-----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, DZ+fvEKs1YS6nOu94sz/8BLqx9S83bI9FJdUYaEZv3ErYD54q9okS+eSvDBQvDYg qPTUEu5ZufpwjdZgaFvaZA== 0000903423-98-000236.txt : 19980702 0000903423-98-000236.hdr.sgml : 19980702 ACCESSION NUMBER: 0000903423-98-000236 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 56 FILED AS OF DATE: 19980630 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMOND BRANDS OPERATING CORP CENTRAL INDEX KEY: 0001064048 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411905675 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-58223 FILM NUMBER: 98658641 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 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1998 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- 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: [_] CALCULATION OF REGISTRATION FEE ============================================================================= Proposed Proposed Title of each maximum maximum class of secur- Amount offering aggregate Amount of ities to be to be price offering registration registered registered per unit price (1) fee - ----------------------------------------------------------------------------- 10 1/8% Senior Subordinated Notes due 2008 $100,000,000 100% $100,000,000 $29,500 - ----------------------------------------------------------------------------- (1) Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended. ============================================================================= ---------------- 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 JUNE 30, 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 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 guaranteed 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 (20 business days following the commencement of the Exchange Offer) 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) 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 16 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 (as defined herein). 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 a registration statement on Form S-4 (together with all amendments and exhibits, 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. 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. 1 PROSPECTUS SUMMARY Prior to the Recapitalization (as defined herein), 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) 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), and the Empire Acquisition (as defined herein) 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 three months ended March 31, 1998 are to such data that give effect to the Recapitalization as if it had occurred on January 1, 1998. 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) of $31.6 million, which represented a pro forma EBITDA margin (as defined herein) of 26.2%. For the three months ended March 31, 1998, the Company generated net sales of $26.5 million and EBITDA of $5.8 million, which represented an EBITDA margin of 22.1%. 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) 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 2 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 $0.5 million had been expended in the three months ended March 31, 1998. 3 . 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 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. The Company intends to continue 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. 4 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"). 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 $213.5 million, subject to certain working capital and debt 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 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 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 has repaid substantially all of the Company's funded debt obligations existing immediately before the consummation of the Recapitalization (the "Debt Retirement"). At March 31, 1998, the aggregate principal amount of the Company's funded indebtedness was $50.2 million. Funding requirements for the Recapitalization (which was consummated on April 21, 1998) were $292.3 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) $6.4 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 Offering, the Debt Retirement, the issuance and sale by Holdings of Holdings Preferred Stock, the Warrants and the Holdings Senior Discount Debentures, and the borrowing by the Issuer of funds under the Bank Facilities were effected in connection with the Recapitalization. The Recapitalization was accounted for as a recapitalization transaction for accounting purposes. 5 The following table sets forth the sources and uses of funds in connection with the Recapitalization as it occurred on April 21, 1998:
(IN THOUSANDS) SOURCES: Bank Facilities (1)........................................ $ 86,445 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................................... $292,333 ======== USES: Equity Repurchase.......................................... $213,499 Debt Retirement............................................ 51,834 Implied Value of the Retained Shares (3)................... 15,000 Transaction fees and expenses (4).......................... 12,000 -------- Total uses of funds...................................... $292,333 ========
- -------- (1) Represents (i) $6.4 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 Holdings' expenses, financial advisory, consulting and other professional fees and deferred financing costs, other than certain expenses borne by the Stockholders. See "Certain Relationships and Related Transactions." 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. 6 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. 7 THE EXCHANGE OFFER Registration Rights The Old Notes were issued on April 21, 1998 to Agreement................... 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 8 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 (20 business days following the commencement of the Exchange Offer), 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 (as defined herein) of such Old Notes. Interest on the New Notes is payable on October 15 and April 15 of each year, commencing October 15, 1998. 9 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." 10 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 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), 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); 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) (other than Restricted Subsidiaries that do not guarantee any indebtedness of the Issuer or any other Restricted Subsidiary). The Subsidiary Guarantees (as defined herein) 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) 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 March 31, 1998, on a pro forma basis giving effect to the Recapitalization, the Issuer and the Guarantors would have had approximately $84.8 million of Senior Debt. The Indenture permits the Issuer and the Guarantors to incur additional indebtedness, 11 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) 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), which is permitted in limited circumstances, and the Issuer or its Restricted Subsidiaries has Excess Proceeds (as defined herein), 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." 12 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. 13 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 three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 1998 gives effect to the Recapitalization as if it had occurred on January 1, 1998. The unaudited pro forma consolidated balance sheet data as of March 31, 1998 gives effect to the Recapitalization as if it had occurred on March 31, 1998. 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.
THREE MONTHS YEAR ENDED DECEMBER 31, PRO FORMA ENDED MARCH 31, PRO FORMA -------------------------------------------- DECEMBER 31, ---------------- MARCH 31, 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 $22,560 $26,486 $26,486 Gross profit............ 10,730 8,223 21,169 27,169 39,490 40,186 6,885 8,209 8,209 Operating income........ 6,423 4,070 10,417 17,301 26,555 26,781 4,257 4,809 4,809 Net income (1).......... 3,957 3,578 4,102 7,636 20,629 5,389 1,929 3,762 237 Other Data: Depreciation and amortization (2)....... $ 1,207 $ 1,250 $ 3,761 $ 4,204 $ 4,668 $ 4,856 $ 978 $ 1,032 $ 1,032 EBITDA (3).............. 7,630 5,320 14,178 21,505 31,223 31,637 5,235 5,841 5,841 EBITDA margin (4)....... 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 23.2% 22.1% 22.1% Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 602 $ 472 $ 472 CREDIT DATA: Cash interest expense............................................ $ 16,823 -- -- $ 4,205 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 MARCH 31, 1998 -------------------- HISTORICAL PRO FORMA ---------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital........................................... $16,529 $ 26,082 Total assets.............................................. 95,590 102,916 Total debt, including current maturities.................. 50,157 184,812 Stockholders' equity (deficit)............................ 29,879 (98,185)
14 - -------- (1) For the years ended December 31, 1993, 1995 and 1996, the Company was a Subchapter C corporation for federal income tax purposes and for the years ended December 31, 1994 and 1997 and the three months ended March 31, 1997 and 1998, 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. (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). 15 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 March 31, 1998, on a pro forma basis and after giving effect to the Recapitalization, the Issuer and its Guarantors would have had outstanding approximately $184.8 million of total indebtedness (including approximately $84.8 million of Senior Debt) and stockholders' deficit of approximately $98.1 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, 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 16 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 is not guaranteed and 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, no assurance can be given as to the accuracy of management's estimates. Prospective holders of the New Notes should not place undue emphasis on the market data and predictions of future trends contained in the Prospectus, as there can be no assurance that such data or predictions are accurate in all material respects. 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 17 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. 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 18 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 19 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 March 31, 1998, on a pro forma basis after giving effect to the Recapitalization, the Issuer would have had outstanding approximately $84.8 million of Senior Debt (all of which was secured borrowings) and the Issuer had approximately $21.2 million of additional revolving borrowing availability under the Revolving Credit Facility. Additional Senior Debt may be incurred by the Issuer from time to time subject to certain restrictions contained in the Bank Facilities and the Indenture. See "--Restrictive Debt Covenants," "Description of the Bank Facilities" 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 20 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 21 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 Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer 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, 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. 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. 22 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. 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 $213.5 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. 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 has repaid substantially all of the Company's funded debt obligations existing immediately before the consummation of the Recapitalization. At March 31, 1998, the aggregate principal amount of the Company's funded indebtedness was $50.2 million. Funding requirements for the Recapitalization (which was consummated on April 21, 1998) were $292.3 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) $6.4 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 Offering, the Debt Retirement, the issuance and sale by Holdings of Holdings Preferred Stock, the Warrants and the Holdings Senior Discount Debentures and the borrowing by the Issuer of funds under the Bank Facilities were effected in connection with the Recapitalization. The Recapitalization was accounted for as a recapitalization transaction for accounting purposes. 23 The following table sets forth the sources and uses of funds in connection with the Recapitalization, as it occurred on April 21, 1998.
(IN THOUSANDS) ---------- SOURCES: Bank Facilities (1)............................................. $ 86,445 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........................................ $292,333 ======== USES: Equity Repurchase............................................... $213,499 Debt Retirement................................................. 51,834 Implied Value of the Retained Shares (3)........................ 15,000 Transaction fees and expenses (4)............................... 12,000 -------- Total uses of funds........................................... $292,333 ========
- -------- (1) Represents (i) $6.4 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 Holdings' expenses, financial advisory, consulting and other professional fees and deferred financing costs, other than certain expenses borne by the Stockholders. See "Certain Relationships and Related Transactions." 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. 24 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. 25 CAPITALIZATION The following table sets forth as of March 31, 1998: (i) the actual capitalization of the Issuer and (ii) the capitalization of the Issuer as adjusted to give effect to the Recapitalization. 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" and "Unaudited Pro Forma Consolidated Financial Data" included elsewhere in this Prospectus.
AS OF MARCH 31, 1998 ----------------- ACTUAL PRO FORMA ------- --------- (IN THOUSANDS) Debt (including current maturities): Revolving Credit Facility (1).............................. $ -- $ 4,812 Term Loan Facilities (2)................................... -- 80,000 Notes offered in the Offering.............................. -- 100,000 Existing indebtedness (3).................................. 50,157 -- Total debt............................................... 50,157 184,812 Stockholders' equity (deficit)............................... 29,879 (98,185) Total capitalization.................................. $80,036 $ 86,627
- -------- (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." (3) Includes approximately $5.9 million of stockholder debt. 26 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 three months ended March 31, 1998 (the "Unaudited Pro Forma Consolidated Statements of Operations") and the unaudited pro forma consolidated balance sheet as of March 31, 1998 (the "Unaudited Pro Forma Consolidated Balance Sheet"). 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 three months ended March 31, 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, 1998. The Unaudited Pro Forma Consolidated Balance Sheet is based on the unaudited consolidated balance sheet of Holdings as of March 31, 1998, and is adjusted to give effect to the Recapitalization as if it had occurred as of March 31, 1998. The 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 preliminary estimates and certain assumptions that management of the Issuer believes are reasonable in the circumstances. In the opinion of management, all adjustments have been made that are necessary to present fairly the pro forma data. Actual amounts could differ from those set forth below. 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, including the Debt Retirement. See Note 3 to Unaudited Pro Forma Consolidated Statements of Operations. 27 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 (3) 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 (4) -- 1,681 -------- ------ ----- -------- -------- Operating income (loss)............... 26,555 386 (160) -- 26,781 Interest expense........ 4,550 64 270 (5) 12,608 (6) 17,492 -------- ------ ----- -------- -------- Income (loss) before income taxes......... 22,005 322 (430) (12,608) 9,289 Provision for income taxes.................. 1,376 -- -- 2,524 (7) 3,900 -------- ------ ----- -------- -------- Net income (loss)..... $ 20,629 $ 322 $(430) $(15,132) $ 5,389 ======== ====== ===== ======== ========
FOR THE THREE MONTHS ENDED MARCH 31, 1998
HISTORICAL RECAPITALIZATION (3) PRO FORMA ---------- ------------------- --------- (IN THOUSANDS) Net sales............................. $26,486 $ -- $26,486 Cost of sales......................... 18,277 -- 18,277 ------- ------- ------- Gross profit........................ 8,209 -- 8,209 Selling, general and administrative expenses............................. 2,980 -- 2,980 Goodwill amortization................. 420 -- 420 ------- ------- ------- Operating income (loss)............. 4,809 -- 4,809 Interest expense...................... 1,047 3,325 (6) 4,372 ------- ------- ------- Income (loss) before income taxes... 3,762 (3,325) 437 Provision for income taxes............ -- 200 (7) 200 ------- ------- ------- Net income (loss)................... $ 3,762 $(3,525) $ 237 ======= ======= =======
See accompanying notes to Unaudited Pro Forma Consolidated Statements of Operations. 28 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) The pro forma adjustments do not reflect a deduction for deferred financing costs pertaining to existing indebtedness of $0.8 million to be written off in connection with the Offering. Such amount, described in Note 2 to the Unaudited Pro Forma Consolidated Balance Sheet, represents an item which the Company anticipates will be recorded in the consolidated statement of operations for the period in which the Offering occurs. (4) Reflects the additional amortization of goodwill related to the Empire Acquisition for the period from January 1, 1997 to February 28, 1997. (5) Reflects the additional 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. (6) Gives effect to the increase in estimated cash and non-cash interest expense from the use of borrowings to finance the Recapitalization:
FOR THE THREE FOR THE YEAR MONTHS ENDED ENDED DECEMBER 31, MARCH 31, 1997 1998 ------------------ ------------- (IN THOUSANDS) Interest on the Notes (a)................ $10,125 $2,531 Interest on the Bank Facilities: Revolving Credit Facility (b).......... 373 93 Term A Loan Facility (b)............... 2,325 581 Term B Loan Facility (c)............... 4,000 1,000 ----- ----- Total pro forma cash interest expense............................. 16,823 4,205 Amortization of deferred financing costs. 669 167 ----- ----- Total pro forma interest expense..... 17,492 4,372 Less: amount in historical statements of operations (Holdings and Empire)................... 4,614 1,047 Less: pro forma interest expense adjustment for Empire................... 270 -- ------- ------ Adjustment to interest expense........... $12,608 $3,325 ======= ======
-------- (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%. (7) 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. 29 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1998
PRO FORMA ADJUSTMENTS ------------------------- RECAPITALIZATION PRO HISTORICAL ADJUSTMENTS FORMA ---------- ---------------- -------- (IN THOUSANDS) ASSETS Current assets: Accounts receivable, net............... $15,050 $ -- $ 15,050 Inventories............................ 23,020 -- 23,020 Deferred income taxes.................. -- 2,156 (1) 2,156 Prepaid expenses....................... 324 -- 324 ------- -------- -------- Total current assets................. 38,394 2,156 40,550 ------- -------- -------- Property, plant and equipment, net....... 17,405 -- 17,405 Goodwill, net............................ 39,033 -- 39,033 Deferred financing costs................. 758 5,170 (2) 5,928 ------- -------- -------- Total assets......................... $95,590 $ 7,326 $102,916 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current maturities of long-term debt... $ 7,897 $ (7,397)(3) $ 500 Account payable........................ 5,567 -- 5,567 Accrued expenses....................... 8,401 -- 8,401 ------- -------- -------- Total current liabilities............ 21,865 (7,397) 14,468 ------- -------- -------- Post-retirement benefit obligations...... 1,586 -- 1,586 Deferred income taxes.................... -- 735 (1) 735 Long-term debt, net of current maturities.............................. 42,260 142,052 (3) 184,312 ------- -------- -------- Total liabilities.................... 65,711 135,390 201,101 Stockholders' equity (deficit)........... 29,879 (128,064)(4) (98,185) ------- -------- -------- Total liabilities and stockholders' equity (deficit).................... $95,590 $ 7,326 $102,916 ======= ======== ========
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet. 30 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (1) Represents the recognition of deferred income taxes relating to the Company's election to change its status from a Subchapter S corporation to a Subchapter C corporation for federal income tax purposes in conjunction with the Recapitalization. (2) Represents deferred financing costs of $5.9 million associated with the Senior Subordinated Notes and the Bank Facilities less the write-off of deferred financing costs of $0.8 million pertaining to existing indebtedness. (3) Represents the issuance of the Senior Subordinated Notes for $100.0 million, borrowings under the Bank Facilities of $84.8 million and repayments of existing indebtedness of $50.2 million. (4) Represents the distribution to Holdings of excess proceeds of $127.4 million, transaction expenses of $1.3 million, the write-off of existing deferred financing costs of $0.8 million and the recognition of a net deferred tax asset of $1.4 million. 31 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 three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 1998 gives effect to the Recapitalization as if it had occurred on January 1, 1998. The unaudited pro forma consolidated balance sheet data of the Issuer as of March 31, 1998 gives effect to the Recapitalization as if it had occurred on March 31, 1998. 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.
THREE MONTHS YEAR ENDED DECEMBER 31, PRO FORMA ENDED MARCH 31, PRO FORMA -------------------------------------------- DECEMBER 31, ---------------- MARCH 31, 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 $22,560 $26,486 $26,486 Cost of sales........... 22,808 23,066 56,490 63,032 78,582 80,528 15,675 18,277 18,277 ------- ------- ------- ------- -------- -------- ------- ------- ------- Gross profit........... 10,730 8,223 21,169 27,169 39,490 40,186 6,885 8,209 8,209 Selling, general and administrative expenses............... 4,307 4,153 10,152 9,148 11,414 11,724 2,368 2,980 2,980 Goodwill amortization... -- -- 600 720 1,521 1,681 260 420 420 ------- ------- ------- ------- -------- -------- ------- ------- ------- Operating income....... 6,423 4,070 10,417 17,301 26,555 26,781 4,257 4,809 4,809 Interest expense........ 639 492 3,963 3,858 4,550 17,492 952 1,047 4,372 ------- ------- ------- ------- -------- -------- ------- ------- ------- Income before provision for income taxes...... 5,784 3,578 6,454 13,443 22,005 9,289 3,305 3,762 437 Provision for income taxes.................. 1,827 -- 2,352 5,807 1,376 3,900 1,376 -- 200 ------- ------- ------- ------- -------- -------- ------- ------- ------- Net income............. $ 3,957 $ 3,578 $ 4,102 $ 7,636 $ 20,629 $ 5,389 $ 1,929 $ 3,762 $ 237 ======= ======= ======= ======= ======== ======== ======= ======= ======= UNAUDITED PRO FORMA INCOME TAX DATA: Income before income taxes.................. $ 5,784 $ 3,578 $ 6,454 $13,443 $ 22,005 $ 9,289 $ 3,305 $ 3,762 $ 437 Provision for income taxes(1)............... 2,140 1,324 2,700 5,807 9,000 3,900 1,400 1,500 200 ------- ------- ------- ------- -------- -------- ------- ------- ------- Pro forma net income.... $ 3,644 $ 2,254 $ 3,754 $ 7,636 $ 13,005 $ 5,389 $ 1,905 $ 2,262 $ 237 ======= ======= ======= ======= ======== ======== ======= ======= ======= OTHER DATA: Depreciation and amortization (2)....... $ 1,207 $ 1,250 $ 3,761 $ 4,204 $ 4,668 $ 4,856 $ 978 $ 1,032 $ 1,032 EBITDA (3).............. 7,630 5,320 14,178 21,505 31,223 31,637 5,235 5,841 5,841 EBITDA margin (4)....... 22.8% 17.0% 18.3% 23.8% 26.4% 26.2% 23.2% 22.1% 22.1% Capital expenditures.... $ 836 $ 585 $ 1,926 $ 1,979 $ 4,050 $ 4,050 $ 602 $ 472 $ 472 CREDIT DATA: Cash Interest expense............................................ $ 16,823 -- -- $ 4,205 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
32
AS OF MARCH 31, 1998 -------------------- HISTORICAL PRO FORMA ---------- --------- (IN THOUSANDS) Balance Sheet Data: Working capital........................................... $16,529 $ 26,082 Total assets.............................................. 95,590 102,916 Total debt, including current maturities.................. 50,157 184,812 Stockholders' equity (deficit)............................ 29,879 (98,185)
- -------- (1) Reflects the pro forma income tax provision that would have been provided had the Company been a Subchapter C corporation, rather than a Subchapter S corporation, for federal income tax purposes. For the years ended December 31, 1993, 1995 and 1996, the Company was a Subchapter C corporation for federal income tax purposes and for the years ended December 31, 1994 and 1997 and the three months ended March 31, 1997 and 1998, a Subchapter S corporation for federal income tax purposes. (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. (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). 33 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 three months ended March 31, 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. 34
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31, ----------------------------------------- ------------------------------- 1995 1996 1997 1997 1998 ------------ ------------ ------------- --------------- --------------- (DOLLARS IN MILLIONS) Wooden Lights........... $17.6 22.6% $19.8 22.0% $ 20.9 17.7% $ 5.0 22.1% $ 5.1 19.3% Cutlery................. 27.9 35.9 32.6 36.1 35.4 30.0 6.2 27.4 7.0 26.4 Candles................. -- -- -- -- 25.5 21.6 1.5 6.6 5.7 21.5 Woodenware.............. 25.7 33.1 28.7 31.8 30.2 25.6 7.5 33.2 7.5 28.3 Institutional/Other..... 13.8 17.8 17.5 19.4 16.7 14.1 4.4 19.5 4.0 15.1 ----- ----- ----- ----- ------ ----- ------ ------ ------ ------- Total gross sales...... 85.0 109.4 98.6 109.3 128.7 109.0 24.6 108.8 29.3 (110.6) Discounts and allow- ances.................. (7.3) (9.4) (8.4) (9.3) (10.6) (9.0) (2.0) (8.8) (2.8) (10.6) ----- ----- ----- ----- ------ ----- ------ ------ ------ ------- Net sales.............. $77.7 100.0% $90.2 100.0% $118.1 100.0% $ 22.6 100.0% $ 26.5 100.0% ===== ===== ===== ===== ====== ===== ====== ====== ====== ======= EBITDA (1).............. $14.2 18.3% $21.5 23.8% $ 31.2 26.4% $ 5.2 23.2% $ 5.8 22.1% ===== ===== ===== ===== ====== ===== ====== ====== ====== =======
- -------- (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. 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.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ----------- ------------ ------------ ----------- ----------- (DOLLARS IN MILLIONS) Net sales............... $77.7 100.0% $ 90.2 100.0% $118.1 100.0% $22.6 100.0% $26.5 100.0% Cost of sales........... 56.5 72.7 63.0 69.8 78.6 66.6 15.7 69.5 18.3 69.1 ----- ----- ------ ----- ------ ----- ----- ----- ----- ----- Gross profit............ 21.2 27.3 27.2 30.2 39.5 33.4 6.9 30.5 8.2 30.9 Selling, general and administra- tive expenses.......... 10.1 13.0 9.2 10.2 11.4 9.6 2.3 10.2 3.0 11.3 Goodwill amortization... 0.6 0.8 0.7 0.8 1.5 1.3 0.3 1.3 0.4 1.5 ----- ----- ------ ----- ------ ----- ----- ----- ----- ----- Operating income........ 10.5 13.5 17.3 19.2 26.6 22.5 4.3 19.0 4.8 18.1 Interest expense........ 4.0 5.1 3.9 4.3 4.6 3.9 1.0 4.4 1.0 3.8 ----- ----- ------ ----- ------ ----- ----- ----- ----- ----- Income before provision for income taxes....... $ 6.5 8.4% $ 13.4 14.9% $ 22.0 18.6% $ 3.3 14.6% $ 3.8 14.2% ===== ===== ====== ===== ====== ===== ===== ===== ===== =====
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 NET SALES. Net sales in the three months ended March 31, 1998 increased 17.3% to $26.5 million from $22.6 million in the three months ended March 31, 1997, primarily due to the Empire Acquisition in February 1997 which added net sales of $3.0 million. The remaining increase in net sales in the three months ended March 31, 1998 principally resulted from continued growth in Cutlery, Candles and Wooden Lights products, offset by a slight decline in Institutional/Other products. The 12.9% or $0.8 million increase in gross sales of Cutlery products is attributed to strong performance in both branded and private label sales. The increase in gross sales of Candles products is due to the Empire Acquisition and the introduction of Reflections candles into the air freshener section of the grocery trade in the first quarter of 1998. GROSS PROFIT. Gross profit in the three months ended March 31, 1998 increased 18.8% to $8.2 million from $6.9 million in the three months ended March 31, 1997. Gross margin remained constant at 28.0%. The increased gross profit primarily reflects the impact of the Empire Acquisition which contributed $0.8 million to gross profit. 35 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses as a percentage of net sales increased to 11.3% in the three months ended March 31, 1998 from 10.2% in the three months ended March 31, 1997. Excluding the Empire Acquisition, selling, general and administrative expenses increased to 10.6% due primarily to sales samples to support the introduction of Reflections candles in the grocery trade and increased travel costs. GOODWILL AMORTIZATION. Goodwill amortization in the three months ended March 31, 1998 increased to $0.4 million from $0.3 million in the three months ended March 31, 1997 as a result of the Empire Acquisition. INTEREST EXPENSE. Interest expense in the three months ended March 31, 1998 remained constant at $1.0 million due primarily to additional borrowings under the Company's existing bank credit facilities in connection with the Empire Acquisition offset by lower borrowing rates. 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 41.6% for the three months ended March 31, 1997 resulted from the removal of the deferred tax assets and liabilities as of January 1, 1997 due to the election of Subchapter S corporation status. 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. 36 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 $0.8 million and $3.5 million for the three months ended March 31, 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 37 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 three months ended March 31, 1997 were $0.6 million compared to $0.5 million for the three months ended March 31, 1998. 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 $213.5 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 April 21, 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 $6.4 million was used to consummate the Recapitalization; 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. 38 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 which will be Year 2000 compliant. The Company expects to complete the entire project by June 1999. In connection with this process, the Company has retained two information technology consulting groups. 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. 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 information system, the Company is not likely to initiate other major systems projects in connection with the Year 2000 issue. 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. 39 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 three months ended March 31, 1998, the Company generated net sales of $26.5 million and EBITDA of $5.8 million, which represented an EBITDA margin of 22.1% 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 40 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 $0.5 million had been expended in the three months ended March 31, 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. 41 . 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 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. The Company intends to continue 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 THREE MONTHS FISCAL YEAR THREE MONTHS ENDED DECEMBER 31, ENDED MARCH 31, ENDED DECEMBER 31, ENDED MARCH 31, -------------------------- --------------- ---------------------------- ----------------- 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 $ 5.0 $ 5.1 20.7% 20.1% 16.2% 15.9% 20.3% 17.4% Cutlery................. 27.9 32.6 35.4 35.4 6.2 7.0 32.8 33.1 27.5 26.9 25.2 23.9 Candles................. -- -- 25.5 28.3 1.5 5.7 -- -- 19.8 21.5 6.1 19.4 Woodenware.............. 25.7 28.7 30.2 30.2 7.5 7.5 30.2 29.1 23.5 23.0 30.5 25.6 Institutional/Other..... 13.8 17.5 16.7 16.7 4.4 4.0 16.3 17.7 13.0 12.7 17.9 13.7 ----- ----- ------ ------ ------- ------- ----- ----- ----- ----- ----- ----- Total................ $85.0 $98.6 $128.7 $131.5 $ 24.6 $ 29.3 100.0% 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. 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, 42 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 43 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 44 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. 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. 45 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. 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. 46 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 March 31, 1998, the Company had 742 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. 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. 47 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 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. 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 48 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. 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 $6,087 to the profit sharing plan. 49 The option grants in 1997 for the named executive officers are shown in the following table.
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR NUMBER OF OPTION TERM SECURITIES EXERCISE OF ----------------------------- NAME AND PRINCIPAL UNDERLYING OPTION BASE PRICE EXPIRATION POSITION GRANTED ($/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. The Company paid Dr. Nakra a cash bonus equal to 10% of the aggregate fees paid to equity investors with respect to the Recapitalization and will pay additional 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. 50 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 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, registration rights and customary tag-along and bring- along rights. 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 $13.976 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 employment agreements. The bonus payments were provided for by the Company from the proceeds payable to the Stockholders in the Equity Repurchase. In the event that the employment of Messrs. Knuesel, Mathews or Young is terminated by the Company without cause, or voluntarily by such executive for good reason, the Company will pay such executive a severance payment in an amount equal to 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 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 annual base salary. 51 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 target operating profit levels and individual performance goals. The amount of each executive's annual bonus under the bonus plan is based on certain target operating profit levels and an executive's individual performance goals and 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. 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 Per Share Equity Value (as defined in the Recapitalization Agreement), 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." 52 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. 53 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. The 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, payable semi-annually. Dividends will compound to the extent not paid. Holdings will be required on October 15, 2009 to redeem shares of Holdings Preferred Stock. Shares of Holdings Preferred Stock may be redeemed at the option of Holdings, 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. 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
- -------- 54
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. 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) -- -- -- 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%
- -------- (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. 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, 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. 57 THE EXCHANGE OFFER The summary herein of certain provisions of the Registration Rights Agreement does not purport to be complete and reference 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 on or prior to the 45th day 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 58 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 59 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 (20 business days following the commencement of the Exchange Offer), 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. 60 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 date the Old Notes were issued (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. 61 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. 62 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 63 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 64 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. 65 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 below 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 March 31, 1998, on a pro forma basis and after giving effect to the Recapitalization, the Issuer would have had Senior Debt of approximately $84.8 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 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 $84.8 million of Senior Debt outstanding on a pro forma basis and after giving effect to the Recapitalization as of March 31, 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 66 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 67 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. 68 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 69 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 70 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 71 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 72 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 73 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; 74 (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, 75 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 76 $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. 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. 77 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. 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. 78 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. 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. 79 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. 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 80 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. 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. 81 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). 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 82 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." 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 83 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. 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. 84 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 95 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." 96 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following is a general summary of certain 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. 97 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. Long-term capital gain realized by an individual United States holder generally is subject to a maximum tax rate of 28 percent in respect of property held for more than one year and to a maximum rate of 20 percent in respect of property held in excess of 18 months. Legislation currently pending in Congress generally would, if enacted in its current form, subject 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 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. 98 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. 99 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. 100 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 AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND MARCH 31, 1998: Unaudited Consolidated Balance Sheet as of December 31, 1997 and March 31, 1998 ............................................................. F-15 Unaudited Consolidated Statements of Operations for the Three Months Ended March 31, 1997 and 1998 ........................................ F-16 Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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 SHARE AND 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; 50,000,000 shares authorized; 16,112,500 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 ("DBI") 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. DBI'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, DBI 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 =======
Pro forma results of operations of the Company (unaudited) for the year ended December 31, 1995 as though Forster had been acquired on January 1, 1995 were as follows:
(IN THOUSANDS) -------------- Net sales................................................... $84,798 ======= Net income.................................................. $ 3,456 =======
On February 28, 1997, DBI acquired Empire (the "Empire Acquisition"). Certain assets were acquired and liabilities assumed by DBI 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 DBI 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. 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: 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 provides for the recapitalization of the Company. Pursuant to the Recapitalization Agreement, on April 21, 1998 the Sponsors and other investors purchased $47.0 million of preferred stock with warrants and the Company purchased from the existing stockholders certain outstanding shares of the Company's common stock. Also, the Company issued $100.0 million of senior subordinated notes and $45.1 million senior discount debentures and entered into a bank credit agreement providing for (i) $80.0 million in term loan facilities and (ii) a $25.0 million revolving credit facility. It is intended that the recapitalization will be 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 INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 1998 1997 --------- ------------ ASSETS CURRENT ASSETS: Accounts receivable, net of allowances of $981 and $1,195............................................... $15,050 $15,526 Inventories........................................... 23,020 20,744 Prepaid expenses...................................... 324 406 ------- ------- Total current assets................................ 38,394 36,676 ------- ------- PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $17,366 and $16,715.................... 17,405 17,544 GOODWILL................................................ 39,033 39,454 DEFERRED FINANCING COSTS................................ 758 876 ------- ------- Total assets........................................ $95,590 $94,550 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt.................. $ 7,897 $ 7,892 Accounts payable...................................... 5,567 4,500 Accrued expenses...................................... 8,401 11,037 ------- ------- Total current liabilities............................. 21,865 23,429 ------- ------- POSTRETIREMENT BENEFIT OBLIGATIONS.................... 1,586 1,586 LONG-TERM DEBT, net of current maturities............. 42,260 41,605 ------- ------- Total liabilities..................................... 65,711 66,620 ------- ------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value; 50,000,000 shares authorized; 16,112,500 shares issued and outstanding...................................... 161 161 Additional paid in capital............................ 774 774 Retained earnings..................................... 28,944 26,995 ------- ------- Total stockholders' equity............................ 29,879 27,930 ------- ------- $95,590 $94,550 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-15 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------- 1997 1998 ------- ------- NET SALES...................................................... $22,560 $26,486 COST OF SALES.................................................. 15,675 18,277 ------- ------- Gross Profit................................................. 6,885 8,209 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................... 2,368 2,980 GOODWILL AMORTIZATION.......................................... 260 420 ------- ------- Operating income............................................. 4,257 4,809 INTEREST EXPENSE............................................... 952 1,047 ------- ------- Income before provision for income taxes..................... 3,305 3,762 PROVISION FOR INCOME TAXES..................................... 1,376 -- ------- ------- Net income................................................... $ 1,929 $ 3,762 ======= ======= PRO FORMA NET INCOME: Income before provision for income taxes...................... $ 3,305 $ 3,762 Pro forma income tax expense (Note 2)......................... 1,400 1,500 ------- ------- Pro forma net income.......................................... $ 1,905 $ 2,262 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-16 DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------- 1997 1998 ------- ------ OPERATING ACTIVITIES Net Income.................................................. $ 1,929 $3,762 Adjustments to reconcile net income to cash provided by op- erating activities Depreciation and amortization............................. 1,112 1,150 Deferred income taxes..................................... 1,376 -- Change in operating assets and liabilities, net of effects of acquisition Accounts receivable..................................... (1,725) 476 Inventories............................................. (2,118) (2,276) Prepaid expenses........................................ 122 82 Accounts payable........................................ (433) 1,067 Accrued expenses........................................ 520 (712) ------- ------ Net cash provided by operating activities............... 783 3,549 ------- ------ INVESTING ACTIVITIES Acquisition of Empire, net of cash received............... (24,696) -- Purchases of property, plant and equipment................ (602) (472) ------- ------ Net cash used for investing activities.................. (25,298) (472) ------- ------ FINANCING ACTIVITIES Borrowings from bank revolving line of credit............... 13,800 12,250 Repayments to bank revolving line of credit................. (8,300) (9,650) Proceeds from issuance of long-term debt.................... 21,000 -- Repayments of long-term debt................................ (1,615) (1,940) Distributions to stockholders............................... -- (3,737) Debt issuance costs......................................... (370) -- ------- ------ Net cash provided by (used for) financing activities...... 24,515 (3,077) ------- ------ NET INCREASE IN CASH AND CASH EQUIVALENTS..................... -- -- CASH AND CASH EQUIVALENTS, beginning of year.................. -- -- ------- ------ CASH AND CASH EQUIVALENTS, end of year........................ $ -- $ -- ======= ======
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 Incorporated and its wholly owned subsidiaries, Forster Inc. (Forster) and Empire Candle, Inc. (Empire) collectively referred to as "the Company." All material intercompany accounts and transactions have been eliminated in consolidation. The accompanying 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. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for a full year. 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 as of and for the year ended December 31, 1997. 2. 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 three months ended March 31, 1997. 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 the 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 for the three months ended March 31, 1998 and 1997. The unaudited pro forma income tax expense is presented assuming the Company had been a Corporation since January 1, 1997 using an effective income tax rate of 40% and 42% for the three months ended March 31, 1998 and 1997. 3. 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 provides for the recapitalization of the Company. Pursuant to the Recapitalization Agreement, in April 1998, the Sponsors and other investors purchased $47.0 million of preferred stock with warrants and the Company purchased from the existing stockholders certain outstanding shares of the Company's common stock. Also, the Company issued $100.0 million of senior subordinated notes and $45.1 million senior discount debentures and entered into a bank credit agreement providing for (i) $80.0 million in term loan facilities and (ii) a $25.0 million revolving credit facility. The recapitalization will be 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-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..................................................... 1 Prospectus Summary........................................................ 2 Risk Factors.............................................................. 16 The Recapitalization...................................................... 23 New Chief Executive Officer............................................... 24 The Sponsors.............................................................. 25 Use of Proceeds........................................................... 25 Capitalization............................................................ 26 Unaudited Pro Forma Consolidated Financial Data........................... 27 Selected Historical and Pro Forma Consolidated Financial Data............. 32 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 34 Business.................................................................. 40 Management................................................................ 48 Certain Relationships and Related Transactions............................ 52 Description of Holdings Indebtedness...................................... 53 Capital Stock of Holdings and the Issuer.................................. 54 Description of the Bank Facilities........................................ 56 The Exchange Offer........................................................ 58 Description of the New Notes.............................................. 66 Certain United States Federal Income Tax Considerations................... 97 Plan of Distribution...................................................... 100 Legal Matters............................................................. 100 Experts................................................................... 100 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 registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Cloquet, State of Minnesota, on June 30, 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 registration statement has been signed by the following persons in the capacities and on the dates indicated, on June 30, 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/ 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. 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 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 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. 4.6 Subsidiary Security 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. 4.7 Subsidiary Copyright Security 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. 4.8 Subsidiary Trademark Security 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. 4.9 Subsidiary Patent Collateral Assignment and Security 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. 4.10 Holdings Pledge Agreement, dated as of April 21, 1998, among Diamond Brands Incorporated and Wells Fargo Bank, N.A. 4.11 Holdings Guaranty Agreement, dated as of April 21, 1998, among 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
NO. DESCRIPTION ----- ----------- 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. 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-2.1 2 RECAPITALIZATION AGREEMENT EXECUTION COPY -------------- RECAPITALIZATION AGREEMENT This Recapitalization Agreement (this "Agreement"), is made and entered into on March 3, 1998, among Seaver Kent--TPG Partners L.P. and Seaver Kent I Parallel, L.P. (collectively, the "Buyer"), Diamond Brands Incorporated, a Minnesota corporation ("DBI"), and each of the owners of equity interests or options to purchase equity interests in DBI, all of which are listed on Exhibit A hereto (collectively, the "Shareholders"). DBI and its wholly-owned subsidiaries, Forster Inc., a Maine corporation ("Forster"), and Empire Candle, Inc., a Kansas corporation ("Empire") (each such subsidiary a "Subsidiary" and, collectively, the "Subsidiaries") are engaged in the business of manufacturing, selling and distributing various consumer goods, including, without limitation, toothpicks, candles, matches, clothes pins and plastic cutlery (the "Business"). DBI and the Shareholders desire to have Buyer invest in preferred stock of DBI and to use the proceeds of such investment, along with the proceeds of borrowing by DBI, to (i) refinance outstanding funded debt of DBI, (ii) repurchase a majority of the outstanding Common Stock of DBI, (iii) purchase outstanding stock options of DBI, and (iv) pay related transactional expenses. Buyer desires to make such investment on the terms set forth in this Agreement. Certain capitalized terms used in this Agreement have the meanings given those terms in Section 14. The parties agree as follows: 1. The Investment. -------------- 1.1 Authorization. DBI shall authorize the issuance and sale to Buyer of ------------- that number of shares of Series A Cumulative Preferred Stock of DBI, which will have the terms outlined on Exhibit B hereto, equal to the Purchase Price (determined in accordance with Section 1.3) (the "Preferred Shares") divided by the Liquidation Preference (as defined in Exhibit B). The terms of the related warrants to be issued to Buyer (the "Warrants") are also outlined on Exhibit B hereto. At Closing, and prior to any exercise as required in Section 1.2, the Warrants shall represent the right to purchase 77.5% of the common equity of DBI on a fully diluted basis, assuming the repurchase of shares and DBI Options pursuant to Sections 2.1 and 2.2 has been completed. 1.2 Purchase and Sale. Subject to the terms and conditions set forth ----------------- herein, at the Closing (as defined herein), DBI shall sell to Buyer and Buyer shall purchase the Preferred Shares in consideration for the Purchase Price as determined in accordance with Section 1.3 hereof. In addition, at the Closing, Buyer shall exercise Warrants to purchase that number of shares of DBI Common Stock (as defined herein) as equals 28% of the total outstanding DBI Common Stock after such exercise and after the repurchase of shares pursuant to Section 2.1 and shall pay the exercise price related thereto. For all purposes, the Warrants shall be deemed issued and exercised prior to the repurchase of shares pursuant to Section 2.1. 1.3 Purchase Price. -------------- (A) The Purchase Price to be paid by Buyer for the Preferred Shares (the "Purchase Price") will be an amount equal to: (1) the amount that would be necessary to satisfy in full all of DBI's funded debt immediately prior to the Closing ("Debt"), including without limitation, any line of credit, capital lease obligations, notes to shareholders and long-term debt, including the current portion thereof (the "Debt Amount"); plus (2) an amount equal to (A) $276,000,000 (the "Enterprise Value"), minus (B) the Debt Amount, plus (C) the Working Capital Adjustment (as defined below) (the amount equal to (A) minus (B) plus (C) is herein referred to as the "Equity Value"; the amount equal to the Equity Value plus the exercise price of all unexercised options to purchase DBI Common Stock ("DBI Options") immediately prior to the Closing divided by the aggregate of (x) the number of outstanding shares of DBI Common Stock, $.01 par value, of DBI ("DBI Common Stock") immediately prior to the Closing plus (y) the number of shares of DBI Common Stock which could be purchased pursuant to all unexercised DBI Options immediately prior to the Closing, is herein referred to as the "Per Share Equity Value"); plus (3) the sum of $12,000,000 [estimated fees and expenses]; minus (4) the sum of $15,000,000 [Retained Stock value]; minus (5) approximately $227,000,000, which will be borrowed by DBI from Buyer and/or other sources at or before the Closing. (B) The Working Capital Adjustment will be the amount (which may be a negative amount) equal to (i) the "Closing Date Working Capital Amount" minus (ii) the average monthly working capital for the last full 12 months prior to the Closing Date minus $1,600,000 (the "Baseline Working Capital"). The "Closing Date Working Capital" will be equal to the difference as of the close of business on the day immediately preceding the Closing Date of (x) the book value of DBI's current assets minus (y) the book value of DBI's current liabilities (other than the current portion of funded debt), including accruals for all brokers' fees, employee bonuses and expenses related to the transactions contemplated hereby (other than fees and expenses related to the funding of 2 the transactions contemplated hereby or to the funding of the Business on or after the Closing), all determined in accordance with GAAP, except if the Closing is prior to May 7, 1998 by reason of the giving of the Shareholders' Notice (as defined in Section 3.2), the take down fees (but not the commitment fees) plus the legal and accounting costs primarily related to the take down of the subordinated indebtedness required to fund the transactions contemplated hereby, shall be accrued as a liability. In addition, for purposes of determining Closing Date Working Capital, (i) the employee bonuses accrued as a liability will reflect the net effect of the expense deduction for income tax purposes which DBI will realize after the Closing; and (ii) the Closing Date Working Capital will reflect the tax benefit to be realized by DBI after the Closing from the payment of the Option Value. The Closing Date Working Capital will not be reduced for any inventory reduction pursuant to the terms of Section 7.5. 1.4 Payment of Purchase Price. ------------------------- (A) At the Closing, Buyer will pay to DBI, as consideration for the issuance of the Preferred Shares, an estimate of the Purchase Price (the "Estimated Purchase Price"), determined by estimating the Working Capital Adjustment based upon DBI's records. (B) Within sixty days after the Closing, DBI shall deliver to Buyer and Shareholders Representative (as defined herein), a calculation of the Purchase Price using the actual Working Capital Adjustment but no other changes to the Estimated Purchase Price. Within thirty days after delivery of such calculation, Buyer or Shareholders Representative may assert that the calculations delivered by DBI are inaccurate and specify the amount of and the basis for the inaccuracy (the "Disputed Amount") in a written notice delivered to DBI and the other party. During such thirty-day period, and thereafter until the Closing Statement (as defined below) is acknowledged by Buyer and Shareholders Representative, Shareholders Representative and Buyer and their respective agents and advisors shall have full access to all records applicable to the determination of the Working Capital Adjustment. If neither Buyer nor Shareholders Representative delivers such written assertion to DBI within such thirty days, Buyer and Shareholders shall be conclusively presumed to agree to DBI's calculation. (C) If either Buyer or Shareholders Representative delivers such written assertion to DBI within such thirty day period, Buyer and Shareholders Representative shall negotiate in good faith with respect to the Disputed Amount and if they are unable to reach agreement within thirty days after delivery of Buyer's or Shareholders Representative's assertion, the dispute shall be settled by submitting such dispute to Ernst & Young LLP (the "Accountants"), with a direction to deliver Accountant's determination within thirty days of such submission. The decision of Accountants as to the Purchase Price shall be final and binding on the parties. Buyer and the Shareholders shall each pay one-half of the costs of Accountants. The final Purchase Price as adjusted 3 in accordance with this Section, will be reflected on a final statement acknowledged by Buyer and Shareholders Representative (the "Closing Statement"). (D) Within ten (10) business days following the final determination of the Working Capital Adjustment in accordance with the provisions of this Section: (1) if the actual Purchase Price exceeds the Estimated Purchase Price, DBI will pay the amount of such excess in cash to the Shareholders from whom DBI Common Stock was purchased pursuant to Section 2.1 or DBI Options were canceled pursuant to Section 2.2, in accordance with his or her Percentage Interest (as set forth opposite his or her name on Exhibit C); or (2) if the actual Purchase Price is less than the estimated Purchase Price, then each Shareholder from whom DBI Common Stock was purchased pursuant to Section 2.1 or DBI Options were canceled pursuant to Section 2.2 shall refund to DBI his or her Percentage Interest (as set forth opposite his or her name on Exhibit C) of such deficit from the escrowed funds under the Price Adjustment Escrow Agreement (as defined herein). All payments required to be made by DBI or the Shareholders pursuant to Section 1.4(D) shall bear interest from the Closing Date through the date of payment at the rate of 8% per annum. 1. Equity Repurchases and Refinancing. ---------------------------------- 2.1 Common Stock Repurchases. Assuming receipt of the necessary funds, at ------------------------ the Closing DBI will repurchase from the Shareholders and the Shareholders will sell, pro rata in accordance with their interests, outstanding DBI Common Stock with an aggregate value (the "Common Stock Repurchase Amount") equal to the estimated Equity Value minus $15,000,000 minus the Option Value. The purchase price per share shall be equal to the estimated Per Share Equity Value, determined by estimating the Working Capital Adjustment based upon DBI's records. Such purchase price will be paid in cash to each Shareholder upon the surrender of the certificate(s) representing the DBI Common Stock owned by such Shareholder. The Per Share Equity Value will be subject to adjustment as provided in Section 1.4(D). The Common Stock Repurchase Amount, less the amount required to be placed in escrow under the terms of Section 3.3(A)(1), shall be paid by DBI to the Shareholders by wire transfer of immediately available funds to such accounts designated by the Shareholders prior to Closing. 2.2 Cancellation of Options. Assuming receipt of the necessary funds, at ----------------------- the Closing DBI will purchase and cancel all of the DBI Options for a price determined for each option by multiplying (i) the amount by which the Per Share Equity Value exceeds the applicable exercise price of such option by (ii) the number of shares of DBI Common Stock as to which the Option 4 is then exercisable (the "Option Value"). The Option Value, less the amount required to be placed in escrow under the terms of Section 3.3(A)(1), will be paid in cash to each holder of a DBI Option, upon the surrender of the DBI Option accompanied by a duly executed Assignment and Termination Agreement, which each holder of a DBI Option agrees to deliver at Closing. The Option Value will be subject to adjustment as provided in Section 1.4(D). 2.3 Retained Stock. The Shareholders will, as of the Closing, continue to -------------- hold the outstanding DBI Common Stock (the "Retained Stock") not repurchased under the terms of Section 2.1 above. At the Closing, the Retained Stock shall represent 22.5% of the common equity of DBI on a fully diluted basis (including the Warrants), subject to the issuance of management options, which shall dilute the ownership of the Shareholders and Buyer proportionately. 2.4 Financing. Assuming receipt of the necessary funds, at Closing DBI --------- will refinance the Debt. 2.5 Indemnification Escrow. At the Closing, the Shareholders will deposit ---------------------- a portion of the Retained Stock into an escrow in accordance with Section 10.5. 1. The Closing. ----------- 3.1 Closing. The purchase and sale of the Preferred Shares and the ------- consummation of the transactions contemplated by this Agreement (the "Closing") shall occur at the offices of Lindquist & Vennum P.L.L.P. in Minneapolis, Minnesota at 10:00 a.m. on May 7, 1998, or such earlier or later time (or such other location) which is agreed upon by Buyer and DBI in writing or as provided in Section 3.2 (the "Closing Date"). All transactions at the Closing shall be deemed to take place simultaneously as of the opening of business on the Closing Date. 3.2 Early Closing. Upon written notice by the Shareholders Representative ------------- to the Buyer (the "Shareholders' Notice"), the Shareholders may demand that Buyer take down the funds pursuant to the commitments attached as Schedule 6.9 to fund the transactions contemplated by this Agreement. In the event a Shareholders' Notice is given, the Closing shall occur on the later of (i) fifteen calendar days after delivery of the Shareholders' Notice to Buyer; or (ii) the date which is three business days after receipt by Buyer and DBI of necessary approvals under the HSR Act, but in any event, not prior to twenty- eight days after the date of this Agreement, or on such earlier date agreed upon by Buyer and DBI. 3.3 Deliveries by Buyer. At the Closing, Buyer shall deliver the ------------------- following: (A) An amount equal to the Estimated Purchase Price, in immediately available funds, by wire transfer to: 5 (1) an account designated by the Escrow Agent under the Escrow Agreement (as defined herein) of the amount of $500,000 (a pro rata reduction of the Common Stock Repurchase Amount and Option Value in accordance with each Shareholder's Percentage Interest) to be held for a period of up to 150 days under the Escrow Agreement in substantially the form of Exhibit D hereto (the "Price Adjustment Escrow Agreement"), to support the obligations of the Shareholders pursuant to Section 1.4(D)(2) of this Agreement; and (2) an account designated by DBI prior to the Closing, the balance of the Estimated Purchase Price. (B) An Officer's Certificate as to the accuracy at Closing of all of Buyer's representations and warranties as if made at and as of Closing, the fulfillment of all of Buyer's agreements and covenants and the satisfaction of all Closing conditions to be performed by Buyer; (C) An opinion of legal counsel to Buyer dated as of the Closing Date, in form reasonably satisfactory to DBI, which opinion is to the effect that: (1) Each Buyer is a limited partnership validly existing under the laws of Delaware and has all requisite company power and authority to conduct its business as, to such counsel's knowledge, such business is now conducted; (2) Buyer has all requisite power and authority to permit it to execute and deliver this Agreement and perform its obligations hereunder; (3) The execution, delivery and performance of this Agreement by Buyer and each of the documents delivered by Buyer hereunder have been duly authorized and approved by all necessary partnership action. This Agreement and each of the documents delivered by Buyer hereunder have been duly executed and delivered and constitute legal, valid and binding obligations of Buyer, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, rearrangement, reorganization and other debtor relief legislation and to the application of general equity principles; and (4) Neither the execution and delivery of this Agreement nor consummation of the transactions contemplated hereby will, except as identified in such opinion, (a) require Buyer to file, register with or obtain any approval or action of any governmental entity or agency, (b) conflict with, result in a breach of, violate or constitute a default under the governing documents of Buyer or any applicable law or regulation. 6 (D) A Stockholders Agreement in the form of Exhibit E; (E) The Escrow Agreement in substantially the form of Exhibit F (the "Indemnification Escrow Agreement"); (F) Such other instruments or documents as may be reasonably requested by DBI to carry out the transactions contemplated hereby. 3.4 Deliveries by DBI. At the Closing, DBI shall deliver the following to ----------------- Buyer; provided DBI shall have fulfilled its obligations under Section 3.3(D) if it uses all reasonable efforts to deliver the agreements described therein: (A) Stock certificates for the Preferred Shares; (B) Evidence of the repurchase of DBI Common Stock in accordance with Section 2.1, in form reasonably acceptable to Buyer; (C) Duly executed Assignments and Termination Agreements with respect to all DBI Options, in form reasonably acceptable to Buyer; (D) Employment agreements between DBI and the members of its management listed on Schedule 3.3(D), in form reasonably acceptable to Buyer; (E) Resignations of all of the directors of DBI and the Subsidiaries as are requested by Buyer prior to the Closing. (F) Evidence of the appointment or election to the Board of Directors of DBI of the directors designated by Buyer; (G) A copy of DBI's Articles of Incorporation, certified by the Secretary of State of Minnesota; (H) A certificate of the secretary of DBI certifying as to (i) the bylaws of DBI, (ii) the resolutions of the Board of Directors of DBI authorizing the consummation of the transactions contemplated hereby and that such resolutions have not been amended or rescinded and remain in full force and effect, and (iii) the incumbency of the signatories on behalf of DBI to this Agreement and the other documents delivered hereunder. (I) A Certificate from the Secretary of State of Minnesota, dated as of a date within thirty days prior to the Closing Date, to the effect that DBI is in existence and in good standing; 7 (J) An opinion of legal counsel to DBI dated as of the Closing Date, in form reasonably satisfactory to Buyer, which opinion is to the effect that: (1) DBI is a corporation validly existing under the laws of Minnesota and has all requisite corporate power and authority to conduct its business as, to such counsel's knowledge, such business is now conducted; (2) DBI has all requisite corporate power and authority to permit it to execute and deliver this Agreement and to perform its obligations hereunder; (3) The execution, delivery and performance of this Agreement and each of the documents delivered by DBI hereunder have been duly authorized and approved by all necessary corporate action. This Agreement and each of the documents delivered by DBI hereunder have been duly executed and delivered and constitute legal, valid and binding obligations of DBI, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance, rearrangement, reorganization and other debtor relief legislation and to the application of general equity principles; (4) The authorized Capital Stock of DBI consists of (i) ______ shares of Common Stock, of which there are ________ shares issued and outstanding of record; and (ii) _______ shares of Series A Cumulative Preferred Stock, of which there are ______ shares issued and outstanding of record. Schedule 5.5 to this Agreement contains a complete list of record shareholders of DBI as well as the number of shares of DBI Common Stock held of record by each such shareholder, in each case as registered on the books and records of DBI. Schedule 5.5 to this Agreement lists the record owners of the DBI Options. All such issued and outstanding shares are validly issued and (assuming receipt by DBI of the consideration called for by the minutes authorizing the issuance of each shares) are fully paid and nonassessable and issued without violation of any preemptive or other right to purchase granted by statute or the applicable organizational documents. Except as set forth in such Schedule 5.5, to such counsel's knowledge, there are no other shares of capital stock of DBI, or securities convertible into or exchangeable or exercisable for shares of capital stock outstanding. Upon issuance at the Closing and payment therefor in accordance with the terms of this Agreement, the Preferred Shares will be duly authorized, validly issued, fully paid and nonassessable shares of DBI, issued without violation of any preemptive or other right to purchase granted by statute or DBI's organizational documents; and (5) Neither the execution and delivery of this Agreement, nor consummation of the transactions contemplated hereby, will, except as identified in such opinion, (A) require DBI to file, register with or obtain any approval or 8 action of any governmental entity or agency, (B) conflict with, result in a breach of, violate or constitute a default under the organizational documents of DBI or any Subsidiary or any applicable law or regulation; (K) All consents of third parties required pursuant to Section 4.1(D); (L) The Purchase Price Escrow Agreement; and (M) Such other instruments or documents as may be reasonably requested by Buyer to carry out the transactions contemplated hereby. 3.5 Deliveries by the Shareholders. At the Closing, the Shareholders will ------------------------------ deliver: (A) Certificates representing the DBI Common Stock to be repurchased in accordance with Section 2.1; (B) The Price Adjustment Escrow Agreement; (C) The Stockholders Agreement; and (D) The Indemnification Escrow Agreement and certificates representing the shares of DBI Common Stock to be deposited thereunder in accordance with Section 10.5 accompanied by stock powers duly executed in blank. 1. Closing Conditions. ------------------ 4.1 Buyer's Conditions. The obligation of Buyer to consummate the ------------------ purchase and sale of the Preferred Shares is subject to the satisfaction, or written waiver by Buyer, of all of the following conditions as of the Closing Date, except that the condition in Sections 4.1(D) may not be waived: (A) Representations and Warranties. The representations and ------------------------------ warranties made by DBI and the Shareholders in this Agreement must be true and correct in all material respects as of the date of this Agreement and, except as specifically contemplated by this Agreement, on and as of the Closing Date, except to the extent of changes caused by the transactions expressly contemplated by this Agreement; provided this condition shall not apply with respect to any matter properly and specifically reflected in the Working Capital Adjustment or which would not be a material adverse change as described in Section 4.1(C). DBI and the Shareholders must have performed or complied, in all material respects, with all obligations and covenants required by this Agreement to be performed or complied with by DBI or the Shareholders by the Closing Date. 9 (B) No Pending Action. No action or proceeding before any court or ----------------- governmental body shall be pending or threatened wherein an unfavorable judgment, decree or order would prevent the carrying out of this Agreement or any of the transactions contemplated hereby, declare unlawful the transactions contemplated by this Agreement or cause such transactions to be rescinded or affect the right of Buyer to own the Preferred Shares or of DBI to own or use its assets or conduct the Business. (C) No Material Adverse Change. Since December 31, 1997, there -------------------------- shall not have been any material adverse change in the business, properties, financial condition, results of operations, assets, prospects of the current Business during the successive twelve months, or liabilities of DBI and its Subsidiaries, taken as a whole; provided this condition shall not apply with respect to any matter not reasonably likely to result in a net cost to DBI in excess of $5,000,000 following Closing (excluding any cost reflected in the Working Capital Adjustment) and in a material impairment of the operations of DBI as currently conducted or the right or ability of DBI to issue the Preferred Stock and Warrants containing the terms set forth on Exhibit B. (D) Governmental Authorizations. DBI shall have received all --------------------------- required authorizations, consents and approvals of governments and governmental agencies and third parties with respect to the consummation by DBI of the transactions contemplated hereby, except where the failure to obtain such third party consents would not reasonably be expected to result in a material liability to DBI or its Subsidiaries or materially interfere with the Business, create a lien on any assets of DBI or any of its Subsidiaries, or affect the right or ability of DBI to issue the Preferred Shares and Warrants containing the terms set forth on Exhibit B. 4.2 DBI's and Shareholders' Conditions. The obligations of DBI and the ---------------------------------- Shareholders to consummate the transactions contemplated hereby are subject to the satisfaction or written waiver by DBI of all of the following conditions as of the Closing Date, except that the condition in Section 4.2(C) may not be waived: (A) Representations and Warranties. The representations and ------------------------------ warranties of Buyer made in this Agreement must be true and correct in all material respects as of the date of this Agreement and on and as of the Closing Date, and Buyer must have performed or complied, in all material respects, with the obligations (including those specified in Section 12.4) and covenants required by this Agreement to be performed or complied with by Buyer by the Closing Date; (B) No Adverse Actions. There must be no injunction or order of any ------------------ court or administrative agency of competent jurisdiction in effect as of the Closing Date which restrains or prohibits the transactions contemplated hereby; and 10 (C) Governmental Authorizations. Buyer shall have received all --------------------------- required authorizations, consents and approvals of governments and governmental agencies and third parties with respect to the consummation by Buyer of the transactions contemplated hereby, except where the failure to obtain such third party consents would not reasonably be expected to result in a material liability to DBI or its Subsidiaries or materially interfere with the Business, create a Lien on the assets of DBI or its Subsidiaries or the DBI Common Stock or the ability of DBI to issue the Preferred Shares or the Warrants. 5. Representations and Warranties of DBI. DBI represents and warrants to ------------------------------------- Buyer as follows: 5.1 Organization and Authority. DBI is a corporation duly organized, -------------------------- validly existing and in good standing under the laws of the state of Minnesota. Forster is a corporation duly organized, validly existing and in good standing under the laws of the state of Maine. Empire is a corporation duly organized, validly existing and in good standing under the laws of the state of Kansas. DBI and each of the Subsidiaries is duly qualified as a foreign corporation in every jurisdiction where failure to so qualify would result in a Material Adverse Effect. DBI and each of the Subsidiaries has the corporate power and authority to carry on its business as now conducted and to consummate the transactions contemplated hereby. All corporate acts and proceedings required to be taken by DBI and each of the Subsidiaries to authorize the execution, delivery and performance of, and the consummation of the transactions contemplated by, this Agreement have been duly and properly taken. DBI has delivered to Buyer complete and correct copies of the charter and bylaws of DBI and each Subsidiary. 5.2 Due Execution. This Agreement has been duly executed and delivered by ------------- DBI and constitutes a valid and binding obligation of DBI, enforceable against DBI in accordance with its terms, except that (A) such enforceability may be subject to bankruptcy, insolvency, reorganization, moratorium or other laws, decisions or equitable principles now or hereafter in effect relating to or affecting the enforcement of creditors' rights or debtors' obligations generally, and (B) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefore may be brought. 5.3 No Conflicts. Except as disclosed on Schedule 5.3, the execution and ------------ delivery of this Agreement does not, and the consummation of the transactions contemplated by, and the compliance with the terms of, this Agreement will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a benefit or to a lien, encumbrance, penalty or payment under, or require any consent, authorization or approval under 11 (A) any provision of the articles of incorporation or bylaws of DBI or any of the Subsidiaries; (B) any Material Contract; or (C) any judgment, order or decree or any statute, law, ordinance, rule, regulation, material license or permit applicable to DBI, any Subsidiary or the Business, other than: (1) compliance with and filings under the HSR Act and any applicable foreign laws; and (2) those that may be required solely by reason of Buyer's (as opposed to any other party's) participation in the transactions contemplated by this Agreement. 5.4 Governmental Consents. Based, in part, upon the representations and --------------------- warranties of Buyer in Section 6.7, no consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, is required to be obtained or made by or with respect to DBI or any of the Subsidiaries in connection with the execution and delivery of this Agreement, or the consummation by DBI of the transactions contemplated by this Agreement, other than: (A) compliance with and filings under the HSR Act and any applicable foreign laws; (B) qualification under applicable state securities laws; and (C) filing of a Certificate of Rights and Preferences with the Secretary of State of Minnesota with respect to the Preferred Shares; and (D) those that may be required solely by reason of Buyer's (as opposed to any other party's) participation in the transactions contemplated by this Agreement. 5.5 Capitalization. -------------- (A) Schedule 5.5 accurately identifies all of the authorized capital stock of DBI and each of the Subsidiaries and the number of shares of such capital stock outstanding and the record holders of that stock. The DBI Common Stock constitutes 100% of the issued and outstanding capital stock of DBI. All of the issued and 12 outstanding DBI Common Stock is validly issued, fully paid and nonassessable and issued without violation of any preemptive right. Except for the DBI Options, as disclosed on Schedule 5.5, there are no outstanding subscriptions, options, warrants, calls, rights, convertible securities or other agreements or commitments of any character relating to ownership interests in DBI, or any other securities of DBI or of any of the Subsidiaries or otherwise obligating DBI or any of the Subsidiaries to issue, transfer, register or sell any such securities, except Warrants and Preferred Shares hereunder. DBI owns 100% of the issued and outstanding capital stock of the Subsidiaries. Except for the Subsidiaries, DBI holds, directly or indirectly, no beneficial interests in any corporation or other entity except as set forth on Schedule 5.5. (B) As of the Closing, the Preferred Shares will be duly authorized and validly issued, fully paid and nonassessable and issued without violation of any preemptive right. 5.6 No Restrictions. To the Knowledge of DBI, other than transfer --------------- restrictions imposed by applicable state or federal securities laws, or by contracts which will be terminated on or prior to the Closing Date which are listed on Schedule 5.6, there are no transfer restrictions, subscriptions, options, warrants, rights, calls, contracts, voting trusts, irrevocable proxies, voting arrangements, commitments, understandings or agreements relating to the sale, voting or transfer of any of the DBI Common Stock. 5.7 Financial Statements. DBI has delivered to Buyer, true and correct -------------------- copies of the Financial Statements. The Financial Statements have been prepared in accordance with the applicable books and records of DBI and the Subsidiaries and the audited Financial Statements have been prepared in conformity with generally accepted accounting principles, consistently applied during the related periods (except as expressly noted in the notes to the Financial Statements). The balance sheet contained in each of the Financial Statements fairly presents, in all material respects, the financial condition of DBI, on a consolidated basis, as of the respective dates set forth in those balance sheets, and each income statement and statement of cash flows included in each of the Financial statements fairly presents, in all material respects, the results of operations and the cash flows of DBI, on a consolidated basis, for the respective periods set forth therein. 5.8 Undisclosed Liabilities. Neither DBI nor any of the Subsidiaries has ----------------------- any material liabilities or obligations, except for (i) those reflected on or reserved against in the Financial Statements; (ii) those incurred in the ordinary course of business since the date of the latest Financial Statements; or (iii) those set forth on Schedule 5.8. 5.9 Absence of Certain Changes. Except as disclosed on Schedule 5.9, -------------------------- since December 31, 1997, neither DBI nor any Subsidiary has incurred any debts, obligations or liabilities, absolute, accrued or contingent and whether due or to become due, except in the ordinary course of business, none of which would have a Material Adverse Effect; paid any 13 obligation or liability, or discharged or satisfied any Liens other than in the usual and ordinary course of business; entered into any Material Contract other than in the ordinary course of business; declared or made any payment to or distribution to its shareholders as such, or purchased or redeemed any of its shares of capital stock or obligated itself to do so; mortgaged, pledged or subjected to Lien any material asset of DBI or any Subsidiary; sold, transferred or leased any material asset except for the sale of inventory in the ordinary course of business; suffered any material physical damage, destruction or loss not covered by insurance; encountered any strike or labor union organizing activities, or issued or sold any shares of capital stock or other securities or granted any options with respect thereto; nor has DBI or any Subsidiary agreed to do any of the foregoing, except the Warrants and Preferred Shares hereunder. 5.10 Title to Properties and Encumbrances. Except as disclosed on ------------------------------------ Schedule 5.10, DBI and its Subsidiaries have good and valid title, subject to no Lien, to all of their respective properties and assets, including without limitation the properties and assets reflected in the most recently dated Financial Statements, except for properties disposed of in the ordinary course of business since the date of the most recently dated Financial Statements. 5.11 Property, Plant and Equipment. The property, plant and equipment of ----------------------------- DBI and its Subsidiaries are in operating condition adequate to permit the conduct of the Business in substantially the manner in which the Business is currently conducted. Except as disclosed on Schedule 5.10, DBI or a Subsidiary has good title to, or a valid leasehold interest in, all of the assets used in the conduct of the Business. 5.12 Contracts. Schedule 5.12 identifies all of the Material Contracts. --------- Except as disclosed on Schedule 5.12: (A) each Material Contract is a valid and binding obligation of DBI or the Subsidiary as the case may be, and, to the Knowledge of DBI, is in full force and effect and enforceable, subject to applicable insolvency, fraudulent transfer, reorganization, other laws affecting creditors' rights generally from time to time in effect and subject to general principles of equity; and (B) DBI and each Subsidiary have performed, as of the date of this Agreement, all of their respective obligations required to be performed to date under the Material Contracts and are not (with or without the lapse of time, the giving of notice, or both) in breach or default under any of the Material Contracts. 5.13 Intellectual Property. Except as disclosed on Schedule 5.13, either --------------------- DBI or one of the Subsidiaries owns all of the Intellectual Property free and clear of all Liens. Schedule 5.13 identifies all letters patent and patent applications, registered trademarks, and copyright registrations and applications owned by DBI or the Subsidiaries. Except as disclosed on Schedule 5.13, neither the Business nor any products sold by the Business infringes on the 14 intellectual property rights of any Person. Except as disclosed on Schedule 5.13, no claims are pending or, to the Knowledge of DBI, threatened in writing against DBI or any of the Subsidiaries by any Person with respect to the ownership, validity, enforceability or use of any of the Intellectual Property or, to the Knowledge of DBI, otherwise challenging or questioning the validity or effectiveness of any of the Intellectual Property. 5.14 Litigation. ---------- (A) Schedule 5.14(A) identifies all of the lawsuits, claims, actions, suits, proceedings and, to the Knowledge of DBI, investigations pending, or, to the Knowledge of DBI, threatened which relate to the Business, DBI or any of the Subsidiaries; and (B) Except as disclosed on Schedule 5.14(B), neither DBI nor any of the Subsidiaries is subject to any judgment, order or decree of any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign. 5.15 Compliance with Applicable Laws. ------------------------------- (A) Except as disclosed on Schedule 5.15(A), DBI, each Subsidiary and the Business are in compliance with all applicable statutes, laws, ordinances, rules, orders and regulations and all conditions of applicable licenses and permits and any past non-compliance with such laws has been remedied to the extent required by such laws or to the satisfaction of applicable governmental agencies. (B) Except as disclosed on Schedule 5.15(A), neither DBI nor any of the Subsidiaries has received any written, or, to the Knowledge of DBI, oral communication from a governmental authority that alleges that DBI, a Subsidiary or the Business is not currently in compliance, in all material respects, with any Environmental Laws, including the rules and regulations relating thereto, or any other applicable statute, law, ordinance, rule, order, regulation, license or permit. (C) Schedule 5.15(B) identifies all material permits, licenses and governmental authorizations obtained by DBI or any of the Subsidiaries relating to the current conduct of the Business. Except as disclosed on Schedule 5.15(B), the Business is in compliance with the provisions of such permits, licenses and governmental authorizations. 5.16 Taxes. DBI and each Subsidiary have each timely filed all tax or ----- assessment reports and tax returns that are required by any law or regulation to be filed by DBI or any Subsidiary, and all those reports and returns are accurate and complete. DBI and each Subsidiary have duly paid or deposited all taxes due and payable, or which have been assessed against DBI 15 or any Subsidiary or which DBI or any Subsidiary is obligated to withhold from amounts owing to any employee. All taxes relating to the current year operations through the end of the most recently concluded fiscal month of DBI prior to the Closing Date have been accrued or reflected in the books and records of DBI and each Subsidiary. Except as disclosed on Schedule 5.16, no taxing or assessment authority has indicated to DBI in writing any intent to conduct an audit or other investigation or asserted any unresolved deficiencies with respect to tax liabilities of DBI or any Subsidiary for any period and DBI has no Knowledge of any facts or circumstances which would give rise thereto. 5.17 Labor Relations. Except as disclosed on Schedule 5.17, neither DBI --------------- nor any Subsidiary has any: (A) unfair labor practice charge or complaint or other proceeding pending or, to its Knowledge, threatened against DBI or any of the Subsidiaries before the National Labor Relations Board; (B) labor strike, slowdown or stoppage pending or, to the Knowledge of DBI, threatened against or affecting DBI or any of the Subsidiaries; (C) pending collective bargaining negotiations relating to the employees of DBI or any of the Subsidiaries; (D) pending petitions for recognition of a labor union or association as the exclusive bargaining agent for any or all of the employees of DBI or any of the Subsidiaries, and, to the Knowledge of DBI, there has not been any general solicitation of representation cards by any union seeking to represent the employees of DBI or any of the Subsidiaries as their exclusive bargaining agent; (E) collective bargaining agreements; or (F) material arbitrations, grievances, suits or administrative proceedings before any government entity relating to labor or employment matters involving any employees of DBI or any of the Subsidiaries. 5.18 ERISA. ----- (A) Schedule 5.18 accurately identifies all Plans. DBI has delivered or caused to be delivered to Buyer a copy of each Plan. Except as disclosed on Schedule 5.18, (i) no Plan has been terminated within the past twenty- four months; and (ii) there is no investigation, action, suit, arbitration or other legal, administrative or other proceeding pending, or to the Knowledge of DBI, threatened, against any Plan or any assets of any Plan. 16 (B) Except as provided in Schedule 5.18, each Plan is in compliance with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the Internal Revenue Code of 1986, as amended (the "Code"), as well as each Plan's terms and conditions. Except as provided in Schedule 5.18, there have been no "prohibited transactions" and no "reportable events" within the meaning of the ERISA and the Code within the last twenty-four months with respect to any Plan. Neither DBI nor any of the Subsidiaries have incurred any "accumulated funding deficiency" within the meaning of ERISA or incurred any liability to the Pension Benefit Guaranty Corporation in connection with a Plan (or other class of benefit that the Pension Benefit Guaranty Corporation has elected to insure). 5.19 Brokers or Finders. DBI has not engaged the services of any broker ------------------ or finder with respect to the transactions contemplated by this Agreement, and no Person has, or will have, as a result of the consummation of the transactions contemplated by this Agreement, any right, interest or valid claim against or upon DBI for any commission, fee or other compensation as a finder or broker thereof, except that Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has been retained by DBI in connection with the transactions contemplated by this Agreement, as described on Schedule 5.19. 5.20 Transactions With Affiliates. Except as disclosed on Schedule 5.20, ---------------------------- no director or officer of DBI or any Subsidiary (i) has any contractual relationship or arrangements with, or commitments to, DBI or any Subsidiary; (ii) has any direct or indirect interest in any right, property or assets which are used by DBI or any Subsidiary in the conduct of its business; or (iii) owns any securities of, or has any direct or indirect interest in, any entity which conducts a material amount of business with DBI or any Subsidiary, other than ownership of not more than 1% of a public company. 5.21 Customers and Suppliers. Schedule 5.21 contains a list of the sales ----------------------- to the twenty largest customers of DBI within the twelve months ended December 31, 1997 and of purchases from and the identity of the ten largest suppliers to DBI during such period. Except as set forth in Schedule 5.21, since January 1, 1997: (a) DBI has not received from any of the top five customers listed on Schedule 5.21 notice that such customer intends to discontinue all or substantially all of its purchasing from DBI, and (b) DBI has not received from any of the major suppliers of DBI notice that any significant supplier intends to discontinue delivery of supplies to DBI. 5.22 Improper Payments. Neither DBI or any Subsidiary, nor any officer, ----------------- agent or employee of DBI, nor, to the Knowledge of DBI or any Subsidiary, any distributor, licensee or any other person acting on behalf of DBI or any Subsidiary, (a) has made any unlawful domestic or foreign political contributions; (b) has made any payment or provided services which were not legal to make or provide or which DBI or any Subsidiary or any such officer, employee or other 17 person should have known were not legal for the payee or the recipient of such services to receive; (c) has received any payments, services or gratitudes which were not legal to receive or which DBI or any Subsidiary or such person should have known were not legal for the payor or the provider to make or provide; (d) has had any transactions or payments required to be reflected in its financial statements which are not recorded in its accounting books and records or disclosed in its financial statements; (e) has had any off-book bank or cash accounts or "slush funds"; (f) has made any payments to governmental officials in their individual capacities for the purpose of affecting their action or the action of the government they represent to obtain special occasions; or (g) has made illegal payments to obtain or retain business. Neither DBI or any Subsidiary nor, to the Knowledge of DBI, any of the employees, have received or paid a "kickback" or any improper or illegal rebate, commission or other payment in connection with the Business. 5.23 Insurance. Schedule 5.23 contains a complete and correct list and --------- summary description (including the name of the insurer, coverage, premium, deductible and expiration date) of all policies of insurance which are in force, including the amounts thereof, maintained by DBI or any Subsidiary or in which DBI or any Subsidiary is a named insured or on which DBI or any Subsidiary is paying premiums. Subject to the deductibles set forth in Schedule 5.23, such policies are in full force and effect and, based on the past experience of DBI, are adequate to provide coverage against risks of a material nature to which DBI or any Subsidiary would normally be exposed in the operation of its business. 5.24 Product Claims. Schedule 5.24 contains an accurate and complete -------------- statement of all written warranties, warranty policies, service and maintenance agreements of DBI or any Subsidiary. A summary of the customer claims for defective products or poor performance related to the Business since January 1, 1996 is included in Schedule 5.24. 5.25 Product Liability. Schedule 5.25 contains an accurate and complete ----------------- list and summary description of all existing liabilities, claims or obligations arising from or alleged to arise from any injury to persons or property as a result of the ownership, consumption, possession or use of any product sold by DBI or any Subsidiary, or service rendered by DBI or any Subsidiary, or any failure on the part of DBI or any Subsidiary to deliver product or render service, on or prior to the Closing Date. All such claims are fully covered by product liability insurance, subject to any applicable deductibles on Schedule 5.23. There are no recalls, threatened or pending, of any product of DBI or any Subsidiary. 5.26 Software and Information Systems. Schedule 5.26 identifies or -------------------------------- describes all material computer software, programs and information systems ("Software") used by the Company or any Subsidiary, all of which is licensed from third parties. Schedule 5.26 describes the procedures and actions to be taken by DBI with respect to the continued effective use of its software and information systems after December 31, 1999. Neither DBI nor its Subsidiaries is in violation of any third party software license. 18 5.27 Environmental Matters. --------------------- (A) Except as identified in Schedule 5.27, DBI and each Subsidiary has previously and is currently complying with its obligations under all Environmental Laws in connection with the operation of the Business, its occupancy of facilities and otherwise, except for such non-compliance which has been remedied to the extent required by the Environmental Laws or to the satisfaction of applicable governmental agencies. Except as identified in Schedule 5.27, neither DBI nor any Subsidiary has received any written or, to the Knowledge of DBI, any oral notice alleging any potential non- compliance with or potential liability pursuant to any Environmental Laws or with respect to any Materials of Environmental Concern. (B) Except as identified in Schedule 5.27, no Materials of Environmental Concern have ever been unlawfully generated, treated, stored, or disposed of by DBI or any Subsidiary at any facility owned, leased, operated or utilized by DBI or any Subsidiary (a "Facility"). No underground storage tanks, as defined in RCRA or under applicable state law, are present at any Facility or are operated by DBI or any Subsidiary at any Facility, and, to the Knowledge of DBI, no such tanks were previously abandoned or removed, except as identified in Schedule 5.27. Except as identified on Schedule 5.27, there are no Materials of Environmental Concern or other condition or use of any Facility, whether natural or man-made, which poses a significant threat of damage to the health of persons, to property, to natural resources, or to the environment. (C) Except as identified in Schedule 5.27, with respect to the Business, each Facility and its assets, neither DBI or any Subsidiary nor the Business has any liability or unfulfilled obligation, whether fixed, unliquidated, absolute, contingent or otherwise, under any Environmental Laws, including any liability, responsibility or obligation for fines or penalties, or for investigation, expense, removal, or remedial action to effect compliance with or discharge any duty, obligation or claim under any such laws or regulations, and, to the Knowledge of DBI, no such claims, actions, suits, proceedings or investigations under such laws or regulations exist or may be brought or threatened. Except as identified in Schedule 5.27, (i) there has not been, and is not occurring at any Facility, or any location to which DBI or any Subsidiary ever sent any materials, or its current or former operations, any release or threatened release, as those terms are defined in CERCLA, of any Materials of Environmental Concern resulting from the operations of DBI or any Subsidiary; and (ii) to the Knowledge of DBI, such a release is not occurring and has not occurred at any time in the past. Except as identified in Schedule 5.27, neither DBI nor any Subsidiary has ever arranged for disposal or treatment, arranged with a transporter to or accepted for transport any Materials of Environmental Concern, to a facility, site or location, which, pursuant to CERCLA or any similar state or local law, (i) has been placed or has been publicly proposed by authorities having jurisdiction to be 19 placed, on the National Priorities List or its state equivalent; or (ii) which is subject to a claim, administrative order or other request to take removal or remedial action by any person having jurisdiction and authority in the matter. (D) Schedule 5.27 identifies all environmental audits or assessments or occupational health studies undertaken by or on behalf of DBI or any Subsidiary or legal counsel therefor or, to the Knowledge of DBI, governmental agencies with respect to each Facility and the Business, in the past five years. (E) For purposes of this Agreement, the following terms shall have the meanings set forth below: (1) "Environmental Laws" (A) means all federal, state and local ------------------ laws, statutes, decisions, rules, ordinances, regulations, moratoria, orders and requirements ("Laws") relating to (i) pollution or the protection of the environment (including air, surface water, ground water, soil, land surface or subsurface strata), or (ii) disposal, emissions, discharges, spills, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, import, export, treatment, storage, disposal, transport or handling of Materials of Environmental Concern, and (B) shall include the Resource Conservation and Recovery Act, as amended ("RCRA"); the Comprehensive Environmental Response Compensation and Liability Act, as amended ("CERCLA"); the Federal Water Pollution Control Act, as amended; the Occupational Safety and Health Act, as amended; the Clean Air Act, as amended; the Safe Drinking Water Act, as amended; the Toxic Substances Control Act, as amended; the Emergency Planning and Community Right-to-Know Act; the Hazardous Materials Transportation Act, as amended; all Laws related thereto, all implementing Laws and all similar state and local Laws with respect to each of the foregoing acts. (2) "Materials of Environmental Concern" means any and all ---------------------------------- hazardous chemicals and materials, and any and all hazardous substances as defined in CERCLA, hazardous wastes as defined in RCRA, petroleum and petroleum products, radioactive materials, and any and all other hazardous chemicals, materials, constituents, pollutants or contaminants regulated under any Environmental Laws. 5.28 Receivables. All of the accounts receivable of DBI and each ----------- Subsidiary as of the Closing will be valid claims against customers for goods or services delivered or rendered in the ordinary course of business. 20 5.29 Disclosure. The representations and warranties made by DBI in this ---------- Agreement, or in any certificate, statement or other document furnished to Buyer by DBI pursuant to this Agreement, and the written information and documents provided by DBI to Buyer on or before the date hereof, excluding specifically the memorandum prepared by DLJ, all as modified by the Schedules to this Agreement and all as taken as a whole, in light of the circumstances made, do not contain untrue statements of material facts and do not omit to state material facts necessary to make the statements therein in light of the circumstances under which they were made, not misleading. DBI makes no representation or warranty with respect to any forecasts, plans, estimates, budgets or projections contained in any of the foregoing except that such prospective information prepared by DBI was prepared in good faith. To the Knowledge of DBI, DBI is not aware of any facts pertaining to DBI, any Subsidiary or the Business which are reasonably likely to have a Material Adverse Effect. 6. Representations and Warranties of Buyer. Buyer represents and warrants to --------------------------------------- DBI and the Shareholders as follows: 6.1 Organization and Authority. Buyer is a limited liability company duly -------------------------- organized, validly existing and in good standing under the laws of the State of Delaware. All company acts and proceedings required to be taken by Buyer to authorize the execution, delivery and performance of, and the consummation of the transactions contemplated by, this Agreement have been duly and properly taken. 6.2 Due Execution. This Agreement has been duly executed and delivered by ------------- Buyer and constitutes a valid and binding obligation of Buyer, enforceable against it in accordance with its terms, except that (A) such enforceability may be subject to bankruptcy, insolvency, reorganization, moratorium or other laws, decisions or equitable principles now or hereafter in effect relating to or affecting the enforcement of creditors' rights or debtors' obligations generally; and (B) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefore may be brought. 6.3 No Conflicts. The execution and delivery of this Agreement does not, ------------ and the consummation of the transactions contemplated by, and the compliance with the terms of, this Agreement will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a benefit under, or result in the creation of any Lien upon any of the properties or assets of, Buyer under any provision of, or require any consent, authorization or approval under 21 (A) any provision of the governing documents of Buyer; (B) any contract, agreement, instrument or other document to which Buyer is a party or by which any of its properties or assets are bound; or (C) any material judgment, order or decree or any material statute, law, ordinance, rule or regulation applicable to Buyer or its assets, other than (1) compliance with and filings under the HSR Act and any applicable foreign laws; and (2) those that may be required solely by reason of DBI's (as opposed to any other party's) participation in the transactions contemplated by this Agreement. 6.4 Governmental Consents. No consent, approval, license, permit, order --------------------- or authorization of, or registration, declaration or filing with, any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, is required to be obtained or made by or with respect to Buyer in connection with the execution and delivery of this Agreement, or the consummation by Buyer of the transactions contemplated by this Agreement, other than (A) compliance with and filings under the HSR Act and any applicable foreign laws; and (B) those that may be required solely by reason of DBI's (as opposed to any other party's) participation in the transactions contemplated by this Agreement. 6.5 Actions and Proceedings. There are no: ----------------------- (A) outstanding judgments, orders, writs, injunctions or decrees of any court, governmental agency or arbitration tribunal against Buyer which may have a materially adverse effect on the ability of Buyer to consummate the transactions contemplated by this Agreement; or (B) actions, suits, claims or legal, administrative or arbitration proceedings or investigations pending or, to the knowledge of Buyer, threatened against Buyer, which have or could have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. 