or arising out of this Agreement or any other documents contemplated by or referred to herein or the transactions contemplated hereby or the enforcement of the terms hereof or of any such other documents (the "indemnified liabilities"); provided, however, that Grantor shall -------- ------- not be liable to an Indemnitee for any indemnified liability to the extent arising from the gross negligence or willful misconduct of that Indemnitee. Notwithstanding anything herein to the contrary, no Indemnitee shall have any duty to Grantor to undertake any affirmative action in connection with this Agreement or the Collateral and any failure by any Indemnitee to undertake any action hereunder shall not constitute gross negligence or willful misconduct of such Indemnitee. SECTION 18. NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of ------------------------------- Administrative Agent to exercise, and no course of dealing with respect to and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by Administrative Agent of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are to the fullest extent permitted by law cumulative of any remedies provided by law. 14 SECTION 19. ADDRESSES FOR NOTICES. All notices and other --------------------- communications to any party provided for hereunder shall be given as provided in the Credit Agreement. SECTION 20. CONTINUING SECURITY INTEREST AND TRANSFER OF LOANS. This -------------------------------------------------- Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Administrative Agent hereunder, to the benefit of Administrative Agent and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Administrative Agent will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination and Grantor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to Administrative Agent, of such of the Collateral as shall not have been sold or otherwise applied pursuant to the terms hereof. SECTION 21. REASSIGNMENT. If (a) an Event of Default shall have ------------ occurred and, by reason of waiver, modification, amendment or otherwise, no longer be continuing, (b) no other Event of Default shall be continuing, (c) an assignment to the Administrative Agent shall have been previously made pursuant to Sections 1, 10(b) or Section 13 hereof, and (d) the Secured Obligations shall not have become immediately due and payable, upon the written request of Grantor and the written consent of Administrative Agent or the written election of Requisite Lenders or Requisite Obligees, Administrative Agent shall promptly execute and deliver to Grantor such assignments as may be necessary to reassign to Grantor any rights, title and interests as may have been assigned pursuant to Sections 1, 10(b) or 13 hereof, subject to any disposition thereof that may have been made by Administrative Agent pursuant hereto; provided that, after giving -------- effect to such reassignment, Administrative Agent's security interest and conditional assignment granted pursuant to Section 1 hereof, as well as all other rights and remedies of Administrative Agent granted hereunder, shall continue to be in full force and effect; and provided, further, that the rights, -------- ------- title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Administrative Agent and Permitted Liens. SECTION 22. WAIVER. Grantor hereby waives promptness, diligence, ------ notice of acceptance and any other notice with respect to any of the Secured Obligations and this Agreement and any requirement that Administrative Agent protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or 15 take any action against Grantor or any other person or entity or any of the Collateral. SECTION 23. GOVERNING LAW; TERMS; RULES OF CONSTRUCTION. THIS ------------------------------------------- AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Agreement mutatis mutandis. SECTION 24. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 25. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. SECTION 26. CREDIT AGREEMENT CONTROLS. In case of any irreconcilable ------------------------- conflict between the provisions of this Agreement and the Credit Agreement, the provisions of the Credit Agreement shall control. SECTION 27. CONSENT TO JURISDICTION; WAIVER OF IMMUNITIES. ALL --------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; 16 (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 18; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT ADMINISTRATIVE AGENT RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 27 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 28. WAIVER OF JURY TRIAL. GRANTOR AND ADMINISTRATIVE AGENT -------------------- HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Administrative Agent each acknowledge that this waiver is a material inducement for Grantor and Administrative Agent to enter into a business relationship, that Grantor and Administrative Agent have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Administrative Agent further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 28 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. 17 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. EMPIRE CANDLE, INC., as Grantor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 555 Montgomery Street, 17th Floor San Francisco, CA 94111 Attention: Alan Wray S-1 SCHEDULE A ---------- U.S. COPYRIGHTS DATE COPYRIGHT REG. NO. OF ISSUE - --------- -------- -------- SCHEDULE A ---------- FOREIGN COPYRIGHT REGISTRATIONS DATE COUNTRY COPYRIGHT REGISTRATION NO. OF ISSUE - ------- --------- ---------------- -------- SCHEDULE A ---------- PENDING U.S. COPYRIGHTS DATE OF COPYRIGHT REF. NO. APPLICATION - --------- -------- ----------- SCHEDULE A ---------- LICENSES STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared __________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) EX-4.8 7 [Form of Subsidiary Trademark Security Agreement] SUBSIDIARY TRADEMARK SECURITY AGREEMENT This SUBSIDIARY TRADEMARK SECURITY AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between [SUBSIDIARY], a ____________________ corporation ("GRANTOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "SECURED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), has entered into that certain Credit Agreement dated as of April 21, 1998 with DLJ Capital Funding, Inc., as Syndication Agent, Secured Party, Morgan Stanley Senior Funding Inc., as Documentation Agent, and Lenders (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT"; capitalized terms defined therein and not otherwise defined herein being used herein as therein defined). B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with or one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Grantor has executed and delivered a Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Secured Party for the benefit of Lenders and Interest Rate Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and under any Lender Interest Rate Agreements. D. Grantor owns and uses in its business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "TRADEMARKS"). E. Secured Party desires Grantor to assign and grant to it a lien on and security interest in all of Grantor's existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof and in foreign countries (the "REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof and in foreign countries (the "TRADEMARK RIGHTS"), all goodwill of Grantor's business symbolized by the Trademarks and associated therewith, including without limitation the documents and things described in Section 1(b) (the "ASSOCIATED GOODWILL"), and all proceeds of the Trademarks, the Registrations, the Trademark Rights and the Associated Goodwill, and Grantor agrees to assign and grant to Secured Party a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and all the proceeds thereof as provided herein. F. Pursuant to the Subsidiary Security Agreement, Grantor has assigned and granted to Secured Party a lien on and security interest in, among other assets, all of Grantor's equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default, Secured Party would be able to exercise its remedies consistent with the Subsidiary Security Agreement, this Agreement and applicable law to foreclose upon Grantor's business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantor, and benefit from the Associated Goodwill. G. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Grantor shall have assigned and granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Secured Party as follows: SECTION 1. ASSIGNMENT AND GRANT OF SECURITY. Grantor hereby assigns -------------------------------- to Secured Party, and hereby grants to Secured Party a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) each of the Trademarks and rights and interests in Trademarks that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part (including, without limitation, the Trademarks specifically identified in Schedule A annexed ---------- hereto, as the same may be amended pursuant hereto from time to time), and including all Trademark Rights with respect thereto and all federal, state and foreign Registrations therefor heretofore or hereafter granted or applied for, the right (but not the obligation) to register claims under any state or federal trademark law or regulation or any trademark law or regulation of any foreign country and to apply for, 2 renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Secured Party or otherwise for past, present and future infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States and any foreign country, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; (b) the following documents and things in Grantor's possession, or subject to Grantor's right to possession, related to (Y) the production, sale and delivery by Grantor, or by any Affiliate, licensee or subcontractor of Grantor, of products or services sold or delivered by or under the authority of Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by Grantor or any Affiliate, licensee or subcontractor of Grantor: (i) all lists and ancillary documents that identify and describe any of Grantor's customers, or those of its Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering products or services of the kind supplied by Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; (ii) all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; (iii) all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and 3 (iv) all documents constituting or concerning the then current or proposed advertising and promotion by Grantor or its Affiliates, licensees or subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (d) to the extent not included in the foregoing clauses (a) - (c), all general intangibles relating to the Collateral; and (e) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). 4 SECTION 3. GRANTOR REMAINS LIABLE. Anything contained herein to the ---------------------- contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. REPRESENTATIONS AND WARRANTIES. Grantor represents and ------------------------------ warrants as follows: (a) Description of Collateral. A true and complete list of all ------------------------- Trademarks, Registrations and Trademark Rights owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule A annexed hereto. Each Trademark, ---------- Registration or Trademark Right designated on Schedule A annexed hereto as a ---------- Material Trademark Property, each other Trademark, Registration or Trademark Right that uses or incorporates the name "_____________" or any other identifiers or symbols derived from or associated with the name "[_____________]" hereafter arising or otherwise owned, held or used by Grantor, and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by Grantor is referred to herein as a "MATERIAL TRADEMARK PROPERTY". (b) Validity and Enforceability of Collateral. Each Material ----------------------------------------- Trademark Property is valid, subsisting and enforceable. As of the Closing Date, Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property is invalid or unenforceable or that the use of any Material Trademark Property violates the rights of any third person or of any basis for any such claim, and there is no such pending or, to the knowledge of Grantor, threatened claim that could reasonably be expected to have a Material Adverse Effect. (c) Ownership of Collateral. Except for the security interest ----------------------- assigned and created by this Agreement, Grantor is the sole legal and beneficial owner of the entire right, title and interest in and to each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for Registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED TRADEMARK LIENS"). Except such as may have been filed in favor of Secured Party relating to this Agreement, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. 5 (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Grantor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at ___________________________________. Grantor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the assignment and grant by Grantor of the security interest created hereby, (ii) the execution, delivery or performance of this Agreement by Grantor, or (iii) the perfection or exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Grantor). (f) Perfection. This Agreement, together with the filing of a ---------- financing statement describing the Collateral with the Secretary of State of the State of ______________ and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, assigns and creates a valid, perfected and First Priority security interest in the Collateral (subject only to Permitted Trademark Liens), securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. (g) Other Information. All information heretofore, herein or ----------------- hereafter supplied to Secured Party by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 5. FURTHER ASSURANCES; NEW TRADEMARKS, REGISTRATIONS AND ----------------------------------------------------- TRADEMARK RIGHTS; CERTAIN INSPECTION RIGHTS. - ------------------------------------------- (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest assigned or granted or purported to be assigned or granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) at the request of Secured Party, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the assignment and perfection of a security interest to Secured Party with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any reasonable 6 time and upon request by Secured Party, exhibit the Collateral to and allow inspection of the Collateral by Secured Party, or persons designated by Secured Party, and (v) at Secured Party's request, appear in and defend any action or proceeding that may affect Grantor's title to or Secured Party's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Grantor hereby authorizes Secured Party to modify this Agreement without obtaining Grantor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or ---------- interest in any existing Trademark, Registration or Trademark Right or any Trademark, Registration or Trademark Right acquired or developed by Grantor after the execution hereof or to delete any reference to any right, title or interest in any Trademark, Registration or Trademark Right in which Grantor no longer has or claims any right, title or interest. (d) Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (e) If Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, the provisions of this Agreement shall automatically apply thereto. Grantor shall promptly notify Secured Party in writing of any rights to any new Trademarks or Trademark Rights acquired by Grantor after the date hereof and of any Registrations issued or applications for Registration made after the date hereof, which notice shall state whether such Trademark, Registration or Trademark Right constitutes a Material Trademark Property. Concurrently with the filing of an application for Registration for any Trademark, Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Secured Party, pursuant to which Grantor shall assign and grant a security interest to the extent of its interest in such Registration as provided herein to Secured Party unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Registration in the name of Secured Party, in which event Grantor shall give written notice to Secured Party as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Registration. (f) Grantor hereby grants to Secured Party and its employees, representatives and agents the right to visit Grantor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection 7 with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Trademarks, Registrations or Trademark Rights (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Grantor and as often as may be reasonably requested. SECTION 6. CERTAIN COVENANTS OF GRANTOR. Grantor shall: ---------------------------- (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Secured Party of any change in Grantor's name, identity or corporate structure within 15 days of such change; (c) give Secured Party 30 days' prior written notice of any change in Grantor's chief place of business or chief executive office or the office where Grantor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for Permitted Trademark Liens and the security interest assigned and created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Trademarks, Registrations and Trademark Rights at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way conflict with this Agreement or impair or prevent the assignment and creation of a security interest in Grantor's rights and interests in any property included within the definitions of any Trademarks, Registrations, Trademark Rights and Associated Goodwill; (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Trademarks 8 and Trademark Rights, including without limitation entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each Material Trademark Property to the extent reasonably necessary for the protection of such Material Trademark Property; (k) use consistent standards of high quality (which may be consistent with Grantor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations; and (l) upon any officer of Grantor obtaining knowledge thereof, promptly notify Secured Party in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Grantor or Secured Party to dispose of the Collateral or any portion thereof, or the rights and remedies of Secured Party in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 7. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 7, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof. In connection with such collections, Grantor may take (and, at Secured Party's direction, shall take) such action as Grantor or Secured Party may deem necessary or advisable to enforce collection of such amounts; provided, however, that Secured Party shall have the right at any time, -------- ------- upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest assigned and created hereby, and to direct such obligors to make payment of all such amounts directly to Secured Party, and, upon such notification and at the expense of Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, ------- (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of amounts due to Grantor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 14, and (ii) Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. SECTION 8. TRADEMARK APPLICATIONS AND LITIGATION. ------------------------------------- 9 (a) Grantor shall have the duty diligently to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgment of Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Material Trademark Property. (b) Except as provided in Section 8(d), Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Secured Party shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Grantor shall promptly, following its becoming aware thereof, notify Secured Party of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 8(a) or 8(b) or regarding Grantor's claim of ownership in or right to use any material Trademark, material Registration or material Trademark Right, its right to register the same, or its right to keep and maintain such Registration. Grantor shall provide to Secured Party any information with respect thereto requested by Secured Party. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right (but not the obligation) to bring suit, in the name of Grantor, Secured Party or otherwise, to enforce any Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event Grantor shall, at the request of Secured Party, do any and all lawful acts and execute any and all documents required by Secured Party in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Secured Party as provided in Section 15 in connection with the exercise of its rights under this Section 8. To the extent that Secured Party shall elect not to bring suit to enforce any Trademark, Registration, Trademark Right, Associated Goodwill or any license thereunder as provided in this Section 8(d), Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 9. NON-DISTURBANCE AGREEMENTS, ETC. If and to the extent -------------------------------- that Grantor is permitted to license the Collateral, Secured Party shall enter into a non-disturbance 10 agreement or other similar arrangement, at Grantor's request and expense, with Grantor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Secured Party pursuant to which (a) Secured Party shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest assigned and created in favor of Secured Party and the other terms of this Agreement. SECTION 10. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Grantor hereby ---------------------------------------- irrevocably appoints Secured Party as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Grantor's name on all applications, documents, papers and instruments necessary for Secured Party in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Grantor to Secured Party, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Secured Party pursuant to Section 13(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Grantor's expense, at any time or from 11 time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. SECTION 11. SECURED PARTY MAY PERFORM. If Grantor fails to perform ------------------------- any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantor under Section 15. SECTION 12. STANDARD OF CARE. The powers conferred on Secured Party ---------------- hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property. SECTION 13. REMEDIES. If any Event of Default shall have occurred and -------- be continuing: (a) Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and 12 Secured Party, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Upon written demand from Secured Party, Grantor shall execute and deliver to Secured Party an assignment or assignments of the Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Secured Party. Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Secured Party (or any Lender or Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days after written notice from Secured Party, Grantor shall make available to Secured Party, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of such Event of Default as Secured Party may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Secured Party's behalf and to be compensated by Secured Party at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. 13 SECTION 14. APPLICATION OF PROCEEDS. All proceeds received by Secured ----------------------- Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 15. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Secured Party and each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 16. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This ----------------------------------------------- Agreement shall assign and create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest assigned and granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Secured Party will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. SECTION 17. SECURED PARTY AS ADMINISTRATIVE AGENT. ------------------------------------- (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking 14 any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured -------- Party shall exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 17(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 17(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 18. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Grantor. Any 15 such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 19. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 20. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 21. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 22. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 23. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 24. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL ---------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY 16 EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 19; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 24 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 25. WAIVER OF JURY TRIAL. GRANTOR AND SECURED PARTY HEREBY -------------------- AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Secured Party each acknowledge that this waiver is a material inducement for Grantor and Secured Party to enter into a business relationship, that Grantor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 25 AND EXECUTED BY EACH 17 OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 26. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 18 IN WITNESS WHEREOF, Grantor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. [GRANTOR] By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: Attention: 1 SCHEDULE A TO TRADEMARK SECURITY AGREEMENT UNITED STATES REGISTERED TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE ---------- ------------- ------------ ------------ 2 STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared ____________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) 3 SUBSIDIARY TRADEMARK SECURITY AGREEMENT This SUBSIDIARY TRADEMARK SECURITY AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between EMPIRE CANDLE, INC., a Kansas corporation ("GRANTOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "SECURED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), has entered into that certain Credit Agreement dated as of April 21, 1998 with DLJ Capital Funding, Inc., as Syndication Agent, Secured Party, Morgan Stanley Senior Funding Inc., as Documentation Agent, and Lenders (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT"; capitalized terms defined therein and not otherwise defined herein being used herein as therein defined). B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with or one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Grantor has executed and delivered a Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Secured Party for the benefit of Lenders and Interest Rate Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and under any Lender Interest Rate Agreements. D. Grantor owns and uses in its business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "TRADEMARKS"). E. Secured Party desires Grantor to assign and grant to it a lien on and security interest in all of Grantor's existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof and in foreign countries (the "REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof and in foreign countries (the "TRADEMARK RIGHTS"), all goodwill of Grantor's business symbolized by the 1 Trademarks and associated therewith, including without limitation the documents and things described in Section 1(b) (the "ASSOCIATED GOODWILL"), and all proceeds of the Trademarks, the Registrations, the Trademark Rights and the Associated Goodwill, and Grantor agrees to assign and grant to Secured Party a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and all the proceeds thereof as provided herein. F. Pursuant to the Subsidiary Security Agreement, Grantor has assigned and granted to Secured Party a lien on and security interest in, among other assets, all of Grantor's equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default, Secured Party would be able to exercise its remedies consistent with the Subsidiary Security Agreement, this Agreement and applicable law to foreclose upon Grantor's business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantor, and benefit from the Associated Goodwill. G. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Grantor shall have assigned and granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Secured Party as follows: SECTION 1. ASSIGNMENT AND GRANT OF SECURITY. Grantor hereby assigns -------------------------------- to Secured Party, and hereby grants to Secured Party a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) each of the Trademarks and rights and interests in Trademarks that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part (including, without limitation, the Trademarks specifically identified in Schedule A annexed ---------- hereto, as the same may be amended pursuant hereto from time to time), and including all Trademark Rights with respect thereto and all federal, state and foreign Registrations therefor heretofore or hereafter granted or applied for, the right (but not the obligation) to register claims under any state or federal trademark law or regulation or any trademark law or regulation of any foreign country and to apply for, renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Secured Party or otherwise for past, present and future 2 infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States and any foreign country, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; (b) the following documents and things in Grantor's possession, or subject to Grantor's right to possession, related to (Y) the production, sale and delivery by Grantor, or by any Affiliate, licensee or subcontractor of Grantor, of products or services sold or delivered by or under the authority of Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by Grantor or any Affiliate, licensee or subcontractor of Grantor: (i) all lists and ancillary documents that identify and describe any of Grantor's customers, or those of its Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering products or services of the kind supplied by Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; (ii) all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; (iii) all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and (iv) all documents constituting or concerning the then current or proposed advertising and promotion by Grantor or its Affiliates, licensees or 3 subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (d) to the extent not included in the foregoing clauses (a) - (c), all general intangibles relating to the Collateral; and (e) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). 4 SECTION 3. GRANTOR REMAINS LIABLE. Anything contained herein to the ---------------------- contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. REPRESENTATIONS AND WARRANTIES. Grantor represents and ------------------------------ warrants as follows: (a) Description of Collateral. A true and complete list of all ------------------------- Trademarks, Registrations and Trademark Rights owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule A annexed hereto. Each Trademark, ---------- Registration or Trademark Right designated on Schedule A annexed hereto as a ---------- Material Trademark Property, each other Trademark, Registration or Trademark Right that uses or incorporates the name "Empire" or any other identifiers or symbols derived from or associated with the name "Empire" hereafter arising or otherwise owned, held or used by Grantor, and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by Grantor is referred to herein as a "MATERIAL TRADEMARK PROPERTY". (b) Validity and Enforceability of Collateral. Each Material ----------------------------------------- Trademark Property is valid, subsisting and enforceable. As of the Closing Date, Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property is invalid or unenforceable or that the use of any Material Trademark Property violates the rights of any third person or of any basis for any such claim, and there is no such pending or, to the knowledge of Grantor, threatened claim that could reasonably be expected to have a Material Adverse Effect. (c) Ownership of Collateral. Except for the security interest ----------------------- assigned and created by this Agreement, Grantor is the sole legal and beneficial owner of the entire right, title and interest in and to each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for Registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED TRADEMARK LIENS"). Except such as may have been filed in favor of Secured Party relating to this Agreement, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. 5 (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Grantor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at 2925 Fairfax Trafficway, Kansas City, Kansas 66115. Grantor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the assignment and grant by Grantor of the security interest created hereby, (ii) the execution, delivery or performance of this Agreement by Grantor, or (iii) the perfection or exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Grantor). (f) Perfection. This Agreement, together with the filing of a ---------- financing statement describing the Collateral with the Secretary of State of the State of Kansas, Missouri and Nevada and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, assigns and creates a valid, perfected and First Priority security interest in the Collateral (subject only to Permitted Trademark Liens), securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. (g) Other Information. All information heretofore, herein or ----------------- hereafter supplied to Secured Party by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 5. FURTHER ASSURANCES; NEW TRADEMARKS, REGISTRATIONS AND ----------------------------------------------------- TRADEMARK RIGHTS; CERTAIN INSPECTION RIGHTS. - ------------------------------------------- (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest assigned or granted or purported to be assigned or granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) at the request of Secured Party, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the assignment and perfection of a security interest to Secured Party with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any 6 reasonable time and upon request by Secured Party, exhibit the Collateral to and allow inspection of the Collateral by Secured Party, or persons designated by Secured Party, and (v) at Secured Party's request, appear in and defend any action or proceeding that may affect Grantor's title to or Secured Party's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Grantor hereby authorizes Secured Party to modify this Agreement without obtaining Grantor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or ---------- interest in any existing Trademark, Registration or Trademark Right or any Trademark, Registration or Trademark Right acquired or developed by Grantor after the execution hereof or to delete any reference to any right, title or interest in any Trademark, Registration or Trademark Right in which Grantor no longer has or claims any right, title or interest. (d) Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (e) If Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, the provisions of this Agreement shall automatically apply thereto. Grantor shall promptly notify Secured Party in writing of any rights to any new Trademarks or Trademark Rights acquired by Grantor after the date hereof and of any Registrations issued or applications for Registration made after the date hereof, which notice shall state whether such Trademark, Registration or Trademark Right constitutes a Material Trademark Property. Concurrently with the filing of an application for Registration for any Trademark, Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Secured Party, pursuant to which Grantor shall assign and grant a security interest to the extent of its interest in such Registration as provided herein to Secured Party unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Registration in the name of Secured Party, in which event Grantor shall give written notice to Secured Party as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Registration. 7 (f) Grantor hereby grants to Secured Party and its employees, representatives and agents the right to visit Grantor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Trademarks, Registrations or Trademark Rights (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Grantor and as often as may be reasonably requested. SECTION 6. CERTAIN COVENANTS OF GRANTOR. Grantor shall: ---------------------------- (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Secured Party of any change in Grantor's name, identity or corporate structure within 15 days of such change; (c) give Secured Party 30 days' prior written notice of any change in Grantor's chief place of business or chief executive office or the office where Grantor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for Permitted Trademark Liens and the security interest assigned and created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Trademarks, Registrations and Trademark Rights at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way conflict with this Agreement or impair or prevent the assignment and creation of a security interest in Grantor's rights and interests in any property included within the definitions of any Trademarks, Registrations, Trademark Rights and Associated Goodwill; 8 (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Trademarks and Trademark Rights, including without limitation entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each Material Trademark Property to the extent reasonably necessary for the protection of such Material Trademark Property; (k) use consistent standards of high quality (which may be consistent with Grantor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations; and (l) upon any officer of Grantor obtaining knowledge thereof, promptly notify Secured Party in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Grantor or Secured Party to dispose of the Collateral or any portion thereof, or the rights and remedies of Secured Party in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 7. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 7, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof. In connection with such collections, Grantor may take (and, at Secured Party's direction, shall take) such action as Grantor or Secured Party may deem necessary or advisable to enforce collection of such amounts; provided, however, that Secured Party shall have the right at any time, -------- ------- upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest assigned and created hereby, and to direct such obligors to make payment of all such amounts directly to Secured Party, and, upon such notification and at the expense of Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, ------- (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of amounts due to Grantor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 14, and (ii) Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. 9 SECTION 8. TRADEMARK APPLICATIONS AND LITIGATION. ------------------------------------- (a) Grantor shall have the duty diligently to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgment of Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Material Trademark Property. (b) Except as provided in Section 8(d), Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Secured Party shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Grantor shall promptly, following its becoming aware thereof, notify Secured Party of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 8(a) or 8(b) or regarding Grantor's claim of ownership in or right to use any material Trademark, material Registration or material Trademark Right, its right to register the same, or its right to keep and maintain such Registration. Grantor shall provide to Secured Party any information with respect thereto requested by Secured Party. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right (but not the obligation) to bring suit, in the name of Grantor, Secured Party or otherwise, to enforce any Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event Grantor shall, at the request of Secured Party, do any and all lawful acts and execute any and all documents required by Secured Party in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Secured Party as provided in Section 15 in connection with the exercise of its rights under this Section 8. To the extent that Secured Party shall elect not to bring suit to enforce any Trademark, Registration, Trademark Right, Associated Goodwill or any license thereunder as provided in this Section 8(d), Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. 10 SECTION 9. NON-DISTURBANCE AGREEMENTS, ETC. If and to the extent that -------------------------------- Grantor is permitted to license the Collateral, Secured Party shall enter into a non-disturbance agreement or other similar arrangement, at Grantor's request and expense, with Grantor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Secured Party pursuant to which (a) Secured Party shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest assigned and created in favor of Secured Party and the other terms of this Agreement. SECTION 10. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Grantor hereby ---------------------------------------- irrevocably appoints Secured Party as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Grantor's name on all applications, documents, papers and instruments necessary for Secured Party in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Grantor to Secured Party, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Secured Party pursuant to Section 13(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally 11 to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner thereof for all purposes, and to do, at Secured Party's option and Grantor's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. SECTION 11. SECURED PARTY MAY PERFORM. If Grantor fails to perform ------------------------- any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantor under Section 15. SECTION 12. STANDARD OF CARE. The powers conferred on Secured Party ---------------- hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property. SECTION 13. REMEDIES. If any Event of Default shall have occurred and -------- be continuing: (a) Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for 12 cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Secured Party, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Upon written demand from Secured Party, Grantor shall execute and deliver to Secured Party an assignment or assignments of the Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Secured Party. Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Secured Party (or any Lender or Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days after written notice from Secured Party, Grantor shall make available to Secured Party, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of such Event of Default as Secured Party may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Secured Party's behalf and to be compensated by Secured Party at Grantor's 13 expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. SECTION 14. APPLICATION OF PROCEEDS. All proceeds received by Secured ----------------------- Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 15. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Secured Party and each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 16. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This ----------------------------------------------- Agreement shall assign and create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest assigned and granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Secured Party will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. SECTION 17. SECURED PARTY AS ADMINISTRATIVE AGENT. ------------------------------------- 14 (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Secured Party shall exercise, -------- or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 17(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 17(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. 15 SECTION 18. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and signed by Secured Party and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 19. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 20. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 21. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 22. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 23. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. 16 SECTION 24. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL ---------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 19; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 24 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 25. WAIVER OF JURY TRIAL. GRANTOR AND SECURED PARTY HEREBY -------------------- AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Secured Party each acknowledge that this waiver is a material inducement for Grantor and Secured Party to enter into a business relationship, that Grantor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Secured Party further warrant and represent that 17 each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO THIS SECTION 25 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 26. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 18 IN WITNESS WHEREOF, Grantor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. EMPIRE CANDLE, INC. By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 555 Montgomery Street, 17th Floor San Francisco, CA 94111 Attention: Alan Wray 1 SCHEDULE A TO TRADEMARK SECURITY AGREEMENT UNITED STATES REGISTERED TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE ---------- ------------- ------------ ------------ 2 STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared ____________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) 3 SUBSIDIARY TRADEMARK SECURITY AGREEMENT This SUBSIDIARY TRADEMARK SECURITY AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between FORSTER INC.a Maine corporation ("GRANTOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "SECURED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), has entered into that certain Credit Agreement dated as of April 21, 1998 with DLJ Capital Funding, Inc., as Syndication Agent, Secured Party, Morgan Stanley Senior Funding Inc., as Documentation Agent, and Lenders (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT"; capitalized terms defined therein and not otherwise defined herein being used herein as therein defined). B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with or one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Grantor has executed and delivered a Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Secured Party for the benefit of Lenders and Interest Rate Exchangers, pursuant to which Grantor has guarantied the prompt payment and performance when due of all obligations of Company under the Credit Agreement and under any Lender Interest Rate Agreements. D. Grantor owns and uses in its business, and will in the future adopt and so use, various intangible assets, including trademarks, service marks, designs, logos, indicia, tradenames, corporate names, company names, business names, fictitious business names, trade styles and/or other source and/or business identifiers and applications pertaining thereto (collectively, the "TRADEMARKS"). E. Secured Party desires Grantor to assign and grant to it a lien on and security interest in all of Grantor's existing and future Trademarks, all registrations that have been or may hereafter be issued or applied for thereon in the United States and any state thereof and in foreign countries (the "REGISTRATIONS"), all common law and other rights in and to the Trademarks in the United States and any state thereof and in foreign countries (the "TRADEMARK RIGHTS"), all goodwill of Grantor's business symbolized by the 1 Trademarks and associated therewith, including without limitation the documents and things described in Section 1(b) (the "ASSOCIATED GOODWILL"), and all proceeds of the Trademarks, the Registrations, the Trademark Rights and the Associated Goodwill, and Grantor agrees to assign and grant to Secured Party a secured and protected interest in the Trademarks, the Registrations, the Trademark Rights, the Associated Goodwill and all the proceeds thereof as provided herein. F. Pursuant to the Subsidiary Security Agreement, Grantor has assigned and granted to Secured Party a lien on and security interest in, among other assets, all of Grantor's equipment, inventory, accounts and general intangibles relating to the products and services sold or delivered under or in connection with the Trademarks such that, upon the occurrence and during the continuation of an Event of Default, Secured Party would be able to exercise its remedies consistent with the Subsidiary Security Agreement, this Agreement and applicable law to foreclose upon Grantor's business and use the Trademarks, the Registrations and the Trademark Rights in conjunction with the continued operation of such business, maintaining substantially the same product and service specifications and quality as maintained by Grantor, and benefit from the Associated Goodwill. G. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Grantor shall have assigned and granted the security interests and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Grantor hereby agrees with Secured Party as follows: SECTION 1. ASSIGNMENT AND GRANT OF SECURITY. Grantor hereby assigns -------------------------------- to Secured Party, and hereby grants to Secured Party a security interest in, all of Grantor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Grantor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) each of the Trademarks and rights and interests in Trademarks that are presently, or in the future may be, owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part (including, without limitation, the Trademarks specifically identified in Schedule A annexed ---------- hereto, as the same may be amended pursuant hereto from time to time), and including all Trademark Rights with respect thereto and all federal, state and foreign Registrations therefor heretofore or hereafter granted or applied for, the right (but not the obligation) to register claims under any state or federal trademark law or regulation or any trademark law or regulation of any foreign country and to apply for, renew and extend the Trademarks, Registrations and Trademark Rights, the right (but not the obligation) to sue or bring opposition or cancellation proceedings in the name of Grantor or in the name of Secured Party or otherwise for past, present and future 2 infringements of the Trademarks, Registrations or Trademark Rights and all rights (but not obligations) corresponding thereto in the United States and any foreign country, and the Associated Goodwill; it being understood that the rights and interests included herein shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Grantor pertaining to any Trademarks, Registrations or Trademark Rights presently or in the future owned, held or used by third parties but, in the case of third parties which are not Affiliates of Grantor, only to the extent permitted by such licensing or other contracts or otherwise permitted by applicable law and, if not so permitted under any such contracts and applicable law, only with the consent of such third parties; (b) the following documents and things in Grantor's possession, or subject to Grantor's right to possession, related to (Y) the production, sale and delivery by Grantor, or by any Affiliate, licensee or subcontractor of Grantor, of products or services sold or delivered by or under the authority of Grantor in connection with the Trademarks, Registrations or Trademark Rights (which products and services shall, for purposes of this Agreement, be deemed to include, without limitation, products and services sold or delivered pursuant to merchandising operations utilizing any Trademarks, Registrations or Trademark Rights); or (Z) any retail or other merchandising operations conducted under the name of or in connection with the Trademarks, Registrations or Trademark Rights by Grantor or any Affiliate, licensee or subcontractor of Grantor: (i) all lists and ancillary documents that identify and describe any of Grantor's customers, or those of its Affiliates, licensees or subcontractors, for products sold and services delivered under or in connection with the Trademarks or Trademark Rights, including without limitation any lists and ancillary documents that contain a customer's name and address, the name and address of any of its warehouses, branches or other places of business, the identity of the Person or Persons having the principal responsibility on a customer's behalf for ordering products or services of the kind supplied by Grantor, or the credit, payment, discount, delivery or other sale terms applicable to such customer, together with information setting forth the total purchases, by brand, product, service, style, size or other criteria, and the patterns of such purchases; (ii) all product and service specification documents and production and quality control manuals used in the manufacture or delivery of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; (iii) all documents which reveal the name and address of any source of supply, and any terms of purchase and delivery, for any and all materials, components and services used in the production of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights; and (iv) all documents constituting or concerning the then current or proposed advertising and promotion by Grantor or its Affiliates, licensees or 3 subcontractors of products and services sold or delivered under or in connection with the Trademarks or Trademark Rights including, without limitation, all documents which reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and services; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; (d) to the extent not included in the foregoing clauses (a) - (c), all general intangibles relating to the Collateral; and (e) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and ------------------------ the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Grantor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Grantor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Secured Party or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Grantor now or hereafter existing under this Agreement (all such obligations of Grantor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). 4 SECTION 3. GRANTOR REMAINS LIABLE. Anything contained herein to the ---------------------- contrary notwithstanding, (a) Grantor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Secured Party of any of its rights hereunder shall not release Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Secured Party shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Secured Party be obligated to perform any of the obligations or duties of Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 4. REPRESENTATIONS AND WARRANTIES. Grantor represents and ------------------------------ warrants as follows: (a) Description of Collateral. A true and complete list of all ------------------------- Trademarks, Registrations and Trademark Rights owned, held (whether pursuant to a license or otherwise) or used by Grantor, in whole or in part, as of the date of this Agreement is set forth in Schedule A annexed hereto. Each Trademark, ---------- Registration or Trademark Right designated on Schedule A annexed hereto as a ---------- Material Trademark Property, each other Trademark, Registration or Trademark Right that uses or incorporates the name "Empire" or any other identifiers or symbols derived from or associated with the name "Empire" hereafter arising or otherwise owned, held or used by Grantor, and each other Trademark, Registration or Trademark Right hereafter arising or otherwise owned, held or used by Grantor is referred to herein as a "MATERIAL TRADEMARK PROPERTY". (b) Validity and Enforceability of Collateral. Each Material ----------------------------------------- Trademark Property is valid, subsisting and enforceable. As of the Closing Date, Grantor is not aware of any pending or threatened claim by any third party that any Material Trademark Property is invalid or unenforceable or that the use of any Material Trademark Property violates the rights of any third person or of any basis for any such claim, and there is no such pending or, to the knowledge of Grantor, threatened claim that could reasonably be expected to have a Material Adverse Effect. (c) Ownership of Collateral. Except for the security interest ----------------------- assigned and created by this Agreement, Grantor is the sole legal and beneficial owner of the entire right, title and interest in and to each Material Trademark Property, free and clear of any Lien other than Liens of mechanics, materialmen, attorneys and other similar liens imposed by law in the ordinary course of business in connection with the establishment, creation or application for Registration of any Trademarks, Registrations or Trademark Rights for sums not yet delinquent or being contested in good faith (such Liens being referred to herein as "PERMITTED TRADEMARK LIENS"). Except such as may have been filed in favor of Secured Party relating to this Agreement, no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office, including the United States Patent and Trademark Office. 5 (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Grantor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at Mill Street, East Wilton, Maine 04234. Grantor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the assignment and grant by Grantor of the security interest created hereby, (ii) the execution, delivery or performance of this Agreement by Grantor, or (iii) the perfection or exercise by Secured Party of its rights and remedies hereunder (except as may have been taken by or at the direction of Grantor). (f) Perfection. This Agreement, together with the filing of a ---------- financing statement describing the Collateral with the Secretary of State of the State of Maine and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, assigns and creates a valid, perfected and First Priority security interest in the Collateral (subject only to Permitted Trademark Liens), securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. (g) Other Information. All information heretofore, herein or ----------------- hereafter supplied to Secured Party by or on behalf of Grantor with respect to the Collateral is accurate and complete in all material respects. SECTION 5. FURTHER ASSURANCES; NEW TRADEMARKS, REGISTRATIONS AND ----------------------------------------------------- TRADEMARK RIGHTS; CERTAIN INSPECTION RIGHTS. - ------------------------------------------- (a) Grantor agrees that from time to time, at the expense of Grantor, Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Secured Party may request, in order to perfect and protect any security interest assigned or granted or purported to be assigned or granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Grantor will: (i) at the request of Secured Party, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the assignment and perfection of a security interest to Secured Party with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any reasonable time and upon request by Secured Party, exhibit the Collateral to and allow inspection of the Collateral by Secured Party, or persons designated by Secured Party, and 6 (v) at Secured Party's request, appear in and defend any action or proceeding that may affect Grantor's title to or Secured Party's security interest in all or any part of the Collateral. (b) Grantor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Grantor. Grantor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Grantor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Grantor hereby authorizes Secured Party to modify this Agreement without obtaining Grantor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or ---------- interest in any existing Trademark, Registration or Trademark Right or any Trademark, Registration or Trademark Right acquired or developed by Grantor after the execution hereof or to delete any reference to any right, title or interest in any Trademark, Registration or Trademark Right in which Grantor no longer has or claims any right, title or interest. (d) Grantor will furnish to Secured Party from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may reasonably request, all in reasonable detail. (e) If Grantor shall obtain rights to any new Trademarks, Registrations or Trademark Rights, the provisions of this Agreement shall automatically apply thereto. Grantor shall promptly notify Secured Party in writing of any rights to any new Trademarks or Trademark Rights acquired by Grantor after the date hereof and of any Registrations issued or applications for Registration made after the date hereof, which notice shall state whether such Trademark, Registration or Trademark Right constitutes a Material Trademark Property. Concurrently with the filing of an application for Registration for any Trademark, Grantor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Trademark Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Secured Party, pursuant to which Grantor shall assign and grant a security interest to the extent of its interest in such Registration as provided herein to Secured Party unless so doing would, in the reasonable judgment of Grantor, after due inquiry, result in the grant of a Registration in the name of Secured Party, in which event Grantor shall give written notice to Secured Party as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Registration. (f) Grantor hereby grants to Secured Party and its employees, representatives and agents the right to visit Grantor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection 7 with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Trademarks, Registrations or Trademark Rights (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Grantor and as often as may be reasonably requested. SECTION 6. CERTAIN COVENANTS OF GRANTOR. Grantor shall: ---------------------------- (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Secured Party of any change in Grantor's name, identity or corporate structure within 15 days of such change; (c) give Secured Party 30 days' prior written notice of any change in Grantor's chief place of business or chief executive office or the office where Grantor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for Permitted Trademark Liens and the security interest assigned and created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Trademarks, Registrations and Trademark Rights at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way conflict with this Agreement or impair or prevent the assignment and creation of a security interest in Grantor's rights and interests in any property included within the definitions of any Trademarks, Registrations, Trademark Rights and Associated Goodwill; (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Trademarks and Trademark Rights, including without limitation entering into confidentiality 8 agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each Material Trademark Property to the extent reasonably necessary for the protection of such Material Trademark Property; (k) use consistent standards of high quality (which may be consistent with Grantor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Trademarks, Registrations and Trademark Rights, including, to the extent applicable, in the operation and maintenance of its merchandising operations; and (l) upon any officer of Grantor obtaining knowledge thereof, promptly notify Secured Party in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Grantor or Secured Party to dispose of the Collateral or any portion thereof, or the rights and remedies of Secured Party in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 7. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 7, Grantor shall continue to collect, at its own expense, all amounts due or to become due to Grantor in respect of the Collateral or any portion thereof. In connection with such collections, Grantor may take (and, at Secured Party's direction, shall take) such action as Grantor or Secured Party may deem necessary or advisable to enforce collection of such amounts; provided, however, that Secured Party shall have the right at any time, -------- ------- upon the occurrence and during the continuation of an Event of Default and upon written notice to Grantor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest assigned and created hereby, and to direct such obligors to make payment of all such amounts directly to Secured Party, and, upon such notification and at the expense of Grantor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Grantor might have done. After receipt by Grantor of the notice from Secured Party referred to in the proviso to the preceding sentence, ------- (i) all amounts and proceeds (including checks and other instruments) received by Grantor in respect of amounts due to Grantor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Secured Party hereunder, shall be segregated from other funds of Grantor and shall be forthwith paid over or delivered to Secured Party in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 14, and (ii) Grantor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. SECTION 8. TRADEMARK APPLICATIONS AND LITIGATION. ------------------------------------- 9 (a) Grantor shall have the duty diligently to prosecute any trademark application relating to any Material Trademark Property that is pending as of the date of this Agreement, to make federal application on any existing or future registerable but unregistered Material Trademark Property (whenever it is commercially reasonable in the reasonable judgment of Grantor to do so), and to file and prosecute opposition and cancellation proceedings, renew Registrations and do any and all acts which are necessary or desirable to preserve and maintain all rights in all Material Trademark Properties. Any expenses incurred in connection therewith shall be borne solely by Grantor. Grantor shall not abandon any Material Trademark Property. (b) Except as provided in Section 8(d), Grantor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, dilution or other damage as are in its reasonable business judgment necessary to protect the Collateral. Secured Party shall provide, at Grantor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Grantor shall promptly, following its becoming aware thereof, notify Secured Party of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 8(a) or 8(b) or regarding Grantor's claim of ownership in or right to use any material Trademark, material Registration or material Trademark Right, its right to register the same, or its right to keep and maintain such Registration. Grantor shall provide to Secured Party any information with respect thereto requested by Secured Party. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right (but not the obligation) to bring suit, in the name of Grantor, Secured Party or otherwise, to enforce any Trademark, Registration, Trademark Right, Associated Goodwill and any license thereunder, in which event Grantor shall, at the request of Secured Party, do any and all lawful acts and execute any and all documents required by Secured Party in aid of such enforcement and Grantor shall promptly, upon demand, reimburse and indemnify Secured Party as provided in Section 15 in connection with the exercise of its rights under this Section 8. To the extent that Secured Party shall elect not to bring suit to enforce any Trademark, Registration, Trademark Right, Associated Goodwill or any license thereunder as provided in this Section 8(d), Grantor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Trademarks, Registrations, Trademark Rights or Associated Goodwill by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 9. NON-DISTURBANCE AGREEMENTS, ETC. If and to the extent -------------------------------- that Grantor is permitted to license the Collateral, Secured Party shall enter into a 10 non-disturbance agreement or other similar arrangement, at Grantor's request and expense, with Grantor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Secured Party pursuant to which (a) Secured Party shall agree not to disturb or interfere with such licensee's rights under its license agreement with Grantor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest assigned and created in favor of Secured Party and the other terms of this Agreement. SECTION 10. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Grantor hereby ---------------------------------------- irrevocably appoints Secured Party as Grantor's attorney-in-fact, with full authority in the place and stead of Grantor and in the name of Grantor, Secured Party or otherwise, from time to time in Secured Party's discretion to take any action and to execute any instrument that Secured Party may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Grantor's name on all applications, documents, papers and instruments necessary for Secured Party in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Secured Party may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Secured Party with respect to any of the Collateral; (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Secured Party in its sole discretion, any such payments made by Secured Party to become obligations of Grantor to Secured Party, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Secured Party pursuant to Section 13(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Secured Party were the absolute owner 11 thereof for all purposes, and to do, at Secured Party's option and Grantor's expense, at any time or from time to time, all acts and things that Secured Party deems necessary to protect, preserve or realize upon the Collateral and Secured Party's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Grantor might do. SECTION 11. SECURED PARTY MAY PERFORM. If Grantor fails to perform ------------------------- any agreement contained herein, Secured Party may itself perform, or cause performance of, such agreement, and the expenses of Secured Party incurred in connection therewith shall be payable by Grantor under Section 15. SECTION 12. STANDARD OF CARE. The powers conferred on Secured Party ---------------- hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Secured Party shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Secured Party shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Secured Party accords its own property. SECTION 13. REMEDIES. If any Event of Default shall have occurred -------- and be continuing: (a) Secured Party may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Grantor to, and Grantor hereby agrees that it will at its expense and upon request of Secured Party forthwith, assemble all or part of the Collateral as directed by Secured Party and make it available to Secured Party at a place to be designated by Secured Party that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Secured Party deems appropriate, (iv) take possession of Grantor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Grantor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Grantor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable. Secured Party 12 or any Lender or Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Secured Party, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Secured Party at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Grantor, and Grantor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Grantor hereby waives any claims against Secured Party arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Grantor shall be liable for the deficiency and the fees of any attorneys employed by Secured Party to collect such deficiency. (b) Upon written demand from Secured Party, Grantor shall execute and deliver to Secured Party an assignment or assignments of the Trademarks, Registrations, Trademark Rights and the Associated Goodwill and such other documents as are requested by Secured Party. Grantor agrees that such an assignment and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Secured Party (or any Lender or Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. (c) Within five Business Days after written notice from Secured Party, Grantor shall make available to Secured Party, to the extent within Grantor's power and authority, such personnel in Grantor's employ on the date of such Event of Default as Secured Party may reasonably designate, by name, title or job responsibility, to permit Grantor to continue, directly or indirectly, to produce, advertise and sell the products and services sold or delivered by Grantor under or in connection with the Trademarks, Registrations and Trademark Rights, such persons to be available to perform their prior functions on Secured Party's behalf and to be compensated by Secured Party at Grantor's expense on a per diem, pro-rata basis consistent with the salary and benefit structure applicable to each as of the date of such Event of Default. 13 SECTION 14. APPLICATION OF PROCEEDS. All proceeds received by ----------------------- Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 15. INDEMNITY AND EXPENSES. ---------------------- (a) Grantor agrees to indemnify Secured Party and each Lender and each Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Secured Party's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Grantor shall pay to Secured Party upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Secured Party may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Secured Party hereunder, or (iv) the failure by Grantor to perform or observe any of the provisions hereof. SECTION 16. CONTINUING SECURITY INTEREST; TRANSFER OF LOANS. This ----------------------------------------------- Agreement shall assign and create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Grantor, its successors and assigns, and (c) inure, together with the rights and remedies of Secured Party hereunder, to the benefit of Secured Party and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest assigned and granted hereby shall terminate and all rights to the Collateral shall revert to Grantor. Upon any such termination Secured Party will, at Grantor's expense, execute and deliver to Grantor such documents as Grantor shall reasonably request to evidence such termination. SECTION 17. SECURED PARTY AS ADMINISTRATIVE AGENT. ------------------------------------- (a) Secured Party has been appointed to act as Secured Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Secured Party shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from 14 taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that -------- Secured Party shall exercise, or refrain from exercising, any remedies provided for in Section 11 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 17(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Secured Party for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 17(a). (b) Secured Party shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Secured Party under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Secured Party under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Secured Party under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Secured Party under this Agreement, and the retiring or removed Secured Party under this Agreement shall promptly (i) transfer to such successor Secured Party all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Secured Party under this Agreement, and (ii) execute and deliver to such successor Secured Party such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Secured Party of the security interests created hereunder, whereupon such retiring or removed Secured Party shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Secured Party, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Secured Party hereunder. SECTION 18. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Grantor therefrom, shall in any event be effective unless the same shall be in writing and 15 signed by Secured Party and, in the case of any such amendment or modification, by Grantor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 19. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 20. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Secured Party in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 21. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 22. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 23. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 24. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL ---------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST GRANTOR ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT 16 JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GRANTOR, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II) WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO GRANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SECTION 19; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GRANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT SECURED PARTY RETAINS THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GRANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SECTION 24 RELATING TO JURISDICTION AND VENUE SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE. SECTION 25. WAIVER OF JURY TRIAL. GRANTOR AND SECURED PARTY HEREBY -------------------- AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Grantor and Secured Party each acknowledge that this waiver is a material inducement for Grantor and Secured Party to enter into a business relationship, that Grantor and Secured Party have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Grantor and Secured Party further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN 17 WAIVER SPECIFICALLY REFERRING TO THIS SECTION 25 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 26. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 18 IN WITNESS WHEREOF, Grantor and Secured Party have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. FORSTER INC. By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 555 Montgomery Street, 17th Floor San Francisco, CA 94111 Attention: Alan Wray 1 SCHEDULE A TO TRADEMARK SECURITY AGREEMENT UNITED STATES REGISTERED TRADEMARK REGISTRATION REGISTRATION OWNER DESCRIPTION NUMBER DATE ---------- ------------- ------------ ------------ 2 STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared ___________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) 3 EX-4.9 8 [Form of Subsidiary Patent Security Agreement] SUBSIDIARY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT This SUBSIDIARY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between [SUBSIDIARY], a ____________________ corporation ("ASSIGNOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "ASSIGNEE") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Assignee and Lenders have entered into a Credit Agreement dated as of April 21, 1998 with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Assignor has executed and delivered the Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Assignee for the benefit of Lenders and Interest Rate Exchangers pursuant to which Assignor has guarantied the prompt payment and performance when due of all Obligations of the Company under the Credit Agreement and under any Lender Interest Rate Agreements. D. Assignor has and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). E. Assignor is willing to grant to Assignee (i) a security interest in all such Collateral for the purpose of securing the complete and timely satisfaction of all of the Secured Obligations (as hereinafter defined) and (ii) effective upon the occurrence and during 1 the continuation of an Event of Default, an assignment of Assignor's entire rights, title and interest in and to all such Collateral. F. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Assignor shall have granted the security interests and made the conditional assignment and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor hereby agrees with Assignee as follows: SECTION 1. GRANT OF SECURITY. Assignor hereby assigns to Assignee, ----------------- and hereby grants to Assignee a security interest in, all of Assignor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Assignor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, owned by Assignor and all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, held or used by Assignor in whole or in part (including, without limitation, the patents and patent applications listed in Schedule A annexed hereto, as the same may be amended pursuant hereto ---------- from time to time), all rights (but not obligations) corresponding thereto (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of Assignor or in the name of Assignee or Lenders or Interest Rate Exchangers), and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interest assigned hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Assignor pertaining to patent applications and patents presently or in the future owned or used by third parties but, in the case of third parties which are not Affiliates of Assignor, only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third parties; (b) all general intangibles relating to the Patents; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (d) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing 2 Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Assignee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. CONDITIONAL ASSIGNMENT. In addition to, and not by way of ---------------------- limitation of, the granting of a security interest in the Collateral pursuant to Section 1, Assignor hereby, effective upon the occurrence of an Event of Default and upon written notice from Assignee, grants, sells, conveys, transfers, assigns and sets over to Assignee, for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers, all of Assignor's right, title and interest in and to the Collateral, including without limitation Assignor's right, title and interest in and to the Patents identified in Schedule A annexed ---------- hereto. SECTION 3. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Assignor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Assignor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Assignee or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Assignor now or hereafter existing under this Agreement (all such obligations of Assignor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). SECTION 4. ASSIGNOR REMAINS LIABLE. Anything contained herein to the ----------------------- contrary notwithstanding, (a) Assignor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Assignee of any of its rights hereunder shall not release Assignor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Assignee shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Assignee be obligated to 3 perform any of the obligations or duties of Assignor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. SECTION 5. REPRESENTATIONS AND WARRANTIES. Assignor represents and ------------------------------ warrants as follows: (a) Description of Collateral. A true and complete list of all Patents ------------------------- owned, held (whether pursuant to a license or otherwise) or used by Assignor, in whole or in part, as of the date of this Agreement is set forth in Schedule A ---------- annexed hereto. (b) Validity and Enforceability of Collateral. Each Patent that is ----------------------------------------- material to Assignor's business is valid, subsisting and enforceable and Assignor is not aware of any pending or threatened claim by any third party that any such material Patent is invalid or unenforceable or that the use of any such material Patent violates the rights of any third person or of any basis for any such claim. (c) Ownership of Collateral. Except for the security interest and ----------------------- conditional assignment created by this Agreement, Assignor owns each material Patent free and clear of any Lien. Except such as may have been filed in favor of Assignee relating to this Agreement and of Foothill Capital Corporation (a release of which has been delivered to Administrative Agent), (i) no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office and (ii) no effective filing covering all or any part of the Collateral is on file in the United States Patent and Trademark Office. (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Assignor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at ___________________________________. Assignor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Assignor of the security interest and conditional assignment granted hereby, (ii) the execution, delivery or performance of this Agreement by Assignor, or (iii) the perfection of or the exercise by Assignee of its rights and remedies hereunder (except as may have been taken by or at the direction of Assignor). (f) Perfection. This Agreement, together with the filing of a ---------- financing statement describing the Collateral with the Secretary of State of the State of ______________ and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, creates a valid, perfected and first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. 4 (g) Other Information. All information heretofore, herein or hereafter ----------------- supplied to Assignee by or on behalf of Assignor with respect to the Collateral is accurate and complete in all material respects. SECTION 6. FURTHER ASSURANCES; NEW PATENTS AND PATENT APPLICATIONS. ------------------------------------------------------- (a) Assignor agrees that from time to time, at the expense of Assignor, Assignor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Assignee may request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Assignee to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Assignor will: (i) at the request of Assignee, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Assignee, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Assignee may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest and assignment to Assignee with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any reasonable time and upon request by Assignee, exhibit the Collateral to and allow inspection of the Collateral by Assignee, or persons designated by Assignee, and (v) at Assignee's request, appear in and defend any action or proceeding that may affect Assignor's title to or Assignee's security interest in all or any part of the Collateral. (b) Assignor hereby authorizes Assignee to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Assignor. Assignor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Assignor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Assignor hereby authorizes Assignee to modify this Agreement without obtaining Assignor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or ---------- interest in any existing Patent or any Patent acquired or developed by Assignor after the execution hereof or to delete any reference to any right, title or interest in any Patent in which Assignor no longer has or claims any right, title or interest. (d) Assignor will furnish to Assignee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Assignee may reasonably request, all in reasonable detail. (e) If Assignor shall hereafter obtain rights to any patentable inventions, or become entitled to the benefit of any patent application or patent or any reissue, division, 5 continuation, renewal, extension, or continuation-in-part of any Patent or any improvement on any Patent, the provisions of this Agreement shall automatically apply thereto. Assignor shall promptly notify Assignee in writing of any of the foregoing rights or benefits acquired by Assignor after the date hereof. Concurrently with the filing of an application for any Patent, Assignor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Subsidiary Patent Collateral Assignment and Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Assignee, pursuant to which Assignor shall grant a security interest and conditional assignment to the extent of its interest in such Patent as provided herein to Assignee unless so doing would, in the reasonable judgment of Assignor, after due inquiry, result in the grant of a patent in the name of Assignee, in which event Assignor shall give written notice to Assignee as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Patent. SECTION 7. CERTAIN COVENANTS OF ASSIGNOR. Assignor shall: ----------------------------- (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Assignee of any change in Assignor's name, identity or corporate structure within 15 days of such change; (c) give Assignee 30 days' prior written notice of any change in Assignor's chief place of business or chief executive office or the office where Assignor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way impair or prevent the creation of a security 6 interest in, or the assignment of, Assignor's rights and interests in any property included within the definition of any Patents acquired under such contracts; (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, including without limitation entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each material Patent; (k) use consistent standards of high quality (which may be consistent with Assignor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Patents, including, to the extent applicable, in the operation and maintenance of its retail stores and other merchandising operations; and (l) upon any officer of Assignor obtaining knowledge thereof, promptly notify Assignee in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Assignor or Assignee to dispose of the Collateral or any portion thereof, or the rights and remedies of Assignee in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 8. CERTAIN INSPECTION RIGHTS. Subject to the terms of the ------------------------- Credit Agreement, Assignor hereby grants to Assignee and any and all of its employees, representatives and agents the right to visit Assignor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Patents (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Assignor and as often as may be reasonably requested. SECTION 9. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 9, Assignor shall continue to collect, at its own expense, all amounts due or to become due to Assignor in respect of the Collateral or any portion thereof. In connection with such collections, Assignor may take (and, at Assignee's direction, shall take) such action as Assignor or Assignee may deem necessary or advisable to enforce collection of such amounts; provided, however, that Assignee shall have the right at any time, -------- ------- upon the occurrence and during the continuation of an Event of Default and upon written notice to Assignor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest created, and the conditional assignment effected hereby, and to direct such obligors to make payment of all such amounts directly to Assignee, and, upon such notification and at the expense of Assignor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Assignor might have done. After receipt by Assignor of the notice from Assignee referred to in the proviso to ------- the preceding sentence, 7 (i) all amounts and proceeds (including checks and other instruments) received by Assignor in respect of amounts due to Assignor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Assignee hereunder, shall be segregated from other funds of Assignor and shall be forthwith paid over or delivered to Assignee in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 17, and (ii) Assignor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. SECTION 10. PATENT APPLICATIONS AND LITIGATION. ---------------------------------- (a) Assignor shall have the duty diligently to prosecute any patent application relating to any of the Patents specifically identified in Schedule A ---------- annexed hereto that is pending as of the date of this Agreement, to make application on any existing or future unpatented but patentable invention that is material to Assignor's business, and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all material Patents. Any expenses incurred in connection therewith shall be borne solely by Assignor. Assignor shall not abandon any right to file a patent application or any pending patent application or any material Patent without the prior written consent of Assignee. (b) Except as provided in Section 10(d) and notwithstanding Section 2, Assignor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, or other damage or reexamination or reissue proceedings as are in its reasonable business judgment necessary to protect the Collateral. Assignee shall provide, at Assignor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Assignor shall promptly, following its becoming aware thereof, notify Assignee of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 10(a) or 10(b) or regarding Assignor's interests in any material Collateral. Assignor shall provide to Assignee any information with respect thereto requested by Assignee. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Assignee shall have the right (but not the obligation) to bring suit, in the name of Assignor, Assignee or otherwise, to enforce any Patent and any license thereunder, in which event Assignor shall, at the request of Assignee, do any and all lawful acts and execute any and all documents required by Assignee in aid of such enforcement and Assignor shall promptly, upon demand, reimburse and indemnify Assignee as provided in Section 18 in connection with the exercise of its rights under this Section 10. To the extent that Assignee shall elect not to bring suit to enforce any Patent or any license thereunder as provided in this Section 10(d), Assignor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the 8 infringement of any of the Patents by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 11. NON-DISTURBANCE AGREEMENTS, ETC. If and to the extent -------------------------------- that Assignor is permitted to license the Collateral, Assignee shall enter into a non-disturbance agreement or other similar arrangement, at Assignor's request and expense, with Assignor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Assignee pursuant to which (a) Assignee shall agree not to disturb or interfere with such licensee's rights under its license agreement with Assignor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Assignee and the other terms of this Agreement. SECTION 12. REASSIGNMENT OF COLLATERAL. If (a) an Event of Default -------------------------- shall have occurred and, by reason of cure, waiver, modification, amendment or otherwise, no longer be continuing, (b) no other Event of Default shall have occurred and be continuing, (c) an assignment to Assignee of any rights, title and interests in and to the Collateral shall have been previously made and shall have become absolute and effective pursuant to Section 2, Section 13(f) or Section 16(b), and (d) the Secured Obligations shall not have become immediately due and payable, upon the written request of Assignor and the written consent of Assignee, Assignee shall promptly execute and deliver to Assignor such assignments as may be necessary to reassign to Assignor any such rights, title and interests as may have been assigned to Assignee as aforesaid, subject to any disposition thereof that may have been made by Assignee pursuant hereto; provided that, after giving effect to such reassignment, Assignee's security - -------- interest and conditional assignment granted pursuant to Section 1 and Section 2, as well as all other rights and remedies of Assignee granted hereunder, shall continue to be in full force and effect; and provided, further that the rights, -------- ------- title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Assignee and Permitted Liens. SECTION 13. ASSIGNEE APPOINTED ATTORNEY-IN-FACT. Assignor hereby ----------------------------------- irrevocably appoints Assignee as Assignor's attorney-in-fact, with full authority in the place and stead of Assignor and in the name of Assignor, Assignee or otherwise, from time to time in Assignee's discretion to take any action and to execute any instrument that Assignee may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Assignor's name on all applications, documents, papers and instruments necessary for Assignee in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; 9 (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Assignee may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Assignee with respect to any of the Collateral; (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Assignee in its sole discretion, any such payments made by Assignee to become obligations of Assignor to Assignee, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Assignee pursuant to Section 16(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Assignee were the absolute owner thereof for all purposes, and to do, at Assignee's option and Assignor's expense, at any time or from time to time, all acts and things that Assignee deems necessary to protect, preserve or realize upon the Collateral and Assignee's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Assignor might do. SECTION 14. ASSIGNEE MAY PERFORM. If Assignor fails to perform any -------------------- agreement contained herein, Assignee may itself perform, or cause performance of, such agreement, and the expenses of Assignee incurred in connection therewith shall be payable by Assignor under Section 18. SECTION 15. STANDARD OF CARE. The powers conferred on Assignee ---------------- hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Assignee shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Assignee shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Assignee accords its own property. SECTION 16. REMEDIES. If any Event of Default shall have occurred and -------- be continuing: (a) Assignee may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and 10 remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Assignor to, and Assignor hereby agrees that it will at its expense and upon request of Assignee forthwith, assemble all or part of the Collateral as directed by Assignee and make it available to Assignee at a place to be designated by Assignee that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Assignee deems appropriate, (iv) take possession of Assignor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Assignor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Assignor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Assignee's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Assignee may deem commercially reasonable. Assignee or any Lender or any Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Assignee, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Assignee at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Assignor, and Assignor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Assignor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Assignor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Assignee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Assignee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Assignor hereby waives any claims against Assignee arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Assignee accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Assignor shall be liable for the deficiency and the fees of any attorneys employed by Assignee to collect such deficiency. 11 (b) Upon written demand from Assignee, Assignor shall execute and deliver to Assignee an assignment or assignments of the Patents and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; provided that the failure of Assignor to comply with such -------- demand will not impair or affect the validity of the conditional assignment effected by Section 2 or its effectiveness upon notice by Assignee as specified in Section 2. Assignor agrees that such an assignment (including without limitation the conditional assignment effected by Section 2) and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Assignee (or any Lender or any Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. SECTION 17. APPLICATION OF PROCEEDS. All proceeds received by ----------------------- Assignee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 18. INDEMNITY AND EXPENSES. ---------------------- (a) Assignor agrees to indemnify Assignee and each Lender and Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Assignee's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Assignor shall pay to Assignee upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Assignee may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Assignee hereunder, or (iv) the failure by Assignor to perform or observe any of the provisions hereof. SECTION 19. CONTINUING ASSIGNMENT AND SECURITY INTEREST; TRANSFER OF -------------------------------------------------------- LOANS. This Agreement shall create a continuing security interest in, and - ----- conditional assignment of, the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Assignor, its successors and assigns, and (c) inure, together with the rights and remedies of Assignee hereunder, to the benefit of Assignee and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the 12 security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to Assignor. Upon any such termination Assignee will, at Assignor's expense, execute and deliver to Assignor such documents as Assignor shall reasonably request to evidence such termination. SECTION 20. ASSIGNEE AS ADMINISTRATIVE AGENT. -------------------------------- (a) Assignee has been appointed to act as Assignee hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Assignee shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Assignee shall exercise, or refrain from exercising, -------- any remedies provided for in Section 16 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 20(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Assignee for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 20(a). (b) Assignee shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Assignee under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Assignee under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Assignee under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Assignee under this Agreement, and the retiring or removed Assignee under this Agreement shall promptly (i) transfer to such successor Assignee all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Assignee under this Agreement, and (ii) execute and deliver to such successor Assignee such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Assignee of the security interests created hereunder, whereupon such retiring or removed Assignee shall be discharged from its duties and obligations under this Agreement. After any 13 retiring or removed Administrative Agent's resignation or removal hereunder as Assignee, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Assignee hereunder. SECTION 21. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Assignor therefrom, shall in any event be effective unless the same shall be in writing and signed by Assignee and, in the case of any such amendment or modification, by Assignor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 22. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 23. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Assignee in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 24. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 25. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 26. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise 14 defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 27. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL ---------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST ASSIGNOR ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT ASSIGNOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. Assignor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Assignor at its address provided in Section 22, such service being hereby acknowledged by Assignor to be sufficient for personal jurisdiction in any action against Assignor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of Assignee to bring proceedings against Assignor in the courts of any other jurisdiction. SECTION 28. WAIVER OF JURY TRIAL. ASSIGNOR AND ASSIGNEE HEREBY AGREE -------------------- TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Assignor and Assignee each acknowledge that this waiver is a material inducement for Assignor and Assignee to enter into a business relationship, that Assignor and Assignee have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Assignor and Assignee further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 29. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. 15 [Remainder of page intentionally left blank] 16 IN WITNESS WHEREOF, Assignor and Assignee have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. [NAME OF SUBSIDIARY], as Assignor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: Attention: S-1 SCHEDULE A TO PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention Inventor - ---------- ---------- --------- -------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor ----------- ----- ----------- --------- -------- STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared ____________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) SUBSIDIARY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT This SUBSIDIARY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between EMPIRE CANDLE, INC., a Kansas corporation ("ASSIGNOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "ASSIGNEE") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Assignee and Lenders have entered into a Credit Agreement dated as of April 21, 1998 with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Assignor has executed and delivered the Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Assignee for the benefit of Lenders and Interest Rate Exchangers pursuant to which Assignor has guarantied the prompt payment and performance when due of all Obligations of the Company under the Credit Agreement and under any Lender Interest Rate Agreements. D. Assignor has and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). E. Assignor is willing to grant to Assignee (i) a security interest in all such Collateral for the purpose of securing the complete and timely satisfaction of all of the Secured Obligations (as hereinafter defined) and (ii) effective upon the occurrence and during the continuation of an Event of Default, an assignment of Assignor's entire rights, title and interest in and to all such Collateral. 1 F. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Assignor shall have granted the security interests and made the conditional assignment and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor hereby agrees with Assignee as follows: SECTION 1. GRANT OF SECURITY. Assignor hereby assigns to Assignee, ----------------- and hereby grants to Assignee a security interest in, all of Assignor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Assignor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, owned by Assignor and all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, held or used by Assignor in whole or in part (including, without limitation, the patents and patent applications listed in Schedule A annexed hereto, as the same may be amended pursuant hereto ---------- from time to time), all rights (but not obligations) corresponding thereto (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of Assignor or in the name of Assignee or Lenders or Interest Rate Exchangers), and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interest assigned hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Assignor pertaining to patent applications and patents presently or in the future owned or used by third parties but, in the case of third parties which are not Affiliates of Assignor, only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third parties; (b) all general intangibles relating to the Patents; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (d) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Assignee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. 2 For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. CONDITIONAL ASSIGNMENT. In addition to, and not by way of ---------------------- limitation of, the granting of a security interest in the Collateral pursuant to Section 1, Assignor hereby, effective upon the occurrence of an Event of Default and upon written notice from Assignee, grants, sells, conveys, transfers, assigns and sets over to Assignee, for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers, all of Assignor's right, title and interest in and to the Collateral, including without limitation Assignor's right, title and interest in and to the Patents identified in Schedule A annexed ---------- hereto. SECTION 3. SECURITY FOR OBLIGATIONS. This Agreement secures, and the ------------------------ Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Assignor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Assignor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Assignee or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Assignor now or hereafter existing under this Agreement (all such obligations of Assignor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). SECTION 4. ASSIGNOR REMAINS LIABLE. Anything contained herein to the ----------------------- contrary notwithstanding, (a) Assignor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Assignee of any of its rights hereunder shall not release Assignor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Assignee shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Assignee be obligated to perform any of the obligations or duties of Assignor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 3 SECTION 5. REPRESENTATIONS AND WARRANTIES. Assignor represents and ------------------------------ warrants as follows: (a) Description of Collateral. A true and complete list of all ------------------------- Patents owned, held (whether pursuant to a license or otherwise) or used by Assignor, in whole or in part, as of the date of this Agreement is set forth in Schedule A annexed hereto. - ---------- (b) Validity and Enforceability of Collateral. Each Patent that is ----------------------------------------- material to Assignor's business is valid, subsisting and enforceable and Assignor is not aware of any pending or threatened claim by any third party that any such material Patent is invalid or unenforceable or that the use of any such material Patent violates the rights of any third person or of any basis for any such claim. (c) Ownership of Collateral. Except for the security interest and ----------------------- conditional assignment created by this Agreement, Assignor owns each material Patent free and clear of any Lien. Except such as may have been filed in favor of Assignee relating to this Agreement and of Foothill Capital Corporation (a release of which has been delivered to Administrative Agent), (i) no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office and (ii) no effective filing covering all or any part of the Collateral is on file in the United States Patent and Trademark Office. (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Assignor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at 2925 Fairfax Trafficway, Kansas City, Kansas 66115. Assignor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Assignor of the security interest and conditional assignment granted hereby, (ii) the execution, delivery or performance of this Agreement by Assignor, or (iii) the perfection of or the exercise by Assignee of its rights and remedies hereunder (except as may have been taken by or at the direction of Assignor). (f) Perfection. This Agreement, together with the filing of a ---------- financing statement describing the Collateral with the Secretary of State of the State of Kansas, Missouri and Nevada and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, creates a valid, perfected and first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. 