22 6.6 Brokers or Finders. Buyer has not engaged the services of any broker ------------------ or finder with respect to the transactions contemplated by this Agreement, and no Person has, or will have, as a result of the consummation of the transactions contemplated by this Agreement, any right, interest or valid claim against or upon Buyer for any commission, fee or other compensation as a finder or broker thereof. 6.7 Investment Intent; Experience. Buyer has sufficient knowledge and ----------------------------- experience in financial and business matters to enable it to evaluate the merits and risks of the transactions contemplated by this Agreement and has so evaluated the merits and risks of the transactions contemplated by this Agreement to its satisfaction. Buyer is acquiring the Preferred Shares and Warrants for its own account, for investment purposes and not with a present view for resale or for distribution of all or any portion of the Preferred Shares or Warrants. The Buyer understands that the Preferred Shares and Warrants have not been, and will not be, registered under the Securities Act of 1933, as amended, as of the Closing or under any state securities laws. The Preferred Shares and Warrants are being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering, and such certificates will bear a legend restricting the transfer thereof. Buyer is an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (4) under the Securities Act of 1933. Buyer is able to bear the economic risks inherent in holding the Preferred Shares and Warrants. 6.8 Principal Office. The state in which Buyer's principal office is ---------------- located is the State of California. 6.9 Financing. Buyer has the financing commitments attached hereto as --------- Schedule 6.9. As of the date hereof, such commitments are in full force and effect and contain the complete understanding of the parties thereto with respect to the matters described therein. Buyer will not terminate such commitments unless it has secured substitute commitments sufficient to provide the financing under Section 12.4 7. Covenants of DBI and the Shareholders. DBI and the Shareholders covenant ------------------------------------- and agree as follows: 7.1 Access. Prior to the Closing, DBI must give Buyer, and Buyer's ------ representatives, employees, counsel and accountants, reasonable access, during normal business hours and upon reasonable notice to Andrew M. Hunter, III or Edward A. Michael, to the books and records of DBI and the Subsidiaries, such access will not unreasonably interfere with the normal operations of DBI or the Business and all requests for access to management personnel must be approved in advance by Edward A. Michael or Andrew M. Hunter, III. Access to management personnel will not be unreasonably withheld and may only be requested to the extent necessary to facilitate financing or the consummation of the transactions contemplated by this Agreement and will, in any event, require the participation of Edward A. Michael who will be reasonably available. 23 7.2 Ordinary Conduct. Except as permitted by the terms of this Agreement, ---------------- from the date of this Agreement to the Closing Date, DBI shall and shall cause the Subsidiaries to conduct the Business in the ordinary course consistent with past practice. Without the prior written consent of Buyer, neither DBI nor any Subsidiary will do any of the following: (A) sell, lease, license or otherwise dispose of, or agree to sell, lease, license or otherwise dispose of, any interest in any of its assets that are material, individually or in the aggregate, to the Business, except for the sales of inventory in the ordinary course of business consistent with past practice; (B) create, incur, assume or guarantee any indebtedness for money borrowed or increase the amount of any indebtedness outstanding under any line of credit, loan agreement, mortgage, or other borrowing arrangement in existence on the date of this Agreement, except in the ordinary course of business consistent with past practice; (C) amend any existing Material Contract, or enter into any new contract that would constitute a Material Contract, other than purchase and sale orders in the ordinary course of business or necessary for the maintenance of property relating to the Business; (D) except as provided in Section 8.5 or, in connection with the exercise of outstanding stock options, declare or pay any dividend or other distribution on its capital stock, issue or agree to issue any such stock or other securities or redeem or repurchase any of its securities; (E) fail to maintain its assets in operating condition sufficient for operations of the Business as currently operated; (F) fail to comply with any obligation under any Material Contracts; (G) except as otherwise provided herein, fail to use reasonable efforts to keep available the services of the present employees of the Business and preserve the goodwill of customers, suppliers and others having business relationships with the Business; (H) fail to maintain its books, accounts and records in the usual, regular and ordinary manner on a basis consistent with past practice; (I) enter into, amend or terminate employment, bonus, severance or retirement contract, plan or arrangement, or increase or agree to increase any salary or other form of compensation or benefits payable or to become payable to any executive employee, except, with respect to non-executive employees, in the ordinary course of business consistent with past practice; 24 (J) except as provided in DBI's 1998 Capital Budget, including a software operating lease described on Schedule 5.26 (which will include installation and consulting costs), purchase, acquire or lease, or agree or commit to purchase, acquire or lease any asset in an individual amount in excess of $25,000, other than purchases of raw materials and supplies in the ordinary course of business, consistent with past practices; or (K) enter into any agreement to do any of the foregoing. From the date of this Agreement to the Closing Date, each Shareholder and DBI shall not (and DBI shall instruct its officers, representatives, agents and advisors not to) solicit, encourage or negotiate any proposal from or with, or supply information to, persons other than Buyer or its representatives with respect to, or in connection with, the acquisition of DBI or any Subsidiary or its business or material assets or ownership interests therein, and will promptly advise Buyer of any acquisition proposal or inquiry with respect to such a proposal that DBI receives. 7.3 Non-Disclosure. Except as required by law or court order, no -------------- Shareholder will disclose, or use directly or indirectly, to or for the benefit of any person or entity other than DBI, and each Shareholder will use all reasonable efforts to prevent any affiliate from disclosing, any confidential or proprietary information, data or materials of DBI or any Subsidiary, except to the extent such information is in the public domain through no fault of the Shareholder. Each Shareholder may disclose such information to his or her auditors, attorneys, financial advisors, bankers and other consultants and advisors. Each Shareholder agrees that any breach of this Section 7.3 will result in irreparable damage to DBI for which DBI will have no adequate remedy at law, and, therefore if such a breach should occur, hereby consents to any temporary or permanent injunction or decree of specific performance by any court of competent jurisdiction in favor of DBI enjoining any such breach, without prejudice to any other right or remedy to which DBI shall be entitled. 7.4 Non-Competition. During the period commencing on the Closing Date and --------------- continuing for five (5) years, each Shareholder designated on Exhibit C as being bound by this Section 7.4 shall not, directly or indirectly, anywhere in the United States, Canada or Mexico, (a) engage in any activities, as an owner, investor (except for an investment of less than five percent in a publicly held company), partner, consultant or otherwise, in competition with the Business, as currently conducted by DBI; or (b) induce or attempt to persuade any employee, agent or customer of DBI or any Subsidiary to terminate such employment agency or business relationship. If this covenant is determined by any court of competent jurisdiction to be invalid or unenforceable for any reason, including, without limitation, by reason of such agreement extending for too great a period of time or over too great a geographical area, or by reason of its being too extensive in any other respect, such agreement, to the specific extent that it is 25 unenforceable, this covenant shall be deemed automatically modified and shall be interpreted to extend only over the maximum extent as to which it is valid and enforceable in order to effectuate the parties' intent to the greatest extent possible. Any such modification or interpretation shall have no effect on the validity or enforceability of any remaining provisions of this Agreement. Each Shareholder agrees that any breach of this Section 7.4 will result in irreparable damage to DBI for which DBI will have no adequate remedy at law, and, therefore if such a breach should occur, hereby consents to any temporary or permanent injunction or decree of specific performance by any court of competent jurisdiction in favor of DBI enjoining any such breach, without prejudice to any other right or remedy to which DBI shall be entitled. 7.5 Empire Inventory. On the first anniversary of the Closing Date or ---------------- such earlier date as the Empire Inventory is liquidated, DBI shall pay to the Shareholders in the manner provided in Section 1.4(D) an amount equal to the amount recovered by DBI or Empire Candle ("Recovered Amount") with respect to the inventory purchased by Empire Candle from Empire Manufacturing Company in February 1997 (the "Empire Inventory") including any recovered fees and expenses of collection incurred after the Closing less any amount by which DBI's net proceeds (not required to be paid to any person) from the liquidation of the Empire Inventory (assuming for such purposes that the net proceeds from liquidation of any Empire Inventory still held by DBI on the date of such payment to the Shareholders is zero) is less than $1,000,000. In no event shall the Shareholders receive more than $1,000,000 of the Recovered Amount plus recovered fees and expenses of collection incurred after the Closing. If such recovery is received prior to Closing, any inventory written off as a result of such recovery will remain as an asset for purposes of the Closing Date Working Capital. The Shareholders shall be entitled to control the claim and settlement with respect to such Empire Inventory; provided that any such settlement does not obligate DBI except as to delivery of any proceeds from the liquidation of the Empire Inventory. DBI will provide such assistance as may be reasonably requested by the Shareholders in this matter. All fees and expenses of collection will be borne by the Shareholders, except to the extent in the Recovered Amount. DBI will use all reasonable efforts to liquidate the Empire Inventory as soon as reasonably practicable. 8. Covenants of Buyer. Buyer covenants as follows: ------------------ 8.1 Non-Disclosure. Prior to the Closing Date, Buyer may not disclose, -------------- and must take all necessary action to prevent all Recipients from disclosing, any Confidential Information to any Person and Buyer may not use, and Buyer must take all reasonable action to prevent any Recipient from using (other than in connection with the transactions contemplated by this Agreement), any Confidential Information, without the prior written consent of an officer of DBI, except disclosures made exclusively: 26 (A) to Buyer's employees, agents and representatives who have a need to know such Confidential Information for the performance of their duties as employees, agents or representatives; (B) to enforce Buyer's rights and remedies under this Agreement; or (C) to the extent required by law, but only if Buyer first notifies Edward A. Michael in writing of that required disclosure and uses Buyer's best efforts to cooperate with Edward A. Michael to obtain a protective order or other similar determination with respect to such Confidential Information. 8.2 Return of Information. If the transactions contemplated by this --------------------- Agreement are not consummated by May 7, 1998, Buyer must promptly return, and use reasonable efforts to cause all other Recipients to return, to DBI all Confidential Information and any copies of, and notes and extracts regarding, Confidential Information, and all documents and other information supplied to Buyer or any other Recipient by DBI. 8.3 Survival. Notwithstanding any other provision in this Agreement to -------- the contrary, the obligations of confidentiality contained in Sections 8.1 and 8.2 will survive the termination of this Agreement for a period of five years. 8.4 Director and Officer Liability. For six years after the Closing Date, ------------------------------ Buyer will not take any action to cause DBI not to, and DBI will not fail to, indemnify and hold harmless the present and former officers and directors of DBI in respect of acts or omissions occurring prior to the Closing to the extent provided under DBI's Articles of Incorporation, Bylaws and any Indemnification Agreements in effect on the date of this Agreement true and complete copies of which have been delivered to Buyer. But, if any claim or claims are asserted or made within that six-year period, all rights to indemnification in respect of any such claim or claims will continue until final disposition of any and all such claims. 8.5 Tax Matters. In the event that any taxing authority conducts an audit ----------- to determine the amount of any taxes of DBI or any Subsidiary for any period ending on or before the Closing Date, during which period an S election was in effect with respect to DBI, or asserts any tax liability for such period, the Shareholders Representative shall have the exclusive authority to direct, compromise or contest such audit or asserted tax liabilities as he shall, in his sole discretion, deem proper. In such event, Buyer and DBI shall cause DBI or the respective Subsidiary to empower (by power of attorney or such other documentation as may be appropriate) Shareholders Representative or his designee to represent DBI or the Subsidiary in any audit or administrative or judicial proceeding insofar as such audit or proceeding involves any asserted liability for taxes for the period specified above. Notwithstanding the foregoing, the Shareholders Representative shall keep DBI fully informed regarding the audit or asserted tax liability described above. Without the prior written consent of the Shareholders Representative, 27 DBI will not, except as required by law, regulation or order, amend any foreign, federal, state or local income tax return where such amendment is made after the Closing Date and the effect of which is to increase any income taxes payable by shareholders of DBI for any period on or before the Closing Date. Where such amendment is required by law, DBI shall provide adequate notice to the Shareholders Representative to allow review of such amendment prior to filing. DBI will prepare the final income tax return for DBI, and the related forms K-1 through the Closing Date. Notwithstanding any provision in this Agreement to the contrary, DBI may make cash distributions to its shareholders for the estimated tax liability of those shareholders for income earned by DBI through the Closing Date, as mutually determined in good faith by DBI and Buyer. In addition, DBI may distribute an additional amount equal to the Shareholders' Accumulated Adjustment Account prior to Closing, provided such distribution is reflected in the calculation of Equity Value by a corresponding increase in the Debt Amount. 8.6 Fees. At the Closing, DBI must pay all fees of DLJ and all legal and ---- accounting fees incurred by DBI, whether incurred on behalf of DBI or any of the holders of the Shares and the DBI Options, which relate to the transactions contemplated in this Agreement, accrual for which will be reflected in the Closing Date Working Capital Amount. 9. Mutual Covenants. The parties covenant and agree as follows: ---------------- 9.1 Publicity. DBI, Buyer and the Shareholders agree that no public --------- release or announcement concerning the transactions contemplated by this Agreement may be issued by DBI, on the one hand, or Buyer, on the other, without the prior written consent of the other parties (which consent may not be unreasonably withheld), except as such release or announcement may be required by the applicable laws, rules or regulations of any United States or foreign securities exchange, in which case the party required to make the release or announcement must allow the other party reasonable time to comment on such release or announcement in advance of such issuance. Any consent required by the Shareholders shall be made by the Shareholders Representative. Notwithstanding the foregoing, DBI and Buyer agree to hold in confidence and not disclose the information set forth on Exhibit A or C with respect to one or more Shareholders without the written consent of such Shareholder, except as may be required by law or necessary for Buyer to consummate the transactions contemplated hereby, to prosecute claims against any Shareholder or to defend against any claim. 9.2 Best Efforts. Subject to the terms of this Agreement, each party will ------------ use its best efforts to cause the closing of the transactions contemplated in this Agreement to occur by the Closing Date, it being acknowledged that time is of the essence. Buyer and DBI will use their best efforts to obtain any consents required under Section 4.1(D). 9.3 Record Retention. DBI will retain its records existing on the Closing ---------------- Date for a period of five years from the Closing Date, or for any longer period as may be required by any 28 government agency or ongoing litigation, and will make such records available to the former shareholders of DBI as may be reasonably required by the Shareholder Representative. 9.4 Antitrust Notification. If required, DBI and Buyer shall, as promptly ---------------------- as practicable following the execution and delivery of this Agreement, file with the United States Federal Trade Commission (the "FTC") and the United States Department of Justice (the "DOJ") the notification and report forms (the "HSR Filing") required for the transactions contemplated by this Agreement and any supplemental information requested in connection therewith pursuant to the HSR Act. Those notification and report forms and any supplemental information will be in substantial compliance with the requirements of the HSR Act. Each of DBI and Buyer shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission which is necessary under the HSR Act. DBI and Buyer shall keep each other apprised of the status of any communications with, and inquiries or requests for additional information from, the FTC and the DOJ and must promptly comply with any such inquiry or request. Each of DBI and Buyer shall use its best efforts to obtain as promptly as possible any clearance required under the HSR Act for the transactions contemplated hereby. 10. Survival and Indemnity. ---------------------- 10.1 Survival. All representations, warranties, covenants and agreements -------- contained in this Agreement shall be deemed to be material and to have been relied upon by the parties hereto, and all of the representations and warranties herein shall survive the Closing and the consummation of the transactions contemplated in this Agreement for a period of fifteen (15) months after the Closing Date, except that the representations and warranties in Section 5.16 (taxes) shall survive until the expiration of the statutes of limitation applicable to claims of such types related to any period ending on or before the Closing Date and the representations and warranties in Section 5.27 (environmental) and the indemnities in Section 10.2(iii) - (vi) shall survive for thirty (30) months after the Closing Date. All such representations and warranties shall expire upon the expiration of the survival period specified in this Section 10.1. All covenants contained in this Agreement shall survive the Closing indefinitely or until satisfied, except those which by their terms have a different effective period. No claim for the recovery of any indemnifiable Loss or Expense for a breach of a representation or warranty may be asserted by the Buyer against Shareholders after such representation or warranty shall have expired, provided, however, that claims first asserted in writing within the pre-expiration period shall survive until resolved. 10.2 Indemnity. --------- (A) Shareholders, severally in proportion to their ownership of Retained Stock, shall indemnify, defend and hold harmless Buyer and its affiliates (including, after the Closing, DBI and the Subsidiaries), directors, officers and employees (each an 29 "Indemnified Party") from and against and pay (a) any and all liabilities, losses, costs and damages (including, without limitation, direct damages, interest, fines, penalties, monetary sanctions or other relief) (collectively, "Loss"), and (b) any and all attorneys' and accountants' fees and expenses, court costs and other out-of-pocket expenses (collectively, "Expense"), incurred or suffered by any such Indemnified Party arising from or relating to (i) any breach of any warranty, or the inaccuracy of any representation, made by DBI in this Agreement; (ii) the failure by DBI or any Shareholder to perform any of the covenants or agreements made by it in this Agreement (excluding any covenant to be performed by DBI on or after the Closing); or (iii) whether or not disclosed by DBI as of the Closing Date, the use, treatment, or storage at, or release from, any of the premises owned or used by DBI or any Subsidiary ("Premises") prior to the Closing, of any Materials of Environmental Concern, (iv) any of DBI or any Subsidiary or any agent, representative, or other person or entity acting for or on behalf of DBI or any Subsidiary having at any time prior to the Closing engaged in or restrained from engaging in any activity, or holding, exercising, or failing to exercise any power or authority such as to, at any time, subject DBI or any Subsidiary in any manner to any liability (including, but not limited to costs of investigation, remediation, property damage, personal injury damage, punitive awards, penalties, or fines) arising from any ownership, possession, use, storage, transportation, disposal, or release of any Materials of Environmental Concern from or at any location prior to the Closing, (v) the existence or maintenance of any fuel or other storage tank on or under the Premises at any time prior the Closing; (vi) the presence prior to the Closing of any hazardous substance, asbestos containing materials, or polychlorinated biphenyl substance in, under or upon any of the Premises, the presence of which is, at the Closing, in violation of any Environmental Law; (vii) the litigation matters identified as items 1, 2 and 3 of Schedule 5.14(A), except to the extent of any reserve for litigation on the Closing Date Working Capital, other than such portion of the reserve specifically attributable to other litigation; or (viii) related to any restrictions on the use by Forster of the names "Woodsies" or "Forster" in the Business, other than a restriction on the use of the name "Forster" for lawn games. (B) Buyer shall indemnify, defend and hold harmless the Shareholders from and against and pay any Loss or Expense incurred or suffered by any Shareholder arising from or relating to (i) any breach of any warranty or the inaccuracy of any representation made by Buyer in this Agreement; or (ii) the failure by Buyer to perform any of the covenants or agreements made by it in this Agreement. 10.3 Defense of Third Party Claims. In the event that after the Closing, ----------------------------- an Indemnified Party becomes involved in any litigation (hereinafter in this Section 10.3 called "Litigation") in which an adverse result may give rise to Shareholders' obligation to indemnify hereunder, Buyer will give prompt written notice to Shareholders Representative of the pendency of any such Litigation, and the following provisions shall be applicable: (i) Shareholders Representative 30 shall have the right to participate in and control the contest and defense of such Litigation at the Shareholders' own cost and expense, including the cost and expense of attorneys' fees in connection therewith, and (ii) in the event that Shareholders Representative does not assume control of the contest and defense of the Litigation, then Buyer may use, but shall not be obligated to use, its efforts to contest and defend such Litigation at its cost and expense (but subject to its rights to indemnification hereunder), and in such case Shareholders will assist Buyer to such extent as it reasonable in its contest and defense of such Litigation. No settlement of any claim for which indemnification is sought hereunder shall be made without the written consent of other party hereto, which consent shall not be unreasonably withheld. 10.4 Limitations. ----------- (A) If the Closing occurs, the liability of the Shareholders under Section 10.2 shall be limited as follows: (i) the Shareholders shall have no liability under Section 10.2 until the aggregate Loss and Expense arising out of the matters as set forth in Section 10.2 in the aggregate exceed $1,000,000 (the "Threshold Amount") and then only to the extent of such excess; (ii) except as provided in Section 10.5, any recovery by an Indemnified Party for Loss or Expense under Section 10.2 shall be sought solely from the Retained Stock in the Escrow described in Section 10.5, which shall be valued at the Per Share Equity Value, as adjusted pursuant to Section 1.4(D); (iii) except as provided in Section 10.5, the Shareholders shall have no liability under Section 10.2 for aggregate Losses and Expenses which exceed $10,000,000 (the "Liability Cap"); (iv) any proceeds from insurance paid to DBI or Buyer which relate to any fact, event or circumstance requiring indemnity pursuant to Section 10.2 shall constitute a credit which shall be offset against the total Losses and Expenses (before the application of the Threshold Amount); (v) any Loss or Expense calculated for purposes of Section 10.2 shall be calculated taking into account any offsetting federal, state, local or foreign tax benefits that are realized because of such Loss or Expense to an Indemnified Party; and (vi) the Shareholders shall have no liability under Section 10.2 with respect to any costs or expenses of any remediation or environmental equipment repair, upgrade or addition undertaken by DBI unless (x) ordered or demanded by a court, governmental body or agency; or (y) such remediation, repair, upgrade or addition is required to be undertaken by applicable Environmental Law; or (z) necessary in order for DBI to be in compliance with applicable Environmental Laws and resulting from an investigation (if there is an investigation) and remediation or environmental equipment repair, upgrade or addition which would be voluntarily undertaken under customary business practices in the industry. In addition, Shareholders shall not be obligated to indemnify Buyer pursuant to Section 10.2 for any loss or expense resulting from and related to the violation of any applicable Environmental Law by DBI or any Subsidiary after the Closing or, to the extent of the accrual therefor set forth in the Closing Date Working Capital, for any current ongoing monitoring or closure plan costs of DBI and its Subsidiaries. 31 (B) If the Closing occurs, the liability of Buyer under Section 10.2 shall be limited as follows: (i) Buyer shall have no liability under Section 10.2 until the aggregate Loss and Expense arising out of the matters as set forth in Section 10.2 in the aggregate exceed $1,000,000 and then only to the extent of the excess; and (ii) Buyer shall have no liability under Section 10.2 for aggregate Losses and Expenses which exceed $10,000,000. 10.5 Escrow Matters. For purposes of administering claims by Buyer under -------------- this Section 10, at Closing each Shareholder shall place in escrow, under the terms of the Indemnification Escrow Agreement attached as Exhibit F, two-thirds of the number of shares of Retained Stock held by such Shareholder at the Closing. Except as provided below, the Retained Stock shall be held in escrow for a period of thirty (30) months after the Closing Date. After DBI completes a public offering of its Common Stock, or an event under 3.2.1 or 3.2.2 of the Stockholders Agreement occurs, the entire balance of the Retained Stock (or, if an event under 3.2.1 or 3.2.2 of the Stockholders Agreement, up to the amount removed to comply with such provisions) may be removed from the escrow and replaced by the amount of cash received from the sale of such shares, but not in excess of $20,000,000, in which case the Liability Cap shall be adjusted upward by the amount by which the cash received upon sale, up to $20,000,000, exceeds the Liability Cap. After the Retained Stock is released from escrow, the Shareholders shall be free to sell such Retained Stock without lien or other encumbrance of Buyer arising under the terms of this Agreement. 10.6 Exclusive Remedy. Buyer acknowledges and agrees that, from and after ---------------- the Closing, its sole and exclusive remedy with respect to any and all claims related to the subject matter of this Agreement (other than claims of fraud) shall be pursuant to the indemnification provisions set forth in this Section 10. 11. Further Assurances. From time to time, as and when requested by any party, ------------------ any other party shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions, as such other party may reasonably deem necessary to consummate the transactions contemplated by this Agreement. 12. Termination. ----------- 12.1 Notwithstanding any provision in this Agreement contrary, this Agreement may be terminated, and the transactions contemplated by this Agreement abandoned, at any time on or prior to the Closing Date (A) by mutual written consent of DBI and Buyer; 32 (B) by DBI if any of the conditions set forth in Section 4.2 have not been satisfied, through no fault of DBI, or waived in writing by DBI, on the Closing Date; (C) by Buyer if any of the conditions set forth in Section 4.1 have not been satisfied, through no fault of Buyer, or waived in writing by Buyer, on the Closing Date; or (D) by either DBI or Buyer if the Closing does not occur on or prior to May 8, 1998, but only if, prior to that date, the party requesting termination used all reasonable efforts and acted in good faith to close the transactions contemplated by this Agreement and to satisfy all conditions precedent to the closing of these transactions. 12.2 If DBI or Buyer desires to terminate this Agreement pursuant to Section 12.1, that party must give written notice to the other parties. Upon receipt of that notice, this Agreement will be terminated without further action by any party. 12.3 If this Agreement is terminated as provided in this Section 12, this Agreement will become void and of no further force and effect, except for the provisions of: (A) Sections 8.1, 8.2 and 8.3; (B) Section 9.1; (C) this Section 12; and (D) Sections 13.1, 13.2, 13.3 and 13.4. 12.4 Nothing contained in this Section 12 will release any party from any liability for any breach by such party of any of the terms or provisions of this Agreement or impair the right of any party to compel specific performance by another party of its obligations under this Agreement. Without limiting the foregoing, Buyer agrees that if all of the conditions in Section 4.1 are satisfied, DBI and the Shareholders are able and willing to effect the Closing and Buyer is required to effect the Closing hereunder, but is unable to do so due to Buyer's failure to secure financing necessary to allow DBI to refinance the Debt and to pay the Common Stock Repurchase Amount, the Option Value and the Purchase Price at the Closing, which Buyer acknowledges is, in each case, its obligations to secure (and is a condition precedent to DBI's and the Shareholders' obligations hereunder), Buyer will be in breach of this Agreement and DBI and the Shareholders will have all remedies provided by law with respect to the failure to consummate the transactions contemplated hereby, notwithstanding any limitations in Schedule 10.4(B) which shall apply from and after Closing. 13. General Provisions. ------------------ 33 13.1 Certain Expenses. Except as otherwise provided in this Agreement, ---------------- all costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement must be paid by the party incurring those costs or expenses. 13.2 Attorneys' Fees. Should any litigation be commenced concerning this --------------- Agreement, or the rights and duties of any party with respect to it, the party prevailing will be entitled, in addition to such other relief as may be granted, to a reasonable sum for such party's attorneys' fees and expenses determined by the court in such litigation or in a separate action brought for that purpose. This Section 13.2 will survive indefinitely. 13.3 Notices. All notices, and replies to such notices, required under ------- this Agreement must be in writing, properly addressed to the other party, signed by the party giving notice, and may be delivered by hand, sent by facsimile transaction, sent by a nationally-recognized overnight delivery service, or sent by certified mail, return receipt requested. Notices are effective upon receipt. Notices sent by mail are deemed to be received on the date of receipt indicated by the return verification provided by the U.S. Postal Service. Notice sent by a nationally-recognized overnight delivery service are deeded to be received on the next business day after date of sending. Notices sent by facsimile transaction are deemed to be received the date on which sent and are conclusively presumed to have been received if the sender's copy of the facsimile transaction contains the "answer back" of the other party's facsimile transaction. Notice must be given, mailed or sent to the parties at the following addresses, or at such other address as may be given by proper notice. This Section 13.3 will survive indefinitely. If to DBI (pre-closing) or Shareholders Representative, addressed to: Hunter Keith Industries, Inc. 5100 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Attn: Andrew M. Hunter, III Fax No.: 612-338-7079 with a copy to (which copy does not constitute notice): 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 34 If to Buyer or (DBI post-closing), addressed to: c/o 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 (which copy does not constitute notice): McDermott, Will & Emery 227 West Monroe Street Chicago, IL 60606 Attn: Helen R. Friedli, P.C. Fax No.: (312) 984-7700 13.4 Miscellaneous. No amendment to this Agreement is effective unless it ------------- is in writing and signed by each party. The headings contained in this Agreement, or in any Schedule or Exhibit, are for reference purposes only and do not affect in any way the meaning or interpretation of this Agreement. This Agreement may be executed in one or more counterparts, all of which are considered one and the same agreement, and are effective when one or more of those counterparts have been signed by each of the parties and delivered to the other parties. This Agreement constitutes the entire agreement and understanding between the parties with respect to the subject matter of this Agreement and supersedes all prior agreements and understandings relating to that subject matter. The parties agree that neither has made any representations, warranties, covenants or undertakings other than as expressly provided for in this Agreement and the Schedules and Exhibits attached hereto. If any provision of this Agreement, or the application of any such provision to any Person or circumstance, is held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision of this Agreement. No party may assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of each of the other parties, except that Buyer may assign its rights hereunder to another entity or individual and may designate additional "accredited investors" to purchase the Preferred Shares and/or Warrants, provided such purchasers make the same representation as is in Section 6.7 and do not otherwise, solely by their participation, adversely affect DBI's ability under the federal and state securities laws to issue such securities. This Agreement is for the sole benefit of the parties and their permitted assigns and nothing in this Agreement is intended to give to any Person, other than such parties and persons, any legal or equitable rights under this Agreement. This Agreement is governed in accordance with the internal laws of the state of Minnesota, without regard to the conflict of laws statutes or provisions of any jurisdiction. This Section 13.4 will survive the Closing Date indefinitely. 35 14. Shareholders Representative. --------------------------- (A) Each of the Shareholders hereby irrevocably constitutes and appoints Andrew M. Hunter, III, and Mr. Hunter hereby accepts such appointment, as their agent and attorney-in-fact with full power of substitution and revocation to do any and all things and execute any and all documents on his or her behalf which may be necessary, convenient or appropriate with respect to: (i) amendments to this Agreement, provided that no amendment shall materially adversely affect the rights of any one Shareholder relative to any other Shareholders; (ii) the execution of documents and certificates pursuant to this Agreement; (iii) determination of the Working Capital Adjustment; (iv) receipt and forwarding of notices and communications pursuant to this Agreement; and (v) negotiation and compromise of any indemnity claims made by Buyer hereunder. The Shareholders Representative is authorized (i) to take all actions which the Shareholders Representative considers necessary or desirable in connection with the defense, pursuit or settlement of any determinations relating to the matters described above, including to sue, defend, negotiate, settle and compromise any such claims for indemnification made by Buyer pursuant to this Agreement or any of the agreements or transactions contemplated hereby; (ii) to engage and employ agents and representatives (including accoutants, legal counsel and other professionals) and to incur such other expenses as he shall deem necessary or prudent in connection with the administration of the foregoing; and (iii) to take all other actions and exercise all other rights which the Shareholders Representative (in his sole discretion) considers necessary or appropriate in connection with the foregoing. Notwithstanding anything to the contrary contained in this Agreement, the Shareholders Representative shall have no duties or responsibilities except as expressly set forth herein, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on behalf of any Shareholder shall otherwise exist against the Shareholders Representative. (B) The Buyer and DBI shall be fully protected in dealing with Mr. Hunter under this Agreement and may rely upon the authority of Mr. Hunter to act as the Shareholders Representative. The Shareholders Representative is authorized to act on the Shareholders' behalf notwithstanding any dispute or disagreement among the Shareholders. The appointment of Mr. Hunter is coupled with an interest and is irrevocable by any Shareholder in any manner or for any reason, unless written revocation is personally delivered to Mr. Hunter and the Buyer on or prior to the time that action on behalf of the Shareholders is taken or payments or deliveries are made, in which case such revocation shall only apply to actions taken or proposed to be taken after receipt of such notice. This power of attorney shall not be affected by the death, disability or incapacity of any Shareholder. 36 (C) If at any time there is no person acting as Shareholders Representative for any reason, the Shareholders holding a majority interest in the Retained Stock shall choose a person to act as Shareholders Representative under this Agreement. (D) Neither the Shareholders Representative nor any agent employed by him shall be liable to any Shareholder relating to the performance of his duties under this Agreement for any errors in judgment, negligence, oversight, breach of duty or otherwise except to the extent it is finally determined in a court of competent jurisdiction by clear and convincing evidence that the actions taken or not taken by the Shareholders Representative constituted fraud or were taken or not taken in bad faith. The Shareholders Representative shall be indemnified and held harmless by the Shareholders against all costs, expenses and damages paid or incurred in connection with any action, suit, proceeding or claim to which the Shareholders Representative is made a party by reason of the fact that he was acting as the Shareholders Representative pursuant to this Agreement; provided, however, that the Shareholders Representative shall not be entitled to indemnification hereunder to the extent it is finally determined in a court of competent jurisdiction by clear and convincing evidence that the actions taken or not taken by the Shareholders Representative constituted fraud or were taken or not taken in bad faith. The Shareholders Representative shall be protected in acting upon any notice, statement or certificate believed by him to be genuine and to have been furnished by the appropriate person and in acting or refusing to act in good faith on any matter. 15. Certain Definitions. ------------------- 15.1 "Confidential Information" (A) "Confidential Information" means: (1) with respect to DBI, all financial, technical, commercial or other information disclosed by DBI to Buyer or Buyer's respective directors, officers, employees, advisors or affiliates (such Person a "Recipient") in connection with the transactions contemplated by this Agreement; (2) the fact of the transactions contemplated by this Agreement; and (3) each of the terms, conditions and other provisions contained in this Agreement and the agreements or documents delivered pursuant to this Agreement. (B) Notwithstanding Section 15.1(A), Confidential Information does not include any information that: 37 (1) is in the public domain at the time of disclosure to the Recipient or becomes part of the public domain after such disclosure through no action or fault of any Recipient; (2) is already know by Recipient from independent sources at the time of disclosure to such Recipient other than (a) as a result of a breach of any provision of this Agreement; or (b) from any source who, after reasonable investigation by Recipient, is not bound by any confidentiality agreement with, or other contractual, legal or fiduciary duty of confidentiality to, DBI or either of the Subsidiaries; or (3) is subsequently disclosed to a Recipient by any Person who is not a party to this Agreement (but only if that Recipient does not have actual knowledge after reasonable investigation that such Person is prohibited from disclosing such information, either by reason of contract or legal or fiduciary obligation) and who has a legal right to transmit that information. 15.2 "Financial Statements" means the audited consolidated financial statements of DBI for the fiscal years ended December 31, 1995, 1996 and 1997, and unaudited consolidated financial statements of DBI for the one-month interim period ended January 31, 1997, including the consolidated balance sheet statements, income statements, statements of shareholders equity and statements of cash flows of DBI for each of the periods then ended. 15.3 "GAAP" means United States generally accepted accounting principles, applied on a consistent basis. 15.4 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976. 15.5 "Intellectual Property" means, with respect to DBI, and the Subsidiaries all of the following (and all amendments, modifications, and improvements thereto): (A) letters patent and patent applications; (B) tradenames, trademarks or service marks, and all registrations and applications related thereto, common law trademarks, and all goodwill associated therewith; (C) copyrights and copyright registrations and applications; and 38 (D) discoveries, ideas, technology, know-how, trade secrets, processes, formulas, drawings and designs, computer programs or software. 15.6 "Knowledge" means, with respect to DBI or any Subsidiary, the knowledge of any officer or director of DBI or any Subsidiary. 15.7 "Lien" means any lien, encumbrance, security interest, pledge, mortgage, option, charge or similar restriction. 15.8 "Material Contracts" means those contracts and agreements (all of which are identified on Schedule 5.12) to which DBI or any of the Subsidiaries is a party that: (A) relates to the borrowing of money or the guaranty of any obligation for the borrowing of money; (B) involves the receipt or payment of more than $25,000 in any one year and is not terminable on 30 or fewer days' notice at any time without a penalty; (C) prohibits or limits the ability of DBI or any of the Subsidiaries to engage in any business or compete with any Person; or (D) obligates DBI or any of the Subsidiaries to purchase goods or services for consideration in excess of $25,000. 15.9 "Material Adverse Effect" means any effect on DBI or any of the Subsidiaries that is in the aggregate materially adverse to the Business or the operations or financial condition of DBI and the Subsidiaries taken as a whole. 15.10 "Person" means any natural person or entity. 15.11 "Plan" means any "employee benefit plan," "employee pension benefit plan," "defined benefit plan" or "multiemployer benefit plan" which DBI or any Subsidiary maintains, contributes to, or is required to maintain or contribute to. As used in this Agreement, the terms "employee benefit plan," "employee pension benefit plan," "defined benefit plan," and "multiemployer benefit plan" have the respective meanings assigned to each of them in Section 3 of ERISA and any applicable rules and regulations promulgated under ERISA. 39 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. SEAVER KENT--TPG PARTNERS L.P. By________________________________ Its_______________________________ SEAVER KENT I PARALLEL, L.P. By________________________________ Its_______________________________ DIAMOND BRANDS INCORPORATED By________________________________ Its_______________________________ 40 EXHIBITS Exhibit A Shareholders Exhibit B Terms of Preferred Shares and Warrants Exhibit C Shareholder Information Exhibit D Price Adjustment Escrow Agreement Exhibit E Stockholders Agreement Exhibit F Indemnification Escrow Agreement SCHEDULES Schedule 3.3(D) Key Employees Schedule 5.3 Conflicts Schedule 5.5 Capitalization Schedule 5.6 Restrictions Schedule 5.8 Undisclosed Liabilities Schedule 5.9 Certain Changes Schedule 5.10 Encumbrances Schedule 5.12 Material Contracts Schedule 5.13 Intellectual Property Schedule 5.14(A) Litigation Schedule 5.14(B) Consent Decrees; Orders Schedule 5.15(A) Compliance With Laws Schedule 5.15(B) Permits Schedule 5.16 Tax Matters Schedule 5.17 Labor Relations Schedule 5.18 ERISA Schedule 5.19 Brokers Schedule 5.20 Transactions with Affiliates Schedule 5.21 Customers and Suppliers Schedule 5.23 Insurance Schedule 5.24 Product Warranty; Claims Schedule 5.25 Product Liability Schedule 5.26 Software Licenses Schedule 5.27 Environmental Matters Schedule 6.9 Financing Commitments 41 EX-3.1 3 CERTIFICATE OF INCORPORATION CERTIFICATE OF INCORPORATION OF DIAMOND BRANDS OPERATING CORP. __________________________ FIRST: The name of the corporation is Diamond Brands Operating Corp. SECOND: The registered office of the corporation in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The name of its registered agent shall be The Corporation Trust Company. THIRD: The purposes of the corporation are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: The total number of shares of all classes of stock which the corporation shall have authority to issue is 1,000 shares of Common Stock, par value $.01 per share. FIFTH: The name and mailing address of the sole incorporator is as follows: Thomas Beehler 227 West Monroe Street Suite 3100 Chicago, IL 60606 SIXTH: In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized and empowered, in the manner provided in the By-Laws of the corporation, to make, alter, amend and repeal the By-Laws of the corporation in any respect not inconsistent with the laws of the State of Delaware or with this Certificate of Incorporation. In addition to the powers and authorities hereinbefore or by statute expressly conferred upon it, the Board of Directors may exercise all such powers and do all such acts as may be exercised or done by the corporation, subject, nevertheless, to the provisions of the laws of the State of Delaware, this Certificate of Incorporation and the By-Laws of the corporation. Any contract, transaction or act of the corporation or of the directors or of any committee which shall be ratified by the holders of a majority of the shares of stock of the corporation present in person or by proxy and voting at any annual meeting, or at any special meeting called for such purpose, shall, insofar as permitted by law or by this Certificate of Incorporation, be as valid and as binding as though ratified by every stockholder of the corporation. SEVENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code, or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation as the case may be, and also on this corporation. EIGHTH: A director of the corporation shall not be personally liable to the corporation 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, (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or hereafter may be amended, or (iv) for any transaction from which the director derived an improper personal benefit. 2 If the Delaware General Corporation Law 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 authorized by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of this Article shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. NINTH: The books of the corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By- Laws of the corporation. Election of directors need not be by ballot unless the By-Laws of the corporation shall so provide. TENTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. I, THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the purpose of forming a corporation pursuant to the General Corporation Law of the State of Delaware, do make this certificate, hereby declaring and certifying that the facts stated are true, and accordingly, have hereunto set my hand this 8/th/ day of April, 1998. ___________________________________ Thomas Beehler 3 EX-3.2 4 CERTIFICATE OF INCORPORATION OF EMPIRE CANDLE ARTICLES OF INCORPORATION OF EMPIRE CANDLE, INC. The undersigned incorporator, a natural person of full age, in order to form a corporation FOR profit under the laws of the State of Kansas, hereby adopts the following Articles of Incorporation: ARTICLE I The name of this corporation is Empire Candle, Inc. ARTICLE II The registered office of this corporation in Kansas is c/o The Corporation Company, Inc., 515 South Kansas Avenue, Topeka, Shawnee County, Kansas 66603. The name of the registered agent at above address is The Corporation Company, Inc. ARTICLE III The nature of the corporation business or purposes to be conducted or promoted is the manufacturing and distribution of candles and related products and to conduct such other activities as may be permitted by law. ARTICLE IV The corporation is authorized to issue an aggregate total of 1,000 shares of common stock with a stated par value of $0.01 per share. All shares are of one class and one series, except that the Board of Directors, by its action, may establish more than one class or series. ARTICLE V No shareholder of this corporation is entitled to any cumulative voting rights. ARTICLE VI No shareholder of this corporation has any preferential, preemptive or other rights to subscribe for, purchase or acquire any shares of the corporation of any class, whether unissued or now or hereafter authorized, or any obligations or other securities convertible into or exchangeable for any such shares. ARTICLE VII Any action required or permitted to be taken at a meeting of the Board of Directors of this corporation, or any committee thereof, may be taken by written action signed by all of the directors. ARTICLE VIII The name and mailing address of each person who is to serve as a director until the first annual meeting of the stockholders or until a successor is elected and qualified are: Name Address ---- ------- Edward A. Michael Parkdale Plaza, Suite 340, 1660 South Highway 100 Minneapolis, MN 55416 Andrew M. Hunter, III 5100 IDS Center, 80 South 8th Street Minneapolis, MN 55402 ARTICLE IX 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 as the same may now exist or may hereafter be amended. Any repeal or modification of the provisions of this Article will not adversely affect any right or protection of a director or an officer of the corporation existing at the time of such repeal or modification. 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 provisions of the 1972 General Corporation Code of Kansas, as it may be amended from time to time. ARTICLE X Is this corporation to exist perpetually? Yes. 2 ARTICLE XI The name and mailing address of the incorporator is Loren R. Thacker, Lindquist & Vennum P.L.L.P., 4200 IDS Center, 80 South 8th Street, Minneapolis, MN 55402. IN TESTIMONY WHEREOF, I have hereunto set my hand this 4th day of February, 1997. Loren R. Thacker, Incorporator STATE OF MINNESOTA) ) COUNTY OF HENNEPIN) Before me, a notary public in and for said county and state, personally appeared Loren R. Thacker who is known to me to be the same person who executed the foregoing Articles of Incorporation and duly acknowledged the execution of the same. In witness whereof, I have hereunto subscribed my name and affixed my official seal this 4th day of February, 1997. (Seal) _________________________________ Notary Public My appointment or commission expires _________________, 19__. 3 EX-3.3 5 CERTIFICATE OF INCORPORATION OF FORSTER
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 _________________________ _________________________ 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 _________________________________________ and its principal business location in Maine is ________________________ (physical location - ________________________________________________ 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: ________________________________________________________________________ (name) ________________________________________________________________________ (physical location - street (not P.O. Box), city, state and zip code) ________________________________________________________________________ (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 _______ (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 [_] 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 ______ directors, (see (S)703.1.a) and the maximum number, if any, shall be __________ 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) ________________ Par value of each share (if none, so state) _____________________ Number of shares authorized _________________ [_] 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 $______________________ - --------- 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 ______________________ _____________________________________ 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) _____________________________________ 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 EX-3.4 6 BY-LAWS OF DIAMOND BRANDS OPERATION CORP. BY-LAWS OF DIAMOND BRANDS OPERATING CORP. ------------------------------ ARTICLE I OFFICES ------- SECTION 1.1. REGISTERED OFFICE. The registered office of the corporation ----------------- shall be maintained in the City of Wilmington, State of Delaware, and the registered agent in charge thereof is The Corporation Trust Company. SECTION 1.2. OTHER OFFICES. The corporation may also have an office in ------------- Cloquet, Minnesota, and also offices at such other places as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II STOCKHOLDERS' MEETINGS ---------------------- SECTION 2.1. PLACE OF MEETINGS. All meetings of the stockholders, whether ----------------- annual or special, shall be held at the offices of the corporation, or at such other place as may be fixed from time to time by the Board of Directors. SECTION 2.2. ANNUAL MEETINGS. An annual meeting of the stockholders, --------------- commencing with the year 1998, shall be held on the first Monday in May in each year, but if a legal holiday then on the next secular day following, at 10:00 A.M., at which they shall elect a Board of Directors, and transact such other business as may properly be brought before the meeting. SECTION 2.3. NOTICE OF MEETING. Written notice of the annual meeting ----------------- stating the place, date and hour of the meeting, shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. SECTION 2.4. STOCKHOLDERS' LIST. At least ten days before every meeting ------------------ of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.5. SPECIAL MEETINGS. Special meetings of the stockholders, for ---------------- any purpose or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the President and shall be called by the Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning at least 75% of the number of shares of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. SECTION 2.6. NOTICE OF SPECIAL MEETINGS. Written notice of a special -------------------------- meeting, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. SECTION 2.7. QUORUM. The holders of a majority of the shares issued and ------ outstanding and entitled to vote thereat, present in person or represented by proxy, shall be requisite and shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute, by the Certificate of Incorporation or by these By-Laws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, of the place, date and hour of the adjourned meeting, until a quorum shall again be present or represented by proxy. At the adjourned meeting at which a quorum shall be present or represented by proxy, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment, a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 2.8. VOTING. When a quorum is present at any meeting, and subject ------ to the provisions of the General Corporation Law of the State of Delaware, the Certificate of Incorporation or by these By-Laws in respect of the vote that shall be required for a specified action, the vote of the holders of a majority of the shares having voting power, present in person or represented by proxy, shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the statutes or of the Certificate of Incorporation or of these By-Laws, a different vote is required in which case such express provision shall govern and control the decision of such question. Each -2- stockholder shall have one vote for each share of stock having voting power registered in his name on the books of the corporation, except as otherwise provided in the Certificate of Incorporation. SECTION 2.9. PROXIES. Each stockholder entitled to vote at a meeting of ------- stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A stockholder may execute a writing authorizing another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission, provided that the telegram, cablegram or other means of electronic transmission either sets forth or is submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. SECTION 2.10. MAJORITY CONSENT. Whenever the vote of stockholders at a ---------------- meeting thereof is required or permitted to be taken for or in connection with any corporate action by any provisions of the statutes or of the Certificate of Incorporation or these By-Laws, the meeting, notice of the meeting, and vote of stockholders may be dispensed with if stockholders owning stock having not less than the minimum number of votes which, by statute, the Certificate of Incorporation or these By-Laws, is required to authorize such action at a meeting at which all shares entitled to vote thereon were present and voted shall consent in writing to such corporate action being taken; provided that prompt notice of the taking of such action must be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS --------- SECTION 3.1. GENERAL POWERS. The business and affairs of the corporation -------------- shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the corporation and do all such acts and things as are not by the General Corporation Law of the State of Delaware nor by the Certificate of Incorporation nor by these By-Laws directed or required to be exercised or done by the stockholders. SECTION 3.2. NUMBER OF DIRECTORS. The number of directors which shall ------------------- constitute the whole Board shall be three. The directors shall be elected at the annual meeting of the -3- stockholders, and each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. SECTION 3.3. VACANCIES. If the office of any director or directors --------- becomes vacant by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, or a new directorship is created, the holders of a plurality of shares issued and outstanding and entitled to vote in elections of directors, shall choose a successor or successors, or a director to fill the newly created directorship, who shall hold office for the unexpired term or until the next election of directors. SECTION 3.4. PLACE OF MEETINGS. The Board of Directors may hold its ----------------- meetings outside of the State of Delaware, at the office of the corporation or at such other places as they may from time to time determine, or as shall be fixed in the respective notices or waivers of notice of such meetings. SECTION 3.5. COMMITTEES OF DIRECTORS. The Board of Directors may, by ----------------------- resolution or resolutions passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power of authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amendment to the By-Laws, of the corporation; and, unless the resolution, By-Laws, or Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. SECTION 3.6. COMPENSATION OF DIRECTORS. Directors, as such, may receive ------------------------- such stated salary for their services and/or such fixed sums and expenses of attendance for attendance at each regular or special meeting of the Board of Directors as may be established by resolution of the Board; provided that nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. -4- SECTION 3.7. ANNUAL MEETING. The annual meeting of the Board of Directors -------------- shall be held within ten days after the annual meeting of the stockholders in each year. Notice of such meeting, unless waived, shall be given by mail or telegram to each director elected at such annual meeting, at his address as the same may appear on the records of the corporation, or in the absence of such address, at his residence or usual place of business, at least three days before the day on which such meeting is to be held. Said meeting may be held at such place as the Board may fix from time to time or as may be specified or fixed in such notice or waiver thereof. SECTION 3.8. SPECIAL MEETINGS. Special meetings of the Board of Directors ---------------- may be held at any time on the call of the President or at the request in writing of any one director. Notice of any such meeting, unless waived, shall be given by mail or telegram to each director at his address as the same appears on the records of the corporation not less than one day prior to the day on which such meeting is to be held if such notice is by telegram, and not less than two days prior to the day on which the meeting is to be held if such notice is by mail. If the Secretary shall fail or refuse to give such notice, then the notice may be given by the officer or any one of the directors making the call. Any such meeting may be held at such place as the Board may fix from time to time or as may be specified or fixed in such notice or waiver thereof. Any meeting of the Board of Directors shall be a legal meeting without any notice thereof having been given, if all the directors shall be present thereat, and no notice of a meeting shall be required to be given to any director who shall attend such meeting. SECTION 3.9. ACTION WITHOUT MEETING. Any action required or permitted to ---------------------- be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if a written consent to such action is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors. Members of the Board of Directors, or any committee designated by the Board, may participate in a meeting of the Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this section shall constitute presence in person at such meeting. SECTION 3.10. QUORUM AND MANNER OF ACTING. Except as otherwise provided --------------------------- in these By-Laws, a majority of the total number of directors as at the time specified by the By-Laws shall constitute a quorum at any regular or special meeting of the Board of Directors. Except as otherwise provided by statute, by the Certificate of Incorporation or by these By-Laws, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given, except that notice shall -5- be given to all directors if the adjournment is for more than thirty days or if after the adjournment a new record date is fixed for the adjourned meeting. ARTICLE IV OFFICERS -------- SECTION 4.1. EXECUTIVE OFFICERS. The executive officers of the ------------------ corporation shall be a President, such number of Vice Presidents, if any, as the Board of Directors may determine, a Secretary and a Treasurer. One person may hold any number of said offices. SECTION 4.2. ELECTION, TERM OF OFFICE AND ELIGIBILITY. The executive ---------------------------------------- officers of the corporation shall be elected annually by the Board of Directors at its annual meeting or at a special meeting held in lieu thereof. Each officer, except such officers as may be appointed in accordance with the provisions of Section 4.3, shall hold office until his successor shall have been duly chosen and qualified or until his death, resignation or removal. None of the officers need be members of the Board. SECTION 4.3. SUBORDINATE OFFICERS. The Board of Directors may appoint -------------------- such Assistant Secretaries, Assistant Treasurers, Controller and other officers, and such agents as the Board may determine, to hold office for such period and with such authority and to perform such duties as the Board may from time to time determine. The Board may, by specific resolution, empower the chief executive officer of the corporation or the Executive Committee to appoint any such subordinate officers or agents. SECTION 4.4. REMOVAL. The President, any Vice President, the Secretary ------- and/or the Treasurer may be removed at any time, either with or without cause, but only by the affirmative vote of the majority of the total number of directors as at the time specified by the By-Laws. Any subordinate officer appointed pursuant to Section 4.3 may be removed at any time, either with or without cause, by the majority vote of the directors present at any meeting of the Board or by any committee or officer empowered to appoint such subordinate officers. SECTION 4.5. THE PRESIDENT. The President shall be the chief executive ------------- officer of the corporation. He shall have executive authority to see that all orders and resolutions of the Board of Directors are carried into effect and, subject to the control vested in the Board of Directors by statute, by the Certificate of Incorporation, or by these By-Laws, shall administer and be responsible for the management of the business and affairs of the corporation. He shall preside at all meetings of the stockholders and the Board of Directors; and in general shall perform all duties incident to the office of the President and such other duties as from time to time may be assigned to him by the Board of Directors. -6- SECTION 4.6. THE VICE PRESIDENTS. In the event of the absence or ------------------- disability of the President, each Vice President, in the order designated, or in the absence of any designation, then in the order of their election, shall perform the duties of the President. The Vice Presidents shall also perform such other duties as from time to time may be assigned to them by the Board of Directors or by the chief executive officer of the corporation. SECTION 4.7. THE SECRETARY. The Secretary shall: ------------- (a) Keep the minutes of the meetings of the stockholders and of the Board of Directors; (b) See that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) Be custodian of the records and of the seal of the corporation and see that the seal or a facsimile or equivalent thereof is affixed to or reproduced on all documents, the execution of which on behalf of the corporation under its seal is duly authorized; (d) Have charge of the stock record books of the corporation; (e) In general, perform all duties incident to the office of Secretary, and such other duties as are provided by these By-Laws and as from time to time are assigned to him by the Board of Directors or by the chief executive officer of the corporation. SECTION 4.8. THE ASSISTANT SECRETARIES. If one or more Assistant ------------------------- Secretaries shall be appointed pursuant to the provisions of Section 4.3 respecting subordinate officers, then, at the request of the Secretary, or in his absence or disability, the Assistant Secretary designated by the Secretary (or in the absence of such designations, then any one of such Assistant Secretaries) shall perform the duties of the Secretary and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Secretary. SECTION 4.9. THE TREASURER. The Treasurer shall: ------------- (a) Receive and be responsible for all funds of and securities owned or held by the corporation and, in connection therewith, among other things: keep or cause to be kept full and accurate records and accounts for the corporation; deposit or cause to be deposited to the credit of the corporation all moneys, funds and securities so received in such bank or other depositary as the Board of Directors or an officer designated by the Board may from time to time establish; and disburse or supervise the disbursement of the funds of the corporation as may be properly authorized. -7- (b) Render to the Board of Directors at any meeting thereof, or from time to time when ever the Board of Directors or the chief executive officer of the corporation may require, financial and other appropriate reports on the condition of the corporation; (c) In general, perform all the duties incident to the office of Treasurer and such other duties as from time to time may be assigned to him by the Board of Directors or by the chief executive officer of the corporation. SECTION 4.10. THE ASSISTANT TREASURERS. If one or more Assistant ------------------------ Treasurers shall be appointed pursuant to the provisions of Section 4.3 respecting subordinate officers, then, at the request of the Treasurer, or in his absence or disability, the Assistant Treasurer designated by the Treasurer (or in the absence of such designation, then any one of such Assistant Treasurers) shall perform all the duties of the Treasurer and when so acting shall have all the powers of and be subject to all the restrictions upon, the Treasurer. SECTION 4.11. SALARIES. The salaries of the officers shall be fixed from -------- time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the corporation. SECTION 4.12. BONDS. If the Board of Directors or the chief executive ----- officer shall so require, any officer or agent of the corporation shall give bond to the corporation in such amount and with such surety as the Board of Directors or the chief executive officer, as the case may be, may deem sufficient, conditioned upon the faithful performance of their respective duties and offices. SECTION 4.13. DELEGATION OF DUTIES. In case of the absence of any officer -------------------- of the corporation or for any other reason which may seem sufficient to the Board of Directors, the Board of Directors may, for the time being, delegate his powers and duties, or any of them, to any other officer or to any director. ARTICLE V SHARES OF STOCK --------------- SECTION 5.1. REGULATION. Subject to the terms of any contract of the ---------- corporation, the Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer, and registration of certificates for shares of the stock of the corporation, including the issue of new certificates for lost, stolen or destroyed certificates, and including the appointment of transfer agents and registrars. SECTION 5.2. STOCK CERTIFICATES. Certificates for shares of the stock of ------------------ the corporation shall be respectively numbered serially for each class of stock, or series thereof, -8- as they are issued, shall be impressed with the corporate seal or a facsimile thereof, and shall be signed by the President or a Vice President, and by the Secretary or Treasurer, or an Assistant Secretary or an Assistant Treasurer, provided that such signatures may be facsimiles on any certificate countersigned by a transfer agent other than the corporation or its employee. Each certificate shall exhibit the name of the corporation, the class (or series of any class) and number of shares represented thereby, and the name of the holder. Each certificate shall be otherwise in such form as may be prescribed by the Board of Directors. SECTION 5.3. RESTRICTION ON TRANSFER OF SECURITIES. A restriction on the ------------------------------------- transfer or registration of transfer of securities of the corporation may be imposed either by the Certificate of Incorporation or by these By-Laws or by an agreement among any number of security holders or among such holders and the corporation. No restriction so imposed shall be binding with respect to securities issued prior to the adoption of the restriction unless the holders of the securities are parties to an agreement or voted in favor of the restriction. A restriction on the transfer of securities of the corporation is permitted by this Section if it: (a) Obligates the holder of the restricted securities to offer to the corporation or to any other holders of securities of the corporation or to any other person or to any combination of the foregoing a prior opportunity, to be exercised within a reasonable time, to acquire the restricted securities; or (b) Obligates the corporation or any holder of securities of the corporation or any other person or any combination of the foregoing to purchase the securities which are the subject of an agreement respecting the purchase and sale of the restricted securities; or (c) Requires the corporation or the holders of any class of securities of the corporation to consent to any proposed transfer of the restricted securities or to approve the proposed transferee of the restricted securities; or (d) Prohibits the transfer of the restricted securities to designated persons or classes of persons; and such designation is not manifestly unreasonable; or (e) Restricts transfer or registration of transfer in any other lawful manner. Unless noted conspicuously on the security, a restriction, even though permitted by this Section, is ineffective except against a person with actual knowledge of the restriction. -9- SECTION 5.4. TRANSFER OF SHARES. Subject to the restrictions permitted by ------------------ Section 5.3, shares of the capital stock of the corporation shall be transferable on the books of the corporation by the holder thereof in person or by his duly authorized attorney, upon the surrender or cancellation of a certificate or certificates for a like number of shares. As against the corporation, a transfer of shares can be made only on the books of the corporation and in the manner hereinabove provided, and the corporation shall be entitled to treat the registered holder of any share as the owner thereof and shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the statutes of the State of Delaware. SECTION 5.5. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. (a) ------------------------------------------------------- In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; providing, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the General Corporation Law of the State of Delaware, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings by stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the General Corporation Law of the State of Delaware, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. -10- (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. SECTION 5.6. LOST CERTIFICATE. Any stockholder claiming that a ---------------- certificate representing shares of stock has been lost, stolen or destroyed may make an affidavit or affirmation of the fact and, if the Board of Directors so requires, advertise the same in a manner designated by the Board, and give the corporation a bond of indemnity in form and with security for an amount satisfactory to the Board (or an officer or officers designated by the Board), whereupon a new certificate may be issued of the same tenor and representing the same number, class and/or series of shares as were represented by the certificate alleged to have been lost, stolen or destroyed. ARTICLE VI BOOKS AND RECORDS ----------------- SECTION 6.1. LOCATION. The books, accounts and records of the corporation -------- may be kept at such place or places within or without the State of Delaware as the Board of Directors may from time to time determine. SECTION 6.2. INSPECTION. The books, accounts, and records of the ---------- corporation shall be open to inspection by any member of the Board of Directors at all times; and open to inspection by the stockholders at such times, and subject to such regulations as the Board of Directors may prescribe, except as otherwise provided by statute. SECTION 6.3. CORPORATE SEAL. The corporate seal shall contain two -------------- concentric circles between which shall be the name of the corporation and the word "Delaware" and in the center shall be inscribed the words "Corporate Seal." ARTICLE VII DIVIDENDS AND RESERVES ---------------------- SECTION 7.1. DIVIDENDS. The Board of Directors of the corporation, --------- subject to any restrictions contained in the Certificate of Incorporation and other lawful commitments of the corporation, may declare and pay dividends upon the shares of its capital stock either out of -11- the surplus of the corporation, as defined in and computed in accordance with the General Corporation Law of the State of Delaware, or in case there shall be no such surplus, out of the net profits of the corporation for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If the capital of the corporation, computed in accordance with the General Corporation Law of the State of Delaware, shall have been diminished by depreciation in the value of its property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, the Board of Directors of the corporation shall not declare and pay out of such net profits any dividends upon any shares of any classes of its capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired. SECTION 7.2. RESERVES. The Board of Directors of the corporation may set -------- apart, out of any of the funds of the corporation available for dividends, a reserve or reserves for any proper purpose and may abolish any such reserve. ARTICLE VIII MISCELLANEOUS PROVISIONS ------------------------ SECTION 8.1. FISCAL YEAR. The fiscal year of the corporation shall end on ----------- the 31st day of December of each year. SECTION 8.2. DEPOSITORIES. The Board of Directors or an officer ------------ designated by the Board shall appoint banks, trust companies, or other depositories in which shall be deposited from time to time the money or securities of the corporation. SECTION 8.3. CHECKS, DRAFTS AND NOTES. All checks, drafts, or other ------------------------ orders for the payment of money and all notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers or agent or agents as shall from time to time be designated by resolution of the Board of Directors or by an officer appointed by the Board. SECTION 8.4. CONTRACTS AND OTHER INSTRUMENTS. The Board of Directors may ------------------------------- authorize any officer, agent or agents to enter into any contract or execute and deliver any instrument in the name and on behalf of the corporation and such authority may be general or confined to specific instances. SECTION 8.5. NOTICES. Whenever under the provisions of the statutes or of ------- the Certificate of Incorporation or of these By-Laws notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, by depositing the same in a post office or letter box, in a postpaid -12- sealed wrapper, or by delivery to a telegraph company, addressed to such director or stockholder at such address as appears on the records of the corporation, or, in default of other address, to such director or stockholder at the General Post Office in the City of Dover, Delaware, and such notice shall be deemed to be given at the time when the same shall be thus mailed or delivered to a telegraph company. SECTION 8.6. WAIVERS OF NOTICE. Whenever any notice is required to be ----------------- given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice. SECTION 8.7. STOCK IN OTHER CORPORATIONS. Any shares of stock in any --------------------------- other corporation which may from time to time be held by this corporation may be represented and voted at any meeting of shareholders of such corporation by the President or a Vice President, or by any other person or persons thereunto authorized by the Board of Directors, or by any proxy designated by written instrument of appointment executed in the name of this corporation by its President or a Vice President. Shares of stock belonging to the corporation need not stand in the name of the corporation, but may be held for the benefit of the corporation in the individual name of the Treasurer or of any other nominee designated for the purpose by the Board of Directors. Certificates for shares so held for the benefit of the corporation shall be endorsed in blank or have proper stock powers attached so that said certificates are at all times in due form for transfer, and shall be held for safekeeping in such manner as shall be determined from time to time by the Board of Directors. SECTION 8.8. INDEMNIFICATION. (a) 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 (hereinafter a "proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director or officer of the corporation or is or was a director or officer of the corporation who is or was serving at the request of the corporation 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 fullest extent authorized by the laws of Delaware as the same now or may hereafter exist (but, in the case of any change, only to the extent that such change authorizes the corporation to provide broader indemnification rights than said law permitted the corporation to provide prior to such change) against all costs, charges, expenses, liabilities and losses (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts -13- 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. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the corporation the expenses incurred in defending any such proceeding in advance of its final disposition upon receipt by the corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that the director or officer is not entitled to be indemnified under this Section or otherwise. The corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the corporation with the same scope and effect as the foregoing indemnification of directors and officers. (b) If a claim under subsection (a) of this Section is not paid in full by the corporation within thirty days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has failed to meet a standard of conduct which makes it permissible under Delaware law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he has met such standard of conduct, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such standard of conduct, nor the termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall be a defense to the action or create a presumption that the claimant has failed to meet the required standard of conduct. (c) The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, by-law, agreement, vote of stockholders or disinterested directors or otherwise. (d) The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under Delaware law. -14- (e) To the extent that any director, officer, employee or agent of the corporation is by reason of such position, or a position with another entity at the request of the corporation, a witness in any proceeding, he shall be indemnified against all costs and expenses actually and reasonably incurred by him or on his behalf in connection therewith. (f) Any amendment, repeal or modification of any provision of this Section by the stockholders or the directors of the corporation shall not adversely affect any right or protection of a director or officer of the corporation existing at the time of such amendment, repeal or modification. SECTION 8.9. AMENDMENT OF BY-LAWS. The stockholders, by the affirmative -------------------- vote of the holders of a majority of the stock issued and outstanding and having voting power may, at any annual or special meeting if notice of such alteration or amendment of the By-Laws is contained in the notice of such meeting, adopt, amend, or repeal these By-Laws, and alterations or amendments of By-Laws made by the stockholders shall not be altered or amended by the Board of Directors. The Board of Directors, by the affirmative vote of a majority of the whole Board, may adopt, amend, or repeal these By-Laws at any meeting, except as provided in the above paragraph. By-Laws made by the Board of Directors may be altered or repealed by the stockholders. -15- EX-3.5 7 BY-LAWS OF EMPIRE CANDLE BYLAWS OF EMPIRE CANDLE, INC. ARTICLE I --------- OFFICES AND CORPORATE SEAL Section 1.01. Registered and Other Offices. The registered office of the ---------------------------- corporation in Kansas is the address set forth in the Articles of Incorporation or in the most recent amendment of the Articles of Incorporation or statement of the Board of Directors filed with the Secretary of State of Kansas changing the registered office in the manner prescribed by law. The corporation may have such other offices, within or without the State of Kansas, as the Board of Directors may, from time to time, determine. Section 1.02. Corporate Seal. The corporation has no corporate seal. -------------- ARTICLE II ---------- MEETINGS OF SHAREHOLDERS Section 2.01. Time and Place of Meetings. Regular or special meetings of -------------------------- the shareholders, if any, must be held on the date and at the time and place fixed by the Chairman of the Board of Directors or, if a Chairman of the Board of Directors has not been elected, by Board action or, in the absence of Board action, by the President, except that a regular or special meeting called by, or at the demand of a shareholder or shareholders, must be held in the county where the principal executive office is located. Section 2.02. Regular Meetings. At any regular meeting of the ---------------- shareholders there must be an election of qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six (6) months after the date of the meeting. Any business appropriate for action by the shareholders may be transacted at a regular meeting. No meeting may be considered a regular meeting unless specifically designated as such in the notice of meeting or unless all the shareholders are present in person or by proxy and none of them objects to such designation. Section 2.03. Demand by Shareholders. Regular or special meetings may be ---------------------- demanded by a shareholder or shareholders, pursuant to the provisions of Kansas Statutes, Article 65, 17-6501. Section 2.04. Quorum, Adjourned Meetings. The holders of a majority of -------------------------- the voting power of the shares entitled to vote at a meeting constitute a quorum for the transaction of business; said holders may be present at the meeting either in person or by proxy. In the absence of a quorum, any meeting may be adjourned to a subsequent date, provided a notice of such adjournment is mailed to each shareholder entitled to vote at least five (5) days before such adjourned meeting. If a quorum is present, a meeting may be adjourned from time to time without notice other than announcement at such meeting. At adjourned meetings at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though withdrawal of shareholders originally present leaves less than the proportion or number otherwise required for a quorum. Section 2.05. Voting. At each meeting of the shareholders, every ------ shareholder having the right to vote must be entitled to vote either in person or by proxy. Unless otherwise provided by the Articles of Incorporation or a resolution of the Board of Directors filed with the Secretary of State, each shareholder will have one vote for each share held. Upon demand of any shareholder, the vote upon any question before the meeting must be by ballot. Section 2.06. Notice of Meetings. Notice of all meetings of shareholders ------------------ must be given to every holder of voting shares, except where the meeting is an adjourned meeting at which a quorum was present and the date, time and place of the meeting were announced at the time of adjournment. The notice must be given at least ten (10), but not more than sixty (60) days before the date of the meeting, except that written notice of a meeting at which there is to be considered either (i) an agreement of merger or consolidation other than a merger of the nature described in Kansas Statutes Article 17-6703, (ii) a proposal to dispose of all or substantially all of the property and assets of the corporation, (iii) a proposal to dissolve the corporation, or (iv) a proposal to amend the Articles of Incorporation, must be mailed to all shareholders, whether entitled to vote or not, at least twenty (20) days prior thereto. Every notice of any special meeting must state the purpose or purposes for which the meeting has been called, and the business transacted at all special meetings must be confined to the purpose stated in the call, unless all of the shareholders are present in person or by proxy and none of them objects to consideration of a particular item of business. Section 2.07. Waiver of Notice. A shareholder may waive notice of any ---------------- meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at or after the meeting and whether given in writing, orally or by attendance. Section 2.08. Authorization Without a Meeting. Any action required or ------------------------------- permitted to be taken at a meeting of the shareholders may be taken without a meeting by written action signed by all of the shareholders entitled to vote on that action. 2 ARTICLE III ----------- DIRECTORS Section 3.01. General Powers. The business and affairs of the Corporation -------------- must be managed by and must be under the direction of the Board of Directors. Section 3.02. Number, Qualifications and Term of Office. The Board of ----------------------------------------- Directors of this corporation must consist of one or more directors as fixed from time to time by the shareholders. In addition, the number of directors may be increased or, subject to Kansas Statutes, Article 17-6301, decreased at any time by action of the Board of Directors. Directors need not be shareholders. Each of the directors must hold office until the regular meeting of the shareholders next held after his or her election, until his or her successor has been elected and qualified, subject, however, to prior retirement, resignation, death or removal from office, as provided in these Bylaws. Section 3.03. Board Meetings; Place and Notice. Meetings of the Board of -------------------------------- Directors may be held from time to time at any place within or without the State of Kansas that the Board of Directors may designate. In the absence of designation by the Board of Directors, Board meetings must be held at the principal executive office of the corporation, except as may be otherwise unanimously agreed orally or in writing or by attendance. The Chairman of the Board, the President, or directors comprising at least one third of the number of directors then in office may call a Board meeting by giving five (5) days' notice if by mail or two (2) days' notice if by telephone, facsimile transmission, telegram or in person, to all directors of the day or date and time of the meeting. The notice need not state the purpose of the meeting. If a meeting schedule is adopted by the Board, or if the date and time of a Board meeting has been announced at a previous meeting, no notice is required. Section 3.04. Action Without Meeting. An action required or permitted to ---------------------- be taken at a Board meeting may be taken by written action signed by all of the directors. Any such written action is effective when signed by all directors, unless a different effective time is provided in the written action. Section 3.05. Waiver of Notice. Notice of any meeting of the Board of ---------------- Directors may be waived by a director either before, at, or after such meeting in a writing signed by such director; provided, however, that a director, by his attendance and participation in any action taken at the meeting of the Board of Directors, is deemed to waive notice of such meeting. Section 3.06. Quorum. A majority of the directors currently holding ------ office is a quorum for the transaction of business. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though 3 withdrawal of directors originally present leaves less than the proportion or number otherwise required for a quorum. Section 3.07. Advance Consent by Absent Directors. A director may give ----------------------------------- advance written consent or opposition to a proposal to be acted on at a Board of Directors' meeting. Section 3.08. Vacancies. Any vacancies occurring in the Board of --------- Directors for any reason, and any newly created directorships resulting from an increase in the number of directors, may be filled by a majority of the directors then in office. Any director so chosen must hold office until the regular meeting of the shareholders next held after his or her election, until his or her successor has been elected and qualified, subject, however, to prior retirement, resignation, death or removal from office, as provided in these Bylaws. ARTICLE IV ---------- OFFICERS Section 4.01. Number and Offices. The officers of the corporation must ------------------ consist of a President, Treasurer and Secretary and may also consist of one or more Vice Presidents (any one of whom may be designated an Executive Vice President or Senior Vice President in the discretion of the Board), one or more Assistant Secretaries and one or more Assistant Treasurers. The Board may elect or appoint any other officers it deems necessary for the operation and management of the corporation, each of whom will have the powers, rights, duties, responsibilities and terms of office determined by the Board from time to time. Any number of officers or functions of those offices may be held or exercised by the same person. Section 4.02. Chairman of the Board. The Board of Directors may also --------------------- elect as an officer a Chairman of the Board, who, if so elected, must preside at all meetings of the Board of Directors, must make such reports to the Board of Directors as may from time to time be required, and must have such other powers and must perform such other duties as may be from time to time assigned to him or her by the Board of Directors. If a Chairman of the Board is not appointed, or is not present at any meetings of the Board of Directors, the duties and responsibilities of the Chairman of the Board set forth in this Section 4.02 must be performed by the President. Section 4.03. Election and Term of Office. The Board of Directors must --------------------------- from time to time elect a President and may elect one or more Vice Presidents, a Secretary and a Treasurer and any other officers or agents the Board deems necessary. Such officers must hold their offices until their successors are elected and qualified, subject, however, to prior retirement, resignation, death or removal from office, as provided in these Bylaws. Section 4.04. President. Unless otherwise stipulated, the President is --------- the chief executive officer of the corporation and has responsibility for the general active management of the 4 corporation. When present, he or she must preside at all meetings of the shareholders, and unless a Chairman of the Board of Directors has been elected and is present, must preside at all meetings of the Board of Directors and see that all orders and resolutions of the Board of Directors are carried into effect. The President, a Vice President or the Secretary, unless some other person is specifically authorized by resolution of the Board of Directors, must sign all certificates of stock, bonds, deeds, mortgages, agreements, modification of mortgage agreements, leases, and contracts of the corporation. The President, if no Secretary has been elected, must maintain records of and whenever necessary, must certify all proceedings of the Board of Directors and the shareholders. The President must perform such other duties as the Board of Directors may designate. Section 4.05. Vice President. If a Vice President or Vice Presidents have -------------- been elected, they have such powers and must perform such duties as may be prescribed by the Board of Directors or by the President. In the event of the absence, death or disability of the President, a Vice President must succeed to the President's power and duties in the order designated by the Board of Directors. Section 4.06. Secretary. The Secretary must keep accurate minutes of all --------- meetings of the shareholders and the Board of Directors, must give proper notice of meetings of shareholders and directors, and will have such powers and must perform such other duties as the Board of Directors or the President may from time to time prescribe. In the Secretary's absence at any meeting, the President, an Assistant Secretary or a Secretary Pro Tempore must perform the Secretary's duties. Section 4.07. Treasurer. Unless another officer is designated by the --------- Board of Directors as the chief financial officer, the Treasurer must hold such title and must keep accurate financial records of the corporation; deposit all money, drafts and checks in the name of and to the credit of the corporation in the banks and depositories designated by the Board of Directors; endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board of Directors, making proper vouchers therefor; and disburse corporate funds and issue checks and drafts in the name of the corporation, as ordered by the Board of Directors. The Treasurer will have such powers and must perform such other duties as the Board of Directors or the President may from time to time prescribe. Section 4.08. Removal and Vacancies. Any officer may be removed from --------------------- office by a majority of the whole Board of Directors, with or without cause. Such removal, however, must be without prejudice to the contract rights of the person so removed. If there is a vacancy among the officers of the corporation by reason of death, resignation or otherwise, such vacancy may be filled for the unexpired term by the Board of Directors. Section 4.09. Delegation of Authority. Unless prohibited by the Articles ----------------------- of Incorporation, these Bylaws, or a resolution approved by the affirmative vote of a majority of the 5 Directors present, an officer elected or appointed by the Board may without the approval of the Board delegate some or all of the duties or powers of such office to other persons, provided that such delegation is in writing. ARTICLE V --------- SHARES AND THEIR TRANSFER Section 5.01. Certificates for Shares. Every shareholder of this ----------------------- corporation is entitled to a certificate, to be in such form as prescribed by law and adopted by the Board of Directors, certifying the number of shares of the corporation owned by such shareholder. The certificates must be numbered in the order in which they are issued and must be signed by the President, a Vice President or the Secretary, unless some other person is specifically authorized by resolution of the Board of Directors. Every certificate surrendered to the corporation for exchange or transfer must be canceled and no new certificate or certificates may be issued in exchange for any existing certificate until such existing certificate has been so canceled. Section 5.02. Transfer of Shares. Transfer of shares on the books of the ------------------ corporation may be authorized by the shareholder named in the certificate or the shareholder's legal representative, and upon surrender of the certificate or the certificates for such shares. The corporation may treat, as the absolute owner of the shares of the corporation, the person or persons in whose name or names the shares are registered on the books of the corporation. The legend on the reverse side of all certificates for shares of the corporation must read: The shares of common stock represented by this certificate have not been registered under the Securities Act of 1933 or under applicable state laws and may not be sold, transferred, or pledged in the absence of such registration unless pursuant to an exemption from the registration requirements of the Securities Act of 1933 and applicable state securities laws. The company reserves the right to require an opinion of counsel satisfactory to it before effecting any transfer of the shares. Section 5.03. Lost Certificates. A new share certificate may be issued in ----------------- place of one that is alleged to have been lost, stolen or destroyed, but only in accordance with applicable law and such other reasonable requirements imposed by the Board of Directors. ARTICLE VI ---------- AMENDMENTS Section 6.01. Subject to the power of shareholders to adopt, amend, or repeal these Bylaws as provided in Kansas Statutes Article 17-6009, any Bylaw may be amended or repealed by the Board of Directors at any meeting, except that after adoption of the initial Bylaws, the 6 Board must not adopt, amend, or repeal a Bylaw fixing a quorum for meetings for shareholders, prescribing procedures for removing directors or filling vacancies in the Board, or fixing the number of directors or their classifications, qualifications, or terms of office but may adopt or amend a Bylaw to increase the number of directors. ARTICLE VII ----------- INDEMNIFICATION Section 7.01. Any person who at any time serves or served as 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 provisions of the 1972 General Corporation Code of Kansas as it may be amended from time to time. 7 EX-3.6 8 BY-LAWS OF FORSTER EXHIBIT A FORSTER ACQUISITION CO. ----------------------- BYLAWS ------ Article 1 General ------- Section 1.1 Principal Place of Business. The principal office of the ---------------------------------------- corporation shall be located at Wilton, Maine, or such other place as the board of directors may from time to time designate. Section 1.2 Other Offices. The corporation may also have offices and -------------------------- places of business at such other places both within and without the State of Maine as the board of directors may from time to time determine or the business of the corporation may require. Section 1.3 Seal. The corporate seal shall have inscribed thereon ----------------- the name of the corporation, the year of its organization and the word "Maine". The seal may be used by causing it or a facsimile of it to be impressed or affixed or in any manner reproduced. Article 2 Meetings of Shareholders and Unanimous Action --------------------------------------------- Section 2.1 Place of Meetings. Meetings of the shareholders shall be ------------------------------ held either within or without the State of Maine at the principal office or at any other place as may be fixed by the board of directors, or in the absence of such action by the board of directors, as may be fixed by the President. Section 2.2 Annual Meetings. Annual meetings of the shareholders ---------------------------- shall be held at such time of day and place as may be fixed by the directors or in the absence of action by the directors, as may be fixed by the President, and shall be held on the third Tuesday of October in each year, if not a legal holiday, and if a legal holiday, then on the next secular day following that is not a legal holiday, or on such other date and time as the board of directors may specify. The shareholders shall elect a board of directors and transact such other business as may properly be brought before the annual meeting. If an annual meeting has not been called and held within thirty (30) days after the time designated for it, any shareholder entitled to call a special meeting of shareholders may call it. Section 2.3 Special Meetings. Special meetings of the shareholders ----------------------------- may be called by the board of directors, by the President, or by the holders of more than forty percent of the shares outstanding and entitled to vote. Section 2.4 Notice of Meetings. Written notice of each meeting of ------------------------------- shareholders, stating the place, day and hour of the meeting the shall be delivered, either personally or by mail, to each shareholder of record entitled to vote at such meeting, not less than three (3) days before the date of the meeting. In the case of a special meeting, or to the extent otherwise required by statute, the Articles of Incorporation or by these Bylaws, such notice shall also state the purpose of purposes for which the meeting is called. Attendance of a shareholder at any meeting shall constitute a waiver of notice of such meeting, except where a shareholder attends for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Notwithstanding any provision of these Bylaws, defects in the calling or notice of a meeting of shareholders shall be deemed waived to the extent provided by statute. Section 2.5 Unanimous Consent. Any action required or permitted to ------------------------------ be taken at any annual or special meeting of the shareholders may be taken without a meeting if consents in writing, setting forth the action so taken, shall be signed by all the shareholders entitled to vote with respect to the subject matter thereof and filed with the Clerk as part of the corporate records. Article 3 Quorum and Voting of Stock -------------------------- Section 3.1 Quorum. The holders of a majority of the voting shares ------------------- of stock issued and outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of the shareholders for the transaction of business. If, however, such quorum shall not be present or represented at any meeting of the shareholders, the shareholders present in person or represented by proxy shall have the power to adjourn the meeting for up to thirty (30) days, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 3.2 Vote Required. If a quorum is or was present, the -------------------------- affirmative vote of a majority of the votes cast at the meeting shall be the act of the shareholders unless the vote of a greater number of shares of stock is required by the Articles of incorporation, these Bylaws, or by statute. Section 3.3 Voting Rights. Each outstanding share of stock having -------------------------- voting power shall be entitled to one vote on each matter submitted to a vote at a meeting or shareholders. Section 3.4 Proxies. A shareholder may vote either in person or by -------------------- proxy executed in writing by the shareholder or by his duly authorized attorney- in-fact. No proxy shall be valid after eleven (11) months. Article 4 Directors --------- Section 4.1 Management by Board. The business and affairs of the -------------------------------- corporation shall be managed by its board of directors, which may exercise all powers of the corporation and 2 do all lawful acts and things as are not be statute or by the Articles of Incorporation or by these Bylaws directed or required to by exercised or done by the shareholders. Section 4.2 Number of Directors. As stated in the Articles of -------------------------------- Incorporation, the number of directors shall be not less than one (1) nor more than seven (7) provided that the number of directors may be one (1) only when there is no more than one (1) shareholder and may be two (2) only when there are not more than two (2) shareholders. The number of directors shall be fixed at the annual meeting of the shareholders or at any meeting held in lieu thereof. Section 4.3 Election, Term. The directors shall be elected at the --------------------------- annual meeting of the shareholders, or at any meeting held in lieu thereof, and each director elected shall serve until the next succeeding annual meeting and until his successor shall have been elected and qualified. Section 4.4 Qualifications. Directors need not be shareholders. --------------------------- Section 4.5 Vacancies. Any vacancy occurring in the board of ---------------------- directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected for the unexpired portion of the term of his predecessor in office. Section 4.6 Vacancies Created by Enlargement of the Board. The board ---------------------------------------------------------- of directors may at any time increase the number of directors within the limits set in Section 4.2 of this Article. Any directorship so created by an increase in the number of directors shall be filled by the remaining directors. A director elected to fill a newly created directorship shall serve until the next succeeding annual meeting of shareholders and until his successor shall have been elected and qualified. Section 4.7 Removal of Directors. The entire board of directors or --------------------------------- any individual director may be removed, with or without cause, at a special shareholders' meeting the notice of which includes notice of the proposed removal, by the affirmative vote of the holders of two-thirds (2/3) of the outstanding shares of common stock. Article 5 Meetings of the Board of Directors and Unanimous Action ------------------------------------------------------- Section 5.1 Place of Meetings. Regular or special meetings of the ------------------------------ board of directors may be held either within or without the State of Maine. Section 5.2 Regular Meetings. Regular meetings of the board of ----------------------------- directors may be held upon such notice, or without notice if the time and place is fixed by the board of directors, and at such time and at such place as shall from time to time be determined by the board. 3 Section 5.3 Special Meetings. Special meetings of the board of ----------------------------- directors may be called by the President or by any two (2) directors on two (2) days' notice to each director at such time and at such place as shall be determined by the person calling the meeting. Section 5.4 Notice of Meetings. Written notice of each meeting of ------------------------------- directors, stating the place, day and hour of the meeting shall be (i) delivered or mailed to each director, addressed to him at his residence or usual place of business, not less than two (2) days before the date of the meeting or (ii) sent to him at such place by telegram or cable, or received by him personally by telephone at least twenty-four (24) hours before the meeting. Notwithstanding any provision of these Bylaws, defects in the calling or notice of a meeting of directors shall be deemed waived to the extent provided by statute. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting, except as provided by statute. Section 5.5 Telephonic Meetings. The directors may hold a meeting by -------------------------------- conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Notice of such meeting shall be given as provided in Section 5.4 and shall give each director the telephone number at which, or other manner in which, he will be called. Section 5.6 Record of Meetings. The Clerk, Secretary or such person ------------------------------- as the directors designate shall keep a record of the meeting. Section 5.7 Quorum. A majority of the directors shall constitute a ------------------- quorum for the transaction of business and the act of the majority of the directors present at any meeting at which a quorum is or was once present shall be the act of the board of directors, unless a greater vote is required by the Articles of Incorporation, these Bylaws, or by statute. If a quorum shall not be present at any meeting of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum shall be present. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. Section 5.8 Action by Unanimous Consent. Any action required or ---------------------------------------- permitted to be taken at a meeting of the directors may be taken without a meeting if consents in writing, setting forth the action so taken, shall be signed by all of the directors and filed with the minutes of the meetings of the board of directors. Section 5.9 Executive and Other Committees. The board of directors, ------------------------------------------- by a resolution adopted by a majority of the directors then in office, may designate from among its members an executive committee and other committees, each consisting of two (2) or more directors, and may delegate to such committee or committees all the authority of the board of directors, or any portion of said authority, to the extent permitted by law. 4 Article 6 Officers and Agents ------------------- Section 6.1 Officers. The officers of the corporation shall be a --------------------- President, one or more Vice Presidents, a Treasurer, a Secretary and a Clerk. Section 6.2 Election and Qualification of Officers. The board of --------------------------------------------------- directors, at its first meeting after each annual shareholders' meeting, shall choose the officers. A person may hold more than one office. Section 6.3 Other Officers and Agents. The board of directors or the -------------------------------------- President may from time to time appoint or delegate the appointment of such other officers and assistant officers as are deemed necessary, including one or more Vice-Presidents, Assistant Secretaries, Assistant Clerks or Assistant Treasurers. Section 6.4 Compensation. The compensation of all officers and ------------------------- agents of the corporation shall be fixed by the board of directors. Section 6.5 Term of Officers, Vacancies. The officers of the ---------------------------------------- corporation shall hold office until their successors shall have been elected and qualified, and they need not be elected annually. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors or the Executive Committee. Any vacancy occurring in any office of the corporation shall be filled by the directors. Section 6.6 The President. The President shall be the chief -------------------------- executive officer of the corporation, shall preside at all meetings of the shareholders and the board of directors, shall have general and active management of the business of the corporation, shall see that all orders and resolutions of the board of directors are carried into effect, and shall perform whatever duties the board of directors may from time to time prescribe. He shall execute bonds, mortgages, deeds and other contracts requiring a seal, under the seal of the corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the board of directors to some other officer or agent of the corporation. Section 6.7 The Vice President. The Vice President shall, in the ------------------------------- absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. Section 6.8 The Treasurer. The Treasurer shall have the custody of -------------------------- the corporate funds and securities, shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board 5 directors, taking proper vouchers for such disbursements, and shall render to the President and the board of directors at its regular meetings, or when the directors so require, an account of all his transactions as Treasurer and of the financial condition of the corporation. Section 6.9 The Secretary. The Secretary shall attend all meetings -------------------------- of the board of directors and record all its proceedings. He may give, or cause to be given, notice of all shareholders' and directors' meetings and shall perform such other duties as may be prescribed by the board of directors or by the President. The Secretary may certify all votes, resolutions, and actions of the shareholders and of the board. Section 6.10 The Clerk. The Clerk shall be a resident of Maine. He ----------------------- shall keep, at the registered office of the corporation, in a book kept for such purpose, the records of all shareholders' meetings, shall keep the stock transfer book and keep on file a list of shareholders entitled to vote at each meeting and the most recent list of shareholders. He may certify all votes, resolutions and actions of the shareholders and of the board of directors, shall attend the meetings of the shareholders and record the proceedings in a book kept for that purpose; and, in his absence, a temporary Clerk shall be appointed and shall record such meetings. He may give or cause to be given notice of all shareholders' and directors' meetings. He shall have custody of the corporate seal and shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature. The directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. Article 7 Share Certificates and Transfers of Shares ------------------------------------------ Section 7.1 Certificates for Shares. The shares of the corporation ------------------------------------ shall be represented by certificates signed by any two of the officers, and shall be sealed with the seal of the corporation or a facsimile thereof. Section 7.2 Lost Certificates. The board of directors may direct a ------------------------------ new certificate to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost or destroyed. When authorizing such issue of a new certificate, the board of directors, in its discretion and as a condition precedent to the issuance thereof, may prescribe such terms and conditions as it deems expedient, and may require such indemnities as it deems adequate to protect the corporation from any claim that may be made against it with respect to any such certificate alleged to have been lost or destroyed. Section 7.3 Record Owners. The corporation shall be entitled to -------------------------- treat the holder of record of shares as the holder in fact and shall not be bound to recognize any equitable or other claim to or interest in the shares, except as otherwise provided by law. Section 7.4 List of Shareholders. The officer or agent having charge --------------------------------- of the stock transfer books and shares shall, in advance of each meeting of shareholders, prepare a complete list of the shareholders entitled to vote at such meeting. Such list shall comply as to form with the requirements of the corporation statute. For a period commencing not less than ten (10) days 6 prior to the date of the meeting (or such lesser period as is permitted by statute), such list shall be kept on file at the office of the clerk of the corporation, and at the office of its transfer agent or registrar, if any, and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. Failure to comply with the requirements of this section shall not affect the validity of any action taken at any meeting. If the requirements of this section have not been substantially complied with, the meeting shall, on the demand in person or by proxy of any shareholder who sought to inspect the required list, be adjourned shall until the requirements are met. Article 8 Finances -------- Section 8.1 Dividends. Dividends may be declared by the board of ---------------------- directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock. Section 8.2 Checks. All checks or demands for money and notes for ------------------- the corporation shall be signed by the Treasurer and such officers or other persons as the board of directors may from time to time designate. Section 8.3 Fiscal Year. The fiscal year of the corporation shall ------------------------ end on the close of business on the Saturday closest to the end of September unless otherwise fixed by resolution of the board of directors. Article 9 Indemnification --------------- The corporation shall indemnify any 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, to the extent authorized by law, and may purchase and maintain liability insurance on behalf of such persons or to protect itself against liability for such indemnification to the extent authorized by law. 7 EX-4.1 9 INDENTURE DATED APRIL 21, 1998 EXECUTION COPY DIAMOND BRANDS OPERATING CORP. ___________________________________ 10 1/8% SENIOR SUBORDINATED NOTES DUE 2008 ___________________________________ _________________ INDENTURE DATED AS OF APRIL 21, 1998 _________________ ___________________________________ STATE STREET BANK AND TRUST COMPANY TRUSTEE ___________________________________ Indenture, dated as of April 21, 1998 among Diamond Brands Operating Corp., a Delaware corporation (the "Company"), as issuer, each of Empire Candle, Inc., a Kansas corporation, and Forster, Inc., a Maine corporation as guarantors (each a "Guarantor") and together with any subsidiary that executes a Subsidiary Guarantee substantially in the form of Exhibit D attached hereto, (the "Guarantors") and State Street Bank and Trust Company, as trustee (the "Trustee"). The Company, the Guarantors and the Trustee agree as follows for the benefit of each other and for the equal and ratable benefit of the holders of the Company's 10 1/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes") and the exchange 10 1/8% Senior Subordinated Notes due 2008 (the "Exchange Senior Subordinated Notes" and, together with the Senior Subordinated Notes, the "Notes"): ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.01. Definitions "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. "Agent" means any Registrar, Paying Agent or co-registrar. "Applicable Procedures" means, with respect to any transfer or exchange of beneficial interests in a Global Note, the rules and procedures of the Depositary that apply to such transfer and exchange. "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 Company and its Restricted Subsidiaries taken as a whole will be governed by the provisions of this Indenture described in Sections 4.13 and 5.01 and not by the provisions of Section 4.10 hereof, and (ii) the sale by the Company and the issue or sale by any of the Restricted Subsidiaries of the Company of Equity Interests of any of the Company'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 following shall not 2 be deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted Subsidiary of the Company or by a Wholly Owned Restricted Subsidiary of the Company to the Company or to a Wholly Owned Restricted Subsidiary of the Company, (ii) an issuance of Equity Interests by a Restricted Subsidiary of the Company to the Company or to a Wholly Owned Restricted Subsidiary of the Company, (iii) a Restricted Payment that is permitted by Section 4.07 hereof, (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 Company, DLJ Capital Funding, Inc., as Syndication Agent, Wells Fargo Bank, N.A., as Administrative Agent, Morgan Stanley Senior Funding, Inc., 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 Company as additional borrowers or guarantors thereunder and whether by the same or any other agent, lender or group of lenders. "Bankruptcy Law" means Title 11, U.S. Code or any similar federal or state law for the relief of debtors. "Board of Directors" means the board of directors of the Company or any authorized committee of such board of directors. "Business Day" means any day other than a Legal Holiday. "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 3 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. "Cedel" means Cedel Bank, societe anonyme. "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 Company 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 Company, (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 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 the Company than such other "person", (iv) the first day on which a majority of the members of the Board of Directors of the Company are not Continuing Directors or (v) the Company consolidates with, or merges with or into, any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which any of the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (A) the Voting Stock of the Company 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 Company 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 Company 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. "Commission" means the Securities and Exchange Commission. "Company" means Diamond Brands Operating Corp., a Delaware corporation, and its permitted successors. "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 4 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 non-cash 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. "Continuing Directors" means, as of any date of determination, any member of the Board of Directors of the Company or Holdings who (i) was a member of such Board of Directors on the date hereof 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). "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 13.02 hereof or such other address as to which the Trustee may give notice to the Company. "Credit Agent" means Wells Fargo Bank, N.A. in its capacity as Administrative Agent for the lenders party to the Bank Facilities or any successor thereto or any person otherwise appointed. "Credit Facilities" means, with respect to the Company, 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 5 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. "Definitive Notes" means Notes that are in the form of Exhibit A-1 attached ----------- hereto (but without including the text referred to in footnotes 1 and 3 thereto). "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, until a successor shall have been appointed and become such pursuant to Section 2.06 of this Indenture, and, thereafter, "Depositary" shall mean or include such successor. "Designated Senior Debt" means (i) any Senior Debt outstanding under the Bank Facilities and (ii) any other Senior Debt permitted under this Indenture the principal amount of which is $25 million or more and that has been designated by the Company 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 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 Section 4.07 hereof; and provided, further, that Capital Stock issued to any plan for the benefit of employees of the Company 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 Company in order to satisfy applicable statutory or regulatory obligations. "DLJ" means Donaldson, Lufkin & Jenrette Securities Corporation. "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 Company 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 Company the portion of the net cash proceeds thereof necessary to pay the aggregate redemption price of the Notes to be redeemed in connection therewith. "Euroclear" means Morgan Guaranty Trust Company of New York, the Brussels office, as operator of the Euroclear system. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 6 "Exchange Offer" means the offer by the Company to Holders to exchange Senior Subordinated Notes for Exchange Senior Subordinated Notes. "Exchange Offer Registration Statement" has the meaning set forth in the Registration Rights Agreement. "Exchange Senior Subordinated Notes" means the Company's 10 1/8% Senior Subordinated Notes due 2008, which will be issued in exchange for the Company's Senior Subordinated Notes. "Existing Indebtedness" means Indebtedness of the Company and its Subsidiaries (other than Indebtedness under the Bank Facilities) in existence on the date of this Indenture, until such amounts are repaid. "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), and (ii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period, and (iii) any interest expense on 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 Company 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 Company 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 7 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 hereof; 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. "Global Notes" means the Rule 144A Global Notes, the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes and any Notes exchanged for any of the foregoing in the Exchange Offer. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged. "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 Company on the Issue Date and thereafter each of the Subsidiaries of the Company that executes a Subsidiary Guarantee, substantially in the form of Exhibit D attached hereto, and their respective successors and assigns. "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. "Holder" means a Person in whose name a Note is registered. "Holdings" means Diamond Brands, Incorporated, a Minnesota corporation, the corporate parent of the Company, or its successors. 8 "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 Company or any Restricted Subsidiary of the Company sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of the Company such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of the Company, the Company 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 Section 4.07 hereof. "Indenture" means this Indenture, as amended or supplemented from time to time. "Indirect Participant" means a Person who holds an interest through a Participant. "Initial Purchasers" means DLJ and Morgan Stanley. "Insolvency or Liquidation Proceedings" means (i) any insolvency or bankruptcy case or proceeding, or any receivership, liquidation, reorganization or other similar case or proceeding, relative to the Company or to the creditors of the Company, as such, or to the assets of the Company or (ii) any liquidation, dissolution, reorganization or winding up of the Company, whether voluntary or involuntary and involving insolvency or bankruptcy, or (iii) any assignment for the benefit of creditors or any other marshalling of assets and liabilities of the Company. "Institutional Accredited Investor" means an "accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "Issue Date" means the date on which notes are first issued and authenticated under this Indenture. "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York, the city in which the principal Corporate Trust Office of the Trustee is located or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a 9 Legal Holiday at a place of payment, payment shall be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "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). "Liquidated Damages" means all liquidated damages then owing pursuant to Section 5 of the Registration Rights Agreement. "Morgan Stanley" means Morgan Stanley & Co. Incorporated. "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 Company 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) 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 Company 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 Company or any of its Restricted Subsidiaries, including the stock of such Unrestricted Subsidiary. "Note Custodian" means the Trustee when serving as custodian for the Depositary with respect to the Notes in global form, or any successor entity thereto. "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. "Offering" means the offer and sale of the Notes of the Company. "Offerings" means the Offering and the concurrent offering of the 12 7/8% Senior Discount Debentures due 2009 by Holdings pursuant to an offering memorandum dated as of April 15, 1998. 10 "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Sections 13.04 and 13.05 hereof. "Opinion of Counsel" means an opinion from legal counsel who is reasonably acceptable to the Trustee, that meets the requirements of Sections 13.04 and 13.05 hereof. The counsel may be an employee of or counsel to the Company, any Subsidiary of the Company or the Trustee. "Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right of payment to the Notes. "Participant" means, with respect to DTC, Euroclear or Cedel, a Person who has an account with DTC, Euroclear or Cedel, respectively (and, with respect to DTC, shall include Euroclear and Cedel). "Permitted 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 Company or in a Restricted Subsidiary of the Company; (b) any Investment in Cash and Cash Equivalents; (c) any Investment by the Company or any Restricted Subsidiary in a Person, if as a result of such Investment (i) such Person becomes a Restricted Subsidiary of the Company 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 Company or a Restricted Subsidiary of the Company; (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 Section 4.10 hereof 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 Company; (f) Hedging Obligations entered into in the ordinary course of the Company's or its Restricted Subsidiaries' Businesses and otherwise in compliance with this Indenture; (g) loans and advances to employees and officers of the Company 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 Company 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 hereof, that have a full maturity date and a weighted average life to maturity which is the same as or greater than the 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 11 Recapitalization); (ii) Liens securing Senior Debt and Liens on assets of Restricted Subsidiaries securing Guarantees of Senior Debt permitted to be incurred under this Indenture; (iii) Liens securing the Notes and the Subsidiary Guarantees; (iv) Liens of the Company or a Wholly Owned Restricted Subsidiary on assets of any Restricted Subsidiary of the Company; (v) Liens securing Permitted Refinancing Indebtedness which is incurred to refinance any Indebtedness which has been secured by a Lien permitted under this Indenture and which has been incurred in accordance with the provisions hereof; provided, however, that such Liens (A) are not materially less favorable to the 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 Company 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 Company 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 and 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 Company 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 Section 4.09 hereof; 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 Company or any Restricted Subsidiary of the Company other than the property or assets of the Company or any Restricted Subsidiary of the Company 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 Company or any of its Restricted Subsidiaries, including rights of offset and set-off; (xvi) Liens securing Hedging Obligations which Hedging Obligations relate to Indebtedness that is otherwise permitted under this Indenture; (xvii) Liens securing Acquired Debt incurred in accordance with Section 4.09 hereof; provided that (A) such Liens secured such Acquired Debt at the time of and prior to the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired 12 Debt by the Company or a Restricted Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company 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 Company or a Restricted Subsidiary of the Company and are not more favorable to the lienholders than those securing the Acquired Debt prior to the incurrence of such Acquired Debt by the Company or a Restricted Subsidiary of the Company; and (xviii) leases or subleases granted to others not interfering in any material respect with the business of the Company or its Restricted Subsidiaries. "Permitted Refinancing Indebtedness" means any Indebtedness of the Company 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 Company or any of its Subsidiaries (other than such Indebtedness described in clauses (i), (vi), (vii), (viii), (ix), (x), (xi), (xii) and (xiii) of Section 4.09 hereof); 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 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 Notes on terms at least as favorable to the Holders of 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 Company 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. "Private Placement Legend" means the legend initially set forth on the Senior Discount Notes in the form set forth in Section 2.06(g) hereof. "QIB" means a "qualified institutional buyer" as defined in Rule 144A under the Securities Act. "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 Company or any Restricted Subsidiary of the Company 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 Company or any Wholly-Owned Restricted Subsidiary of the Company that is a Guarantor. 13 "Registration Rights Agreement" means the Registration Rights Agreement, dated as of the date hereof, among the Company, the Guarantors and the Initial Purchasers. "Regulation S" means Regulation S promulgated under the Securities Act. "Regulation S Global Notes" means the Regulation S Temporary Global Notes or the Regulation S Permanent Global Notes as applicable. "Regulation S Permanent Global Notes" means the permanent global notes that do not contain the paragraphs referred to in footnote 1 to the form of Note attached hereto as Exhibit A-2 and that are deposited with and registered in the ----------- name of the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "Regulation S Temporary Global Notes" means the temporary global notes that contain the paragraphs referred to in footnote 1 to the form of Note attached hereto as Exhibit A-2 and that are deposited with and registered in the name of ----------- the Depositary or its nominee, representing a series of Notes sold in reliance on Regulation S. "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. "Responsible Officer" when used with respect to the Trustee, means any officer within the Corporate Trust Administration of the Trustee (or any successor group of the Trustee) or any other officer of the trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Beneficial Interest" means any beneficial interest of a Participant or Indirect Participant in the Rule 144A Global Note or the Regulation S Global Note. "Restricted Broker Dealer" has the meaning set forth in the Registration Rights Agreement. "Restricted Global Notes" means the Rule 144A Global Notes and the Regulation S Global Notes, all of which shall bear the Private Placement Legend. "Restricted Investment" means an Investment other than a Permitted Investment. "Restricted Subsidiary" means any Subsidiary of the Company other than an Unrestricted Subsidiary. "Rule 144A" means Rule 144A promulgated under the Securities Act. "Rule 144A Global Notes" means the permanent global notes that contain the paragraph referred to in footnote 1 and the additional schedule referred to in footnote 3 to the form of the Note attached 14 hereto as Exhibit A-1, and that is deposited with and registered in the name of ----------- the Depositary or its nominee, representing a series of Notes sold in reliance on Rule 144A. "Securities Act" means the Securities Act of 1933, as amended. "Senior Debt" means (i) all Indebtedness of the Company or any Guarantor outstanding under Credit Facilities and all Hedging Obligations with respect thereto, (ii) other Indebtedness of the Company 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 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 Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in violation of the Indenture. "Senior Discount Debentures" means Holdings' 12 7/8% Senior Discount Debentures due 2009. "Shelf Registration Statement" means the Shelf Registration Statement as defined in the Registration Rights Agreement. "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 hereof. "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 Company and any one or more of the Company's subsidiaries, as amended from time to time, so long as the method of calculating the amount of the Company's (or any Restricted Subsidiary's) payments, if any, to be made thereunder is not less favorable to the Company 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 Company. 15 "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) 77aaa- 77bbbb), as amended, as in effect on the date hereof. "Transfer Restricted Securities" means Notes or beneficial interests therein that bear or are required to bear the Private Placement Legend. "Trustee" means State Street Bank and Trust Company until a successor replaces it in accordance with the applicable provisions of this Indenture, and thereafter means the successor. "Unrestricted Global Notes" means one or more Global Notes that do not and are not required to bear the Private Placement Legend. "Unrestricted Subsidiary" means any Subsidiary (other than the Subsidiary Guarantors as of the date hereof or any successor to any of them) of the Company 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 Company or any Restricted Subsidiary unless the terms of any such agreement, contract, arrangement or understanding are no less favorable to the Company or such Restricted Subsidiary than those that might be obtained at the time from Persons who are not Affiliates of the Company; (c) is a Person with respect to which neither the Company 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 Company 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 Company or any of its Restricted Subsidiaries and has at least one executive officer that is a director or executive officer of the Company or any of its Restricted Subsidiaries. Any such designation by the Board of Directors shall be evidenced to the Trustee by filing with a 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 Section 4.07 hereof. 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 this Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the Company as of such date. The Board of Directors of the Company 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 Company 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 to be 16 incurred under Section 4.09 hereof, 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 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 Subsidiaries of such Person. Section 1.02. Other Definitions
Defined In Term Section "Affiliate Transaction" 4.11 "Asset Sale Offer" 4.10 "Change of Control Offer" 4.13 "Change of Control Payment" 4.13 "Change of Control Payment Date" 4.13 "Covenant Defeasance" 8.03 "Custodian" 6.01 "DTC" 2.03 "Electronic Message" 2.02 "Event of Default" 6.01 "Excess Proceeds" 4.10 "Guaranteed Debt" 4.17 "incur" 4.09 "Legal Defeasance" 8.02 "Offer Amount" 3.09 "Offer Period" 3.09 "Pari Passu Indebtedness" 4.10
17 "Paying Agent" 2.03 "Payment Default" 6.01 "Permitted Debt" 4.09 "Repurchase Date" 3.09 "Registrar" 2.03 "Repurchase Offer" 3.09 "Restricted Payments" 4.07
Section 1.03. Incorporation by Reference of Trust Indenture Act Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in, and made a part of, this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Notes means the Company, each Guarantor and any successor obligor upon the Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by the Commission rule under the TIA have the meanings so assigned to them therein. Section 1.04. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it herein; (2) an accounting term not otherwise defined herein has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; (5) provisions apply to successive events and transactions; and 18 (6) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the Commission from time to time. ARTICLE 2 THE NOTES Section 2.01. Form and Dating. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A-1 or Exhibit A-2 attached hereto. The ----------- ----------- Notes may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Note shall be dated the date of its authentication. The Notes initially shall be issued in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes shall constitute, and are hereby expressly made, a part of this Indenture and the Company, the Guarantors and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. (a) Global Notes. Notes offered and sold to QIBs in reliance on Rule 144A shall be issued initially in the form of Rule 144A Global Notes, which shall be deposited on behalf of the purchasers of the Notes represented thereby with a custodian of the Depositary, and registered in the name of the Depositary or a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the Rule 144A Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee as hereinafter provided. Notes offered and sold in reliance on Regulation S shall be issued initially in the form of the Regulation S Temporary Global Note, which shall be deposited on behalf of the purchasers of the Notes represented thereby with the Trustee, as custodian for the Depositary, and registered in the name of the Depositary or the nominee of the Depositary for the accounts of designated agents holding on behalf of Euroclear or Cedel, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The "40-day restricted period" (as defined in Regulation S) shall be terminated upon the receipt by the Trustee of (i) a written certificate from the Depositary, together with copies of certificates from Euroclear and Cedel certifying that they have received certification of non-United States beneficial ownership of 100% of the aggregate principal amount of the Regulation S Temporary Global Notes (except to the extent of any beneficial owners thereof who acquired an interest therein pursuant to another exemption from registration under the Securities Act and who will take delivery of a beneficial ownership interest in a Rule 144A Global Note, all as contemplated by Section 2.06(a)(ii) hereof), and (ii) an Officers' Certificate from the Company certifying as to the same matters covered in clause (i) 19 above. Following the termination of the 40-day restricted period, beneficial interests in the Regulation S Temporary Global Note shall be exchanged for beneficial interests in Regulation S Permanent Global Notes pursuant to the Applicable Procedures. Simultaneously with the authentication of Regulation S Permanent Global Notes, the Trustee shall cancel the Regulation S Temporary Global Notes. The aggregate principal amount of the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary or its nominee, as the case may be, in connection with transfers of interest as hereinafter provided. Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate amount of outstanding Notes from time to time endorsed thereon and that the aggregate amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges, redemptions and transfers of interests. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the amount of outstanding Notes represented thereby shall be made by the Trustee or the Note Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "Management Regulations" and "Instructions to Participants" of Cedel shall be applicable to interests in the Regulation S Temporary Global Notes and the Regulation S Permanent Global Notes that are held by Participants through Euroclear or Cedel. The Trustee shall have no obligation to notify Holders of any such procedures or to monitor or enforce compliance with the same. Except as set forth in Section 2.06 hereof, the Global Notes may be transferred, in whole and not in part, only to another nominee of the Depositary or to a successor of the Depositary or its nominee. (b) Book-Entry Provisions. This Section 2.01(b) shall apply only to Rule 144A Global Notes and Regulation S Permanent Global Notes deposited with or on behalf of the Depositary. The Company shall execute and the Trustee shall, in accordance with this Section 2.01(b) and Section 2.02, authenticate and deliver the Global Notes that (i) shall be registered in the name of the Depositary or the nominee of the Depositary and (ii) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions or held by the Trustee as custodian for the Depositary. Participants shall have no rights either under this Indenture with respect to any Global Note held on their behalf by the Depositary or by the Note Custodian as custodian for the Depositary or under such 20 Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Participants, the operation of customary practices of such Depositary governing the exercise of the rights of an owner of a beneficial interest in any Global Note. (c) Definitive Notes. Notes issued in certificated form shall be substantially in the form of Exhibit A-1 attached hereto (but without ----------- including the text referred to in footnotes 1 and 2 thereto). Section 2.02. Execution and Authentication. Two Officers of the Company shall sign the Notes for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Notes and may be in facsimile form. If an Officer of the Company whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual signature of the Trustee. The signature of the Trustee shall be conclusive evidence that the Note has been authenticated under this Indenture. The form of Trustee's certificate of authentication to be borne by the Notes shall be substantially as set forth in Exhibit A-1 or Exhibit A-2 hereto. -------------------------- The Trustee shall, upon a written order of the Company signed by two Officers of the Company, authenticate Notes for original issue up to an aggregate principal amount at maturity of Notes stated in the Notes. The aggregate principal amount at maturity of Notes outstanding at any time shall not exceed such amount except as provided in Section 2.07 hereof. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. Unless limited by the terms of such appointment, an authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate of the Company. Section 2.03. Registrar and Paying Agent. The Company shall maintain in the Borough of Manhattan, in the City of New York, State of New York and in such other locations as it shall determine, (i) an office or agency where Notes may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where 21 Notes may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent or Registrar. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent and to act as Note Custodian with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar and Paying Agent with respect to the Definitive Notes. Section 2.04. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent shall hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal, premium or Liquidated Damages, if any, or interest on the Notes, and shall notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall have no further liability for the money. If the Company or a Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon the occurrence of events specified in Section 6.01(vii) or (viii) hereof, the Trustee shall serve as Paying Agent for the Notes. Section 2.05. Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA (S) 312(a). If the Trustee is not the Registrar, the Company and the Guarantors shall furnish to the Trustee at least seven (7) Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Holders of Notes and the Company shall otherwise comply with TIA (S) 312(a). 22 Section 2.06. Transfer and Exchange. (a) Transfer and Exchange of Global Notes. The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depositary, in accordance with this Indenture and the procedures of the Depositary therefor, which shall include restrictions on transfer comparable to those set forth herein to the extent required by the Securities Act. Beneficial interests in a Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in the same Global Note in accordance with the transfer restrictions set forth in the legend in subsection (g) of this Section 2.06. Transfers of beneficial interests in the Global Notes to Persons required to take delivery thereof in the form of an interest in another Global Note shall be permitted as follows: (i) Rule 144A Global Note to Regulation S Global Note. If, at any time, an owner of a beneficial interest in a Rule 144A Global Note deposited with the Depositary (or the Trustee as custodian for the Depositary) wishes to transfer its beneficial interest in such Rule 144A Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a Regulation S Global Note, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Regulation S Global Note as provided in this Section 2.06(a)(i). Upon receipt by the Trustee of (1) instructions given in accordance with the Applicable Procedures from a Participant directing the Trustee to credit or cause to be credited a beneficial interest in the Regulation S Global Note in an amount equal to the beneficial interest in the Rule 144A Global Note to be exchanged, (2) a written order given in accordance with the Applicable Procedures containing information regarding the Participant account of the Depositary and the Euroclear or Cedel account to be credited with such increase, and (3) a certificate in the form of Exhibit B-1 hereto given by the owner of such beneficial interest stating that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of the applicable Rule 144A Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Regulation S Global Note by the principal amount at maturity of the beneficial interest in the Rule 144A Global Note to be exchanged or transferred, to credit or cause to be credited to the account of the 23 Person specified in such instructions, a beneficial interest in the Regulation S Global Note equal to the reduction in the aggregate principal amount at maturity of the Rule 144A Global Note, and to debit, or cause to be debited, from the account of the Person making such exchange or transfer the beneficial interest in the Rule 144A Global Note that is being exchanged or transferred. (ii) Regulation S Global Note to Rule 144A Global Note. If, at any time, after the expiration of the 40-day restricted period, an owner of a beneficial interest in a Regulation S Global Note deposited with the Depositary or with the Trustee as custodian for the Depositary wishes to transfer its beneficial interest in such Regulation S Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a Rule 144A Global Note, such owner shall, subject to the Applicable Procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Rule 144A Global Note as provided in this Section 2.06(a)(ii). Upon receipt by the Trustee of (1) instructions from Euroclear or Cedel, if applicable, and the Depositary, directing the Trustee, as Registrar, to credit or cause to be credited a beneficial interest in the Rule 144A Global Note equal to the beneficial interest in the Regulation S Global Note to be exchanged, such instructions to contain information regarding the Participant account with the Depositary to be credited with such increase, (2) a written order given in accordance with the Applicable Procedures containing information regarding the participant account of the Depositary and (3) a certificate in the form of Exhibit B-2 attached hereto given by the owner of such beneficial ----------- interest stating (A) if the transfer is pursuant to Rule 144A, that the Person transferring such interest in a Regulation S Global Note reasonably believes that the Person acquiring such interest in a Rule 144A Global Note is a QIB and is obtaining such beneficial interest in a transaction meeting the requirements of Rule 144A and any applicable blue sky or securities laws of any state of the United States, (B) that the transfer complies with the requirements of Rule 144 under the Securities Act, (C) if the transfer is to an Institutional Accredited Investor that such transfer is in compliance with the Securities Act and a certificate in the form of Exhibit C --------- attached hereto and, if such transfer is in respect of an aggregate principal amount of less than $250,000, an Opinion of Counsel acceptable to the Company that such transfer is in compliance with the Securities Act or (D) if the transfer is pursuant to any other exemption from the registration requirements of the Securities Act, that the 24 transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the requirements of the exemption claimed, such statement to be supported by an Opinion of Counsel from the transferee or the transferor in form reasonably acceptable to the Company and to the Registrar and in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction, then the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the aggregate principal amount at maturity of such Regulation S Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Rule 144A Global Note by the principal amount at maturity of the beneficial interest in the Regulation S Global Note to be exchanged or transferred, and the Trustee, as Registrar, shall instruct the Depositary, concurrently with such reduction, to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the applicable Rule 144A Global Note equal to the reduction in the aggregate principal amount at maturity of such Regulation S Global Note and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Regulation S Global Note that is being exchanged or transferred. (b) Transfer and Exchange of Definitive Notes. When Definitive Notes are presented by a Holder to the Registrar with a request to register the transfer of the Definitive Notes or to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested only if the Definitive Notes are presented or surrendered for registration of transfer or exchange, are endorsed and contain a signature guarantee or accompanied by a written instrument of transfer in form satisfactory to the Registrar duly executed by such Holder or by his attorney and contains a signature guarantee, duly authorized in writing and the Registrar received the following documentation (all of which may be submitted by facsimile): (i) in the case of Definitive Notes that are Transfer Restricted Securities, such request shall be accompanied by the following additional information and documents, as applicable: (A) if such Transfer Restricted Security is being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, or such Transfer Restricted 25 Security is being transferred to the Company or any of its Subsidiaries, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); or (B) if such Transfer Restricted Security is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); or - ----------- (C) if such Transfer Restricted Security is being transferred to a Non-U.S. Person in an offshore transaction in accordance with Rule 904 under the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto); ----------- (D) if such Transfer Restricted Security is being transferred to an Institutional Accredited Investor in reliance on an exemption from the registration requirements of the Securities Act other than those listed in subparagraphs (B) and (C) above, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto), a certification ----------- substantially in the form of Exhibit C hereto, and, if such transfer is in --------- respect of an-aggregate principal amount of Notes of less than $250,000, an Opinion of Counsel reasonably acceptable to the Company that such transfer is in compliance with the Securities Act; or (E) if such Transfer Restricted Security is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from such Holder (in substantially the form of Exhibit B-3 hereto) and an Opinion of Counsel from ----------- such Holder or the transferee reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act. (c) Transfer of a Beneficial Interest in a Rule 144A Global Note or Regulation S Permanent Global Note for a Definitive Note. (i) Any Person having a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note may upon request, subject to the Applicable Procedures, exchange such beneficial interest for a Definitive Note. Upon receipt by the Trustee of written instructions or such other form of instructions as is customary for the Depositary (or Euroclear or Cedel, if applicable), from the Depositary or its nominee on behalf of any Person having a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note, and, in the case of a Transfer Restricted Security, the following 26 additional information and documents (all of which may be submitted by facsimile): (A) if such beneficial interest is being transferred to the Person designated by the Depositary as being the beneficial owner, a certification to that effect from such Person (in substantially the form of Exhibit B-4 hereto); - ----------- (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act or pursuant to an exemption from registration in accordance with Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto); - ----------- (C) if such beneficial interest is being transferred to an Institutional Accredited Investor, pursuant to a private placement exemption from the registration requirements of the Securities Act (and based on an opinion of counsel if the Company so requests), a certification to that effect from such Holder (in substantially the form of Exhibit B-4 hereto) and a ----------- certificate from the applicable transferee (in substantially the form of Exhibit ------- C hereto); or - - (D) if such beneficial interest is being transferred in reliance on any other exemption from the registration requirements of the Securities Act, a certification to that effect from the transferor (in substantially the form of Exhibit B-4 hereto) and an Opinion of Counsel from the transferee or the - ----------- transferor reasonably acceptable to the Company and to the Registrar to the effect that such transfer is in compliance with the Securities Act, in which case the Trustee or the Note Custodian, at the direction of the Trustee, shall, in accordance with the standing instructions and procedures existing between the Depositary and the Note Custodian, cause the aggregate principal amount of Rule 144A Global Notes or Regulation S Permanent Global Notes, as applicable, to be reduced accordingly and, following such reduction, the Company shall execute and, the Trustee shall authenticate and deliver to the transferee a Definitive Note in the appropriate principal amount. (ii) Definitive Notes issued in exchange for a beneficial interest in a Rule 144A Global Note or Regulation S Permanent Global Note, as applicable, pursuant to this Section 2.06(c) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or Indirect Participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. Following any such issuance of Definitive Notes, the Trustee, as Registrar, shall instruct the Depositary to reduce or cause to be reduced the 27 aggregate principal amount at maturity of the applicable Global Note to reflect the transfer. (d) Restrictions on Transfer and Exchange of Global Notes. Notwithstanding any other provision of this Indenture (other than the provisions set forth in subsection (g) of this Section 2.06), a Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (e) Transfer and Exchange of a Definitive Note for a Beneficial Interest in a Global Note. A Definitive Note may not be transferred or exchanged for a beneficial interest in a Global Note. (f) Authentication of Definitive Notes in Absence of Depositary. If at any time: (i) the Depositary for the Notes notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Notes and a successor Depositary for the Global Notes is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Trustee in writing that it elects to cause the issuance of Definitive Notes under this Indenture, then the Company shall execute, and the Trustee shall, upon receipt of an authentication order in accordance with Section 2.02 hereof, authenticate and deliver, Definitive Notes in an aggregate principal amount equal to the principal amount of the Global Notes in exchange for such Global Notes. (g) Legends. (i) Except as permitted by the following paragraphs (ii), (iii) and (iv), each Note certificate evidencing Global Notes and Definitive Notes (and all Notes issued in exchange therefor or substitution thereof) shall bear the legend (the "Private Placement Legend") in substantially the following form: "THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE 28 ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE OF CLAUSE (b), (c), (d) OR (e), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER 29 APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE." (ii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Note) pursuant to Rule 144 under the Securities Act or pursuant to an effective registration statement under the Securities Act: (A) in the case of any Transfer Restricted Security that is a Definitive Note, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security upon receipt of a certification from the transferring holder substantially in the form of Exhibit B-4 hereto; and ----------- (B) in the case of any Transfer Restricted Security represented by a Global Note, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof; provided, however, that with respect to any request for an exchange of a Transfer Restricted Security that is represented by a Global Note for a Definitive Note that does not bear the legend set forth in (i) above, which request is made in reliance upon Rule 144, the Holder thereof shall certify in writing to the Registrar that such request is being made pursuant to Rule 144 (such certification to be substantially in the form of Exhibit B-4 hereto). ----------- (iii) Upon any sale or transfer of a Transfer Restricted Security (including any Transfer Restricted Security represented by a Global Note) in reliance on any exemption from the registration requirements of the Securities Act (other than exemptions pursuant to Rule 144A or Rule 144 under the Securities Act) in which the Holder or the transferee provides an Opinion of Counsel to the Company and the Registrar in form and substance reasonably acceptable to the Company and the Registrar (which Opinion of Counsel shall also state that the transfer restrictions contained in the legend are no longer applicable): (A) in the case of any Transfer Restricted Security that is a Definitive Note, the Registrar shall permit the Holder thereof to exchange such Transfer Restricted Security for a Definitive Note that does not bear the legend set forth in (i) above and rescind any restriction on the transfer of such Transfer Restricted Security; and 30 (B) in the case of any Transfer Restricted Security represented by a Global Note, such Transfer Restricted Security shall not be required to bear the legend set forth in (i) above, but shall continue to be subject to the provisions of Section 2.06(a) and (b) hereof. (iv) Notwithstanding the foregoing, upon the consummation of the Exchange Offer in accordance with the Registration Rights Agreement, the Company shall issue and, upon receipt of an authentication order in accordance with Section 2.02 hereof, the Trustee shall authenticate (i) one or more Unrestricted Global Notes in aggregate principal amount equal to the principal amount of the Restricted Beneficial Interests tendered for acceptance by persons that are not (x) broker-dealers, (y) Persons participating in the distribution of the Notes or (z) Persons who are affiliates (as defined in Rule 144) of the Company and accepted for exchange in the Exchange Offer and (ii) Definitive Notes that do not bear the Private Placement Legend in an aggregate principal amount equal to the principal amount of the Restricted Definitive Notes accepted for exchange in the Exchange Offer. The Trustee shall be entitled to rely upon the authentication order when authenticating the Notes without any obligation to verify that the restrictions in the preceding sentence have been complied with. Concurrently with the issuance of such Notes, the Trustee shall cause the aggregate principal amount of the applicable Restricted Global Notes to be reduced accordingly and the Company shall execute and the Trustee shall authenticate and deliver to the Persons designated by the Holders of Definitive Notes so accepted Definitive Notes in the appropriate principal amount. (h) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in Global Notes have been exchanged for Definitive Notes, redeemed, repurchased or canceled, all Global Notes shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for Definitive Notes, redeemed, repurchased or canceled, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement may be made on such Global Note, by the Trustee or the Notes Custodian, at the direction of the Trustee, to reflect such reduction but any failure to make such an endorsement shall not affect the reductions. (i) General Provisions Relating to Transfers and Exchanges. 31 (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes at the Registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any stamp or transfer tax or similar governmental charge payable in connection therewith (other than any such stamp or transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 4.10, 4.13 and 9.05 hereto). (iii) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (iv) The Registrar shall not be required: (A) to issue, to register the transfer of or to exchange Notes during a period beginning at the opening of fifteen (15) Business Days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part, or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding interest payment date. (v) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and neither the Trustee, any Agent nor the Company shall be affected by notice to the contrary. (vi) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. Section 2.07. Replacement Notes. 32 If any mutilated Note is surrendered to the Trustee, or the Company and the Trustee receives evidence to their satisfaction of the destruction, loss or theft of any Note, the Company shall issue and the Trustee, upon the written order of the Company signed by an Officer of the Company, shall authenticate a replacement Note if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company and the Trustee may charge for their expenses in replacing a Note. Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. Section 2.08. Outstanding Notes. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section 2.08 as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company or any Guarantor holds the Note. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a redemption date or maturity date, money sufficient to pay Notes payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. Section 2.09. Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or any Guarantor, or by any Affiliate of the Company or any Guarantor shall be considered as though not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes shown on the Trustee's register as being owned shall be so disregarded. Notwithstanding the foregoing, Notes that are to be acquired by the Company or any Guarantor or an Affiliate of the Company or any Guarantor pursuant to an exchange offer, tender offer or other 33 agreement shall not be deemed to be owned by such entity until legal title to such Notes passes to such entity. Section 2.10. Temporary Notes. Until Definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes upon a written order of the Company signed by an Officer of the Company. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee shall upon receipt of a written order of the Company signed by an Officer authenticate Definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. Section 2.11. Cancellation. The Company at any time may deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder or which the Company may have acquired in any manner whatsoever, and all Notes so delivered shall be promptly canceled by the Trustee. All Notes surrendered for registration of transfer, exchange or payment, if surrendered to any Person other than the Trustee, shall be delivered to the Trustee. The Trustee and no one else shall cancel all Notes surrendered for registration of transfer, exchange, payment, replacement or cancellation. Subject to Section 2.07 hereof, the Company may not issue new Notes to replace Notes that it has redeemed or paid or that have been delivered to the Trustee for cancellation. All canceled Notes held by the Trustee shall be destroyed and certification of their destruction delivered to the Company, unless by a written order, signed by an Officer of the Company, the Company shall direct that canceled Notes be returned to it. Section 2.12. Defaulted Interest. If the Company defaults in a payment of interest on the Notes, it shall pay the defaulted interest in any lawful manner plus, to the extent lawful, interest payable on the defaulted interest, to the Persons who are Holders on a subsequent special record date, which date shall be at the earliest practicable date but in all events at least five (5) Business Days prior to the payment date, in each case at the rate provided in the Notes and in Section 4.01 hereof. The Company shall fix or cause to be fixed each such special record date and payment date, and shall promptly thereafter, notify the Trustee of any such date. At least fifteen (15) days before the special record date, the Company (or the Trustee, in the name and at the expense of the Company) shall mail or cause to be mailed to Holders a notice that states the special record date, the related payment date and the amount of such interest to be paid. Section 2.13. Record Date. 34 The record date for purposes of determining the identity of Holders of Notes entitled to vote or consent to any action by vote or consent authorized or permitted under this Indenture shall be determined as provided for in TIA (S) 316 (c). Section 2.14. Computation of Interest. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. Section 2.15. CUSIP Number. The Company in issuing the Notes may use a "CUSIP" number, and if it does so, the Trustee shall use the CUSIP number in notices of redemption or exchange as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Notes and that reliance may be placed only on the other identification numbers printed on the Notes. The Company shall promptly notify the Trustee of any change in the CUSIP number. ARTICLE 3. REDEMPTION AND PREPAYMENT Section 3.01. Notices to Trustee. If the Company elects to redeem Notes pursuant to the optional redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee, at least 45 days but not more than 60 days before a redemption date (unless a shorter period is acceptable to the Trustee), an Officers' Certificate setting forth (i) the Section of this Indenture pursuant to which the redemption shall occur, (ii) the redemption date, (iii) the principal amount of Notes to be redeemed and (iv) the redemption price. If the Company is required to make an offer to repurchase Notes pursuant to Section 4.10 or 4.13 hereof, it shall furnish to the Trustee, at least 45 days before the scheduled purchase date, an Officers' Certificate setting forth (i) the section of this Indenture pursuant to which the offer to purchase shall occur, (ii) the terms of the offer, (iii) the principal amount of Notes to be repurchased, (iv) the repurchase price, (v) the repurchase date and (vi) and further setting forth a statement to the effect that (a) the Company or one its Subsidiaries has affected an Asset Sale and there are Excess Proceeds aggregating more than $7.5 million or (b) a Change of Control has occurred, as applicable. Section 3.02. Selection of Notes to be Redeemed or Repurchased. If less than all of the Notes are to be redeemed in an offer to purchase at any time, selection of Notes for redemption or repurchase will be made by the Trustee in compliance with the requirements of 35 the principal national securities exchange, if any, on which the Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by lot or by such other method as the Trustee shall deem fair and appropriate; provided that Notes to be redeemed with the proceeds of an Equity Offering shall be selected on a pro rata basis; provided further that no Notes of $1000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest and Liquidated Damages shall cease to accrue on Notes or portions of them called for redemption unless the Company defaults in making the redemption payment. Section 3.03. Notice of Redemption. At least 30 days but not more than 60 days before a redemption date, the Company shall mail or cause to be mailed by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed. The notice shall identify the Notes to be redeemed and shall state: (1) the redemption date; (2) the redemption price for the Notes and accrued interest, and Liquidated Damages, if any; (3) if any Note is being redeemed in part, the portion of the principal amount of such Notes to be redeemed and that, after the redemption date, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion shall be issued upon surrender of the original Note; (4) the name and address of the Paying Agent; (5) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6) that, unless the Company defaults in making such redemption payment, interest and Liquidated Damages, if any, on Notes called for redemption ceases to accrue on and after the redemption date; 36 (7) the paragraph of the Notes and/or Section of this Indenture pursuant to which the Notes called for redemption are being redeemed; and (8) that no representation is made as to the correctness or accuracy of the CUSIP number, if any, listed in such notice or printed on the Notes. At the Company's request, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense; provided, however, that the Company shall have delivered to the Trustee, at least 45 days prior to the redemption date (or such shorter period as shall be acceptable to the Trustee), an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in the notice as provided in the preceding paragraph. The notice mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Note shall not affect the validity of the proceeding for the redemption of any other Note. Section 3.04. Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become irrevocably due and payable on the redemption date at the redemption price plus accrued and unpaid interest and Liquidated Damages, if any, to such date. A notice of redemption may not be conditional. Section 3.05. Deposit of Redemption Or Repurchase Price. On or before 10:00 a.m. (New York City time) on each redemption date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price, and accrued and unpaid interest and Liquidated Damages, if any, on all Notes to be redeemed on that date. The Trustee or the Paying Agent shall promptly return to the Company upon its written request any money deposited with the Trustee or the Paying Agent by the Company in excess of the amounts necessary to pay the redemption price (including any applicable premium), accrued interest and Liquidated Damages, if any, on all Notes to be redeemed. If Notes called for redemption or tendered in an Asset Sale Offer or Change of Control Offer are paid or if the Company has deposited with the Trustee or Paying Agent money sufficient to pay the redemption price, unpaid and accrued interest and Liquidated Damages, if any, on all Notes to be redeemed or repurchased, on and after the redemption or repurchase date, interest and Liquidated Damages, if any, shall cease to accrue on the Notes or the portions of Notes called for redemption or tendered and not withdrawn in an Asset Sale Offer or Change of Control Offer (regardless of whether 37 certificates for such securities are actually surrendered). If a Note is redeemed or repurchased on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption or repurchase shall not be so paid upon surrender (which surrender has not been withdrawn) for redemption or tender for repurchase of the Notes pursuant to an Asset Sales Offer or Change of Control Offer because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal and Liquidated Damages, if any, from the redemption or repurchase date until such principal and Liquidated Damages, if any, is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case, at the rate provided in the Notes and in Section 4.01 hereof. Section 3.06. Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, the Company shall issue and, upon the Company's written request, the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. Section 3.07. Optional Redemption. (a) Except as set forth in the next paragraph, the Notes will not be redeemable at the Company's option prior to April 15, 2003. Thereafter, the Notes will be subject to redemption at any time at the option of the Company, 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:
YEAR REDEMPTION PRICE 2003 105.063% 2004 103.375% 2005 101.688% 2006 and thereafter 100.000%
(b) Notwithstanding the foregoing, at any time on or prior to April 15, 2001, the Company may (but shall not have the obligation to) redeem, on one or more occasions, up to an aggregate of 35% of the principal amount of 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 Notes 38 originally issued remains outstanding immediately after the occurrence of such redemption; and provided further, that such redemption shall occur within 90 days of the date of the closing of such Equity Offering. Section 3.08. Mandatory Redemption. Except as set forth under Sections 3.09, 4.10 and 4.13 hereof, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. Section 3.09. Repurchase Offers. In the event that the Company shall be required to commence an offer to all Holders to repurchase Notes (a "Repurchase Offer") pursuant to Section 4.10 hereof, an "Asset Sale," or pursuant to Section 4.13 hereof, a "Change of Control Offer," the Company shall follow the procedures specified below. A Repurchase Offer shall commence no earlier than 30 days and no later than 60 days after a Change of Control (unless the Company is not required to make such offer pursuant to Section 4.13(c) hereof) or an Asset Sale Offer Triggering Event (as defined below) (an "Asset Sale Offer Triggering Event"), as the case may be, and remain open for a period of twenty (20) Business Days following its commencement and no longer, except to the extent that a longer period is required by applicable law (the "Offer Period"). No later than five (5) Business Days after the termination of the Offer Period (the "Repurchase Date"), the Company shall purchase the principal amount of Notes required to be purchased pursuant to Section 4.10 hereof, in the case of an Asset Sale Offer, or 4.13 hereof, in the case of a Change of Control Offer (the "Offer Amount") or, if less than the Offer Amount has been tendered, all Notes tendered in response to the Repurchase Offer. Payment for any Notes so purchased shall be made in the same manner as interest payments are made. If the Repurchase Date is on or after an interest record date and on or before the related interest payment date, any accrued and unpaid interest and Liquidated Damages, if any, shall be paid to the Person in whose name a Note is registered at the close of business on such record date, and no additional interest or Liquidated Damages, if any, shall be payable to Holders who tender Notes pursuant to the Repurchase Offer. Upon the commencement of a Repurchase Offer, the Company shall send, by first class mail, a notice to the Trustee (pursuant to Section 3.01 hereof) and each of the Holders (pursuant to Section 3.02 hereof), with a copy to the Trustee. The notice shall contain all instructions and materials necessary to enable such Holders to tender Notes pursuant to such Repurchase Offer. The Repurchase Offer shall be made to all Holders. The notice, which shall govern the terms of the Repurchase Offer, shall describe the 39 transaction or transactions that constitute the Change of Control or Asset Sale as the case may be and shall state: (a) that the Repurchase Offer is being made pursuant to this Section 3.09 and Section 4.10 or 4.13 hereof, as the case may be, and the length of time the Repurchase Offer shall remain open; (b) the Offer Amount, the repurchase price and the Repurchase Date; (c) that any Note not tendered or accepted for payment shall continue to accrue interest; (d) that, unless the Company defaults in making such payment, any Note accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest and Liquidated Damages, if any, after the Repurchase Date; (e) that Holders electing to have a Note repurchased pursuant to a Repurchase Offer shall be required to surrender the Note, with the form entitled "Option of Holder to Elect Repurchase" on the reverse of the Note, duly completed, or transfer by book-entry transfer, to the Company, the Depositary, or the Paying Agent at the address specified in the notice not later than the close of business on the last day of the Offer Period; (f) that Holders shall be entitled to withdraw their election if the Company, the Depositary or the Paying Agent, as the case may be, receives, not later than the expiration of the Offer Period, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Note the Holder delivered for repurchase and a statement that such Holder is withdrawing his election to have such Note repurchased; (g) that, if the aggregate principal amount of Notes surrendered by Holders exceeds the Offer Amount, the Company shall select the Notes to be repurchased on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Notes in denominations of $1,000, or integral multiples thereof, shall be repurchased); and (h) that Holders whose Notes were repurchased only in part shall be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered (or transferred by book-entry transfer). On or before 10:00 a.m. (New York City time) on each Repurchase Date, the Company shall irrevocably deposit with the Trustee or Paying Agent in immediately available funds the aggregate purchase price with respect to a principal amount of Notes equal to the Offer Amount, together with accrued and unpaid interest and Liquidated Damages, if any, thereon, to be held for payment in 40 accordance with the terms of this Section 3.09. On the Repurchase Date, the Company shall, to the extent lawful, (i) accept for payment, on a pro rata basis to the extent necessary, the Offer Amount of Notes or portions thereof tendered pursuant to the Repurchase Offer, or if less than the Offer Amount has been tendered, all Notes tendered, (ii) deliver or cause the Paying Agent or depository, as the case may be, to deliver to the Trustee Notes so accepted and (iii) deliver to the Trustee an Officers' Certificate stating that such Notes or portions thereof were accepted for payment by the Company in accordance with the terms of this Section 3.09. The Company, the Depositary or the Paying Agent, as the case may be, shall promptly (but in any case not later than three (3) Business Days after the Repurchase Date) mail or deliver to each tendering Holder an amount equal to the repurchase price of the Notes tendered by such Holder and accepted by the Company for repurchase, plus any accrued and unpaid interest and Liquidated Damages, if any, thereon to the Repurchase Date, and the Company shall promptly issue a new Note, and the Trustee, shall authenticate and mail or deliver such new Note, to such Holder, equal in principal amount to any unrepurchased portion of such Holder's Notes surrendered. Any Note not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company shall publicly announce in a newspaper of general circulation or in a press release provided to a nationally recognized financial wire service the results of the Repurchase Offer on the Repurchase Date. Other than as specifically provided in this Section 3.09, any repurchase pursuant to this Section 3.09 shall be made pursuant to the provisions of Sections 3.01, 3.02, 3.05 and 3.06 hereof. ARTICLE 4 COVENANTS Section 4.01. Payment of Notes. The Company shall pay or cause to be paid the principal of, premium, if any, and interest on the Notes on the dates and in the manner provided in the Notes. The Company shall pay all Liquidated Damages, if any, in the same manner on the dates and in the amounts set forth in the Registration Rights Agreement. Principal, premium and Liquidated Damages, if any, and interest, shall be considered paid for all purposes hereunder on the date the Paying Agent if other than the Company or a Subsidiary thereof holds, as of 10:00 a.m. (New York City time) money deposited by the Company in immediately available funds and designated for and sufficient to pay all such principal, premium and Liquidated Damages, if any, and interest, then due. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any 41 proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Section 4.02. Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, the City of New York an office or agency (which may be an office of the Trustee or an affiliate of the Trustee or Registrar) where Notes may be surrendered for registration of transfer or for exchange and where notices and demands to or upon the Company in respect of the Notes and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, the City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby designates the Corporate Trust Office of the Trustee as one such office or agency of the Company in accordance with Section 2.03 hereof. Section 4.03. Commission Reports. From and after the date hereof, whether or not required by the rules and regulations of the Commission, so long as any Notes are outstanding, the Company shall furnish to the Holders of 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 Company 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 Company and its consolidated Subsidiaries and, with respect to the annual information only, a report thereon by the Company'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 Company 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 Right Agreement (or, if the Exchange Offer is not consummated, after the effectiveness of the Shelf Registration Statement), the Company shall file a copy of all such 42 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 Company and the Guarantors shall, for so long as any Notes remain outstanding, furnish to the 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. The financial information to be distributed to Holders of Notes shall be filed with the Trustee and mailed to the Holders at their addresses appearing in the register of Notes maintained by the Registrar, within 90 days after the end of the Company's fiscal years and within 45 days after the end of each of the first three quarters of each such fiscal year. The Company shall provide the Trustee with a sufficient number of copies of all reports and other documents and information and, if requested by the Company and at the Company's expense, the Trustee will deliver such reports to the Holders under this Section 4.03. Section 4.04. Compliance Certificate. The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year, an Officers' Certificate stating that a review of the activities of the Company and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether each has kept, observed, performed and fulfilled its obligations under this Indenture (including, with respect to any Restricted Payments made during such year, the basis upon which the calculations required by Section 4.07 hereof were computed, which calculations may be based on the Company's latest available financial statements), and further stating, as to each such Officer signing such certificate, that, to the best of his or her knowledge, each entity has kept, observed, performed and fulfilled each and every covenant contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Company is taking or proposes to take with respect thereto) and that, to the best of his or her knowledge, no event has occurred and remains in existence by reason of which payments on account of principal of, premium or Liquidated Damages, if any, or interest on the Notes is prohibited or if such event has occurred, a description of the event and what action the Company is taking or proposes to take with respect thereto. So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants, in connection with the year-end financial statements delivered pursuant to 43 Section 4.03 hereof, the Company shall use its best efforts to deliver a written statement of the Company's independent public accountants (who shall be a firm of established national reputation) that in making the examination necessary for certification of such financial statements, nothing has come to their attention that would lead them to believe that the Company has violated any provisions of Article Four or Section 5.01 hereof or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation. In the event that such written statement of the Company's independent public accountants cannot be obtained, the Company shall deliver an Officers' Certificate certifying that it has used its best efforts to obtain such statements and was unable to do so. The Company shall, so long as any of the Notes are outstanding, deliver to the Trustee, forthwith upon any Officer becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default and what action the Company is taking or proposes to take with respect thereto. Section 4.05. Taxes. The Company shall pay, and shall cause each of its Subsidiaries to pay, prior to delinquency all material taxes, assessments and governmental levies, except such as are contested in good faith and by appropriate proceedings and with respect to which appropriate reserves have been taken in accordance with GAAP. Section 4.06. Stay, Extension and Usury Laws. The Company and each Guarantor covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and the Company and each Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it shall not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law has been enacted. Section 4.07. Restricted Payments. From and after the date hereof the Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make any other payment or distribution on account of the Company's or any of its Restricted Subsidiaries' Equity Interests 44 (including, without limitation, any such dividend, distribution or other payment made as a payment in connection with any merger or consolidation involving the Company or any of its Restricted Subsidiaries), other than dividends or distributions payable in Equity Interests (other than Disqualified Stock) of the Company or dividends or distributions payable to the Company or any Wholly Owned Subsidiary of the Company; (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 Company) any Equity Interests of the Company or any Restricted Subsidiary (other than any such Equity Interests owned by the Company or any Restricted Subsidiary of the Company); (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 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 shall have occurred and be continuing; and (b) the Company would, at the time of such Restricted Payment, and after giving pro forma effect thereto as if any Indebtedness 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 Section 4.09 hereof; and (c) such Restricted Payment, together with the aggregate amount of all other Restricted Payments made by the Company and its Restricted Subsidiaries after the date hereof (excluding Restricted 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 Company for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing after the date hereof to the end of the Company'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 Company from contributions to the Company's capital or the issue or sale subsequent to the date hereof of Equity Interests of the Company (other than Disqualified Stock) or of Disqualified Stock or debt securities of the Company 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 Company and other than Disqualified Stock or convertible debt 45 securities that have been converted into Disqualified Stock), plus (iii) to the extent that any Restricted Investment that was made after the date hereof 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 Company 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 this Indenture; (ii) the redemption, repurchase, retirement, defeasance or other acquisition of any subordinated Indebtedness or Equity Interests of the Company 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 Company) of, other Equity Interests of the Company (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 shall 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 Company to the holders of its common Equity Interests on a pro rata basis; (v) so long as no Default or Event of Default shall have occurred and is continuing, the repurchase, redemption or other acquisition or retirement for value of any Equity Interests of the Company, Holdings or any Restricted Subsidiary of the Company, held by any member of the Company'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 hereof; provided that the aggregate price paid for all such repurchased, redeemed, acquired or retired Equity Interests shall 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 Company from any reissuance of Equity Interests by Holdings or the Company to members of management of the Company and its Subsidiaries (provided that the cash proceeds referred to in this clause (B) shall 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 Company on the date hereof, the proceeds of which are utilized solely to consummate the Recapitalization; (viii) the payment of dividends or the 46 making of loans or advances by the Company 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 company or for services rendered by Holdings on behalf of the Company; (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 Company or any Guarantor issued after the date hereof in accordance with Section 4.09; 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 Company 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 Section 4.09, (I) from and after 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 hereof, provided that such interest payments are made with the proceeds of such dividends, and (II) a $16.0 million cash dividend that the Company shall 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 hereof, 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 Company 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) shall 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 Company or such Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment and (ii) Qualified Proceeds (other than cash) shall be the fair market value on the date of receipt thereof by the Company of such Qualified Proceeds. The fair market value of any non-cash Restricted Payment and Qualified Proceeds shall be determined by the Board of Directors whose resolution with respect thereto shall 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 47 exceeds $10.0 million. Not later than the date of making any Restricted Payment, the Company shall 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 Section 4.07 were computed, together with a copy of any fairness opinion or appraisal required by this Indenture. Section 4.08. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist 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 Company 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 Company or any of its Restricted Subsidiaries, (ii) make loans or advances to the Company or any of its Restricted Subsidiaries, (iii) guarantee any Indebtedness of the Company or any Restricted Subsidiary of the Company (provided that this clause (iii) shall apply only to Restricted Subsidiaries that are Guarantors), (iv) transfer any of its properties or assets to the Company 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 hereof, 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 hereof, (b) this Indenture and the 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 Company 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 this Indenture, (e) customary non-assignment provisions in leases, licenses, encumbrances, contracts or similar assets entered into or acquired 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 48 that has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Subsidiary. Section 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock. The Company shall not, and shall 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); neither the Company nor any Guarantor shall issue any Disqualified Stock; and the Company shall not permit any of its Restricted Subsidiaries that are not Guarantors to issue any shares of preferred stock; provided, however, that the Company or any Guarantor may incur Indebtedness (including Acquired Debt) or issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the Company'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 will not apply to the incurrence of any of the following items of Indebtedness (collectively, "Permitted Debt"): (i) the incurrence by the Company (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 Company and the 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 principal of all principal payments (optional and mandatory) thereunder constituting permanent reductions of such Indebtedness pursuant to and in accordance with Section 4.10; (ii) the incurrence by the Company and the Guarantors of Indebtedness represented by the Notes and the Subsidiary Guarantees; (iii) the incurrence by the Company or any of the Guarantors of Indebtedness represented by Capital Lease Obligations, mortgage financings or purchase 49 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 Company or such Guarantor, in an aggregate principal amount not to exceed $5.0 million at any time outstanding; (iv) other Indebtedness of the Company 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 Company 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 is permitted by this Indenture to exist or be incurred; (vi) the incurrence of intercompany Indebtedness (A) between or among the Company and any Wholly Owned Restricted Subsidiaries of the Company or (B) by a Restricted Subsidiary that is not a Wholly Owned Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary; provided, however, that (i) if the Company 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 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 Company or a Wholly Owned Restricted Subsidiary of the Company and (B) any sale or other transfer of any such Indebtedness to a Person that is not either the Company or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in each case, to constitute an incurrence of such Indebtedness by the Company or such Subsidiary, as the case may be, not permitted by this clause (vi); (vii) the incurrence by the Company 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 Company in the ordinary course of business or (iii) the price of raw materials used by the Company or its Restricted Subsidiaries in a Permitted Business; 50 (viii) Indebtedness incurred in respect of workers' compensation claims, self-insurance obligations and performance, surety and similar bonds provided by the Company or a Guarantor in the ordinary course of business; (ix) Indebtedness arising from agreements of the Company 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 Company or any of the Guarantors of Indebtedness of the Company or a Guarantor that was permitted to be incurred by another provision of this covenant; (xi) the incurrence by the Company or any of its Restricted Subsidiaries of Acquired Debt in an aggregate principal amount at any time outstanding not to exceed $17.0 million; (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 Company 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 Company shall, 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. Section 4.10. Asset Sales. 51 The Company shall not, and shall not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the Company (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 Officers' 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 Company 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 Company's or such Restricted Subsidiary's most recent balance sheet), of the Company or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the Notes or any Guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases the Company or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by the Company or any such Restricted Subsidiary from such transferee that are converted by the Company or such Restricted Subsidiary into cash (to extent of the cash received) within 180 days following the closing of such Asset Sale, shall 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 Company or its 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 Company 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 Company 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 Company or its Restricted Subsidiaries may temporarily reduce Senior Debt or otherwise invest such Net Proceeds in any manner that is not prohibited by this 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 Company will be required to make an offer to all Holders of Notes and, to the extent required by the terms of any Pari Passu Indebtedness to all holders of such Pari Passu Indebtedness (an "Asset Sale Offer"), to repurchase the maximum principal amount of 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, if any, thereon to the date of repurchase, in accordance with the procedures set forth in Section 3.09 hereof or such Pari Passu Indebtedness, as applicable. To the extent any Excess Proceeds remain after consummation of the Asset Sale Offer, the Company may use such Excess Proceeds for any purpose not otherwise prohibited by this Indenture. If 52 the aggregate principal amount of Notes and any such Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be repurchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. Section 4.11. Transactions With Affiliates. The Company shall not, and shall 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 Company or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Company or such Restricted Subsidiary with an unrelated Person and (ii) the Company 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 Officers' 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 shall not be deemed to be Affiliated 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 Company or any of its Restricted Subsidiaries in the ordinary course of business of the Company or such Restricted Subsidiary to or with the officers, directors or employees of the Company or its Restricted Subsidiaries, (2) transactions between or among the Company and/or its Restricted Subsidiaries, (3) Restricted Payments (other than Restricted Investments) that are permitted by Section 4.07 hereof, (4) customary advisory investment banking fees paid to Principals and their 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 this Indenture which are fair to the Company, in the good faith determination of the Board of Directors of the Company and are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party. Section 4.12. Liens. 53 The Company shall not, and shall 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 Notes, the 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 shall have with respect to the Notes and Subsidiary Guarantees) and (y) in all other cases, the Notes are secured by such Lien on an equal and ratable basis. Section 4.13. Offer to Repurchase Upon Change of Control. Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's 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, if any, thereon to the date of repurchase (the "Change of Control Payment"). Within 30 days following any Change of Control, the Company shall mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control and offering to repurchase Notes on the date specified in such notice, which date shall 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 Section 3.09 hereof and described in such notice. The Company 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 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 hereof relating to such Change of Control Offer, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations described herein by virtue thereof. On the Change of Control Payment Date, the Company shall, to the extent lawful, (1) accept for payment all Notes or portions thereof properly tendered pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an amount equal to the Change of Control Payment in respect of all Notes or portions thereof so tendered and (3) deliver or cause to be delivered to the Trustee the Notes so accepted together with an Officers' Certificate stating the aggregate principal amount of Notes or portions thereof being purchased by the Company. The Paying Agent will promptly mail to each Holder of Notes so tendered the Change of Control Payment for such Notes, and the Trustee will promptly 54 authenticate and mail (or cause to be transferred by book entry) to each Holder a new Note equal in principal amount to any unrepurchased portion of the Notes surrendered, if any; provided that each such new Note will be in a principal amount of $1,000 or an integral multiple thereof. Prior to complying with the provisions of this covenant, but in any event within 90 days following a Change of Control, the Company 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 Notes required by this covenant. The Company will not be required to purchase any Notes until it has complied with the preceding sentence, but failure to comply with the preceding sentence shall constitute an Event of Default. The Company shall publicly announce the results of the Change of Control Offer on or as soon as practicable after the Change of Control Payment Date in accordance with Section 3.09 hereof. The Change of Control provisions described above will be applicable whether or not any other provisions of this Indenture are applicable. Except as described above with respect to a Change of Control, this Indenture does not contain provisions that permit the Holders of Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction. The Company shall 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 herein applicable to a Change of Control Offer made by the Company and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. Section 4.14. Corporate Existence. Subject to Section 4.13 and Article 5 hereof, as the case may be, the Company and each Guarantor shall do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each of its Subsidiaries in accordance with the respective organizational documents (as the same may be amended from time to time) of the Company or any such Subsidiary and the rights (charter and statutory), licenses and franchises of the Company and its Subsidiaries; provided that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any of its Subsidiaries, if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders of Notes. Section 4.15. Business Activities. 55 The Company shall not, and shall not permit any Restricted Subsidiary to engage in any business other than a Permitted Businesses. Section 4.16. Senior Subordinated Debt. Notwithstanding the provisions of Section 4.09 hereof, (i) the Company shall 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 Notes, and (ii) no Guarantor shall 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 Guarantees. Section 4.17. Limitation on Issuances of Guarantees of Indebtedness. The Company shall not permit any Restricted Subsidiary to guarantee the payment of any Indebtedness of the Company 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 this Indenture providing for a Subsidiary Guarantee of payment of the Notes by such Restricted Subsidiary, (ii) if the 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 shall be subordinated to such Restricted Subsidiary's guarantee with respect to the Guaranteed Debt substantially to the same extent as the 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 Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, any such guarantee of such Restricted Subsidiary with respect to the Guaranteed Debt shall be subordinated in right of payment to such Restricted Subsidiary's Subsidiary Guarantee with respect to the Notes substantially to the same extent as the Guaranteed Debt is subordinated to the 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 Company 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 shall deliver to the Trustee an opinion of counsel to the effect that (A) such Subsidiary Guarantee of the Notes has been duly authorized, executed and delivered, and (B) such Subsidiary Guarantee of the 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 limitations, all laws relating to fraudulent transfers) and except insofar as enforcement thereof is subject to general principles of equity. 56 ARTICLE 5 SUCCESSORS Section 5.01. Merger, Consolidation of Sale of Assets. The Company shall not consolidate or merge with or into (whether or not the Company 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 Company is the surviving corporation or the Person formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall 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 shall have been made assumes all the obligations of the Company under the Notes and this 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 Company with or into a Wholly Owned Restricted Subsidiary of the Company, the Company or the entity or Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such sale, assignment, transfer, lease, conveyance or other disposition shall 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 Section 4.09 hereof. For purposes of this Section 5.01, 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 Company, which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. Clause (iv) of the preceding paragraph will not prohibit (a) a merger between the Company and a Wholly Owned Restricted Subsidiary of Holdings created for the purpose of holding the Capital Stock of the Company, or (b) a merger between the Company and a Wholly Owned Restricted Subsidiary of the Company so long as, in the case of each of clause (a) and (b) the amount of Indebtedness of the Company and its Restricted Subsidiaries is not increased thereby. Section 5.02. Successor Corporation Substituted. 57 Upon any consolidation or merger, or any sale, assignment, transfer, lease, conveyance or other disposition of all or substantially all of the assets of the Company in accordance with Section 5.01 hereof, the successor corporation formed by such consolidation or into or with which the Company is merged or to which such sale, assignment, transfer, lease, conveyance or other disposition is made shall succeed to, and be substituted for (so that from and after the date of such consolidation, merger, sale, lease, conveyance or other disposition, the provisions of this Indenture referring to the "Company" shall refer instead to the successor corporation and not to the Company), and shall exercise every right and power of the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein; provided, that, (i) solely for the purposes of computing Consolidated Net Income for purposes of clause (b) of the first paragraph of Section 4.07 hereof, the Consolidated Net Income of any person other than the Company and its Subsidiaries shall be included only for periods subsequent to the effective time of such merger, consolidation, combination or transfer of assets; and (ii) in the case of any sale, assignment, transfer, lease, conveyance, or other disposition of less than all of the assets of the predecessor Company, the predecessor Company shall not be released or discharged from the obligation to pay the principal of or interest and Liquidated Damages, if any, on the Notes. ARTICLE 6 DEFAULTS AND REMEDIES Section 6.01. Events of Default. Each of the following constitutes an "Event of Default": (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes (whether or not prohibited by the Article 10 hereof); (ii) default in payment when due of the principal of, or premium, if any, on, the Notes (whether or not prohibited by Article 10 hereof); (iii) failure by the Company or any of its Restricted Subsidiaries for 30 days after notice by the Trustee or by the Holders of at least 25% in principal amount of Notes then outstanding to comply with the provisions described under Sections 4.07, 4.09, 4.10 or 4.13; (iv) failure by the Company or any of its Restricted Subsidiaries for 60 days after notice by the Trustee or by the Holders of at least 25% in principal amount of Notes then outstanding to comply with any of its other agreements in this Indenture or the Notes; 58 (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 Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company or any of its Restricted Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created after the date hereof, 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 Company or any of its Subsidiaries to pay final judgments aggregating in excess of $10.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days; (vii) except as permitted herein, any Subsidiary Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; (viii) the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole would constitute a Significant Subsidiary, pursuant to or within the meaning of any Bankruptcy Law: (a) commences a voluntary case, (b) consents to the entry of an order for relief against it in an involuntary case, (c) consents to the appointment of a Custodian of it or for all or substantially all of its property, (d) makes a general assignment for the benefit of its creditors, or (e) generally is not paying its debts as they become due; or 59 (ix) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (a) is for relief against the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; (b) appoints a Custodian of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of the property of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; or (c) orders the liquidation of the Company or any of its Significant Subsidiaries or any group of Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary; and the order or decree remains unstayed and in effect for 60 consecutive days. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. Section 6.02. Acceleration. If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default as described in clause (viii) or (ix) of Section 6.01 hereof, all outstanding Notes will become due and payable without further action or notice. Upon such acceleration, all principal of and accrued interest and Liquidated Damages, if any, on the Notes shall be due and payable immediately. Holders of Notes may not enforce this Indenture or the Notes except as provided in this Indenture. The Trustee may withhold from Holders of 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 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 Section 6.01 hereof, the declaration of acceleration of the Notes shall be automatically annulled if the holders of any Indebtedness described in clause (v) of Section 6.01 hereof 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 60 the acceleration of the 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 Notes that became due solely because of the acceleration of the Notes, have been cured or waived. Section 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal, premium, if any, interest and Liquidated Damages, if any, on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder of a Note in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. The Company is required to deliver to the Trustee annually a statement regarding compliance with this Indenture, and the Company 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. Section 6.04. Waiver of Past Defaults. The Holders of a majority in aggregate principal amount of the Notes then outstanding by notice to the Trustee may on behalf of the Holders of all of the Notes waive any existing Default or Event of Default and its consequences under this Indenture (including any acceleration (other than an automatic acceleration resulting from an Event of Default under clause (vii) or (viii) of Section 6.01 hereof) except a continuing Default or Event of Default in the payment of interest on, or the principal of, the Notes (other than as a result of an acceleration), which shall require the consent of all of the Holders of the Notes then outstanding. Section 6.05. Control by Majority. The Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee or exercising any trust power conferred on it. However, (i) the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that the Trustee determines may be unduly prejudicial to the rights of other Holders of Notes or that may involve the Trustee in personal liability, and (ii) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. In case an Event of Default shall occur (which shall not be 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. 61 Notwithstanding any provision to the contrary in this Indenture, the Trustee is under no obligation to exercise any of its rights or powers under this Indenture at the request of any Holder of Notes, unless such Holder shall offer to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. Section 6.06. Limitation on Suits. A Holder of a Note may pursue a remedy with respect to this Indenture, the Subsidiary Guarantees or the Notes only if: (a) the Holder of a Note gives to the Trustee written notice of a continuing Event of Default or the Trustee receives such notice from the Company; (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder of a Note or Holders of Notes offer and, if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder of a Note may not use this Indenture to prejudice the rights of another Holder of a Note or to obtain a preference or priority over another Holder of a Note. Section 6.07. Rights of Holders of Notes to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, premium, if any, interest, and Liquidated Damages, if any, on the Note, on or after the respective due dates expressed in such Note (including in connection with an offer to purchase), or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. Section 6.08. Collection Suit by Trustee. If an Event of Default specified in Section 6.01(i) or (ii) hereof occurs and is continuing, the Trustee is authorized to recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal of, premium and Liquidated Damages, if any, and interest remaining unpaid on the Notes and interest on overdue principal and, to the extent lawful, interest and 62 such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.09. Trustee May File Proofs of Claim. The Trustee is authorized to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and the Holders of the Notes allowed in any judicial proceedings relative to the Company (or any other obligor upon the Notes), its creditors or its property and shall be entitled and empowered to collect, receive and distribute any money or other securities or property payable or deliverable upon the conversion or exchange of the Notes or on any such claims and any Custodian in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee, and in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To the extent that the payment of any such compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.07 hereof out of the estate in any such proceeding, shall be denied for any reason, payment of the same shall be secured by a Lien on, and shall be paid out of, any and all distributions, dividends, money, securities and other properties that the Holders may be entitled to receive in such proceeding whether in liquidation or under any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 6.10. Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: First: to the Trustee, its agents and attorneys for amounts due under Section 7.07 hereof, including payment of all compensation, expense and liabilities incurred, and all advances made, by the Trustee and the costs and expenses of collection; Second: to Holders of Notes for amounts due and unpaid on the Notes for principal, premium, if any, interest, and Liquidated Damages, if any, ratably, without preference or priority of 63 any kind, according to the amounts due and payable on the Notes for principal, premium, if any, interest, and Liquidated Damages, if any, respectively; Third: without duplication, to the Holders for any other Obligations owing to the Holders under this Indenture and the Notes; and Fourth: to the Company or to such party as a court of competent jurisdiction shall direct. The Trustee may fix a record date and payment date for any payment to Holders of Notes pursuant to this Section 6.10. Section 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder of a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE 7 TRUSTEE Section 7.01. Duties of Trustee. (a) If an Event of Default has occurred and is continuing of which a Responsible Officer of the Trustee has knowledge, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture or the TIA and the Trustee need perform only those duties that are specifically set forth in this Indenture or the TIA and no others, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and 64 (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 7.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.05 hereof. (d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b), (c), (e) and (f) of these Sections 7.01 and 7.02. (e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 7.02. Rights of Trustee. (a) The Trustee may conclusively rely on the truth of the statements and correctness of the opinions contained in, and shall be protected from acting or refraining from acting upon, any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. 65 (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. Prior to taking, suffering or admitting any action, the Trustee may consult with counsel of the Trustee's own choosing and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection from liability in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (c) The Trustee may act through its attorneys and agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith that it believes to be authorized or within the rights or powers conferred upon it by this Indenture. (e) Unless otherwise specifically provided in this Indenture, any demand, request, direction or notice from the Company or any Guarantor shall be sufficient if signed by an Officer of the Company or Guarantor, as applicable. (f) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders unless such Holders shall have offered to the Trustee reasonable security or indemnity satisfactory to the Trustee against the costs, expenses and liabilities that might be incurred by it in compliance with such request or direction. Section 7.03. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner of Notes and may otherwise deal with the Company, the Guarantors or any Affiliate of the Company or any Guarantor with the same rights it would have if it were not Trustee. However, in the event that the Trustee acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee or resign. Any Agent may do the same with like rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof. Section 7.04. Trustee's Disclaimer. The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of this Indenture, the Subsidiary Guarantees or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes or any money paid to the Company or upon the Company's direction under any provision of this Indenture, it shall not be responsible for the use or 66 application of any money received by any Paying Agent other than the Trustee, and it shall not be responsible for any statement or recital herein or any statement in the Notes or any other document in connection with the sale of the Notes or pursuant to this Indenture other than its certificate of authentication. Section 7.05. Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is known to a Responsible Officer of the Trustee, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Note pursuant to Section 6.01(i) or (ii) hereof, the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Notes. Section 7.06. Reports by Trustee to Holders of the Notes. Within 60 days after each May 15 beginning with the May 15 following the date of this Indenture, and for so long as Notes remain outstanding, the Trustee shall mail to the Holders of the Notes a brief report dated as of such reporting date that complies with TIA (S) 313(a) (but if no event described in TIA (S) 313(a) has occurred within the twelve months preceding the reporting date, no report need be transmitted). The Trustee also shall comply with TIA (S) 313(b). The Trustee shall also transmit by mail all reports as required by TIA (S) 313(c). A copy of each report at the time of its mailing to the Holders of Notes shall be mailed to the Company and filed with the Commission and each stock exchange on which the Company has informed the Trustee in writing the Notes are listed in accordance with TIA (S) 313(d). The Company shall promptly notify the Trustee when the Notes are listed on any stock exchange and of any delisting thereof. Section 7.07. Compensation and Indemnity. The Company and the Guarantors shall pay to the Trustee from time to time reasonable compensation for its acceptance of this Indenture and services hereunder. To the extent permitted by law, the Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company and the Guarantors shall reimburse the Trustee promptly upon request for all reasonable disbursements, advances and expenses incurred or made by it in addition to the compensation for its services. Such expenses shall include the reasonable compensation, disbursements and expenses of the Trustee's agents and counsel. The Company and the Guarantors shall indemnify the Trustee against any and all losses, liabilities or expenses incurred by it arising out of or in connection with the acceptance or administration 67 of its duties under this Indenture, including the costs and expenses of enforcing this Indenture against the Company and the Guarantors (including this Section 7.07) and defending itself against any claim (whether asserted by the Company and the Guarantors or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder except to the extent any such loss, liability or expense may be attributable to its negligence or bad faith. The Trustee shall notify the Company and the Guarantors promptly of any claim for which it may seek indemnity. Failure by the Trustee to so notify the Company and the Guarantors shall not relieve the Company of its obligations hereunder. The Company and the Guarantors shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company and the Guarantors shall pay the reasonable fees and expenses of such counsel. The Company and the Guarantors need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The obligations of the Company and the Guarantors under this Section 7.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's and the Guarantors payment obligations in this Section 7.07, the Trustee shall have a Lien prior to the Notes on all money or property held or collected by the Trustee, except that held in trust to pay principal, interest and Liquidated Damages, if any, on particular Notes. Such Lien shall survive the satisfaction and discharge of this Indenture and the resignation or removal of the Trustee. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01 (vii) or (viii) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. The Trustee shall comply with the provisions of TIA (S) 313(b)(2) to the extent applicable. Section 7.08. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 7.08. The Trustee may resign in writing at any time and be discharged from the trust hereby created by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 7.10 hereof; 68 (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company, or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee, after written request by any Holder of a Note who has been a Holder of a Note for at least six months, fails to comply with Section 7.10 hereof, such Holder of a Note may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and the duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to the Holders of the Notes. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, provided that all sums owing to the Trustee hereunder have been paid and subject to the Lien provided for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 7.08, the Company's obligations under Section 7.07 hereof shall continue for the benefit of the retiring Trustee. Section 7.09. Successor Trustee by Merger, etc. If the Trustee or any Agent consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee or any Agent, as applicable. Section 7.10. Eligibility; Disqualification. There shall at all times be a Trustee hereunder that is a corporation organized and doing business under the laws of the United States of America or of any state thereof that is authorized under such laws 69 to exercise corporate trustee power, that is subject to supervision or examination by federal or state authorities. The Trustee and its direct parent shall at all times have a combined capital surplus of at least $50.0 million as set forth in its most recent annual report of condition. This Indenture shall always have a Trustee who satisfies the requirements of TIA (S) 310(a)(1), (2) and (5). The Trustee is subject to TIA (S) 310(b). Section 7.11. Preferential Collection of Claims Against the Company. The Trustee is subject to TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated therein. ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance. The Company may, at the option of its Board of Directors evidenced by a resolution set forth in an Officers' Certificate, at any time, elect to have either Section 8.02 or Section 8.03 hereof be applied to all Notes and Subsidiary Guarantees then outstanding upon compliance with the conditions set forth below in this Article 8. Section 8.02. Legal Defeasance and Discharge. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.02, the Company and each Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to have been discharged from their respective obligations with respect to all Notes and Subsidiary Guarantees then outstanding on the date the conditions set forth below are satisfied ("Legal Defeasance"). For this purpose, Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire Indebtedness represented by the Notes outstanding, which shall thereafter be deemed to be "outstanding" only for the purposes of Section 8.05 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all their respective other obligations under such Notes and Subsidiary Guarantees and this Indenture (and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following provisions which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of outstanding Notes to receive payments in respect of the principal amount, premium, if any, and interest and Liquidated Damages, if any, on such Notes when such payments are due from the trust referred to in Section 8.04(a); (b) the Company's obligations with respect to such Notes under Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.10, 4.02 and 4.03 hereof; (c) the rights, powers, 70 trusts, duties and immunities of the Trustee and the Company's obligations in connection therewith; and (d) the provisions of this Section 8.02. Section 8.03. Covenant Defeasance. Upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, the Company and each Guarantor shall, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, be released from its obligations under the covenants contained in Article 5 and in Sections 4.03, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, 5.01 and 11.01 hereof with respect to the outstanding Notes and Subsidiary Guarantees on and after the date the conditions set forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes and Subsidiary Guarantees shall thereafter be deemed not "outstanding" for the purposes of any direction, waiver, consent or declaration or act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "outstanding" for all other purposes hereunder (it being understood that such Notes shall not be deemed outstanding for accounting purposes). For this purpose, Covenant Defeasance means that, with respect to the outstanding Notes and Subsidiary Guarantees, the Company or any of its Subsidiaries may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.01 hereof, but, except as specified above, the remainder of this Indenture and such Notes and Subsidiary Guarantees shall be unaffected thereby. In addition, upon the Company's exercise under Section 8.01 hereof of the option applicable to this Section 8.03, subject to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections 6.01(iii) through 6.01(v) hereof shall not constitute Events of Default. Section 8.04. Conditions to Legal or Covenant Defeasance. The following shall be the conditions to the application of either Section 8.02 or Section 8.03 hereof to the outstanding Notes and Subsidiary Guarantees: In order to exercise either Legal Defeasance or Covenant Defeasance: (a) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S. dollars, non-callable Government Securities, or a combination thereof, in such amounts as shall be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal amount, premium, if any, and interest and Liquidated Damages, if any, on the outstanding Notes on the stated maturity or 71 on the applicable redemption date, as the case may be, and the Company must specify whether the Notes are being defeased to maturity or to a particular redemption date; (b) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date hereof, 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 shall confirm that, subject to customary assumptions and exclusions, the Holders of the outstanding Notes shall not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and shall 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; (c) in the case of Covenant Defeasance, the Company shall 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, the Holders of the outstanding Notes shall not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and shall 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; (d) no Default or Event of Default shall have 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; (e) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument (other than this Indenture) to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (f) the Company shall have delivered to the Trustee an opinion of counsel to the effect that, subject to customary assumptions and exclusions (which assumptions and exclusions shall 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 shall not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; 72 (g) the Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit was not made by the Company with the intent of preferring the Holders of Notes over the other creditors of the Company with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (h) the Company shall have delivered 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. Section 8.05. Deposited Money and U.S. Government Securities to be Held in Trust; Other Miscellaneous Provisions. Subject to Section 8.06 hereof, all money and non-callable Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant to Section 8.04 hereof in respect of the then outstanding Notes shall be held in trust and applied by the Trustee, in accordance with the provisions of such Notes and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as Paying Agent) as the Trustee may determine, to the Holders of such Notes of all sums due and to become due thereon in respect of principal, premium, if any, interest and Liquidated Damages, if any, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the cash or non-callable Government Securities deposited pursuant to Section 8.04 hereof or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the outstanding Notes. Anything in this Article 8 to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time at the Company's written request and be relieved of all liability with respect to any money or non- callable Government Securities held by it as provided in Section 8.04 hereof which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee (which may be the opinion delivered under Section 8.04(a) hereof), are in excess of the amount thereof that would then be required to be deposited to effect an equivalent Legal Defeasance or Covenant Defeasance. Section 8.06. Repayment to the Company. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, interest or Liquidated Damages, if any, on any Note and remaining unclaimed for one year after such principal, and premium, if any, or interest, if any, 73 or Liquidated Damages, if any, have become due and payable shall be paid to the Company on its written request or (if then held by the Company) shall be discharged from such trust; and the Holder of such Note shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and The Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. Section 8.07. Reinstatement. If the Trustee or Paying Agent is unable to apply any United States dollars or non-callable Government Securities in accordance with Section 8.02 hereof or Section 8.03 hereof, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company and the Guarantors under this Indenture, and the Notes and the Subsidiary Guarantees shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.02 hereof or Section 8.03 hereof, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.02 hereof or Section 8.03 hereof, as the case may be; provided, however, that, if the Company makes any payment of principal of, premium, if any, interest or Liquidated Damages, if any, on any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Notes to receive such payment from the money held by the Trustee or Paying Agent. ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER Section 9.01. Without Consent of Holders of the Notes. Notwithstanding Section 9.02 of this Indenture, without the consent of any Holder of Notes the Company and the Trustee may amend or supplement this Indenture, the Notes or the Subsidiary Guarantees: (a) to cure any ambiguity, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes; 74 (c) to provide for the assumption of the Company's or a Guarantor's obligations to the Holders of Notes in the case of a merger, or consolidation pursuant to Article 5 or Article 11 hereof, as applicable; (d) to make any change that would provide any additional rights or benefits to the Holders of Notes or that does not adversely affect the legal rights hereunder of any such Holder; or (e) to comply with requirements of the Commission in order to effect or maintain the qualification of this Indenture under the TIA; or (f) to allow any Restricted Subsidiary to Guarantee the Notes. Upon the written request of the Company accompanied by a resolution of its Board of Directors of the Company authorizing the execution of any such amended or supplemental indenture, and upon receipt by the Trustee of the documents described in Section 9.06 hereof, the Trustee shall join with the Company or the Guarantors in the execution of any amended or supplemental indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental indenture that affects its own rights, duties or immunities under this Indenture or otherwise. Section 9.02. With Consent of Holders of Notes. Except as provided below in this Section 9.02 or as provided in Section 10.13 or Section 12.13 of this Indenture, this Indenture, the Notes and the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount at maturity of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of, or a tender offer or exchange offer for Notes), and any existing default or compliance with any provision of this Indenture, the Notes or the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including, without limitation, consents obtained in connection with a purchase of or a tender offer or exchange offer for the Notes). Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental indenture, and upon the filing with the Trustee of evidence satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid, and upon receipt by the Trustee of an Officers' Certificate and an Opinion of Counsel, the Trustee shall join with the Company and the Guarantors in the execution of such amended or supplemental indenture unless such amended or supplemental indenture affects the Trustee's own rights, duties or immunities 75 under this Indenture or otherwise, in which case the Trustee may, but shall not be obligated to, enter into such amended or supplemental indenture. It shall not be necessary for the consent of the Holders of Notes under this Section 9.02 to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 9.02 becomes effective, the Company shall mail to the Holders of each Note affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Company to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amended or supplemental indenture or waiver. Subject to Sections 6.04, 6.07, 10.13 and 12.13 hereof, the Holders of a majority in aggregate principal amount of the Notes then outstanding may amend or waive compliance in a particular instance by the Company or the Guarantors with any provision of this Indenture or the Notes or the Subsidiary Guarantees. However, without the consent of each Holder affected, an amendment, or waiver may not (with respect to any Note held by a non-consenting Holder): (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Notes or alter the provisions with respect to the redemption of the Notes (other than provisions relating to Sections 3.09, 4.10 and 4.13 hereof); (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive a Default or Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount at maturity of the Notes and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated in the Notes; (f) make any change in Section 6.04 or 6.07 hereof; (g) waive a redemption payment with respect to any Note (other than a payment described in Section 4.10 or 4.13 hereof); or (h) except as otherwise permitted herein, release any Guarantor from any of its obligations under its Subsidiary Guarantee or this Indenture, or amend the provisions herein relating to the release of Guarantors; or 76 (i) make any change in the amendment and waiver provisions of this Article 9. Section 9.03. Compliance with Trust Indenture Act. Every amendment or supplement to this Indenture, the Subsidiary Guarantees or the Notes shall be set forth in an amended or supplemental indenture that complies with the TIA as then in effect. Section 9.04. Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder of a Note may revoke the consent as to its Note if the Trustee receives written notice of revocation before the date the waiver, supplement or amendment becomes effective. When an amendment, supplement or waiver becomes effective in accordance with its terms, it thereafter binds every Holder. Section 9.05. Notation on or Exchange of Notes. The Trustee may place an appropriate notation about an amendment, supplement or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment, supplement or waiver. Failure to make the appropriate notation or issue a new Note shall not affect the validity and effect of such amendment, supplement or waiver. Section 9.06. Trustee to Sign Amendments, etc. The Trustee shall sign any amended or supplemental indenture authorized pursuant to this Article 9 if the amendment or supplement does not adversely affect the rights, duties, liabilities or immunities of the Trustee. The Company and the Guarantors may not sign an amendment or supplemental indenture until their respective Boards of Directors approve it. In signing or refusing to sign any amended or supplemental indenture the Trustee shall be entitled to receive and (subject to Section 7.01 hereof) shall be fully protected in relying upon an Officers' Certificate and an Opinion of Counsel stating that the execution of such amended or supplemental indenture is authorized or permitted by this Indenture, that it is not inconsistent herewith, and that it will be valid and binding upon the Company and the Guarantors in accordance with its terms. ARTICLE 10 SUBORDINATION Section 10.01 Agreement to Subordinate. 77 The Company agrees, and each Holder of Notes by accepting a Note agrees, that the Indebtedness evidenced by the Note is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Debt (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt. Section 10.02 Liquidation; Dissolution; Bankruptcy. Upon any payment or distribution to creditors of the Company of any kind, whether in cash, property or securities in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Company or its property, an assignment for the benefit of creditors or any marshalling of the Company's assets and liabilities, whether voluntary or involuntary, the holders of Senior Debt of the Company 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 the Holders of Notes will be entitled to receive any payment or distribution of any kind with respect to the Notes, and until all Obligations with respect to Senior Debt are paid in full, any payment or distribution to which the Holders of Notes would be entitled shall be made to the holders of Senior Debt (except that Holders of Notes may receive and retain Permitted Junior Securities and payments made from the trust described under Sections 8.02 and 8.03). Section 10.03 Default on Designated Senior Debt. The Company also shall not make any payment upon or in respect of the Notes (except in Permitted Junior Securities or from the trust described under Sections 8.02 and 8.03) 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, and 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 Notes may and shall 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 the non-payment 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 78 Debt). No 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 shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 90 days. Whenever the Company is prohibited from making any payment in respect of the Notes, the Company also shall be prohibited from making, directly or indirectly, any payment of any kind on account of the purchase or other acquisition of the Notes. If any Holder receives any payment or distribution that such Holder is not entitled to receive with respect to the Notes, such Holder shall be required to pay the same over to the holders of Senior Debt. Section 10.04. Acceleration of Notes. If payment of the Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Debt of the acceleration. Section 10.05. When Distribution Must Be Paid Over. In the event that the Trustee or any Holder of a Note receives any payment of any Obligations with respect to the Notes at a time when such payment is prohibited by Section 10.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued (the "Representative"), as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 10, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders of the Notes or the Company or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 10, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. 79 Section 10.06. Notice by the Company. The Company shall promptly notify the Trustee and the Paying Agent of any facts known to the Company that would cause a payment of any Obligations with respect to the Notes to violate this Article, which notice shall specifically refer to this Article 10, but failure to give such notice shall not affect the subordination of the Notes to the Senior Debt as provided in this Article. Section 10.07. Subrogation. After all Senior Debt is paid in full and until the Notes are paid in full, Holders of Notes shall be subrogated (equally and ratably with all other pari passu indebtedness) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of the Notes have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders of the Notes is not, as between the Company and Holders of the Notes, a payment by the Company on the Notes. Section 10.08. Relative Rights. This Article defines the relative rights of Holders of Notes and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Company and Holders of Notes, the obligations of the Company, which are absolute and unconditional, to pay principal of and interest on the Notes in accordance with their terms; (2) affect the relative rights of Holders of Notes and creditors of the Company other than their rights in relation to holders of Senior Debt; or (3) prevent the Trustee or any Holder of Notes from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders of Notes. If the Company fails because of this Article to pay principal of or interest on a Note on the due date, the failure is still a Default or Event of Default. Section 10.09. Subordination May Not Be Impaired by the Company. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Notes shall be impaired by any act or failure to act by the Company or any Holder or by the failure of the Company or any Holder to comply with this Indenture. 80 Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt, or any of them, may, at any time and from time to time, without the consent of or notice to the Holders of the Notes, without incurring any liabilities to any Holder of any Notes and without impairing or releasing the subordination and other benefits provided in this Indenture or the obligations of the Holders of the Notes to the holders of the Senior Debt, even if any right of reimbursement or subrogation or other right or remedy of any Holder of Notes is affected, impaired or extinguished thereby, do any one or more of the following: (1) change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend, increase or alter, the terms of any Senior Debt, any security therefor or guaranty thereof or any liability of any obligor thereon (including any guarantor) to such holder, or any liability incurred directly or indirectly in respect thereof or otherwise amend, renew, exchange, extend, modify, increase or supplement in any manner any Senior Debt or any instrument evidencing or guaranteeing or securing the same or any agreement under which Senior Debt is outstanding; (2) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise securing Senior Debt or any liability of any obligor thereon, to such holder, or any liability incurred directly or indirectly in respect thereof; (3) settle or compromise any Senior Debt or any other liability of any obligor of the Senior Debt to such holder or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, Senior Debt) in any manner or order; and (4) fail to take or to record or to otherwise perfect, for any reason or for no reason, any lien or security interest securing Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other person, elect any remedy and otherwise deal freely with any obligor and any security for the Senior Debt or any liability of any obligor to such holder or any liability incurred directly or indirectly in respect thereof. Section 10.10. Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. 81 Upon any payment or distribution of assets of the Company referred to in this Article 10, the Trustee and the Holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders of Notes for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 10. Section 10.11. Rights of Trustee and Paying Agent. Notwithstanding the provisions of this Article 10 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes, unless the Trustee shall have received at its Corporate Trust Office at least three Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Notes to violate this Article, which notice shall specifically refer to this Article 10. Only the Company or a Representative may give the notice. Nothing in this Article 10 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. Section 10.12. Authorization to Effect Subordination. Each Holder of a Note by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 10, and appoints the Trustee to act as the Holder's attorney-in-fact for any and all such purposes, including without limitation the timely filing of a claim for the unpaid balance of the Notes held by such Holder in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time of such claim, the Representatives of the Designated Senior Debt, including the Credit Agent, are hereby authorized to file an appropriate claim for and on behalf of the Holders of the Notes. Section 10.13. Amendments. 82 Any amendment to the provisions of this Article 10 shall require the consent of the Holders of at least 75% in aggregate amount of Notes then outstanding if such amendment would adversely affect the rights of the Holders of Notes. ARTICLE 11 GUARANTEE OF NOTES Section 11.01. Note Guarantee. Subject to Section 11.06 hereof, each of the Guarantors hereby, jointly and severally, unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Notes and the Obligations of the Company hereunder and thereunder, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Notes will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration, redemption or otherwise, and interest on the overdue principal, premium, if any, (to the extent permitted by law) interest on any interest, if any, and Liquidated Damages, if any, on the Notes, and all other payment Obligations of the Company to the Holders or the Trustee hereunder or thereunder will be promptly paid in full and performed, all in accordance with the terms hereof and thereof; and (b) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when so due of any amount so guaranteed for whatever reason the Guarantors will be jointly and severally obligated to pay the same immediately. An Event of Default under this Indenture or the Notes shall constitute an event of default under the Subsidiary Guarantees, and shall entitle the Holders to accelerate the Obligations of the Guarantors hereunder in the same manner and to the same extent as the Obligations of the Company. The Guarantors hereby agree that their Obligations hereunder shall be unconditional, irrespective of the validity, regularity or enforceability of the Notes or this Indenture, the absence of any action to enforce the same, any waiver or consent by any Holder with respect to any provisions hereof or thereof, the recovery of any judgment against the Company, any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a Guarantor. Each Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest, notice and all demands whatsoever and covenants that this Note Guarantee will not be discharged except by complete performance of the Obligations contained in the Notes and this Indenture. If any Holder or the Trustee is required by any court or otherwise to return 83 to the Company, the Guarantors, or any Note Custodian, Trustee, liquidator or other similar official acting in relation to either the Company or the Guarantors, any amount paid by either to the Trustee or such Holder, this Note Guarantee, to the extent theretofore discharged, shall be reinstated in full force and effect. Each Guarantor agrees that it shall not be entitled to, and hereby waives, any right of subrogation in relation to the Holders in respect of any Obligations guaranteed hereby. Each Guarantor further agrees that, as between the Guarantors, on the one hand, and the Holders and the Trustee, on the other hand, (x) the maturity of the Obligations guaranteed hereby may be accelerated as provided in Article 6 for the purposes of this Note Guarantee, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed hereby, and (y) in the event of any declaration of acceleration of such Obligations as provided in Article 6 hereof, such Obligations (whether or not due and payable) shall forthwith become due and payable by the Guarantors for the purpose of this Note Guarantee. The Guarantors shall have the right to seek contribution from any non-paying Guarantor so long as the exercise of such right does not impair the rights of the Holders under the Subsidiary Guarantees. Section 11.02. Execution and Delivery of Subsidiary Guarantee. To evidence its Subsidiary Guarantee set forth in Section 11.01, each Guarantor hereby agrees that a notation of such Subsidiary Guarantee substantially in the form of Exhibit D shall be endorsed by an Officer of such --------- Guarantor on each Note authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of such Guarantor, by manual or facsimile signature, by an Officer of such Guarantor. Each Guarantor hereby agrees that its Subsidiary Guarantee set forth in Section 11.01 shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Subsidiary Guarantee. If an Officer whose signature is on this Indenture or on the Subsidiary Guarantee no longer holds that office at the time the Trustee authenticates the Note on which a Subsidiary Guarantee is endorsed, the Subsidiary Guarantee shall be valid nevertheless. The delivery of any Note by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee set forth in this Indenture on behalf of the Guarantors. Section 11.03. Guarantors May Consolidate, etc., on Certain Terms 84 (a) Except as set forth in Articles 4 and 5 hereof, nothing contained in this Indenture shall prohibit a merger between a Guarantor and another Guarantor or a merger between a Guarantor and the Company. (b) Subject to Section 11.04 hereof, 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, subject to the provisions of the following paragraph, (i) 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 this Indenture and the Subsidiary Guarantees; and (ii) immediately after giving effect to such transaction, no Default or Event of Default exists. (c) In the case of any such consolidation, merger, sale or conveyance and upon the assumption by the successor Person, by supplemental indenture, executed and delivered to the Trustee and substantially in the form of Exhibit E hereto, of the Subsidiary Guarantee endorsed upon the Notes and --------- the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Guarantor, such successor Person shall succeed to and be substituted for the Guarantor with the same effect as if it had been named herein as a Guarantor; provided that, solely for purposes of computing Consolidated Net Income for purposes of clause (b) of the first paragraph of Section 4.07 hereof, the Consolidated Net Income of any Person other than the Company and its Restricted Subsidiaries shall only be included for periods subsequent to the effective time of such merger, consolidation, combination or transfer of assets. Such successor Person thereupon may cause to be signed any or all of the Subsidiary Guarantees to be endorsed upon all of the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee. All of the Subsidiary Guarantees so issued shall in all respects have the same legal rank and benefit under this Indenture as the Subsidiary Guarantees theretofore and thereafter issued in accordance with the terms of this Indenture as though all of such Subsidiary Guarantees had been issued at the date of the execution hereof. Section 11.04. Releases Following Sale of Assets, Merger, Sale of Capital Stock Etc. In the event (a) 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, or (b) that the Company designates a Guarantor that is a Restricted Subsidiary to be an Unrestricted Subsidiary, or such Guarantor ceases to be a Subsidiary of the Company, then such Guarantor (in the event of a sale or other disposition, by way of such a merger, consolidation or 85 otherwise, of all of the capital stock of such Guarantor or any such designation) or the entity acquiring the property (in the event of a sale or other disposition of all of the assets of such Guarantor) shall be released and relieved of any obligations under its Subsidiary Guarantee. In the case of a sale, assignment, lease, transfer, conveyance or other disposition of all or substantially all of the assets of a Guarantor, upon the assumption provided for in clause (i) of Section 11.03(b) hereof, such Guarantor shall be discharged from all further liability and obligation under this Indenture. Upon delivery by the Company to the Trustee of an Officers' Certificate to the effect of the foregoing, the Trustee shall execute any documents reasonably required in order to evidence the release of any Guarantor from its Obligation under its Subsidiary Guarantee. Any Guarantor not released from its Obligations under its Subsidiary Guarantee shall remain liable for the full amount of principal of, premium, if any, interest and Liquidated Damages, if any, on the Notes and for the other Obligations of such Guarantor under the Indenture as provided in this Article 11. Section 11.05. Additional Guarantors. Any Person that was not a Guarantor on the date of this Indenture may become a Guarantor by executing and delivering to the Trustee (a) a supplemental indenture in substantially the form of Exhibit E, and (b) an Opinion of Counsel --------- to the effect that such supplemental indenture has been duly authorized and executed by such Person and constitutes the legal, valid, binding and enforceable obligation of such Person (subject to such customary exceptions concerning creditors rights', fraudulent transfers, public policy and equitable principles as may be acceptable to the Trustee in its discretion). Section 11.06. Limitation on Guarantor Liability. For purposes hereof, each Guarantor's liability shall be limited to the lesser of (i) the aggregate amount of the Obligations of the Company under the Notes and this Indenture and (ii) the amount, if any, which would not have (A) rendered such Guarantor "insolvent" (as such term is defined in the United States Bankruptcy Code and in the Debtor and Creditor Law of the State of New York) or (B) left such Guarantor with unreasonably small capital at the time its Subsidiary Guarantee of the Notes was entered into; provided that, it will be a presumption in any lawsuit or other proceeding in which a Guarantor is a party that the amount guaranteed pursuant to the Subsidiary Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of such Guarantor, or debtor in possession or trustee in bankruptcy of the Guarantor, otherwise proves in such a lawsuit that the aggregate liability of the Guarantor is the amount set forth in clause (ii) above. In making any determination as to solvency or sufficiency of capital of a Guarantor in accordance with the previous sentence, the right of such Guarantor to contribution from other Guarantors, and any other rights such Guarantor may have, contractual or otherwise, shall be taken into account. 86 Section 11.07. "Trustee" to Include Paying Agent. In case at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article 11 shall in each case (unless the context shall otherwise require) be construed as extending to and including such Paying Agent within its meaning as fully and for all intents and purposes as if such Paying Agent were named in this Article 11 in place of the Trustee. ARTICLE 12 SUBORDINATION OF SUBSIDIARY GUARANTEE Section 12.01. Agreement to Subordinate. The Guarantors agree, and each Holder of Notes by accepting a Note agrees, that the Indebtedness evidenced by the Note is subordinated in right of payment, to the extent and in the manner provided in this Article, to the prior payment in full of all Senior Debt (whether outstanding on the date hereof or hereafter created, incurred, assumed or guaranteed), and that the subordination is for the benefit of the holders of Senior Debt. Section 12.02. Liquidation; Dissolution; Bankruptcy. Upon any payment or distribution to creditors of the Guarantors of any kind, whether in cash, property or securities in a liquidation or dissolution of the Guarantors or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to any Guarantor or its property, an assignment for the benefit of creditors or any marshalling of such Guarantor's assets and liabilities, whether voluntary or involuntary, the holders of Senior Debt 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 the Holders of Notes will be entitled to receive any payment or distribution of any kind with respect to the Notes, and until all Obligations with respect to Senior Debt are paid in full, any payment or distribution to which the Holders of Notes would be entitled shall be made to the holders of Senior Debt (except that Holders of Notes may receive and retain Permitted Junior Securities and payments made from the trust described under Sections 8.02 and 8.03). Section 12.03. Default on Designated Senior Debt. The Guarantors also shall not make any payment upon or in respect of the Notes (except in Permitted Junior securities or from the trust described under Sections 8.02 and 8.03) if (i) a default in the payment of the principal of premium, if any, or interest on Designated Senior Debt occurs and is 87 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, and 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 Notes may and shall 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 the non-payment of a scheduled principal repayment upon Designated Senior Debt, non-payment of principal upon the stated maturity of any Designated Senior Debt or the acceleration of the maturity of any Designated Senior Debt). No 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 shall be, or be made, the basis for a subsequent Payment Blockage Notice unless such default shall have been cured or waived for a period of not less than 90 days. Whenever a Guarantor is prohibited from making any payment in respect of the Notes, the Guarantor also shall be prohibited from making, directly or indirectly, any payment of any kind on account of the purchase or other acquisition of the Notes. If any Holder receives any payment or distribution that such Holder is not entitled to receive with respect to the Notes, such Holder shall be required to pay the same over to the holders of Senior Debt. Section 12.04. Acceleration of Notes. If payment of the Notes is accelerated because of an Event of Default, the Guarantors shall promptly notify holders of Senior Debt of the acceleration. Section 12.05. When Distribution Must Be Paid Over. In the event that the Trustee or any Holder of a Note receives any payment of any Obligations with respect to the Notes at a time when such payment is prohibited by Section 12.03 hereof, such payment shall be held by the Trustee or such Holder, in trust for the benefit of, and shall be paid forthwith over and delivered, upon written request, to, the holders of Senior Debt as their interests may appear or their Representative under the indenture or other agreement (if any) pursuant to which Senior Debt may have been issued, as their respective interests may appear, for application to the payment of all Obligations with respect to Senior Debt remaining unpaid to the extent necessary to pay such 88 Obligations in full in accordance with their terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. With respect to the holders of Senior Debt, the Trustee undertakes to perform only such obligations on the part of the Trustee as are specifically set forth in this Article 12, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Debt, and shall not be liable to any such holders if the Trustee shall pay over or distribute to or on behalf of Holders of the Notes or the Guarantors or any other Person money or assets to which any holders of Senior Debt shall be entitled by virtue of this Article 12, except if such payment is made as a result of the willful misconduct or gross negligence of the Trustee. Section 12.06. Notice by Guarantor The Guarantors shall promptly notify the Trustee and the Paying Agent of any facts known to the Guarantors that would cause a payment of any Obligations with respect to the Notes to violate this Article, which notice shall specifically refer to this Article 12, but failure to give such notice shall not affect the subordination of the Notes to the Senior Debt as provided in this Article. Section 12.07. Subrogation. After all Senior Debt is paid in full and until the Notes are paid in full, Holders of the Notes shall be subrogated (equally and ratably with all other pari passu indebtedness) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of the Notes have been applied to the payment of Senior Debt. A distribution made under this Article to holders of Senior Debt that otherwise would have been made to Holders of the Notes is not, as between the Guarantor and Holders of the Notes, a payment by the Guarantors on the Notes. Section 12.08. Relative Rights. This Article defines the relative rights of Holders of the Notes and holders of Senior Debt. Nothing in this Indenture shall: (1) impair, as between the Guarantors and Holders of the Notes, the obligations of the Guarantors, which are absolute and unconditional, to pay principal of and interest on the Notes in accordance with their terms; (2) affect the relative rights of Holders of the Notes and creditors of the Guarantors other than their rights in relation to holders of Senior Debt; or 89 (3) prevent the Trustee or any Holder of the Notes from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders and owners of Senior Debt to receive distributions and payments otherwise payable to Holders of the Notes. If the Guarantors fail because of this Article to pay principal of or interest on a Note on the due date, the failure is still a Default or Event of Default. Section 12.09. Subordination May Not Be Impaired by the Guarantors. No right of any holder of Senior Debt to enforce the subordination of the Indebtedness evidenced by the Notes shall be impaired by any act or failure to act by any Guarantor or any Holder or by the failure of any Guarantor or any Holder to comply with this Indenture. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt, or any of them, may, at any time and from time to time, without the consent of or notice to the Holders of the Notes, without incurring any liabilities to any Holder of any Notes and without impairing or releasing the subordination and other benefits provided in this Indenture or the obligations of the Holders of the Notes to the holders of the Senior Debt, even if any right of reimbursement or subrogation or other right or remedy of any Holder of Notes is affected, impaired or extinguished thereby, do any one or more of the following: (1) change the manner, place or terms of payment or change or extend the time of payment of, or renew, exchange, amend, increase or alter, the terms of any Senior Debt, any security therefor or guaranty thereof or any liability of any obligor thereon (including any guarantor) to such holder, or any liability incurred directly or indirectly in respect thereof or otherwise amend, renew, exchange, extend, modify, increase or supplement in any manner any Senior Debt or any instrument evidencing or guaranteeing or securing the same or any agreement under which Senior Debt is outstanding; (2) sell, exchange, release, surrender, realize upon, enforce or otherwise deal with in any manner and in any order any property pledged, mortgaged or otherwise securing Senior Debt or any liability of any obligor thereon, to such holder, or any liability incurred directly or indirectly in respect thereof; (3) settle or compromise any Senior Debt or any other liability of any obligor of the Senior Debt to such holder or any security therefor or any liability incurred directly or indirectly in respect thereof and apply any sums by whomsoever paid and however realized to any liability (including, without limitation, Senior Debt) in any manner or order; and 90 (4) fail to take or to record or to otherwise perfect, for any reason or for no reason, any lien or security interest securing Senior Debt by whomsoever granted, exercise or delay in or refrain from exercising any right or remedy against any obligor or any guarantor or any other person, elect any remedy and otherwise deal freely with any obligor and any security for the Senior Debt or any liability of any obligor to such holder or any liability incurred directly or indirectly in respect thereof. Section 12.10. Distribution or Notice to Representative. Whenever a distribution is to be made or a notice given to holders of Senior Debt, the distribution may be made and the notice given to their Representative. Upon any payment or distribution of assets of any Guarantor referred to in this Article 12, the Trustee and the Holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction or upon any certificate of such Representative or of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders of the Notes for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other Indebtedness of the Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 12. Section 12.11. Rights of Trustee and Paying Agent. Notwithstanding the provisions of this Article 12 or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment or distribution by the Trustee, and the Trustee and the Paying Agent may continue to make payments on the Notes, unless the Trustee shall have received at its Corporate Trust Office at least three Business Days prior to the date of such payment written notice of facts that would cause the payment of any Obligations with respect to the Notes to violate this Article, which notice shall specifically refer to this Article 12. Only a Guarantor or a Representative may give the notice. Nothing in this Article 12 shall impair the claims of, or payments to, the Trustee under or pursuant to Section 7.07 hereof. The Trustee in its individual or any other capacity may hold Senior Debt with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. Section 12.12. Authorization to Effect Subordination. Each Holder of a Note by the Holder's acceptance thereof authorizes and directs the Trustee on the Holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article 12, and appoints the Trustee to act as the Holder's 91 attorney-in-fact for any and all such purposes, including without limitation the timely filing of a claim for the unpaid balance of the Notes held by such Holder in the form required in any Insolvency or Liquidation Proceeding and causing such claim to be approved. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in Section 6.09 hereof at least 30 days before the expiration of the time of such claim, the Representatives of the Designated Senior Debt, including the Credit Agent, are hereby authorized to file an appropriate claim for and on behalf of the Holders of Notes. Section 12.13. Amendments. Any amendment to the provisions of this Article 12 shall require the consent of the Holders of at least 75% in aggregate amount of Notes then outstanding if such amendment would adversely affect the rights of the Holders of Notes. ARTICLE 13 MISCELLANEOUS Section 13.01. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with the duties imposed by TIA (S)318(c), the imposed duties shall control. Section 13.02. Notices. Any notice or communication by the Company, the Guarantors or the Trustee to the others is duly given if in writing and delivered in Person or mailed by first class mail (registered or certified, return receipt requested), telecopier or overnight air courier guaranteeing next day delivery, to the others' address: If to the Company: Diamond Brands Operating Corp. 1800 Cloquet Avenue Cloquet, Minnesota 55720-2141 Telecopier No.: (218) 879-6369 Attention: Chief Executive Officer With a copy to: Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, New York 10006 Telecopier No.: (212) 225-3999 92 Attention: Paul J. Shim, Esq. If to the Trustee: State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Telecopier No.: (860) 244-1897 Attention: Corporate Trust Department The Company or the Trustee, by notice to the others may designate additional or different addresses for subsequent notices or communications. All notices and communications (other than those sent to Holders) shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and the next Business Day after timely delivery to the courier, if sent by overnight air courier promising next Business Day delivery. Any notice or communication to a Holder shall be mailed by first class mail or by overnight air courier promising next Business Day delivery to its address shown on the register kept by the Registrar. Any notice or communication shall also be so mailed to any Person described in TIA (S) 313(c), to the extent required by the TIA. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. Section 13.03. Communication by Holders of Notes with Other Holders of Notes. Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). Section 13.04. Certificate and Opinion as to Conditions Precedent. 93 Upon any request or application by the Company or the Guarantors to the Trustee to take any action under this Indenture (other than the initial issuance of the Notes), the Company or Guarantor shall furnish to the Trustee upon request: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.05 hereof) stating that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied; and ' (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee (which shall include the statements set forth in Section 13.05 hereof) stating that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied. Section 13.05. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than a certificate provided pursuant to TIA (S) 314(a)(4)) shall comply with the provisions of TIA (S) 314(e) and shall include: (a) a statement that the Person making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, he or she has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been satisfied; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been satisfied. Section 13.06. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or at a meeting of Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 13.07. No Personal Liability of Directors, Officers, Employees and Stockholders. No director, officer, employee, incorporator or stockholder of the Company or the Guarantors, as such, shall have any liability for any obligations of the Company or any Guarantor under the Notes, this 94 Indenture, the Subsidiary Guarantees or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Notes. Section 13.08. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES. Section 13.09. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret any other indenture, loan or debt agreement of the Company or its Subsidiaries or of any other Person. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.10. Successors. All agreements of the Company and the Guarantors in this Indenture, the Notes and the Subsidiary Guarantees shall bind their respective successors and assigns. All agreements of the Trustee in this Indenture shall bind its successors and assigns. Section 13.11. Severability. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 13.12. Counterpart Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Section 13.13. Table of Contents, Headings, etc. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part of this Indenture and shall in no way modify or restrict any of the terms or provisions hereof. [SIGNATURES ON FOLLOWING PAGE] 95 SIGNATURES Dated as of April 21, 1998 DIAMOND BRANDS OPERATING CORP. By:______________________________________ Name: Thomas W. Knuesel Title: Vice President of Finance and Chief Financial Officer EMPIRE CANDLE, INC. By:_________________________________________ Name: Thomas W. Knuesel Title: Vice President of Finance and Chief Financial Officer FORSTER, INC. By:_________________________________________ Name: Thomas W. Knuesel Title: Vice President of Finance and Chief Financial Officer STATE STREET BANK AND TRUST COMPANY as trustee By:_______________________________ Name: Title: 96 Exhibit A-1 - ----------- (Face of note) - -------------- 10 1/8% Senior Subordinated Notes due 2008 No. __ $__________ CUSIP NO.___________ DIAMOND BRANDS OPERATING CORP. promises to pay to _________________ or registered assigns, the principal sum of ________________________ ($ ) on April 15, 2008. Interest Payment Dates: October 15 and April 15 Record Dates: October 1 and April 1 DIAMOND BRANDS OPERATING CORP. By:_____________________________ Name: Title: By:______________________________ Name: Title: This is one of the 10 1/8% Senior Subordinated Notes referred to in the within-mentioned Indenture: Dated: ____________________ State Street Bank and Trust Company, as Trustee By:_________________________________ 97 (Back of Note) 10 1/8% Senior Subordinated Notes due 2008 [Unless and until it is exchanged in whole or in part for Notes in definitive form, this Note may not be transferred except as a whole by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. Unless this certificate is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York, New York) ("DTC"), to the issuer or its agent for registration of transfer, exchange or payment, and any certificate issued is registered in the name of Cede & Co. or such other name as may be requested by an authorized representative of DTC (and any payment is made to Cede & Co. or such other entity as may be requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL in as much as the registered owner hereof, Cede & Co., has an interest herein.]1/ [THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE _______________________ 1 This paragraph should be included only if the Note is issued in global form. 98 THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE OF CLAUSE (b), (c), (d) OR (e), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.]2/ _______________________ 2 This paragraph should be removed upon the exchange of Senior Subordinated Notes for New Senior Subordinated Notes in the Exchange Offer or upon the registration of the Senior Subordinated Notes pursuant to the terms of the Registration Rights Agreement. 99 Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. Interest. Diamond Brands Operating Corp., a Delaware corporation, or its successor (the "Company"), promises to pay interest on the principal amount of this Note at the rate of 10 1/8% per annum and shall pay the Liquidated Damages, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages, if any, in United States dollars (except as otherwise provided herein) semi-annually in arrears on October 15 and April 15, commencing on October 15, 1998, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from April 21, 1998; provided that if there is no existing Default or Event of Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the original issuance of Notes, in which case interest shall accrue from April 21, 1998. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages, if any, on the applicable Interest Payment Date to the Persons who are registered Holders of Notes at the close of business on the October 1 or April 1 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes shall be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium and Liquidated Damages, if any, and interest on, all Global Notes. Such payment shall be in such coin or currency of the 100 United States of America as at the time of payment is legal tender for payment of public and private debts. 3. Paying Agent and Registrar. Initially, State Street Bank and Trust Company, the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Notes under an Indenture, dated as of April 21, 1998 ("Indenture"), among the Company, the Guarantors and the Trustee. The terms of the Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA"). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Notes are general unsecured Obligations of the Company limited to $100.0 million in aggregate principal amount, plus amounts, if any, sufficient to pay premium or Liquidated Damages, if any, and interest on outstanding Notes as set forth in Paragraph 2 hereof. 5. Optional Redemption. Except as set forth in the next paragraph, the Notes shall not be redeemable at the Company's option prior to April 15, 2003. Thereafter, the Notes shall be subject to redemption at the option of the Company, 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 together with accrued and unpaid interest and any 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: YEAR REDEMPTION PRICE - ---- ---------------- 2003 105.063% 2004 103.375% 2005 101.688% 2006 and thereafter 100.000% Notwithstanding the foregoing, at any time prior to April 15, 2001, the Company may (but shall not have the obligation to) redeem, on one or more occasions, up to an aggregate of 35% of the principal amount of the Notes originally issued at a redemption price equal to 110.125% of the principal amount thereof, plus accrued and unpaid interest 101 and Liquidated Damages, if any, thereon to the redemption date, with the net proceeds of one or more Equity Offerings; provided that at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Equity Offering. 6. Mandatory Redemption. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 7. Repurchase at Option of Holder. (a) Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's 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, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control setting forth the procedures governing the Change of Control Offer required by the Indenture. (b) When the aggregate amount of Excess Proceeds from Asset Sales exceeds $7.5 million, the Company will be required to make an offer to all Holders of 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 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, if any, thereon to the date of repurchase, in accordance with the procedures set forth in the Indenture or such Pari Passu Indebtedness. To the extent that any Excess Proceeds remain after consummation of the Asset Sale Offer, the Company may use any such Excess Proceeds for any purposes not otherwise prohibited by this Indenture. If the aggregate principal amount of Notes and any Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. 102 (c) Holders of the Notes that are the subject of an offer to purchase will receive a notice relating to the Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form titled "Option of Holder to Elect Purchase" appearing below. 8. Notice of Redemption. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date, interest and Liquidated Damages, if any, cease to accrue on the Notes or portions thereof called for redemption unless the Company defaults in making the redemption payment. 9. Subordination. The Notes are subordinated to Senior Debt, which is Indebtedness outstanding under Credit Facilities and all Hedging Obligations with respect thereto, and all other Indebtedness 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 parity with or subordinated in right of payment to the Notes. To the extent provided in the Indenture, Senior Debt must be paid before the Notes may be paid. The Company agrees, and each Holder by accepting a Note agrees, to the subordination and authorizes the Trustee to give it effect. 10. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Notes may be registered and the Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, it need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 11. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 103 12. Amendment, Supplement and Waiver. Subject to the following paragraphs and the provisions of the Indenture, the Indenture, the Notes and the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of or, tender offer or exchange offer for Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture, the Notes and the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for Notes). Without the consent of any Holder of Notes, the Company and the Trustee may amend or supplement the Indenture, the Notes or the Subsidiary Guarantees to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to Holders of Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of 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 Subsidiary to guarantee the Notes. 13. Defaults and Remedies. Events of Default include: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes; (ii) default in payment when due of the principal of, or premium, if any, on, the Notes; (iii) failure by the Company or any Restricted Subsidiary for 30 days after notice from the Trustee or by the Holders of at least 25% in principal amount of Notes then outstanding to comply with the provisions described in Sections 4.07, 4.09, 4.10 or 4.13 of the Indenture; (iv) failure by the Company or any of its Restricted Subsidiaries for 60 days after notice from the Trustee or by the Holders of at least 25% in principal amount of Notes then outstanding to comply with its other agreements in the Indenture or the 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 Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company 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 104 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 Company or any of its Restricted Subsidiaries to pay final judgments aggregating in excess of $10.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company 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 shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the 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 Company or any Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Upon any acceleration of maturity of the Notes, all principal of and accrued interest and Liquidated Damages, if any, on the Notes shall be due and payable immediately. Holders of Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Holders of the 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 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 Notes shall 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 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 Notes that became due solely because of the acceleration of the Notes, have been cured or waived. 105 14. Trustee Dealings With Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Guarantors or their respective Affiliates, and may otherwise deal with the Company, the Guarantors or their respective Affiliates, as if it were not the Trustee. 15. No Recourse Against Others. No director, officer, employee, incorporator or stockholder, of the Company or any Guarantor as such, shall have any liability for any obligations of the Company or any Guarantor under the 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 Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 16. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THE NOTES AND THE SUBSIDIARY GUARANTEES. 17. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 19. Additional Rights Of Holders of Transfer Restricted Securities. In addition to the rights provided to Holders of the Notes under the Indenture, Holders of Transfer Restricted Securities (as defined in the Registration Rights Agreement) shall have all the rights set forth in the Registration Rights Agreement, dated as of the date hereof, among the Company, the Guarantors and the Initial Purchasers (the "Registration Rights Agreement"). 20. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 106 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to ________________________________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint to transfer this Note on the books of the Company. The agent may substitute another to act for him. ________________________________________________________________________________ Date:__ Your Signature:__________ (Sign exactly as your name appears on the face of this Note) Signature Guarantee: 107 Option of Holder to Elect Purchase If you want to elect to have this Note purchased by the Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below: Section 4.10 Section 4.13 If you want to elect to have only part of the Note purchased by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state the amount you elect to have purchased: $___________ Date:_____ Your Signature:________ (Sign exactly as your name appears on the Note) Tax Identification No.: Signature Guarantee: 108 SCHEDULE OF EXCHANGES OF NOTES3/ THE FOLLOWING EXCHANGES OF A PART OF THIS GLOBAL NOTE FOR OTHER NOTES HAVE BEEN MADE:
Principal Amount Amount of Amount of of this Global Signature of decrease in increase in Note following authorized Date of Exchange Principal Amount Principal Amount such decrease (or officer of of this Global of this Global increase) Trustee or Note Note Note Custodian
_____________________________ 3 This should be included only if the Note is issued in global form. 109 Exhibit A-2 - ----------- (Face of Regulation S Temporary Global Note) 10 1/8% Senior Subordinated Notes due 2008 No. ____ $______________ CUSIP NO.____________ DIAMOND BRANDS OPERATING CORP. promises to pay to _________________ or registered assigns, the principal sum of __________________ on April 15, 2008. Interest Payment Dates: October 15 and April 15 Record Dates: October 1 and April 1 DIAMOND BRANDS OPERATING CORP. By:________________________ Name: Title: By:________________________ Name: Title: This is one of the 10 1/8% Senior Subordinated Notes referred to in the within-mentioned Indenture: Dated: ____________________ State Street Bank and Trust Company, as Trustee By:_____________________________________ 110 (Back of Regulation S Temporary Global Note) 10 1/8% Senior Subordinated Notes due 2008 [THE RIGHTS ATTACHING TO THIS REGULATION S TEMPORARY GLOBAL NOTE, AND THE CONDITIONS AND PROCEDURES GOVERNING ITS EXCHANGE FOR DEFINITIVE SENIOR SUBORDINATED NOTES, ARE AS SPECIFIED IN THE INDENTURE (AS DEFINED HEREIN).]4/ [UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR NOTES IN DEFINITIVE FORM, THIS NOTE MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITARY TO A NOMINEE OF THE DEPOSITARY OR BY A NOMINEE OF THE DEPOSITARY TO THE DEPOSITARY OR ANOTHER NOMINEE OF THE DEPOSITARY OR BY THE DEPOSITARY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITARY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITARY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH OTHER ENTITY AS MAY BE REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL IN AS MUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]5/ [THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED HEREBY ____________________________ 4 These paragraphs should be removed upon the exchange of Regulation S Temporary Global Notes for Regulation S Permanent Global Notes pursuant to the terms of the Indenture. 5 This paragraph should be included only if the Note is issued in global form. 111 AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (c) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (d) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF THE SECURITIES ACT (AN "INSTITUTIONAL ACCREDITED INVESTOR"), THAT PRIOR TO SUCH TRANSFER, FURNISHES THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS (THE FORM OF WHICH CAN BE OBTAINED FROM THE TRUSTEE) AND, IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF SECURITIES LESS THAN $250,000, AN OPINION OF COUNSEL THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, OR (e) IN ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT (AND, IN THE CASE OF CLAUSE (b), (c), (d) OR (e), BASED UPON AN OPINION OF COUNSEL IF THE COMPANY SO REQUESTS), (2) TO THE COMPANY OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A) ABOVE.]6/ Until this Regulation S Temporary Global Note is exchanged for Regulation S Permanent Global Notes, the Holder hereof shall not be entitled to receive payments of interest or Liquidated Damages, if any, hereon although interest and Liquidated Damages, if any, will continue to accrue; until so exchanged in full, this Regulation S Temporary Global Note shall in all other respects be entitled to the same benefits as other Senior Subordinated Notes under the Indenture. ___________________________ 6 This paragraph should be removed upon the exchange of Notes for Exchange Senior Discount Notes in the Exchange Offer or upon the registration of the Notes pursuant to the terms of the Registration Rights Agreement. 112 This Regulation S Temporary Global Note is exchangeable in whole or in part for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes only (i) on or after the termination of the 40-day restricted period (as defined in Regulation S) and (ii) upon presentation of certificates (accompanied by an Opinion of Counsel, if applicable) required by Article 2 of the Indenture. Upon exchange of this Regulation S Temporary Global Note for one or more Regulation S Permanent Global Notes or Rule 144A Global Notes, the Trustee shall cancel this Regulation S Temporary Global Note. This Regulation S Temporary Global Note shall not become valid or obligatory until the certificate of authentication hereon shall have been duly manually signed by the Trustee in accordance with the Indenture. This Regulation S Temporary Global Note shall be governed by and construed in accordance with the laws of the State of the New York. All references to "$," "Dollars," "dollars" or "U.S. $" are to such coin or currency of the United States of America as at the time shall be legal tender for the payment of public and private debts therein. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. Interest. Diamond Brands Operating Corp., a Delaware corporation, or its successor (the "Company"), promises to pay interest on the principal amount of this Note at the rate of 10 1/8% per annum and shall pay the Liquidated Damages, if any, payable pursuant to Section 5 of the Registration Rights Agreement referred to below. The Company will pay interest and Liquidated Damages, if any, in United States dollars (except as otherwise provided herein) semi-annually in arrears on October 15 and April 15, commencing on October 15, 1998, or if any such day is not a Business Day, on the next succeeding Business Day (each an "Interest Payment Date"). Interest on the Notes shall accrue from the most recent date to which interest has been paid or, if no interest has been paid, from April 21, 1998; provided that if there is no existing Default or Event of Default in the payment of interest, and if this Note is authenticated between a record date referred to on the face hereof and the next succeeding Interest Payment Date, interest shall accrue from such next succeeding Interest Payment Date, except in the case of the original issuance of Notes, in which case interest shall accrue from April 21, 1998. The Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue principal at the rate equal to 1% per annum in excess of the then applicable interest rate on the Notes to the extent lawful; it shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on overdue installments of interest and Liquidated Damages (without 113 regard to any applicable grace period) at the same rate to the extent lawful. Interest shall be computed on the basis of a 360-day year comprised of twelve 30-day months. 2. Method of Payment. The Company will pay interest on the Notes (except defaulted interest) and Liquidated Damages, if any, on the applicable Interest Payment Date to the Persons who are registered Holders of Notes at the close of business on the October 1 or April 1 next preceding the Interest Payment Date, even if such Notes are canceled after such record date and on or before such Interest Payment Date, except as provided in Section 2.12 of the Indenture with respect to defaulted interest. The Notes shall be payable as to principal, premium and Liquidated Damages, if any, and interest at the office or agency of the Company maintained for such purpose within or without the City and State of New York, or, at the option of the Company, payment of interest and Liquidated Damages, if any, may be made by check mailed to the Holders at their addresses set forth in the register of Holders; provided that payment by wire transfer of immediately available funds shall be required with respect to principal of, premium and Liquidated Damages, if any, and interest on, all Global Notes. Such payment shall be in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. 3. Paying Agent and Registrar. Initially, State Street Bank and Trust Company, the Trustee under the Indenture, shall act as Paying Agent and Registrar. The Company may change any Paying Agent or Registrar without notice to any Holder. The Company or any of its Subsidiaries may act in any such capacity. 4. Indenture. The Company issued the Notes under an Indenture, dated as of April 21, 1998 ("Indenture"), among the Company, the Guarantors and the Trustee. The terms of the Notes include those stated in the Indenture and those made a part of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA"). The Notes are subject to all such terms, and Holders are referred to the Indenture and such Act for a statement of such terms. The Notes are general unsecured Obligations of the Company limited to $100.0 million in aggregate principal amount, plus amounts, if any, sufficient to pay premium or Liquidated Damages, if any, and interest on outstanding Notes as set forth in Paragraph 2 hereof. 5. Optional Redemption. Except as set forth in the next paragraph, the Notes shall not be redeemable at the Company's option prior to April 15, 2003. Thereafter, the Notes shall be subject to 114 redemption at the option of the Company, 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 together with accrued and unpaid interest and any 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:
YEAR REDEMPTION PRICE - ---- ---------------- 2003 105.063% 2004 103.375% 2005 101.688% 2006 and thereafter 100.000%
Notwithstanding the foregoing, at any time prior to April 15, 2001, the Company may (but shall not have the obligation to) redeem, on one or more occasions, up to an aggregate of 35% of the principal amount of the 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 proceeds of one or more Equity Offerings; provided that at least 65% of the aggregate principal amount of the Notes originally issued remain outstanding immediately after the occurrence of such redemption; and provided, further, that such redemption shall occur within 90 days of the date of the closing of such Equity Offering. 6. Mandatory Redemption. Except as set forth in paragraph 7 below, the Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 7. Repurchase at Option of Holder. (a) Upon the occurrence of a Change of Control, each Holder of Notes will have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's 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, if any, thereon, to the date of purchase. Within 30 days following any Change of Control, the Company will mail a notice to each Holder describing the transaction or transactions that constitute the Change of Control setting forth the procedures governing the Change of Control Offer required by the Indenture. 115 (b) When the aggregate amount of Excess Proceeds from Asset Sales exceeds $7.5 million, the Company will be required to make an offer to all Holders of 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 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, if any, thereon to the date of repurchase, in accordance with the procedures set forth in the Indenture or such Pari Passu Indebtedness. To the extent that any Excess Proceeds remain after consummation of the Asset Sale, the Company may use such Excess Proceeds for any purposes not otherwise prohibited by this Indenture. If the aggregate principal amount of Notes and any Pari Passu Indebtedness tendered pursuant to an Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero. (c) Holders of the Notes that are the subject of an offer to purchase will receive a notice relating to the Change of Control Offer or Asset Sale Offer from the Company prior to any related purchase date and may elect to have such Notes purchased by completing the form titled "Option of Holder to Elect Purchase" appearing below. 8. Notice of Redemption. Notice of redemption shall be mailed at least 30 days but not more than 60 days before the redemption date to each Holder whose Notes are to be redeemed at its registered address. Notes in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000, unless all of the Notes held by a Holder are to be redeemed. On and after the redemption date, interest and Liquidated Damages, if any, cease to accrue on the Notes or portions thereof called for redemption unless the Company defaults in making the redemption payment. 9. Subordination. The Notes are subordinated to Senior Debt, which is Indebtedness outstanding under Credit Facilities and all Hedging Obligations with respect thereto, and all other Indebtedness 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 parity with or subordinated in right of payment to the Notes. To the extent provided in the Indenture, Senior Debt must be paid before the Notes may be paid. The Company agrees, and each Holder by accepting a Note agrees, to the subordination and authorizes the Trustee to give it effect. 116 10. Denominations, Transfer, Exchange. The Notes are in registered form without coupons in initial denominations of $1,000 and integral multiples of $1,000. The transfer of the Notes may be registered and the Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and the Company may require a Holder to pay any taxes and fees required by law or permitted by the Indenture. The Company need not exchange or register the transfer of any Note or portion of a Note selected for redemption, except for the unredeemed portion of any Note being redeemed in part. Also, it need not exchange or register the transfer of any Notes for a period of 15 days before a selection of Notes to be redeemed or during the period between a record date and the corresponding Interest Payment Date. 11. Persons Deemed Owners. The registered Holder of a Note may be treated as its owner for all purposes. 12. Amendment, Supplement and Waiver. Subject to the following paragraphs and to the provisions of the Indenture, the Indenture, the Notes and the Subsidiary Guarantees may be amended or supplemented with the consent of the Holders of at least a majority in principal amount of the Notes then outstanding (including, without limitation, consents obtained in connection with a purchase of or, tender offer or exchange offer for Notes), and any existing Default or Event of Default or compliance with any provision of the Indenture, the Notes and the Subsidiary Guarantees may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for Notes). Without the consent of any Holder of Notes, the Company and the Trustee may amend or supplement the Indenture, the Notes or the Subsidiary Guarantees to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for the assumption of the Company's obligations to Holders of Notes in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of 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 Subsidiary to guarantee the Notes. 13. Defaults and Remedies. Events of Default include: (i) default for 30 days in the payment when due of interest on, or Liquidated Damages, if any, with respect to, the Notes; (ii) default in payment when due of the principal of, or premium, if any, on, the 117 Notes; (iii) failure by the Company or any Restricted Subsidiary for 30 days after notice from the Trustee or at least 25% in principal amount of the Notes then outstanding to comply with the provisions described in Sections 4.07, 4.09, 4.10 or 4.13 of the Indenture; (iv) failure by the Company or any of its Restricted Subsidiaries for 60 days after notice from the Trustee or by the Holders of at least 25% in principal amount of Notes then outstanding to comply with its other agreements in the Indenture or the 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 Company or any of its Restricted Subsidiaries (or the payment of which is guaranteed by the Company 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 Company or any of its Subsidiaries to pay final judgments aggregating in excess of $10.0 million (net of any amounts with respect to which a reputable and creditworthy insurance company 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 shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Guarantor, or any Person acting on behalf of any Guarantor, shall deny or disaffirm its obligations under its Subsidiary Guarantee; and (viii) certain events of bankruptcy or insolvency with respect to the Company or any of its Significant Subsidiaries If any Event of Default occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Notes may declare all the 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 Company or any Significant Subsidiary, all outstanding Notes will become due and payable without further action or notice. Upon any acceleration of maturity of the Notes, all principal of and accrued interest and Liquidated Damages, if any, on the Notes shall be due and payable immediately. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Notes may direct the Trustee in its exercise of any 118 trust or power. The Trustee may withhold from Holders of 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 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 Notes shall 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 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 Notes that became due solely because of the acceleration of the Notes, have been cured or waived. 14. Trustee Dealings with Company. The Trustee, in its individual or any other capacity, may make loans to, accept deposits from, and perform services for the Company, the Guarantors or their respective Affiliates, and may otherwise deal with the Company, the Guarantors or their respective Affiliates, as if it were not the Trustee. 15. No Recourse Against Others. No director, officer, employee, incorporator or stockholder, of the Company or any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder of Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issuance of the Notes. 16. Governing Law. THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO CONSTRUE THE NOTES AND THE SUBSIDIARY GUARANTEES. 17. Authentication. This Note shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 18. Abbreviations. Customary abbreviations may be used in the name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). 119 19. Additional Rights of Holders of Transfer Restricted Securities. In addition to the rights provided to Holders of the Notes under the Indenture, Holders of Transfer Restricted Securities (as defined in the Registration Rights Agreement) shall have all the rights set forth in the Registration Rights Agreement, dated as of the date hereof, among the Company, the Guarantors and the Initial Purchasers (the "Registration Rights Agreement"). 20. CUSIP Numbers. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Company has caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 120 Exhibit B-1 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL NOTE TO REGULATION S GLOBAL NOTE (Pursuant to Section 2.06(a)(1) of the Indenture) State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Re: 10 1/8% Senior Subordinated Notes due 2008 of Diamond Brands Operating Corp. Reference is hereby made to the Indenture, dated as of April 21, 1998 (the "Indenture"), between Diamond Brands Operating Corp., a Delaware corporation (the "Company"), Empire Candle, Inc., a Kansas corporation, Forster, Inc., a Maine corporation, together with any subsidiary that executes a Subsidiary Guarantee and State Street Bank and Trust Company as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $ _______________ principal amount of Notes which are evidenced by one or more Rule 144A Global Notes and held with the Depositary in the name of ________________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Notes to a Person who will take delivery thereof in the form of an equal principal amount of Notes evidenced by one or more Regulation S Global Notes, which amount, immediately after such transfer, is to be held with the Depositary through Euroclear or Cedel or both. In connection with such request and in respect of such Notes, the Transferor hereby certifies that such transfer has been effected in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with Rule 903 or Rule 904 under the United States Securities Act of 1933, as amended (the "Securities Act"), and accordingly the Transferor hereby further certifies that: (1) The offer of the Notes was not made to a person in the United States; (2) either: (a) at the time the buy order was originated, the transferee was outside the United States or the Transferor and any person acting on its behalf reasonably believed and believes that the transferee was outside the United States; or (b) the transaction was executed in, on or through the facilities of a designated offshore securities market and neither the Transferor nor any person acting on its behalf knows that the transaction was prearranged with a buyer in the United States; 121 (3) no directed selling efforts have been made in contravention of the requirements of Rule 904(b) of Regulation S; (4) the transaction is not part of a plan or scheme to evade the registration provisions of the Securities Act; and (5) upon completion of the transaction, the beneficial interest being transferred as described above is to be held with the Depositary through Euroclear or Cedel or both. Upon giving effect to this request to exchange a beneficial interest in a Rule 144A Global Note for a beneficial interest in a Regulation S Global Note, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Regulation S Global Notes pursuant to the Indenture and the Securities Act and, if such transfer occurs prior to the end of the 40-day restricted period associated with the initial offering of Notes, the additional restrictions applicable to transfers of interest in the Regulation S Temporary Global Note. This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated, the initial purchasers of such Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By:________________________ Name: Title: Dated: cc: Diamond Brands Operating Corp. Donaldson, Lufkin & Jenrette Securities Corporation Morgan Stanley & Co. Incorporated 122 Exhibit B-2 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM REGULATION S GLOBAL NOTE TO RULE 144A GLOBAL NOTE (Pursuant to Section 2.06(a)(ii) of the Indenture) State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Re: 10 1/8% Senior Subordinated Notes due 2008 of Diamond Brands Operating Corp. Reference is hereby made to the Indenture, dated as of April 21, 1998 (the "Indenture"), between Diamond Brands Operating Corp., a Delaware corporation (the "Company"), Empire Candle, Inc., a Kansas corporation, Forster, Inc., a Maine corporation, together with any subsidiary that executes a Subsidiary Guarantee and State Street Bank and Trust Company as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $_________ principal amount at maturity of Notes which are evidenced by one or more Regulation S Global Notes and held with the Depositary through Euroclear or Cedel in the name of ______________ (the "Transferor"). The Transferor has requested a transfer of such beneficial interest in the Notes to a Person who will take delivery thereof in the form of an equal principal amount of the Notes evidenced by one or more Rule 144A Global Notes, to be held with the Depositary. In connection with such request and in respect of such Notes, the Transferor hereby certifies that: [CHECK ONE] [_] such transfer is being effected pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, the Transferor hereby further certifies that the Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A in a transaction meeting the requirements of Rule 144A; or 123 [_] such transfer is being effected pursuant to and in accordance with Rule 144 under the Securities Act; or [_] such transfer is being effected pursuant to an exemption under the Securities Act other than Rule 144A, Rule 144 or Rule 904 and the Transferor further certifies that the Transfer complies with the transfer restrictions applicable to beneficial interests in Global Notes and Definitive Notes bearing the Private Placement Legend and the requirements of the exemption claimed, which certification is supported by (x) if such transfer is in respect of a principal amount of Notes at the time of Transfer of $250,000 or more, a certificate executed by the Transferee in the form of Exhibit C to the Indenture, --------- or (y) if such Transfer is in respect of a principal amount of Notes at the time of transfer of less than $250,000, (1) a certificate executed in the form of Exhibit C to the Indenture and (2) an Opinion --------- of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that (1) such Transfer is in compliance with the Securities Act and (2) such Transfer complies with any applicable blue sky securities laws of any state of the United States; or [_] such transfer is being effected pursuant to an effective registration statement under the Securities Act; or [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further certifies that the Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and such Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. Upon giving effect to this request to exchange a beneficial interest in Regulation S Global Notes for a 124 beneficial interest in 144A Global Notes, the resulting beneficial interest shall be subject to the restrictions on transfer applicable to Rule 144A Global Notes pursuant to the Indenture and the Securities Act. 125 This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated, collectively the initial purchasers of such Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By:___________________________ Name: Title: Dated: cc: Diamond Brands Operating Corp. Donaldson, Lufkin & Jenrette Securities Corporation Morgan Stanley & Co. Incorporated 126 Exhibit B-3 FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER OF DEFINITIVE Senior Subordinated Notes (Pursuant to Section 2.06(b) of the Indenture) State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Re: 10 1/8% Senior Subordinated Notes due 2008 of Diamond Brands Operating Corp. Reference is hereby made to the Indenture, dated as of April 21, 1998 (the "Indenture"), between Diamond Brands Operating Corp., a Delaware corporation (the "Company"), Empire Candle, Inc., a Kansas corporation, Forster, Inc., a Maine corporation, together with any subsidiary that executes a Subsidiary Guarantee and State Street Bank and Trust Company, as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This relates to $ ___________ principal amount of Notes which are evidenced by one or more Definitive Senior Subordinated Notes in the name of __________________ (the "Transferor"). The Transferor has requested an exchange or transfer of such Definitive Senior Subordinated Note(s) in the form of an equal principal amount of Senior Subordinated Notes evidenced by one or more Definitive Senior Subordinated Notes, to be delivered to the Transferor or, in the case of a transfer of such Senior Subordinated Notes, to such Person as the Transferor instructs the Trustee. In connection with such request and in respect of the Senior Subordinated Notes surrendered to the Trustee herewith for exchange (the "Surrendered Senior Subordinated Notes"), the Holder of such Surrendered Senior Subordinated Notes hereby certifies that: [CHECK ONE] [_] the Surrendered Senior Subordinated Notes are being acquired for the Transferor's own account, without transfer; or [_] the Surrendered Senior Subordinated Notes are being transferred to the Company; or [_] the Surrendered Senior Subordinated Notes are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities 127 Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Senior Subordinated Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Senior Subordinated Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting the requirements of Rule 144A; or [_] the Surrendered Senior Subordinated Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act; or [_] the Surrendered Senior Subordinated Notes are being transferred pursuant to an exemption under the Securities Act other than Rule 144A, Rule 144 or Rule 904 and the Transferor further certifies that the Transfer complies with the transfer restrictions applicable to beneficial interests in Global Notes and Definitive Senior Subordinated Notes bearing the Private Placement Legend and the requirements of the exemption claimed, which certification is supported by (x) if such transfer is in respect of a principal amount of Senior Subordinated Notes at the time of Transfer of $100,000 or more, a certificate executed by the Transferee in the form of Exhibit C to the Indenture, or (y) if such Transfer is in respect of a --------- principal amount of Senior Subordinated Notes at the time of transfer of less than $100,000, (1) a certificate executed in the form of Exhibit C to --------- the Indenture and (2) an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that (1) such Transfer is in compliance with the Securities Act and (2) such Transfer complies with any applicable blue sky securities laws of any state of the United States; or [_] the Surrendered Senior Subordinated Notes are being transferred pursuant to an effective registration statement under the Securities Act; or [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further 128 certifies that the Senior Subordinated Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Senior Subordinated Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. 129 This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated, the initial purchasers of such Senior Subordinated Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By:_________________ Name: Title: Dated: Dated: cc: Diamond Brands Operating Corp. Donaldson, Lufkin & Jenrette Securities Corporation Morgan Stanley & Co. Incorporated 130 Exhibit B-4 ----------- FORM OF CERTIFICATE FOR EXCHANGE OR REGISTRATION OF TRANSFER FROM RULE 144A GLOBAL NOTE OR REGULATION S PERMANENT GLOBAL NOTE TO DEFINITIVE SENIOR SUBORDINATED NOTE (Pursuant to Section 2.06(c) of the Indenture) State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Re: 10 1/8% Senior Subordinated Notes due 2008 of Diamond Brands Operating Corp. Reference is hereby made to the Indenture, dated as of April 21, 1998 (the "Indenture"), between Diamond Brands Operating Corp., a Delaware corporation (the "Company"), Empire Candle, Inc., a Kansas corporation, Forster, Inc., a Maine corporation, together with any subsidiary that executes a Subsidiary Guarantee and State Street Bank and Trust Company, as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. This letter relates to $__________ principal amount of Senior Subordinated Notes which are evidenced by a beneficial interest in one or more Rule 144A Global Notes or Regulation S Permanent Global Notes in the name of ____________________ (the "Transferor"). The Transferor has requested an exchange or transfer of such beneficial interest in the form of an equal principal amount of Senior Subordinated Notes evidenced by one or more Definitive Senior Subordinated Notes, to be delivered to the Transferor or, in the case of a transfer of such Senior Subordinated Notes, to such Person as the Transferor instructs the Trustee. In connection with such request and in respect of the Senior Subordinated Notes surrendered to the Trustee herewith for exchange (the "Surrendered Senior Subordinated Notes"), the Holder of such Surrendered Senior Subordinated Notes hereby certifies that: [CHECK ONE] [_] the Surrendered Senior Subordinated Notes are being transferred to the beneficial owner of such Senior Subordinated Notes; or [_] the Surrendered Senior Subordinated Notes are being transferred pursuant to and in accordance with Rule 144A under the United States Securities Act of 1933, as amended (the "Securities 131 Act"), and, accordingly, the Transferor hereby further certifies that the Surrendered Senior Subordinated Notes are being transferred to a Person that the Transferor reasonably believes is purchasing the Surrendered Senior Subordinated Notes for its own account, or for one or more accounts with respect to which such Person exercises sole investment discretion, and such Person and each such account is a "qualified institutional buyer" within the meaning of Rule 144A, in each case in a transaction meeting they requirements of Rule 144A; or [_] the Surrendered Senior Subordinated Notes are being transferred in a transaction permitted by Rule 144 under the Securities Act; or [_] the Surrendered Senior Subordinated Notes are being transferred pursuant to an effective registration statement under the Securities Act; or [_] the Surrendered Senior Subordinated Notes are being transferred pursuant to an exemption under the Securities Act other than Rule 144A, Rule 144 or Rule 904 and the Transferor further certifies that the Transfer complies with the transfer restrictions applicable to beneficial interests in Global Notes and Definitive Senior Subordinated Notes bearing the Private Placement Legend and the requirements of the exemption claimed, which certification is supported by (x) if such transfer is in respect of a principal amount of Senior Subordinated Notes at the time of Transfer of $250,000 or more, a certificate executed by the Transferee in the form of Exhibit C to the Indenture, or (y) if such Transfer is in respect of a --------- principal amount of Senior Subordinated Notes at the time of transfer of less than $250,000, (1) a certificate executed in the form of Exhibit C to --------- the Indenture and (2) an Opinion of Counsel provided by the Transferor or the Transferee (a copy of which the Transferor has attached to this certification), to the effect that (1) such Transfer is in compliance with the Securities Act and (2) such Transfer complies with any applicable blue sky securities laws of any state of the United States; or [_] such transfer is being effected pursuant to an exemption from the registration requirements of the Securities Act other than Rule 144A or Rule 144, and the Transferor hereby further 132 certifies that the Senior Subordinated Notes are being transferred in compliance with the transfer restrictions applicable to the Global Notes and in accordance with the requirements of the exemption claimed, which certification is supported by an Opinion of Counsel, provided by the transferor or the transferee (a copy of which the Transferor has attached to this certification) in form reasonably acceptable to the Company and to the Registrar, to the effect that such transfer is in compliance with the Securities Act; and the Surrendered Senior Subordinated Notes are being transferred in compliance with any applicable blue sky securities laws of any state of the United States. 133 This certificate and the statements contained herein are made for your benefit and the benefit of the Company and Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated, the initial purchasers of such Senior Subordinated Notes being transferred. Terms used in this certificate and not otherwise defined in the Indenture have the meanings set forth in Regulation S under the Securities Act. [Insert Name of Transferor] By:_________________ Name: Title: Dated: Dated: cc: Diamond Brands Operating Corp. Donaldson, Lufkin & Jenrette Securities Corporation Morgan Stanley & Co. Incorporated 134 Exhibit C --------- FORM OF CERTIFICATE FROM ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR State Street Bank and Trust Company 225 Asylum Street, 23rd Floor Hartford, Connecticut 06103 Re: 10 1/8% Senior Subordinated Notes due 2008 of Diamond Brands Operating Corp. Reference is hereby made to the Indenture, dated as of April 21, 1998 (the "Indenture"), between Diamond Brands Operating Corp., a Delaware corporation (the "Company"), Empire Candle, Inc., a Kansas corporation, Forster, Inc., a Maine corporation, together with any subsidiary that executes a Subsidiary Guarantee and State Street Bank and Trust Company, as trustee (the "Trustee"). Capitalized terms used but not defined herein shall have the meanings given to them in the Indenture. In connection with our proposed purchase of $__________ aggregate principal amount of: (a) Beneficial interests, or (b) Definitive Notes, we confirm that: 1. We understand that any subsequent transfer of the Senior Subordinated Notes of any interest therein is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Notes or any interest therein except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 2. We understand that the offer and sale of the Notes have not been registered under the Securities Act, and that the Notes and any interest therein may not be offered or sold except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell the Notes or any interest therein, (A) we will do so only (1)(a) to a person who the Seller reasonably believes is a qualified institutional buyer (as defined in Rule 144A under the Securities Act) in a transaction meeting the requirements of 144A, (b) in a transaction meeting the requirements of Rule 144 under the Securities Act, (c) outside the United States to a foreign 135 person in a transaction meeting the requirements of Rule 904 of the Securities Act, or (d) in accordance with another exemption from the registration requirements of the Securities Act (and based upon an opinion of counsel), (2) to the Company or any of its subsidiaries or (3) pursuant to an effective registration statement and, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction and (B) we will, and each subsequent holder will be required to, notify any purchaser from it of the security evidenced hereby of the resale restrictions set forth in (A) above." 3. We understand that, on any proposed resale of the Notes or beneficial interests, we will be required to furnish to you and the Company such certifications, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Notes purchased by us will bear a legend to the foregoing effect. 4. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Notes, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 5. We are acquiring the Notes or beneficial interests therein purchased by us for our own account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. 6. We are not acquiring the Notes with a view to any distribution thereof that would violate the Securities Act or the securities laws of any State of the United States. 136 You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. ________________________________ [Insert Name of Accredited Investor] By:_____________________________ Name: Title Dated: ____________,____ - ----- 137 Exhibit D --------- Note Guarantee Subject to Section 11.06 of the Indenture, each Guarantor hereby, jointly and severally, unconditionally guarantees to each Holder of a Senior Subordinated Note authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of the Indenture, the Senior Subordinated Notes and the Obligations of the Company under the Senior Subordinated Notes or under the Indenture, that: (a) the principal of, premium, if any, interest and Liquidated Damages, if any, on the Senior Subordinated Notes will be promptly paid in full when due, subject to any applicable grace period, whether at maturity, by acceleration, redemption or otherwise, and interest on overdue principal, premium, if any, (to the extent permitted by law) interest on any interest, if any, and Liquidated Damages, if any, on the Senior Subordinated Notes and all other payment Obligations of the Company to the Holders or the Trustee under the Indenture or under the Senior Subordinated Notes will be promptly paid in full and performed, all in accordance with the terms thereof; and (b) in case of any extension of time of payment or renewal of any Senior Subordinated Notes or any of such other payment Obligations, the same will be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, subject to any applicable grace period, whether at stated maturity, by acceleration, redemption or otherwise. Failing payment when so due of any amount so guaranteed or any performance so guaranteed for whatever reason, the Guarantors will be jointly and severally obligated to pay the same immediately. The obligations of the Guarantor to the Holders and to the Trustee pursuant to this Note Guarantee and the Indenture are expressly set forth in Article 11 of the Indenture, and reference is hereby made to such Indenture for the precise terms of this Note Guarantee. The terms of Article 11 of the Indenture are incorporated herein by reference. This Note Guarantee is subject to release as and to the extent provided in Section 11.04 of the Indenture. This is a continuing Guarantee and shall remain in full force and effect and shall be binding upon each Guarantor and its respective successors and assigns to the extent set forth in the Indenture until full and final payment of all of the Company's Obligations under the Senior Subordinated Notes and the Indenture and shall inure to the benefit of the successors and assigns of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges herein conferred upon that party shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. This is a Note Guarantee of payment and not a guarantee of collection. This Note Guarantee shall not be valid or obligatory for any purpose until the certificate of authentication on the Senior Subordinated Note to which this Note Guarantee relates shall 138 have been executed by the Trustee under the Indenture by the manual signature of one of its authorized officers. For purposes hereof, each Guarantor's liability shall be limited to the lesser of (i) the aggregate amount of the Obligations of the Company under the Senior Subordinated Notes and the Indenture and (ii) the amount, if any, which would not have (A) rendered such Guarantor "insolvent" (as such term is defined in the Bankruptcy Law and in the Debtor and Creditor Law of the State of New York) or (B) left such Guarantor with unreasonably small capital at the time its Note Guarantee of the Senior Subordinated Notes was entered into; provided that, it will be a presumption in any lawsuit or other proceeding in which a Guarantor is a party that the amount guaranteed pursuant to the Note Guarantee is the amount set forth in clause (i) above unless any creditor, or representative of creditors of such Guarantor, or debtor in possession or trustee in bankruptcy of such Guarantor, otherwise proves in such a lawsuit that the aggregate liability of the Guarantor is limited to the amount set forth in clause (ii) above. The Indenture provides that, in making any determination as to the solvency or sufficiency of capital of a Guarantor in accordance with the previous sentence, the right of such Guarantors to contribution from other Guarantors and any other rights such Guarantors may have, contractual or otherwise, shall be taken into account. Capitalized terms used herein have the same meanings given in the Indenture unless otherwise indicated. Dated as of April 21, 1998 EMPIRE CANDLE, INC. By:__________________________________ Name: Title: Dated as of April 21, 1998 FORSTER, INC. By:__________________________________ Name: Title: 139 Exhibit E --------- FORM OF SUPPLEMENTAL INDENTURE Supplemental Indenture (this "Supplemental Indenture"), dated as of ___________, between Guarantor (the "New Guarantor"), a subsidiary of Diamond Brands Operating Corp., a Delaware corporation (the "Company"), and State Street Bank and Trust Company, as trustee under the indenture referred to below (the "Trustee"). Capitalized terms used herein and not defined herein shall have the meaning ascribed to them in the Indenture (as defined below). W I T N E S S E T H WHEREAS, the Company has heretofore executed and delivered to the Trustee an indenture (the "Indenture"), dated as of April 21, 1998, providing for the issuance of an aggregate principal amount of $100,000,000 of 10 1/8% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"); WHEREAS, Section 11.05 of the Indenture provides that under certain circumstances the Company may cause, and Section 11.03 of the Indenture provides that under certain circumstances the Company must cause, certain of its subsidiaries to execute and deliver to the Trustee a supplemental indenture pursuant to which such subsidiaries shall unconditionally guarantee all of the Company's Obligations under the Senior Subordinated Notes pursuant to a Note Guarantee on the terms and conditions set forth herein; and WHEREAS, pursuant to Section 9.01 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture. NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Guarantor and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Senior Subordinated Notes as follows: 1. Capitalized Terms. Capitalized terms used herein without definition shall have the meanings assigned to them in the Indenture. 2. Agreement to Note Guarantee. The New Guarantor hereby agrees, jointly and severally with all other Guarantors, to guarantee the Company's Obligations under the Senior Subordinated Notes and the Indenture on the terms and subject to the conditions set forth in Article 11 of the Indenture and to be bound by all other applicable provisions of the Indenture. 140 3. No Recourse Against Others. No past, present or future director, officer, employee, incorporator, shareholder or agent of any Guarantor, as such, shall have any liability for any obligations of the Company or any Guarantor under the Senior Subordinated Notes, any Subsidiary Guarantees, the Indenture or this Supplemental Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each Holder by accepting a Senior Subordinated Note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the Senior Subordinated Notes. 4. New York Law to Govern. The internal law of the State of New York shall govern and be used to construe this Supplemental Indenture. 5. Counterparts The parties may sign any number of copies of this Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. 6. Effect of Headings. The Section headings herein are for convenience only and shall not affect the construction hereof. 7. The Trustee. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the correctness of the recitals of fact contained herein, all of which recitals are made solely by the New Guarantor. 141 IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written. Dated: _________________ [NAME OF NEW GUARANTOR] By:________________________________ Name: Title: Dated: ________________ STATE STREET BANK AND TRUST COMPANY as Trustee By:________________________________ Name: Title: 142