4 (g) Other Information. All information heretofore, herein or ----------------- hereafter supplied to Assignee by or on behalf of Assignor with respect to the Collateral is accurate and complete in all material respects. SECTION 6. FURTHER ASSURANCES; NEW PATENTS AND PATENT APPLICATIONS. ------------------------------------------------------- (a) Assignor agrees that from time to time, at the expense of Assignor, Assignor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Assignee may request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Assignee to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Assignor will: (i) at the request of Assignee, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Assignee, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Assignee may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest and assignment to Assignee with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any reasonable time and upon request by Assignee, exhibit the Collateral to and allow inspection of the Collateral by Assignee, or persons designated by Assignee, and (v) at Assignee's request, appear in and defend any action or proceeding that may affect Assignor's title to or Assignee's security interest in all or any part of the Collateral. (b) Assignor hereby authorizes Assignee to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Assignor. Assignor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Assignor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Assignor hereby authorizes Assignee to modify this Agreement without obtaining Assignor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or ---------- interest in any existing Patent or any Patent acquired or developed by Assignor after the execution hereof or to delete any reference to any right, title or interest in any Patent in which Assignor no longer has or claims any right, title or interest. (d) Assignor will furnish to Assignee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Assignee may reasonably request, all in reasonable detail. (e) If Assignor shall hereafter obtain rights to any patentable inventions, or become entitled to the benefit of any patent application or patent or any reissue, division, 5 continuation, renewal, extension, or continuation-in-part of any Patent or any improvement on any Patent, the provisions of this Agreement shall automatically apply thereto. Assignor shall promptly notify Assignee in writing of any of the foregoing rights or benefits acquired by Assignor after the date hereof. Concurrently with the filing of an application for any Patent, Assignor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Subsidiary Patent Collateral Assignment and Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Assignee, pursuant to which Assignor shall grant a security interest and conditional assignment to the extent of its interest in such Patent as provided herein to Assignee unless so doing would, in the reasonable judgment of Assignor, after due inquiry, result in the grant of a patent in the name of Assignee, in which event Assignor shall give written notice to Assignee as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Patent. SECTION 7. CERTAIN COVENANTS OF ASSIGNOR. Assignor shall: ----------------------------- (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Assignee of any change in Assignor's name, identity or corporate structure within 15 days of such change; (c) give Assignee 30 days' prior written notice of any change in Assignor's chief place of business or chief executive office or the office where Assignor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way impair or prevent the creation of a security 6 interest in, or the assignment of, Assignor's rights and interests in any property included within the definition of any Patents acquired under such contracts; (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, including without limitation entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each material Patent; (k) use consistent standards of high quality (which may be consistent with Assignor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Patents, including, to the extent applicable, in the operation and maintenance of its retail stores and other merchandising operations; and (l) upon any officer of Assignor obtaining knowledge thereof, promptly notify Assignee in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Assignor or Assignee to dispose of the Collateral or any portion thereof, or the rights and remedies of Assignee in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 8. CERTAIN INSPECTION RIGHTS. Subject to the terms of the ------------------------- Credit Agreement, Assignor hereby grants to Assignee and any and all of its employees, representatives and agents the right to visit Assignor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Patents (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Assignor and as often as may be reasonably requested. SECTION 9. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 9, Assignor shall continue to collect, at its own expense, all amounts due or to become due to Assignor in respect of the Collateral or any portion thereof. In connection with such collections, Assignor may take (and, at Assignee's direction, shall take) such action as Assignor or Assignee may deem necessary or advisable to enforce collection of such amounts; provided, however, that Assignee shall have the right at any time, -------- ------- upon the occurrence and during the continuation of an Event of Default and upon written notice to Assignor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest created, and the conditional assignment effected hereby, and to direct such obligors to make payment of all such amounts directly to Assignee, and, upon such notification and at the expense of Assignor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Assignor might have done. After receipt by Assignor of the notice from Assignee referred to in the proviso to ------- the preceding sentence, 7 (i) all amounts and proceeds (including checks and other instruments) received by Assignor in respect of amounts due to Assignor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Assignee hereunder, shall be segregated from other funds of Assignor and shall be forthwith paid over or delivered to Assignee in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 17, and (ii) Assignor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. SECTION 10. PATENT APPLICATIONS AND LITIGATION. ---------------------------------- (a) Assignor shall have the duty diligently to prosecute any patent application relating to any of the Patents specifically identified in Schedule A ---------- annexed hereto that is pending as of the date of this Agreement, to make application on any existing or future unpatented but patentable invention that is material to Assignor's business, and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all material Patents. Any expenses incurred in connection therewith shall be borne solely by Assignor. Assignor shall not abandon any right to file a patent application or any pending patent application or any material Patent without the prior written consent of Assignee. (b) Except as provided in Section 10(d) and notwithstanding Section 2, Assignor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, or other damage or reexamination or reissue proceedings as are in its reasonable business judgment necessary to protect the Collateral. Assignee shall provide, at Assignor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Assignor shall promptly, following its becoming aware thereof, notify Assignee of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 10(a) or 10(b) or regarding Assignor's interests in any material Collateral. Assignor shall provide to Assignee any information with respect thereto requested by Assignee. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Assignee shall have the right (but not the obligation) to bring suit, in the name of Assignor, Assignee or otherwise, to enforce any Patent and any license thereunder, in which event Assignor shall, at the request of Assignee, do any and all lawful acts and execute any and all documents required by Assignee in aid of such enforcement and Assignor shall promptly, upon demand, reimburse and indemnify Assignee as provided in Section 18 in connection with the exercise of its rights under this Section 10. To the extent that Assignee shall elect not to bring suit to enforce any Patent or any license thereunder as provided in this Section 10(d), Assignor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the 8 infringement of any of the Patents by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. SECTION 11. NON-DISTURBANCE AGREEMENTS, ETC. If and to the extent -------------------------------- that Assignor is permitted to license the Collateral, Assignee shall enter into a non-disturbance agreement or other similar arrangement, at Assignor's request and expense, with Assignor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Assignee pursuant to which (a) Assignee shall agree not to disturb or interfere with such licensee's rights under its license agreement with Assignor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Assignee and the other terms of this Agreement. SECTION 12. REASSIGNMENT OF COLLATERAL. If (a) an Event of Default -------------------------- shall have occurred and, by reason of cure, waiver, modification, amendment or otherwise, no longer be continuing, (b) no other Event of Default shall have occurred and be continuing, (c) an assignment to Assignee of any rights, title and interests in and to the Collateral shall have been previously made and shall have become absolute and effective pursuant to Section 2, Section 13(f) or Section 16(b), and (d) the Secured Obligations shall not have become immediately due and payable, upon the written request of Assignor and the written consent of Assignee, Assignee shall promptly execute and deliver to Assignor such assignments as may be necessary to reassign to Assignor any such rights, title and interests as may have been assigned to Assignee as aforesaid, subject to any disposition thereof that may have been made by Assignee pursuant hereto; provided that, after giving effect to such reassignment, Assignee's security - -------- interest and conditional assignment granted pursuant to Section 1 and Section 2, as well as all other rights and remedies of Assignee granted hereunder, shall continue to be in full force and effect; and provided, further that the rights, -------- ------- title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Assignee and Permitted Liens. SECTION 13. ASSIGNEE APPOINTED ATTORNEY-IN-FACT. Assignor hereby ----------------------------------- irrevocably appoints Assignee as Assignor's attorney-in-fact, with full authority in the place and stead of Assignor and in the name of Assignor, Assignee or otherwise, from time to time in Assignee's discretion to take any action and to execute any instrument that Assignee may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Assignor's name on all applications, documents, papers and instruments necessary for Assignee in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; 9 (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Assignee may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Assignee with respect to any of the Collateral; (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Assignee in its sole discretion, any such payments made by Assignee to become obligations of Assignor to Assignee, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Assignee pursuant to Section 16(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Assignee were the absolute owner thereof for all purposes, and to do, at Assignee's option and Assignor's expense, at any time or from time to time, all acts and things that Assignee deems necessary to protect, preserve or realize upon the Collateral and Assignee's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Assignor might do. SECTION 14. ASSIGNEE MAY PERFORM. If Assignor fails to perform any -------------------- agreement contained herein, Assignee may itself perform, or cause performance of, such agreement, and the expenses of Assignee incurred in connection therewith shall be payable by Assignor under Section 18. SECTION 15. STANDARD OF CARE. The powers conferred on Assignee ---------------- hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Assignee shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Assignee shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Assignee accords its own property. SECTION 16. REMEDIES. If any Event of Default shall have occurred and -------- be continuing: (a) Assignee may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and 10 remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Assignor to, and Assignor hereby agrees that it will at its expense and upon request of Assignee forthwith, assemble all or part of the Collateral as directed by Assignee and make it available to Assignee at a place to be designated by Assignee that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Assignee deems appropriate, (iv) take possession of Assignor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Assignor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Assignor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Assignee's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Assignee may deem commercially reasonable. Assignee or any Lender or any Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Assignee, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Assignee at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Assignor, and Assignor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Assignor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Assignor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Assignee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Assignee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Assignor hereby waives any claims against Assignee arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Assignee accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Assignor shall be liable for the deficiency and the fees of any attorneys employed by Assignee to collect such deficiency. 11 (b) Upon written demand from Assignee, Assignor shall execute and deliver to Assignee an assignment or assignments of the Patents and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; provided that the failure of Assignor to comply with such -------- demand will not impair or affect the validity of the conditional assignment effected by Section 2 or its effectiveness upon notice by Assignee as specified in Section 2. Assignor agrees that such an assignment (including without limitation the conditional assignment effected by Section 2) and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Assignee (or any Lender or any Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. SECTION 17. APPLICATION OF PROCEEDS. All proceeds received by ----------------------- Assignee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 18. INDEMNITY AND EXPENSES. ---------------------- (a) Assignor agrees to indemnify Assignee and each Lender and Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Assignee's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Assignor shall pay to Assignee upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Assignee may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Assignee hereunder, or (iv) the failure by Assignor to perform or observe any of the provisions hereof. SECTION 19. CONTINUING ASSIGNMENT AND SECURITY INTEREST; TRANSFER OF -------------------------------------------------------- LOANS. This Agreement shall create a continuing security interest in, and - ----- conditional assignment of, the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Assignor, its successors and assigns, and (c) inure, together with the rights and remedies of Assignee hereunder, to the benefit of Assignee and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the 12 security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to Assignor. Upon any such termination Assignee will, at Assignor's expense, execute and deliver to Assignor such documents as Assignor shall reasonably request to evidence such termination. SECTION 20. ASSIGNEE AS ADMINISTRATIVE AGENT. -------------------------------- (a) Assignee has been appointed to act as Assignee hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Assignee shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Assignee shall exercise, or refrain from -------- exercising, any remedies provided for in Section 16 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 20(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Assignee for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 20(a). (b) Assignee shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Assignee under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Assignee under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Assignee under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Assignee under this Agreement, and the retiring or removed Assignee under this Agreement shall promptly (i) transfer to such successor Assignee all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Assignee under this Agreement, and (ii) execute and deliver to such successor Assignee such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Assignee of the security interests created hereunder, whereupon such retiring or removed Assignee shall be discharged from its duties and obligations under this Agreement. After any 13 retiring or removed Administrative Agent's resignation or removal hereunder as Assignee, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Assignee hereunder. SECTION 21. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Assignor therefrom, shall in any event be effective unless the same shall be in writing and signed by Assignee and, in the case of any such amendment or modification, by Assignor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 22. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 23. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Assignee in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 24. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 25. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 26. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise 14 defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 27. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL ---------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST ASSIGNOR ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT ASSIGNOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. Assignor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Assignor at its address provided in Section 22, such service being hereby acknowledged by Assignor to be sufficient for personal jurisdiction in any action against Assignor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of Assignee to bring proceedings against Assignor in the courts of any other jurisdiction. SECTION 28. WAIVER OF JURY TRIAL. ASSIGNOR AND ASSIGNEE HEREBY AGREE -------------------- TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Assignor and Assignee each acknowledge that this waiver is a material inducement for Assignor and Assignee to enter into a business relationship, that Assignor and Assignee have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Assignor and Assignee further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 29. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. 15 [Remainder of page intentionally left blank] 16 IN WITNESS WHEREOF, Assignor and Assignee have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. EMPIRE CANDLE, INC., as Assignor By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: __________________________ Name: __________________________ Title: __________________________ Notice Address: 555 Montgomery Street, 17th Floor San Francisco, CA 94111 Attention: Alan Wray S-1 SCHEDULE A TO PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention Inventor - ---------- ---------- --------- -------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor ----------- ----- ----------- --------- -------- STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared __________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) SUBSIDIARY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT This SUBSIDIARY PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between FORSTER INC., a Maine corporation ("ASSIGNOR"), and WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "ASSIGNEE") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined). PRELIMINARY STATEMENTS A. Assignee and Lenders have entered into a Credit Agreement dated as of April 21, 1998 with Diamond Brands Operating Corp., a Delaware corporation ("COMPANY"), DLJ Capital Funding, Inc., as Syndication Agent, and Morgan Stanley Senior Funding Inc., as Documentation Agent (said Credit Agreement, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "CREDIT AGREEMENT", the terms defined therein and not otherwise defined herein being used herein as therein defined), pursuant to which Lenders have made certain commitments, subject to the terms and conditions set forth in the Credit Agreement, to extend certain credit facilities to Company. B. Company may from time to time enter, or may from time to time have entered, into one or more Interest Rate Agreements (collectively, the "LENDER INTEREST RATE AGREEMENTS") with one or more Lenders (in such capacity, collectively, "INTEREST RATE EXCHANGERS"). C. Assignor has executed and delivered the Subsidiary Guaranty dated as of April 21, 1998 (said Subsidiary Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "SUBSIDIARY GUARANTY") in favor of Assignee for the benefit of Lenders and Interest Rate Exchangers pursuant to which Assignor has guarantied the prompt payment and performance when due of all Obligations of the Company under the Credit Agreement and under any Lender Interest Rate Agreements. D. Assignor has and may in the future have rights, title and interests in and to various Patents and other related Collateral (as such terms are hereinafter defined). E. Assignor is willing to grant to Assignee (i) a security interest in all such Collateral for the purpose of securing the complete and timely satisfaction of all of the Secured Obligations (as hereinafter defined) and (ii) effective upon the occurrence and during the continuation of an Event of Default, an assignment of Assignor's entire rights, title and interest in and to all such Collateral. 1 F. It is a condition precedent to the initial extensions of credit by Lenders under the Credit Agreement that Assignor shall have granted the security interests and made the conditional assignment and undertaken the obligations contemplated by this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce Lenders to make Loans and other extensions of credit under the Credit Agreement and to induce Interest Rate Exchangers to enter into Lender Interest Rate Agreements and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Assignor hereby agrees with Assignee as follows: SECTION 1. GRANT OF SECURITY. Assignor hereby assigns to Assignee, ----------------- and hereby grants to Assignee a security interest in, all of Assignor's right, title and interest in and to the following, in each case whether now or hereafter existing or in which Assignor now has or hereafter acquires an interest and wherever the same may be located (the "COLLATERAL"): (a) all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, owned by Assignor and all patents and patent applications and rights and interests in patents and patent applications under any domestic law that are presently, or in the future may be, held or used by Assignor in whole or in part (including, without limitation, the patents and patent applications listed in Schedule A annexed hereto, as the same may be amended pursuant hereto ---------- from time to time), all rights (but not obligations) corresponding thereto (including without limitation the right (but not the obligation) to sue for past, present and future infringements in the name of Assignor or in the name of Assignee or Lenders or Interest Rate Exchangers), and all re-issues, divisions, continuations, renewals, extensions and continuations-in-part thereof (all of the foregoing being collectively referred to as the "PATENTS"); it being understood that the rights and interest assigned hereby shall include, without limitation, all rights and interests pursuant to licensing or other contracts in favor of Assignor pertaining to patent applications and patents presently or in the future owned or used by third parties but, in the case of third parties which are not Affiliates of Assignor, only to the extent permitted by such licensing or other contracts and, if not so permitted, only with the consent of such third parties; (b) all general intangibles relating to the Patents; (c) all books, records, ledger cards, files, correspondence, computer programs, tapes, disks and related data processing software that at any time evidence or contain information relating to any of the Collateral or are otherwise necessary or helpful in the collection thereof or realization thereupon; and (d) all proceeds, products, rents and profits (including without limitation license royalties and proceeds of infringement suits) of or from any and all of the foregoing Collateral and, to the extent not otherwise included, all payments under insurance (whether or not Assignee is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral. 2 For purposes of this Agreement, the term "PROCEEDS" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary. SECTION 2. CONDITIONAL ASSIGNMENT. In addition to, and not by way ---------------------- of limitation of, the granting of a security interest in the Collateral pursuant to Section 1, Assignor hereby, effective upon the occurrence of an Event of Default and upon written notice from Assignee, grants, sells, conveys, transfers, assigns and sets over to Assignee, for its benefit and the ratable benefit of Lenders and Interest Rate Exchangers, all of Assignor's right, title and interest in and to the Collateral, including without limitation Assignor's right, title and interest in and to the Patents identified in Schedule A annexed ---------- hereto. SECTION 3. SECURITY FOR OBLIGATIONS. This Agreement secures, and ------------------------ the Collateral is collateral security for, the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. (S)362(a)), of all obligations and liabilities of every nature of Assignor now or hereafter existing under or arising out of or in connection with the Subsidiary Guaranty, the other Loan Documents and the Lender Interest Rate Agreements and all extensions or renewals thereof, whether