CROSS-REFERENCE TABLE* Trust Indenture Act Section Indenture Section 310(a)(1)............................................... 7.10 (a)(2)............................................... 7.10 (a)(3)............................................... N.A. (a)(4)............................................... N.A. (b).................................................. 7.03; 7.10 (c).................................................. N.A. 311(a).................................................. 7.11 (b).................................................. 7.11 (c).................................................. N.A. 312(a).................................................. 2.05 (b).................................................. 10.03 (c).................................................. 10.03 313(a).................................................. 7.06 (b)(1)............................................... 7.06 (b)(2)............................................... 7.06; 7.07 (c).................................................. 7.06; 10.02 (d).................................................. 7.06 314(a).................................................. 4.03; 10.05 (b).................................................. N.A. (c)(1)............................................... 10.04 (c)(2)............................................... 10.04 (c)(3)............................................... N.A. (d).................................................. N.A. (e).................................................. 10.05 (f).................................................. N.A. 315(a).................................................. 7.05, 10.02 (b).................................................. 7.01 (c).................................................. 7.01 (d).................................................. 7.01 (e).................................................. 6.11 316(a)(last sentence)................................... 2.09 (a)(1)(A)............................................ 6.05
143 (a)(1)(B)............................................. 6.04 (a)(2)................................................ 2.13 (b)................................................... 6.07 (c)................................................... N.A. 317(a)(1)............................................... 6.08 (a)(2)................................................ 6.09 (b)................................................... 2.04 (c)................................................... 10.01 318(a).................................................. 10.01 (b)................................................... N.A. (c)................................................... 10.01
N.A. means not applicable *This Cross-Reference is not part of the Indenture 144 TABLE OF CONTENTS ----------------- ADVANCE \d 6ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE GOTOBUTTON A_Toc416589302 1 Section 1.01. Definitions GOTOBUTTON A_Toc416589303 1 Section 1.02. Other Definitions.................................... GOTOBUTTON A_Toc416589304 16 Section 1.03. Incorporation by Reference of Trust Indenture Act.... GOTOBUTTON A_Toc416589305 17 Section 1.04. Rules of Construction................................ GOTOBUTTON A_Toc416589306 17 ADVANCE \d 6ARTICLE 2 THE NOTES.................................... GOTOBUTTON A_Toc416589307 17 Section 2.01. Form and Dating...................................... GOTOBUTTON A_Toc416589308 17 Section 2.02. Execution and Authentication......................... GOTOBUTTON A_Toc416589309 19 Section 2.03. Registrar and Paying Agent........................... GOTOBUTTON A_Toc416589310 20 Section 2.04. Paying Agent to Hold Money in Trust.................. GOTOBUTTON A_Toc416589311 20 Section 2.05. Holder Lists......................................... GOTOBUTTON A_Toc416589312 20 Section 2.06. Transfer and Exchange................................ GOTOBUTTON A_Toc416589313 21 Section 2.07. Replacement Notes.................................... GOTOBUTTON A_Toc416589314 28 Section 2.08. Outstanding Notes.................................... GOTOBUTTON A_Toc416589315 29 Section 2.09. Treasury Notes....................................... GOTOBUTTON A_Toc416589316 29 Section 2.10. Temporary Notes...................................... GOTOBUTTON A_Toc416589317 29 Section 2.11. Cancellation......................................... GOTOBUTTON A_Toc416589318 29 Section 2.12. Defaulted Interest................................... GOTOBUTTON A_Toc416589319 30 Section 2.13. Record Date.......................................... GOTOBUTTON A_Toc416589320 30 Section 2.14. Computation of Interest.............................. GOTOBUTTON A_Toc416589321 30 Section 2.15. CUSIP Number......................................... GOTOBUTTON A_Toc416589322 30 ADVANCE \d 6ARTICLE 3. REDEMPTION AND PREPAYMENT................... GOTOBUTTON A_Toc416589323 30 Section 3.02. Selection of Notes to be Redeemed or Purchased....... GOTOBUTTON A_Toc416589324 31 Section 3.03. Section 3.03.Notice of Redemption.................... GOTOBUTTON A_Toc416589325 31 Section 3.04. Effect of Notice of Redemption....................... GOTOBUTTON A_Toc416589326 32 Section 3.05. Deposit of Redemption or Purchase Price.............. GOTOBUTTON A_Toc416589327 32 Section 3.06. Notes Redeemed in Part............................... GOTOBUTTON A_Toc416589328 33 Section 3.07. Optional Redemption.................................. GOTOBUTTON A_Toc416589329 33 Section 3.08. Mandatory Redemption................................. GOTOBUTTON A_Toc416589330 33 Section 3.09. Repurchase Offers.................................... GOTOBUTTON A_Toc416589331 33 ADVANCE \d 6ARTICLE 4 COVENANTS.................................... GOTOBUTTON A_Toc416589332 35
145 Section 4.01. Payment of Notes............................................................ GOTOBUTTON A_Toc416589334 35 Section 4.02. Maintenance of Office or Agency............................................. GOTOBUTTON A_Toc416589334 36 Section 4.03. Commission Reports.......................................................... GOTOBUTTON A_Toc416589335 36 Section 4.04. Compliance Certificate...................................................... GOTOBUTTON A_Toc416589336 37 Section 4.05. Taxes....................................................................... GOTOBUTTON A_Toc416589337 38 Section 4.06. Stay, Extension and Usury Laws.............................................. GOTOBUTTON A_Toc416589338 38 Section 4.07. Restricted Payments......................................................... GOTOBUTTON A_Toc416589339 38 Section 4.08. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries... GOTOBUTTON A_Toc416589340 40 Section 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock.................. GOTOBUTTON A_Toc416589341 41 Section 4.10. Asset Sales................................................................. GOTOBUTTON A_Toc416589342 43 Section 4.11. Transactions With Affiliates................................................ GOTOBUTTON A_Toc416589343 44 Section 4.12. Liens....................................................................... GOTOBUTTON A_Toc416589344 45 Section 4.13. Offer to Purchase Upon Change of Control.................................... GOTOBUTTON A_Toc416589345 45 Section 4.14. Corporate Existence......................................................... GOTOBUTTON A_Toc416589346 46 Section 4.15. Business Activities......................................................... GOTOBUTTON A_Toc416589347 47 Section 4.16. Senior Subordinated Debt.................................................... GOTOBUTTON A_Toc416589348 47 Section 4.17. Limitation on Issuances of Guarantees of Indebtedness....................... GOTOBUTTON A_Toc416589349 47 ADVANCE \d 6ARTICLE 5 SUCCESSORS.......................................................... GOTOBUTTON A_Toc416589350 47 Section 5.01. Merger, Consolidation of Sale of Assets..................................... GOTOBUTTON A_Toc416589351 47 Section 5.02. Successor Corporation Substituted........................................... GOTOBUTTON A_Toc416589352 48 ADVANCE \d 6ARTICLE 6 DEFAULTS AND REMEDIES............................................... GOTOBUTTON A_Toc416589353 48 Section 6.01. Events of Default........................................................... GOTOBUTTON A_Toc416589354 49 Section 6.02. Acceleration................................................................ GOTOBUTTON A_Toc416589355 50 Section 6.03. Other Remedies.............................................................. GOTOBUTTON A_Toc416589356 51 Section 6.04. Waiver of Past Defaults..................................................... GOTOBUTTON A_Toc416589357 51 Section 6.05. Control by Majority......................................................... GOTOBUTTON A_Toc416589358 51 Section 6.06. Limitation on Suits......................................................... GOTOBUTTON A_Toc416589359 52 Section 6.07. Rights of Holders of Notes to Receive Payment............................... GOTOBUTTON A_Toc416589360 52 Section 6.08. Collection Suit by Trustee.................................................. GOTOBUTTON A_Toc416589361 52 Section 6.09. Trustee May File Proofs of Claim............................................ GOTOBUTTON A_Toc416589362 52 Section 6.10. Priorities.................................................................. GOTOBUTTON A_Toc416589363 53 Section 6.11. Undertaking for Costs....................................................... GOTOBUTTON A_Toc416589364 53 ADVANCE \d 6ARTICLE 7 TRUSTEE............................................................. GOTOBUTTON A_Toc416589365 53 Section 7.01. Duties of Trustee........................................................... GOTOBUTTON A_Toc416589366 54
146 Section 7.02. Rights of Trustee....................................................................... GOTOBUTTON A_Toc416589367 55 Section 7.03. Individual Rights of Trustee............................................................ GOTOBUTTON A_Toc416589368 55 Section 7.04. Trustee's Disclaimer.................................................................... GOTOBUTTON A_Toc416589369 55 Section 7.05. Notice of Defaults...................................................................... GOTOBUTTON A_Toc416589370 56 Section 7.06. Reports by Trustee to Holders of the Notes.............................................. GOTOBUTTON A_Toc416589371 56 Section 7.07. Compensation and Indemnity.............................................................. GOTOBUTTON A_Toc416589372 56 Section 7.08. Replacement of Trustee.................................................................. GOTOBUTTON A_Toc416589373 57 Section 7.09. Successor Trustee by Merger, etc........................................................ GOTOBUTTON A_Toc416589374 58 Section 7.10. Eligibility; Disqualification........................................................... GOTOBUTTON A_Toc416589375 58 Section 7.11. Preferential Collection of Claims Against the Company................................... GOTOBUTTON A_Toc416589376 58 ADVANCE \d 6ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE........................................ GOTOBUTTON A_Toc416589377 58 Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance................................ GOTOBUTTON A_Toc416589378 58 Section 8.02. Legal Defeasance and Discharge.......................................................... GOTOBUTTON A_Toc416589379 58 Section 8.03. Covenant Defeasance..................................................................... GOTOBUTTON A_Toc416589380 59 Section 8.04. Conditions to Legal or Covenant Defeasance.............................................. GOTOBUTTON A_Toc416589381 59 Section 8.05. Deposited Money and U.S. Government Securities to be Held in Trust; Other Miscellaneous Provisions............................................................................................ GOTOBUTTON A_Toc416589382 61 Section 8.06. Repayment to the Company................................................................ GOTOBUTTON A_Toc416589383 61 Section 8.07. Reinstatement........................................................................... GOTOBUTTON A_Toc416589384 61 ADVANCE \d 6ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER................................................ GOTOBUTTON A_Toc416589385 62 Section 9.01. Without Consent of Holders of the Notes................................................. GOTOBUTTON A_Toc416589386 62 Section 9.02. With Consent of Holders of Notes........................................................ GOTOBUTTON A_Toc416589387 62 Section 9.03. Compliance with Trust Indenture Act..................................................... GOTOBUTTON A_Toc416589388 64 Section 9.04. Revocation and Effect of Consents....................................................... GOTOBUTTON A_Toc416589389 64 Section 9.05. Notation on or Exchange of Notes........................................................ GOTOBUTTON A_Toc416589390 64 Section 9.06. Trustee to Sign Amendments, etc......................................................... GOTOBUTTON A_Toc416589391 64 ADVANCE \d 6ARTICLE 10 SUBORDINATION.................................................................. GOTOBUTTON A_Toc416589392 64 Section 10.01 Agreement to Subordinate................................................................ GOTOBUTTON A_Toc416589393 64 Section 10.02 Liquidation; Dissolution; Bankruptcy.................................................... GOTOBUTTON A_Toc416589394 65 Section 10.03 Default on Designated Senior Debt....................................................... GOTOBUTTON A_Toc416589395 65 Section 10.04. Acceleration of Notes.................................................................. GOTOBUTTON A_Toc416589396 66 Section 10.05. When Distribution Must Be Paid Over.................................................... GOTOBUTTON A_Toc416589397 66 Section 10.06. Notice by the Company.................................................................. GOTOBUTTON A_Toc416589398 66 Section 10.07. Subrogation............................................................................ GOTOBUTTON A_Toc416589399 66 Section 10.08. Relative Rights........................................................................ GOTOBUTTON A_Toc416589400 66
147 Section 10.09. Subordination May Not Be Impaired by the Company...................... GOTOBUTTON A_Toc416589401 67 Section 10.10. Distribution or Notice to Representative.............................. GOTOBUTTON A_Toc416589402 68 Section 10.11. Rights of Trustee and Paying Agent.................................... GOTOBUTTON A_Toc416589403 68 Section 10.12. Authorization to Effect Subordination................................. GOTOBUTTON A_Toc416589404 68 Section 10.13. Amendments............................................................ GOTOBUTTON A_Toc416589405 68 ADVANCE \d 6ARTICLE 11 GUARANTEE OF NOTES............................................ GOTOBUTTON A_Toc416589406 69 Section 11.01. Note Guarantee........................................................ GOTOBUTTON A_Toc416589407 69 Section 11.02. Execution and Delivery of Subsidiary Guarantee........................ GOTOBUTTON A_Toc416589408 70 Section 11.03. Guarantors May Consolidate, etc., on Certain Terms.................... GOTOBUTTON A_Toc416589409 70 Section 11.04. Releases Following Sale of Assets, Merger, Sale of Capital Stock Etc.. GOTOBUTTON A_Toc416589410 71 Section 11.05. Additional Guarantors................................................. GOTOBUTTON A_Toc416589411 71 Section 11.06. Limitation on Guarantor Liability..................................... GOTOBUTTON A_Toc416589412 71 Section 11.07. "Trustee" to Include Paying Agent..................................... GOTOBUTTON A_Toc416589413 72 ADVANCE \d 6ARTICLE 12 SUBORDINATION OF SUBSIDIARY GUARANTEE......................... GOTOBUTTON A_Toc416589414 72 Section 12.01. Agreement to Subordinate.............................................. GOTOBUTTON A_Toc416589415 72 Section 12.02. Liquidation; Dissolution; Bankruptcy.................................. GOTOBUTTON A_Toc416589416 72 Section 12.03. Default on Designated Senior Debt..................................... GOTOBUTTON A_Toc416589417 72 Section 12.04. Acceleration of Notes................................................. GOTOBUTTON A_Toc416589418 73 Section 12.05. When Distribution Must Be Paid Over................................... GOTOBUTTON A_Toc416589419 73 Section 12.06. Notice by Guarantor................................................... GOTOBUTTON A_Toc416589420 73 Section 12.07. Subrogation........................................................... GOTOBUTTON A_Toc416589421 74 Section 12.08. Relative Rights....................................................... GOTOBUTTON A_Toc416589422 74 Section 12.09. Subordination May Not Be Impaired by the Guarantors................... GOTOBUTTON A_Toc416589423 74 Section 12.10. Distribution or Notice to Representative.............................. GOTOBUTTON A_Toc416589424 75 Section 12.11. Rights of Trustee and Paying Agent.................................... GOTOBUTTON A_Toc416589425 75 Section 12.12. Authorization to Effect Subordination................................. GOTOBUTTON A_Toc416589426 76 Section 12.13. Amendments............................................................ GOTOBUTTON A_Toc416589427 76 ADVANCE \d 6ARTICLE 13 MISCELLANEOUS................................................. GOTOBUTTON A_Toc416589428 76 Section 13.01. Trust Indenture Act Controls.......................................... GOTOBUTTON A_Toc416589429 76 Section 13.02. Notices............................................................... GOTOBUTTON A_Toc416589430 76 Section 13.03. Communication by Holders of Notes with Other Holders of Notes......... GOTOBUTTON A_Toc416589431 77 Section 13.04. Certificate and Opinion as to Conditions Precedent.................... GOTOBUTTON A_Toc416589432 77 Section 13.05. Statements Required in Certificate or Opinion......................... GOTOBUTTON A_Toc416589433 78 Section 13.06. Rules by Trustee and Agents........................................... GOTOBUTTON A_Toc416589434 78
148 Section 13.07. No Personal Liability of Directors, Officers, Employees and Stockholders... GOTOBUTTON A_Toc416589435 78 Section 13.08. Governing Law.............................................................. GOTOBUTTON A_Toc416589436 78 Section 13.09. No Adverse Interpretation of Other Agreements.............................. GOTOBUTTON A_Toc416589437 78 Section 13.10. Successors................................................................. GOTOBUTTON A_Toc416589438 79 Section 13.11. Severability............................................................... GOTOBUTTON A_Toc416589439 79 Section 13.12. Counterpart Originals...................................................... GOTOBUTTON A_Toc416589440 79 Section 13.13. Table of Contents, Headings, etc........................................... GOTOBUTTON A_Toc416589441 79
149 EX-4.3 10 CREDIT AGREEMENT 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 EX-4.4 11 SUBSIDIARY GUARANTEE AGREEMENT EXHIBIT XVIII [FORM OF SUBSIDIARY GUARANTY] SUBSIDIARY GUARANTY This SUBSIDIARY GUARANTY is entered into as of April 21, 1998 by THE UNDERSIGNED (each a "GUARANTOR" and collectively, "GUARANTORS") in favor of and for the benefit of WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "GUARANTIED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 5.14, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS 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, Guarantied 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") in accordance with the terms of the Credit Agreement, and it is desired that the 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 (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Credit Agreement and the other Loan Documents, be guarantied hereunder. C. A portion of the proceeds of the Loans may be advanced to Guarantors and thus the Guarantied Obligations (as hereinafter defined) are being incurred for and will inure to the benefit of Guarantors (which benefits are hereby acknowledged). D. Guarantors are willing irrevocably and unconditionally to guaranty such obligations of Company. E. Diamond Brands Incorporated, a Minnesota corporation ("HOLDINGS"), has entered into that certain Guaranty dated as of April 21, 1998 in favor of Guarantied Party (the "HOLDINGS GUARANTY"). XVIII-1 F. It is a condition precedent to the making of the initial Loans under the Credit Agreement that Company's obligations thereunder be guarantied by Guarantors. NOW, THEREFORE, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Lenders and Guarantied Party to enter into the Credit Agreement and to make Loans and other extensions of credit thereunder and to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, Guarantors hereby agree as follows: SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. As used in this Guaranty, the following terms --------------------- shall have the following meanings unless the context otherwise requires: "BENEFICIARIES" means Guarantied Party, Lenders and any Interest Rate Exchangers. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Subsidiary Guaranty dated as of April 21, 1998, as it may be amended, supplemented or otherwise modified from time to time. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations, including all principal, interest, costs, fees and expenses (including reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 DEFINED TERMS IN CREDIT AGREEMENT. All capitalized terms used and not --------------------------------- otherwise defined herein shall have the meanings given such terms in the Credit Agreement. 1.3 INTERPRETATION. -------------- (a) References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. (b) In the event of any conflict or inconsistency between the terms, conditions and provisions of this Guaranty and the terms, conditions and provisions of the Credit Agreement, the terms, conditions and provisions of this Guaranty shall prevail. SECTION 2. THE GUARANTY XVIII-2 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Subject to the provisions of -------------------------------------- subsection 2.2(a), Guarantors jointly and severally hereby irrevocably and unconditionally guaranty the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including 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)). The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: (a) any and all Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with the Credit Agreement and the other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under the Credit Agreement which shall either continue the Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.8 hereof. 2.2 LIMITATION ON AMOUNT GUARANTIED; CONTRIBUTION BY GUARANTORS. (a) ----------------------------------------------------------- Anything contained in this Guaranty to the contrary notwithstanding, if any Fraudulent Transfer Law (as hereinafter defined) is determined by a court of competent jurisdiction to be applicable to the obligations of any Guarantor under this Guaranty, such obligations of such Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Guarantor (x) in respect of intercompany indebtedness to Company or other affiliates of Company to the extent that such indebtedness would be discharged in an amount equal to the amount paid by such Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of such Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of such Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including any such right of contribution under subsection 2.2(b)). XVIII-3 (b) Each Guarantor under this Guaranty, and Holdings under the Holdings Guaranty, together desire to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty and the Holdings Guaranty. Accordingly, in the event any payment or distribution is made on any date by any Guarantor under this Guaranty or Holdings under the Holdings Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors multiplied by (ii) the aggregate amount paid or distributed on or ---------- -- before such date by all Funding Guarantors under this Guaranty and the Holdings Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "ADJUSTED MAXIMUM AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty and the Holdings Guaranty, determined as of such date, in the case of any Guarantor, in accordance with subsection 2.2(a), or, if applicable, subsection 2.2(a) of the Holdings Guaranty; provided that, solely -------- for purposes of calculating the "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under the Holdings Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty and the Holdings Guaranty (including in respect of this subsection 2.2(b) or subsection 2.2(b) of the Holdings Guaranty) minus (ii) the aggregate ----- amount of all payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2(b) or subsection 2.2(b) of the Holdings Guaranty. The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) or subsection 2.2(b) of the Holdings Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Holdings Guaranty. Holdings under the Holdings Guaranty is a third party beneficiary to the contribution agreement set forth in this subsection 2.2(b). XVIII-4 2.3 PAYMENT BY GUARANTORS; APPLICATION OF PAYMENTS. Subject to the ---------------------------------------------- provisions of subsection 2.2(a), Guarantors hereby jointly and severally agree, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against any Guarantor by virtue hereof, that upon the failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including 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)), Guarantors will upon demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 2.4D of the Credit Agreement. 2.4 LIABILITY OF GUARANTORS ABSOLUTE. Each Guarantor agrees that its -------------------------------- obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) Guarantied Party may enforce this Guaranty upon the occurrence and continuation of an Event of Default under the Credit Agreement or the occurrence and continuation 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 Guaranty). (c) The obligations of each Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor (including any other Guarantor) of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against such Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. XVIII-5 (d) Payment by any Guarantor of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge any Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce any Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release such Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by such Guarantor, limit, affect, modify or abridge any other Guarantor's liability hereunder in respect of the Guarantied Obligations. (e) Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied Obligations, or any other obligation of any Person (including any other Guarantor) with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the Credit Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. (f) This Guaranty and the obligations of Guarantors hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including the occurrence of any of the following, whether XVIII-6 or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) of the Credit Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of the Credit Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to such other guaranty or security; (iii) the Guarantied Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (v) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vii) any defenses (other than the expiration of applicable statute of limitations), set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including failure of consideration, breach of warranty, payment, statute of frauds, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTORS. Each Guarantor hereby waives, for the benefit --------------------- of Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against Company, any other guarantor (including any other Guarantor) of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to XVIII-7 any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company (other than the expiration of applicable statute of limitations) including any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to gross negligence, willful misconduct or bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty and any legal or equitable discharge of such Guarantor's obligations hereunder, (ii) any rights to set-offs, recoupments and counterclaims, and (iii) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Credit Agreement, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof; and (g) any defenses (other than expiration of statutes of limitations) or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Guaranty. 2.6 GUARANTORS' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Until the ---------------------------------------------------- Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor hereby waives any claim, right or remedy, direct or indirect, that such XVIII-8 Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by such Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against Company, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor shall withhold exercise of any right of contribution such Guarantor may have against any other guarantor (including any other Guarantor) of the Guarantied Obligations. Each Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against Company or against any collateral or security, and any rights of contribution such Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to any Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. 2.7 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company or any ---------------------------------- Guarantor now or hereafter held by any Guarantor (the "OBLIGEE GUARANTOR") is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness collected or received by the Obligee Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of the Obligee Guarantor under any other provision of this Guaranty. 2.8 EXPENSES. Guarantors jointly and severally agree to pay, or cause to -------- be paid, on demand, and to save Beneficiaries harmless against liability for, any and all reasonable out-of-pocket costs and expenses (including reasonable fees and disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. XVIII-9 2.9 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall ------------------- remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Each Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.10 AUTHORITY OF GUARANTORS OR COMPANY. It is not necessary for any ---------------------------------- Beneficiary to inquire into the capacity or powers of any Guarantor or Company or the officers, directors, members, governors or any agents acting or purporting to act on behalf of any of them. 2.11 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to Company ------------------------------ or continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from any Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor's assessment, of the financial condition of Company. Each Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 2.12 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement between any Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.13 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. (a) So ------------------------------------------------------------- long as any Guarantied Obligations remain outstanding, no Guarantor shall, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Company. The obligations of Guarantors under this Guaranty shall not be reduced, limited, impaired, discharged, XVIII-10 deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. (b) Each Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantors and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantors pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantors will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations is paid by Company, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty. 2.14 NOTICE OF EVENTS. As soon as any Guarantor obtains knowledge thereof, ---------------- each such Guarantor shall give Guarantied Party written notice of any condition or event which has resulted in (a) a material adverse change in the financial condition of such Guarantor or Company or (b) a breach of or noncompliance with any term, condition or covenant contained herein or in the Credit Agreement, any other Loan Document, any Lender Interest Rate Agreements or any other document delivered pursuant hereto or thereto. 2.15 SET OFF. In addition to any other rights any Beneficiary may have ------- under law or in equity, if any amount shall at any time be due and owing by any Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (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) and any other indebtedness of such Beneficiary owing to such Guarantor and any other property of such Guarantor held by any Beneficiary to or for the credit or the account of such XVIII-11 Guarantor against and on account of the Guarantied Obligations and liabilities of such Guarantor to any Beneficiary under this Guaranty. 2.16 DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the stock or -------------------------------------------- limited liability company interests of any Guarantor or any of its successors in interest under this Guaranty shall be sold or otherwise disposed of (including by merger or consolidation) in an Asset Sale not prohibited by subsection 7.7 of the Credit Agreement or otherwise consented to by Requisite Lenders, the Guaranty of such Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided that, as a condition precedent to such discharge and -------- release, Guarantied Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Guarantied Party of the applicable Net Asset Sale Proceeds if required under the Credit Agreement; provided further that no such delivery shall be required in ---------------- connection with a merger or consolidation of such entity into or with Company or another subsidiary of Company. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce Beneficiaries to accept this Guaranty and to enter into the Credit Agreement and to make the Loans thereunder, each Guarantor hereby represents and warrants to Beneficiaries that the following statements are true and correct: 3.1 CORPORATE EXISTENCE. Each Guarantor is duly organized, validly ------------------- existing and in good standing under the laws of the state of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that would not in the aggregate have a material adverse effect on the business, operations, assets or financial condition of Guarantor. 3.2 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each ------------------------------------------------------- Guarantor has the corporate power, authority and legal right to execute, deliver and perform this Guaranty and all obligations required hereunder and has taken all necessary corporate action to authorize its Guaranty hereunder on the terms and conditions hereof and its execution, delivery and performance of this Guaranty and all obligations required hereunder. No consent of any other Person including, without limitation, stockholders and creditors of either Guarantor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by either Guarantor in connection with this Guaranty or the execution, delivery, performance, validity or enforceability of this Guaranty and all obligations required hereunder. This Guaranty has been, and each instrument or document XVIII-12 required hereunder will be, executed and delivered by a duly authorized officer of each of the Guarantors, and this Guaranty constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of each of the Guarantors, enforceable against each of the Guarantors in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws or equitable principles relating to or limiting creditors' rights generally. 3.3 NO LEGAL BAR TO THIS GUARANTY. The execution, delivery and performance ----------------------------- of this Guaranty and the documents or instruments required hereunder, and the use of the proceeds of the borrowings under the Credit Agreement, will not violate any provision of any existing law or regulation binding on either Guarantor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on either Guarantor, or the certificate of incorporation or bylaws of either Guarantor or any securities issued by either Guarantor, or any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which either Guarantor is a party or by which either Guarantor or any of its assets may be bound, the violation of which would have a material adverse effect on the business, operations, assets or financial condition of either Guarantor and will not result in, or require, the creation or imposition of any Lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 4. AFFIRMATIVE COVENANTS Each Guarantor covenants and agrees that, unless and until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated, unless Requisite Lenders shall otherwise consent in writing: 4.1 CORPORATE EXISTENCE, ETC. Each Guarantor shall at all times preserve ------------------------ and keep in full force and effect its corporate existence and all rights and franchises material to its business. 4.2 COMPLIANCE WITH LAWS, ETC. Each Guarantor shall comply in all material ------------------------- respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying when due all taxes, assessments and governmental charges imposed upon it or upon any of its properties or assets or in respect of any of its franchises, businesses, income or property before any penalty or interest accrues thereon. 4.3 BOOKS AND RECORDS. Subject to the terms of the Credit Agreement, each ----------------- Guarantor shall keep and maintain books of record and account with respect to its operations in accordance with generally accepted accounting principles and shall permit any Beneficiary and its officers, employees and authorized agents, to the extent Guarantied Party in good faith deems necessary for the proper administration of this Guaranty, to examine, copy and make excerpts from the books and records of either Guarantor and its Subsidiaries and to inspect the properties of either Guarantor and its Subsidiaries, both real and personal, at such reasonable times as Guarantied Party may request. XVIII-13 SECTION 5. MISCELLANEOUS 5.1 SURVIVAL OF WARRANTIES. All agreements, representations and warranties ---------------------- made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents and the Lender Interest Rate Agreements and any increase in the Commitments under the Credit Agreement. 5.2 NOTICES. Any communications between Guarantied Party and any Guarantor ------- and any notices or requests provided herein to be given shall be given as provided in the Credit Agreement to each such party at its address set forth in the Credit Agreement, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or any Guarantor shall not be effective until received. 5.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty 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. 5.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination or ---------------------- waiver of any provision of this Guaranty, and no consent to any departure by any Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, each Guarantor against whom enforcement of such amendment or modification is sought. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 5.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 5.6 APPLICABLE LAW; RULES OF CONSTRUCTION. THIS GUARANTY AND THE RIGHTS ------------------------------------- AND OBLIGATIONS OF GUARANTORS AND BENEFICIARIES 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. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Guaranty mutatis mutandis. 5.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and ---------------------- shall be binding upon each Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. No Guarantor shall assign this Guaranty or any of the rights or obligations of such Guarantor XVIII-14 hereunder without the prior written consent of all Lenders. Any Beneficiary may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 5.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL ---------------------------------------------- PROCEEDINGS BROUGHT AGAINST ANY GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY, 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, EACH GUARANTOR, 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 SUCH GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 5.2; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GUARANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 5.8 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. 5.9 WAIVER OF TRIAL BY JURY. EACH GUARANTOR AND, BY ITS ACCEPTANCE OF THE ----------------------- BENEFITS HEREOF, EACH BENEFICIARY EACH XVIII-15 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 GUARANTY. 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 Guarantor and, by its acceptance of the benefits hereof, each Beneficiary, each (i) acknowledges that this waiver is a material inducement for such Guarantor and Beneficiaries to enter into a business relationship, that such Guarantor and Beneficiaries have already relied on this waiver in entering into this Guaranty or accepting the benefits thereof, as the case may be, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and represents 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 SUBSECTION 5.9 AND EXECUTED BY GUARANTIED PARTY AND EACH GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed as a written consent to a trial by the court. 5.10 NO OTHER WRITING. This writing is intended by Guarantors and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 5.11 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantors shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 5.12 ADDITIONAL GUARANTORS. The initial Guarantors hereunder shall be --------------------- such of the Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Guarantors (each an "ADDITIONAL GUARANTOR"), by executing a counterpart of this Guaranty. Upon delivery of any such counterpart to Administrative Agent, notice of which is hereby waived by Guarantors, each such Additional Guarantor shall be a Guarantor and shall be as fully a party hereto as if such Additional Guarantor were an original signatory hereof. Each Guarantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Guarantor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Company to become an Additional Guarantor hereunder. This Guaranty XVIII-16 shall be fully effective as to any Guarantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Guarantor hereunder. 5.13 COUNTERPARTS; EFFECTIVENESS. This Guaranty may be executed in any --------------------------- number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes; but all such counterparts together shall constitute but one and the same instrument. This Guaranty shall become effective as to each Guarantor upon the execution of a counterpart hereof by such Guarantor (whether or not a counterpart hereof shall have been executed by any other Guarantor) and receipt by Guarantied Party of written or telephonic notification of such execution and authorization of delivery thereof. 5.14 GUARANTIED PARTY AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Guarantied 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, solely in accordance with this Guaranty and the Credit Agreement; provided that Guarantied -------- Party shall exercise, or refrain from exercising, any remedies hereunder 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 subsection 5.14, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 5.14. (b) Guarantied 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 Guarantied Party under this Guaranty; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the XVIII-17 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 Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] XVIII-18 IN WITNESS WHEREOF, each of the undersigned Guarantors has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. EMPIRE CANDLE, INC. By: ____________________________ Name: ____________________________ Title: ____________________________ Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel FORSTER, INC. By: ____________________________ Name: ____________________________ Title: ____________________________ Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel S-1 IN WITNESS WHEREOF, the undersigned Additional Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of ______________, _____. ________________________________________ (Name of Additional Guarantor) By _____________________________________ Title __________________________________ Address: _________________________ ____________________________ ____________________________ SUBSIDIARY GUARANTY This SUBSIDIARY GUARANTY is entered into as of April 21, 1998 by THE UNDERSIGNED (each a "GUARANTOR" and collectively, "GUARANTORS") in favor of and for the benefit of WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "GUARANTIED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 5.14, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS 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, Guarantied 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") in accordance with the terms of the Credit Agreement, and it is desired that the 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 (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Credit Agreement and the other Loan Documents, be guarantied hereunder. C. A portion of the proceeds of the Loans may be advanced to Guarantors and thus the Guarantied Obligations (as hereinafter defined) are being incurred for and will inure to the benefit of Guarantors (which benefits are hereby acknowledged). D. Guarantors are willing irrevocably and unconditionally to guaranty such obligations of Company. E. Diamond Brands Incorporated, a Minnesota corporation ("HOLDINGS"), has entered into that certain Guaranty dated as of April 21, 1998 in favor of Guarantied Party (the "HOLDINGS GUARANTY"). F. It is a condition precedent to the making of the initial Loans under the Credit Agreement that Company's obligations thereunder be guarantied by Guarantors. 1 NOW, THEREFORE, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Lenders and Guarantied Party to enter into the Credit Agreement and to make Loans and other extensions of credit thereunder and to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, Guarantors hereby agree as follows: SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. As used in this Guaranty, the following terms --------------------- shall have the following meanings unless the context otherwise requires: "BENEFICIARIES" means Guarantied Party, Lenders and any Interest Rate Exchangers. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Subsidiary Guaranty dated as of April 21, 1998, as it may be amended, supplemented or otherwise modified from time to time. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations, including all principal, interest, costs, fees and expenses (including reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 DEFINED TERMS IN CREDIT AGREEMENT. All capitalized terms used and not --------------------------------- otherwise defined herein shall have the meanings given such terms in the Credit Agreement. 1.3 INTERPRETATION. -------------- (a) References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. (b) In the event of any conflict or inconsistency between the terms, conditions and provisions of this Guaranty and the terms, conditions and provisions of the Credit Agreement, the terms, conditions and provisions of this Guaranty shall prevail. SECTION 2. THE GUARANTY 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Subject to the provisions of -------------------------------------- subsection 2.2(a), Guarantors jointly and severally hereby irrevocably and unconditionally guaranty the due and punctual payment in full of all Guarantied Obligations when the 2 same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including 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)). The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: (a) any and all Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with the Credit Agreement and the other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under the Credit Agreement which shall either continue the Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.8 hereof. 2.2 LIMITATION ON AMOUNT GUARANTIED; CONTRIBUTION BY GUARANTORS. (a) ----------------------------------------------------------- Anything contained in this Guaranty to the contrary notwithstanding, if any Fraudulent Transfer Law (as hereinafter defined) is determined by a court of competent jurisdiction to be applicable to the obligations of any Guarantor under this Guaranty, such obligations of such Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after giving effect to all other liabilities of such Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of such Guarantor (x) in respect of intercompany indebtedness to Company or other affiliates of Company to the extent that such indebtedness would be discharged in an amount equal to the amount paid by such Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of such Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of such Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including any such right of contribution under subsection 2.2(b)). (b) Each Guarantor under this Guaranty, and Holdings under the Holdings Guaranty, together desire to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this 3 Guaranty and the Holdings Guaranty. Accordingly, in the event any payment or distribution is made on any date by any Guarantor under this Guaranty or Holdings under the Holdings Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors multiplied by (ii) the aggregate amount ------------- paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Holdings Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "ADJUSTED MAXIMUM AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty and the Holdings Guaranty, determined as of such date, in the case of any Guarantor, in accordance with subsection 2.2(a), or, if applicable, subsection 2.2(a) of the Holdings Guaranty; provided that, solely for purposes of calculating the -------- "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under the Holdings Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty and the Holdings Guaranty (including in respect of this subsection 2.2(b) or subsection 2.2(b) of the Holdings Guaranty) minus (ii) the aggregate amount of ----- all payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2(b) or subsection 2.2(b) of the Holdings Guaranty. The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) or subsection 2.2(b) of the Holdings Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Holdings Guaranty. Holdings under the Holdings Guaranty is a third party beneficiary to the contribution agreement set forth in this subsection 2.2(b). 2.3 PAYMENT BY GUARANTORS; APPLICATION OF PAYMENTS. Subject to the ---------------------------------------------- provisions of subsection 2.2(a), Guarantors hereby jointly and severally agree, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary 4 may have at law or in equity against any Guarantor by virtue hereof, that upon the failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including 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)), Guarantors will upon demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 2.4D of the Credit Agreement. 2.4 LIABILITY OF GUARANTORS ABSOLUTE. Each Guarantor agrees that its -------------------------------- obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) Guarantied Party may enforce this Guaranty upon the occurrence and continuation of an Event of Default under the Credit Agreement or the occurrence and continuation 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 Guaranty). (c) The obligations of each Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor (including any other Guarantor) of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against such Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. (d) Payment by any Guarantor of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge any Guarantor's 5 liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce any Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release such Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by such Guarantor, limit, affect, modify or abridge any other Guarantor's liability hereunder in respect of the Guarantied Obligations. (e) Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied Obligations, or any other obligation of any Person (including any other Guarantor) with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the Credit Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. (f) This Guaranty and the obligations of Guarantors hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including the occurrence of any of the following, whether or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or 6 enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) of the Credit Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of the Credit Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to such other guaranty or security; (iii) the Guarantied Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (v) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vii) any defenses (other than the expiration of applicable statute of limitations), set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including failure of consideration, breach of warranty, payment, statute of frauds, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTORS. Each Guarantor hereby waives, for the benefit --------------------- of Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against Company, any other guarantor (including any other Guarantor) of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in 7 favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company (other than the expiration of applicable statute of limitations) including any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to gross negligence, willful misconduct or bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty and any legal or equitable discharge of such Guarantor's obligations hereunder, (ii) any rights to set-offs, recoupments and counterclaims, and (iii) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Credit Agreement, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof; and (g) any defenses (other than expiration of statutes of limitations) or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Guaranty. 2.6 GUARANTORS' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Until the ---------------------------------------------------- Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor hereby waives any claim, right or remedy, direct or indirect, that such Guarantor now has or may hereafter have against Company or any of its assets in 8 connection with this Guaranty or the performance by such Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against Company, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, each Guarantor shall withhold exercise of any right of contribution such Guarantor may have against any other guarantor (including any other Guarantor) of the Guarantied Obligations. Each Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against Company or against any collateral or security, and any rights of contribution such Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to any Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. 2.7 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company or any ---------------------------------- Guarantor now or hereafter held by any Guarantor (the "OBLIGEE GUARANTOR") is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness collected or received by the Obligee Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of the Obligee Guarantor under any other provision of this Guaranty. 2.8 EXPENSES. Guarantors jointly and severally agree to pay, or cause to -------- be paid, on demand, and to save Beneficiaries harmless against liability for, any and all reasonable out-of-pocket costs and expenses (including reasonable fees and disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. 9 2.9 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall ------------------- remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Each Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.10 AUTHORITY OF GUARANTORS OR COMPANY. It is not necessary for any ---------------------------------- Beneficiary to inquire into the capacity or powers of any Guarantor or Company or the officers, directors, members, governors or any agents acting or purporting to act on behalf of any of them. 2.11 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to Company or ------------------------------ continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from any Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor's assessment, of the financial condition of Company. Each Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 2.12 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement between any Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.13 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. (a) So ------------------------------------------------------------- long as any Guarantied Obligations remain outstanding, no Guarantor shall, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Company. The obligations of Guarantors under this Guaranty shall not be reduced, limited, impaired, discharged, 10 deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. (b) Each Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantors and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantors pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantors will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations is paid by Company, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty. 2.14 NOTICE OF EVENTS. As soon as any Guarantor obtains knowledge thereof, ---------------- each such Guarantor shall give Guarantied Party written notice of any condition or event which has resulted in (a) a material adverse change in the financial condition of such Guarantor or Company or (b) a breach of or noncompliance with any term, condition or covenant contained herein or in the Credit Agreement, any other Loan Document, any Lender Interest Rate Agreements or any other document delivered pursuant hereto or thereto. 2.15 SET OFF. In addition to any other rights any Beneficiary may have ------- under law or in equity, if any amount shall at any time be due and owing by any Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (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) and any other indebtedness of such Beneficiary owing to such Guarantor and any other property of such Guarantor held by any Beneficiary to or for the credit or the account of such 11 Guarantor against and on account of the Guarantied Obligations and liabilities of such Guarantor to any Beneficiary under this Guaranty. 2.16 DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the stock or -------------------------------------------- limited liability company interests of any Guarantor or any of its successors in interest under this Guaranty shall be sold or otherwise disposed of (including by merger or consolidation) in an Asset Sale not prohibited by subsection 7.7 of the Credit Agreement or otherwise consented to by Requisite Lenders, the Guaranty of such Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided that, as a condition precedent to such discharge and -------- release, Guarantied Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Guarantied Party of the applicable Net Asset Sale Proceeds if required under the Credit Agreement; provided further that no such delivery shall be required in ---------------- connection with a merger or consolidation of such entity into or with Company or another subsidiary of Company. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce Beneficiaries to accept this Guaranty and to enter into the Credit Agreement and to make the Loans thereunder, each Guarantor hereby represents and warrants to Beneficiaries that the following statements are true and correct: 3.1 CORPORATE EXISTENCE. Each Guarantor is duly organized, validly ------------------- existing and in good standing under the laws of the state of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that would not in the aggregate have a material adverse effect on the business, operations, assets or financial condition of Guarantor. 3.2 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Each ------------------------------------------------------- Guarantor has the corporate power, authority and legal right to execute, deliver and perform this Guaranty and all obligations required hereunder and has taken all necessary corporate action to authorize its Guaranty hereunder on the terms and conditions hereof and its execution, delivery and performance of this Guaranty and all obligations required hereunder. No consent of any other Person including, without limitation, stockholders and creditors of either Guarantor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by either Guarantor in connection with this Guaranty or the execution, delivery, performance, validity or enforceability of this Guaranty and all obligations required hereunder. This Guaranty has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of each of the Guarantors, and this Guaranty constitutes, and each instrument or document 12 required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of each of the Guarantors, enforceable against each of the Guarantors in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws or equitable principles relating to or limiting creditors' rights generally. 3.3 NO LEGAL BAR TO THIS GUARANTY. The execution, delivery and performance ----------------------------- of this Guaranty and the documents or instruments required hereunder, and the use of the proceeds of the borrowings under the Credit Agreement, will not violate any provision of any existing law or regulation binding on either Guarantor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on either Guarantor, or the certificate of incorporation or bylaws of either Guarantor or any securities issued by either Guarantor, or any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which either Guarantor is a party or by which either Guarantor or any of its assets may be bound, the violation of which would have a material adverse effect on the business, operations, assets or financial condition of either Guarantor and will not result in, or require, the creation or imposition of any Lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 4. AFFIRMATIVE COVENANTS Each Guarantor covenants and agrees that, unless and until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated, unless Requisite Lenders shall otherwise consent in writing: 4.1 CORPORATE EXISTENCE, ETC. Each Guarantor shall at all times preserve ------------------------ and keep in full force and effect its corporate existence and all rights and franchises material to its business. 4.2 COMPLIANCE WITH LAWS, ETC. Each Guarantor shall comply in all material ------------------------- respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying when due all taxes, assessments and governmental charges imposed upon it or upon any of its properties or assets or in respect of any of its franchises, businesses, income or property before any penalty or interest accrues thereon. 4.3 BOOKS AND RECORDS. Subject to the terms of the Credit Agreement, each ----------------- Guarantor shall keep and maintain books of record and account with respect to its operations in accordance with generally accepted accounting principles and shall permit any Beneficiary and its officers, employees and authorized agents, to the extent Guarantied Party in good faith deems necessary for the proper administration of this Guaranty, to examine, copy and make excerpts from the books and records of either Guarantor and its Subsidiaries and to inspect the properties of either Guarantor and its Subsidiaries, both real and personal, at such reasonable times as Guarantied Party may request. 13 SECTION 5. MISCELLANEOUS 5.1 SURVIVAL OF WARRANTIES. All agreements, representations and warranties ---------------------- made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents and the Lender Interest Rate Agreements and any increase in the Commitments under the Credit Agreement. 5.2 NOTICES. Any communications between Guarantied Party and any Guarantor ------- and any notices or requests provided herein to be given shall be given as provided in the Credit Agreement to each such party at its address set forth in the Credit Agreement, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or any Guarantor shall not be effective until received. 5.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty 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. 5.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination or ---------------------- waiver of any provision of this Guaranty, and no consent to any departure by any Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, each Guarantor against whom enforcement of such amendment or modification is sought. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 5.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 5.6 APPLICABLE LAW; RULES OF CONSTRUCTION. THIS GUARANTY AND THE RIGHTS ------------------------------------- AND OBLIGATIONS OF GUARANTORS AND BENEFICIARIES 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. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Guaranty mutatis mutandis. 5.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and ---------------------- shall be binding upon each Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. No Guarantor shall assign this Guaranty or any of the rights or obligations of such Guarantor 14 hereunder without the prior written consent of all Lenders. Any Beneficiary may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 5.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL ---------------------------------------------- PROCEEDINGS BROUGHT AGAINST ANY GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY, 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, EACH GUARANTOR, 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 SUCH GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 5.2; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER SUCH GUARANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST SUCH GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 5.8 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. 5.9 WAIVER OF TRIAL BY JURY. EACH GUARANTOR AND, BY ITS ACCEPTANCE OF THE ----------------------- BENEFITS HEREOF, EACH BENEFICIARY EACH 15 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 GUARANTY. 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 Guarantor and, by its acceptance of the benefits hereof, each Beneficiary, each (i) acknowledges that this waiver is a material inducement for such Guarantor and Beneficiaries to enter into a business relationship, that such Guarantor and Beneficiaries have already relied on this waiver in entering into this Guaranty or accepting the benefits thereof, as the case may be, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and represents 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 SUBSECTION 5.9 AND EXECUTED BY GUARANTIED PARTY AND EACH GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed as a written consent to a trial by the court. 5.10 NO OTHER WRITING. This writing is intended by Guarantors and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 5.11 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantors shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 5.12 ADDITIONAL GUARANTORS. The initial Guarantors hereunder shall be --------------------- such of the Subsidiaries of Company as are signatories hereto on the date hereof. From time to time subsequent to the date hereof, additional Subsidiaries of Company may become parties hereto, as additional Guarantors (each an "ADDITIONAL GUARANTOR"), by executing a counterpart of this Guaranty. Upon delivery of any such counterpart to Administrative Agent, notice of which is hereby waived by Guarantors, each such Additional Guarantor shall be a Guarantor and shall be as fully a party hereto as if such Additional Guarantor were an original signatory hereof. Each Guarantor expressly agrees that its obligations arising hereunder shall not be affected or diminished by the addition or release of any other Guarantor hereunder, nor by any election of Administrative Agent not to cause any Subsidiary of Company to become an Additional Guarantor hereunder. This Guaranty 16 shall be fully effective as to any Guarantor that is or becomes a party hereto regardless of whether any other Person becomes or fails to become or ceases to be a Guarantor hereunder. 5.13 COUNTERPARTS; EFFECTIVENESS. This Guaranty may be executed in any --------------------------- number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes; but all such counterparts together shall constitute but one and the same instrument. This Guaranty shall become effective as to each Guarantor upon the execution of a counterpart hereof by such Guarantor (whether or not a counterpart hereof shall have been executed by any other Guarantor) and receipt by Guarantied Party of written or telephonic notification of such execution and authorization of delivery thereof. 5.14 GUARANTIED PARTY AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Guarantied 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, solely in accordance with this Guaranty and the Credit Agreement; provided that Guarantied -------- Party shall exercise, or refrain from exercising, any remedies hereunder 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 subsection 5.14, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 5.14. (b) Guarantied 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 Guarantied Party under this Guaranty; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. Upon the acceptance of any appointment as Administrative Agent under subsection 9.5 of the 17 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 Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] 18 IN WITNESS WHEREOF, each of the undersigned Guarantors has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. EMPIRE CANDLE, INC. By: ____________________________ Name: ____________________________ Title: ____________________________ Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel FORSTER, INC. By: ____________________________ Name: ____________________________ Title: ____________________________ Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel S-1 IN WITNESS WHEREOF, the undersigned Additional Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of ______________, _____. ________________________________________ (Name of Additional Guarantor) By _____________________________________ Title __________________________________ Address: _______________________________ _______________________________ _______________________________ EX-4.5 12 SUBSIDIARY PLEDGE AGREEMENT EXHIBIT XIX [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 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. 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-4.6 13 SUBSIDIARY SECURITY AGREEMENT EXHIBIT XX [FORM OF SUBSIDIARY SECURITY AGREEMENT] SUBSIDIARY SECURITY AGREEMENT This SUBSIDIARY SECURITY AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998, and entered into by and between [NAME OF 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. 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" or "BORROWER"), 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. 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 Secured Party for the benefit of Lenders, pursuant to which Grantor has guarantied the prompt payment and performance when due of all Obligations of the Borrower under the Credit Agreement. C. 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 XX-1 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; XX-2 (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 Subsidiary Pledge Agreement to which Grantor is a party (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 Subsidiary Pledge Agreement to which Grantor is a party (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"); XX-3 (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) XX-4 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. Section 362(a)), XX-5 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 Subsidiary Guaranty 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 XX-6 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 [___________________________________]. 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 XX-7 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 XX-8 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. 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 deferent from those being maintained by Grantor as of the date hereof (as such manner may be revised in the good faith 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. XX-9 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. 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. Subject to Section 2.4(B) of the Credit Agreement, 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 XX-10 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 (c), 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. XX-11 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 XX-12 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 reasonably 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 15. SECURED PARTY MAY PERFORM. If Grantor fails to perform ------------------------- any agreement contained herein, Secured Party may itself perform, or cause performance XX-13 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, XX-14 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, XX-15 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 XX-16 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. XX-17 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 XX-18 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) XX-19 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. [NAME OF SUBSIDIARY] 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 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] SUBSIDIARY SECURITY AGREEMENT This SUBSIDIARY 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. 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" or "BORROWER"), 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. 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 Secured Party for the benefit of Lenders, pursuant to which Grantor has guarantied the prompt payment and performance when due of all Obligations of the Borrower under the Credit Agreement. C. 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"): 1 (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; 2 (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 Subsidiary Pledge Agreement to which Grantor is a party (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 Subsidiary Pledge Agreement to which Grantor is a party (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 3 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 4 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. 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 Credit Agreement, the Subsidiary Guaranty and, the other Loan Documents and the Lender Interest Rate Agreements and all 5 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 2925 Fairfax Trafficway, Kansas City, Kansas 66115. Grantor has not in the past done, and does not now do, 6 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 7 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; 8 (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. 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 deferent from those being maintained by Grantor as of the date hereof (as such manner may be revised in the good faith 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. 9 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 10 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 (c), 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. 11 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 12 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 reasonably 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 15. SECURED PARTY MAY PERFORM. If Grantor fails to perform ------------------------- any agreement contained herein, Secured Party may itself perform, or cause performance 13 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, 14 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, 15 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 16 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. 17 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 18 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) 19 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 9411 Attention: Alan Wray S-1 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] SUBSIDIARY SECURITY AGREEMENT This SUBSIDIARY 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. 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" or "BORROWER"), 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. 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 Secured Party for the benefit of Lenders, pursuant to which Grantor has guarantied the prompt payment and performance when due of all Obligations of the Borrower under the Credit Agreement. C. 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"): 1 (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; 2 (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 Subsidiary Pledge Agreement to which Grantor is a party (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 Subsidiary Pledge Agreement to which Grantor is a party (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 3 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 4 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. 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 Credit Agreement, the Subsidiary Guaranty and, the other Loan Documents and the Lender Interest Rate Agreements and all 5 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 Mill Street, East Wilton, Maine 04234. Grantor has not in the past done, and does not now do, business under any 6 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 7 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; 8 (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. 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 deferent from those being maintained by Grantor as of the date hereof (as such manner may be revised in the good faith 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. 9 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 10 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 (c), 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. 11 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 12 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 reasonably 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 15. SECURED PARTY MAY PERFORM. If Grantor fails to perform ------------------------- any agreement contained herein, Secured Party may itself perform, or cause performance 13 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, 14 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, 15 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 16 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. 17 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 18 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) 19 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 9411 Attention: Alan Wray S-1 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] EX-4.7 14 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 [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"). 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 15 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 16 SUBSIDIARY PATENT COLLATERAL 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-4.10 17 HOLDINGS PLEDGE AGREEMENT EXHIBIT XXIV [FORM OF HOLDINGS PLEDGE AGREEMENT] HOLDINGS PLEDGE AGREEMENT This PLEDGE AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between DIAMOND BRANDS INCORPORATED, a Minnesota 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 Guaranty dated as of April 21, 1998 (said Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "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. XXIV-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; XXIV-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 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 XXIV-3 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, after 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. XXIV-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 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; XXIV-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; (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 XXIV-6 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, 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 XXIV-7 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 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 XXIV-8 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 XXIV-9 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 XXIV-10 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. XXIV-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 -------- XXIV-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. XXIV-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 FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS XXIV-14 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 XXIV-15 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] XXIV-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. DIAMOND BRANDS INCORPORATED, 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 Diamond Brands Incorporated, 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 INCORPORATED By: ___________________________ Title: Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ ----- ------------ ----- --------- Debt Issuer Amount of Indebtedness - ----------- ---------------------- HOLDINGS PLEDGE AGREEMENT This PLEDGE AGREEMENT (this "AGREEMENT") is dated as of April 21, 1998 and entered into by and between DIAMOND BRANDS INCORPORATED, a Minnesota 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 Guaranty dated as of April 21, 1998 (said Guaranty, as it may hereafter be amended, supplemented or otherwise modified from time to time, being the "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 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 transfer by delivery or, as applicable, shall be accompanied by Pledgor's endorsement, 3 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, after 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 consti tutes 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 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; 5 (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; 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 6 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 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 7 (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 8 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 9 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 enti tled, 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 10 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 from Secured Party's or such Lender's gross negligence or willful misconduct as finally determined by a court of competent jurisdiction. 11 (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 12 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 13 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; 14 (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 15 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. DIAMOND BRANDS INCORPORATED, 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 Diamond Brands Incorporated, 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 INCORPORATED By: ___________________________ Title:
Class of Stock Certi- Par Number of Stock Issuer Stock ficate Nos. Value Shares - ------------ -------- ------------- ----- --------- Debt Issuer Amount of Indebtedness - ----------- ----------------------
EX-4.11 18 HOLDINGS GUARANTY AGREEMENT EXHIBIT XXV [FORM OF HOLDINGS GUARANTY] HOLDINGS GUARANTY This GUARANTY is entered into as of April 21, 1998 by THE UNDERSIGNED ("GUARANTOR") in favor of and for the benefit of WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "GUARANTIED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 5.13, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS 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, Guarantied 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") in accordance with the terms of the Credit Agreement, and it is desired that the 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 (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Credit Agreement and the other Loan Documents, be guarantied hereunder. C. Guarantor is willing irrevocably and unconditionally to guaranty such obligations of Company. D. EMPIRE CANDLE, INC., a Kansas corporation, and FORSTER INC., a Maine corporation, (each a "SUBSIDIARY GUARANTOR," and collectively, the "SUBSIDIARY GUARANTORS") have entered into that certain Subsidiary Guaranty dated as of April 21, 1998 in favor of Guarantied Party (the "SUBSIDIARY GUARANTY"). E. It is a condition precedent to the making of the initial Loans under the Credit Agreement that Company's obligations thereunder be guarantied by Guarantor. XXV-1 NOW, THEREFORE, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Lenders and Guarantied Party to enter into the Credit Agreement and to make Loans and other extensions of credit thereunder and to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, Guarantor hereby agrees as follows: SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. As used in this Guaranty, the following terms --------------------- shall have the following meanings unless the context otherwise requires: "BENEFICIARIES" means Guarantied Party, Lenders and any Interest Rate Exchangers. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Guaranty dated as of April 21, 1998, as it may be amended, supplemented or otherwise modified from time to time. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations, including all principal, interest, costs, fees and expenses (including reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 DEFINED TERMS IN CREDIT AGREEMENT. All capitalized terms used and not --------------------------------- otherwise defined herein shall have the meanings given such terms in the Credit Agreement. 1.3 INTERPRETATION. -------------- (a) References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. (b) In the event of any conflict or inconsistency between the terms, conditions and provisions of this Guaranty and the terms, conditions and provisions of the Credit Agreement, the terms, conditions and provisions of this Guaranty shall prevail. SECTION 2. THE GUARANTY 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Subject to the provisions of -------------------------------------- subsection 2.2(a), Guarantor hereby irrevocably and unconditionally guaranties the due and punctual payment in full of all Guarantied Obligations when the same shall become XXV-2 due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including 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)). The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: (a) any and all Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with the Credit Agreement and the other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under the Credit Agreement which shall either continue the Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.8 hereof. 2.2 LIMITATION ON AMOUNT GUARANTIED; CONTRIBUTION BY GUARANTOR. ---------------------------------------------------------- (a) Anything contained in this Guaranty to the contrary notwithstanding, if any Fraudulent Transfer Law (as hereinafter defined) is determined by a court of competent jurisdiction to be applicable to the obligations of Guarantor under this Guaranty, such obligations of Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after giving effect to all other liabilities of Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of Guarantor (x) in respect of intercompany indebtedness to Company or other affiliates of Company to the extent that such indebtedness would be discharged in an amount equal to the amount paid by Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including any such right of contribution under subsection 2.2(b)). (b) Guarantor under this Guaranty, and each Subsidiary Guarantor under the Subsidiary Guaranty, together desire to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising XXV-3 under this Guaranty. Accordingly, in the event any payment or distribution is made on any date by Guarantor under this Guaranty or any Subsidiary Guarantor under the Subsidiary Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors multiplied by (ii) the aggregate amount ---------- paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Subsidiary Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "ADJUSTED MAXIMUM AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty and the Subsidiary Guaranty, determined as of such date, in the case of Guarantor, in accordance with subsection 2.2(a), or, if applicable, subsection 2.2(a) of the Subsidiary Guaranty; provided that, solely for purposes of calculating the -------- "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under the Subsidiary Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty and the Subsidiary Guaranty (including in respect of this subsection 2.2(b) or subsection 2.2(b) of the Subsidiary Guaranty) minus (ii) the aggregate amount of ----- all payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2(b) or subsection 2.2(b) of the Subsidiary Guaranty. The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) or subsection 2.2(b) of the Subsidiary Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Subsidiary Guaranty. Each Contributing Guarantor under the Subsidiary Guaranty is a third party beneficiary to the contribution agreement set forth in this subsection 2.2(b). 2.3 PAYMENT BY GUARANTOR; APPLICATION OF PAYMENTS. Subject to the --------------------------------------------- provisions of subsection 2.2(a), Guarantor hereby agrees, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in XXV-4 equity against Guarantor by virtue hereof, that upon the failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including 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)), Guarantor will upon demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 2.4D of the Credit Agreement. 2.4 LIABILITY OF GUARANTOR ABSOLUTE. Guarantor agrees that its obligations ------------------------------- hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) Guarantied Party may enforce this Guaranty upon the occurrence and continuation of an Event of Default under the Credit Agreement or the occurrence and continuation 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 Guaranty). (c) The obligations of Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. (d) Payment by Guarantor of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without XXV-5 limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release Guarantor from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit. (e) Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied Obligations, or any other obligation of any Person with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the Credit Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. (f) This Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied XXV-6 Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) of the Credit Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of the Credit Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to such other guaranty or security; (iii) the Guarantied Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Docu ments or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (v) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vii) any defenses (other than the expiration of applicable statute of limitations), set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including failure of consideration, breach of warranty, payment, statute of frauds, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTOR. Guarantor hereby waives, for the benefit of -------------------- Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by Guarantor, to (i) proceed against Company, any other guarantor of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company (other than the expiration of applicable statute of limitations) including any defense based on or arising out of the lack of XXV-7 validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to gross negligence, wilful misconduct or bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty and any legal or equitable discharge of Guarantor's obligations hereunder, (ii) any rights to set-offs, recoupments and counterclaims, and (iii) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Credit Agreement, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof; and (g) any defenses (other than expiration of statutes of limitations) or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Guaranty. 2.6 GUARANTOR' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Until the --------------------------------------------------- Guarantied Obligations shall have been indefeasilby paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, Guarantor hereby waives any claim, right or remedy, direct or indirect, that Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that Guarantor now has or may hereafter have against Company, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, XXV-8 and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, Guarantor shall withhold exercise of any right of contribution Guarantor may have against any other guarantor of the Guarantied Obligations. Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification Guarantor may have against Company or against any collateral or security, and any rights of contribution Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. 2.7 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company now or ---------------------------------- hereafter held by Guarantor is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness of Company to Guarantor collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision of this Guaranty. 2.8 EXPENSES. Guarantor agrees to pay, or cause to be paid, on demand, and -------- to save Beneficiaries harmless against liability for, any and all out-of-pocket costs and expenses (including reasonable fees and disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. 2.9 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall ------------------- remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.10 AUTHORITY OF GUARANTOR OR COMPANY. It is not necessary for any --------------------------------- Beneficiary to inquire into the capacity or powers of Guarantor or Company or the XXV-9 officers, directors, members, governors or any agents acting or purporting to act on behalf of any of them. 2.11 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to Company or ------------------------------ continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with Guarantor its assessment, or Guarantor's assessment, of the financial condition of Company. Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 2.12 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement between Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.13 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. (a) So ------------------------------------------------------------- long as any Guarantied Obligations remain outstanding, Guarantor shall not, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Company. The obligations of Guarantor under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. (b) Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, XXV-10 such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantor and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantor pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations is paid by Company, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty. 2.14 NOTICE OF EVENTS. As soon as Guarantor obtains knowledge thereof, ---------------- Guarantor shall give Guarantied Party written notice of any condition or event which has resulted in (a) a material adverse change in the financial condition of Guarantor or Company or (b) a breach of or noncompliance with any term, condition or covenant contained herein or in the Credit Agreement, any other Loan Document, any Lender Interest Rate Agreements or any other document delivered pursuant hereto or thereto. 2.15 SET OFF. In addition to any other rights any Beneficiary may have ------- under law or in equity, if any amount shall at any time be due and owing by Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (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) and any other indebtedness of such Beneficiary owing to Guarantor and any other property of Guarantor held by any Beneficiary to or for the credit or the account of Guarantor against and on account of the Guarantied Obligations and liabilities of Guarantor to any Beneficiary under this Guaranty. 2.16 DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the stock or -------------------------------------------- limited liability company interests of Guarantor or any of its successors in interest under this Guaranty shall be sold or otherwise disposed of (including by merger or consolidation) in an Asset Sale not prohibited by subsection 7.7 of the Credit Agreement or otherwise consented to by Requisite Lenders, the Guaranty of Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided that, as a condition precedent to such discharge and -------- release, Guarantied Party shall have received evidence satisfactory to it that arrangements XXV-11 satisfactory to it have been made for delivery to Guarantied Party of the applicable Net Asset Sale Proceeds if required under the Credit Agreement; provided further that no such delivery shall be required in connection with a - ---------------- merger or consolidation of such entity into or with Company or another subsidiary of Company. SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce Beneficiaries to accept this Guaranty and to enter into the Credit Agreement and to make the Loans thereunder, Guarantor hereby represents and warrants to Beneficiaries that the following statements are true and correct: 3.1 CORPORATE EXISTENCE. Guarantor is duly organized, validly existing ------------------- and in good standing under the laws of the state of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that would not in the aggregate have a material adverse effect on the business, operations, assets or financial condition of Guarantor. 3.2 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Guarantor has ------------------------------------------------------- the corporate power, authority and legal right to execute, deliver and perform this Guaranty and all obligations required hereunder and has taken all necessary corporate action to authorize its Guaranty hereunder on the terms and conditions hereof and its execution, delivery and performance of this Guaranty and all obligations required hereunder. No consent of any other Person including, without limitation, stockholders and creditors of Guarantor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by Guarantor in connection with this Guaranty or the execution, delivery, performance, validity or enforceability of this Guaranty and all obligations required hereunder. This Guaranty has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Guarantor, and this Guaranty constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws or equitable principles relating to or limiting creditors' rights generally. 3.3 NO LEGAL BAR TO THIS GUARANTY. The execution, delivery and performance ----------------------------- of this Guaranty and the documents or instruments required hereunder, and the use of the proceeds of the borrowings under the Credit Agreement, will not violate any provision of any existing law or regulation binding on Guarantor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on Guarantor, or the certificate of incorporation or bylaws of Guarantor or any securities issued by Guarantor, XXV-12 or any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which Guarantor is a party or by which Guarantor or any of its assets may be bound, the violation of which would have a material adverse effect on the business, operations, assets or financial condition of Guarantor and will not result in, or require, the creation or imposition of any Lien on any of its property, assets or revenues pursuant to the provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 4. AFFIRMATIVE COVENANTS Guarantor covenants and agrees that, unless and until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated, unless Requisite Lenders shall otherwise consent in writing: 4.1 CORPORATE EXISTENCE, ETC. Guarantor shall at all times preserve and ------------------------ keep in full force and effect its corporate existence and all rights and franchises material to its business. 4.2 COMPLIANCE WITH LAWS, ETC. Guarantor shall comply in all material ------------------------- respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying when due all taxes, assessments and governmental charges imposed upon it or upon any of its properties or assets or in respect of any of its franchises, businesses, income or property before any penalty or interest accrues thereon. 4.3 BOOKS AND RECORDS. Subject to the terms of the Credit Agreement, ----------------- Guarantor shall keep and maintain books of record and account with respect to its operations in accordance with generally accepted accounting principles and shall permit any Beneficiary and its officers, employees and authorized agents, to the extent Guarantied Party in good faith deems necessary for the proper administration of this Guaranty, to examine, copy and make excerpts from the books and records of Guarantor and its Subsidiaries and to inspect the properties of Guarantor and its Subsidiaries, both real and personal, at such reasonable times as Guarantied Party may request. SECTION 5. MISCELLANEOUS 5.1 SURVIVAL OF WARRANTIES. All agreements, representations and warranties ---------------------- made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents and the Lender Interest Rate Agreements and any increase in the Commitments under the Credit Agreement. 5.2 NOTICES. Any communications between Guarantied Party and Guarantor and ------- any notices or requests provided herein to be given shall be given as provided in the Credit Agreement to each such party at its address set forth in the Credit Agreement, on the signature pages hereof or to such other addresses as each such party may in writing XXV-13 hereafter indicate. Any notice, request or demand to or upon Guarantied Party or Guarantor shall not be effective until received. 5.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty 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. 5.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination or ---------------------- waiver of any provision of this Guaranty, and no consent to any departure by Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, Guarantor against whom enforcement of such amendment or modification is sought. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 5.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 5.6 APPLICABLE LAW; RULES OF CONSTRUCTION. THIS GUARANTY AND THE RIGHTS ------------------------------------- AND OBLIGATIONS OF GUARANTOR AND BENEFICIARIES 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. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Guaranty mutatis mutandis. 5.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and ---------------------- shall be binding upon Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. Guarantor shall not assign this Guaranty or any of the rights or obligations of Guarantor hereunder without the prior written consent of all Lenders. Any Beneficiary may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 5.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL ---------------------------------------------- PROCEEDINGS BROUGHT AGAINST GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY, OR ANY OBLIGATIONS HEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT XXV-14 JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING AND DELIVERING THIS AGREEMENT, GUARANTOR, 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 GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 5.2; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GUARANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 5.8 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. 5.9 WAIVER OF TRIAL BY JURY. GUARANTOR AND, BY ITS ACCEPTANCE OF THE ----------------------- BENEFITS HEREOF, EACH BENEFICIARY EACH 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 GUARANTY. 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. Guarantor and, by its acceptance of the benefits hereof, each Beneficiary, each (i) acknowledges that this waiver is a material inducement for Guarantor and Beneficiaries to enter into a business relationship, that Guarantor and Beneficiaries have already relied on this waiver in entering into this Guaranty or accepting the benefits thereof, as the case may be, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and represents that each has XXV-15 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 SUBSECTION 5.9 AND EXECUTED BY GUARANTIED PARTY AND GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed as a written consent to a trial by the court. 5.10 NO OTHER WRITING. This writing is intended by Guarantor and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 5.11 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantor shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 5.12 COUNTERPARTS; EFFECTIVENESS. This Guaranty may be executed in any --------------------------- number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes; but all such counterparts together shall constitute but one and the same instrument. This Guaranty shall become effective as to Guarantor upon the execution of a counterpart hereof by Guarantor and receipt by Guarantied Party of written or telephonic notification of such execution and authorization of delivery thereof. 5.13 GUARANTIED PARTY AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Guarantied 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, solely in accordance with this Guaranty and the Credit Agreement; provided that Guarantied -------- Party shall exercise, or refrain from exercising, any remedies hereunder 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 XXV-16 Lenders or, if applicable, such holders being referred to herein as "REQUISITE OBLIGEES"). In furtherance of the foregoing provisions of this subsection 5.13, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 5.13. (b) Guarantied 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 Guarantied Party under this Guaranty; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. 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 Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] XXV-17 IN WITNESS WHEREOF, the undersigned Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. DIAMOND BRANDS INCORPORATED By: _____________________ Name: ___________________ Title: __________________ Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel S-1 HOLDINGS GUARANTY This GUARANTY is entered into as of April 21, 1998 by THE UNDERSIGNED ("GUARANTOR") in favor of and for the benefit of WELLS FARGO BANK, N.A., as administrative agent for and representative of (in such capacity herein called "GUARANTIED PARTY") the financial institutions ("LENDERS") party to the Credit Agreement referred to below and any Interest Rate Exchangers (as hereinafter defined), and, subject to subsection 5.13, for the benefit of the other Beneficiaries (as hereinafter defined). RECITALS 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, Guarantied 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") in accordance with the terms of the Credit Agreement, and it is desired that the 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 (all such obligations being the "INTEREST RATE OBLIGATIONS"), together with all obligations of Company under the Credit Agreement and the other Loan Documents, be guarantied hereunder. C. Guarantor is willing irrevocably and unconditionally to guaranty such obligations of Company. D. EMPIRE CANDLE, INC., a Kansas corporation, and FORSTER INC., a Maine corporation, (each a "SUBSIDIARY GUARANTOR," and collectively, the "SUBSIDIARY GUARANTORS") have entered into that certain Subsidiary Guaranty dated as of April 21, 1998 in favor of Guarantied Party (the "SUBSIDIARY GUARANTY"). E. It is a condition precedent to the making of the initial Loans under the Credit Agreement that Company's obligations thereunder be guarantied by Guarantor. NOW, THEREFORE, based upon the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce Lenders and Guarantied Party to enter into the Credit Agreement and 1 to make Loans and other extensions of credit thereunder and to induce Interest Rate Exchangers to enter into the Lender Interest Rate Agreements, Guarantor hereby agrees as follows: SECTION 1. DEFINITIONS 1.1 CERTAIN DEFINED TERMS. As used in this Guaranty, the following terms --------------------- shall have the following meanings unless the context otherwise requires: "BENEFICIARIES" means Guarantied Party, Lenders and any Interest Rate Exchangers. "GUARANTIED OBLIGATIONS" has the meaning assigned to that term in subsection 2.1. "GUARANTY" means this Guaranty dated as of April 21, 1998, as it may be amended, supplemented or otherwise modified from time to time. "PAYMENT IN FULL", "PAID IN FULL" or any similar term means payment in full of the Guarantied Obligations, including all principal, interest, costs, fees and expenses (including reasonable legal fees and expenses) of Beneficiaries as required under the Loan Documents and the Lender Interest Rate Agreements. 1.2 DEFINED TERMS IN CREDIT AGREEMENT. All capitalized terms used and not --------------------------------- otherwise defined herein shall have the meanings given such terms in the Credit Agreement. 1.3 INTERPRETATION. -------------- (a) References to "Sections" and "subsections" shall be to Sections and subsections, respectively, of this Guaranty unless otherwise specifically provided. (b) In the event of any conflict or inconsistency between the terms, conditions and provisions of this Guaranty and the terms, conditions and provisions of the Credit Agreement, the terms, conditions and provisions of this Guaranty shall prevail. SECTION 2. THE GUARANTY 2.1 GUARANTY OF THE GUARANTIED OBLIGATIONS. Subject to the provisions of -------------------------------------- subsection 2.2(a), Guarantor hereby irrevocably and unconditionally guaranties the due and punctual payment in full of all Guarantied Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including 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)). 2 The term "GUARANTIED OBLIGATIONS" is used herein in its most comprehensive sense and includes: (a) any and all Obligations of Company and any and all Interest Rate Obligations, in each case now or hereafter made, incurred or created, whether absolute or contingent, liquidated or unliquidated, whether due or not due, and however arising under or in connection with the Credit Agreement and the other Loan Documents and the Lender Interest Rate Agreements, including those arising under successive borrowing transactions under the Credit Agreement which shall either continue the Obligations of Company or from time to time renew them after they have been satisfied and including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on any Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding; and (b) those expenses set forth in subsection 2.8 hereof. 2.2 LIMITATION ON AMOUNT GUARANTIED; CONTRIBUTION BY GUARANTOR. (a) ---------------------------------------------------------- Anything contained in this Guaranty to the contrary notwithstanding, if any Fraudulent Transfer Law (as hereinafter defined) is determined by a court of competent jurisdiction to be applicable to the obligations of Guarantor under this Guaranty, such obligations of Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "FRAUDULENT TRANSFER LAWS"), in each case after giving effect to all other liabilities of Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of Guarantor (x) in respect of intercompany indebtedness to Company or other affiliates of Company to the extent that such indebtedness would be discharged in an amount equal to the amount paid by Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness which guaranty contains a limitation as to maximum amount similar to that set forth in this subsection 2.2(a), pursuant to which the liability of Guarantor hereunder is included in the liabilities taken into account in determining such maximum amount) and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of Guarantor pursuant to applicable law or pursuant to the terms of any agreement (including any such right of contribution under subsection 2.2(b)). (b) Guarantor under this Guaranty, and each Subsidiary Guarantor under the Subsidiary Guaranty, together desire to allocate among themselves (collectively, the "CONTRIBUTING GUARANTORS"), in a fair and equitable manner, their obligations arising under this Guaranty. Accordingly, in the event any payment or distribution is made on any date by Guarantor under this Guaranty or any Subsidiary Guarantor under the Subsidiary Guaranty (a "FUNDING GUARANTOR") that exceeds its Fair Share (as defined 3 below) as of such date, that Funding Guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the amount of such other Contributing Guarantor's Fair Share Shortfall (as defined below) as of such date, with the result that all such contributions will cause each Contributing Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of such date. "FAIR SHARE" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum Amount (as defined below) with respect to such Contributing Guarantor to (y) the aggregate of the Adjusted Maximum Amounts with respect to all Contributing Guarantors multiplied by (ii) the aggregate amount ---------- -- paid or distributed on or before such date by all Funding Guarantors under this Guaranty and the Subsidiary Guaranty in respect of the obligations guarantied. "FAIR SHARE SHORTFALL" means, with respect to a Contributing Guarantor as of any date of determination, the excess, if any, of the Fair Share of such Contributing Guarantor over the Aggregate Payments of such Contributing Guarantor. "ADJUSTED MAXIMUM AMOUNT" means, with respect to a Contributing Guarantor as of any date of determination, the maximum aggregate amount of the obligations of such Contributing Guarantor under this Guaranty and the Subsidiary Guaranty, determined as of such date, in the case of Guarantor, in accordance with subsection 2.2(a), or, if applicable, subsection 2.2(a) of the Subsidiary Guaranty; provided that, solely for purposes of calculating the -------- "Adjusted Maximum Amount" with respect to any Contributing Guarantor for purposes of this subsection 2.2(b), any assets or liabilities of such Contributing Guarantor arising by virtue of any rights to subrogation, reimbursement or indemnification or any rights to or obligations of contribution hereunder or under the Subsidiary Guaranty shall not be considered as assets or liabilities of such Contributing Guarantor. "AGGREGATE PAYMENTS" means, with respect to a Contributing Guarantor as of any date of determination, an amount equal to (i) the aggregate amount of all payments and distributions made on or before such date by such Contributing Guarantor in respect of this Guaranty and the Subsidiary Guaranty (including in respect of this subsection 2.2(b) or subsection 2.2(b) of the Subsidiary Guaranty) minus (ii) the aggregate amount of ----- all payments received on or before such date by such Contributing Guarantor from the other Contributing Guarantors as contributions under this subsection 2.2(b) or subsection 2.2(b) of the Subsidiary Guaranty. The amounts payable as contributions hereunder shall be determined as of the date on which the related payment or distribution is made by the applicable Funding Guarantor. The allocation among Contributing Guarantors of their obligations as set forth in this subsection 2.2(b) or subsection 2.2(b) of the Subsidiary Guaranty shall not be construed in any way to limit the liability of any Contributing Guarantor hereunder or under the Subsidiary Guaranty. Each Contributing Guarantor under the Subsidiary Guaranty is a third party beneficiary to the contribution agreement set forth in this subsection 2.2(b). 2.3 PAYMENT BY GUARANTOR; APPLICATION OF PAYMENTS. Subject to the --------------------------------------------- provisions of subsection 2.2(a), Guarantor hereby agrees, in furtherance of the foregoing and not in limitation of any other right which any Beneficiary may have at law or in equity against Guarantor by virtue hereof, that upon the failure of Company to pay any of the Guarantied Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise 4 (including 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)), Guarantor will upon demand pay, or cause to be paid, in cash, to Guarantied Party for the ratable benefit of Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guarantied Obligations then due as aforesaid, accrued and unpaid interest on such Guarantied Obligations (including interest which, but for the filing of a petition in bankruptcy with respect to Company, would have accrued on such Guarantied Obligations, whether or not a claim is allowed against Company for such interest in the related bankruptcy proceeding) and all other Guarantied Obligations then owed to Beneficiaries as aforesaid. All such payments shall be applied promptly from time to time by Guarantied Party as provided in subsection 2.4D of the Credit Agreement. 2.4 LIABILITY OF GUARANTOR ABSOLUTE. Guarantor agrees that its obligations ------------------------------- hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guarantied Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows: (a) This Guaranty is a guaranty of payment when due and not of collectibility. (b) Guarantied Party may enforce this Guaranty upon the occurrence and continuation of an Event of Default under the Credit Agreement or the occurrence and continuation 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 Guaranty). (c) The obligations of Guarantor hereunder are independent of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements and the obligations of any other guarantor of the obligations of Company under the Loan Documents or the Lender Interest Rate Agreements, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against Company or any of such other guarantors and whether or not Company is joined in any such action or actions. (d) Payment by Guarantor of a portion, but not all, of the Guarantied Obligations shall in no way limit, affect, modify or abridge Guarantor's liability for any portion of the Guarantied Obligations which has not been paid. Without limiting the generality of the foregoing, if Guarantied Party is awarded a judgment in any suit brought to enforce Guarantor's covenant to pay a portion of the Guarantied Obligations, such judgment shall not be deemed to release Guarantor 5 from its covenant to pay the portion of the Guarantied Obligations that is not the subject of such suit. (e) Any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability of this Guaranty or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor's liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guarantied Obligations, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guarantied Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guarantied Obligations and take and hold security for the payment of this Guaranty or the Guarantied Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guarantied Obligations, any other guaranties of the Guarantied Obligations, or any other obligation of any Person with respect to the Guarantied Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiary in respect of this Guaranty or the Guarantied Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Beneficiary may have against any such security, in each case as such Beneficiary in its discretion may determine consistent with the Credit Agreement or the applicable Lender Interest Rate Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against Company or any security for the Guarantied Obligations; and (vi) exercise any other rights available to it under the Loan Documents or the Lender Interest Rate Agreements. (f) This Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guarantied Obligations), including the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents or the Lender Interest Rate Agreements, at law, in equity or otherwise) with respect to the Guarantied Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guarantied Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure 6 from, any of the terms or provisions (including provisions relating to events of default) of the Credit Agreement, any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guarantied Obligations, in each case whether or not in accordance with the terms of the Credit Agreement or such Loan Document, such Lender Interest Rate Agreement or any agreement relating to such other guaranty or security; (iii) the Guarantied Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or any of the Lender Interest Rate Agreements or from the proceeds of any security for the Guarantied Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guarantied Obligations) to the payment of indebtedness other than the Guarantied Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guarantied Obligations; (v) any Beneficiary's consent to the change, reorganization or termination of the corporate structure or existence of Company or any of its Subsidiaries and to any corresponding restructuring of the Guarantied Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guarantied Obligations; (vii) any defenses (other than the expiration of applicable statute of limitations), set-offs or counterclaims which Company may allege or assert against any Beneficiary in respect of the Guarantied Obligations, including failure of consideration, breach of warranty, payment, statute of frauds, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guarantied Obligations. 2.5 WAIVERS BY GUARANTOR. Guarantor hereby waives, for the benefit of -------------------- Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by Guarantor, to (i) proceed against Company, any other guarantor of the Guarantied Obligations or any other Person, (ii) proceed against or exhaust any security held from Company, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of Company or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of Company (other than the expiration of applicable statute of limitations) including any defense based on or arising out of the lack of validity or the unenforceability of the Guarantied Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of Company from any cause other than payment in full of the Guarantied Obligations; 7 (c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary's errors or omissions in the administration of the Guarantied Obligations, except behavior which amounts to gross negligence, wilful misconduct or bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms of this Guaranty and any legal or equitable discharge of Guarantor's obligations hereunder, (ii) any rights to set-offs, recoupments and counterclaims, and (iii) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Guaranty, notices of default under the Credit Agreement, the Lender Interest Rate Agreements or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guarantied Obligations or any agreement related thereto, notices of any extension of credit to Company and notices of any of the matters referred to in subsection 2.4 and any right to consent to any thereof; and (g) any defenses (other than expiration of statutes of limitations) or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Guaranty. 2.6 GUARANTOR' RIGHTS OF SUBROGATION, CONTRIBUTION, ETC. Until the --------------------------------------------------- Guarantied Obligations shall have been indefeasilby paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, Guarantor hereby waives any claim, right or remedy, direct or indirect, that Guarantor now has or may hereafter have against Company or any of its assets in connection with this Guaranty or the performance by Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that Guarantor now has or may hereafter have against Company, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against Company, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guarantied Obligations shall have been indefeasibly paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled, Guarantor shall withhold exercise of any right of contribution Guarantor may have against any other guarantor of the Guarantied Obli- 8 gations. Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification Guarantor may have against Company or against any collateral or security, and any rights of contribution Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against Company, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount shall be paid to Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guarantied Obligations shall not have been paid in full, such amount shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms hereof. 2.7 SUBORDINATION OF OTHER OBLIGATIONS. Any indebtedness of Company now ---------------------------------- or hereafter held by Guarantor is hereby subordinated in right of payment to the Guarantied Obligations, and any such indebtedness of Company to Guarantor collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for Guarantied Party on behalf of Beneficiaries and shall forthwith be paid over to Guarantied Party for the benefit of Beneficiaries to be credited and applied against the Guarantied Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision of this Guaranty. 2.8 EXPENSES. Guarantor agrees to pay, or cause to be paid, on demand, -------- and to save Beneficiaries harmless against liability for, any and all out-of- pocket costs and expenses (including reasonable fees and disbursements of counsel and allocated costs of internal counsel) incurred or expended by any Beneficiary in connection with the enforcement of or preservation of any rights under this Guaranty. 2.9 CONTINUING GUARANTY. This Guaranty is a continuing guaranty and shall ------------------- remain in effect until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated and all Letters of Credit shall have expired or been cancelled. Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guarantied Obligations. 2.10 AUTHORITY OF GUARANTOR OR COMPANY. It is not necessary for any --------------------------------- Beneficiary to inquire into the capacity or powers of Guarantor or Company or the officers, directors, members, governors or any agents acting or purporting to act on behalf of any of them. 2.11 FINANCIAL CONDITION OF COMPANY. Any Loans may be granted to Company ------------------------------ or continued from time to time, and any Lender Interest Rate Agreements may be entered into from time to time, in each case without notice to or authorization from 9 Guarantor regardless of the financial or other condition of Company at the time of any such grant or continuation or at the time such Lender Interest Rate Agreement is entered into, as the case may be. No Beneficiary shall have any obligation to disclose or discuss with Guarantor its assessment, or Guarantor's assessment, of the financial condition of Company. Guarantor has adequate means to obtain information from Company on a continuing basis concerning the financial condition of Company and its ability to perform its obligations under the Loan Documents and the Lender Interest Rate Agreements, and Guarantor assumes the responsibility for being and keeping informed of the financial condition of Company and of all circumstances bearing upon the risk of nonpayment of the Guarantied Obligations. Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of Company now known or hereafter known by any Beneficiary. 2.12 RIGHTS CUMULATIVE. The rights, powers and remedies given to ----------------- Beneficiaries by this Guaranty are cumulative and shall be in addition to and independent of all rights, powers and remedies given to Beneficiaries by virtue of any statute or rule of law or in any of the other Loan Documents, any of the Lender Interest Rate Agreements or any agreement between Guarantor and any Beneficiary or Beneficiaries or between Company and any Beneficiary or Beneficiaries. Any forbearance or failure to exercise, and any delay by any Beneficiary in exercising, any right, power or remedy hereunder shall not impair any such right, power or remedy or be construed to be a waiver thereof, nor shall it preclude the further exercise of any such right, power or remedy. 2.13 BANKRUPTCY; POST-PETITION INTEREST; REINSTATEMENT OF GUARANTY. (a) So ------------------------------------------------------------- long as any Guarantied Obligations remain outstanding, Guarantor shall not, without the prior written consent of Guarantied Party acting pursuant to the instructions of Requisite Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency proceedings of or against Company. The obligations of Guarantor under this Guaranty shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of Company or by any defense which Company may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding. (b) Guarantor acknowledges and agrees that any interest on any portion of the Guarantied Obligations which accrues after the commencement of any proceeding referred to in clause (a) above (or, if interest on any portion of the Guarantied Obligations ceases to accrue by operation of law by reason of the commencement of said proceeding, such interest as would have accrued on such portion of the Guarantied Obligations if said proceedings had not been commenced) shall be included in the Guarantied Obligations because it is the intention of Guarantor and Beneficiaries that the Guarantied Obligations which are guarantied by Guarantor pursuant to this Guaranty should be determined without regard to any rule of law or order which may relieve Company of any portion of such Guarantied Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay 10 Guarantied Party, or allow the claim of Guarantied Party in respect of, any such interest accruing after the date on which such proceeding is commenced. (c) In the event that all or any portion of the Guarantied Obligations is paid by Company, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guarantied Obligations for all purposes under this Guaranty. 2.14 NOTICE OF EVENTS. As soon as Guarantor obtains knowledge thereof, ---------------- Guarantor shall give Guarantied Party written notice of any condition or event which has resulted in (a) a material adverse change in the financial condition of Guarantor or Company or (b) a breach of or noncompliance with any term, condition or covenant contained herein or in the Credit Agreement, any other Loan Document, any Lender Interest Rate Agreements or any other document delivered pursuant hereto or thereto. 2.15 SET OFF. In addition to any other rights any Beneficiary may have ------- under law or in equity, if any amount shall at any time be due and owing by Guarantor to any Beneficiary under this Guaranty, such Beneficiary is authorized at any time or from time to time, without notice (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) and any other indebtedness of such Beneficiary owing to Guarantor and any other property of Guarantor held by any Beneficiary to or for the credit or the account of Guarantor against and on account of the Guarantied Obligations and liabilities of Guarantor to any Beneficiary under this Guaranty. 2.16 DISCHARGE OF GUARANTY UPON SALE OF GUARANTOR. If all of the stock or -------------------------------------------- limited liability company interests of Guarantor or any of its successors in interest under this Guaranty shall be sold or otherwise disposed of (including by merger or consolidation) in an Asset Sale not prohibited by subsection 7.7 of the Credit Agreement or otherwise consented to by Requisite Lenders, the Guaranty of Guarantor or such successor in interest, as the case may be, hereunder shall automatically be discharged and released without any further action by any Beneficiary or any other Person effective as of the time of such Asset Sale; provided that, as a condition precedent to such discharge and -------- release, Guarantied Party shall have received evidence satisfactory to it that arrangements satisfactory to it have been made for delivery to Guarantied Party of the applicable Net Asset Sale Proceeds if required under the Credit Agreement; provided further that no such delivery shall be required in ---------------- connection with a merger or consolidation of such entity into or with Company or another subsidiary of Company. 11 SECTION 3. REPRESENTATIONS AND WARRANTIES In order to induce Beneficiaries to accept this Guaranty and to enter into the Credit Agreement and to make the Loans thereunder, Guarantor hereby represents and warrants to Beneficiaries that the following statements are true and correct: 3.1 CORPORATE EXISTENCE. Guarantor is duly organized, validly existing and ------------------- in good standing under the laws of the state of its incorporation, has the corporate power to own its assets and to transact the business in which it is now engaged and is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification, except for failures to be so qualified, authorized or licensed that would not in the aggregate have a material adverse effect on the business, operations, assets or financial condition of Guarantor. 3.2 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Guarantor has ------------------------------------------------------- the corporate power, authority and legal right to execute, deliver and perform this Guaranty and all obligations required hereunder and has taken all necessary corporate action to authorize its Guaranty hereunder on the terms and conditions hereof and its execution, delivery and performance of this Guaranty and all obligations required hereunder. No consent of any other Person including, without limitation, stockholders and creditors of Guarantor, and no license, permit, approval or authorization of, exemption by, notice or report to, or registration, filing or declaration with, any governmental authority is required by Guarantor in connection with this Guaranty or the execution, delivery, performance, validity or enforceability of this Guaranty and all obligations required hereunder. This Guaranty has been, and each instrument or document required hereunder will be, executed and delivered by a duly authorized officer of the Guarantor, and this Guaranty constitutes, and each instrument or document required hereunder when executed and delivered hereunder will constitute, the legally valid and binding obligation of the Guarantor, enforceable against the Guarantor in accordance with its terms, except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws or equitable principles relating to or limiting creditors' rights generally. 3.3 NO LEGAL BAR TO THIS GUARANTY. The execution, delivery and performance ----------------------------- of this Guaranty and the documents or instruments required hereunder, and the use of the proceeds of the borrowings under the Credit Agreement, will not violate any provision of any existing law or regulation binding on Guarantor, or any order, judgment, award or decree of any court, arbitrator or governmental authority binding on Guarantor, or the certificate of incorporation or bylaws of Guarantor or any securities issued by Guarantor, or any mortgage, indenture, lease, contract or other agreement, instrument or undertaking to which Guarantor is a party or by which Guarantor or any of its assets may be bound, the violation of which would have a material adverse effect on the business, operations, assets or financial condition of Guarantor and will not result in, or require, the creation or imposition of any Lien on any of its property, assets or revenues pursuant to the 12 provisions of any such mortgage, indenture, lease, contract or other agreement, instrument or undertaking. SECTION 4. AFFIRMATIVE COVENANTS Guarantor covenants and agrees that, unless and until all of the Guarantied Obligations shall have been paid in full and the Commitments shall have terminated, unless Requisite Lenders shall otherwise consent in writing: 4.1 CORPORATE EXISTENCE, ETC. Guarantor shall at all times preserve and ------------------------ keep in full force and effect its corporate existence and all rights and franchises material to its business. 4.2 COMPLIANCE WITH LAWS, ETC. Guarantor shall comply in all material ------------------------- respects with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, paying when due all taxes, assessments and governmental charges imposed upon it or upon any of its properties or assets or in respect of any of its franchises, businesses, income or property before any penalty or interest accrues thereon. 4.3 BOOKS AND RECORDS. Subject to the terms of the Credit Agreement, ----------------- Guarantor shall keep and maintain books of record and account with respect to its operations in accordance with generally accepted accounting principles and shall permit any Beneficiary and its officers, employees and authorized agents, to the extent Guarantied Party in good faith deems necessary for the proper administration of this Guaranty, to examine, copy and make excerpts from the books and records of Guarantor and its Subsidiaries and to inspect the properties of Guarantor and its Subsidiaries, both real and personal, at such reasonable times as Guarantied Party may request. SECTION 5. MISCELLANEOUS 5.1 SURVIVAL OF WARRANTIES. All agreements, representations and warranties ---------------------- made herein shall survive the execution and delivery of this Guaranty and the other Loan Documents and the Lender Interest Rate Agreements and any increase in the Commitments under the Credit Agreement. 5.2 NOTICES. Any communications between Guarantied Party and Guarantor and ------- any notices or requests provided herein to be given shall be given as provided in the Credit Agreement to each such party at its address set forth in the Credit Agreement, on the signature pages hereof or to such other addresses as each such party may in writing hereafter indicate. Any notice, request or demand to or upon Guarantied Party or Guarantor shall not be effective until received. 5.3 SEVERABILITY. In case any provision in or obligation under this ------------ Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and 13 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. 5.4 AMENDMENTS AND WAIVERS. No amendment, modification, termination or ---------------------- waiver of any provision of this Guaranty, and no consent to any departure by Guarantor therefrom, shall in any event be effective without the written concurrence of Guarantied Party and, in the case of any such amendment or modification, Guarantor against whom enforcement of such amendment or modification is sought. Any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 5.5 HEADINGS. Section and subsection headings in this Guaranty are -------- included herein for convenience of reference only and shall not constitute a part of this Guaranty for any other purpose or be given any substantive effect. 5.6 APPLICABLE LAW; RULES OF CONSTRUCTION. THIS GUARANTY AND THE RIGHTS ------------------------------------- AND OBLIGATIONS OF GUARANTOR AND BENEFICIARIES 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. The rules of construction set forth in subsection 1.3 of the Credit Agreement shall be applicable to this Guaranty mutatis mutandis. 5.7 SUCCESSORS AND ASSIGNS. This Guaranty is a continuing guaranty and ---------------------- shall be binding upon Guarantor and its respective successors and assigns. This Guaranty shall inure to the benefit of Beneficiaries and their respective successors and assigns. Guarantor shall not assign this Guaranty or any of the rights or obligations of Guarantor hereunder without the prior written consent of all Lenders. Any Beneficiary may, without notice or consent, assign its interest in this Guaranty in whole or in part. The terms and provisions of this Guaranty shall inure to the benefit of any transferee or assignee of any Loan, and in the event of such transfer or assignment the rights and privileges herein conferred upon such Beneficiary shall automatically extend to and be vested in such transferee or assignee, all subject to the terms and conditions hereof. 5.8 CONSENT TO JURISDICTION AND SERVICE OF PROCESS. ALL JUDICIAL ---------------------------------------------- PROCEEDINGS BROUGHT AGAINST GUARANTOR ARISING OUT OF OR RELATING TO THIS GUARANTY, 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, GUARANTOR, 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 GUARANTOR AT ITS ADDRESS PROVIDED IN ACCORDANCE WITH SUBSECTION 5.2; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE (III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER GUARANTOR IN ANY SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT BENEFICIARIES RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS AGAINST GUARANTOR IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT THE PROVISIONS OF THIS SUBSECTION 5.8 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. 5.9 WAIVER OF TRIAL BY JURY. GUARANTOR AND, BY ITS ACCEPTANCE OF THE ----------------------- BENEFITS HEREOF, EACH BENEFICIARY EACH 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 GUARANTY. 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. Guarantor and, by its acceptance of the benefits hereof, each Beneficiary, each (i) acknowledges that this waiver is a material inducement for Guarantor and Beneficiaries to enter into a business relationship, that Guarantor and Beneficiaries have already relied on this waiver in entering into this Guaranty or accepting the benefits thereof, as the case may be, and that each will continue to rely on this waiver in their related future dealings and (ii) further warrants and represents 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 15 SPECIFICALLY REFERRING TO THIS SUBSECTION 5.9 AND EXECUTED BY GUARANTIED PARTY AND GUARANTOR), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTY. In the event of litigation, this Guaranty may be filed as a written consent to a trial by the court. 5.10 NO OTHER WRITING. This writing is intended by Guarantor and ---------------- Beneficiaries as the final expression of this Guaranty and is also intended as a complete and exclusive statement of the terms of their agreement with respect to the matters covered hereby. No course of dealing, course of performance or trade usage, and no parol evidence of any nature, shall be used to supplement or modify any terms of this Guaranty. There are no conditions to the full effectiveness of this Guaranty. 5.11 FURTHER ASSURANCES. At any time or from time to time, upon the ------------------ request of Guarantied Party, Guarantor shall execute and deliver such further documents and do such other acts and things as Guarantied Party may reasonably request in order to effect fully the purposes of this Guaranty. 5.12 COUNTERPARTS; EFFECTIVENESS. This Guaranty may be executed in any --------------------------- number of counterparts and by the different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original for all purposes; but all such counterparts together shall constitute but one and the same instrument. This Guaranty shall become effective as to Guarantor upon the execution of a counterpart hereof by Guarantor and receipt by Guarantied Party of written or telephonic notification of such execution and authorization of delivery thereof. 5.13 GUARANTIED PARTY AS ADMINISTRATIVE AGENT. ---------------------------------------- (a) Guarantied Party has been appointed to act as Guarantied Party hereunder by Lenders and, by their acceptance of the benefits hereof, Interest Rate Exchangers. Guarantied 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, solely in accordance with this Guaranty and the Credit Agreement; provided that Guarantied -------- Party shall exercise, or refrain from exercising, any remedies hereunder 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 subsection 5.13, each Interest Rate Exchanger, by its acceptance of the benefits hereof, agrees that it shall have no right individually to enforce this Guaranty, it being understood and agreed by such Interest 16 Rate Exchanger that all rights and remedies hereunder may be exercised solely by Guarantied Party for the benefit of Beneficiaries in accordance with the terms of this subsection 5.13. (b) Guarantied 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 Guarantied Party under this Guaranty; removal of Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute removal as Guarantied Party under this Guaranty; and appointment of a successor Administrative Agent pursuant to subsection 9.5 of the Credit Agreement shall also constitute appointment of a successor Guarantied Party under this Guaranty. 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 Guarantied Party under this Guaranty, and the retiring or removed Guarantied Party under this Guaranty shall promptly (i) transfer to such successor Guarantied Party all sums held hereunder, together with all records and other documents necessary or appropriate in connection with the performance of the duties of the successor Guarantied Party under this Guaranty, and (ii) take such other actions as may be necessary or appropriate in connection with the assignment to such successor Guarantied Party of the rights created hereunder, whereupon such retiring or removed Guarantied Party shall be discharged from its duties and obligations under this Guaranty. After any retiring or removed Guarantied Party's resignation or removal hereunder as Guarantied Party, the provisions of this Guaranty shall inure to its benefit as to any actions taken or omitted to be taken by it under this Guaranty while it was Guarantied Party hereunder. [Remainder of page intentionally left blank] 17 IN WITNESS WHEREOF, the undersigned Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first written above. DIAMOND BRANDS INCORPORATED By: _________________________ Name: _______________________ Title: ______________________ Address: 1800 Cloquet Avenue Cloquet, MN 55720-2141 Attention: Tom Knuesel S-1 EX-4.12 19 REGISTRATION RIGHTS AGREEMENT A/B EXCHANGE REGISTRATION RIGHTS AGREEMENT DATED AS OF APRIL 21, 1998 BY AND AMONG DIAMOND BRANDS OPERATING CORP. EMPIRE CANDLE, INC. FORSTER, INC. AND DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MORGAN STANLEY & CO. INCORPORATED This Registration Rights Agreement (this "AGREEMENT") is made and entered --------- into as of April 21, 1998, by and among Diamond Brands Operating Corp., a Delaware corporation (the "COMPANY"), Empire Candle, Inc., a Kansas corporation ------- and wholly owned subsidiary of the Company ("EMPIRE"), Forster, Inc., a Maine ------ corporation and wholly owned subsidiary of the Company ("FORSTER" and together ------- with Empire, the "GUARANTORS"), and Donaldson, Lufkin & Jenrette Securities ---------- Corporation ("DLJ") and Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") --- -------------- (each an "INITIAL PURCHASER" and, collectively, the "INITIAL PURCHASERS"), each ----------------- ------------------ of whom has agreed to purchase the Company's 10 1//8 /% Series A Senior Subordinated Notes due 2008 (the "SERIES A NOTES") pursuant to the Purchase -------------- Agreement (as defined below). This Agreement is made pursuant to the Purchase Agreement, dated April 15, 1998, (the "PURCHASE AGREEMENT"), by and among the Company, the Guarantors and ------------------ the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Series A Notes, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in Section 2 of the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Indenture, dated April 21, 1998 (the "INDENTURE"), between the Company and State Street Bank and Trust Company, --------- as Trustee, relating to the Series A Notes and the Series B Notes (as defined herein). The parties hereby agree as follows: SECTION 1. DEFINITIONS As used in this Agreement, the following capitalized terms shall have the following meanings: ACT: The Securities Act of 1933, as amended. --- AFFILIATE: As defined in Rule 144 of the Act. --------- AFFILIATED MARKET MAKER: A Broker-Dealer who is deemed to be an Affiliate ----------------------- of the Company. BUSINESS DAY: Any day except a Saturday, Sunday, or other day in the City ------------- of New York, or in the city of the corporate trust office of the Trustee, on which banks are authorized to close. BROKER-DEALER: Any broker or dealer registered under the Exchange Act. ------------- CERTIFICATED SECURITIES: Definitive Notes, as defined in the Indenture. ----------------------- CLOSING DATE: The date hereof. ------------ COMMISSION: The Securities and Exchange Commission. ---------- 1 CONSUMMATE: An Exchange Offer shall be deemed "Consummated" for purposes ---------- of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to the Series B Notes to be issued in the Exchange Offer, (b) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the minimum period required pursuant to Section 3(b) hereof and (c) the delivery by the Company to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by Holders thereof pursuant to the Exchange Offer. CONSUMMATION DEADLINE: As defined in Section 3(b) hereof. --------------------- EFFECTIVENESS DEADLINE: As defined in Sections 3(a) and 4(a) hereof. ---------------------- EXCHANGE ACT: The Securities Exchange Act of 1934, as amended. ------------ EXCHANGE OFFER: The exchange and issuance by the Company of a principal -------------- amount of Series B Notes (which shall be registered under the Act pursuant to the Exchange Offer Registration Statement) equal to the outstanding principal amount of Series A Notes that are Transfer Restricted Securities and are tendered by such Holders in connection with such exchange and issuance. EXCHANGE OFFER REGISTRATION STATEMENT: The Registration Statement relating ------------------------------------- to the Exchange Offer, including the related Prospectus. EXEMPT RESALES: The transactions in which the Initial Purchasers propose -------------- to sell the Series A Notes to certain "qualified institutional buyers," as such term is defined in Rule 144A under the Act and pursuant to Regulation S under the Act. FILING DEADLINE: As defined in Sections 3(a) and 4(a) hereof. --------------- HOLDERS: As defined in Section 2 hereof. ------- NASD: National Association of Securities Dealers, Inc. ----- NOTES: The Series A Notes and the Series B Notes. ------ PERSON: An individual, partnership, corporation, trust, unincorporated ------- organization, or a government or agency or political subdivision thereof. PROSPECTUS: The prospectus included in a Registration Statement at the ---------- time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus. RECOMMENCEMENT DATE: As defined in Section 6(d) hereof. ------------------- REGISTRATION DEFAULT: As defined in Section 5 hereof. -------------------- 2 REGISTRATION STATEMENT: Any registration statement of the Company and the ---------------------- Guarantors relating to (a) an offering of Series B Notes pursuant to an Exchange Offer or (b) the registration for resale of Transfer Restricted Securities pursuant to the Shelf Registration Statement, in each case, (i) that is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post- effective amendments) and all exhibits and material incorporated by reference therein. REGULATION S: Regulation S promulgated under the Act. ------------ RULE 144: Rule 144 promulgated under the Act. -------- SERIES B NOTES: The Company's 10 1/8% Series B Senior Subordinated -------------- Notes due 2008 to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii) as contemplated by Section 4 hereof. SHELF REGISTRATION STATEMENT: As defined in Section 4 hereof. ---------------------------- SUSPENSION NOTICE: As defined in Section 6(d) hereof. ----------------- TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as --- in effect on the date of the Indenture. TRANSFER RESTRICTED SECURITIES: Each Series A Note, until the earliest to ------------------------------ occur of (a) the date on which such Series A Note is exchanged in the Exchange Offer for a Series B Note which is 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 Series A Note has been disposed of in accordance with a Shelf Registration Statement (and the purchasers thereof have been issued Series B Notes), or (c) the date on which such Series A Note is distributed to the public pursuant to Rule 144 under the Act (and purchasers thereof have been issued Series B Notes) and each Series B Note until the date on which such Series B Note is disposed of by a Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the Exchange Offer Registration Statement (including the delivery of the Prospectus contained therein). SECTION 2. HOLDERS A Person is deemed to be a holder of Transfer Restricted Securities (each, a "HOLDER") whenever such Person owns Transfer Restricted Securities. ------ SECTION 3. REGISTERED EXCHANGE OFFER (a) Unless the Exchange Offer shall not be permitted by applicable federal law (after the procedures set forth in Section 6(a)(i) below have been complied with), the Company and the Guarantors shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 75 days after the Closing Date (such 75th day being the "FILING DEADLINE"), (ii) use its best efforts to --------------- cause such Exchange Offer Registration Statement to become effective at the earliest possible time, but 3 in no event later than 150 days after the Closing Date (such 150th day being the "EFFECTIVENESS DEADLINE"), (iii) in connection with the foregoing, (A) file all ---------------------- pre-effective amendments to such Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to such Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Series B Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness of such Exchange Offer Registration Statement, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form permitting (i) registration of the Series B Notes to be offered in exchange for the Series A Notes that are Transfer Restricted Securities and (ii) resales of Series B Notes by any Broker-Dealer that tendered into the Exchange Offer Series A Notes that such Broker-Dealer acquired for its own account as a result of market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) as contemplated by Section 3(c) below. (b) The Company and the Guarantors shall use their respective best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate the Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Company and the Guarantors shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Series B Notes shall be included in the Exchange Offer Registration Statement. The Company and the Guarantors shall use their respective best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 195 days after the Closing Date (such 195th day being the "CONSUMMATION DEADLINE"). --------------------- (c) The Company shall include a "Plan of Distribution" section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Series A Notes acquired directly from the Company or any Affiliate of the Company), may exchange such Transfer Restricted Securities pursuant to the Exchange Offer. Such "Plan of Distribution" section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such "Plan of Distribution" shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. Because such Broker-Dealer may be deemed to be an "underwriter" within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of any Series B Notes received by such Broker-Dealer in the Exchange Offer, the Company and Guarantors shall permit the use of the Prospectus contained in the Exchange 4 Offer Registration Statement by such Broker-Dealer to satisfy such prospectus delivery requirement. To the extent necessary to ensure that the prospectus contained in the Exchange Offer Registration Statement is available for sales of Series B Notes by Broker-Dealers, the Company and the Guarantors agree to use their respective best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented and amended as required by and subject to the provisions of Section 6(c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of one year from the date on which the Exchange Offer is Consummated. The Company and the Guarantors shall provide sufficient copies of the latest version of such Prospectus to such Broker-Dealers, promptly upon request, and in no event later than one day after such request, at any time during such one year period. SECTION 4. SHELF REGISTRATION (a) Shelf Registration. If (i) the Exchange Offer is not permitted by ------------------ applicable law (after the Company and the Guarantors have complied with the procedures set forth in Section 6(a)(i) below) or (ii) if any Holder of Transfer Restricted Securities shall notify the Company 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 Series B 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 Series A Notes acquired directly from the Company or any of its Affiliates, then the Company and the Guarantors shall: (x) cause to be filed, on or prior to (i) 30 days after the date on which the Company determines that the Exchange Offer Registration Statement cannot be filed as a result of clause (a)(i) above or (ii) 60 days after the date on which the Company receives the notice specified in clause (a)(ii) above, (each such date, the "FILING DEADLINE"), a shelf registration statement pursuant to Rule --------------- 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement in either event (the "SHELF REGISTRATION STATEMENT")), the Holders of ---------------------------- which shall have provided the information required pursuant to Section 4(b) hereof, relating to all Transfer Restricted Securities, the holders of which shall have provided the information required pursuant to Section 4(b) hereof, and (y) shall use their respective best efforts to cause such Shelf Registration Statement to become effective on or prior to 150 days after the Filing Deadline for the Shelf Registration Statement (such 150th day the "EFFECTIVENESS ------------- DEADLINE"). - --------- If, after the Company has filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Company is required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under applicable federal law (i.e., pursuant to clause (a)(i) above), then the filing of the Exchange Offer Registration 5 Statement shall be deemed to satisfy the requirements of clause (x) above; provided that, in such event, the Company and the Guarantors shall remain obligated to meet the Effectiveness Deadline set forth in clause (y) above. To the extent necessary to ensure that the Shelf Registration Statement is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a) and the other securities required to be registered therein pursuant to Section 6(b)(ii) hereof, the Company and the Guarantors shall use their respective best efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented and amended as required by and subject to the provisions of Sections 6(b) and (c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least two years (as extended pursuant to Section 6(c)(i)) following the Closing Date, or such shorter period as will terminate when all Transfer Restricted Securities covered by such Shelf Registration Statement have been sold pursuant thereto. (b) Provision by Holders of Certain Information in Connection with the ------------------------------------------------------------------ Shelf Registration Statement. No Holder of Transfer Restricted Securities may - ---------------------------- include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Company in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such information. Each selling Holder agrees to promptly furnish all additional information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. SECTION 5. LIQUIDATED DAMAGES If (i) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (ii) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (iii) the Exchange Offer, if applicable, has not been Consummated on or prior to the Consummation Deadline or (iv) any Registration Statement required by this Agreement is filed and declared effective but shall 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) above, a "REGISTRATION DEFAULT"), then the Company and the -------------------- Guarantors hereby jointly and severally agree to pay to each Holder of Transfer Restricted Securities affected thereby liquidated damages in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90-day period immediately following the occurrence of such Registration Default. The amount of the liquidated damages shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Securities with 6 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 in principal amount of Transfer Restricted Securities; provided that the Company and the Guarantors shall in no event be required to pay liquidated damages for more than one Registration Default at any given time. 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 as a result of such clause (i), (ii), (iii) or (iv), as applicable, shall cease. All accrued liquidated damages shall be paid to the Holders entitled thereto, in the manner provided for the payment of interest in the Indenture, on each Interest Payment Date, as more fully set forth in the Indenture and the Notes. Notwithstanding the fact that any securities for which liquidated damages are due cease to be Transfer Restricted Securities, all obligations of the Company and the Guarantors to pay liquidated damages with respect to such securities shall survive until such time as such obligations with respect to such securities shall have been satisfied in full. SECTION 6. REGISTRATION PROCEDURES (a) Exchange Offer Registration Statement. In connection with the Exchange ------------------------------------- Offer, the Company and the Guarantors shall (x) comply with all applicable provisions of Section 6(c) below, (y) use their respective best efforts to effect such exchange and to permit the resale of Series B Notes by Broker- Dealers that tendered in the Exchange Offer Series A Notes that such Broker- Dealer acquired for its own account as a result of its market making activities or other trading activities (other than Series A Notes acquired directly from the Company or any of its Affiliates) being sold in accordance with the intended method or methods of distribution thereof, and (z) comply with all of the following provisions: (i) If, following the date hereof there has been published a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Company raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law, the Company and the Guarantors hereby agree to seek a no-action letter or other favorable decision from the Commission allowing the Company and the Guarantors to Consummate an Exchange Offer for such Transfer Restricted Securities. The Company and the Guarantors hereby agree to pursue the issuance of such a decision to the Commission staff level. In connection with the foregoing, the Company and the Guarantors hereby agree to take all such other actions as are requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) 7 participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff. (ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder that is a Broker Dealer) shall furnish, upon the request of the Company, prior to the Consummation of the Exchange Offer, a written representation to the Company and the Guarantors (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) it is not an Affiliate of the Company, (B) it is not engaged in, and does not intend to engage in, and has no arrangement or understanding with any person to participate in, a distribution of the Series B Notes to be issued in the Exchange Offer and (C) it is acquiring the Series B Notes in its ordinary course of business. As a condition to its participation in the Exchange Offer, each Holder (including, without limitation, any Holder that is a Broker Dealer) using the Exchange Offer to participate in a distribution of the Series B Notes shall acknowledge and agree that, if the resales are of Series B Notes obtained by such Holder in exchange for Series A Notes acquired directly from the Company or an Affiliate thereof, it (1) could not, under Commission policy as in effect on the date of this Agreement, rely on the position of the Commission enunciated in Exxon Capital Holdings Corporation ---------------------------------- (available May 13, 1988), and Morgan Stanley and Co., Inc. (available June ---------------------------- 5, 1991), as interpreted in the Commission's letter to Shearman & Sterling ------------------- dated July 2, 1993, and similar no-action letters (including, if applicable, any no-action letter obtained pursuant to clause (i) above), and (2) must comply with the registration and prospectus delivery requirements of the Act in connection with a secondary resale transaction and that such a secondary resale transaction must be covered by an effective registration statement containing the selling security holder information required by Item 507 or 508, as applicable, of Regulation S-K. (iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Company and the Guarantors shall provide a supplemental letter to the Commission (A) stating that the Company and the Guarantors are registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May ---------------------------------- 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991), as ---------------------------- interpreted in the Commission's letter to Shearman & Sterling dated July 2, ------------------- 1993, and, if applicable, any no-action letter obtained pursuant to clause (i) above, (B) including a representation that neither the Company nor any Guarantor has entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Exchange Offer and that, to the best of the Company's and each Guarantor's information and belief, each Holder participating in the Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Exchange Offer and (C) any other undertaking or representation required 8 by the Commission as set forth in any no-action letter obtained pursuant to clause (i) above, if applicable. (iv) Shelf Registration Statement. In connection with the Shelf ---------------------------- Registration Statement, the Company and the Guarantors shall comply with all the provisions of Section 6(c) below and use their respective best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Company pursuant to Section 4(b) hereof), and pursuant thereto the Company and the Guarantors will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof, and (v) issue, upon the request of any Holder or purchaser of Series A Notes covered by any Shelf Registration Statement contemplated by this Agreement, Series B Notes having an aggregate principal amount equal to the aggregate principal amount of Series A Notes sold pursuant to the Shelf Registration Statement and surrendered to the Company for cancellation; the Company shall register Series B Notes on the Shelf Registration Statement for this purpose and issue the Series B Notes to the purchaser(s) of securities subject to the Shelf Registration Statement in the names as such purchaser(s) shall designate. (b) General Provisions. In connection with any Registration Statement and ------------------ any related Prospectus required by this Agreement, the Company and the Guarantors shall: (i) use their respective best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Company and the Guarantors shall file promptly an appropriate amendment to such Registration Statement curing such defect, and, if Commission review is required, use their respective best efforts to cause such amendment to be declared effective and such Registration Statement and the related Prospectus to become usable for their intended purpose(s) as soon as practicable thereafter. Notwithstanding anything to the contrary set forth in this Agreement, the Company's and the Guarantors' obligations to use their respective best efforts to keep the Shelf Registration Statement continuously effective, supplemented and amended shall be suspended in the event continued effectiveness of the Shelf Registration Statement would, in the opinion of counsel to the Company, require the Company to disclose a material financing, acquisition or other corporate transaction, and the Board of Directors shall have determined in good faith that such disclosure is not in the best interests of the Company, 9 but in no event will any such suspension, individually or in the aggregate, exceed ninety (90) days since the Closing Date. (ii) prepare and file with the Commission such amendments and post- effective amendments to the applicable Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, or such shorter period as will terminate upon the earlier of the following (A) when all Transfer Restricted Securities covered by such Registration Statement have been sold and (B) when, in the written opinion of counsel to the Company, all outstanding Transfer Restricted Securities held by Persons that are not Affiliates of the Company may be resold without registration under the Act pursuant to Rule 144(k) under the Act or any successor provision thereto; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (iii) advise each Holder and each Initial Purchaser who is required to deliver a prospectus in connection with sales or market making activities (an "AFFILIATED MARKET MAKER") promptly and, if requested by such Holders, ----------------------- confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Company and the Guarantors shall use their respective best efforts to obtain the withdrawal or lifting of such order at the earliest possible time; 10 (iv) subject to Section 6(c)(i), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; (v) furnish to each Holder and each Affiliated Market Maker in connection with such exchange or sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Holders in connection with such sale, if any, for a period of at least five Business Days, and the Company will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Holders shall reasonably object within five Business Days after the receipt thereof. A Holder shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading or fails to comply with the applicable requirements of the Act; (vi) promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to each Holder and each Affiliated Market Maker in connection with such exchange or sale, if any, make the Company's and the Guarantors' representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as such Holders may reasonably request; (vii) make available, at reasonable times, for inspection by each Holder and each Affiliated Market Maker and any attorney or accountant retained by such Holders, all financial and other records, pertinent corporate documents of the Company and the Guarantors and cause the Company's and the Guarantors' officers, directors and employees to supply all information reasonably requested by any such Holder, attorney or accountant in connection with such Registration Statement or any post- effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; (viii) if requested by any Holders in connection with such exchange or sale or any Affiliated Market Maker, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Holders may reasonably request to have included therein, including, without 11 limitation, information relating to the "Plan of Distribution" of the Transfer Restricted Securities, information with respect to the principal amount of Transfer Restricted Securities being sold to such underwriter(s), the purchase price being paid therefor and any other terms of the offering of the Transfer Restricted Securities to be sold in such offering and the use of the Registration Statement or Prospectus for market making activities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Company is notified of the matters to be included in such Prospectus supplement or post-effective amendment; (ix) furnish to each Holder in connection with such exchange or sale and each Affiliated Market Maker, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference); (x) deliver to each Holder and each Affiliated Market Maker without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Company and the Guarantors hereby consent to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Holder in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto and all lawful market making activities of such Affiliated Market Maker, as the case may be; (xi) upon the request of any Holder, enter into such agreements (including underwriting agreements) and make such representations and warranties and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any applicable Registration Statement contemplated by this Agreement as may be reasonably requested by any Holder in connection with any sale or resale pursuant to any applicable Registration Statement. In such connection, and also in connection with market making activities by any Affiliated Market Maker, the Company and the Guarantors shall: (A) upon request of any Holder, furnish (or in the case of paragraphs (2) and (3), use its best efforts to cause to be furnished) to each Holder, upon Consummation of the Exchange Offer or upon the effectiveness of the Shelf Registration Statement, as the case may be: (1) a certificate, dated such date, signed on behalf of the Company and each Guarantor by (x) the President or any Vice President and (y) a principal financial or accounting officer of the Company and such Guarantor, confirming, as of the date thereof, the matters set forth in Sections 6(x), 9(a) and 9(b) of the Purchase Agreement and such other similar matters as such Holders may reasonably request; 12 (2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Company and the Guarantors covering matters similar to those set forth in paragraph (e) of Section 9 of the Purchase Agreement and such other matter as such Holder may reasonably request, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Company and the Guarantors, representatives of the independent public accountants for the Company and the Guarantors and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to the extent such counsel deems appropriate upon the statements of officers and other representatives of the Company and the Guarantors) and without independent check or verification), no facts came to such counsel's attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, notes and schedules and other financial and statistical data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and (3) a customary comfort letter, dated the date of Consummation of the Exchange Offer, or as of the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Company's independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings, and affirming the matters set forth in the comfort letters delivered pursuant to Section 9(g) of the Purchase Agreement; and (B) set forth in full or incorporate by reference in the underwriting agreement, if any, in connection with the sale or resale pursuant to any Shelf Registration Statement 13 the indemnification provisions and procedures of Section 8 hereof with respect to all parties to be indemnified pursuant to said Section; and (C) deliver such other documents and certificates as may be reasonably requested by such Holders to evidence compliance with the matters covered in clause (A) above and with any customary conditions contained in the any agreement entered into by the Company and the Guarantors pursuant to this clause (xi); The above shall be done at each closing under such underwriting or similar agreement, as and to the extent required thereunder, and if at any time the representations and warranties of the Company and the Guarantors contemplated in (A)(1) above cease to be true and correct, the Company and the Guarantors shall so advise the underwriter(s), if any, the selling Holders and each Restricted Broker Dealer promptly and if requested by such Person, shall confirm such advice in writing; (xii) prior to any public offering of Transfer Restricted Securities, cooperate with the Holders and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as such Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that neither the Company nor any Guarantor shall be required to register or qualify as a foreign corporation where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject; (xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and to register such Transfer Restricted Securities in such denominations and such names as the Holders may request at least two Business Days prior to such sale of Transfer Restricted Securities; (xiv) use their respective best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in clause (xii) above; (xv) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee under the Indenture with printed certificates for the Transfer 14 Restricted Securities which are in a form eligible for deposit with the Depository Trust Company; (xvi) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter") that is required to be retained in accordance with the rules and regulations of the NASD, and use their respective best efforts to cause such Registration Statement to become effective and approved by such governmental agencies or authorities as may be necessary to consummate the disposition of such Transfer Restricted Securities; (xvii) otherwise use their respective best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, within 90 days after the end of the Company's fiscal year and within 45 days after the end of each such fiscal quarter, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); (xviii) cause the Indenture to be qualified under the TIA not later than the effective date of the first Registration Statement required by this Agreement and, in connection therewith, cooperate with the Trustee and the Holders to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of the TIA; and execute and use its best efforts to cause the Trustee to execute, all documents that may be required to effect such changes and all other forms and documents required to be filed with the Commission to enable such Indenture to be so qualified in a timely manner; and (xix) provide promptly to each Holder and Affiliated Market Maker, upon request, a copy of each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. (c) Restrictions on Holders. Each Holder agrees by acquisition of a ----------------------- Transfer Restricted Security and each Affiliated Market Maker agrees that, upon receipt of the notice referred to in Section 6(c)(i) or 6(c)(iii)(C) or any notice from the Company of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a "SUSPENSION NOTICE"), such Holder ----------------- will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Person has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Person is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the "RECOMMENCEMENT DATE"). Each Person receiving ------------------- a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Person's possession or (ii) deliver to the Company (at the Company's expense) all copies, other 15 than permanent file copies, then in such Person's possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and including the date of delivery of the Suspension Notice to the date of delivery of notice of the Recommencement Date. SECTION 7. REGISTRATION EXPENSES (a) All expenses incident to the Company's and the Guarantors' performance of or compliance with this Agreement will be borne by the Company, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses (including filings made by any Purchaser or Holder with the NASD (and, if applicable, the fees and expenses of any "qualified independent underwriter") and its counsel that may be required by the rules and regulations of the NASD); (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the Series B Notes to be issued in the Exchange Offer and printing of Prospectuses whether for exchanges, sales, market making or otherwise), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Company, the Guarantors and the Holders of Transfer Restricted Securities; (v) all application and filing fees in connection with listing the Series B Notes on an automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Company and the Guarantors (including the expenses of any special audit and comfort letters required by or incident to such performance). The Company will, in any event, bear its and the Guarantors' internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by the Company or the Guarantors. (b) In connection with any Registration Statement required by this Agreement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement), the Company and the Guarantors will reimburse the Initial Purchasers and the Holders of Transfer Restricted Securities who are tendering Series A Notes into in the Exchange Offer and/or selling or reselling Series A Notes or Series B Notes pursuant to the "Plan of Distribution" contained in the Exchange Offer Registration Statement or the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Latham and Watkins, unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared. SECTION 8. INDEMNIFICATION (a) The Company and the Guarantors agree, jointly and severally, to indemnify and hold harmless each Holder, its directors, officers and each Person, if any, who controls such 16 Holder (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, liabilities and judgments, (including without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by the Company to any Holder or any prospective purchaser of Series B Notes or registered Series A Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Company by any of the Holders expressly for use therein; provided, however, that the foregoing indemnification with respect to any untrue statement or alleged untrue statement or omission or alleged omission in any preliminary prospectus or Prospectus, shall not inure to the benefit of any Indemnified Holder from whom the person asserting such loss, claim, damage, liability or expense purchased any of the Notes if a copy of the Prospectus (or any amendment or supplement thereto) was not sent or given on behalf of such Indemnified Holder to such person at or prior to the written confirmation of the sale of such Notes to such person and if the Prospectus (or the Prospectus, as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. (b) Each Holder of Transfer Restricted agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantors, and their respective directors and officers, and each person, if any, who controls (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) the Company, or the Guarantors to the same extent as the foregoing indemnity from the Company and the Guarantors set forth in section (a) above, but only with reference to information relating to such Holder furnished in writing to the Company by such Holder expressly for use in any Registration Statement. (c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person - ------------------ against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing ------------------ and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Holder). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the 17 indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Holders, in the case of the parties indemnified pursuant to Section 8(a), and by the Company and Guarantors, in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of any settlement of any action (i) effected with its written consent or (ii) effected without its written consent if the settlement is entered into more than 20 Business Days after the indemnifying party shall have received a request from the indemnified party for reimbursement for the fees and expenses of counsel (in any case where such fees and expenses are at the expense of the indemnifying party) and, prior to the date of such settlement, the indemnifying party shall have failed to comply with such reimbursement request. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party. (d) To the extent that the indemnification provided for in this Section 8 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each 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 or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantors, on the one hand, and the Holders, on the other hand, from their sale of Transfer Restricted Securities or (ii) if the allocation provided by clause 8(d)(i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause 8(d)(i) above but also the relative fault of the Company and the Guarantors, on the one hand, and of the Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Initial Purchasers, on the other hand, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Series A Notes (before deducting expenses) received by the Company, and the 18 total discounts and commissions received by the Initial Purchasers bear to the total price to investors of Series A Notes, in each case as set forth in the table on the cover page of the Offering Memorandum. The relative fault of the Company and the Guarantors, on the one hand, and of the Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or such Guarantor, on the one hand, or by the Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Guarantors and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the 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 the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities 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 matter, including any action that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Holder, its directors, its officers or any Person, if any, who controls such Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds the sum of (i) the amount paid by such Holder for such Transfer Restricted Securities plus (ii) 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(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders' obligations to contribute pursuant to this Section 8(c) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each Holder hereunder and not joint. (e) The Company and Guarantors agree that the indemnity and contribution provisions of this Section 8 shall apply to Affiliated Market Makers to the same extent, on the same conditions, as it applies to Holders. SECTION 9. RULE 144A AND RULE 144 The Company and each Guarantor agrees with each Holder, for so long as any Transfer Restricted Securities remain outstanding and during any period in which the Company or such Guarantor (i) is not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii) is subject to Section 13 or 15 (d) of the Exchange Act, to make all filings 19 required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144. SECTION 10. MISCELLANEOUS (a) Remedies. The Company and the Guarantors acknowledge and agree that -------- any failure by the Company and/or the Guarantors to comply with their respective obligations under Sections 3 and 4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders or Affiliated Market Makers for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder or Affiliated Market Makers may obtain such relief as may be required to specifically enforce the Company's and the Guarantor's obligations under Sections 3 and 4 hereof. The Company and the Guarantors further agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. Neither the Company nor any Guarantor -------------------------- will, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Exhibit B hereto, neither the Company nor any Guarantor has previously entered into any agreement granting any registration rights with respect to its securities to any Person. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantors' securities under any agreement in effect on the date hereof. (c) Amendments and Waivers. The provisions of this Agreement may not be ---------------------- amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless (i) in the case of Section 5 hereof and this Section 10(c)(i), the Company has obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Company has obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Company or its Affiliates). Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose Transfer Restricted Securities are being tendered pursuant to the Exchange Offer, and that does not affect directly or indirectly the rights of other Holders whose Transfer Restricted Securities are not being tendered pursuant to such Exchange Offer, may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer. (d) Third Party Beneficiary. The Holders shall be third party ----------------------- beneficiaries to the agreements made hereunder between the Company and the Guarantors, on the one hand, and the Initial Purchasers, on the other hand, and Holders of at least 25% in principal amount of the then outstanding Notes shall have the right to enforce such agreements directly to the extent they may deem such enforcement necessary or advisable to protect their rights or the rights of Holders hereunder. 20 (e) Notices. All notices and other communications provided for or ------- permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery: (i) if to a Holder, at the address set forth on the records of the Registrar under the Indenture, with a copy to the Registrar under the Indenture; and (ii) if to the Company or the Guarantors: Diamond Brands Operating Corp. 1800 Cloquet Avenue Cloquet, Minnesota 55720-2141 Telecopier No.: (218) 879-6369 Attention: Chief Executive Officer With a copy to: Seaver Kent & Company, LLC 3000 Sand Hill Road Building A, Suite 230 Menlo Park, California 92045 Telecopier No.: (650) 233-9130 Attention: Alexander M. Seaver and Bradley R. Kent And with a copy to: Cleary, Gottlieb, Steen & Hamilton One Liberty Plaza New York, New York Telecopier No.: (212) 225-3999 Attention: Paul J. Shim, Esq. All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture. Upon the date of filing of the Exchange Offer or a Shelf Registration Statement, as the case may be, notice shall be delivered to Donaldson, Lufkin & Jenrette Securities Corporation, on behalf of the Initial Purchasers (in the form attached hereto as Exhibit A) and shall be addressed to: Attention: Louise Guarneri (Compliance Department), 277 Park Avenue, New York, New York 10067. 21 (f) Successors and Assigns. This Agreement shall inure to the benefit of ---------------------- and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Person shall be entitled to receive the benefits hereof. (g) Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of -------- reference only and shall not limit or otherwise affect the meaning hereof. (i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ------------- ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF. (j) Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) 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. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. 22 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. DIAMOND BRANDS OPERATING CORP. By:_________________________________________ Name: Thomas W. Knuesel Title: Vice President of Finance and Chief Financial Officer EMPIRE CANDLE, INC. By:_________________________________________ Name: Thomas W. Knuesel Title: Vice President of Finance and Chief Financial Officer FORSTER, INC. By:_________________________________________ Name: Thomas W. Knuesel Title: Vice President of Finance and Chief Financial Officer DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION By:_________________________________ Name: Title: MORGAN STANLEY & CO. INCORPORATED By:_________________________________ Name: Title: 23 EXHIBIT A NOTICE OF FILING OF A/B EXCHANGE OFFER REGISTRATION STATEMENT To: Donaldson, Lufkin & Jenrette Securities Corporation 277 Park Avenue New York, New York 10067 Attention: Louise Guarneri (Compliance Department) Fax: (212) 892-7272 From: Diamond Brands Operating Corp. 10 1/8% Senior Subordinated Notes due 2008 Date: _______ __, 199_ For your information only (NO ACTION REQUIRED): Today, ______, 199_, we filed [an A/B Exchange Registration Statement/a Shelf Registration Statement] with the Securities and Exchange Commission. We currently expect this registration statement to be declared effective within __ business days of the date hereof. 24 EXHIBIT B LIST OF CONTRACTS AND AGREEMENTS -------------------------------- Stockholders Agreement, dated as of April 21, 1998 among Diamond Brands Incorporated, Seaver Kent - TPG Partners, L.P., Seaver Kent I Parallel, L.P. and the other parties named therein. 25 EX-5.1 20 OPINION OF CLEARY Exhibit 5.1 Conformed Copy [Letterhead of Cleary, Gottlieb, Steen & Hamilton] June 30, 1998 Diamond Brands Operating Corp. 1800 Cloquet Avenue Cloquet, Minnesota 55720 Ladies and Gentlemen: We have acted as your counsel in connection with a Registration Statement on Form S-4 (the "Registration Statement") filed today with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), in respect of the Series B 10-1/8% Senior Subordinated Notes due 2008 (the "New Notes") of Diamond Brands Operating Corp., a Delaware corporation (the "Issuer"), to be offered in exchange for all outstanding Series A 10-1/8% Senior Subordinated Notes due 2008 (the "Old Notes") of the Issuer. The New Notes will be issued pursuant to an indenture (the "Indenture"), dated as of April 21, 1998, among Forster Inc., a Maine corporation, Empire Candle, Inc., a Kansas corporation, as guarantors (collectively, the "Guarantors"), the Issuer and State Street Bank and Trust Company, as trustee (the "Trustee"). The obligations of the Issuer pursuant to the New Notes are unconditionally guaranteed on a senior subordinated basis by the Guarantors (the "Guarantees"). We have participated in the preparation of the Registration Statement and have reviewed originals or copies, certified or otherwise identified to our satisfaction, of such documents and records of the Issuer and each of the Guarantors and such other instruments and other certificates of public officials, officers and representatives of the Issuer and each of the Guarantors and such other persons, and we have made such investigations of law, as we have deemed appropriate as a basis for the opinions expressed below. Diamond Brands Operating Corp., p. 2 In rendering the opinions expressed below, we have assumed the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. In addition, we have assumed and have not verified (i) the accuracy as to factual matters of each document we have reviewed and (ii) that the Old Notes and the New Notes conform or will conform to the forms thereof that we have reviewed and have been or will be duly authenticated in accordance with their terms and the terms of the Indenture. Based on the foregoing, and subject to the further assumptions and qualifications set forth below, it is our opinion that: 1. When the New Notes have been duly executed and authenticated in accordance with their terms and the terms of the Indenture, and duly issued and delivered by the Issuer in exchange for an equal principal amount of Old Notes pursuant to the terms of the Registration Rights Agreement (in the form filed as an exhibit to the Registration Statement), the New Notes will constitute valid, binding and enforceable obligations of the Issuer, entitled to the benefits of the Indenture. 2. The Indenture (including, without limitation, the Guarantees included therein) has been duly executed and delivered by the Issuer and the Guarantors under the law of the State of New York, and upon the exchange of New Notes for an equal principal amount of Old Notes pursuant to the Registration Rights Agreement (in the form filed as an exhibit to the Registration Statement), the Guarantees will constitute the valid, binding and enforceable obligation of the respective Guarantors. Insofar as the foregoing opinions relate to the validity, binding effect or enforceability of any agreement or obligation of the Issuer or any of the Guarantors, (a) we have assumed that the Issuer, each of the Guarantors and each other party to such agreement or obligation has satisfied those legal requirements that are applicable to it to the extent necessary to make such agreement or obligation enforceable against it (except that no such assumption is made as to the Issuer or any of the Guarantors regarding matters of the law of the State of New York); (b) such opinions are subject to applicable bankruptcy, insolvency, fraudulent conveyance and similar laws affecting creditors' rights generally and to general principles of equity; and (c) we express no opinion as to sections of the Indenture which pertain to severability of illegal provisions or waiver of protection under stay, extension or usury laws. The foregoing opinion is limited to the law of the State of New York. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the heading "Legal Matters" in the Prospectus included in the Registration Statement. In giving such consent, we do not thereby admit that we are "experts" within the meaning of the Act or the rules and regulations of the Securities and Exchange Commission issued thereunder with respect to any part of the Registration Statement, including this exhibit. Diamond Brands Operating Corp., p. 3 Very truly yours, CLEARY, GOTTLIEB, STEEN & HAMILTON By /s/ Paul J. Shim -------------------------------- Paul J. Shim, a Partner EX-10.1 21 EMPLOYMENT AGREEMENT DATED APRIL 21, 1998 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement ("Agreement") is hereby entered into on and as of April 21, 1998, by and between Diamond Brands Operating Corp., a Minnesota corporation ("Employer"), and Naresh K. Nakra ("Employee"). RECITALS -------- WHEREAS, Employee has, over the period of his business career, compiled extensive experience in acting as the senior executive of various domestic and international enterprises which are engaged in the domestic and international food industry; and WHEREAS, Employer is desirous of engaging the services of Employee as Chief Executive Officer of Employer, on the terms and conditions set forth in this Agreement; and WHEREAS, Employee is desirous of accepting such employment, title and attendant responsibilities on the terms and conditions set forth in this Agreement; NOW, THEREFORE, for and in consideration of the foregoing recitals and the mutual covenants and obligations set forth in this Agreement, Employer and Employee hereby agree as follows: AGREEMENT --------- 1. Employment. Employer hereby employs Employee and Employee hereby ---------- accepts employment with Employer, upon the terms and conditions set forth in this agreement. 2. Term of Employment. Employer's employment of Employee, pursuant to ------------------ the terms of this Agreement, shall commence on and as of the date hereof (hereinafter, the "Commencement Date") and shall continue until terminated as provided herein. 3. Duties. ------ (a) Duties. Employee shall serve as Chief Executive Officer of ------ Employer and Employee shall assume all responsibilities ordinarily attendant to that position. In addition, Employee shall be duly elected as a full voting member to the Board of Directors of Employer. (b) Time Devoted to Employment. During the term of this Agreement, -------------------------- Employee shall work for Employer on a full-time basis and shall not accept other employment of any kind without Employer's prior written consent. Employee may, however, with the consent of Employer's Board of Directors, participate in such trade associations as Employee reasonably deems is advantageous to Employer's businesses. 4. Compensation. ------------ (a) Salary. As compensation for services rendered under this ------ Agreement, Employer shall pay Employee an initial base salary of Three Hundred Seventy-Five Thousand Dollars ($375,000.00) per year, payable in equal bi-weekly or semi-monthly installments in accordance with Employer's payroll practice for executives as in effect from time to time. (b) Annual Bonus. In addition to the salary referenced in Section ------------ 4(a) of this Agreement, Employee shall be entitled to an annual bonus of 30-40% of base salary at the base case level (see attached base case model dated February 10, 1997) and 50-60% of base salary at the upside case level (see attached upside case model dated February 23, 1998). (c) Benefits. During the term of this Agreement, Employer shall -------- provide Employee with the following benefits: (i) health insurance coverage for Employee and his immediate family equivalent to that currently provided other executive personnel of Employer; (ii) term life insurance coverage on Employee's life in an amount equal to four (4) times Employee's annual base salary; Employee shall have the sole right to designate (and to amend his designation of) the beneficiary of such coverage; (iii) the use of an automobile owned or leased by Employer equivalent in value to the automobiles provided to other executives of Employer, for which automobile Employer shall pay and/or reimburse Employee for, as the case may be, all costs and expenses incurred in connection with the use of such automobile (including without limitation, lease, fuel, maintenance and insurance costs); (iv) paid vacation which shall accrue at the rate of one and two-thirds (1-2/3) days per month together with allowances of sick leave similar to those afforded to other executive personnel of Employer; (v) reimbursement for travel and entertainment expenses incurred in connection with Employer's business, as authorized by Employer's Board of Directors from time to time, provided, however, that Employee shall provide Employer with such receipts and/or other documentation of expenses or other 2 amounts reimbursable or payable to Employee pursuant to this Section 4 as Employer may reasonably require from time to time; and (vi) such other employee benefits as are made available from time to time to or for the benefit of employees of the Company. (d) Common Stock Investment. Employee agrees that, at the closing of ----------------------- the DBI Recapitalization, Employee shall purchase $1,000,000 of the same securities of Employer as other new equity investors in the DBI Recapitalization for a purchase price equal to the value of such securities reflected in the DBI Recapitalization (the "Recapitalization Value"). At Employee's option, up to $666,666 of such purchase price may be provided through a full recourse five-year promissory note (accelerated upon a change in control of Employer) in principal amount equal to such amount and bearing interest at 6.75% per annum. The balance of the purchase price will be paid by Employee in cash. (e) Stock Options. Employee shall be entitled to receive the ------------- following rights to acquire stock in the Employer: (i) As of the Commencement Date, Employer grants to Employee, a ten-year option to purchase six percent (6%) of the common stock of Employer as of the consummation of the DBI Recapitalization at an exercise price equal to the Recapitalization Value of such stock. Such percentage shall be calculated on a fully-diluted basis, after taking into consideration any and all conversion rights, stock options, warrants, and other right to purchase stock which are outstanding as of the consummation of the DBI Recapitalization. On the 180th day after the Commencement Date, one quarter of such option shall vest and become exercisable. On the first day of each of the subsequent thirty (30) consecutive calendar months, one-thirtieth (1/30) of the balance of such option shall vest and become exercisable; (ii) As of the Commencement Date, Employer grants to Employee, a ten-year option to purchase two percent (2%) of the common stock of Employer as of the consummation of the DBI Recapitalization at a price per share equal to two (2) times the Recapitalization Value of such stock. Such percentage shall be calculated on a fully-diluted basis, after taking into consideration any and all conversion rights, stock options, warrants, and other rights to purchase stock which are outstanding as of consummation of the DBI Recapitalization. On the 180th day after the Commencement Date, one-quarter of such option shall vest and become exercisable. On the first day of each of the subsequent thirty (30) consecutive calendar months, one-thirtieth (1/30) of the balance of such options shall vest and become exercisable; and 3 (iii) in the event that Employer sells stock to provide funds for future acquisitions, Employer shall grant to Employee (A) a ten-year option to purchase four percent (4%) of such newly-issued stock at the same price paid by other investors and (B) a ten-year option to purchase one percent (1%) of such newly issued stock for a price equal to two (2) times the price paid by other investors. Employee's right to exercise these options shall fully vest in forty-eight (48) equal portions over the forty-eight month period following grant of the options. (f) Registration Rights. In connection with each registration of any ------------------- of common stock of Employer in preparation for a public offering of any portion thereof (other than on Form S-4 or S-8), Employer shall extend to Employee the same rights to register Employee's stock as are afforded to other stockholders of Employer. (g) Sale of Employer Stock. In the event that the shareholders of ---------------------- Employer determine to sell the majority of the outstanding stock of Employer, Employee agrees to use its best efforts to allow Employee the right to include his stock in such sale at a value equivalent to that received by other stockholders. (h) Accelerated Vesting. Any unvested portion of the options granted ------------------- to Employee pursuant to Section (f) which, at the time of the death or disability of Employee or at the time of any change in control, (as defined below), are not yet fully vested shall automatically become fully vested in Employee 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 Employer which results in the majority of the outstanding stock of Employer no longer being held by Seaver, Kent & Company, LLC or affiliates thereof; and (i) Transaction Fees. In addition to all other sums payable by ---------------- Employer to Employee under this Agreement, upon the Commencement Date, Employer shall pay to Employee a cash bonus equal to ten percent (10%) of the aggregate fees paid to equity investors with respect to the DBI Recapitalization. Additionally, Employer agrees to pay to Employee a bonus equal to ten percent (10%) of the aggregate fees paid to equity investors with respect any subsequent acquisition by Employer. 5. Termination of Employment. ------------------------- (a) Automatic Termination of Employment. This Agreement, and the ----------------------------------- employment of Employee hereunder, shall automatically terminate, without notice, upon the occurrence of any one or more of the following events: (i) the death of Employee; or 4 (ii) the loss by Employee of legal capacity. (b) Termination for Cause. Employer may, at its option upon notice to --------------------- Employee immediately terminate this Agreement, and the employment of Employee hereunder, upon the occurrence of any one or more of the following events: (i) the willful breach of a material duty by Employee in the course of his employment; (ii) the material neglect by Employee of his employment duties, provided that Employer has delivered written notice to Employee of the perceived neglect and a reasonable opportunity to cure such perceived neglect, if subject to cure; or (iii) the reasonable determination by a competent physician satisfactory to Employer that Employee will be unable, for a period of six (6) consecutive months or more, to perform his duties under this Agreement. Prior to termination pursuant to Section 5(b)(i) or (ii) Employee shall be given the opportunity to present his view to Employer's Board of Directors or its designee. (c) Termination without Cause. Either Employer or Employee may, at ------------------------- any time and without cause, and without thereby incurring any liability to the other (except as provided in Section 5(e) hereof), terminate this Agreement and the employment of Employee hereunder, upon thirty (30) days prior written notice to the other. (d) Termination by Employee for Good Reason. Employee may, at his --------------------------------------- option upon notice to Employer, immediately terminate this Agreement and the employment of Employee hereunder, upon the occurrence of any material breach by Employer under this Agreement which continues without cure for a period of 30 days after Employee shall have given Employer written notice specifying such breach. (e) Effect of Termination On Compensation. In the event of any ------------------------------------- termination of this Agreement, Employee shall not be entitled to any compensation in addition to that fully earned by him under this Agreement prior to the date of said termination, except that should Employer terminate this Agreement and the employment of Employee hereunder pursuant to Section 5(c) hereof, or should Employee terminate this Agreement and the employment of Employee hereunder, pursuant to Section 5(d) hereof, Employer shall pay Employee a severance amount equal to one year's base salary. The severance amount shall be paid to Employee during the one year period following such termination in payments and on dates on which Employee would have received salary payments had his employment not terminated. Additionally, should Employer terminate this Agreement 5 and the employment of Employee hereunder pursuant to Section 5(c) hereof, or should Employee terminate this Agreement and the employment of Employee hereunder, pursuant to Section 5(d) hereof, Employee shall have the right, exercisable by written notice to Employer delivered within thirty (30) days of the effective date of any such termination, to exercise any fully vested but previously unexercised stock options granted under this Agreement. 6. Non-Disclosure. Except as may be required by law, Employee will not -------------- at any time after the date of this Agreement, divulge, furnish or make accessible, or otherwise transfer to anyone (other than in the regular course of business of the Employer) who is not an employee, agent or representative of Employer, without the consent of the Board of Directors of Employer, any knowledge or information which has not been publicly disclosed by Employer or otherwise is not generally known to other persons engaged in businesses similar to that conducted by Employer ("Confidential Information"), with respect to any (i) confidential or secret processes, inventions, discoveries, improvements, formulae, recipes, plans, material, devices or ideas or other know-how, whether patentable or not, (ii) confidential or secret development or research work or (iii) other confidential or secret aspects of Employer's business (including, without limitation, information relating to manufacturing, processing, distribution and operating methods or processes, marketing or business plans, sales techniques, service records, customer lists, supplier lists and pricing arrangements with customers or suppliers). 7. Covenant Not To Compete. In consideration for Employer's employment ----------------------- of Employee, during the term of this Agreement and any period during which Employee receives any severance payments hereunder, Employee shall not, without the consent of the Board of Directors of Employer: (i) engage, directly or indirectly, whether as an owner, employee, officer, director, agent, consultant or otherwise, in the geographic area of the United States, in a business the same as or competitive with any business conducted by Employer during the term of this Agreement, provided, however, that the ownership of 2% or less of the stock of a company whose shares are listed on a national securities exchange or are quoted on the National Association of Securities Dealers Automated Quotation System shall not be deemed ownership or having an interest which is prohibited hereunder; (ii) solicit or accept any business from any customer of Employer for products or services competitive with those of Employer, or request, induce or advise customers of Employer to withdraw, curtail or cancel their business with Employer; or 6 (iii) solicit for employment or employ any then current employee of Employer, or request, induce or advise any then current employee to leave the employ of Employer. The necessity of protection against the competition of Employee and the nature and scope of such protection have been carefully considered by the parties hereto. The parties hereto agree and acknowledge that the duration, scope and geographic areas applicable to the covenant not to compete described in this Agreement are fair, reasonable and necessary, that adequate compensation has been herewith received by Employee for such obligations, and that these obligations do not prevent Employee from earning a livelihood. If, however, for any reason any court determines that the restrictions in this Agreement are not reasonable, that consideration is inadequate or that Employee has been prevented from earning a livelihood, such restrictions shall be interpreted, modified or rewritten to include as much of the duration, scope and geographic area identified in this Agreement as will render such restrictions valid and enforceable. 