for principal, interest (including without limitation interest that, but for the filing of a petition in bankruptcy with respect to Assignor, would accrue on such obligations), reimbursement of amounts drawn under Letters of Credit, payments for early termination of Lender Interest Rate Agreements, fees, expenses, indemnities or otherwise, whether voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later increased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from Assignee or any Lender or Interest Rate Exchanger as a preference, fraudulent transfer or otherwise (all such obligations and liabilities being the "UNDERLYING DEBT"), and all obligations of every nature of Assignor now or hereafter existing under this Agreement (all such obligations of Assignor, together with the Underlying Debt, being the "SECURED OBLIGATIONS"). SECTION 4. ASSIGNOR REMAINS LIABLE. Anything contained herein to ----------------------- the contrary notwithstanding, (a) Assignor shall remain liable under any contracts and agreements included in the Collateral, to the extent set forth therein, to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Assignee of any of its rights hereunder shall not release Assignor from any of its duties or obligations under the contracts and agreements included in the Collateral, and (c) Assignee shall not have any obligation or liability under any contracts and agreements included in the Collateral by reason of this Agreement, nor shall Assignee be obligated to perform any of the obligations or duties of Assignor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 3 SECTION 5. REPRESENTATIONS AND WARRANTIES. Assignor represents and ------------------------------ warrants as follows: (a) Description of Collateral. A true and complete list of all ------------------------- Patents owned, held (whether pursuant to a license or otherwise) or used by Assignor, in whole or in part, as of the date of this Agreement is set forth in Schedule A annexed hereto. - ---------- (b) Validity and Enforceability of Collateral. Each Patent that is ----------------------------------------- material to Assignor's business is valid, subsisting and enforceable and Assignor is not aware of any pending or threatened claim by any third party that any such material Patent is invalid or unenforceable or that the use of any such material Patent violates the rights of any third person or of any basis for any such claim. (c) Ownership of Collateral. Except for the security interest and ----------------------- conditional assignment created by this Agreement, Assignor owns each material Patent free and clear of any Lien. Except such as may have been filed in favor of Assignee relating to this Agreement and of Foothill Capital Corporation (a release of which has been delivered to Administrative Agent), (i) no effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any filing or recording office and (ii) no effective filing covering all or any part of the Collateral is on file in the United States Patent and Trademark Office. (d) Office Locations; Other Names. The chief place of business, the ----------------------------- chief executive office and the office where Assignor keeps its records regarding the Collateral is, and has been for the four month period preceding the date hereof, located at Mill Street, East Wilton, Maine 04234. Assignor has not in the past done, and does not now do, business under any other name (including any trade-name or fictitious business name). (e) Governmental Authorizations. No authorization, approval or other --------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (i) the grant by Assignor of the security interest and conditional assignment granted hereby, (ii) the execution, delivery or performance of this Agreement by Assignor, or (iii) the perfection of or the exercise by Assignee of its rights and remedies hereunder (except as may have been taken by or at the direction of Assignor). (f) Perfection. This Agreement, together with the filing of a ---------- financing statement describing the Collateral with the Secretary of State of the State of Maine and Nevada and the recording of this Agreement with the United States Patent and Trademark Office, which will be made, creates a valid, perfected and first priority security interest in the Collateral, securing the payment of the Secured Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been or will be duly made or taken. (g) Other Information. All information heretofore, herein or ----------------- hereafter supplied to Assignee by or on behalf of Assignor with respect to the Collateral is accurate and complete in all material respects. 4 SECTION 6. FURTHER ASSURANCES; NEW PATENTS AND PATENT APPLICATIONS. ------------------------------------------------------- (a) Assignor agrees that from time to time, at the expense of Assignor, Assignor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Assignee may request, in order to perfect and protect any security interest or conditional assignment granted or purported to be granted hereby or to enable Assignee to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Assignor will: (i) at the request of Assignee, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to Assignee, indicating that such Collateral is subject to the security interest granted hereby, (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as Assignee may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, (iii) use its best efforts to obtain any necessary consents of third parties to the grant and perfection of a security interest and assignment to Assignee with respect to any Collateral, (iv) subject to the terms of the Credit Agreement, at any reasonable time and upon request by Assignee, exhibit the Collateral to and allow inspection of the Collateral by Assignee, or persons designated by Assignee, and (v) at Assignee's request, appear in and defend any action or proceeding that may affect Assignor's title to or Assignee's security interest in all or any part of the Collateral. (b) Assignor hereby authorizes Assignee to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Assignor. Assignor agrees that a carbon, photographic or other reproduction of this Agreement or of a financing statement signed by Assignor shall be sufficient as a financing statement and may be filed as a financing statement in any and all jurisdictions. (c) Assignor hereby authorizes Assignee to modify this Agreement without obtaining Assignor's approval of or signature to such modification by amending Schedule A annexed hereto to include reference to any right, title or ---------- interest in any existing Patent or any Patent acquired or developed by Assignor after the execution hereof or to delete any refer ence to any right, title or interest in any Patent in which Assignor no longer has or claims any right, title or interest. (d) Assignor will furnish to Assignee from time to time statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Assignee may reasonably request, all in reasonable detail. (e) If Assignor shall hereafter obtain rights to any patentable inventions, or become entitled to the benefit of any patent application or patent or any reissue, division, continuation, renewal, extension, or continuation-in-part of any Patent or any improvement on any Patent, the provisions of this Agreement shall automatically apply thereto. Assignor shall promptly notify Assignee in writing of any of the foregoing rights or benefits acquired by Assignor after the date hereof. Concurrently with the filing of an application for any 5 Patent, Assignor shall execute, deliver and record in all places where this Agreement is recorded an appropriate Subsidiary Patent Collateral Assignment and Security Agreement, substantially in the form hereof, with appropriate insertions, or an amendment to this Agreement, in form and substance satisfactory to Assignee, pursuant to which Assignor shall grant a security interest and conditional assignment to the extent of its interest in such Patent as provided herein to Assignee unless so doing would, in the reasonable judgment of Assignor, after due inquiry, result in the grant of a patent in the name of Assignee, in which event Assignor shall give written notice to Assignee as soon as reasonably practicable and the filing shall instead be undertaken as soon as practicable but in no case later than immediately following the grant of the Patent. SECTION 7. CERTAIN COVENANTS OF ASSIGNOR. Assignor shall: ----------------------------- (a) not use or permit any Collateral to be used unlawfully or in violation of any provision of this Agreement or any applicable statute, regulation or ordinance or any policy of insurance covering the Collateral; (b) notify Assignee of any change in Assignor's name, identity or corporate structure within 15 days of such change; (c) give Assignee 30 days' prior written notice of any change in Assignor's chief place of business or chief executive office or the office where Assignor keeps its records regarding the Collateral; (d) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Collateral, except to the extent permitted under the Credit Agreement; (e) not sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except as permitted by the Credit Agreement; (f) except for the security interest and conditional assignment created by this Agreement, not create or suffer to exist any Lien upon or with respect to any of the Collateral to secure the indebtedness or other obligations of any Person; (g) diligently keep reasonable records respecting the Collateral and at all times keep at least one complete set of its records concerning substantially all of the Patents at its chief executive office or principal place of business; (h) not permit the inclusion in any contract to which it becomes a party of any provision that could or might in any way impair or prevent the creation of a security interest in, or the assignment of, Assignor's rights and interests in any property included within the definition of any Patents acquired under such contracts; 6 (i) take all steps necessary to protect the secrecy of all trade secrets relating to the products and services sold or delivered under or in connection with the Patents, including without limitation entering into confidentiality agreements with employees and labeling and restricting access to secret information and documents; (j) use proper statutory notice in connection with its use of each material Patent; (k) use consistent standards of high quality (which may be consistent with Assignor's past practices) in the manufacture, sale and delivery of products and services sold or delivered under or in connection with the Patents, including, to the extent applicable, in the operation and maintenance of its retail stores and other merchandising operations; and (l) upon any officer of Assignor obtaining knowledge thereof, promptly notify Assignee in writing of any event that may materially and adversely affect the value of the Collateral or any portion thereof, the ability of Assignor or Assignee to dispose of the Collateral or any portion thereof, or the rights and remedies of Assignee in relation thereto, including without limitation the levy of any legal process against the Collateral or any portion thereof. SECTION 8. CERTAIN INSPECTION RIGHTS. Subject to the terms of the ------------------------- Credit Agreement, Assignor hereby grants to Assignee and any and all of its employees, representatives and agents the right to visit Assignor's and any of its Affiliate's or subcontractor's plants, facilities and other places of business that are utilized in connection with the manufacture, production, inspection, storage or sale of products and services sold or delivered under any of the Patents (or which were so utilized during the prior six month period), and to inspect the quality control and all other records relating thereto upon reasonable notice to Assignor and as often as may be reasonably requested. SECTION 9. AMOUNTS PAYABLE IN RESPECT OF THE COLLATERAL. Except as -------------------------------------------- otherwise provided in this Section 9, Assignor shall continue to collect, at its own expense, all amounts due or to become due to Assignor in respect of the Collateral or any portion thereof. In connection with such collections, Assignor may take (and, at Assignee's direction, shall take) such action as Assignor or Assignee may deem necessary or advisable to enforce collection of such amounts; provided, however, that Assignee shall have the right at any time, upon the - -------- ------- occurrence and during the continuation of an Event of Default and upon written notice to Assignor of its intention to do so, to notify the obligors with respect to any such amounts of the existence of the security interest created, and the conditional assignment effected hereby, and to direct such obligors to make payment of all such amounts directly to Assignee, and, upon such notification and at the expense of Assignor, to enforce collection of any such amounts and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as Assignor might have done. After receipt by Assignor of the notice from Assignee referred to in the proviso to ------- the preceding sentence, (i) all amounts and proceeds (including checks and other instruments) received by Assignor in respect of amounts due to Assignor in respect of the Collateral or any portion thereof shall be received in trust for the benefit of Assignee hereunder, shall be segregated from other 7 funds of Assignor and shall be forthwith paid over or delivered to Assignee in the same form as so received (with any necessary endorsement) to be held as cash Collateral and applied as provided by Section 17, and (ii) Assignor shall not adjust, settle or compromise the amount or payment of any such amount or release wholly or partly any obligor with respect thereto or allow any credit or discount thereon. SECTION 10. PATENT APPLICATIONS AND LITIGATION. ---------------------------------- (a) Assignor shall have the duty diligently to prosecute any patent application relating to any of the Patents specifically identified in Schedule A ---------- annexed hereto that is pending as of the date of this Agreement, to make application on any existing or future unpatented but patentable invention that is material to Assignor's business, and to do any and all acts which are necessary or desirable to preserve and maintain all rights in all material Patents. Any expenses incurred in connection therewith shall be borne solely by Assignor. Assignor shall not abandon any right to file a patent application or any pending patent application or any material Patent without the prior written consent of Assignee. (b) Except as provided in Section 10(d) and notwithstanding Section 2, Assignor shall have the right to commence and prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement, unfair competition, or other damage or reexamination or reissue proceedings as are in its reasonable business judgment necessary to protect the Collateral. Assignee shall provide, at Assignor's expense, all reasonable and necessary cooperation in connection with any such suit, proceeding or action including, without limitation, joining as a necessary party. (c) Assignor shall promptly, following its becoming aware thereof, notify Assignee of the institution of, or of any adverse determination in, any proceeding (whether in the United States Patent and Trademark Office or any federal, state, local or foreign court) described in Section 10(a) or 10(b) or regarding Assignor's interests in any material Collateral. Assignor shall provide to Assignee any information with respect thereto requested by Assignee. (d) Anything contained herein to the contrary notwithstanding, upon the occurrence and during the continuation of an Event of Default, Assignee shall have the right (but not the obligation) to bring suit, in the name of Assignor, Assignee or otherwise, to enforce any Patent and any license thereunder, in which event Assignor shall, at the request of Assignee, do any and all lawful acts and execute any and all documents required by Assignee in aid of such enforcement and Assignor shall promptly, upon demand, reimburse and indemnify Assignee as provided in Section 18 in connection with the exercise of its rights under this Section 10. To the extent that Assignee shall elect not to bring suit to enforce any Patent or any license thereunder as provided in this Section 10(d), Assignor agrees to use all reasonable measures, whether by action, suit, proceeding or otherwise, to prevent the infringement of any of the Patents by others and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement. 8 SECTION 11. NON-DISTURBANCE AGREEMENTS, ETC. If and to the extent ------------------------------- that Assignor is permitted to license the Collateral, Assignee shall enter into a non-disturbance agreement or other similar arrangement, at Assignor's request and expense, with Assignor and any licensee of any Collateral permitted hereunder in form and substance satisfactory to Assignee pursuant to which (a) Assignee shall agree not to disturb or interfere with such licensee's rights under its license agreement with Assignor so long as such licensee is not in default thereunder and (b) such licensee shall acknowledge and agree that the Collateral licensed to it is subject to the security interest and conditional assignment created in favor of Assignee and the other terms of this Agreement. SECTION 12. REASSIGNMENT OF COLLATERAL. If (a) an Event of Default -------------------------- shall have occurred and, by reason of cure, waiver, modification, amendment or otherwise, no longer be continuing, (b) no other Event of Default shall have occurred and be continuing, (c) an assignment to Assignee of any rights, title and interests in and to the Collateral shall have been previously made and shall have become absolute and effective pursuant to Section 2, Section 13(f) or Section 16(b), and (d) the Secured Obligations shall not have become immediately due and payable, upon the written request of Assignor and the written consent of Assignee, Assignee shall promptly execute and deliver to Assignor such assignments as may be necessary to reassign to Assignor any such rights, title and interests as may have been assigned to Assignee as aforesaid, subject to any disposition thereof that may have been made by Assignee pursuant hereto; provided that, after giving effect to such reassignment, Assignee's security - -------- interest and conditional assignment granted pursuant to Section 1 and Section 2, as well as all other rights and remedies of Assignee granted hereunder, shall continue to be in full force and effect; and provided, further that the rights, -------- ------- title and interests so reassigned shall be free and clear of all Liens other than Liens (if any) encumbering such rights, title and interest at the time of their assignment to Assignee and Permitted Liens. SECTION 13. ASSIGNEE APPOINTED ATTORNEY-IN-FACT. Assignor hereby ----------------------------------- irrevocably appoints Assignee as Assignor's attorney-in-fact, with full authority in the place and stead of Assignor and in the name of Assignor, Assignee or otherwise, from time to time in Assignee's discretion to take any action and to execute any instrument that Assignee may deem necessary or advisable to accomplish the purposes of this Agreement, including without limitation: (a) while an Event of Default exists, to endorse Assignor's name on all applications, documents, papers and instruments necessary for Assignee in the use or maintenance of the Collateral; (b) while an Event of Default exists, to ask for, demand, collect, sue for, recover, compound, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (c) while an Event of Default exists, to receive, endorse and collect any drafts or other instruments, documents and chattel paper in connection with clause (b) above; 9 (d) while an Event of Default exists, to file any claims or take any action or institute any proceedings that Assignee may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of Assignee with respect to any of the Collateral; (e) while an Event of Default exists, to pay or discharge taxes or Liens (other than Liens permitted under this Agreement or the Credit Agreement) levied or placed upon or threatened against the Collateral, the legality or validity thereof and the amounts necessary to discharge the same to be determined by Assignee in its sole discretion, any such payments made by Assignee to become obligations of Assignor to Assignee, due and payable immediately without demand; and (f) upon the occurrence and during the continuation of an Event of Default, (i) to execute and deliver any of the assignments or documents requested by Assignee pursuant to Section 16(b), (ii) to grant or issue an exclusive or non-exclusive license to the Collateral or any portion thereof to any Person, and (iii) otherwise generally to sell, transfer, pledge, make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Assignee were the absolute owner thereof for all purposes, and to do, at Assignee's option and Assignor's expense, at any time or from time to time, all acts and things that Assignee deems necessary to protect, preserve or realize upon the Collateral and Assignee's security interest therein in order to effect the intent of this Agreement, all as fully and effectively as Assignor might do. SECTION 14. ASSIGNEE MAY PERFORM. If Assignor fails to perform any -------------------- agreement contained herein, Assignee may itself perform, or cause performance of, such agreement, and the expenses of Assignee incurred in connection therewith shall be payable by Assignor under Section 18. SECTION 15. STANDARD OF CARE. The powers conferred on Assignee ---------------- hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, Assignee shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. Assignee shall be deemed to have exercised reasonable care in the custody and preservation of Collateral in its possession if such Collateral is accorded treatment substantially equal to that which Assignee accords its own property. SECTION 16. REMEDIES. If any Event of Default shall have occurred -------- and be continuing: (a) Assignee may exercise in respect of the Collateral, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the "CODE") (whether or not the Code applies to the affected Collateral), and also may (i) require Assignor to, and Assignor hereby agrees that it will at 10 its expense and upon request of Assignee forthwith, assemble all or part of the Collateral as directed by Assignee and make it available to Assignee at a place to be designated by Assignee that is reasonably convenient to both parties, (ii) enter onto the property where any Collateral is located and take possession thereof with or without judicial process, (iii) prior to the disposition of the Collateral, store the Collateral or otherwise prepare the Collateral for disposition in any manner to the extent Assignee deems appropriate, (iv) take possession of Assignor's premises or place custodians in exclusive control thereof, remain on such premises and use the same for the purpose of taking any actions described in the preceding clause (iii) and collecting any Secured Obligation, (v) exercise any and all rights and remedies of Assignor under or in connection with the contracts related to the Collateral or otherwise in respect of the Collateral, including without limitation any and all rights of Assignor to demand or otherwise require payment of any amount under, or performance of any provision of, such contracts, and (vi) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of Assignee's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Assignee may deem commercially reasonable. Assignee or any Lender or any Interest Rate Exchanger may be the purchaser of any or all of the Collateral at any such sale and Assignee, as administrative agent for and representative of Lenders (but not any Lender or Lenders in its or their respective individual capacities unless Requisite Lenders shall otherwise agree in writing), shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply any of the Secured Obligations as a credit on account of the purchase price for any Collateral payable by Assignee at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Assignor, and Assignor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Assignor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to Assignor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Assignee shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Assignee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Assignor hereby waives any claims against Assignee arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale, even if Assignee accepts the first offer received and does not offer such Collateral to more than one offeree. If the proceeds of any sale or other disposition of the Collateral are insufficient to pay all the Secured Obligations, Assignor shall be liable for the deficiency and the fees of any attorneys employed by Assignee to collect such deficiency. (b) Upon written demand from Assignee, Assignor shall execute and deliver to Assignee an assignment or assignments of the Patents and such other documents as are necessary or appropriate to carry out the intent and purposes of this Agreement; provided that the failure of Assignor to comply with such -------- demand will not impair or affect the validity of 11 the conditional assignment effected by Section 2 or its effectiveness upon notice by Assignee as specified in Section 2. Assignor agrees that such an assignment (including without limitation the conditional assignment effected by Section 2) and/or recording shall be applied to reduce the Secured Obligations outstanding only to the extent that Assignee (or any Lender or any Interest Rate Exchanger) receives cash proceeds in respect of the sale of, or other realization upon, the Collateral. SECTION 17. APPLICATION OF PROCEEDS. All proceeds received by ----------------------- Assignee in respect of any sale of, collection from, or other realization upon all or any part of the Collateral shall be applied as provided in subsection 2.4D of the Credit Agreement. SECTION 18. INDEMNITY AND EXPENSES. ---------------------- (a) Assignor agrees to indemnify Assignee and each Lender and Interest Rate Exchanger from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Agreement and the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result solely from Assignee's or such Lender's or such Interest Rate Exchanger's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. (b) Assignor shall pay to Assignee upon demand the amount of any and all reasonable out-of-pocket costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that Assignee may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of Assignee hereunder, or (iv) the failure by Assignor to perform or observe any of the provisions hereof. SECTION 19. CONTINUING ASSIGNMENT AND SECURITY INTEREST; TRANSFER OF -------------------------------------------------------- LOANS. This Agreement shall create a continuing security interest in, and - ----- conditional assignment of, the Collateral and shall (a) remain in full force and effect until the payment in full of the Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon Assignor, its successors and assigns, and (c) inure, together with the rights and remedies of Assignee hereunder, to the benefit of Assignee and its successors, transferees and assigns. Without limiting the generality of the foregoing clause (c), but subject to the provisions of subsection 10.1 of the Credit Agreement, any Lender may assign or otherwise transfer any Loans held by it to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to Lenders herein or otherwise. Upon the payment in full of all Secured Obligations, the cancellation or termination of the Commitments and the cancellation or expiration of all outstanding Letters of Credit, the security interest and conditional assignment granted hereby shall terminate and all rights to the Collateral shall revert to Assignor. Upon any such termination Assignee will, at Assignor's expense, execute and deliver to Assignor such documents as Assignor shall reasonably request to evidence such termination. 