8. Remedies. Employee acknowledges that irreparable damage would result -------- to Employer if the provisions of Section 6 or 7 were breached by Employee, and Employer would not have an adequate remedy at law for such a breach or threatened breach. In the event of such a breach or threatened breach, Employee agrees that Employer, may, notwithstanding anything to the contrary herein contained, and in addition to the other remedies which may be available to it, seek to enjoin Employee, together with all those persons associated with him, from the breach or threatened breach of such covenants. 9. Assignment. Due to the personal nature of the services to be provided ---------- by Employee hereunder, neither Employee nor Employer may assign or delegate any of his or its rights or obligations under this Agreement without the prior written consent of Employer. (a) Notices. Any notices or other communications required or ------- permitted to be given hereunder shall be given sufficiently only if in writing and served personally or sent by registered or certified mail, Postage prepaid and return receipt requested, addressed as follows: If to Employer: Diamond Brands Incorporated 1800 Cloquet Avenue Cloquet, Minnesota 55720 If to Employee: Naresh K. Nakra 63 Paseo de Castana 7 Rancho Palos Verdes, CA 90275 Either party may change his/its address for purposes of this Agreement by giving written notice of such change to the other party in accordance with this section. Notices delivered personally shall be deemed effective upon actual receipt by the addressee. Notices which are mailed shall be deemed given and received as of three (3) business days after they are placed in the mail, first- class postage prepaid or by prepaid overnight courier. (b) Choice of Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Minnesota; (c) Entire Agreement; Modification and Waiver. This Agreement ----------------------------------------- supersedes any and all prior agreements between the parties, whether oral or written, with respect to the employment of Employee by Employer and it contains all covenants and agreements between the parties relating to such employment in any manner whatsoever. Each party to this Agreement acknowledges that no representations inducements promises, or agreements relating to the subject matter of this Agreement, oral or written, have been made by either party. or by anyone acting on behalf of either party, which are not embodied herein, and that no other agreement, statement, or promise not contained in this Agreement with respect to the subject matter hereof shall be valid or binding. Any amendment or modification of this Agreement shall be effective only if it is in writing signed by the party to be charged. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver; (d) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument; and (e) Headings and Captions. Headings and captions are included for --------------------- purposes of convenience only and are not a part of this Agreement, however the recitals are an integral part of this Agreement. * * * 8 IN WITNESS WHEREOF the parties hereto have executed this Agreement effective as of the day and year first above written. EMPLOYER: EMPLOYEE: DIAMOND BRANDS INCORPORATED By: /s/ Thomas W. Knuesel /s/ Naresh K. Nakra ------------------------------ ------------------------------ Naresh K. Nakra 9 EX-10.2 22 EMPLOYMENT AGREEMENT DATED NOVEMBER 1, 1997 EMPLOYMENT (CHANGE OF CONTROL) AGREEMENT AGREEMENT made as of this 1st day of November, 1997 by and between Diamond Brands Incorporated, a Minnesota corporation ("DBI") and Thomas Knuesel (the "Employee"). WHEREAS, DBI considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of DBI and its shareholders; and WHEREAS, the Employee has made and is expected to make, due to Employee's intimate knowledge of the business and affairs of DBI, its policies, methods and personnel, a significant contribution to the profitability, growth and financial strength of DBI; and WHEREAS, it is in the best interests of DBI and its shareholders to reinforce and encourage the continued attention and dedication of management personnel, including Employee, to their assigned duties without distraction and to ensure the continued availability to DBI of the Employee in the event of a Change in Control. THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof ----------------- and shall continue in effect until May 1, 1998. Nothwithstanding the preceding ------------------------------------ sentence, if a Change in Control occurs, this Agreement shall continue in effect for a period of 36 months from the date of the occurrence of a Change in Control. Nothwithstanding 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, prior to Change in Control, to terminate the employment of Employee for any reason or for no reason. 2. Change in Control. No benefits shall be payable hereunder unless ----------------- there shall have been a Change in Control, as set forth below. (a) For purposes of this Agreement, a "Change in Control" of DBI shall mean (i) a corporate reorganization of DBI which results in the shareholders of DBI immediately prior to such reorganization owning less than 50% of the combined voting power of the capital stock of the surviving company immediately following such reorganization, (ii) the sale of 50% or more of the combined voting power of the capital stock of DBI, or (iii) the sale of all or substantially all of the assets of DBI. (b) Provided Employee is employed by DBI on the date of the occurrence of a Change in Control (the "Effective Date"), Employee shall be entitled to receive a bonus ("Retention Bonus") equal to .25% of the Aggregate Consideration in excess of $160,000,000 received by DBI or its Shareholders in the Change in Control, provided Employee shall not in any event receive less than $250,000. Aggregate Consideration shall be equal to the aggregate amount of consideration received by DBI or its Shareholders plus any debt assumed, remaining outstanding or retired. DBI or its successor shall pay such Retention Bonus to the Employee, one-half on the Effective Date and, as long as the Employee has maintained continuous employment with DBI or its successor from the Effective Date to the first anniversary of the Effective Date (the "Final Payment Date"), the other one-half on the Final Payment Date. If Employee is employed by DBI on the Effective Date but Employee's employment with DBI or its successor is terminated prior to the Final Payment Date by Employee for Good Reason or by DBI or its successor without Cause, then the unpaid Retention Bonus shall become payable within five business days after the date of such termination. No unpaid Retention Bonus shall be payable hereunder to Employee if Employee's employment is terminated for Cause prior to the Final Payment Date. Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of DBI occurring after the date hereof, Employee will remain in the employ of DBI for a period of 12 months from the Effective Date. 3. Termination Following Change in Control. In addition to the benefits --------------------------------------- provided in Section 2(b) above, if a Change in Control occurs during the term of this Agreement and if Employee's employment is thereafter terminated, Employee shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because the Employee's Death or Retirement, (B) by DBI for Cause or Disability, or (C) by Employee other than for Good Reason. (a) Disability; Retirement. If, as a result of incapacity due to ---------------------- physical or mental illness, the Employee is absent from the full-time performance of Employee's duties with DBI for six consecutive months, and within 30 days after written Notice of Termination is given, the Employee does not return to the full-time performance of the Employee's duties, DBI may terminate Employee's employment for "Disability". Any question as to the existence of Employee's Disability upon which Employee and DBI cannot agree shall be determined by a qualified independent physician selected by Employee (or, if the Employee is unable to make such selection, it shall be made by any adult member of the Employee's immediate family), and approved by DBI in writing. The determination of such physician made in writing to DBI and to Employee shall be final and conclusive for all purposes of this Agreement. Termination by Employee of Employee's employment based on "Retirement" shall mean retirement at or after the date the Employee has attained age 65. (b) Cause. Termination by DBI of Employee's employment for "Cause" ----- shall mean: (i) the willful and continued failure of Employee to perform his essential duties; (ii) Employee's material breach of the provisions of Section 5 or 6; (iii) the willful engaging by Employee in illegal conduct which may adversely affect DBI, or (iv) gross misconduct materially injurious to DBI, which, in the case of clause (i), (ii) and (iv), the Employee has not cured, in the sole opinion of the Board, determined in good faith, within 14 days of receipt of the Notice of Termination. (c) Good Reason. Employee is entitled to terminate his employment ----------- for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Employee's express written consent, any of the following: -2- (i) the assignment to Employee of any duties materially inconsistent with Employee's status or position with DBI, or a substantial reduction in the nature or status of Employee's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by DBI in Employee's annual base salary in effect immediately prior to a Change in Control; (iii) the relocation of DBI's principal executive offices to a location more than fifty miles from Cloquet, Minnesota or DBI requiring Employee to be based anywhere other than DBI's principal executive offices except for required travel on DBI's business to an extent substantially consistent with Employee's prior business travel obligations; (iv) the failure by DBI to continue to provide Employee with benefits at least as favorable to those enjoyed by Employee under any of DBI's life insurance, medical, health and accident, disability, or savings plan in which Employee was participating immediately prior to the Effective Date; (v) the failure of DBI to obtain an agreement from any successor to assume and agree to perform this Agreement, as required by Section 7; or (vi) any purported termination of Employee's employment which is not made pursuant to a Notice of Termination satisfying the requirements of Section 3(d) below; for purposes of this Agreement, no such purported termination shall be effective. (d) Notice of Termination. Any purported termination of Employee's --------------------- employment by DBI or by Employee shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. 4. Compensation Upon Termination or During Disability. Following a Change in -------------------------------------------------- Control of DBI, as defined in subsection 2(a), upon termination of Employee's employment or during a period of Disability, Employee shall be entitled to the following benefits: (a) During any period that Employee fails to perform full-time duties with DBI as a result of a Disability, DBI shall pay Employee the base salary of the Employee at the rate in effect at the commencement of any such period, until such time as the Employee is eligible for and begins receiving long term disability benefits in accordance with DBI's insurance programs then in effect. -3- (b) If Employee's employment shall be terminated by DBI for Cause or by Employee other than for Good Reason or Retirement, DBI shall pay to Employee his full base salary through the date of termination at the rate in effect at the time Notice of Termination is given and DBI shall have no further obligation to Employee under this Agreement. (c) If Employee's employment shall be terminated by DBI for Disability or by Employee for Retirement, or by reason of Death, DBI shall immediately commence payment to the Employee (or Employee's designated beneficiaries or estate, if no beneficiary is designated) any and all benefits to which the Employee is entitled under DBI's retirement and insurance programs then in effect. (d) If Employee's employment by DBI shall be terminated (A) by DBI other than for Cause or Disability or (B) by Employee for Good Reason, then Employee shall be entitled to the benefits provided below: (i) DBI shall pay Employee the Employee's full base salary through the date of and at the rate in effect at the time the Notice of Termination is given; (ii) 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 annual 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 made within 30 days after the date of termination; and (iii) For a period of 12 months after the date of termination, Employee shall be entitled to continue participation in the health insurance benefit plans of DBI substantially similar to those which Employee is receiving or entitled to receive immediately prior to the Notice of Termination. DBI and Employee shall share the cost associated with such coverage as if Employee was still actively employed by DBI. (e) Employee shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the date of termination, or otherwise. (f) In addition to all other amounts payable to Employee under this Section 4, Employee shall be entitled to receive all benefits payable to the Employee under any other plan or agreement relating to retirement benefits or otherwise generally applicable to executive employees. -4- 5. Nondisclosure. In consideration of this Agreement, including the ------------- Retention Bonus in Section 2, Employee represents and agrees that, except by prior written permission from DBI, Employee shall never during his employment or at any time thereafter, directly or indirectly use or disclose (except in the execution of his duties as an employee consistent with this Agreement and then only in strict accordance with his obligations of service and loyalty hereunder) any of DBI's Confidential Information, as hereinafter defined. "Confidential Information" shall include, but not be limited to, trade secrets, formulations, recipes, compounds, customer lists, pricing agreements, product specifications, credit information, production or processing know-how, or other information not generally known to the public acquired or learned by Employee during the course, and on account, of his employment with DBI, whether or not developed by Employee. Confidential Information also includes any confidential information relating to any business of any company affiliated with DBI which is disclosed to Employee either purposely or inadvertently in the course of his employment with DBI. Employee agrees that such information shall be considered secret and disclosed to him in confidence. Employee further recognizes that such information is the sole property of DBI and shall be used for the exclusive benefit of DBI. While some of the Confidential Information may be generally public knowledge, its compilation in a form useful to DBI and their competitors makes it unique and valuable. Upon termination of employment, Employee agrees to deliver to DBI all Confidential Information. Without limiting the foregoing, Employee agrees not to disclose to any person, other than DBI's advisors, either the fact that discussions or negotiations are taking place concerning a possible Change in Control or any of the terms, conditions or other facts with respect to any possible Change in Control, including the status thereof. This provision shall survive any Change in Control and any termination of this Agreement. 6. Noncompetition. -------------- (a) In consideration of this Agreement, including the addition of the Retention Bonus described in Section 2, Employee represents and agrees that during his employment and for a period of one (1) year from and after the termination of his employment for any reason, Employee will not, directly or indirectly, alone or in any capacity with another legal entity, (i) engage in any activity that directly competes in any material respect with DBI, including specifically, but without limitation, the manufacture, sale, marketing or distribution of clothespins, toothpicks, matches, firestarters, wooden crafts, plastic cutlery, candles or aromatherapy products; (ii) contact or in any way interfere or attempt to interfere with the relationship of DBI with any current or potential customers or any current vendors of DBI; (iii) employ or attempt to employ, on behalf of Employee or any other person or entity, any employee of DBI (other than a former employee thereof after such employee has terminated employment with DBI). (b) Employee acknowledges that DBI markets products throughout the United States and Canada (the "Territory") and that DBI would be harmed if Employee conducted any of the activities described in this Section 6 anywhere in the Territory. Therefore, Employee agrees that the covenants contained in this Section 6 shall apply to all portions of, and throughout, the Territory. (c) Employee acknowledges that the duration and scope of the covenants contained in this Section 6, as well as the Territory to which such covenants apply are reasonable -5- under the circumstances. Employee further acknowledges that he understands that his willingness to enter into the covenants contained in Sections 5 and 6 were inducements for DBI to enter into this Agreement, and that the consideration he is receiving hereunder is fair and reasonable. (d) Employee acknowledges that if he fails to fulfill his obligations under Sections 5 and 6, the damages to DBI would be very difficult to determine. Therefore, in addition to any other rights or remedies available to DBI at law, in equity, or by statute, Employee hereby consents to the specific enforcement of the provisions of Sections 5 and 6 by DBI through an injunction or restraining order issued by the appropriate court. (e) If for any reason any court of competent jurisdiction determines any provision of Sections 5 and 6 to be unenforceable as written, the parties expressly grant the court the authority to modify those provisions and to enforce those provisions to the maximum extent possible. In furtherance and not in limitation of the foregoing, should the duration or geographic extent of, or business activities covered by, any provision of Sections 5 and 6 be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which are validly and enforceably covered. Employee acknowledges the uncertainty of the law in this respect and expressly stipulates that this Section 6 be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its expressed terms) possible under applicable laws. (f) Employee may make a written request for a modification of his obligations under this Section 6 if, in his opinion, his intended activities will not adversely affect DBI's legitimate interests. DBI will consider such written request, determine in its sole discretion whether the request is adverse to its legitimate business interests, and notify Employee in writing of any approved modification to Employee's obligations under this Section 6 or its rejection of Employee's request. 7. Successors; Binding Agreement. ----------------------------- (a) DBI will require any successor (whether direct or indirect, by purchase, merger (other than a merger in which DBI is the surviving company), consolidation or otherwise) to all or substantially all of the business and/or assets of DBI to expressly assume and agree to perform this Agreement in the same manner and to the same extent that DBI would be required to perform it if no such succession had taken place. Failure of DBI to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from DBI in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. (b) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if the Employee -6- had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's designated beneficiaries, or, if there is no such designated beneficiary, to the Employee's estate. 8. Notice. For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Employee or in the case of DBI, to its principal office to the attention of the President, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party thereto at anytime of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. 10. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Arbitration and Award of Attorneys' Fees. ---------------------------------------- (a) Any dispute arising between the parties relating to this Agreement shall be resolved by binding arbitration held in the City of Minneapolis pursuant to the Rules of the American Arbitration Association, except as hereinafter expressly modified. If the disputing and responding parties are unable to agree upon a resolution within forty-five business days after the responding party's receipt of written notice from the disputing party setting forth the nature of the dispute, within the following ten business days the disputing and responding parties shall select a mutually acceptable single arbitrator to resolve the dispute or, if the parties fail or are unable to do so, each shall within the following ten business days select a single arbitrator, and the two so selected shall select a third arbitrator within the following ten business days. Such single arbitrator or, as the case may be, panel of three arbitrators acting by majority decision, shall resolve the dispute within sixty days after the date such arbitrator, or the last of them so selected, is selected, or as soon thereafter as practicable. If either party -7- refuses or fails to select an arbitrator within the time therefore, the other party may do so on such refusing or failing party's behalf. The arbitrators shall have no power to award any punitive or exemplary damages but may construe or interpret but shall not ignore or vary the terms of this Agreement and shall be bound by controlling law. The parties acknowledge the Employee's failure to comply with any confidentiality, non- solicit, and non-compete provisions of any agreement to which the Employee is bound will cause immediate and irreparable injury to DBI and that therefore the arbitrators, or a court of competent jurisdiction if an arbitration panel cannot be immediately convened, will be empowered to provide injunctive relief, including temporary or preliminary relief, to restrain any such failure to comply. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere. (b) In the event DBI fails to pay Employee any amounts owing to Employee under this Agreement or to provide Employee any benefits to which Employee is ultimately determined, by settlement, mediation, arbitration, or by any court or other decision making body with jurisdiction, to be entitled to under this Agreement, DBI shall pay the legal expenses (including reasonable attorneys' fees, court costs and other out-of-pocket expenses), incurred by Employee to enforce his rights under this Agreement and collect or obtain such amounts or benefits. DIAMOND BRANDS INCORPORATED By /s/ Edward A. Michael ------------------------ EMPLOYEE /s/ Thomas Knuesel --------------------------- Thomas Knuesel -8- EX-10.3 23 AMENDMENT TO THE EMPLOYMENT AGREEMENT 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/ Edward A. Michael ------------------------------ Its: President ----------------------------- /s/ Thomas Knuesel --------------------------------- Thomas Knuesel 2 EX-10.4 24 EMPLOYMENT AGREEMENT DATED NOVEMBER 1, 1997 EMPLOYMENT (CHANGE OF CONTROL) AGREEMENT AGREEMENT made as of this 1st day of November, 1997 by and between Diamond Brands Incorporated, a Minnesota corporation ("DBI") and John Young (the "Employee"). WHEREAS, DBI considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of DBI and its shareholders; and WHEREAS, the Employee has made and is expected to make, due to Employee's intimate knowledge of the business and affairs of DBI, its policies, methods and personnel, a significant contribution to the profitability, growth and financial strength of DBI; and WHEREAS, it is in the best interest of DBI and its shareholders to reinforce and encourage the continued attention and dedication of management personnel, including Employee, to their assigned duties without distraction and to ensure the continued availability to DBI of the Employee in the event of a Change in Control. THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof ----------------- and shall continue in effect until May 1, 1998. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall continue in effect for a period of 36 months from the date of the occurrence of a Change in Control. 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, prior to a Change in Control, to terminate the employment of Employee for any reason or for no reason. 2. Change in Control. No benefits shall be payable hereunder unless there ----------------- shall have been a Change in Control, as set forth below. (a) For purposes of this Agreement, a "Change in Control" of DBI shall mean (i) a corporate reorganization of DBI which results in the shareholders of DBI immediately prior to such reorganization owning less than 50% of the combined voting power of the capital stock of the surviving company immediately following such reorganization, (ii) the sale of 50% or more of the combined voting power of the capital stock of DBI, or (iii) the sale of all or substantially all of the assets of DBI. (b) Provided Employee is employed by DBI on the date of the occurrence of a Change in Control (the "Effective Date"), Employee shall be entitled to receive a bonus ("Retention Bonus") equal to .25% of the Aggregate Consideration in excess of $160,000,000 received by DBI or its Shareholders in the Change in Control, provided Employee shall not in any event receive less than $250,000. Aggregate Consideration shall be equal to the aggregate amount of consideration received by DBI or its Shareholders plus any debt assumed, remaining outstanding or retired. DBI or its successor shall pay such Retention Bonus to the Employee, one-half on the Effective Date and, as long as the Employee has maintained continuous employment with DBI or its successor from the Effective Date to the first anniversary of the Effective Date (the "Final Payment Date"), the other one-half on the Final Payment Date. If Employee is employed by DBI on the Effective Date but Employee's employment with DBI or its successor is terminated prior to the Final Payment Date by Employee for Good Reason or by DBI or its successor without Cause, then the unpaid Retention Bonus shall become payable within five business days after the date of such termination. No unpaid Retention Bonus shall be payable hereunder to Employee if Employee's employment is terminated for Cause prior to the Final Payment Date. Employee agrees that, subject to the terms and conditions of this Agreement, in the event of a Change in Control of DBI occurring after the date hereof, Employee will remain in the employ of DBI for a period of 12 months from the Effective Date. 3. Termination Following Change in Control. In addition to the benefits --------------------------------------- provided in Section 2(b) above, if a Change in Control occurs during the term of this Agreement and if Employee's employment is thereafter terminated, Employee shall be entitled to the benefits provided in subsection 4(d) unless such termination is (A) because of Employee's Death or Retirement, (B) by DBI for Cause or Disability, or (C) by Employee other than for Good Reason. (a) Disability, Retirement. If, as a result of incapacity due to ---------------------- physical or mental illness, the Employee is absent from the full-time performance of Employee's duties with DBI for six consecutive months, and within 30 days after written Notice of Termination is given, the Employee does not return to the full-time performance of the Employee's duties, DBI may terminate Employee's employment for "Disability". Any question as to the existence of Employee's Disability upon which Employee and DBI cannot agree shall be determined by a qualified independent physician selected by Employee (or, if the Employee is unable to make such selection, it shall be made by any adult member of the Employee's immediate family), and approved by DBI in writing. The determination of such physician made in writing to DBI and to Employee shall be final and conclusive for all purposes of this Agreement. Termination by Employee of Employee's employment based on "Retirement" shall mean retirement at or after the date the Employee has attained age 65. (b) Cause. Termination by DBI of Employee's employment for "Cause" ----- shall mean: (i) the willful and continued failure of Employee to perform his essential duties; (ii) Employee's material breach of the provisions of Sections 5 or 6; (iii) the willful engaging by Employee in illegal conduct which may adversely affect DBI, or (iv) gross misconduct materially injurious to DBI, which, in the case of clause (i), (ii) and (iv), the Employee has not cured, in the sole opinion of the Board, determined in good faith, within 14 days of receipt of the Notice of Termination. (c) Good Reason. Employee is entitled to terminate his employment ----------- for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without Employee's express written consent, any of the following: -2- (i) the assignment to Employee of any duties materially inconsistent with Employee's status or position with DBI, or a substantial reduction in the nature or status of Employee's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by DBI in Employee's annual base salary in effect immediately prior to a Change in Control; (iii) the relocation of DBI's principal executive offices to a location more than fifty miles from Minneapolis, Minnesota or DBI requiring Employee to be based anywhere other than DBI's principal executive offices except for required travel on DBI's business to an extent substantially consistent with Employee's prior business travel obligations; (iv) the failure by DBI to continue to provide Employee with benefits at least as favorable to those enjoyed by Employee under any of DBI's life insurance, medical, health and accident, disability, or savings plans in which Employee was participating immediately prior to the Effective Date; (v) the failure of DBI to obtain an agreement from any successor to assume and agree to perform this Agreement, as required by Section 7; or (vi) any purported termination of Employee's employment which is not made pursuant to a Notice of Termination satisfying the requirements of Section 3(d) below, for purposes of this Agreement, no such termination shall be effective. (d) Notice of Termination. Any purported termination of Employee's --------------------- employment by DBI or by Employee shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. 4. Compensation Upon Termination or During Disability. Following a Change -------------------------------------------------- in Control of DBI, as defined in subsection 2(a), upon termination of Employee's employment or during a period of Disability, Employee shall be entitled to the following benefits: (a) During any period that Employee fails to perform full-time duties with DBI as a result of a Disability, DBI shall pay Employee the base salary of the Employee at the rate in effect at the commencement of any such period, until such time as the Employee is eligible for and begins receiving long term disability benefits in accordance with DBI's insurance programs then in effect. -3- (b) If Employee's employment shall be terminated by DBI for Cause or by Employee other than for Good Reason or Retirement, DBI shall pay to Employee his full base salary through the date of termination at the rate in effect at the time Notice of Termination is given and DBI shall have no further obligation to Employee under this Agreement. (c) If Employee's employment shall be terminated by DBI for Disability or by Employee for Retirement, or by reason of Death, DBI shall immediately commence payment to the Employee (or Employee's designated beneficiaries or estate, if no beneficiary is designated) any and all benefits to which the Employee is entitled under DBI's retirement and insurance programs then in effect. (d) If Employee's employment by DBI shall be terminated (A) by DBI other than for Cause or Disability or (B) by Employee for Good Reason, then Employee shall be entitled to the benefits provided below: (i) DBI shall pay Employee the Employee's full base salary through the date of and at the rate in effect at the time the Notice of Termination is given; (ii) 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 annual 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 made within 30 days after the date of termination; and (iii) For a period of 12 months after the date of termination, Employee shall be entitled to continue participation in the health insurance benefit plans of DBI substantially similar to those which Employee is receiving or entitled to receive immediately prior to the Notice of Termination. DBI and Employee shall share the cost associated with such coverage as if Employee was still actively employed by DBI. (e) Employee shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the date of termination, or otherwise. (f) In addition to all other amounts payable to Employee under this Section 4, Employee shall be entitled to receive all benefits payable to the Employee under any other plan or agreement relating to retirement benefits or otherwise generally applicable to executive employees. -4- 5. Nondisclosure. In consideration of this Agreement, including the ------------- Retention Bonus in Section 2, Employee represents and agrees that, except by prior written permission from DBI, Employee shall never during his employment or at any time thereafter, directly or indirectly use or disclose (except in the execution of his duties as an employee consistent with this Agreement and then only in strict accordance with his obligations of service and loyalty hereunder) any of DBI's Confidential Information, as hereinafter defined. "Confidential Information" shall include, but not be limited to, trade secrets, formulations, recipes, compounds, customer lists, pricing agreements, product specifications, credit information, production or processing know-how, or other information not generally known to the public acquired or learned by Employee during the course, and on account, of his employment with DBI, whether or not developed by Employee. Confidential Information also includes any confidential information relating to any business of any company affiliated with DBI which is disclosed to Employee either purposely or inadvertently in the course of his employment with DBI. Employee agrees that such information shall be considered secret and disclosed to him in confidence. Employee further recognizes that such information in the sole property of DBI and shall be used for the exclusive benefit of DBI. While some of the Confidential Information may be generally public knowledge, its compilation in a form useful to DBI and their competitors makes it unique and valuable. Upon termination of employment, Employee agrees to deliver to DBI all Confidential Information. Without limiting the foregoing, Employee agrees not to disclose to any person, other than DBI's advisors, either the fact that discussions or negotiations are taking place concerning a possible Change in Control or any of the terms, conditions or other facts with respect to any possible Change in Control, including the status thereof. This provision shall survive any Change in Control and any termination of this Agreement. 6. Noncompetition. -------------- (a) In consideration of this Agreement, including the addition of the Retention Bonus described in Section 2, Employee represents and agrees that during his employment and for a period of one (1) year from and after the termination of his employment for any reason, Employee will not, directly or indirectly, alone or in any capacity with another legal entity, (i) engage in any activity that directly competes in any material respect with DBI, including specifically, but without limitation, the manufacture, sale, marketing or distribution of clothespins, toothpicks, matches, firestarters, wooden crafts, plastic cutlery, candles or aromatherapy products; (ii) contact or in any way interfere or attempt to interfere with the relationship of DBI with any current or potential customers or any current vendors of DBI; (iii) employ or attempt to employ, on behalf of Employee or any other person or entity, any employee of DBI (other than a former employee thereof after such employee has terminated employment with DBI). (b) Employee acknowledges that DBI markets products throughout the United States and Canada (the "Territory") and that DBI would be harmed if Employee conducted any of the activities described in this Section 6 anywhere in the Territory. Therefore, Employee agrees that the covenants contained in this Section 6 shall apply to all portions of, and throughout, the Territory. (c) Employee acknowledges that the duration and scope of the covenants contained in this Section 6, as well as the Territory to which such covenants apply are reasonable -5- under the circumstances. Employee further acknowledges that he understands that his willingness to enter into the covenants contained in Section 5 and 6 were inducements for DBI to enter into this Agreement, and that the consideration he is receiving hereunder is fair and reasonable. (d) Employee acknowledges that if he fails to fulfill his obligations under Sections 5 and 6, the damages to DBI would be very difficult to determine. Therefore, in addition to any other rights or remedies available to DBI at law, in equity, or by statute, Employee hereby consents to the specific enforcement of the provisions of Sections 5 and 6 by DBI through an injunction or restraining order issued by the appropriate court. (e) If for any reason any court of competent jurisdiction determines any provision of Sections 5 and 6 to be unenforceable as written, the parties expressly grant the court the authority to modify those provisions and to enforce those provisions to the maximum extent possible. In furtherance and not in limitation of the foregoing, should the duration or geographic extent of, or business activities covered by, any provision of Sections 5 and 6 be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which are validly and enforceably covered. Employee acknowledges the uncertainty of the law in this respect and expressly stipulates that this Section 6 be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its expressed terms) possible under applicable laws. (f) Employee may make a written request for a modification of his obligations under this Section 6 if, in his opinion, his intended activities will not adversely affect DBI's legitimate interests. DBI will consider such written request, determine in its sole discretion whether the request is adverse to its legitimate business interests, and notify Employee in writing of any approved modification to Employee's obligations under this Section 6 or its rejection of Employee's request. 7. Successors; Binding Agreement. ----------------------------- (a) DBI will require any successor (whether direct or indirect, by purchase, merger (other than a merger in which DBI is the surviving company), consolidation or otherwise) to all or substantially all of the business and/or assets of DBI to expressly assume and agree to perform this Agreement in the same manner and to the same extent that DBI would be required to perform it if no such succession had taken place. Failure of DBI to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from DBI in the same amount and on the same terms as he would be entitled hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. (b) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if the Employee -6- had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's designated beneficiaries, or, if there is no such designated beneficiary, to the Employee's estate. 8. Notice. For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Employee or in the case of DBI, to its principal office to the attention of the President, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provisions of this Agreement may be modified, ------------- waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party thereto at anytime of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. 10. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Arbitration and Award of Attorneys' Fees. ---------------------------------------- (a) Any dispute arising between the parties relating to this Agreement shall be resolved by binding arbitration held in the City of Minneapolis pursuant to the Rules of the American Arbitration Association, except as hereinafter expressly modified. If the disputing and responding parties are unable to agree upon a resolution within forty-five business days after the responding party's receipt of written notice from the disputing party setting forth the nature of the dispute, within the following ten business days the disputing and responding parties shall select a mutually acceptable single arbitrator to resolve the dispute or, if the parties fail or are unable to do so, each shall within the following ten business days select a single arbitrator, and the two so selected shall select a third arbitrator within the following ten business days. Such single arbitrator or, as the case may be, panel of three arbitrators acting by majority decision, shall resolve the dispute within sixty days after the date such arbitrator, or the last of them so selected, is selected, or as soon thereafter as practicable. If either party -7- refuses or fails to select an arbitrator within the time therefore, the other party may do so on such refusing or failing party's behalf. The arbitrators shall have no power to award any punitive or exemplary damages but may construe or interpret but shall not ignore or vary the terms of this Agreement and shall be bound by controlling law. The parties acknowledge the Employee's failure to comply with any confidentiality, non- solicit, and non-compete provisions of any agreement to which the Employee is bound will cause immediate and irreparable injury to DBI and that therefore the arbitrators, or a court of competent jurisdiction if an arbitration panel cannot be immediately convened, will be empowered to provide injunctive relief, including temporary or preliminary relief, to restrain any such failure to comply. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere. (b) In the event DBI fails to pay Employee any amounts owing to Employee under this Agreement or to provide Employee any benefits to which Employee is ultimately determined, by settlement, mediation, arbitration, or by any court or other decision making body with jurisdiction, to be entitled to under this Agreement, DBI shall pay the legal expenses (including reasonable attorneys' fees, court costs and other out-of-pocket expenses), incurred by Employee to enforce his rights under this Agreement and collect or obtain such amounts or benefits. DIAMOND BRANDS INCORPORATED By /s/ Edward A. Michael ----------------------------- EMPLOYEE -------------------------------- John Young -8- EX-10.5 25 AMENDMENT TO THE EMPLOYMENT AGREEMENT 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/ Edward A. Michael ----------------------------- Its: President ---------------------------- /s/ John Young -------------------------------- John Young 2 EX-10.6 26 EMPLOYMENT AGREEMENT DATED NOVEMBER 1, 1997 EMPLOYMENT (CHANGE OF CONTROL) AGREEMENT AGREEMENT made as of this 1st day of November, 1997 by and between Diamond Brands Incorporated, a Minnesota corporation ("DBI") and Christopher Matthews (the "Employee"). WHEREAS, DBI considers the establishment and maintenance of a sound and vital management to be essential to protecting and enhancing the best interests of DBI and its shareholders; and WHEREAS, the Employee has made and is expected to make, due to Employee's intimate knowledge of the business and affairs of DBI, its policies, methods and personnel, a significant contribution to the profitability, growth and financial strength of DBI; and WHEREAS, it is in the best interest of DBI and its shareholders to reinforce and encourage the continued attention and dedication of management personnel, including Employee, to their assigned duties without distraction and to ensure the continued availability to DBI of the Employee in the event of a Change in Control. THEREFORE, in consideration of the foregoing and other respective covenants and agreements of the parties herein contained, the parties hereto agree as follows: 1. Term of Agreement. This Agreement shall commence on the date hereof ----------------- and shall continue in effect until May 1, 1998. Notwithstanding the preceding sentence, if a Change in Control occurs, this Agreement shall continue in effect for a period of 36 months from the date of the occurrence of a Change in Control. 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, prior to a Change in Control, to terminate the employment of Employee for any reason or for no reason. 2. Change in Control. No benefits shall be payable hereunder unless there ----------------- shall have been a Change in Control, as set forth below. (a) For purposes of this Agreement, a "Change in Control" of DBI shall mean (i) a corporate reorganization of DBI which results in the shareholders of DBI immediately prior to such reorganization owning less than 50% of the combined voting power of the capital stock of the surviving company immediately following such reorganization, (ii) the sale of 50% or more of the combined voting power of the capital stock of DBI, or (iii) the sale of all or substantially all of the assets of DBI. (b) Provided Employee is employed by DBI on the date of the occurrence of a Change in Control (the "Effective Date"), Employee shall be entitled to receive a bonus ("Retention Bonus") equal to .25% of the Aggregate Consideration in excess of $160,000,000 received by DBI or its Shareholders in the Change in Control, provided Employee shall not in any event receive less than $250,000. Aggregate Consideration shall be equal to the aggregate amount of consideration received by DBI or its Shareholders plus (i) the assignment to Employee of any duties materially inconsistent with Employee's status or position with DBI, or a substantial reduction in the nature or status of Employee's responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction by DBI in Employee's annual base salary in effect immediately prior to a Change in Control; (iii) the relocation of DBI's principal executive offices to a location more than fifty miles from Cloquet, Minnesota or DBI requiring Employee to be based anywhere other than DBI's principal executive offices except for required travel on DBI's business to an extent substantially consistent with Employee's prior business travel obligations; (iv) the failure by DBI to continue to provide Employee with benefits at least as favorable to those enjoyed by Employee under any of DBI's life insurance, medical, health and accident, disability, or savings plan in which Employee was participating immediately prior to the Effective Date; (v) the failure of DBI to obtain an agreement from any successor to assume and agree to perform this Agreement, as required by Section 7; or (vi) any purported termination of Employee's employment which is not made pursuant to a Notice of Termination satisfying the requirements of Section 3(d) below; for purpose of this Agreement, no such purported termination shall be effective. (d) Notice of Termination. Any purported termination of Employee's --------------------- employment by DBI or by Employee shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth the facts and circumstances claimed to provide a basis for termination of Employee's employment. 4. Compensation Upon Termination or During Disability. Following a Change -------------------------------------------------- in Control of DBI, as defined in subsection 2(a), upon termination of Employee's employment or during a period of Disability, Employee shall be entitled to the following benefits: (a) During any period that Employee fails to perform full-time duties with DBI as a result of a Disability, DBI shall pay Employee the base salary of the rate in effect at the commencement of any such period, until such time as the Employee is eligible for and begins receiving long term disability benefits in accordance with DBI's insurance programs then in effect. -3- (b) If Employee's employment shall be terminated by DBI for Cause or by Employee other than for Good Reason or Retirement, DBI shall pay to Employee his full base salary through the date of termination at the rate in effect at the time Notice of Termination is given and DBI shall have no further obligation to Employee under this Agreement. (c) If Employee's employment shall be terminated by DBI for Disability or by Employee for Retirement, or by reason of Death, DBI shall immediately commence payment to the Employee (or Employee's designated beneficiaries or estate, if no beneficiary is designated) any and all benefits to which the Employee is entitled under DBI's retirement and insurance programs then in effect. (d) If Employee's employment by DBI shall be terminated (A) by DBI other than for Cause or Disability or (B) by Employee for Good Reason, then Employee shall be entitled to the benefits provided below: (i) DBI shall pay Employee the Employee's full base salary through the date of and at the rate in effect at the time the Notice of Termination is given; (ii) 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 annual 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 made within 30 days after the date of termination; and (iii) For a period of 12 months after the date of termination, Employee shall be entitled to continue participation in the health insurance benefit plans of DBI substantially similar to those which Employee is receiving or entitled to receive immediately prior to the Notice of Termination. DBI and Employee shall share the cost associated with such coverage as if Employee was still actively employed by DBI. (e) Employee shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by Employee as the result of employment by another employer or by retirement benefits after the date of termination, or otherwise. (f) In addition to all other amounts payable to Employee under this Section 4, Employee shall be entitled to receive all benefits payable to the Employee under any other plan or agreement relating to retirement benefits or otherwise generally applicable to executive employees. -4- 5. Nondisclosure. In consideration of this Agreement, including the ------------- Retention Bonus in Section 2, Employee represents and agrees that, except by prior written permission from DBI, Employee shall never during his employment or at any time thereafter, directly or indirectly use or disclose (except in the execution of his duties as an employee consistent with this Agreement and then only in strict accordance with his obligations of service and loyalty hereunder) any of DBI's Confidential Information, as hereinafter defined. "Confidential Information" shall include, but not be limited to, trade secrets, formulations, recipes, compounds, customer lists, pricing agreements, product specifications, credit information, production or processing know-how, or other information not generally known to the public acquired or learned by Employee during the course, and on account, of his employment with DBI, whether or not developed by Employee. Confidential Information also includes any confidential information relating to any business of any company affiliated with DBI which is disclosed to Employee either purposely or inadvertently in the course of his employment with DBI. Employee agrees that such information shall be considered secret and disclosed to him in confidence. Employee further recognizes that such information in the sole property of DBI and shall be used for the exclusive benefit of DBI. While some of the Confidential Information may be generally public knowledge, its compilation in a form useful to DBI and their competitors makes it unique and valuable. Upon termination of employment, Employee agrees to deliver to DBI all Confidential Information. Without limiting the foregoing, Employee agrees not to disclose to any person, other than DBI's advisors, either the fact that discussions or negotiations are taking place concerning a possible Change in Control or any of the terms, conditions or other facts with respect to any possible Change in Control, including the status thereof. This provision shall survive any Change in Control and any termination of this Agreement. 6. Noncompetition. -------------- (a) In consideration of this Agreement, including the addition of the Retention Bonus described in Section 2, Employee represents and agrees that during his employment and for a period of one (1) year from and after the termination of his employment for any reason, Employee will not, directly or indirectly, alone or in any capacity with another legal entity, (i) engage in any activity that directly competes in any material respect with DBI, including specifically, but without limitation, the manufacture, sale, marketing or distribution of clothespins, toothpicks, matches, firestarters, wooden crafts, plastic cutlery, candles or aromatherapy products; (ii) contact or in any way interfere or attempt to interfere with the relationship of DBI with any current or potential customers or any current vendors of DBI; (iii) employ or attempt to employ, on behalf of Employee or any other person or entity, any employee of DBI (other than a former employee thereof after such employee has terminated employment with DBI). (b) Employee acknowledges that DBI market products throughout the United States and Canada (the "Territory") and that DBI would be harmed if Employee conducted any of the activities described in this Section 6 anywhere in the Territory. Therefore, Employee agrees that the covenants contained in this Section 6 shall apply to all portions of, and throughout, the Territory. (c) Employee acknowledges that the duration and scope of the covenants contained in this Section 6, as well as the Territory to which such covenants apply are reasonable -5- under the circumstances. Employee further acknowledges that he understands that his willingness to enter the covenants contained in Sections 5 and 6 were inducements for DBI to enter into this Agreement, and that the consideration he is receiving hereunder is fair and reasonable. (d) Employee acknowledges that if he fails to fulfill his obligations under Sections 5 and 6, the damages to DBI would be very difficult to determine. Therefore, in addition to any other rights or remedies available to DBI at law, in equity, or by statute, Employee hereby consents to the specific enforcement of the provisions of Sections 5 and 6 by DBI through an injunction or restraining order issued by the appropriate court. (e) If for any reason any court of competent jurisdiction determines any provision of Sections 5 and 6 to be unenforceable as written, the parties expressly grant the court the authority to modify those provisions and to enforce those provisions to the maximum extent possible. In furtherance and not in limitation of the foregoing, should the duration or geographic extent of, or business activities covered by, any provisions of Sections 5 and 6 be in excess of that which is valid and enforceable under applicable law, then such provision shall be construed to cover only that duration, extent or activities which are validly and enforceably covered. Employee acknowledges the uncertainty of the law in this respect and expressly stipulates that this Section 6 be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its expressed terms) possible under applicable laws. (f) Employee may make a written request for a modification of his obligations under this Section 6 if, in his opinion, his intended activities will not adversely affect DBI's legitimate interests, DBI will consider such written request, determine in its sole discretion whether the request is adverse to its legitimate business interests, and notify Employee in writing of any approved modification to Employee's obligations under this Section 6 or its rejection of Employee's request. 7. Successors; Binding Agreement. ----------------------------- (a) DBI will require any successor (whether direct or indirect, by purchase, merger (other than a merger in which DBI is the surviving company), consolidation or otherwise) to all or substantially all of the business and/or assets of DBI to expressly assume and agree to perform this Agreement in the same manner and to the same extent that DBI would be require to perform it if no such succession had taken place. Failure of DBI to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Employee to compensation from DBI in the same amount and on the same terms as he would be entitle hereunder if he terminated his employment for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. (b) This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, successors, heirs, and designated beneficiaries. If Employee should die while any amount would still be payable to Employee hereunder if the Employee -6- had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Employee's designated beneficiaries, or, if there is no such designated beneficiary, to the Employee's estate. 8. Notice. For the purpose of this Agreement, notices and all other ------ communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage pre-paid, addressed to the last known residence address of the Employee or in the case of DBI, to its principal office to the attention of the President, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 9. Miscellaneous. No provision of this Agreement may be modified, waived ------------- or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the parties. No waiver by either party thereto at anytime of any breach by the other party to this Agreement of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or similar time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Minnesota. 10. Validity. The invalidity or unenforceability of any provision of this -------- Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 11. Arbitration and Award of Attorneys' Fees. ---------------------------------------- (a) Any dispute arising between the parties relating to this Agreement shall be resolved by binding arbitration held in the City of Minneapolis pursuant to the Rules of the American Arbitration Association, except as hereinafter expressly modified. If the disputing and responding parties are unable to agree upon a resolution within forty-five business days after the responding party's receipt of written notice from the disputing party setting forth the nature of the dispute, within the following ten business days the disputing and responding parties shall select a mutually acceptable single arbitrator to resolve the dispute or, if the parties fail or are unable to do so, each shall within the following ten business days select a single arbitrator, and the two so selected shall select a third arbitrator within the following ten business days. Such single arbitrator or, as the case may be, panel of three arbitrators acting by majority decision, shall resolve the dispute within sixty days after the date such arbitrator, or the last of them so selected, is selected, or as soon thereafter as practicable. If either party -7- refuses or fails to select an arbitrator within the time therefor, the other party may do so on such refusing or failing party's behalf. The arbitrators shall have no power to award any punitive or exemplary damages but may construe or interpret but shall not ignore or vary the terms of this Agreement and shall be bound by controlling law. The parties acknowledge the Employee's failure to comply with any confidentiality, non- solicit, and non-compete provisions of any agreement to which the Employee is bound will cause immediate and irreparable injury to DBI and that therefore the arbitrators, or a court of competent jurisdiction if an arbitration panel cannot be immediately convened, will be empowered to provide injunctive relief, including temporary or preliminary relief, to restrain any such failure to comply. The arbitration award or other resolution may be entered as a judgment at the request of the prevailing party by any court of competent jurisdiction in Minnesota or elsewhere. (b) In the event DBI fails to pay Employee any amounts owing to Employee under this Agreement or to provide Employee any benefits to which Employee is ultimately determined, by settlement, mediation, arbitration, or by any court or other decision making body with jurisdiction, to be entitled to under this Agreement, DBI shall pay the legal expenses (including reasonable attorneys' fees, court costs and other out-of-pocket expenses), incurred by Employee to enforce his rights under this Agreement and collect or obtain such amounts or benefits. DIAMOND BRANDS INCORPORATED By /s/ Edward A. Michael ---------------------------- EMPLOYEE /s/ Christopher Mathews ------------------------------- Christopher Mathews -8- EX-10.7 27 AMENDMENT TO THE EMPLOYMENT AGREEMENT Mr. Christopher Mathews Diamond Brands Incorporated April 21, 1998 1800 Cloquet Avenue Cloquet, MN 55720-2141 Dear Mr. Mathews: 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/ Edward A. Michael ---------------------------- Its: President --------------------------- /s/ Christopher Mathews ------------------------------- Christopher Mathews 2 EX-10.8 28 EMPLOYMENT, NON - COMPETITION EMPLOYMENT, NON-COMPETITION, AND CONFIDENTIALITY AGREEMENT Employment and Non-Competition and Confidentiality Agreement ("Agreement") entered into as of May 26, 1992, by and among Forster Mfg. Co., Inc., a Maine corporation with its principal business at Wilton, Maine ("Company"), and Richard S. Campbell, Wilton, Maine ("Employee"). W I T N E S S E T H WHEREAS, the Company desires to employ Employee as Director of Operations and Employee desires such employment. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, and of other good and valuable consideration, the receipt of which is hereby acknowledged by each party to the other, the parties hereto agree as follows: 1.0 Employment and Term of Agreement. -------------------------------- 1.1 Employment as Director of Operations. Commencing with the effective ------------------------------------ date (as defined in Section 7.5) of this Agreement, Company will employ Employee as Director of Operations of the Company and Employee will accept such employment. 1.2 Duties. During the term of his employment pursuant to this agreement, ------ Employee shall serve the Company faithfully and to the best of his ability and shall devote his full business and professional time, energy, and diligence to the performance of the duties of such office and shall perform such services and duties in connection with the business and affairs of the Company as may be assigned or delegated to him from time to time by the President of the Company. 1.3 Other Business Activities. During the term of his employment pursuant ------------------------- to this Agreement, Employee will not, without the prior written consent of the Company, directly or indirectly engage in any other business activities or pursuits whatsoever, except activities in connection with any charitable or civic activities, personal investments and serving as an executor, trustee or in other similar fiduciary capacity; provided, however, that such activities do not interfere with his performance of his responsibilities and obligations pursuant to this Agreement. 1.4 Term of Employment. Unless earlier terminated pursuant to the ------------------ provisions hereof, and unless extended by mutual agreement of the parties, the term of Employee's employment under this Agreement shall be for the period of two years commencing with the Effective Date of this Agreement and ending on the second anniversary of such date. 2.0 Compensation, Benefits, and Other Entitlements. ---------------------------------------------- 2.1 Basic Salary. As compensation for his services hereunder and as ------------ compensation for his covenant not to compete provided for in Section 4 hereof, Employee shall be paid a base annual compensation at the rate of $86,000 per year, which rate of compensation shall be in effect from the Effective Date to the end of the Company's 1993 fiscal year. The base annual compensation shall be subject to annual review based upon performance and after the initial year hereof shall be at the rate determined by the Company's President. The base annual compensation shall be payable at such periodic intervals, not less than monthly, as from time to time are applicable with respect to salaried executive personnel of the Company, and shall be inclusive of all applicable income, social security, and other taxes and charges which are required by law to be withheld by the Company or which are requested to be withheld by Employee. 2.2 Insurance. --------- (a) The Company shall purchase and own a policy of life insurance insuring the life of Campbell in the face amount of $175,000, with the beneficiary to be designated by Campbell. Upon termination of employment, Campbell shall be entitled to purchase any policies of insurance on his life owned by the Company for an amount equal to the cash surrender value thereof, less an amount equal to twenty (20) percent thereof for each full year, up to five (5), that Campbell is employed with the Company. (b) The Company shall also provide to Campbell the standard package of other insurance benefits which are from time to time provided to executive employees of the Company, including medical, major medical, dental and disability coverage. 2.3 Miscellaneous Benefits. The Company shall provide Campbell the ---------------------- following additional benefits: (a) Reimbursement of all reasonable expenses incurred for Company business, provided the same are a type which are allowable for deductions under applicable federal tax law; (b) Vacation time of three weeks per year, or such greater amount as may be permitted from time to time by the Company's vacation policy. 2.4 Bonus. Employee shall be entitled to such bonuses as are determined ------ by the Company from time to time, and if the term of this Agreement expires other than at the end of the Company's fiscal year, any bonus for the year of termination shall be based upon and be payable within 30 days of receipt by the Company of its audited financial statements for such year. The amount of the bonus shall be pro-rated in accordance with the portion of the fiscal year for which the Employee is employed hereunder. 2.5 Allocation of Compensation. The parties agree that 92 percent of -------------------------- Employee's base annual compensation and bonus shall be deemed to be compensation for services rendered and eight percent thereof shall be compensation for the covenant not to compete set forth in Section 4 hereof. 3.0 Termination of Employment. ------------------------- 3.1 Termination by Company. The Company shall have the ---------------------- right to terminate Campbell's employment at any time during the term of this Agreement upon the occurrence of any one of the following events: (a) Campbell's death or the inability of Campbell to adequately perform his obligations to the Company, as determined in good faith by, but at the sole discretion of, the Company's President; or (b) Conduct of Campbell involving the willful misconduct, gross negligence, illegality or fraud in connection with his employment, or willful violation of instructions, insubordination or refusal to follow Company rules or regulations imposed by any governmental authority; or (c) Failure by Campbell to perform satisfactorily the duties assigned to him, determination of which shall rest solely in the discretion of the Company's President. (d) A decision by the Company to (i) eliminate Campbell's position, (ii) substantially change the duties or responsibilities of, or qualifications for, the position, or (iii) consolidate the position or its duties with another position. 3.2 Payment of Salary Upon Termination. (a) Campbell shall be entitled to ---------------------------------- separation pay in the event of termination of his employment only in accordance with the Company's Senior Staff Level Employee Separation Policy as in effect at the time of such termination. 3.3 Outplacement Service. In the event of termination of Employee's -------------------- employment by the Company, the Company shall, upon request of the Employee, provide outplacement service for the Employee; such agency and fee to be approved by the President. Additional costs for outplacement such as travel and postage will be reimbursed as approved in an amount not to exceed $2,000, unless termination is pursuant to Section 3.1(b). 4.0 Non-competition. The parties recognize that in the course of --------------- Employee's employment hereunder, Employee will have access to a substantial amount of confidential and proprietary information and trade secrets relating to the business of the Company, and that it would be detrimental to the business of the Company, and have a substantial detrimental effect on the value to the Company of Employee's employment if Employee were to compete with the Company upon termination of his employment. Employee therefore agrees, in consideration of the Company entering this Agreement and establishing the base annual compensation and other compensation and benefits at the level herein provided for, that during the period of the term of his employment with the Company, whether pursuant to this Agreement or otherwise, and for a period of three (3) years thereafter, he shall not, without the prior written consent of the Company, directly or indirectly, for himself or for any other person, whether as principal, agent or employee, partner, director or consultant or through any corporation, partnership or other entity, himself compete with the Company for business from the Company's customers existing at the time of termination, whether through direct solicitation of such customers or otherwise, and shall not, for a period equal to the lesser of (a) one year following termination of his employment or (b) the period for which severance benefits are payable to Employee following termination, be employed by or associated in any manner with (including, without limitation, a sole proprietorship), any person, firm, corporation, association or other entity located anywhere in the United States and engaged in any business competing with the business of the Company or any subsidiary of the Company as such business exists or as it is planned as of the date of termination of employment; provided, however, that the foregoing shall not prevent Employee from owning up to one percent (1%) of the outstanding securities of a publicly-held corporation which may compete with the Company. The parties believe, in light of the facts known as of the date hereof, and after considering the nature and extent of the Company's business, the amount of compensation and other benefits provided herein, the severance benefits payable to employee upon termination, and the damage that could be done to the Company's business by Employee's competing with the Company, that the foregoing covenant not to compete is reasonable in time, scope and geographical limitation. However, if any court should construe the time, scope or geographical limitation of the covenant not to compete to be too broad or extensive, it is the intention of the parties that the contract be automatically reformed, and as so reformed, enforced, to the maximum limits which may be found to be reasonable by such court. 5.0 Confidentiality. --------------- 5.1 Non-Disclosure or Proprietary of Confidential. Information. Employee ----------------------------------------------------------- recognizes and acknowledges the interest of the Company in maintaining the confidential nature of its proprietary and confidential information and trade secrets to which he may have access, and he agrees that he will not for any reason or at any time, whether before or after termination of his employment, directly or indirectly, disclose or use, except as required in the course of, and in connection with, his employment with the Company or when and as authorized in writing to do so by the Company's President, any proprietary or confidential information or trade secrets of the Company, or of any subsidiary or affiliate of the Company, including, but not limited to, records, files, data, methods, formulae, products, samples, apparatus, customer lists, supplier lists, customer requirements, designs, trademarks, activity reports, documents, equipment, plans, drawings, specifications, price lists, marketing programs and plans, notebooks and logbooks (and similar information received from third parties) which is, in fact, proprietary or confidential to or constitutes a trade secret of the Company or any subsidiary or affiliate of the Company (hereinafter referred to as "Proprietary Information"). 5.2 Ownership of Proprietary information. All Proprietary Information ------------------------------------ shall be and remain the sole property of the Company and not be removed by Employee from the premises, except as may be required in the course of his employment, without written consent of a person duly authorized to take such action by the President of the Company, and upon termination of his employment hereunder shall be delivered promptly to the Company, and Employee shall not make, retain, or distribute any copies thereof. 6.0 Remedies for Breach. ------------------- Employee agrees that because any breach of the provisions contained in Sections 4 and 5 hereof will result in an immediate and irreparable injury to the Company, for which the Company will not have an adequate remedy at law, the Company shall be entitled to sue in equity and to enjoin such breach, in addition to any and all legal and equitable remedies to which the Company may be entitled, including, without limitation the right to a refund of all amounts paid for the covenant not to compete. 7.0 Miscellaneous Provision. ----------------------- 7.1 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the Laws of the State of Maine. 7.2 Entire Agreement. This Agreement constitutes the entire understanding ---------------- of the Company and Employee with respect to its subject matter, supersedes any prior agreement or arrangement relative to Employee's employment by the Company, and no modification or waiver of any provision hereof shall be valid unless made in writing and signed by the parties. 7.3 Successors and Assigns; Permitted Assignments. This Agreement shall --------------------------------------------- inure to the benefit of and be binding upon the Company and Employee and their respective successors, executors, administrators, heirs and/or permitted assigns provided, however, that neither employee nor the Company may make any assignment of this Agreement or any interest therein, by operation of law or otherwise, without the prior written consent of the other parties hereto, except that, without such consent, the Company may assign this Agreement to any successor to all or substantially all of its assets and business by means of dissolution, merger, consolidation, transfer of assets, or otherwise, provided that such successor assumes in writing all of the obligations of the Company under this Agreement. 7.4 Captions. The captions set forth in this Agreement are for -------- convenience only and shall not be considered as part of this Agreement or as IN any way limiting or amplifying the terms and provisions hereof. 7.5 Effective Date. This Agreement shall be effective as of May 26, 1992, -------------- (herein referred to as the "Effective Date"). 7.6 No Conflicting Obligations. Employee represents and warrants to the -------------------------- Company that he is not now under, or bound to be under in the future, any obligation to any person, firm, or corporation which is or would be inconsistent or in conflict with this Agreement or would prevent, limit, or impair in any way the performance by him of his obligations hereunder. 7.7 Waivers. The failure of any party to require the performance or ------- satisfaction of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 7.8 Severability. In the event that any court having jurisdiction shall ------------ determine that any restrictive covenant or other provision contained in this Agreement shall be unreasonable or unenforceable in any respect, then such covenant or other provision shall be deemed limited to the extent that such court deems it reasonable or enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such covenant or other provision wholly unenforceable, the remaining covenants and other provisions of the Agreement shall nevertheless remain in full force and effect. 7.9 Counterparts. More than one counterpart of this Agreement may be ------------ executed by the parties hereto, and each fully executed counterpart shall be deemed an original. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal and delivered as of the date first above written. WITNESS: FORSTER MFG. CO., INC. /s/ Richard S. Campbell --------------------------- Richard S. Campbell Director of Operations FORSTER MFG. CO., INC. /s/ Richard J. Corbin - ------------------------ Richard J. Corbin President & CEO Richard J. Corbin President & CEO May 7, 1992 Mr. Richard Campbell 11 Easy Street North Andover, MA 01845 Dear Rich: We are pleased to offer you the position of Director of Operations for Forster Mfg. Co. The purpose of this letter is to set forth your compensation arrangements and relocation plan. Your beginning salary will be $86,000 with annual salary performance reviews. You will be a full participant in all Forster Mfg.'s benefits programs as the eligibility provides (enclosed is a summary of our benefits plan). We will offer a performance bonus potential of up to 25% of your annual salary. Since we are on a fiscal year ending August, we would like you to join Forster by May 25, 1992, then we would view September 1, 1992, as the "start date,, for your bonus package. The bonus will be based upon the sales and profit goals for the corporation as well as management objectives. Rich, as it relates to relocation, we will pay for your physical move, real estate selling fees, and miscellaneous expenses incurred by you, not to exceed $25,000, as well as temporary living expenses for 60 days. We will try to assist you in coordinating the relocation to Maine. On your joining the Company, we will ask you to sign a contract which includes a non-compete agreement. If you are in agreement with the foregoing, please sign in the space provided and return to me. Again, Rich, we are delighted to make you this offer and are enthusiastic about your joining our team. We're going to continue to grow Forster's profitably and will be pleased to have contribute toward our continued success. Sincerely, Accepted: Richard Campbell Date FIRST AMENDMENT TO EMPLOYMENT, NON-COMPETITION AND CONFIDENTIALITY AGREEMENT The Employment, Non-Competition and Confidentiality Agreement between Forster Inc. (formerly known as Forster Mfg. Co., Inc.), a Maine corporation with its principal place of. business at Wilton, Maine, and Richard S. Campbell dated May 26, 1992, is hereby amended as follows: 1. Section 1.4 of the Agreement is hereby amended in its entirety to read as follows: 1.4 Term of Employment. Unless earlier terminated pursuant to the ------------------ provisions hereof, the term of Employee's employment under this Agreement shall be for the period of two (2) years commencing with the effective date of this Agreement and ending on the second anniversary of such date. Thereafter such term shall automatically be renewed for successive one (1) year periods unless either party notifies the other of that party's intent not to renew, such notice to be given no later than ninety (90) days prior to the end of the then current term. 2. In all other respects said Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment Agreement this 27th day of April 1994. FORSTER INC. By: Its Employee FIST AMENDMENT TO EMPLOYMENT, NON-COMPETITION AND CONFIDENTIALITY AGREEMENT The Employment, Non-Competition and Confidentiality Agreement between Forster Inc. (formerly known as Forster Mfg. Co., Inc.), a Maine corporation with its principal place of business at Wilton, Maine, and Richard S. Campbell dated May 26, 1992, is hereby amended as follows: 1. Section 1.4 of the Agreement is hereby amended in its entirety to read as follows: 1.4 Term of Employment. Unless earlier terminated pursuant to the ------------------ provisions hereof, the term of Employee's employment under this Agreement shall be for the period of two (2) years commencing with the effective date of this Agreement and ending on the second anniversary of such date. Thereafter such term shall automatically be renewed for successive one (1) year periods unless either party notifies the other of that party's intent not to renew, such notice to be given no later than ninety (90) days prior to the end of the then current term. 2. In all other respects said Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment Agreement this 27TH day of April, 1994. FORSTER INC. By: Employee October 8, 1988 Page No. EXEC. 2 (Replaces Page Dated 11/20/86) Subject: SEPARATION POLICY SENIOR STAFF LEVEL EMPLOYEE ----------------- ------------ The policy outlined below is to be used as a guide to assist in processing a Senior Staff Level Employee termination. The separation of a Senior Staff Level Employee from the payroll must be classified under one of the separation classifications listed below. This classification is the responsibility of the President. TYPES OF SEPARATIONS -------------------- RESIGNATION: This classification should be used if the separation is initiated - ----------- by the employee, regardless of whether notice is given. DISCHARGE: Release as the result of misconduct (i.e., dishonesty, willful - ---------- negligence in the conduct of duties, willful violation of instructions, insubordination, conduct reflecting adversely upon the Company, or refusal to comply with Company rules or with regulations imposed by government authority). RELEASE: Separation resulting from an inability or failure to perform - -------- satisfactorily work assignments for which the employee is responsible or assigned. RETIREMENT - ---------- REDUCTION IN FORCE: Separation which results from a declining volume of business - ------------------ or from the discontinuance of operations or positions when the services of an employee must be discontinued. This classification applies regardless of whether the Company would or would not consider the employee for re-employment. DEATH SEPARATION - ---------------- NOTIFICATION TO EMPLOYEE ------------------------ In the case of a non-voluntary separation the employee shall be informed verbally by the President, and given the reasons for the separation and resulting status. SEPARATION PAY -------------- October 8, 1988 Page No. EXEC-2a (Replaces Page Dated 11/20/86) A Senior Staff Level Employee will receive separation pay, payable in monthly increments, if his/her employment is terminated for reason other than retirement ---------- discharge, resignation, or death. The amount of separation pay will be equal to six months base pay if employee has worked for less than one and a half years. After which the separation pay will equal 12 months base salary. This separation pay will be paid in monthly equal installments unless otherwise provided. In addition, outplacement services may be made available at the discretion of the President. The term "pay" as used in the preceding paragraphs means the applicable percentage of the employee's current annual base salary. EX-10.9 29 COLLECTIVE BARGAINING AGREEMENT 1997 - 2003 AGREEMENT BETWEEN DIAMOND BRANDS INCORPORATED CLOQUET, MINNESOTA AND MATCHMAKERS LOCAL NO. 970 UNITED PAPERWORKERS INTERNATIONAL UNION AFL-CIO TABLE OF CONTENTS ARTICLE 1 -- AGREEMENT 1 ARTICLE 2 -- NONDISCRIMINATION 1 ARTICLE 3 -- RECOGNITION AND UNION SECURITY 1 ARTICLE 4 -- CHECK-OFF 2 ARTICLE 5 -- HOURLY RATE INCREASES 3 ARTICLE 6 -- HOURS OF WORK AND OVERTIME PREMIUMS 4 ARTICLE 7 -- HOLIDAYS 7 ARTICLE 8 -- NEW JOBS AND JOB BULLETINING 8 ARTICLE 9 -- JOB TRANSFERS 12 ARTICLE 10 -- JOB PERFORMANCE REVIEW 13 ARTICLE 11 -- JOB SIGN-OFF 13 ARTICLE 12 -- TIME OFF FOR UNION ACTIVITY 13 ARTICLE 13 -- ABSENCE AND SENIORITY 14 ARTICLE 14 -- LAYOFFS AND REHIRING 17 ARTICLE 15 -- LONG SERVICE EMPLOYEES 17 ARTICLE 16 -- PAYDAYS 18 ARTICLE 17 -- ADJUSTMENT OF COMPLAINTS 18 ARTICLE 18 -- ARBITRATION 19 ARTICLE 19 -- NO STRIKE - NO LOCKOUT 20 ARTICLE 20 -- BULLETIN BOARDS 20
ARTICLE 21 -- REPORT AND CALL IN TIME 20 ARTICLE 22 -- EMPLOYMENT STABILIZATION 21 ARTICLE 23 -- SERVICES OF COMMITTEE MEMBERS 21 ARTICLE 24 -- PAID VACATION 21 ARTICLE 25 -- PENSION 24 ARTICLE 26 -- SUPERVISORS WORKING 24 ARTICLE 27 -- SAFETY 25 ARTICLE 28 -- CONTRAVENTION OF LAW 26 ARTICLE 29 -- TOOL ALLOWANCE 26 ARTICLE 30 -- CLOTHING ALLOWANCE 27 ARTICLE 31 -- SCOPE OF AGREEMENT 27 ARTICLE 32 -- REQUEST FOR MEETINGS 27 ARTICLE 33 -- UNION - MANAGEMENT COOPERATION 27 ARTICLE 34 -- SHIFT PREMIUM PAY 27 ARTICLE 35 -- COMMITMENT AND COOPERATION TASK FORCE 27 ARTICLE 36 -- CONTRACT PERIOD 29 EMPLOYEES JOB CLASSIFICATION AND WAGE RATES 30 GROUP INSURANCE BENEFITS ACTIVE EMPLOYEES AND ELIGIBLE DEPENDENTS 33 COMPANY CONTRIBUTION TO GROUP HEALTH INSURANCE PLAN PREMIUM 34 GENERAL RULES 35 ATTENDANCE 36 PERSONAL BUSINESS 37
SEXUAL HARASSMENT POLICY 38 LETTERS OF AGREEMENT AND OTHER INFORMATION 38
ARTICLE 1 -- AGREEMENT This AGREEMENT made and entered into between DIAMOND BRANDS INCORPORATED hereinafter referred to as the Company, and the MATCHMAKERS' LOCAL 970, UNITED PAPERWORKERS INTERNATIONAL UNION AFL-CIO, hereinafter referred to as the Union, for the employees of the Cloquet Plant of the Company other than those covered by an agreement with the International Union of Operating Engineers, Local #36, covering Power House employees. This Agreement can be changed or amended only by mutual consent of the parties hereto. The term "Employees" as used in this Agreement shall not include Foreperson, Assistant Foreperson, or Supervisors (as defined in the Labor Relations Act of 1947, whether paid on a salary or hourly basis) or any salaried employee. In the event of a strike or work stoppage, plant protection employees will carry on their usual duties at the plant without interference. ARTICLE 2 -- NONDISCRIMINATION The Company and the Union agree to abide by all of the applicable state and federal laws regarding discrimination against any employee, and to cooperate with each other in this regard. Masculine nouns and pronouns, when used in this Agreement are not meant to connotate sex, but rather are used to refer, without discrimination, to both male and female employees. ARTICLE 3 -- RECOGNITION AND UNION SECURITY The Company recognizes the Union as the sole bargaining agency on wages, hours and working conditions for all employees in its Cloquet, Minnesota plant, not excluded by Article 1 of this Agreement. There shall be no solicitation of membership on the Company's time. All employees who are members of the Union in good standing on the date of signature of this contract, shall as a condition of employment remain members of the Union in good standing; and all new employees shall as a condition of employment become and remain members of the Union after they have completed their probationary period of forty-five (45) active working days. These provisions shall take effect on the date of signature of this contract, but only to the extent that they may take effect in accordance and consist with provisions of Federal and State laws and shall not be construed to operate contrary to the National Labor-Management Act of 1947. The Union shall promptly furnish to the Company a notarized list of members now in good 1 standing. If any employee named on that list asserts that he or she is not a member and any dispute arises, the assertion or dispute shall be adjudicated by an Arbitration Board appointed in accordance with the provision of Article 18 of this Agreement, whose decision shall be final and binding upon the Union and the employees. Should any Union member fail to be in good standing, and face suspension for any reason permitted by law, he or she shall be given not less than seven (7) calendar days advance notice thereof in writing (stating the suspension date) by the Union which shall also send a copy of such notice to the Company. If the member's good standing is not re-established, and such member is suspended, both the member and the Company will be notified to the effect in writing by the Union. His or her employment shall be terminated by the Company not later than seven (7) calendar days thereafter. The Union agrees that neither it nor any of its officers or members will intimidate or coerce employees into membership in the Union. If any dispute arises (as to whether there has been any violation of the pledge or whether any employee affected by this clause has been deprived of good standing in any way contrary to the constitution and by-laws of the Union), the dispute shall be regarded as a grievance and submitted to the provision of Article 18 of this Agreement. Each new employee will be given a copy of this Agreement by the Company at the time of their hiring. A copy will likewise be given to all present employees. The effective rates of pay for the respective jobs shall be set forth in a schedule and attached to the printed form of this contract. ARTICLE 4 -- CHECK-OFF For the convenience of its' employees in paying regular monthly Union dues, Union initiation fees, if any, and such assessments as may be generally levied, the Company will accept and honor requests made by the individual employees in the following form: CHECK-OFF AUTHORIZATION Paperworkers International Union from any wages earned or to be earned by me, the amount of my monthly membership dues in said Union. I authorize and direct my employer to deduct such amounts from my pay each month and to remit the same to the order of the Financial Secretary of my Local Union in accordance with the terms of this Agreement. This assignment, authorization and direction shall be irrevocable for a period of one year from the effective date of the Agreement, or until the termination date of said Agreement, whichever occurs 2 sooner; and I further agree and direct that this assignment, authorization and direction shall be automatically renewed and shall be irrevocable for successive periods of one year each, or for the period of each succeeding applicable collective bargaining agreement with the Union whichever shall be shorter, unless written notice is given by me to the Company and the Union not more than thirty (30) days or less than ten (10) days prior to the expiration of each period of one year or of each applicable collective bargaining Agreement, whichever occurs sooner. Date: _______________ Signature of Employee: _____________________ Name (Print):_________________ UPIU Local No.:_____________________ Address:______________________ City and State:_____________________ Social Security No.:_______________________________________________ Employed by:__________________ Department:_________________________ The Union will give notice in writing to the Company of the person officially designated by the Union to whom such regular monthly Union dues, Union initiation fees, and assessments deducted from employees earned wages shall be transmitted. The Union agrees that transmission such dues, initiation fees, and assessments, to such person shall fully discharge the liability of the Company to the Union and to the individual employee in respect to such dues, initiation fees and assessments. The Union agrees that the Company shall deduct from the wages of an employee the amount designated by the Union as regular monthly Union dues and, where required, the amount indicated in writing by the Financial Secretary of the Local Union as the proper amount for the Union initiation fee and assessments. ARTICLE 5 -- HOURLY RATE INCREASES Basic hourly rates in effect immediately prior to these dates shall be increased by the indicated percentage figure as of these dates for all employees covered by this Agreement: 5-1-97 Two and nine-tenths percent (2.90%) 5-1-98 Two and nine-tenths percent (2.90%) 5-1-99 Two and nine-tenths percent (2.90%) The parties shall negotiate for a "gain sharing" plan to take effect on May 1, 2000. If agreement is reached by that date, basic hourly rates in effect immediately prior to these dates shall be increased by the indicated percentage figure and by the "gain sharing" amount, if any, as of these dates for all 3 employees covered by this Agreement: 5-1-2000 Two and nine-tenths percent (2.90%) plus whatever the "gain sharing" formula yields, if anything 5-1-2001 Two and nine-tenths percent (2.90%) plus whatever the "gain sharing" formula yields, if anything 5-1-2002 Two and nine-tenths percent (2.90%) plus whatever the "gain sharing" formula yields, if anything If agreement is not reached by May 1, 2000, basic hourly rates in effect immediately prior to these dates shall be increased by the indicated percentage figure as of these dates for all employees covered by this Agreement: 5-1-2000 Three and four-tenths percent (3.40%) 5-1-2001 Three and four-tenths percent (3.40%) 5-1-2002 Three and four-tenths percent (3.40%) Each party shall nominate five (5) persons to sit on the "gain sharing" bargaining committee. Each party shall have the right to strike up to two (2) nominees from the other party's list. The hourly rates as so increased shall remain in effect for the life of this Agreement. Inexperienced help may be hired at five (5) cents under the minimum rate for a period not to exceed forty-five (45) days of active work. ARTICLE 6 -- HOURS OF WORK AND OVERTIME PREMIUMS Eight (8) hours shall constitute a normal day's work and forty (40) hours shall constitute a normal week's work. Overtime at the rate of time and one-half shall be paid for time worked in excess of eight (8) consecutive hours, or in excess of eight (8) hours in any calendar day, or forty hours a week, whichever will result in the greater overtime payment, but there shall be no use of the same hours twice in the calculation of overtime. For all hours worked in excess of twelve (12) consecutive hours the employee shall be paid at the rate of double time. Except as otherwise mutually agreed, the normal work week shall begin on Monday. 4 The payroll schedule begins at 11:00 p.m., Sunday night and ends at 11:00 p.m. the following Sunday night. An employee shall not be required to take time off during his or her regular assigned work week to avoid payment of overtime. The Company agrees to a sign-up procedure for overtime purposes. A daily sign-up sheet will be available for a sufficient time period in order that employees on all shifts have an opportunity to sign-up for overtime. Employees may sign up for all three daily weekend overtime shifts but will be scheduled to work only one shift per day. Overtime will be distributed in the following manner: A. Unscheduled Overtime 1. Senior qualified employees on the sign-up sheet. 2. Employees on the job will be forced to work, this includes employees reassigned during the shift. B. Scheduled Overtime (Scheduled overtime is defined as overtime posted on the weekly staffing list according to designated machine crew and shift). Any employee so scheduled and desires not to work will inform their foreperson which days they do not want to work. The Company will attempt to fill the request in the following manner: 1. Senior qualified employees on the unscheduled overtime sheet. 2. Any qualified employee wishing to work. 3. Employee scheduled as such will work. In the event an employee indicates on the overtime sign-up sheet that he/she is available for less than a full shift and the position available requires an eight (8) hour shift be worked, that employee will not be considered to fill that position. C. Weekends All overtime work to be performed on a Saturday and/or Sunday shall be according to the following procedure: 1. The Saturday and/or Sunday schedule shall be posted on the Wednesday which is ten (10) days prior to the affected Saturday and/or Sunday. 5 2. By 7:00 p.m. on the second full day (Friday) after the schedule is posted, the scheduled employees may request release from the schedule by signing a release sheet. By the same deadline other employees may sign up to work the Saturday and/or Sunday by signing a weekend overtime sheet. 3. After that 7:00 p.m. deadline, any vacant shifts on the schedule shall be filled by the unscheduled overtime procedure, using the weekend overtime sheet. 4. On the Monday before the involved Saturday and/or Sunday the final Saturday-Sunday schedule shall be posted. 5. Any employee requesting to be relieved of work after the final schedule is posted on Monday shall notify his or her supervisor. The supervisor shall fill the opening using the weekend overtime sheet. If no qualified employee is on the weekend overtime sheet, the employee shall be responsible for finding a qualified replacement on his or her own time. If no replacement is found, the employee's request to be relieved shall be denied and the employee shall work as scheduled. 6. In cases of emergencies which require a change to the final schedule, the unscheduled overtime procedure shall be followed, using the weekend overtime sheet. Any employee who volunteers for overtime will receive the rate of the job worked for which they volunteer. All overtime work to be performed on a holiday will be according to the unscheduled overtime procedure. If all employees in a maintenance craft who want to work are assigned to work weekend overtime, and additional employees are needed, the senior Employees who have signed the overtime sign up sheets and who are qualified for general work rather than specific tasks, will be scheduled for the overtime. In the event an employee who would be forced to work a weekend overtime shift, signs up for another shift on the same day, the forced shift will take precedence and cancel the Employee's preference for the shift for which the Employee has signed. If a majority of a crew which is working weekend overtime elects to work a different open shift on the same day, the crew decision will take precedence over the right of an employee on that crew to sign up for another shift. All work performed on Sundays shall be paid at the rate of time and one-half. 6 Employees are allowed two (2) fifteen (15) minute breaks per shift. A five minute bathroom relief break will be allowed. However, employees will replace each other at their work stations and the equipment will remain in operation. In the event of a start-up of equipment or a call-in where no relief is present, the supervisor shall first attempt to fill the shift with an employee listed on the overtime sheet. In the event no qualified employee signed the overtime sheet, the least senior qualified employee in the involved department shall be forced to work. Each Tuesday the Company shall update a rolling notice showing anticipated production for the next four (4) weeks. If an employee is to work less than four (4) hours beyond the employee's regular eight (8) hour shift, the employee will be granted a five (5) minute break around the time of shift change. If an employee is to work four (4) or more hours beyond the employee's regular eight (8) hour shift, the employee will be granted a fifteen (15) minute break between the 7th and 9th consecutive hours. Except for emergencies, employees shall not be interrupted while on break. In the event maintenance personnel are scheduled on an ongoing project, that employee shall continue to work on that project on overtime if it would be impracticable to assign the project to another employee without or beyond a minimum amount of training. ARTICLE 7 --HOLIDAYS In order that employees may, so far as possible, not lose a day's pay, eight (8) hours at the employee's "Regular Rate" will be paid as a Holiday Bonus for the following eleven (11) named holidays if not worked; New Year's Eve Day, New Year's Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving Day, day after Thanksgiving Day, December 24th, Christmas Day, and a floating holiday subject to the following conditions: 1. For employees on a normal five (5) day production schedule, if the holiday falls on Sunday and it is celebrated on another day, such other day will be considered as the holiday for all purposes. 2. For employees on a seven (7) day production schedule, a Sunday holiday and it is celebrated on that Sunday. 3. An employee may schedule his or her floating holiday by giving notice to the Company prior to the posting of the affected schedule, unless an emergency 7 forces a shorter notice. Floating holidays shall be scheduled on a first come, first served basis. No more than two (2) floating holidays (not in the same job classification or department) per day shall be scheduled, unless circumstances permit otherwise. In the event of a conflict between an employee's vacation and another employee's floating holiday, the vacation shall take precedence. Any unused floating holidays shall be paid at the end of the calendar year. 4. Regular rate specified above shall be the regular rate of the job the employee would have been working on if the day had been worked, excluding overtime, but including shift bonus. 5. If the active employee does not work or leaves early from his or her last scheduled shift before the holiday, or does not work or is late for his or her first scheduled shift after the holiday, he or she shall lose one (1) and only one (1) day's holiday pay. The Manager of Human Resources shall excuse (for holiday pay purposes) any such absence, early departure, or tardiness for extenuating circumstances, documented in writing if possible by the employee or supervisor. A paid vacation day shall be construed as a day worked for purposes of the holiday pay rule in this subsection five (5). An employee who has been on layoff must perform some work in the 15 work days immediately prior to the holiday in order to qualify for holiday pay. 6. The employee has established seniority status as provided in Article 13, Paragraph 2. 7. The Company will qualify for holiday pay employees absent from work by reason of a disability caused by either illness or accident during the first 30 work days of absence. 8. If a vacation is extended into the preceding or following week because of a holiday, such day(s) in the preceding or following week will be considered as day(s) worked for purposes of computing weekly overtime provided the first scheduled work day thereafter is worked. If one of the above named paid holidays (or day celebrated as such) is worked, the employee will be paid at time and one-half his or her regular rate for all hours actually worked on the calendar day of the holiday or the day celebrated as such, plus the holiday bonus of eight (8) hours pay as above provided. In lieu of the holiday bonus, maintenance employees who work a holiday may choose a day off with eight (8) hours pay at the regular rate. The exact day off shall be set by mutual agreement between the maintenance employee and his or her supervisor within two (2) weeks prior to the holiday. If the day to be taken off is in the succeeding calendar year it shall be paid at the regular rate in advance at the end of the calendar year in which the holiday occurred. If one of the named holidays falls within an employee's vacation in such manner that it would have 8 been paid for if not worked, he or she will be entitled to the Holiday Bonus for such holiday, provided he or she works as provided in article seven (7), subsection five (5). When an employee is not scheduled to work on one of the above enumerated holidays, and consequently does not work, the holiday shall nevertheless count as eight (8) hours for the purpose of computing overtime for hours worked in excess of forty (40) hours, provided that the employee works the other days during the week for which he or she is scheduled to work. ARTICLE 8 -- NEW JOBS AND JOB BULLETINING All posted positions shall start as a spare position. The exception will be progression positions and craft positions already in the progression process. When permanent vacancies occur in these positions the trained spare moves into the permanent position and the spare job is re-posted. On a day-to-day basis spares will be utilized if practical and possible. Spares will be utilized to fill vacancies of a week or more in duration. All permanent vacancies and new jobs, except entry level operator positions, shall be posted on the regular bulletin board for three (3) working days. In the event a job posting is not removed from the bulletin board at the end of the three (3) day posting period, the posting shall be considered null and void and re-posted for the correct period. Where feasible, the Company will award the bid to the successful bidder within ten (10) working days thereafter. Any Employee must be able to accept and to start in the job awarded within twenty-one (21) calendar days of the posting date or the Employee will be considered disqualified on that posting. This twenty-one (21) day period will be extended to twenty-eight (28) days in the event an employee with work related job restrictions or injury desires to contact his or her physician in order to determine whether he or she may safely be allowed to try the posted job. The bulletin shall describe the job vacancy, including qualifications and rate. When filling posted positions, the most senior employee applying therefor shall be first considered for such job, if he or she is qualified to do the work and/or has the potential to advance to the higher job classifications within the department. Any further vacancies which develop within sixty (60) calendar days after the date of a specified job posting will be filled from those applications already filed provided the individual is qualified, otherwise a new bulletin will be posted. The job of Lead Person will be bulletined by sign-up sheet. However, the Company reserves the right to conduct interviews and select candidates according to its own criteria within sixty (60) days. The Lead Person can direct the activities of others and perform bargaining unit work. The Company shall pay a Lead Person at least the minimum rates as per the wage schedule. The Company may pay a higher rate if it chooses, subject to a job review and determination by January first of each year. 9 Any employee placed on a new job, or a created job, for the purpose of a trial period as to whether or not that job will become a regular job, will not have rights to that job. The employee will have to bid on the job when it is posted like everyone else. Their on-the-job qualifications will not give them super- seniority to the job. A trial period shall consist of a period of ninety (90) days, or less, and will not be extended without mutual agreement of the parties. a. In the Woodenware Department, the lathe operator job shall be filled by the oldest veneer stacker in point of service, and the veneer stacker's job shall be the entry point for subsequent selection for the job of Lathe Operator in the Woodenware Department. b. Shipping Department: Vacancies in the position of Loader/Trucker shall be filled from spares for that position and vacancies in the position of Checker/Loader shall be filled first from Loader/Truckers and then from spares for that position. The Helper position is not a posted position. Helpers will be the senior entry level operator position person on duty at the time and available. An additional 5c per hour will be paid to Shipping Department employees who are qualified to spot trucks and who do so on a regular, on-going basis. c. Timber Handling Yard Crew: Truck drivers will progress to the position of Mobile Equipment Operator B and Mobile Equipment Operators B will progress to the position of Mobile Equipment Operator A. In the future, the Company will post spares only for the Truck Driver position and spares will not be utilized for other Yard Crew classifications. d. Inspectors: Inspectors B will progress to the position of Inspectors A. e. General: Where a job progression exists, the positions involved which are not entry level positions, are not open to plant-wide bidding but are instead limited to persons holding positions within the progression involved. f. Moulder Operator: Step 1: Must be able to pass probationary period without any difficulty and meet production standards. Pay: base rate of moulder. Step 2: Must be able to make minor adjustments to the moulders to ensure quality and production standards. At this level, minimal or no damage to heads and aluminum shoe and other parts of moulders. Pay: base rate plus a progression increment, which was $.50 per hour as of April 30, 1997. 