12 SECTION 20. ASSIGNEE AS ADMINISTRATIVE AGENT. -------------------------------- (a) Assignee has been appointed to act as Assignee hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Assignee shall be obligated, and shall have the right hereunder, to make demands, to give notices, to exercise or refrain from exercising any rights, and to take or refrain from taking any action (including the release or substitution of Collateral), solely in accordance with this Agreement and the Credit Agreement; provided that Assignee shall exercise, or refrain from -------- exercising, any remedies provided for in Section 16 in accordance with the instructions of (i) Requisite Lenders or (ii) after payment in full of all Obligations under the Credit Agreement and the other Loan Documents, the holders of a majority of the aggregate notional amount (or, with respect to any Lender Interest Rate Agreement that has been terminated in accordance with its terms, the amount then due and payable (exclusive of expenses and similar payments but including any early termination payments then due) under such Lender Interest Rate Agreement) under all Lender Interest Rate Agreements (Requisite Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this Section 20(a), each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to realize upon any of the Collateral hereunder, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Assignee for the benefit of Lenders and Interest Rate Exchangers in accordance with the terms of this Section 20(a). (b) Assignee shall at all times be the same Person that is Administrative Agent under the Credit Agreement. Written notice of resignation by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute notice of resignation as Assignee under this Agreement; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Assignee under this Agreement; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Assignee under this Agreement. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the Credit Agreement by a successor Administrative Agent, that successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring or removed Assignee under this Agreement, and the retiring or removed Assignee under this Agreement shall promptly (i) transfer to such successor Assignee all sums, securities and other items of Collateral held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Assignee under this Agreement, and (ii) execute and deliver to such successor Assignee such amendments to financing statements, and take such other actions, as may be necessary or appropriate in connection with the assignment to such successor Assignee of the security interests created hereunder, whereupon such retiring or removed Assignee shall be discharged from its duties and obligations under this Agreement. After any retiring or removed Administrative Agent's resignation or removal hereunder as Assignee, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it under this Agreement while it was Assignee hereunder. 13 SECTION 21. AMENDMENTS; ETC. No amendment, modification, termination --------------- or waiver of any provision of this Agreement, and no consent to any departure by Assignor therefrom, shall in any event be effective unless the same shall be in writing and signed by Assignee and, in the case of any such amendment or modification, by Assignor. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. SECTION 22. NOTICES. Any notice or other communication herein ------- required or permitted to be given shall be given as provided in the Credit Agreement. For the purposes hereof, the address of each party hereto shall be as set forth under such party's name on the signature pages hereof or, as to either party, such other address as shall be designated by such party in a written notice delivered to the other party hereto. SECTION 23. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No ----------------------------------------------------- failure or delay on the part of Assignee in the exercise of any power, right or privilege hereunder shall impair such power, right or privilege or be construed to be a waiver of any default or acquiescence therein, nor shall any single or partial exercise of any such power, right or privilege preclude any other or further exercise thereof or of any other power, right or privilege. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 24. SEVERABILITY. In case any provision in or obligation ------------ under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. SECTION 25. HEADINGS. Section and subsection headings in this -------- Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose or be given any substantive effect. SECTION 26. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS AND -------------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE CODE PROVIDES THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. Unless otherwise defined herein or in the Credit Agreement, terms used in Articles 8 and 9 of the Uniform Commercial Code in the State of New York are used herein as therein defined. SECTION 27. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL ---------------------------------------------- JUDICIAL PROCEEDINGS BROUGHT AGAINST ASSIGNOR ARISING OUT OF OR 14 RELATING TO THIS AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT ASSIGNOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. Assignor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to Assignor at its address provided in Section 22, such service being hereby acknowledged by Assignor to be sufficient for personal jurisdiction in any action against Assignor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of Assignee to bring proceedings against Assignor in the courts of any other jurisdiction. SECTION 28. WAIVER OF JURY TRIAL. ASSIGNOR AND ASSIGNEE HEREBY AGREE -------------------- TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including without limitation contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Assignor and Assignee each acknowledge that this waiver is a material inducement for Assignor and Assignee to enter into a business relationship, that Assignor and Assignee have already relied on this waiver in entering into this Agreement and that each will continue to rely on this waiver in their related future dealings. Assignor and Assignee further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. In the event of litigation, this Agreement may be filed as a written consent to a trial by the court. SECTION 29. COUNTERPARTS. This Agreement may be executed in one or ------------ more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. [Remainder of page intentionally left blank] 15 IN WITNESS WHEREOF, Assignor and Assignee have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the date first written above. FORSTER INC., as Assignor By: ___________________________ Name: ___________________________ Title: ___________________________ Notice Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel WELLS FARGO BANK, N.A., as Administrative Agent By: ___________________________ Name: ___________________________ Title: ___________________________ Notice Address: 555 Montgomery Street, 17th Floor San Francisco, CA 9411 Attention: Alan Wray S-1 SCHEDULE A TO PATENT COLLATERAL ASSIGNMENT AND SECURITY AGREEMENT PATENTS ISSUED -------------- Patent No. Issue Date Invention Inventor - ---------- ---------- --------- -------- PATENTS PENDING --------------- Applicant's Date Application Name Filed No. Invention Inventor ---------- ----- ----------- --------- -------- STATE OF CALIFORNIA ) ) SS.: COUNTY OF ____________ ) On ___________, 19___, before me, ____________________, a Notary Public in and for said State, personally appeared _______________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) EX-4.13 9 TAX SHARING AGREEMENT --------------------- Tax Sharing Agreement ("Agreement") dated this twenty-first day of April, 1998, by and among Diamond Brands Incorporated ("Holdings") and Diamond Brands Operating Corp. (the "Borrower"). RECITALS -------- 1. Holdings, Borrower, and the Borrower subsidiaries listed on Schedule I hereto (each a "Subsidiary") are members of an affiliated group (the "Affiliated Group"), as defined in Section 1504(a) of the Internal Revenue Code of 1986 (the "Code"), for the taxable year beginning April 22, 1998. For purposes of applying the provisions of this Agreement, Borrower shall cause to be prepared hypothetical estimated and final United States federal income tax returns showing the estimated and final United States federal income tax liability of the Borrower and its Subsidiaries (the "Borrower Sub-Group") calculated as if the Borrower Sub-Group filed a separate consolidated return. All references in this Agreement to provisions of the Code or the Treasury Regulations promulgated thereunder shall include any corresponding successor provisions. 2. It is the intent and desire of the parties hereto that a method be established for allocating the federal and state consolidated tax liability of the Affiliated Group among Holdings on the one hand and the Borrower Sub-Group on the other, for reimbursing Holdings for payment of such tax liability, and to provide for the allocation and payment of any refund arising from a carry-back of losses or tax credits from subsequent taxable years. AGREEMENT --------- Now, therefore, in consideration of the mutual covenants and promises contained herein, the parties hereto agree as follows: 1. Filing of Returns. A U.S. consolidated income tax return and estimated tax returns shall be filed by Holdings for the taxable year ended December 31, 1998, and shall be filed for each subsequent taxable period in respect of which the Affiliated Group is required or permitted to file a consolidated tax return. Borrower shall and shall cause the other members of the Borrower Sub-Group to execute and file such consents, elections, and other documents as Holdings determines are required or appropriate for the proper filing of such returns and shall furnish to Holdings any and all information reasonably requested by Holdings in order to carry out the provisions of this Agreement. 2. Allocation of Tax Liability. Holdings and Borrower agree that the consolidated tax liability for each year beginning with 1998, determined in accordance with Treasury Regulations Section 1.1502-2, shall be apportioned among Holdings and the Borrower Sub-Group (each of them a "Member") in accordance with the provisions of Treasury Regulations Sections 1.1552-1(a)(2) and 1.1502-33(d)(2). Accordingly, the tax liability shall be allocated to each of the two Members on the basis of the percentage of the total tax that the tax of such Member if computed on a separate return would bear to the total amount of taxes for both Members so computed pursuant to Section 1552(a)(2) of the Code and Treasury Regulations Section 1.1552-1(a)(2). If a Member (the "Tax Attribute Member") is unable to absorb a tax attribute on a separate return basis in one year but is able to absorb that attribute on a separate return basis in a subsequent year a portion of the consolidated tax liability which otherwise would have been allocated to the Tax Attribute Member in the subsequent year under Treasury Regulation Section 1.1552-1(a)(2) will instead be reallocated to the other Member of the Affiliated Group using the principles of Treasury Regulations Section 1.1502-33(d)(2). For purposes of this Agreement, the consolidated tax liability shall include any liability for alternative minimum tax. 3. Payment of Tax. Borrower shall pay to Holdings no later than ten business days before the date on which the Affiliated Group's consolidated income tax return is required to be filed (taking account of any extensions thereof) an amount equal to the Borrower Sub-Group's allocated consolidated federal income tax liability as determined under paragraph 2 hereof, plus its ratable share of any interest or penalties shown due on the return (determined by multiplying such interest or penalties by a fraction, the numerator of which equals the portion of the Affiliated Group's tax liability allocated to the Borrower Sub-Group (before interest or penalties) and the denominator of which equals the Affiliated Group's tax liability (before interest or penalties)) less (where the Borrower Sub-Group is also a Tax Attribute Member) the amount of the consolidated tax liability which otherwise would have been allocated to the Tax Attribute Member pursuant to Treasury Regulation Section 1.1552-1(a)(2) but which was reallocated from the Tax Attribute Member pursuant to Treasury Regulation Section 1.1502- 33(d)(2) in a prior taxable year. 4. Carryforward/Carryback of Losses and Credits. If part or all of an unused loss or tax credit is allocated to a Member pursuant to Treasury Regulations Sections 1.1502-21T or 1.1502-79, and it is carried back or forward to a year in which such Member filed a separate return or a consolidated return with another affiliated group, any refund or reduction in tax liability arising from the carryback or carryover shall be retained by such Member. Notwithstanding the foregoing, Holdings shall determine whether an election shall be made (i) not to carry back any portion of any such loss arising in a consolidated return year (including any portion allocated to a Member under Treasury Regulations Section 1.1502-21T) in accordance with Code Section 172(b)(3), and (ii) to reattribute to itself any portion of any loss attributable to the disposition of the stock of the Borrower or any Subsidiary, to the extent permitted by Treasury Regulations Section 1.1502-20(g). The Borrower agrees to join with Holdings in filing any necessary elections under Treasury Regulations Section 1.1502-20(g). 5. Estimated Tax Payments. If the Affiliated Group is required to make estimated federal income tax payments (including payment due at the time any extension of time is sought for the filing of the Affiliated Group's federal income tax return), the Borrower shall, if requested by Holdings, pay to Holdings, no later than ten business days before the date each estimated tax payment is to be made by Holdings, that percentage of the estimated tax payment that equals the percentage which the estimated separate return tax liability of the Borrower Sub- Group bears to the aggregate of the Borrower Sub-Groups' estimated separate return tax liabilities for the taxable year (computed as provided in Treasury Regulations Section 1.1552- 1(a)(2)(ii)). Such estimates shall be determined by Holdings. Any estimated tax payments made by the Borrower under this paragraph 5 with respect to any taxable year shall be applied to reduce the amount, if any, owed by the Borrower under paragraph 3 hereof with respect to such year. Any excess of such estimated payments by the Borrower over the amount described in paragraph 3 for such year shall be repaid by Holdings to the Borrower no later than twenty business days after the date of filing of the consolidated return for such taxable year or, to the extent such excess represents all or a part of a tax refund to be received by the Affiliated Group, no later than twenty business days after the receipt of the refund. 6. Adjustments to Tax Liability. If the consolidated tax liability is adjusted for any taxable period, whether pursuant to an amended return, a claim for refund, a tax audit by the Internal Revenue Service or some other reason, the liability of each Member shall be recomputed to give effect to such adjustments, and in the case of a refund, Holdings shall make payment to the Borrower for the Borrower Sub-Group's share of the refund, determined in the same manner as in paragraph 2 above, within twenty business days after the refund is received by Holdings, and in the case of an increase in tax liability, the Borrower shall pay to Holdings the Borrower Sub-Group's allocable share of such increased tax liability (including interest and penalties) within ten business days after receiving notice of such liability from Holdings. The parties recognize that a recomputation of the consolidated tax liability for any taxable year under this paragraph 6 is not necessarily the final liability for such year, and such liability may be recomputed more than once. 7. New Members of Affiliated Group. If during a consolidated return period Holdings or the Borrower Sub-Group acquires or organizes another corporation that is required to be included in the Affiliated Group's consolidated return, then such corporation shall join in and be bound by this Agreement. 8. Termination of Agreement. This Agreement shall apply to all taxable periods as to which a consolidated return is filed by Holdings and the Borrower Sub-Group unless Holdings and the Borrower agree in writing to terminate the Agreement, except that this Agreement shall be terminated with respect to any Subsidiary that ceases to be included in the Affiliated Group but continues to be a corporation subject to federal income tax ("Former Member"). Notwithstanding any such termination, this Agreement shall continue in effect with respect to all taxable periods prior to termination, including any payments or refunds relating to such periods. 9. Post-Consolidated Return Period. Notwithstanding the termination of this Agreement with respect to one or more Subsidiaries, Holdings and any Former Member shall furnish each other with all information and assistance as shall reasonably be requested (including, without limitation, returns, supporting schedules, work papers, correspondence and other documents) relating to the tax liability of the Affiliated Group or such Former Member for any taxable year in which the Former Member was included in the Affiliated Group. Moreover, Holdings and the Former Member shall furnish each other with information and assistance required, and shall take all steps necessary, to apply for and obtain the benefit of any carryback of a net operating or capital loss or any investment, foreign tax or other credit of the Former Member to a taxable year in which the former Member was included in the Affiliated Group and a consolidated federal income tax return was filed. 10. Audits and Refund Claims. Holdings and a Former Member shall also consult and furnish each other with information concerning the status of any tax audit or tax refund claim relating to a taxable year in which the Former Member was included in the Affiliated Group and a consolidated federal income tax was filed. Holdings shall have the right to make the final determination as to the response of the Affiliated Group to any audit and shall have the sole right to control, at its own expense, any contest of any change proposed and any proposed disallowance of a refund claim by the Internal Revenue Service through the Appeals Office of the Internal Revenue Service and the courts in connection with any taxable year for which this Agreement is in effect. 11. Settlement of Disputes. A dispute or difference between Holdings and a Former Member with respect to the operation or interpretation of this Agreement shall be decided by three arbitrators. Holdings and the Former Member shall each select one arbitrator and the arbitrators selected by the parties shall select a third arbitrator. The decision of such arbitrators shall be final. The fees of such arbitrators shall be borne equally by Holdings and the Former Member. 12. Elections. Holdings shall have the sole authority to make any or all elections available under the Code, Treasury Regulations and any applicable state or local income tax code, law or statute. 13. State and Local Income Taxes. The principles underlying the rights and obligations hereunder of the Members in respect of federal income taxes shall be applied in respect of any state or local tax (however denominated) based on or measured by all or any part of the net income or loss of the Affiliated Group or several of its Members (a "Combined Tax"). All of the procedural and timing requirements of this Agreement applicable to federal income taxes shall be equally applicable to any Combined Tax, with appropriate adjustments thereto to reflect the differences, if any, in corresponding provisions of the applicable income tax code, law or statute governing any such Combined Tax and any administrative provisions relating thereto. 14. Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein. No alteration, amendment or modification of any of the terms of this Agreement shall be valid unless made by an instrument signed in writing by an authorized officer of each party and in accordance with the provisions set forth in Section 7.15 of the Credit Agreement, dated as of April 21, 1998 (as amended, supplement or otherwise modified from time to time) among the Borrower, the lenders from time to time party thereto, Wells Fargo Bank, N.A., as administrative agent, DLJ Capital Funding, Inc., as syndication agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent. 15. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of each party hereto and its respective successors and assigns. 16. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York. 17. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused their names to be subscribed and executed by their respective authorized officers on the date first appearing above. DIAMOND BRANDS INCORPORATED By:________________________ Name: Title: DIAMOND BRANDS OPERATING CORP. By:__________________________ Name: Title: SCHEDULE I ---------- Subsidiaries ------------ Forster, Inc. Empire Candle, Inc. EX-4.14 10 TAX SHARING AGREEMENT --------------------- Tax Sharing Agreement ("Agreement") dated this twenty-first day of April, 1998, by and among Diamond Brands Operating Corp. (the "Borrower") and each of the subsidiaries listed on Schedule I hereto (each a "Subsidiary"). RECITALS -------- 1. For purposes of applying the provisions of this Agreement, Borrower and the Subsidiaries shall be treated as the only members ("Members") of an affiliated group (the "Affiliated Group"), as defined in Section 1504(a) of the Internal Revenue Code of 1986 (the "Code"), for the taxable year beginning April 22, 1998, of which Borrower is the parent. All references in this Agreement to provisions of the Code or the Treasury Regulations promulgated thereunder shall include any corresponding successor provisions. 2. It is the intent and desire of the parties hereto that a method be established for allocating the federal and state consolidated tax liability of the Affiliated Group among its Members, for reimbursing Borrower for payment of such tax liability, and to provide for the allocation and payment of any refund arising from a carry-back of losses or tax credits from subsequent taxable years. AGREEMENT --------- Now, therefore, in consideration of the mutual covenants and promises contained herein, the parties hereto agree as follows: 1. Allocation of Tax Liability. Borrower and Subsidiaries agree that the consolidated tax liability for each year beginning with 1998, determined in accordance with Treasury Regulations Section 1.1502-2, shall be apportioned among them in accordance with the provisions of Treasury Regulations Sections 1.1552-1(a)(2) and 1.1502-33(d)(2). Accordingly, the tax liability shall be allocated to the several Members on the basis of the percentage of the total tax that the tax of such Member if computed on a separate return would bear to the total amount of taxes for all Members so computed pursuant to Section 1552(a)(2) of the Code and Treasury Regulations Section 1.1552-1(a)(2). If a Member (the "Tax Attribute Member") is unable to absorb a tax attribute on a separate return basis in one year but is able to absorb that attribute on a separate return basis in a subsequent year a portion of the consolidated tax liability which otherwise would have been allocated to the Tax Attribute Member in the subsequent year under Treasury Regulation Section 1.1552-1(a)(2) will instead be reallocated among the other Members of the Affiliated Group, using the principles of Treasury Regulations Section 1.1502- 33(d)(2). For purposes of this Agreement, the consolidated tax liability shall include any liability for alternative minimum tax. 3. Payment of Tax. Each Subsidiary shall pay to Borrower no later than ten business days before the date on which the Affiliated Group's consolidated income tax return is required to be filed (taking account of any extensions thereof) an amount equal to the Subsidiary's allocated consolidated federal income tax liability as determined under paragraph 2 hereof, plus its ratable share of any interest or penalties shown due on the return (determined by multiplying such interest or penalties by a fraction, the numerator of which equals the portion of the Affiliated Group's tax liability allocated to such Member (before interest or penalties) and the denominator of which equals the Affiliated Group's tax liability (before interest or penalties)) less (in the case of a Tax Attribute Member) the amount of the consolidated tax liability which otherwise would have been allocated to the Tax Attribute Member pursuant to Treasury Regulation Section 1.1552-1(a)(2) but which was reallocated from the Tax Attribute Member pursuant to Treasury Regulation Section 1.1502-33(d)(2) in a prior taxable year. 4. Carryforward/Carryback of Losses and Credits. If part or all of an unused loss or tax credit is allocated to a Member pursuant to Treasury Regulations Sections 1.1502-21T or 1.1502-79, and it is carried back or forward to a year in which such Member filed a separate return or a consolidated return with another affiliated group, any refund or reduction in tax liability arising from the carryback or carryover shall be retained by such Member. Notwithstanding the foregoing, Borrower shall determine whether an election shall be made (i) not to carry back any portion of any such loss arising in a consolidated return year (including any portion allocated to a Member under Treasury Regulations Section 1.1502-21T) in accordance with Code Section 172(b)(3), and (ii) to reattribute to itself any portion of any loss attributable to the disposition of the stock of a Subsidiary, to the extent permitted by Treasury Regulations Section 1.1502-20(g). Each Subsidiary agrees to join with Borrower in filing any necessary elections under Treasury Regulations Section 1.1502-20(g). 5. Estimated Tax Payments. If the Affiliated Group is required to make estimated federal income tax payments (including (i) payment due at the time any extension of time is sought for the filing of the Affiliated Group's federal income tax return and (ii) any estimated tax payments pursuant to any other tax sharing agreement), each Subsidiary shall, if requested by Borrower, pay to Borrower, no later than ten business days before the date each estimated tax payment is to be made by Borrower, that percentage of the estimated tax payment that equals the percentage which the estimated separate return tax liability of such Subsidiary bears to the aggregate of the Members' estimated separate return tax liabilities for the taxable year (computed as provided in Treasury Regulations Section 1.1552-1(a)(2)(ii)). Such estimates shall be determined by Borrower. Any estimated tax payments made by a Subsidiary under this paragraph 5 with respect to any taxable year shall be applied to reduce the amount, if any, owed by the Subsidiary under paragraph 3 hereof with respect to such year. Any excess of such estimated payments by a Subsidiary over the amount described in paragraph 3 for such year shall be repaid by Borrower to the Subsidiary no later than twenty business days after the date of filing of the consolidated return for such taxable year or, to the extent such excess represents all or a part of a tax refund to be received by the Affiliated Group, no later than twenty business days after the receipt of the refund. 6. Adjustments to Tax Liability. If the consolidated tax liability is adjusted for any taxable period, whether pursuant to an amended return, a claim for refund, a tax audit by the Internal Revenue Service or some other reason, the liability of each Member shall be recomputed to give effect to such adjustments, and in the case of a refund, Borrower shall make payment to each Member for its share of the refund, determined in the same manner as in paragraph 2 above, within twenty business days after the refund is received by Borrower, and in the case of an increase in tax liability, each Member shall pay to Borrower its allocable share of such increased tax liability (including interest and penalties) within ten business days after receiving notice of such liability from Borrower. The parties recognize that a recomputation of the consolidated tax liability for any taxable year under this paragraph 6 is not necessarily the final liability for such year, and such liability may be recomputed more than once. 7. New Members of Affiliated Group. If during a consolidated return period Borrower or any Subsidiary acquires or organizes another corporation that is required to be included in the Affiliated Group's consolidated return, then such corporation shall join in and be bound by this Agreement. 8. Termination of Agreement. This Agreement shall apply to all taxable periods as to which a consolidated return is filed by Borrower and any Subsidiary unless Borrower and the Subsidiaries agree in writing to terminate the Agreement, except that this Agreement shall be terminated with respect to any Subsidiary that ceases to be included in the Affiliated Group but continues to be a corporation subject to federal income tax ("Former Member"). Notwithstanding any such termination, this Agreement shall continue in effect with respect to all taxable periods prior to termination, including any payments or refunds relating to such periods. 9. Post-Consolidated Return Period. Notwithstanding the termination of this Agreement with respect to one or more Subsidiaries, Borrower and any Former Member shall furnish each other with all information and assistance as shall reasonably be requested (including, without limitation, returns, supporting schedules, work papers, correspondence and other documents) relating to the tax liability of the Affiliated Group or such Former Member for any taxable year in which the Former Member was included in the Affiliated Group. Moreover, Borrower and the Former Member shall furnish each other with information and assistance required, and shall take all steps necessary, to apply for and obtain the benefit of any carryback of a net operating or capital loss or any investment, foreign tax or other credit of the Former Member to a taxable year in which the former Member was included in the Affiliated Group and a consolidated federal income tax return was filed with respect to the income of the Affiliated Group. 10. Audits and Refund Claims. Borrower and a Former Member shall also consult and furnish each other with information concerning the status of any tax audit or tax refund claim relating to a taxable year in which the Former Member was included in the Affiliated Group and a consolidated federal income tax was filed with respect to the income of the Affiliated Group. Borrower shall have the right to make the final determination as to the response of the Affiliated Group to any audit and shall have the sole right to control, at its own expense, any contest of any change proposed and any proposed disallowance of a refund claim by the Internal Revenue Service through the Appeals Office of the Internal Revenue Service and the courts in connection with any taxable year for which this Agreement is in effect. 11. Settlement of Disputes. A dispute or difference between Borrower and a Former Member with respect to the operation or interpretation of this Agreement shall be decided by three arbitrators. Borrower and the Former Member shall each select one arbitrator and the arbitrators selected by the parties shall select a third arbitrator. The decision of such arbitrators shall be final. The fees of such arbitrators shall be borne equally by Borrower and the Former Member. 12. Elections. Borrower shall have the sole authority to make any or all elections available under the Code, Treasury Regulations and any applicable state or local income tax code, law or statute. 13. State and Local Income Taxes. The principles underlying the rights and obligations hereunder of the Members in respect of federal income taxes shall be applied in respect of any state or local tax (however denominated) based on or measured by all or any part of the net income or loss of the Affiliated Group or several of its Members (a "Combined Tax"). All of the procedural and timing requirements of this Agreement applicable to federal income taxes shall be equally applicable to any Combined Tax, with appropriate adjustments thereto to reflect the differences, if any, in corresponding provisions of the applicable income tax code, law or statute governing any such Combined Tax and any administrative provisions relating thereto. 14. Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein. No alteration, amendment or modification of any of the terms of this Agreement shall be valid unless made by an instrument signed in writing by an authorized officer of each party and in accordance with the provisions set forth in Section 7.15 of the Credit Agreement, dated as of April 21, 1998 (as amended, supplement or otherwise modified from time to time) among the Borrower, the lenders from time to time party thereto, Wells Fargo Bank, N.A., as administrative agent, DLJ Capital Funding, Inc., as syndication agent, and Morgan Stanley Senior Funding, Inc., as Documentation Agent. 15. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of each party hereto and its respective successors and assigns. 16. Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of New York. 17. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused their names to be subscribed and executed by their respective authorized officers on the date first appearing above. DIAMOND BRANDS OPERATING CORP. By:___________________________ Name: Title: EACH OF THE SUBSIDIARIES LISTED ON SCHEDULE I HERETO By:_________________________ Name: Title: SCHEDULE I ---------- Subsidiaries ------------ Forster, Inc. Empire Candle, Inc. EX-10.3 11 Mr. Thomas Knuesel April 21, 1998 Diamond Brands Incorporated 1800 Cloquet Avenue Cloquet, MN 55720-2141 Dear Mr. Knuesel: Reference is made to the Employment (Change of Control) Agreement dated as of November 1, 1997 (the "Employment Agreement") between Diamond Brands Incorporated, a Minnesota corporation (the "Company"), and you. This letter is to amend the Employment Agreement as follows: Subsection (d)(ii) of Section 4 is hereby amended to be and read in its entirety as follows: In lieu of any further salary payments for periods subsequent to the date of termination, DBI shall pay a severance payment (the "Severance Payment") equal to (X) one times Employee's regular base salary in effect immediately prior to the Change in Control or in effect at the time the Notice of Termination is given, whichever is greater, plus (Y) an amount equal to Employee's annual target bonus in effect immediately prior to the Change in Control or in effect at the time the Notice of Termination is given, whichever is greater. The Severance Payment shall be paid on a monthly basis without interest, and amounts due hereunder shall be satisfied by 12 consecutive monthly payments, with the first payment to occur within 30 days of Employee's termination of employment with DBI. Such Severance Payments will be offset by any compensation received by Employee under new employment during the 12 months after leaving DBI. Section 1 is hereby amended to be and read in its entirety as follows: This Agreement shall continue in effect for a period ending upon the satisfaction in full of the DBI's obligations pursuant to Section 4 of this Agreement, provided, however, that the provisions of Sections 5 and 6 of this Agreement shall survive the termination of this Agreement. Notwithstanding anything herein to the contrary, the Employee's employment shall be at all times at the will of DBI, and nothing in this Agreement shall prohibit or limit the right of DBI or Employee, to terminate the employment of Employee for any reason or for no reason. IN WITNESS WHEREOF, the parties hereto have executed this agreement on the date first written above. DIAMOND BRANDS INCORPORATED By: /s/ Naresh K. Nakra ------------------------------ Its: President ----------------------------- /s/ Thomas Knuesel --------------------------------- Thomas Knuesel 2 EX-10.5 12 Mr. John Young April 21, 1998 Diamond Brands Incorporated 1800 Cloquet Avenue Cloquet, MN 55720-2141 Dear Mr. Young: Reference is made to the Employment (Change of Control) Agreement dated as of November 1, 1997 (the "Employment Agreement") between Diamond Brands Incorporated, a Minnesota corporation (the "Company"), and you. This letter is to amend the Employment Agreement as follows: Subsection (d)(ii) of Section 4 is hereby amended to be and read in its entirety as follows: In lieu of any further salary payments for periods subsequent to the date of termination, DBI shall pay a severance payment (the "Severance Payment") equal to (X) one times Employee's regular base salary in effect immediately prior to the Change in Control or in effect at the time the Notice of Termination is given, whichever is greater, plus (Y) an amount equal to Employee's annual target bonus in effect immediately prior to the Change in Control or in effect at the time the Notice of Termination is given, whichever is greater. The Severance Payment shall be paid on a monthly basis without interest, and amounts due hereunder shall be satisfied by 12 consecutive monthly payments, with the first payment to occur within 30 days of Employee's termination of employment with DBI. Such Severance Payments will be offset by any compensation received by Employee under new employment during the 12 months after leaving DBI. Section 1 is hereby amended to be and read in its entirety as follows: This Agreement shall continue in effect for a period ending upon the satisfaction in full of the DBI's obligations pursuant to Section 4 of this Agreement, provided, however, that the provisions of Sections 5 and 6 of this Agreement shall survive the termination of this Agreement. Notwithstanding anything herein to the contrary, the Employee's employment shall be at all times at the will of DBI, and nothing in this Agreement shall prohibit or limit the right of DBI or Employee, to terminate the employment of Employee for any reason or for no reason. IN WITNESS WHEREOF, the parties hereto have executed this agreement on the date first written above. DIAMOND BRANDS INCORPORATED By: /s/ Naresh K. Nakra ----------------------------- Its: President ---------------------------- /s/ John Young -------------------------------- John Young 2 EX-10.18 13 NON-QUALIFIED STOCK OPTION -------------------------- THIS STOCK OPTION is granted this 21st day of April, 1998, by DIAMOND BRANDS INCORPORATED, a Minnesota corporation (the "Company") to Thomas Knuesel (the "Optionee"). WITNESSETH: ---------- WHEREAS, the Board of Directors of the Company is of the opinion that the interests of the Company and its subsidiaries will be advanced by encouraging and enabling those employees of the Company and its subsidiaries, upon whose judgment, initiative and efforts the Company is largely dependent for the successful conduct of the business of the Company and its subsidiaries, to acquire or increase their proprietary interest in the Company, thus providing them with a more direct stake in its welfare and assuring a closer identification of their interests with those of the Company; and WHEREAS, the Board believes that the acquisition of such an interest in the Company will stimulate such employees and strengthen their desire to remain with the Company or one of its subsidiaries; NOW, THEREFORE, in consideration of the premises, the Company hereby grants this non-qualified stock option to the Optionee on the terms hereinafter expressed. 1. Option Grant. The Company hereby grants to the Optionee an ------------ option to purchase 47,701 shares of Common Stock of the Company at an exercise price equal to $ 13.976 per share. 2. Time of Exercise. This option may be exercised (in the manner ---------------- provided in paragraph 3 hereof) in whole or in part, and from time to time after the date hereof, subject to paragraph 7 hereunder and the following limitations: (a) This option shall vest and become exercisable as to twenty-five percent (25%) of the shares subject to this option on the first anniversary of the date hereof and shall vest and become exercisable as to 1/36 of the shares subject to this option at the end of each month thereafter. (b) This option may not be exercised after 10 years from the date hereof. (c) Nothing in this option shall confer on the Optionee any right to continue in the employ of the Company or any of its subsidiaries or to interfere with the right of the Company or of such subsidiary to terminate the Optionee's employment at any time. (d) Any unvested portion of this option which, at the time of the death or disability of Optionee or at the time of any change in control (as defined below), is not yet fully vested shall automatically become fully vested in Optionee or his estate, as the case may be. For purposes of this section, the term "change in control" shall mean and refer to any change in the equityholders of the Company which results in the majority of the outstanding stock of the Company no longer being held by Seaver, Kent & Company, LLC or affiliates thereof, other than as a result of an initial public offering of the common stock of the Company. 3. Method of Exercise. This option may be exercised only by 30 ------------------ days' written notice delivered to the Treasurer of the Company and accompanied by: (a) The full purchase price of the shares purchased payable by a certified or cashier's check payable to the order of the Company or such other form of consideration acceptable to the Board of Directors of the Company; and (b) Such other documents or representations (including without limitation representations as to the intention of the Optionee, or the purchaser under paragraph 4 below, to acquire the shares for investment) as the Company may reasonably request in order to comply with securities, tax or other laws then applicable to the exercise of the option. 4. Non-Transferability; Death. This option is not transferable by -------------------------- the Optionee otherwise than by will or the laws of descent and distribution and is exercisable during the Optionee's lifetime only by him. If the Optionee dies while in the employ of the Company or one of its subsidiaries, this option may be exercised (but not later than 10 years from the date hereof) by his estate or the person to whom the option passes by will or the laws of descent and distribution, but only to the extent that the Optionee could have exercised this option on the date of his death. 5. Registration. The Company shall not be required to issue or ------------ deliver any certificate for its Common Shares purchased upon the exercise of this option prior to the admission of such shares to listing on any stock exchange on which shares may at that time be listed. In the event of the exercise of this option with respect to any shares subject hereto, if other Common Shares of the Company are then listed, the Company shall make prompt application for such listing with respect to the shares acquired upon the exercise hereof. If at any time during the option period the Company shall be advised by its counsel that shares deliverable upon exercise of the option are required to be registered under the Securities Act of 1933, as amended, or that delivery of the shares must be accompanied or preceded by a prospectus meeting the requirements of the Act, the Company will use its best efforts to effect such registration or provide such prospectus not later than a reasonable time following each exercise of this option, but delivery of shares by the Company may be deferred until registration is effected or a prospectus is available. The Company shall be under no obligation to register the shares deliverable upon exercise of this option unless it shall be advised by its counsel that such shares are required to be so registered. The Optionee shall have no interest in the shares covered by this option unless and until certificates for the shares are issued following the exercise of this option. 6. Withholding. The Company shall have the right to require, prior ----------- to the issuance or delivery of any shares hereunder, payment by the Optionee of any federal, state or local income taxes required by law to be withheld upon the exercise of all or any part of this Option. The Company may, in its discretion and subject to such rules as it may adopt as are necessary to prevent the withholding from being subject to Section 16(b) of the Securities Exchange Act of 1934, permit the Optionee to satisfy any tax withholding obligation associated with the exercise of this option, in whole or in part, by electing to have the Company withhold from the shares otherwise deliverable as a result of such option exercise Common Shares having a value (based on their Fair Market Value on the date of delivery) equal to the amount required to be withheld. 7. Termination of Employment. Upon termination of the Optionee's ------------------------- employment with the Company ("Termination"), all non-vested options granted hereunder shall be forfeited and all -2- vested options granted hereunder shall only be exercisable for a period of thirty days following the Termination. 8. Subject to Stockholders Agreement. Shares of Common Stock of the --------------------------------- Company issued upon exercise of this option are subject to all of the terms and conditions set forth in the Stockholders Agreement dated as of April 21, 1998, by and between the Company, Seaver Kent - TPG Partners, L.P., Seaver Kent I Parallel, L.P., Naresh Nakra and the Stockholders named therein and Optionee. * * * -3- IN WITNESS WHEREOF, the Company has caused this non-qualified stock option to be executed on the date first above written. DIAMOND BRANDS INCORPORATED By /s/ Naresh K. Nakra ----------------------------- Its President ---------------------------- ACCEPTED: /s/ Thomas W. Knuesel - ------------------------ OPTIONEE -4- EX-10.28 14 MANAGEMENT ADVISORY AGREEMENT THIS MANAGEMENT AGREEMENT (this "Agreement"), dated as of April 21, 1998, is entered into by and between DIAMOND BRANDS INCORPORATED, a Minnesota corporation ("DBI"), and SEAVER KENT & COMPANY, LLC ("SKC"). In consideration of the mutual covenants and agreement set forth below, the parties hereto agree as follows: 1. SKC Management Duties. SKC shall provide general management services to DBI, as reasonably requested by DBI, which shall include, without limitation, the following services (the "SKC Services"): (a) Assist with the development and implementation of a long-term strategic business plan for the expansion and maintenance of DBI's business and operations (the "Business"); (b) Assist with the development of short-term and long-term financial and operational budgets for the Business; (c) Assist with the coordination of DBI's credit arrangements; and (d) Assist with the identification of operational opportunities. 2. Performance of Services. SKC shall exercise due diligence and due care in the performance of the services hereunder. 3. Compensation for Services. (a) For so long as this Agreement shall remain in effect, SKC shall receive from DBI (unless waived in writing by SKC) a management fee, which, on an annual basis shall be equal to the greater of (i) 0.05% of the budgeted consolidated net sales of DBI, as reflected in DBI's budget approved by its Board of Directors and (ii) $200,000. Such fee will be paid in advance within the first ten days of each calendar month in an amount to the greater of (x) the amount described in (i) above for such month or (y) $16,660: (b) In addition to the foregoing, DBI shall reimburse SKC for all out-of-pocket expenses (including travel and lodging expenses) SKC may reasonably incur in connection with the performance of the SKC Services. 4. Independent Contractors. Employees and principals of SKC shall not be deemed to be at any time during the term of this Agreement employees of DBI. The status and relationship with DBI of SKC shall be that of an independent contractor, and accordingly SKC shall not state or imply, directly or indirectly, that it is empowered or authorized to commit or bind DBI or to incur any expenses on behalf of DBI or to enter into any oral of written agreement in the name of or on behalf of DBI (provided, however, that the foregoing shall in no way restrict the ability of any employee or officer of DBI to take any action in such capacity on behalf of DBI, nor shall it restrict the ability of any representative to take any action on behalf of DBI that may be authorized by DBI). Nothing herein shall create, expressly or by implication, a partnership, joint venture or other association between the parties. 5. Term of Agreement. This Agreement shall remain in effect until the tenth anniversary of the date of this Agreement; provided, however, that SKC may elect to terminate this Agreement at any time hereafter and for any reason upon 30 days' written notice to DBI. 6. Indemnification. DBI shall indemnify SKC and its respective partners, principals, members, employees, directors, officers, representatives and consultants (collectively, "Agents") against, and shall defend against, save and hold each of them harmless from, all claims, actions, proceedings, demands, liabilities, damages, judgments, assessments, losses and costs, including fees and expenses (including all legal costs and expenses relating thereto) arising out of or in connection with this Agreement or any act performed or omitted to be performed by SKC or any Agent under or pursuant to this Agreement. When acting within the scope of this Agreement, SKC and each Agent shall be deemed an agent of DBI solely for purposes of indemnification under the Certificate of Incorporation and Bylaws of Cascade. 7. Assignment. No party may assign its rights or obligations under this Agreement without the prior written consent of the other. 8. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to the principles of conflicts of laws thereunder. 9. Amendment. This Agreement can be modified or amended only by a writing signed by the parties hereto. - 2 - IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. DIAMOND BRANDS INCORPORATED By: /s/ Naresh K. Nakra -------------------------- Name: Naresh K. Nakra Title: President SEAVER KENT & COMPANY, LLC By: /s/ Bradley R. Kent -------------------------- Name: Bradley R. Kent Title: Managing Member - 3 - EX-10.29 15 TRANSACTION ADVISORY AGREEMENT THIS TRANSACTION ADVISORY AGREEMENT (this "Agreement"), dated as of April 21, 1998, is entered into by and between DIAMOND BRANDS INCORPORATED, a Minnesota corporation ("DBI") and SEAVER KENT & COMPANY LLC ("SKC"). DBI and SKC agrees as follows: 1. Recapitalization Fee. In consideration for the advisory services rendered by SKC to DBI in connection with the Recapitalization Agreement, dated March 3, 1998, among Seaver Kent-TPG Partners L.P. and Seaver Kent I Parallel, L.P., DBI and the shareholders of DBI listed on Exhibit A thereto (the "Recapitalization Agreement"), DBI shall pay to SKC or its designees, upon the consummation of the transactions contemplated by the Recapitalization Agreement, a fee of $2,750,000 in cash. 2. Future Transactions. DBI shall request that SKC render to it financial advisory services in connection with any acquisition of the assets or capital stock or other ownership interests of or in any other entity or person or any merger or combination therewith (a "Transaction"). SKC shall have the option of accepting an engagement by DBI to render advisory services in connection with any Transaction. If SKC accepts such engagement, DBI shall pay to SKC, as compensation for such services, advisory fees, payable in cash upon consummation of the Transaction, in an amount equal to 1.5% of the "transaction value" of the Transaction. For these purposes the "transaction value" shall be equal to the aggregate amount of consideration paid in the Transaction, including, without limitation, the aggregate amount of funds needed to complete the Transaction, whether to be paid in the form of consideration, to refinance debt, debt, preferred stock, options or similar items assumed or to pay costs or expenses (excluding any fees payable pursuant to this Agreement and any fees, if any, paid to any other person or entity for financial advisory investment banking, brokerage or similar services in connection with the Transaction). SKC may, in its sole discretion, waive all or any portion of the fees related to any Transaction or agree to a fee in a different amount or on a different basis. DBI shall make available to SKC all financial and other information concerning its business and operations that SKC reasonably requests as well as any other information relating to any Transaction prepared by DBI or any of its other advisors. In performing its services hereunder SKC shall be entitled to rely without investigation upon all information that is available from public sources as well as all other information supplied to it by or on behalf of DBI or its advisors or an acquisition target or potential acquisition target or its advisors and shall not in any respect be responsible for the accuracy or completeness of, or have any obligation to verify, the same. 3. Term of Agreement. This Agreement shall remain in effect until the tenth anniversary of the date of this Agreement; provided, however, that SKC may elect to terminate this Agreement at any time hereafter and for any reason upon 30 days' written notice to DBI. 4. Indemnification. DBI shall indemnify SKC and its respective partners, principals, members, employees, directors, officers, representatives and consultants (collectively, "Agents") against, and shall defend against, save and hold each of them harmless from, all claims, actions, proceedings, demands, liabilities, damages, judgments, assessments, losses and costs, including fees and expenses (including all legal costs and expenses relating thereto) arising out of or in connection with, this Agreement or any act performed or omitted to be performed by SKC or any Agent under or pursuant to this Agreement. When acting within the scope of this Agreement, SKC and each Agent shall be deemed an agent of DBI solely for purposes of indemnification under the Certificate of Incorporation and Bylaws of Cascade. 5. Assignment. No party may assign its rights or obligations under this Agreement without the prior written consent of the other. 6. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without giving effect to the principles of conflicts of laws thereunder. 7. Amendment. This Agreement can be modified or amended only by a writing signed by the parties hereto. 2 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first above written. DIAMOND BRANDS INCORPORATED By: /s/ Naresh K. Nakra -------------------------- Name: Naresh K. Nakra Title: President SEAVER KENT & COMPANY, LLC By: /s/ Bradley R. Kent -------------------------- Name: Bradley R. Kent Title: Managing Member 3 EX-23.1 16 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use in this registration statement of our report dated February 6, 1998, except as to Note 8, which is as of April 21, 1998, included herein and to all references to our Firm included in this registration statement. /s/ Arthur Andersen LLP Minneapolis, Minnesota August 25, 1998 -----END PRIVACY-ENHANCED MESSAGE-----