10 Step 3: Must be able to maintain and exceed quality and production standards required. This must occur 50% of the time in between reviews. Pay: base rate plus a progression increment, which was $1.00 per hour as of April 30, 1997. Step 4: Must be able to independently operate all 5 moulders with equal efficiency and be capable of making necessary product changes on the moulders. Pay: base rate plus a progression increment, which was $1.50 per hour as of April 30, 1997. Step 5: Must be able to sharpen heads on moulders, change heads, and be able to fix most mechanical problems on moulders within a reasonable amount of time. Must be able to exceed quality and production standards for 60% of the time period. Must be able to retain all the requirements as you proceed from one step to another. Must be able to train new operators with complete efficiency. Pay: base rate plus a progression increment, which was $2.00 per hour as of April 30, 1997. All operators can only proceed one step at a time. Operators will be reviewed at least once every 6 months and can move up or down at any time. This will be based on their performance. This decision will only be made by management. Effective May 1, 1997, the specified progression increments shall be increased at the beginning of each contract year by the same percentage increase applied to current wage rates. g. Corn Dog Auto Sorter Technician: Step 1: Sign up for posted auto sorter operator and meet all requirements for posting. After 20 day break-in period, if employee meets all requirements, this job pays sorter base rate per hour. Step 2: Must be able to make necessary adjustments to insure quality and production levels required without damaging any functioning parts. Must be able to maintain and exceed quality production levels. Should be able to recognize trouble areas before breakdowns occur. When these requirements are met, job pays sorter base rate plus a progression increment, which was $.50 per hour as of April 30, 1997. Step 3: Must be able to perform steps 1 and 2 without any difficulty. Also must be able to fix any mechanical problem on sorters within operator's duties. Must 11 be able to exceed production and quality levels for extended periods of time. When all requirements are met, this job pays sorter base rate plus a progression increment, which was $1.00 per hour as of April 30, 1997. All operators can only proceed one step at a time. Operators will be reviewed at least once every 4 months and can step up or down at any time. This will be based on their performance. This decision will be made by management only. Effective May 1, 1997, the specified progression increments shall be increased at the beginning of each contract year by the same percentage increase applied to current wage rates. The employee selected by the Company for promotion shall be on a trial period for twenty (20) work days for determination as to whether or not the employee can meet the job requirements. If an extension is given, the Company must inform the Employee in writing of the duties and skills he or she must improve in order to meet the job requirements. This trial period can be extended or shortened by mutual consent in cases requiring more or less than the twenty (20) days. At any time during this trial period, if the employee is determined as not qualified by the Company or at the employee's own request, the employee shall be returned to their former job without loss of seniority. At the conclusion of the trial period, the employee shall relinquish transfer right to their previous job except in case of curtailment of production when they will be entitled to job assignment by seniority. In case the job posting is not filled by the posting procedure, the Company may fill the vacancy by assigning the least senior employee who does not have a posted position, and that employee will be considered as the permanent employee in the classification. Employees selected to fill a skilled vacancy will be given a trial period. Duration of trial period to be mutually agreed upon by Company and Union. No Employee shall be allowed more than two trial periods in any twelve (12) month period for jobs that have been bulletined. If an Employee successfully completes his or her second trial period during a particular twelve (12) month period and remains on that job and within four (4) months thereafter, there is an unexpected curtailment with respect to that job, that trial period will not count as a trial period utilized by that Employee. Any new jobs established resulting from new products differing materially from jobs already in existence in the plant, and any job changes resulting in material increase in work load, responsibility, or skill shall be discussed between the Company and the Union Committee and an effort made to establish a mutually agreeable rate within thirty (30) days by mutual agreement. If no agreement is reached, the Company will determine the rate based on the relationship of the job 12 to other plant jobs and rates. The Union may appeal the rate through the Grievance Procedure (Article 17). In the event of an error in filling posted job vacancies, complaints shall be lodged no later than ninety (90) days from the first day of the trial period of the employee filling the vacancy. If no complaint is lodged within the ninety day period, the posting results stand. Within one (1) year of signing of the 1997 Agreement, the Company shall develop written job descriptions for all positions covered by this Agreement. The job descriptions for the jobs in a department shall be available for inspection by the employees in the department. Any job posting shall be accompanied by a copy of the job description for the position posted. Whenever the Company calls into question an employee's work performance and reviews that issue with the employee, the review shall include reference to the job description and recommendations for improvement. The Company shall post three (3) full-time maintenance/craft helper positions. The postings shall state the specific craft for which help is anticipated. When filling the positions the bidders shall be tested as to aptitude using a test selected by mutual agreement of the Company and the Union. Successful bidders shall receive in-house training and shall be reimbursed for the cost of training elsewhere if the outside training was approved in advance by the Company. Maintenance/craft helpers shall have the same tool requirements and allowances as maintenance employees. Maintenance/craft helpers will progress into maintenance/craft positions if qualified as such positions become available. ARTICLE 9 -- JOB TRANSFERS When employees are required temporarily to work on a different job, they shall receive the rate of the new job or their regular rate, whichever is higher. When returning to their regular job, the employee shall return to the rate of their job. Any employee on the payroll or seniority list as of 9/18/84 that is required to work or be transferred to a new job shall be grandfathered in at the base rate of the match machine operator for the time worked on the new job. If employees sign up for new jobs they shall receive the rate of the new job or position. ARTICLE 10 -- JOB PERFORMANCE REVIEW The performance of Mechanics, skilled Maintenance and Printing employees, regardless of class or 13 rank, shall be reviewed in writing at least annually between February 1 and March 31. Written skills criteria shall be used as part of the reviews. The reviews may include recommendations for improvement and training. The reviews shall be conducted by the supervisor and department head, with input from the employee's peer group. Among other things, it shall be the purpose of the reviews to advise the employee about advancement and to critique the employee's job performance. Employees in these classifications will be expected to improve their skills and performance so that they can advance a grade, in two years or less, until the 1st Class level is attained. Employees in these classifications may request an on-the-job mentor for training assistance. ARTICLE 11 -- JOB SIGN-OFF When an employee wishes to be removed from his or her current posted position, he/she will complete and sign the job sign-off form. The form will also be signed by the employee's Supervisor and a union representative. The employee will then be assigned an available entry level position. At the time of sign-off, the Company shall inform the employee in writing of the time frame (not to exceed six (6) months) during which the employee will be subject to temporary recall back to the signed-off job. At the point the employee is no longer subject to such recall, he or she also shall be removed from the qualifications list for the signed-off job. ARTICLE 12 -- TIME OFF FOR UNION ACTIVITY The employees shall be permitted time off when required to attend conventions, committee meetings, negotiations or any other pertinent business of any labor organization, provided, however, that three (3) calendar days' notice be given the Company stating when the employee is to be away from work, and that at least one (1) day's prior written notice be given the Company stating on what day he or she will be ready to resume his or her duties. Not more than six (6) employees are to be given a leave of absence of this nature at any one time. However, upon fourteen (14) calendar days' notice by the Union to the Company, the Union may request that more than six (6) employees be absent at one time, which request shall not be unreasonably denied. In an emergency where the three (3) or fourteen (14) day notice cannot be given, not to exceed two (2) employees, or three (3) specific employees (the Union's President, Vice President, and Recording Secretary), will be permitted time off for such purpose on one (1) day's written notice. The Company shall not be required to pay wages to the employees for time off to attend such 14 organization business. ARTICLE 13 -- ABSENCE AND SENIORITY 1. Seniority Generally Subsequent to May 1, 1989, seniority shall be construed as continuous service with the Company, compiled by the time actually spent on the payroll plus properly approved absences, and shall date from the last date of hire with the Company. Employees transferred outside the scope of the bargaining unit shall accumulate and retain seniority for a minimum period of six (6) months. During such period the employee will, if returned to the bargaining unit, be placed on their former job. A Seniority List will be posted each January in both the cafeteria and the job posting area by the time cards. Employees who notice errors in this list should report such errors within two (2) calendar weeks. 2. New Employees All new employees shall serve a probationary period of forty-five (45) active working days, and shall not accrue seniority during that period. The length of the probationary period may be extended on a case by case basis upon the mutual agreement of the Company and Union. If any employee is laid off prior to the completion of such probationary period, he/she will receive credit for the time employed prior to such layoff toward completion of his/her probationary period provided he/she is recalled. During the probationary period, the Company may, as its option layoff or dismiss said probationary employee. Employees retained at the expiration of their probationary period will become regular employees and will be ranked in seniority according to a random selection of their names. 3. Loss of Seniority An employee shall lose seniority if, in any of the following situations the employee: (a) engages without written permission in other employment while on leave of absence (b) is discharged (c) quits or voluntarily leaves the employ of the Company (d) fails to report to work from a layoff after at least eight (8) hours' advance telephone notification or if the employee cannot be contacted in this manner, one calendar week from a dated Post 15 Office receipt from a certified letter sent to the employee's last known address, unless in either case (telephone notice or mail notice) there are extenuating circumstances and the employee is excused by the Company; if a telephone call is answered by an answering machine, it shall be treated as though the telephone rang without any answer at all (e) accepts permanent employment elsewhere (f) is detained from work by reason of sickness or any other reason beyond their control and fails to get word to their foreperson or the Personnel Department within two (2) working days and does not furnish satisfactory proof of their inability to do so within a reasonable time thereafter. (1) An employee detained under subparagraph (f) above is not to await the expiration of such two working days' period is to report as aforesaid as soon as they are able. If they are absent for any other reason, they are expected to notify their foreperson or the Personnel Department in advance and their failure to do so will result in disciplinary measure and may result in their discharge. (2) An absent employee shall arrange with the Company for their return to work. (g) is laid off and not recalled within: (1) One (1) year if such employee had less than five (5) years seniority on the date of their layoff (2) Two (2) years if such employee had five (5) years or more seniority on the date of their layoff 4. Leave The maximum accumulative disability, pregnancy and voluntary leave time available to any employee (see exception below) is two (2) years for an employee with less than five (5) years seniority, three (3) years for an employee with less than ten (10) years seniority, etc. Absence of one week or less, absence for Military Service in the Armed Forces, absence due to a plant injury, and leave time prior to May 1, 1971 shall not be counted. While on authorized leave after May 1, 1971, employee will retain and accumulate seniority. The length of any disability or pregnancy leave shall be as medically required, subject to the two (2) and three (3) year maximum periods above. Except as provided with respect to the Company's contribution to the group health insurance plan and the case of approved leaves for injury or illness, all leaves of absence shall be without pay, and vacation or other benefits shall not accrue during any leave. 5. Absence Due to Layoff Any employee who is laid off shall accumulate seniority up to the maximum period provided in 16 Paragraph 3(g) above. 6. Funeral Leave The Company shall grant an employee pay for time lost up to but not exceeding five (5) work days when death occurs in the employee's immediate family. The immediate family is limited to husband; wife; father or stepfather, but not both; mother or stepmother, but not both; brothers, sisters, children, mother-in-law, and father-in-law of the employee. Payment for such leave shall be limited to a maximum of forty (40) hours of actual time lost from regularly scheduled work, one of which days will include the day of the funeral, providing that these are all scheduled working days for the employee. If the funeral or other services or other customary practice in connection with the death does not fall on consecutive days, the leave may be taken intermittently. One day of funeral leave will be allowed to attend the funeral of grandparents and grandchildren. Funeral leave shall not be considered as time worked in the computation of weekly overtime. 7. Jury Duty Upon receipt of the summons from the court, an employee notified of jury duty shall give notice of the summons to the Company. While on jury duty, the employee shall give daily notice to the Company of whether he or she is required to be at the courthouse the next court day. An employee required to lose time to serve on a jury on any of the calendar days Monday through Friday inclusive on which they would otherwise have been scheduled to work, shall be paid the difference between their pay for jury duty and their hourly rate for not more than eight (8) hours for each day they are required to serve, upon presentation of a statement from the court of the date and time of jury service and the amount of their jury pay. In the event the employee works on any of the days on which they serve on the jury, the number of hours worked shall be deducted from the eight (8) hours for which wage payment is heretofore provided and they shall then be paid the difference between their pay for jury duty and their hourly rate for the remaining hours. Time served for which jury duty pay is received from the Company shall be counted as time worked for the purpose of computing overtime. If an employee normally scheduled to work the 11 p.m. to 7 a.m. shift is called to the courthouse for jury duty, he or she shall be scheduled for the 7 a.m. to 3 p.m. shift for that day. If an employee working the 7 a.m. to 3 p.m. shift is required to be at the courthouse for jury duty that day for less than four (4) hours, the employee must report to work thereafter in order to collect jury duty pay. If an employee working the 3 p.m. to 11 p.m. shift is required to be at the courthouse for jury duty that day, he or she shall report for work at 3 p.m. if he or she is excused from jury duty at or before 11 a.m. that day. Absence required by law for jury duty, or as a witness in court, shall not be counted as a break in regular attendance. 17 ARTICLE 14 -- LAYOFFS AND REHIRING In the event of a curtailment of operations or a layoff of a week or more, the Company will reschedule employees to accommodate the premise that the last person hired is the first person to be laid off, provided that employees exercising their seniority must be able to perform the work with a minimum amount of training and orientation (minimum training is defined as three (3) work days or less) and is paid the rate of the job. On an individual basis the Company and the Union can discuss a longer training period. It is recognized that certain jobs require lengthy training periods due to their complexity and/or required skills. If a lay-off or curtailment has the potential of exceeding three (3) months, the Company and Union will meet to work out a training schedule for affected employees. It is also recognized that maintenance/craft jobs require extensive training, and these jobs are exempt from this clause. When, due to curtailment or layoff, an employee has been placed on another job and an opening occurs on their signed up job because of someone being sick, on vacation, leave of absence, or any other reason for a week or more, the employee will exercise their rights and be returned to their original job. An employee assigned a lower rated job because of a decline in operations and/or a layoff shall be paid the rate of the job which they are assigned. When it becomes necessary to lay off employees according to the provisions of this Agreement, the Company shall post the layoff list at the same time it posts the weekly schedule, when reasonably possible, and allowing exceptions for emergencies. At the same time a copy of the layoff list shall be given to the Union. The Union shall likewise be given a list of all recalled employees as soon as possible. Each Tuesday the Company shall update a rolling notice showing the number of possible layoffs for the next four (4) weeks, subject to revisions until the final weekly layoff list is posted. ARTICLE 15 -- LONG SERVICE EMPLOYEES Employees who have given long and faithful service in the employ of the Company, and who have become unable to handle heavy work to advantage, will be given preference to such light work as they are able to do and is available. The rate of pay shall be the rate of the job assigned. 18 There shall be a job classification called Plant Janitor paid at the Match Mill Sweeper wage rate. This classification shall not be subject to normal posting and bidding requirements but instead may be used to accommodate such long- service employees. ARTICLE 16 -- PAYDAYS Should the regular payday fall on a holiday or a day when the shop is closed down, the employee will be paid on the preceding day, if possible. ARTICLE 17 -- ADJUSTMENT OF COMPLAINTS Should any employee covered by this Agreement believe they have been unjustly dealt with as a result of interpretation, application or violation of this Agreement, negotiations for settlement thereof shall be conducted in the manner numbered below. In the event an employee incurs disciplinary action, such action will be taken within five (5) working days from the date of the violation. The attendance program is excluded from the agreement, however the company will make every effort to ensure attendance related disciplinary action is timely. No grievance will be recognized unless presented to the Company promptly and in no event later than five (5) working days after knowledge of the happenings giving rise thereto. 1. The aggrieved employee shall consult with their supervisor or department head and attempt to reach a settlement. When a union steward is available on the premises, the steward will be asked to be present. No grievance will be recognized or accepted by the Company unless the first step of the grievance procedure is followed (with the exception of discharge or suspension cases, which will proceed directly to the last step). A resolution of the grievance at this step shall be non-precedential. If a satisfactory settlement is not arrived at, the grievance shall be reduced to writing stating the nature of the grievance and the article of the contract allegedly being violated. The shop grievance committee person shall in turn present the written grievance to the employee's supervisor or the department head. 2. If a satisfactory settlement is not effected within forty-eight (48) hours after the filing of the written grievance, the Shop Grievance Committee shall then take the matter up with the department head and/or one (1) or more of his or her designees in an interest-based problem solving setting. The group shall appoint a chairperson to chair the IBPS process. The 19 Company and the Union shall each maintain a roster of two trained IBPS facilitators to assist at the IBPS meeting. Only one facilitator shall assist at the meeting. Service as a facilitator shall alternate between Company and Union appointees. 3. If a satisfactory settlement is not effected within five (5) days after the IBPS meeting, the Shop Grievance Committee, the International Union representative or his or her designee, and the department head and/or one (1) or more of his or her designees shall meet to discuss the grievance. Either party may request the participation of a mediator from the Federal Mediation and Conciliation Service or, if mutually agreed, some other qualified third party to serve as mediator, whose expenses shall be equally shared by the parties. Any time limits can be extended by mutual agreement between the two parties. Each grievance shall have a cover sheet to track the status of the grievance, including all deadlines, any agreed-upon extensions of the deadlines, and resolution, if any, of the grievance. Committee members meeting with management at regular or special meetings for the discussion of grievances and other matters of mutual interest may do so during regular working hours without losses of time. All other duties of the committee members shall be performed outside of working hours and shall in no way interfere with their plant duties. No committee members shall be paid by the Company for attending meetings with management, except for time taken off by them for such purpose from their regular working hours, and not then for time spent in contract negotiations. The Grievance meetings shall consist of not to exceed six (6) employees. Additional witnesses, however, may be called in where their testimony is required in meetings with management. ARTICLE 18 -- ARBITRATION Should any dispute arise which comes under the contract which cannot be settled between the Union and the Company, including a claimed wrongful layoff or discharge, then and in that event, the matter in dispute shall be submitted to binding arbitration for settlement, and the arbitrator shall be selected according to the rules of the Federal Mediation and Conciliation Service. Such matters must be submitted within forty-five (45) days of the conclusion of the procedure in Article 17, or the matter will be considered closed. The decision of the Arbitrator shall be binding and conclusive on both parties to this Agreement. The Arbitrator shall have no power to add to, subtract from, or alter any terms of this Agreement. The jurisdiction and authority of the Arbitrator shall be confined to questions involving the 20 interpretation, application, or alleged violation of this Agreement. It is agreed that the parties shall each bear one-half the expense of the Arbitrator. Requests for changes in this contract, or for wage increases or negotiations over a new contract are questions not subject to arbitration. An employee covered by this Agreement who is found to be unjustly laid off or discharged will be reinstated with full seniority and may be compensated for lost time as shall be determined by the facts of the case. ARTICLE 19 -- NO STRIKE - NO LOCKOUT Since adequate provision has been made herein for the settlement of all disputes and grievances such might arise hereunder, it is agreed that during the period of this contract there shall be no strikes, sit downs, cessation of work, picketing, boycotts or lockouts. ARTICLE 20 -- BULLETIN BOARDS A place will be provided within the shop in different departments where notices of the Union business of interest to employees may be posted by the employee's committee without being censored. No notices shall contain any controversial matter or propaganda matter. One bulletin board and mailbox will be located in the time card area for the sole use of the Union. All Union articles will have the approval of two (2) Union officers before posting. No notices shall contain any controversial matter, propaganda items, or election materials other than materials relating to Union elections. ARTICLE 21 -- REPORT AND CALL IN TIME When an employee reports to work and work is not available, the employee shall be paid for four (4) hours at the employee's base pay. When work is not available because of a general or emergency breakdown, a minimum of two (2) hours of the employee's base pay, rather than four (4) hours of the employee's base pay, will be paid to employees who have reported for work. If the Company has made a reasonable effort to give two (2) hours notification that work is not available, then employees whom the Company attempted to notify shall not be entitled to receive any four (4) hour or two (2) hour reporting pay. If the attempted notification was unsuccessful and the employee reports to work, the Company may assign alternate work to the employee, if available. 21 Any employee who, after clocking out, is called to perform emergency work shall receive either four (4) hours at their base pay, or the employee's working time figured at time and one-half, whichever method produces the greater earnings. It shall be left to the Company's discretion how long the employee will stay on the job, subject to a maximum of sixteen (16) hours in any twenty-four (24) hour period. ARTICLE 22 -- EMPLOYMENT STABILIZATION The Company will continue to exert its best efforts in an endeavor to stabilize employment. In case of major layoffs, the program of production shall be discussed by the Union Committee and the Management before definite action is taken. ARTICLE 23 -- SERVICES OF COMMITTEE MEMBERS When an employee requests the service of a member of the committee when called before Management, their request shall be granted. It is agreed that all reasonable requests by the Union for hearings or meetings with Management will be granted without unnecessary delay. ARTICLE 24 -- PAID VACATION The qualification date for the purpose of vacation shall be January 1 or the anniversary date of employment. An employee's vacation eligibility shall be determined as of January 1 of each year. During the preceding November and December, employees will be allowed to sign up for available vacation weeks for the following year. Vacation sign up procedures will be as established in the fall of each year by mutual agreement. Anyone who has not quit or been discharged prior to their qualification date will be considered an employee for the purpose of this vacation clause. All those who are employees on the qualification date and who have 1100 credited vacation hours during the year ending with such qualification date shall receive vacations with pay as follows: Normal working hours lost as a result of disability covered by Workers' Compensation shall be credited towards the 1100 hours during the first vacation year of such disability. 22 Work hours lost by time actually spent in a hospital as a result of any disability will also be credited during the first vacation year of the disability. Hours of work lost as a result of a disability that is compensated under the Weekly Accident and Sickness coverage up to a maximum of 520 hours in a vacation year, will be counted in the vacation requirement of 1100 hours. All hours worked in a calendar year (before and after) a disability or injury shall be accumulated and shall be used as qualifying hours for purpose of vacation. Any full time employee with a year or more of service who does not meet the 1100 hours requirement by January 1 or anniversary date, shall receive pro-rata vacation pay based on the relation of credited vacation hours to 1,600. The Company will, in the event an employee leaves for military service, carry over vacation qualification hours accumulated during the vacation year of their leaving and add them to the hours in the vacation year of their return with the result total being considered toward the 1100 qualifying hours. Paid vacation weeks shall be based on the following schedule: 1. Those with one (1) but less than five (5) years seniority shall receive forty (40) hours vacation. 2. Those with five (5) years but less than ten (10) years seniority shall receive eighty (80) hours vacation. 3. Those with ten (10) years but less than fifteen (15) years seniority shall receive one hundred twenty (120) hours vacation. 4. Those with fifteen (15) years but less than twenty (20) years seniority shall receive one hundred sixty (160) hours vacation. 5. Those with twenty (20) years but less than twenty five (25) years seniority shall receive two hundred (200) hours vacation. 6. Those with twenty-five (25) years or more seniority shall receive two hundred forty (240) hours vacation. 7. The amount of vacation pay will be forty (40), eighty (80), one hundred twenty (120), one hundred sixty (160), two hundred (200), or two hundred forty (240) times the current hourly rate of the employee (not including overtime, but including shift bonus). 23 Employees must take vacations when earned and scheduled and unless there are unusual personal circumstances which the Company feels justifies the employee in not taking time off or unless the Company feels that it cannot spare the employee. The Union will be notified of these circumstances. The Company may cancel a properly scheduled vacation only for a rare and unusual circumstance, or for an emergency. Before such cancellation, the Company shall first exhaust any reasonable alternative to provide the needed staffing. If the vacation cancellation causes a hardship for the employee, the affected employee will keep the vacation as scheduled. Employees who are forced to work during a week of company scheduled vacation shall be paid at a rate of time and one-half of the applicable rate during that week. Note: This does not apply to employees who voluntarily elect to work during scheduled vacation, or defer the week of vacation. Preference of time in taking vacations shall be granted where possible to the more senior employees in point of service, but in all events final decisions as to whether time off shall be taken and the scheduling thereof shall be in the sole discretion of Management. The Company may, however, shut down the plant and give all eligible employees up to two weeks of their vacation at one time. Any employee who dies or retires will receive pro-rated vacation based on the number of hours worked since the previous January 1 qualification date. VACATION PURCHASE PLAN Purchase of Vacation Weeks. Hourly employees eligible for two (2) or fewer weeks of vacation will have the option to purchase one full, additional week of vacation from among those weeks of vacation which the Company has designated as available for purchase. The Company will make one (1) week of vacation available for purchase each year by each eligible employee, subject to a maximum of 189 weeks per year in total. Selection Procedure. Employees bidding on regular, earned vacation weeks will choose their vacations from the available vacation weeks first and then employees who wish to buy vacation weeks will do so, by seniority, from the remaining weeks of available vacation time. The vacation option selected will remain in effect throughout the calendar year regardless of any 24 family status change that may occur. Employees are permitted to purchase only one full week of vacation; individual, singles days cannot be purchased. Payment. The price or dollars for one week vacation will be determined by the employees normal hourly wage rate, not including shift differential or premium pay, on December 1 of the previous calendar year multiplied by 40 hours. If the employee's wage rate is higher or lower at the time the purchased week of vacation is taken, the employee will still receive the original computed value of that week's vacation. Vacation pay for all other weeks of vacation for which an employee is eligible will be determined at the time the vacation is taken. The deduction from an employee's earnings for vacation bought will be taken before taxes, retirement, and all other deductions are made. Vacation pay will then become subject to taxes and deductions when the vacation pay is received by the employee at the time vacation is taken. Deductions for vacation purchased will be made from equal pay periods for the entire year. New Hires. Employees will become eligible to purchase an additional week of vacation the first calendar year after they have completed a minimum of one year accredited service. For example, an employee hired on June 10, 1993 would become eligible to buy vacation for the calendar year 1995. Rehired employees will be treated as new hires for vacation purchase purposes. Termination/Transfer/Leave. If an employee who has bought vacation quits, is discharged, or is on medical or personal leave of absence, the vacation account must be balanced at the time of termination of employment to determine whether the employee or the Company is entitled to reimbursement. ARTICLE 25 -- PENSION The Diamond Brands Pension Plan will be maintained in place with benefits for service through September, 1989 for its present members. The Company will continue to contribute to the Paper Industry Union-Management Pension Fund Defined Contribution Plan. The rate of contribution per hour paid, as defined by the plan will be as 25 follows: $0.35 effective 5-1-97 (An increase of $0.02 over the $0.33) An employee may contribute to the pension plan from his or her gross income as much as the plan permits. The Company will match the employee's contribution at a rate of fifty percent (50%) of any amount up to the first four percent (4%) of gross income contributed by the employee. If you are a member of the Diamond Brands Pension Plan, you will become a member of this plan. If you are not already a member of the Diamond Brands Pension Plan you must complete one year of service, as defined by the plan, and attain age 21 to become a member of the defined contribution plan. ARTICLE 26 -- SUPERVISORS WORKING Supervisory employees shall not perform bargaining unit work except in emergencies, training, and experimental work functions which are explained before being performed. The Company shall periodically make its supervisors aware of the provisions of this article and the chain of command with respect to who can do what work. The Company shall also confront any supervisor found to have violated this article. The Company and the Union shall cooperate in monitoring compliance with this article and in considering ways to avoid violations of this article. ARTICLE 27 -- SAFETY A separate booklet called Safety Rules and Instructions describes the policy of the Cloquet Plant. It includes policies, rules and safety regulations and procedures to which the employees, as a condition of employment, must conform. The Company and the Union realize that it is virtually impossible to write a rule for every conceivable situation. Therefore, good judgment must be paramount. Employment by the Company constitutes acceptance of the Safety Rules and Instructions, and every employee is expected to know and obey them. Compliance with the Safety Rules and Instructions is a condition of employment. Violations of the policies and rules set forth in that booklet are grounds for disciplinary action, including discharge. The Company shall follow progressive discipline when disciplining an employee for safety violations. The progressive discipline steps are intended to correct the employee's actions and may be: 26 1. awareness training 2. verbal (documented) warning and awareness training 3. three (3) days off work without pay and awareness training 4. discharge. Safety violation discipline more than one (1) year old shall not be used for further disciplinary action. The Company may choose to reduce the one (1) year time frame or the discipline if the employee agrees to participate in safety presentations. With just cause due to a serious safety violation, the Company may skip one or more steps of progressive discipline. The Safety Committee shall meet monthly and shall consist of four each from Management and Union. Union members shall be appointed. The Company will provide payment annually for one pair of prescription safety glasses as follows: 1. 100% for glasses of a style selected by the Company. 2. 50% for glasses of a style selected by the employee from the applicable price schedule. The Company will provide payment of up to $50 annually for one pair of safety shoes. This payment is made pending the submission of a receipt of purchase. In the event an employee is injured while performing his or her regular duties for the Company, and he or she reports an injury promptly, he or she shall be paid for the necessary time lost during the remaining time of his or her shift on the day of injury, or on the day he or she first received medical attention. Following the employee's report of the injury, the Company shall give him or her a copy of the free employees' know-your-rights worker's compensation booklet published by the State of Minnesota. Appointments for medical attention due to an industrial injury shall be made as early as the provider's schedule allows. If an employee is required to leave work, the Company will pay the employee for the time it is necessary for the employee to be away from the job for such attention provided: (1) The employee has made a reasonable effort to obtain such medical attention outside of their working hours, and (2) The employee has notified their supervisor and the personnel office at least one day in advance of such appointment. If the Company desires to change the appointment it shall consult with the affected employee. The affected employee can agree to change the appointment or keep the original scheduled appointment if the change would cause a personal hardship. If the employee is not cooperative in scheduling appointments in a timely manner, the Company, the affected employee, and a Union representative will meet and attempt to settle the problem. 27 Unless permitted by the employee, no Company representative may be present in the room when a health care provider examines or treats the employee for an industrial injury. ARTICLE 28-- CONTRAVENTION OF LAW If a court or law makes any part of this Agreement invalid or unenforceable, the balance of this Agreement shall remain in full force and effect and the parties shall negotiate over the part declared invalid or unenforceable with the goal of making it valid and enforceable or removing it from the Agreement. ARTICLE 29 -- TOOL ALLOWANCE The Company shall provide a tool allowance as follows for all regular and spare Maintenance employees in order to take care of tools lost, stolen, or damaged which are relevant to the employee's job: Effective on ratification of the 1997 contract up to $65 per year Effective 5-1-99 up to $70 per year Effective 5-1-2001 up to $75 per year Tools purchased with the tool allowance will be purchased through the Company. Employees are required to provide adequate tools to perform all job requirements. ARTICLE 30 -- CLOTHING ALLOWANCE Permanent and spare employees in the Composition Department and in the Dye Room, the Wood Stick Printer Operator, and all Mechanics will be granted a $40.00 per year clothing allowance, unless the Company provides uniforms in lieu of this allowance. ARTICLE 31 -- SCOPE OF AGREEMENT This agreement contains the full and complete Agreement on all bargaining issues between the Parties. Any side agreements, memoranda of understanding of any kind, written or oral, which are not incorporated into this Agreement are null and void. Other agreements can be made during the term of the contract, such agreements must be reduced to writing and signed by both the Company and the Union. 28 ARTICLE 32 -- REQUEST FOR MEETINGS It is agreed that all reasonable requests by the Union for hearings or meetings with Management will be granted without unnecessary delay. ARTICLE 33 -- UNION - MANAGEMENT COOPERATION The Union and the Company will cooperate fully to produce products in the most economical manner through increasing production and efficiency in the plant in all departments. Except as specifically limited by provision of the Agreement, all rights and authority as customarily exercised by Management in the operation of the business are retained by the Company and are not subject to arbitration. ARTICLE 34 -- SHIFT PREMIUM PAY A shift bonus of fifteen cents ($.15) per hour shall be paid to employees working on the afternoon shift, and a shift bonus of twenty-three cents ($.23) per hour shall be paid to all employees working on the midnight shift, whether rotating or non-rotating. ARTICLE 35 -- COMMITMENT AND COOPERATION TASK FORCE The Union and Management of Diamond Brands Incorporated recognize that our future success will be based largely on the efforts of all employees, and that those efforts can most effectively be channeled through a constructive, cooperative, Union-Management relationship. To that end the Union and Management commit to the following principles: 1. The Company recognizes the legitimate rights and responsibilities of the Union and agrees to cooperate in maintaining the integrity of the Union. 2. In an effort to create a cultural change and resolve problems, the parties must work closely together in a joint partnership which extends from the shop floor to the front office. 3. Employees are responsible and trustworthy, and the parties commit to working to create an environment where employees are treated with dignity and in accorded with this principle. 4. The parties recognize that employment security is of paramount importance to any cooperative commitment; and therefore, no employee will be terminated or laid off because of work 29 redesign resulting from cooperative activities or projects. Any job reductions and corresponding staff level changes that may come about from these efforts will be handled by normal attrition or renegotiated voluntary severance programs. (Attrition means retirement, quits, promotions to fill salaried positions, or termination for any reason). Excluded from this understanding are any reductions caused by market conditions, capital projects, shutdown of equipment or machinery, or other conditions not related to the above. 5. The parties agree to work toward a culture in which information is freely and willingly shared, and issues and concerns are resolved using a problem- solving approach in an atmosphere free of hostility and confrontation. 6. The Company and Union agree that it is important to create an environment where employees at all levels of the organization are involved in decision- making and have an opportunity to voluntarily provide their participation, input, commitment, and cooperation. 7. The Company and the Union commit to train and educate the Union Bargaining Committee in regards to any questions that need to be addressed in order to accomplish the objectives of this commitment to work with each other. Together, they will train and educate the employees as needed to move at an acceptable pace. 8. The parties recognize that the intended cultural change is a long term difficult, and time-consuming process. Successful results are dependent on the cooperative, active participation, the building of mutual trust, honest and open communications, and encouragement by both the Company and the Union. 9. Cooperative activities or projects undertaken as a result of this commitment shall be in conformity with the provisions of the labor agreement. 10. This joint statement of commitment and cooperation may be modified by mutual agreement of the parties. TASK FORCE ACTIVITIES Through the term of this Agreement, the Union and the Company may form task forces, by mutual agreement, to study and make recommendations on topics of concern to either party. The parties will also agree as to the purpose of the task force, with defined parameters for the task force. No task force will be able to make binding agreements on their own but will make recommendations subject to approval and agreement between the Company and the Union. It is understood that it is not possible for all task forces to function simultaneously thereby depleting necessary skilled plant resources or not having necessary resources available for assistance. The parties must therefore 30 carefully weigh the priorities and activate task forces accordingly. The parties recognize that the change to a participative, high commitment organization is a complicated process. Successful results are dependent on the cooperation, active participation, honest and open communication, and encouragement by the Company, Union, and employees. ARTICLE 36 -- CONTRACT PERIOD This contract shall remain in full force and effect without change from the date of signature to and including April 30, 2003. At least sixty (60) days before May 1, 2003 either party desiring to modify or change this Agreement shall give written notice to the other party of such fact stating in said notice the change desired. If no such notice is given by either party, then this Agreement shall be automatically renewed for an additional year. Upon the giving of such notice, the parties shall start negotiations promptly, looking toward consummation of a new agreement before this one expires. If such notice is given this Agreement shall continue in full force and effect after the giving of such notice and during negotiations for a new Agreement until the expiration of ten (10) days after written notice of termination shall have been served by either party upon the other following April 30, 2003. In the event that the Company shall desire to discontinue or to relocate any operation covered by this Agreement, the Company will make every effort to give not less than sixty (60) days notice in writing to the Union. Signed at Cloquet, Minnesota, this _____ day of ____________, 1997. 31 DIAMOND BRANDS INCORPORATED ____________________________ Christopher A. Mathews Vice President of Operations _____________________________ Carl J. Lundberg Manager, Human Resources _____________________________ Leonard F. Anderson Production Manager MATCHMAKERS LOCAL #970 UNITED PAPERWORKERS INTERNATIONAL UNION, AFL-CIO ____________________________ Marvin J. Finendale International Representative _____________________________ Bradley L. Engh President, Local #970 ____________________________ Brad R. Erickson Vice President, Local #970 ______________________________ 32 Thomas J. Nichols Negotiating Committee Member ______________________________ Todd K. Hautajarvi Negotiating Committee Member EMPLOYEES JOB CLASSIFICATION AND WAGE RATES Night Shift Premium 3 p.m. - 11 p.m. - 11 p.m. Shift 7 a.m. Shift .15 .23 33 (1) These columns assume there is NO "gain sharing" agreement. (2) These columns assume there IS a "gain sharing" agreement, but the wage figures do NOT reflect wage increase (if any) due to the "gain sharing" formula. (1) (1) (1) (2) (2) (2) 5/1/97 5/1/98 5/1/99 5/1/00 5/1/01 5/1/02 5/1/00 5/1/01 5/1/02 TIMBER HANDLING (YARD CREW) Mobile Equipment Operator A 12.52 12.89 13.26 13.71 14.18 14.66 13.64 14.04 14.45 Mobile Equipment Operator B 12.11 12.46 12.82 13.26 13.71 14.18 13.20 13.58 13.97 Truck Driver 10.77 11.09 11.41 11.80 12.20 12.61 11.74 12.08 12.43 WOODENWARE & BARKER ROOM Lead Utility 9.43 9.70 9.98 10.32 10.67 11.03 10.27 10.57 10.87 Debarker Operator 10.97 11.29 11.61 12.01 12.42 12.84 11.95 12.30 12.65 Sawyer 10.97 11.29 11.61 12.01 12.42 12.84 11.95 12.30 12.65 Chain Tender 10.49 10.79 11.10 11.48 11.87 12.27 11.42 11.76 12.10 Block Loader 10.49 10.79 11.10 11.48 11.87 12.27 11.42 11.76 12.10 Knife and Saw Grinder 11.72 12.06 12.41 12.83 13.27 13.72 12.77 13.14 13.52 Lathe Operator 11.48 11.82 12.16 12.57 13.00 13.44 12.51 12.87 13.25 Splint Chopper Set-up and Operator 11.33 11.66 12.00 12.40 12.83 13.26 12.34 12.70 13.07 Finisher 11.19 11.51 11.84 12.25 12.66 13.09 12.19 12.54 12.90 Veneer Stacker/Winder Operator 11.03 11.35 11.68 12.08 12.49 12.91 12.02 12.37 12.73 Trucker 10.68 10.99 11.31 11.69 12.09 12.50 11.64 11.97 12.32 Hog Tender 10.64 10.95 11.27 11.65 12.05 12.45 11.59 11.93 12.27 Splint, Shake and Pack 10.49 10.79 11.10 11.48 11.87 12.27 11.42 11.76 12.10 ICS Sorter Technician 10.35 10.65 10.96 11.33 11.72 12.12 11.28 11.61 11.94 Wood Stick Printer Operator 9.22 9.49 9.76 10.09 10.44 10.79 10.05 10.34 10.64 Color Room Technician 9.17 9.43 9.71 10.04 10.38 10.73 9.99 10.28 10.58 Toothpick Pointer Operator 8.89 9.15 9.41 9.73 10.06 10.41 9.69 9.97 10.26 Corn Dog Auto Sorter Technician (Progressive) 8.85 9.11 9.37 9.69 10.02 10.36 9.64 9.92 10.21 ICS Chopper Technician 8.85 9.11 9.37 9.69 10.02 10.36 9.64 9.92 10.21 Moulder Operator (Progressive) 8.85 9.11 9.37 9.69 10.02 10.36 9.64 9.92 10.21 Flat Toothpick Chopper Technician 8.82 9.07 9.34 9.65 9.98 10.32 9.61 9.89 10.17 Veneer Dryer Operator 8.80 9.05 9.32 9.63 9.96 10.30 9.59 9.86 10.15 Veneer Card Saw Operator 8.80 9.05 9.32 9.63 9.96 10.30 9.59 9.86 10.15 Toothpick Packer Operator 8.74 8.99 9.25 9.56 9.89 10.23 9.52 9.79 10.08 MATCH MILL Pocket Box Match Machine Tender/ Wrapper Operator 11.48 11.82 12.16 12.57 13.00 13.44 12.51 12.87 13.25 Wrapper Operator 11.63 11.96 12.31 12.73 13.16 13.61 12.67 13.04 13.41 Match Machine Tender 11.26 11.58 11.92 12.32 12.74 13.18 12.27 12.62 12.99 Match Box Forming Operator 10.64 10.95 11.27 11.65 12.05 12.45 11.59 11.93 12.27 Sweeper 10.49 10.79 11.10 11.48 11.87 12.27 11.42 11.76 12.10 Plant Janitor 10.49 10.79 11.10 11.48 11.87 12.27 11.42 11.76 12.10 Pocket Box Forming Machine 10.45 10.76 11.07 11.45 11.84 12.24 11.39 11.72 12.06
34 Operators Match Machine Operators 10.26 10.56 10.86 11.23 11.61 12.01 11.18 11.50 11.84 SuperMatch Equipment Tender 9.07 9.33 9.60 9.93 10.26 10.61 9.88 10.16 10.46
35 (1) (1) (1) (2) (2) (2) 5/1/97 5/1/98 5/1/99 5/1/00 5/1/01 5/1/02 5/1/00 5/1/01 5/1/02 COMPOSITION ROOM Powder Weigher 11.86 12.21 12.56 12.99 13.43 13.89 12.93 13.30 13.69 Mixer 11.38 11.71 12.05 12.46 12.88 13.32 12.40 12.76 13.13 PRINTING DEPARTMENT Press Operator A-1 13.68 14.07 14.48 14.97 15.48 16.01 14.90 15.33 15.78 Press Operator 1st Class 13.06 13.44 13.83 14.30 14.78 15.29 14.23 14.64 15.06 Press Operator 2nd Class 12.21 12.57 12.93 13.37 13.83 14.30 13.31 13.69 14.09 Press Operator 3rd Class 11.88 12.23 12.58 13.01 13.45 13.91 12.95 13.32 13.71 Press Operator 4th Class 11.57 11.90 12.25 12.66 13.09 13.54 12.60 12.97 13.34 Cutter Operator 1st Class 12.09 12.44 12.80 13.24 13.69 14.15 13.17 13.56 13.95 Cutter Operator 2nd Class 11.76 12.10 12.45 12.88 13.31 13.77 12.81 13.19 13.57 Cutter Operator 3rd Class 11.47 11.81 12.15 12.56 12.99 13.43 12.50 12.86 13.24 Utility 11.19 11.51 11.84 12.25 12.66 13.09 12.19 12.54 12.90 Chambon Press Take Away 10.26 10.56 10.86 11.23 11.61 12.01 11.18 11.50 11.84 Dye Cutter Operator 10.37 10.67 10.98 11.36 11.74 12.14 11.30 11.63 11.97 SHIPPING DEPARTMENT Checker/Loader 11.27 11.59 11.93 12.34 12.76 13.19 12.28 12.63 13.00 Loader/Trucker 11.00 11.32 11.65 12.04 12.45 12.88 11.99 12.33 12.69 Helpers 10.49 10.79 11.10 11.48 11.87 12.27 11.42 11.76 12.10 MAINTENANCE/CRAFT Machinist Experimental 14.03 14.43 14.85 15.36 15.88 16.42 15.28 15.72 16.18 Pocket Box Lead Mechanic 13.76 14.16 14.57 15.06 15.57 16.10 14.99 15.42 15.87 Machinist A-1 13.76 14.16 14.57 15.06 15.57 16.10 14.99 15.42 15.87 Machinist 1st Class 13.36 13.74 14.14 14.62 15.12 15.63 14.55 14.97 15.41 Machinist 2nd Class 12.50 12.86 13.24 13.69 14.15 14.63 13.62 14.02 14.42 Electrician A-1 13.76 14.16 14.57 15.06 15.57 16.10 14.99 15.42 15.87 Electrician 1st Class 13.36 13.74 14.14 14.62 15.12 15.63 14.55 14.97 15.41 Electrician 2nd Class 12.50 12.86 13.24 13.69 14.15 14.63 13.62 14.02 14.42 Steam Fitter A-1 13.76 14.16 14.57 15.06 15.57 16.10 14.99 15.42 15.87 Steam Fitter 1st Class 13.02 13.39 13.78 14.25 14.74 15.24 14.18 14.59 15.02 Steam Fitter 2nd Class 12.50 12.86 13.24 13.69 14.15 14.63 13.62 14.02 14.42 Automotive Mechanic A-1 13.76 14.16 14.57 15.06 15.57 16.10 14.99 15.42 15.87 Automotive Mechanic 1st Class 13.02 13.39 13.78 14.25 14.74 15.24 14.18 14.59 15.02 Millwright Experimental 14.03 14.43 14.85 15.36 15.88 16.42 15.28 15.72 16.18 Millwright A-1 13.76 14.16 14.57 15.06 15.57 16.10 14.99 15.42 15.87 Millwright 1st Class 13.02 13.39 13.78 14.25 14.74 15.24 14.18 14.59 15.02 Millwright 2nd Class 12.14 12.49 12.86 13.29 13.75 14.21 13.23 13.61 14.01 Millwright 3rd Class 11.75 12.09 12.44 12.87 13.30 13.76 12.80 13.17 13.56 Oiler 11.75 12.09 12.44 12.87 13.30 13.76 12.80 13.17 13.56 Mechanic A-1 13.76 14.16 14.57 15.06 15.57 16.10 14.99 15.42 15.87 Mechanic 1st Class 12.97 13.34 13.73 14.20 14.68 15.18 14.13 14.54 14.96 Mechanic 2nd Class 12.49 12.85 13.23 13.68 14.14 14.62 13.61 14.01 14.41 Mechanic 3rd Class 12.05 12.40 12.76 13.19 13.64 14.10 13.13 13.51 13.90 Mechanic 4th Class 11.70 12.04 12.39 12.81 13.24 13.70 12.75 13.12 13.50
36 Maintenance/Craft Helper 11.32 11.65 11.99 12.39 12.81 13.25 12.33 12.69 13.06
37 (1) (1) (1) (2) (2) (2) 5/1/97 5/1/98 5/1/99 5/1/00 5/1/01 5/1/02 5/1/00 5/1/01 5/1/02 GENERAL PLANT Inspector A 10.53 10.83 11.15 11.53 11.92 12.32 11.47 11.80 12.14 Inspector B 10.37 10.67 10.98 11.36 11.74 12.14 11.30 11.63 11.97 Entry Level Operator Position 8.51 8.76 9.01 9.32 9.63 9.96 9.27 9.54 9.82 (ELOP)
Minimum Rate For Production, Maintenance, and Yard Lead Persons: $12.00 GROUP INSURANCE BENEFITS ACTIVE EMPLOYEES AND ELIGIBLE DEPENDENTS Diamond Brands Incorporated referred to as the "Company" and the Matchmakers Local No. 970, United Paperworkers International Union, AFL-CIO, hereinafter referred to as the "Union", do hereby agree that the Employee Benefit Insurance Plan as herein after provided with negotiated improvements shall become effective May 1, 1989. Here is an explanation of the benefits that were negotiated between Diamond Brands Incorporated and the United Paperworkers International Union, AFL-CIO, Local Union 970.
Life Insurance Maximum Amount Effective on ratification of 1997 contract $22,000 Effective 5-1-98 $23,000 Effective 5-1-99 $24,000 Effective 5-1-2000 $25,000 Effective 5-1-2001 $26,000 Effective 5-1-2002 $27,000
38 Accidental Death & Dismemberment Effective on ratification of 1997 contract $22,000 Effective 5-1-98 $23,000 Effective 5-1-99 $24,000 Effective 5-1-2000 $25,000 Effective 5-1-2001 $26,000 Effective 5-1-2002 $27,000
Weekly Accident and Sickness Benefit Payable: 1st Day - Accident 8th Day - Sickness or Pregnancy Effective on ratification of 1997 contract $185/Week Effective 5-1-98 $195/Week Effective 5-1-99 $205/Week Effective 5-1-2000 $215/Week Effective 5-1-2001 $225/Week Effective 5-1-2002 $235/Week
Maximum Benefit Period: 20 Weeks COMPANY CONTRIBUTION TO GROUP HEALTH INSURANCE PLAN PREMIUM All members, their spouses and dependent children to age nineteen (19) will be covered as agreed in the 1997 negotiations. The Company and the Employee shall each continue to pay the same percentage of the health insurance premium as at present, subject to a cap on the employee contribution of $30.00 for single coverage and $125.00 for family coverage. If either of these caps is reached, there shall be a change (carrier, benefits, other) to lower the cost, and the parties shall negotiate over the way to do it. Also, the parties shall jointly explore replacement health insurance coverage before the first term of the new coverage selected during 1997 negotiations expires. As of May 1, 1997, the monthly premium is paid as follows: 39
Employee Company Total Single $22.74 $120.95 $143.69 Family (1 or more dependents) $92.72 $270.87 $363.59
A committee will be formed and chaired by the Union and coordinated by the Human Resources Manager. The goal of this committee is to reduce premium costs by identifying insurance plans with better cost control features and education in the efficient use of health insurance. Company's contribution toward all group insurance premiums - For employees absent from work to be limited as follows: Lay-off 2 calendar months after month of lay-off. COBRA provisions extended at group rates. Immediate re-instatement upon return within labor agreement time limits. Approved leave Up to 6 months as current practice. of absence for injury or illness COBRA provisions extended at group rate. Immediate re-instatement upon return within labor agreement time limits. Special leave Not make any premium contribution beyond last day worked. Employee must pay 100% of premium if he/she wants insurance to continue. Immediate re-instatement upon return within approved time. Effective on ratification of the 1997 contract, any employee covered by this contract at the time of normal retirement, and that person's spouse, shall receive a payment of fifty dollars ($50.00) per month after retirement for life to be applied towards post-retirement health insurance coverage. 40 GENERAL RULES All employees must conduct themselves in a responsible and mature way. Each individual is required to act in a responsible and mature way in order to ensure the safety and well-being of himself and other employees and to ensure the security and productivity of the plant and its equipment. Employees are expected to carry out their duties efficiently. Inattention, loafing, and socializing during working time is prohibited. Cooperation of all employees in carrying out their assignments is required. Employees are required to provide the company with their telephone number and address and to notify the company of any changes. Any article of value that appears to be misplaced should be turned into the Personnel Department. Every effort will be made to find the owner. (If the article is unclaimed within a reasonable time, it will be returned to the finder). Stealing is prohibited (a cause for discharge). Gambling is prohibited. Abusive, threatening, or obscene language is prohibited. Harassment (sexual or otherwise) is prohibited. Pictures of naked or half-naked people will not be displayed on any of the Company's property. Horseplay, fighting, and disorderly conduct are also prohibited. Running -- Employees must exercise caution when moving about the plant. Running, except in case of emergency, is prohibited. Reporting for work under the influence of alcohol or unlawful drugs, or in possession of or drinking alcoholic beverages or unlawful drugs on Company property at any time is prohibited. 41 Destruction of Company property or the property of employees is prohibited. Falsifying production or other reports is prohibited. Smoking on Company grounds or in any building except the cafeteria or designated smoking area is prohibited. ATTENDANCE Every employee is expected to report to work as scheduled unless physically unable to work or because of emergency. Employees must maintain a good attendance record. Late Employees: For payroll purposes only, an employee is considered late four (4) minutes after the beginning of the scheduled shift. This in no way affects normal attendance requirements. Employees are not to leave Company property during scheduled working hours without permission from the Supervisor. Employees are expected to be at their work place at starting time and to leave the plant and Company property after quitting time. Employees should not be on Company property any longer than necessary when they are not working. All absences from work must be reported prior to the employee's scheduled starting time. If any employee is absent for one (1) week or more, due to disability, a physician's statement regarding the employee's ability to work must be submitted to the employee's Supervisor upon returning to work. Employees are assigned numbered time cards. Employees are not to mark or deface time cards. These time cards are placed at the card racks where the employee has been instructed to punch in and out. Employees may not punch in any sooner than 15 minutes prior to their respective shifts. If an employee mispunches his or her time card, he or she shall immediately notify his or her Supervisor. The Supervisor will make the correction necessary. Employees are prohibited from punching another employee's time card. It is your responsibility if you cannot come to work to report the reason to the Time Officer or your foreperson at least 1/2 hour before the 7 - 3 shift and at least 4 hours before the 3 - 11 and 11 - 7 shift. (879-6706) Employees must be at their assigned work stations by five (5) minutes to the hour of shift change. 42 PERSONAL BUSINESS Personal business should not be conducted on Company time. Employees are not to leave Company property during scheduled working hours without permission from their Supervisors. Employees who have been given permission by their Supervisor to leave the plant for personal business are required to punch out when leaving and to punch in when returning. Only Company business is to be transacted through the telephone serviced by the switchboard. Employees requiring emergency telephone calls will be called to the telephone at once. On other calls, a message will be relayed to the employee through his/her Supervisor. Employees may make outgoing personal telephone calls from the pay telephone in the cafeteria during their break or with the permission of their Supervisor. Only notices approved by the Personnel Department may be posted on the Company bulletin boards. Employees may submit notices to the Personnel office for approval. No solicitations or distributions are permitted within the plant, except those approved by the Plant Manager or the Personnel Department. Visitors are not permitted within the plant. In an emergency situation, the employee's Supervisor will arrange a meeting for the employee and the visitor. Employees borrowing Company property must get written permission from the Supervisor who has charge of it. This written permission slip must be given to the guard. Such property must be returned promptly. SEXUAL HARASSMENT POLICY It is the policy of this company to maintain a working environment free from all forms of sexual harassment or intimidation. Unwelcome sexual advances, requests for sexual favors and other verbal or physical conduct of a sexual nature are serious violations of our policy and will not be condoned or permitted. Not only is sexual harassment a violation of our policy, but is may also violate Title VII of the Civil Rights 43 Act. Any employee who is subject to sexual harassment or intimidation should immediately contact their sexual harassment advocate, Supervisor or the Personnel Department. All complaints of sexual harassment will be promptly and confidentially investigated. Any employee who violates this policy will be subject to appropriate disciplinary action, up to and including discharge. Note: Any harassment is covered by the above policy and can result in disciplinary action. LETTERS OF AGREEMENT AND OTHER INFORMATION April 9, 1990 If an employee who had been hired exclusively into a skilled craft job is regressed from that job for a period of a week or more, he/she will be paid at a rate that reflects the base job rate plus half the difference between the base job rate and their normal rate. This "halfway" rate will be paid until such time the employee is returned to their skilled craft job. Spare Veneer Stacker (February 1, 1996) It is mutually agreed to fill four (4) additional Spare Veneer Stacker positions from the posting of January 10, 1996, in anticipation of increased production to meet orders. This will insure that a sufficient pool of trained employees are available to safely meet production requirements. Match Machine Operators (June 19, 1996) Match Machine Operators working on the nester equipment by themselves will be renamed Penny Match Box Former Operators and receive a rate of pay of $10.34 per hour. This position will be filled by the current senior Match Machine Operators on Penny Match. Note: The five (5) permanent Match Machine Operators will remain in their BMAD positions per their choice. There will be a need for three regulars and one spare position. Penny Match Box Former Operators will be chosen by seniority from existing Match Machine Operators (commodity). Effective January 1, 1997, the position of Kitchen Match Box Former Operator and Penny Match Box Former Operator will be combined into one position of Match Box Former Operator. Back pay will be paid to the individuals who were scheduled on the nester equipment by themselves on #4 Match Machine from January 1, 1996, to the present. 44 Flat Toothpick Packer Operator (January 24, 1997) It is agreed that a wage increase of $.15 per hour will be granted to the Flat Toothpick Packer Operator position until such time that the re-engineering effort of the entire finishing area is concluded. This will include back pay for eligible employees from January, 1996 to the present. Job Performance Reviews (eff. on signing of 1997 contract) A committee composed of Company and Union representatives shall meet and devise: a) written skills criteria to be used during job performance reviews of Mechanics, skilled Maintenance and Printing employees, b) a form to be used during such reviews, and c) written skills criteria for entrance into such classifications. The committee shall accomplish these tasks by May 1, 1997. The May 1, 1997 deadline may be extended by mutual agreement of the committee members, but items a) and b) shall be completed in sufficient time so that the criteria and forms are available for the 1998 job performance reviews. Posting of Schedules (eff. on signing of 1997 contract) Monday through Friday schedules shall be posted on Monday of the preceding week. Any employee with knowledge of any personal scheduling concerns shall notify his or her supervisor of the concerns before 7:00 a.m. on the Monday the schedule is to be posted. Any changes desired to the posted schedule due to unforeseen reasons shall be brought to the attention of the supervisor by 10:00 a.m. of the following Wednesday. The Company may refuse to honor any schedule change requested after the Wednesday deadline. This side agreement shall take effect upon signing of the 1997 contract and shall expire six (6) months after the signing date. Prior to expiration the parties shall meet and confer over any problems caused by this side agreement, how to fix those problems, whether to renew this side agreement, and, if so, for how long. Scheduling of Maintenance Work (eff. on signing of 1997 contract) Effective upon signing of the 1997 contract, maintenance crew members shall be involved in the scheduling of the maintenance work. 45 This side agreement shall expire one (1) year after the signing date. Prior to expiration the parties shall meet and confer about whether to renew this side agreement, and, if so, for how long. Bidding (eff. on signing of 1997 contract) Prior to or during a contractual absence an employee may indicate in writing to the Company that he or she wishes to bid on specified permanent vacancies and new jobs that may arise during such absence. Re-engineering (eff. on signing of 1997 contract) A committee comprised of three (3) Company appointees and three (3) Union appointees shall meet and prepare a recommendation on a direction for re- engineering the jobs covered by the labor contract. The committee's recommendation shall be submitted to the Company and to the Union with ninety (90) days of the signing of the 1997 labor contact. Employees appointed by the Union to sit on the committee shall be paid for time spent at committee meetings. Attendance (eff. on signing of 1997 contract) The current attendance point system shall include a Company-Union review board at the seven-point level. The board shall review the causes of the attendance problem and recommend ways to solve the problem. The board need not convene in cases of pattern attendance offenders and there may be further discipline without involvement of the board for such offenders. The attendance point system is as follows: The purpose of this "no fault" absentee program is to provide a uniform approach to the problem of absenteeism throughout the Cloquet plant. This is called a "no fault" program because it is set up so that the employee knows exactly where he/she stands within the program, what will occur from continued absences and what he/she can do to upgrade their absentee record. The excessive absence of a few hurts all of us, especially those who are required to work overtime or assume an additional workload due to an absence. Each employee should make every effort to show up as scheduled as part of his/her overall job performance. Each time an employee is absent it has a negative effect on the efficiency of the plant and service to the customer suffers. 46 As the goal of an attendance program is to address excessive absenteeism, an employee with less than four (4) absences in a twelve (12) month period will not come under this program. The "no fault" absentee program progresses as follows:
STEP ABSENCES ACTION TAKEN PRESENT 1 4 Verbal counseling of employee Supervisor, Employee to inform him/her of potential Union Rep., upon absentee problem. request 2 5 Verbal warning of employee Supervisor, Employee, that absentee rate is Union Rep., upon unacceptable. request. 3 6 Written warning to employee Supervisor, Employee, that absentee rate is Union Representative. unacceptable. Note: Following the Step 3 meeting, the employee is scheduled to meet with an Employee Assistance Program Coordinator and a private meeting is held to ascertain if there is anything that can be done to help the employee address problems causing excessive absenteeism. 4 7 Employee is suspended for Supervisor, Employee, one (1) day due to unacceptable Union Representative. absenteeism. 5 8 Employee is given an additional Supervisor, Employee, (and final) warning that Union Representative continued absenteeism will lead to termination. 6 9 Employee is terminated after Supervisor, Employee, repeated warnings of the result Union Rep., Personnel of unacceptable absenteeism Manager.
In order to provide employees with the opportunity to "erase" absences, the following procedure will be followed: 47
Calendar Days Without an Absence Total Absences "Erased" 60 days 1 120 days 2 180 days 3 270 days 5 360 days 8
The following would not be considered as absences under the program: Union Business Funeral Leave Military Leave Medical Emergency (Employee/Family) Jury/Court Appearance Snow Day (approved) Industrial Injury 3 day advance request (approved) S & A Situations as deemed by Human Family and Medical Leave Resources Manager Act leaves In recognition of the fact that a lengthy illness could adversely affect an otherwise good record, the following leeway is provided: 1. An employee who is ill for three (3) full consecutive days or less will only have one absence recorded. The first full day of absence will count as a point. (Note: If an employee leaves early because of illness and is ill the following day, the full day missed will count as a point.) 2. An employee who is ill for more than three (3) full consecutive days will have one absence recorded if he/she provides a doctor's slip verifying the reason for the extended absence. If no doctor's slip is provided, each day thereafter will count as an absence. Any unusual situations will be reviewed by the Human Resources Manager and a decision made if an absence is to be recorded on an employee's file. Vacation Scheduling Task Force (eff. on signing of 1997 contract) The Company and the Union shall form a task force under article 35 to study and make recommendations on the selection of vacation weeks by employees. The task force shall be completed by November 1, 1997. 48 Drug and Alcohol Policy (eff. on signing of 1997 contract) The Company and the Union shall form a task force under article 35 to study and make recommendations on a drug and alcohol policy, including drug and alcohol testing. The task force shall make its recommendations by December 31, 1997. Certain Match Machine Operators (eff. August 5, 1997) It is mutually agreed that the last three grandfathered Match Machine Operators (at the base rate of the Match Mill) will be allowed to move to permanent match machine operator vacancies in the Advertising Match Department. This will be allowed as a one-time opportunity for each employee as vacancies occur. Splint Coloring (eff. on signing of 1997 contract) Any employee performing splint coloring duties shall be paid at the splint, shake and pack wage rate. Refrigerator/Vending Machines (eff. on signing of 1997 contract) The Company shall purchase a refrigerator for the first floor cafeteria. The Union shall have the opportunity to participate in the selection of the vending machine vendor. Call-Ins (eff. on signing of 1997 contract) The Company and the Union hereby commit to joint task force investigation into call-ins, with the goal of minimizing last-minute call-ins, so that employees on duty are not forced to work past normal quitting time to cover for the employee calling in. 49 EX-10.10 30 NON - QUALIFIED STOCK OPTION DIAMOND BRANDS INCORPORATED NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement is made as of the 1st day of January, 1997 between Diamond Brands Incorporated, a Minnesota corporation (the "Company"), and Thomas Knuesel, an employee of the Company (the "Optionee"). The Company desires, by affording the Optionee an opportunity to purchase shares of its common stock (the "Common Stock") as hereinafter provided to carry out the purpose of the 1997 Non-Qualified Stock Option Plan of the Company (the "Plan"). THEREFORE, the parties hereby agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right --------------- and option (hereinafter call the "Option") to purchase from the Company all or any part of an aggregate amount of 20,000 shares of the Common Stock of the Company on the terms and conditions herein set forth. 2. Purchase Price. The purchase price of the shares of the Common Stock -------------- covered by this Option shall be $7.50 per share. 3. Term of Option. The term of the Option shall be for a period of ten -------------- (10) years from the date hereof (the "Option Date"), subject to earlier termination as hereinafter provided. 4. Vesting of Option. The right to exercise the first 6,667 shares shall ----------------- vest on January 1, 1997; the right to exercise an additional 6,667 shares shall vest on January 1, 1998; and the right to exercise the remaining 6,666 shares shall vest on January 1, 1999. 5. Non-Transferability. The Option shall not be transferable otherwise ------------------- than by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of the Optionee only by the Optionee. 6. Method of Exercising Option. Subject to the terms and conditions of --------------------------- this Option Agreement, the Option may be exercised by written notice to the Company at the principal office of the Company. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised, and shall be signed by the person so exercising the Option. Such notice shall be accompanied by payment of the full purchase price of such shares, which payment shall be made by check or bank draft payable to the Company. In the event the Option shall be exercised by any person other than the Optionee, such notice shall be accompanied by appropriate proof of such right of such person to exercise the Option. 7. Termination of Employment. If an Optionee's employment by the Company ------------------------- terminates for any reason other than death or Disability (defined in the Plan), the Option shall terminate. If an Optionee' s employment is terminated by the Company, the Option shall terminate immediately upon notice by the Company of such termination. Neither the Plan nor this Agreement confers any right with respect to continuance of employment by the Company or by a subsidiary, nor will this Plan or this Agreement interfere in any way with the employee's right, or the Company's right, to terminate his employment at any time. 8. Death of Optionee. If Optionee dies while in the employ of the ----------------- Company, his Option rights may be exercised, without regard to any installment exercise restrictions, at any time within ninety (90) days following his death by his personal representative or by the person or persons to whom his rights under the Option shall pass by will or by the laws of descent and distribution. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 9. Disability. If the employment of Optionee is terminated because of ---------- Disability, the Optionee, or his legal representative, may at any time within not more than ninety (90) days after termination of his employment, exercise his rights, in whole or in part, without regard to any installment exercise restrictions. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 10. Option Plan. This Option is subject to certain additional terms and ----------- conditions set forth in the Plan pursuant to which this Option has been issued. Optionee acknowledges receipt of a copy of the Plan on file with the Secretary of the Company and, by acceptance hereof, agrees to and accepts this Option subject to the terms of the Plan. Except as otherwise defined herein, defined terms used in this Agreement shall have the meaning ascribed thereto in the Plan. 11. Disputes. As a condition of the granting of the Option herein -------- granted, the Optionee agrees, for the Optionee and the Optionee's personal representatives, that any dispute or disagreement which may arise under or as a result of or pursuant to this Agreement shall be determined by the Board of Directors of the Company, in its sole discretion, and that any interpretation by the Board of the terms of this Agreement shall be final, binding and conclusive. 12. Binding Effect. This Agreement shall be binding upon the heirs, -------------- executors, administrators and successors of the parties hereto. 13. Restrictions. Optionee understands that upon exercise of this Option, ------------ the shares purchased may not be sold, transferred, pledged or otherwise disposed of unless the shares are registered under the Securities Act of 1933 and applicable state laws, or unless the Company has received an opinion of counsel satisfactory to the Company that such registration is not required. Optionee agrees that the exercise of the Option is conditional upon receipt by the Company of a signed Subscription Agreement and Repurchase Agreement in the form attached hereto as Exhibit A certifying that the Optionee is acquiring the shares obtained by exercise of the option for investment purposes and not with the view or intent to resell or otherwise distribute such option shares and containing certain transfer restrictions and repurchase rights. The stock certificate evidencing such shares shall bear a legend referring to such transfer restrictions and repurchase rights. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the date and year first above written. DIAMOND BRANDS INCORPORATED By__________________________ Its_________________________ ____________________________ Richard Campbell EXHIBIT A STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT ------------------------------------------- THIS AGREEMENT, made and entered into effective as of the _____ day of ___________________, 199__ by and between Diamond Brands Incorporated, a Minnesota corporation (the "Corporation") and , an individual ("Shareholder"). RECITALS -------- WHEREAS, Shareholder is employed by the Corporation and, pursuant to the terms of an Option Agreement dated January 1, 1997, desires to exercise options to purchase ________ shares of the Corporation's common stock (the "Shares" or "Share") at an exercise price of $7.50 per share; and WHEREAS, the parties hereto believe it to be in the best interests of the Corporation and its shareholders to limit the transferability of the Shares to be purchased by Shareholder hereunder, and, accordingly, such Shares shall be subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the parties hereto agree as follows: 1. SHARE ISSUANCE. -------------- 1.1 Share Issuance. Subject to the terms and upon the conditions -------------- hereinafter set forth, the Corporation hereby issues to Shareholder ___________ Shares. 1.2 Representations, Warranties and Covenants. Shareholder ----------------------------------------- acknowledges and represents as follows: (a) Shareholder has been given full and complete access to information concerning the business and finances of the Corporation, including the opportunity to ask questions and receive answers, and has used such access to evaluate the merits and risks of an investment in the Shares. (b) Shareholder understands that (i) the purchase of the Shares is a long-term investment; (ii) Shareholder must bear the economic risk of investment for an indefinite period of time because the Shares have not been registered under the Securities Act of 1933 or state securities laws and, therefore, cannot be sold unless they are subsequently registered under said laws or an exemption from such registration is available; (iii) there is presently no public market for the Shares and Shareholder may not be able to liquidate the investment in the event of an emergency or pledge the Shares as collateral security for loans; and (iv) the transferability of the Shares is restricted and requires conformity with the restrictions contained in paragraph (c) below, and will be further restricted by a legend placed on the certificates representing the Shares stating that the Shares have not been registered under the Securities Act of 1933 or state securities laws and referencing the restrictions on transferability of the Shares. (c) Shareholder represents and warrants that the Shares to be issued will be issued for his own account and for investment and without the intention of reselling or redistributing the same, and that Shareholder's financial condition is such that it is not likely that it will be necessary to dispose of any Shares in the foreseeable future. Shareholder shall not transfer any Shares in any manner without first obtaining the opinion of counsel designated by the Corporation that such proposed disposition or transfer lawfully may be made insofar as the Corporation's liability is concerned without the registration of the Shares for such purpose pursuant to the Securities Act of 1933 and applicable state securities laws. 2. REPURCHASE AGREEMENT. -------------------- 2.1 Restriction on Transfer of Shares. --------------------------------- (a) Except as otherwise provided in this Agreement, Shareholder may not, without the written consent of the Corporation, transfer any Shares subject to this Agreement, including additional shares which Shareholder may acquire at a future date by purchase, stock split, stock dividend or recapitalization, until he shall have given the Corporation the opportunity to buy such Shares on the terms and conditions hereinafter expressed. Any attempted transfer in contravention of this Agreement shall be null and void. (b) As used in this Paragraph 2, the term "transfer" shall mean any proposed disposition of Shareholder's Shares by any means whatsoever, including, without limitation, the occurrence of the following events: (i) voluntary sale, delivery, assignment, gift, devise, exchange or other transfer of the Shares; (ii) pledge, hypothecation or other encumbrance of the Shares; (iii) adjudication of Shareholder as bankrupt, Shareholder's assignment of his interest in the Shares, or any attachment, levy or other seizure of the Shares by any creditor, whether or not pursuant to the judicial process; or (iv) passage or distribution of such Shares under judicial order or legal process to any person other than Shareholder, including a guardian, trustee or conservator of such Shares. 2.2 Voluntary Transfer of Shares. ---------------------------- (a) If Shareholder desires at any time during the term of this Agreement to voluntarily transfer the Shares in any manner, then Shareholder shall give written notice to the Corporation of such desire and of the number of Shares he desires to transfer (such number of Shares being hereinafter referred to as the "Sale Shares"). Such notice shall further specify the identity of the proposed transferee, the nature of the transfer (for example, sale, gift or devise), and the terms thereof. (b) For a period of thirty (30) days after receipt of the aforesaid notice, the Corporation shall have the right to purchase the Sale Shares at the purchase price determined under the provisions of Paragraph 2.5; provided, however, that if the notice of desire to transfer the Sale Shares shall be occasioned by Shareholder's receipt of an offer from a third party to purchase the Sale Shares, the purchase price per Share to be paid hereunder shall be the lesser of the purchase price determined under Paragraph 2.5 or the purchase price offered by the third party. The Corporation shall exercise its right of purchase by delivering to Shareholder within said thirty (30) day period, written notice specifying the number of Sale Shares to be purchased by the Corporation. (c) The closing on any sale of Sale Shares to the Corporation shall occur within thirty (30) days after expiration of the option period described in subparagraph 2.2(b). At the closing, the Corporation shall pay, in cash, the entire purchase price for the Shares to be purchased, and Shareholder shall deliver to the Corporation stock certificates, duly endorsed for transfer, representing the Sale Shares purchased, free and clear of all liens and encumbrances. (d) If the Corporation does not elect to purchase all of the Sale Shares as heretofore provided, Shareholder shall be entitled, for a period of forty-five (45) days following the expiration of the Corporation's option period under subparagraph 2.2(b), to transfer said unpurchased Sale Shares to the person identified, in the manner and on the terms specified in the notice given by Shareholder pursuant to subparagraph 2.2(a). If said transfer has not been consummated within said forty-five (45) day period, said Sale Shares shall remain subject to all the provisions of this Paragraph 2. If, however, said transfer is consummated within said forty-five (45) day period, the Shares may be transferred to the transferee. (e) This Section 2.2 shall be inoperative and shall not apply in instances where a shareholder desires to transfer shares to a purchaser, where the purchaser is acquiring all or substantially all of the shares of the Corporation, or where a purchaser is acquiring all of the assets of the Corporation and the Corporation is redeeming all of the shares, or where a purchaser is acquiring the Corporation through a merger. 2.3 Involuntary Transfer of Shares. ------------------------------ (a) In case of the involuntary sale or other involuntary transfer or disposition of Shares (including without limitation any transfer of title or beneficial ownership upon default, forfeiture, court order, or otherwise than by a voluntary decision on the party of Shareholder), the Corporation shall have the right to purchase such Shares in the manner hereinafter set forth. Immediately upon the acquisition of such Shares, the transferee thereof shall furnish written notice to the Corporation indicating that said transferee has acquired the Shares and the price and payment terms therefore, accompanied by satisfactory evidence of the same. Upon receipt of such notice, the Corporation shall have the right to purchase all (but not less than all) of the Shares acquired by the transferee, in the same manner and upon the same terms and conditions hereinabove provided in Paragraph 2.2 with respect to the purchase of Shares as if Shareholder had proposed to voluntarily transfer his Shares. The purchase price for said Shares shall be the lesser of the price determined under Paragraph 2.5 or the price paid by the transferee. (b) If the Corporation does not elect to purchase all of the Shares acquired by the transferee, the options shall be deemed not to have been exercised and all of the Shares may be transferred to the transferee. 2.4 Transfer of Shares Upon Termination of Employment, Including ------------------------------------------------------------ Death or Disability. ------------------- (a) In the event Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability (as defined in the 1997 Non-Qualified Stock Option Plan), the Corporation shall have the option to purchase Shareholder's Shares at the price provided in Paragraph 2.5 as though Shareholder had given notice under Paragraph 2.2 that he desired to voluntarily transfer his Shares; provided, however, that for purposes of this Paragraph 2.4, the date specified in Paragraph 2.2 for the commencement of the Corporation's option shall be the date on which Shareholder's employment with the Corporation was terminated and the period of time in which the Corporation may exercise the option shall be twelve (12) months from the date of such termination of employment. Notwithstanding the foregoing, in the event of a termination of Shareholder's employment by reason of death or Disability, the date for commencement of the Corporation's option shall be the later of (i) the date on which Shareholder's employment with the Corporation was terminated by reason of death or Disability; or (ii) the date upon which such Shareholder receives the last of the Shares subject to this Agreement and the period of time in which the Corporation may exercise the option shall be thirty (30) days from such later date. The Corporation's option under this Section 2.4 shall take precedence over any other option hereunder and Section 2.2(e) shall only apply if the Corporation fails to exercise its option prior to the occurrence of an event described therein. (b) In the event the Corporation elects not to purchase Shareholder's Shares within the time provided in Paragraph 2.2, Shareholder shall thereafter be entitled to sell, in accordance with Paragraph 2.2 hereof. 2.5 Purchase Price of Shares. Except as provided in subparagraph ------------------------ 2.5(b) below, the purchase price of each Share shall be equal to (i) seven times earnings before interest, taxes, depreciation and amortization for the twelve month period ended as of the quarter ending immediately prior to the "event of purchase" (as defined in subparagraph 2.5(a) below), less funded debt existing at such quarter end, divided by (ii) the total number of shares outstanding on that date. The purchase price shall be determined by the Corporation and shall be adjusted for any stock splits, recapitalizations or stock dividends occurring after the date as of which the purchase price is determined and before the Closing of the purchase and sale. (a) For purposes of this Paragraph 2.5, "an event of purchase" shall mean the following: (i) In the case of the purchase of Shares under Paragraph 2.2, the "event of purchase" shall mean the date notice is received by the Corporation of Shareholder's desire to transfer his Shares. (ii) In the case of the purchase of Shares of a transferee under Paragraph 2.3, the event of purchase shall mean the date notice of the transferee's acquisition of Shares is received by the Corporation. (iii) In the case of the purchase of Shares upon the termination of Shareholder's employment under Paragraph 2.4, the "event of purchase" shall mean the date that Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability. (b) If the event of purchase shall be a termination of Shareholder's employment with the Corporation for "Cause," as defined in the 1997 Non-Qualified Stock Option Plan, the purchase price of each Share shall be the cash consideration paid by the Shareholder to acquire the Shares. 2.6 Obligations of Transferees. All transferees of Shares -------------------------- transferred in accordance with the terms of this Agreement shall take said Shares subject to the terms, conditions and restrictions of this Agreement, except the restrictions in Section 2.4 shall only apply to a transferee who is an employee of the Corporation. Such transferee shall, as a condition precedent to the transfer of Shares, sign a counterpart of this Agreement agreeing to be bound by its terms. 3. MISCELLANEOUS PROVISIONS. ------------------------ 3.1 Legend on Stock Certificates. The certificate representing the ---------------------------- Shares shall contain a legend substantially as follows: "The transfer or pledge of the Shares represented by this certificate is restricted by, and subject to, the provisions of a certain Stock Subscription and Repurchase Agreement dated as of __________________, 199__. A copy of said Agreement is on file with the Secretary of the Corporation. By acceptance of this certificate, the holder hereof agrees to be bound by the terms of said Agreement." A copy of this Agreement shall be filed with the Secretary of the Corporation. During the term of this Agreement, a legend as set forth above shall be conspicuously endorsed on each certificate representing Shares issued by the Corporation to Shareholder. 3.2 Right to Specific Performance. In recognition of the fact that ----------------------------- the Shares subject to this Agreement are of a closely-held corporation and in view of the purposes of this Agreement, the parties agree that in addition to any other relief which may be afforded by law arising out of a violation of this Agreement or a failure to perform its terms, an injured party may, at its option, have the right to compel the specific performance of the terms and provisions of this Agreement, the understanding of the parties being that both damages and injunction shall be proper forms of relief and are not to be considered alternative remedies. 3.3 Termination. ----------- (a) This Agreement shall terminate when a registration statement of the Corporation has been submitted to and accepted by the SEC authorizing the public trading of the Corporation's Shares and public trading of the Corporation's Shares is commenced on a nationally recognized exchange or over-the-counter market. (b) Upon the termination of this Agreement, Shareholder shall surrender to the Corporation each certificate bearing the legend set forth in Paragraph 3.1, and the Corporation shall issue in lieu thereof a new certificate for an equal number of Shares without such legend. 3.4 Notices. All notices, requests, and other communication from ------- any of the parties hereto to another shall be in writing and shall be considered to have been duly given or served if personally delivered, or sent by first class, certified or registered mail, return receipt requested, postage prepaid, to the address of the Shareholder as shown on the Share register of the Corporation (or such other address as may be known to the sender), or in the case of the Corporation, to its registered office. 3.5 Amendment. This Agreement may be altered or amended only by a --------- written amendment signed by the Corporation and Shareholder. 3.6 Parties in Interest. This Agreement shall be binding upon the ------------------- heirs, executors, administrators, successors and assigns of Shareholder and the Corporation. The parties hereby covenant and agree that they, their heirs, executors, administrators, successors, and assigns will take all action and execute any and all instruments, releases, assignments, and consents which may be reasonably required of them in order to carry out the provisions of this Agreement. 3.7 Counterparts. This Agreement may be executed in any number of ------------ counterparts each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 3.8 Severability. The invalidity or partial invalidity of any ------------ portion of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. 3.9 Captions. The captions at the beginning of paragraphs of this -------- Agreement are designed for convenience of reference only and are not to be used for the purpose of interpreting any provision of this Agreement. 3.10 Governing Law. This Agreement shall be subject to and governed ------------- by the laws of the State of Minnesota, and all questions concerning the meaning and intention of the terms of this Agreement and concerning the validity hereof and performance hereunder shall be determined and resolved in accordance with the laws of said State notwithstanding the fact that one or more of the parties now is or may hereafter become a resident of a different state. 3.11 Employment Rights. The Shareholder acknowledges that no right ----------------- to employment vests in Shareholder by reason of being a Shareholder and further, that the Corporation and its Board of Directors or Shareholders shall have no fiduciary duty or other obligation to provide employment or continuing employment to any Shareholder. 3.12 Dividends. The Shareholder is entitled only to such dividends --------- as may be declared by the Board of Directors out of funds legally available therefor. The Shareholder acknowledges that the Corporation may not pay dividends in the future other than S corporation distributions for taxes. Therefore, the Shareholder acknowledges that he has no entitlement to (unless declared by the Board) nor expectation of dividends with respect to shares of stock of the Corporation owned by such Shareholder. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. DIAMOND BRANDS INCORPORATED By__________________________ Its_________________________ SHAREHOLDER ____________________________ EX-10.11 31 NON - QUALIFIED STOCK OPTION AGREEMENT DIAMOND BRANDS INCORPORATED NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement is made as of the 1st day of January, 1997 between Diamond Brands Incorporated, a Minnesota corporation (the "Company"), and John Young, an employee of the Company (the "Optionee"). The Company desires, by affording the Optionee an opportunity to purchase shares of its common stock (the "Common Stock") as hereinafter provided to carry out the purpose of the 1997 Non-Qualified Stock Option Plan of the Company (the "Plan"). THEREFORE, the parties hereby agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right --------------- and option (hereinafter call the "Option") to purchase from the Company all or any part of an aggregate amount of 20,000 shares of the Common Stock of the Company on the terms and conditions herein set forth. 2. Purchase Price. The purchase price of the shares of the Common -------------- Stock covered by this Option shall be $7.50 per share. 3. Term of Option. The term of the Option shall be for a period of ten -------------- (10) years from the date hereof (the "Option Date"), subject to earlier termination as hereinafter provided. 4. Vesting of Option. The right to exercise the first 6,667 shares shall ----------------- vest on January 1, 1997; the right to exercise an additional 6,667 shares shall vest on January 1, 1998; and the right to exercise the remaining 6,666 shares shall vest on January 1, 1999. 5. Non-Transferability. The Option shall not be transferable otherwise ------------------- than by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of the Optionee only by the Optionee. 6. Method of Exercising Option. Subject to the terms and conditions of --------------------------- this Option Agreement, the Option may be exercised by written notice to the Company at the principal office of the Company. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised, and shall be signed by the person so exercising the Option. Such notice shall be accompanied by payment of the full purchase price of such shares, which payment shall be made by check or bank draft payable to the Company. In the event the Option shall be exercised by any person other than the Optionee, such notice shall be accompanied by appropriate proof of such right of such person to exercise the Option. 7. Termination of Employment. If an Optionee's employment by the Company ------------------------- terminates for any reason other than death or Disability (defined in the Plan), the Option shall terminate. If an Optionee's employment is terminated by the Company, the Option shall terminate immediately upon notice by the Company of such termination. Neither the Plan nor this Agreement confers any right with respect to continuance of employment by the Company or by a subsidiary, nor will this Plan or this Agreement interfere in any way with the employee's right, or the Company's right, to terminate his employment at any time. 8. Death of Optionee. If Optionee dies while in the employ of the ----------------- Company, his Option rights may be exercised, without regard to any installment exercise restrictions, at any time within ninety (90) days following his death by his personal representative or by the person or persons to whom his rights under the Option shall pass by will or by the laws of descent and distribution. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 9. Disability. If the employment of Optionee is terminated because of ---------- Disability, the Optionee, or his legal representative, may at any time within not more than ninety (90) days after termination of his employment, exercise his rights, in whole or in part, without regard to any installment exercise restrictions. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 10. Option Plan. This Option is subject to certain additional terms and ----------- conditions set forth in the Plan pursuant to which this Option has been issued. Optionee acknowledges receipt of a copy of the Plan on file with the Secretary of the Company and, by acceptance hereof, agrees to and accepts this Option subject to the terms of the Plan. Except as otherwise defined herein, defined terms used in this Agreement shall have the meaning ascribed thereto in the Plan. 11. Disputes. As a condition of the granting of the Option herein -------- granted, the Optionee agrees, for the Optionee and the Optionee's personal representatives, that any dispute or disagreement which may arise under or as a result of or pursuant to this Agreement shall be determined by the Board of Directors of the Company, in its sole discretion, and that any interpretation by the Board of the terms of this Agreement shall be final, binding and conclusive. 12. Binding Effect. This Agreement shall be binding upon the heirs, -------------- executors, administrators and successors of the parties hereto. 13. Restrictions. Optionee understands that upon exercise of this Option, ------------ the shares purchased may not be sold, transferred, pledged or otherwise disposed of unless the shares are registered under the Securities Act of 1933 and applicable state laws, or unless the Company has received an opinion of counsel satisfactory to the Company that such registration is not required. Optionee agrees that the exercise of the Option is conditional upon receipt by the Company of a signed Subscription Agreement and Repurchase Agreement in the form attached hereto as Exhibit A certifying that the Optionee is acquiring the shares obtained by exercise of the option for investment purposes and not with the view or intent to resell or otherwise distribute such option shares and containing certain transfer restrictions and repurchase rights. The stock certificate evidencing such shares shall bear a legend referring to such transfer restrictions and repurchase rights. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the date and year first above written. DIAMOND BRANDS INCORPORATED By /s/ Edward A. Michael ---------------------------- Its President /s/ John Young ------------------------------ John Young EXHIBIT A STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT ------------------------------------------- THIS AGREEMENT, made and entered into effective as of the _____ day of ___, __________ 199__ by and between Diamond Brands Incorporated, a Minnesota corporation (the "Corporation") and ___________, an individual ("Shareholder"). RECITALS -------- WHEREAS, Shareholder is employed by the Corporation and, pursuant to the terms of an Option Agreement dated January 1, 1997, desires to exercise options to purchase ________ shares of the Corporation's common stock (the "Shares" or "Share") at an exercise price of $7.50 per share; and WHEREAS, the parties hereto believe it to be in the best interests of the Corporation and its shareholders to limit the transferability of the Shares to be purchased by Shareholder hereunder, and, accordingly, such Shares shall be subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the parties hereto agree as follows: 1. SHARE ISSUANCE. -------------- 1.1 Share Issuance. Subject to the terms and upon the conditions -------------- hereinafter set forth, the Corporation hereby issues to Shareholder ___________ Shares. 1.2 Representations, Warranties and Covenants. Shareholder ----------------------------------------- acknowledges and represents as follows: (a) Shareholder has been given full and complete access to information concerning the business and finances of the Corporation, including the opportunity to ask questions and receive answers, and has used such access to evaluate the merits and risks of an investment in the Shares. (b) Shareholder understands that (i) the purchase of the Shares is a long-term investment; (ii) Shareholder must bear the economic risk of investment for an indefinite period of time because the Shares have not been registered under the Securities Act of 1933 or state securities laws and, therefore, cannot be sold unless they are subsequently registered under said laws or an exemption from such registration is available; (iii) there is presently no public market for the Shares and Shareholder may not be able to liquidate the investment in the event of an emergency or pledge the Shares as collateral security for loans; and (iv) the transferability of the Shares is restricted and requires conformity with the restrictions contained in paragraph (c) below, and will be further restricted by a legend placed on the certificates representing the Shares stating that the Shares have not been registered under the Securities Act of 1933 or state securities laws and referencing the restrictions on transferability of the Shares. (c) Shareholder represents and warrants that the Shares to be issued will be issued for his own account and for investment and without the intention of reselling or redistributing the same, and that Shareholder's financial condition is such that it is not likely that it will be necessary to dispose of any Shares in the foreseeable future. Shareholder shall not transfer any Shares in any manner without first obtaining the opinion of counsel designated by the Corporation that such proposed disposition or transfer lawfully may be made insofar as the Corporation's liability is concerned without the registration of the Shares for such purpose pursuant to the Securities Act of 1933 and applicable state securities laws. 2. REPURCHASE AGREEMENT. -------------------- 2.1 Restriction on Transfer of Shares. --------------------------------- (a) Except as otherwise provided in this Agreement, Shareholder may not, without the written consent of the Corporation, transfer any Shares subject to this Agreement, including additional shares which Shareholder may acquire at a future date by purchase, stock split, stock dividend or recapitalization, until he shall have given the Corporation the opportunity to buy such Shares on the terms and conditions hereinafter expressed. Any attempted transfer in contravention of this Agreement shall be null and void. (b) As used in this Paragraph 2, the term "transfer" shall mean any proposed disposition of Shareholder's Shares by any means whatsoever, including, without limitation, the occurrence of the following events: (i) voluntary sale, delivery, assignment, gift, devise, exchange or other transfer of the Shares; (ii) pledge, hypothecation or other encumbrance of the Shares; (iii) adjudication of Shareholder as bankrupt, Shareholder's assignment of his interest in the Shares, or any attachment, levy or other seizure of the Shares by any creditor, whether or not pursuant to the judicial process; or (iv) passage or distribution of such Shares under judicial order or legal process to any person other than Shareholder, including a guardian, trustee or conservator of such Shares. 2.2 Voluntary Transfer of Shares. ---------------------------- (a) If Shareholder desires at any time during the term of this Agreement to voluntarily transfer the Shares in any manner, then Shareholder shall give written notice to the Corporation of such desire and of the number of Shares he desires to transfer (such number of Shares being hereinafter referred to as the "Sale Shares"). Such notice shall further specify the identity of the proposed transferee, the nature of the transfer (for example, sale, gift or devise), and the terms thereof. (b) For a period of thirty (30) days after receipt of the aforesaid notice, the Corporation shall have the right to purchase the Sale Shares at the purchase price determined under the provisions of Paragraph 2.5; provided, however, that if the notice of desire to transfer the Sale Shares shall be occasioned by Shareholder's receipt of an offer from a third party to purchase the Sale Shares, the purchase price per Share to be paid hereunder shall be the lesser of the purchase price determined under Paragraph 2.5 or the purchase price offered by the third party. The Corporation shall exercise its right of purchase by delivering to Shareholder within said thirty (30) day period, written notice specifying the number of Sale Shares to be purchased by the Corporation. (c) The closing on any sale of Sale Shares to the Corporation shall occur within thirty (30) days after expiration of the option period described in subparagraph 2.2(b). At the closing, the Corporation shall pay, in cash, the entire purchase price for the Shares to be purchased, and Shareholder shall deliver to the Corporation stock certificates, duly endorsed for transfer, representing the Sale Shares purchased, free and clear of all liens and encumbrances. (d) If the Corporation does not elect to purchase all of the Sale Shares as heretofore provided, Shareholder shall be entitled, for a period of forty-five (45) days following the expiration of the Corporation's option period under subparagraph 2.2(b), to transfer said unpurchased Sale Shares to the person identified, in the manner and on the terms specified in the notice given by Shareholder pursuant to subparagraph 2.2(a). If said transfer has not been consummated within said forty-five (45) day period, said Sale Shares shall remain subject to all the provisions of this Paragraph 2. If, however, said transfer is consummated within said forty-five (45) day period, the Shares may be transferred to the transferee. (e) This Section 2.2 shall be inoperative and shall not apply in instances where a shareholder desires to transfer shares to a purchaser, where the purchaser is acquiring all or substantially all of the shares of the Corporation, or where a purchaser is acquiring all of the assets of the Corporation and the Corporation is redeeming all of the shares, or where a purchaser is acquiring the Corporation through a merger. 2.3 Involuntary Transfer of Shares. ------------------------------ (a) In case of the involuntary sale or other involuntary transfer or disposition of Shares (including without limitation any transfer of title or beneficial ownership upon default, forfeiture, court order, or otherwise than by a voluntary decision on the party of Shareholder), the Corporation shall have the right to purchase such Shares in the manner hereinafter set forth. Immediately upon the acquisition of such Shares, the transferee thereof shall furnish written notice to the Corporation indicating that said transferee has acquired the Shares and the price and payment terms therefore, accompanied by satisfactory evidence of the same. Upon receipt of such notice, the Corporation shall have the right to purchase all (but not less than all) of the Shares acquired by the transferee, in the same manner and upon the same terms and conditions hereinabove provided in Paragraph 2.2 with respect to the purchase of Shares as if Shareholder had proposed to voluntarily transfer his Shares. The purchase price for said Shares shall be the lesser of the price determined under Paragraph 2.5 or the price paid by the transferee. (b) If the Corporation does not elect to purchase all of the Shares acquired by the transferee, the options shall be deemed not to have been exercised and all of the Shares may be transferred to the transferee. 2.4 Transfer of Shares Upon Termination of Employment, Including ------------------------------------------------------------ Death or Disability. ------------------- (a) In the event Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability (as defined in the 1997 Non-Qualified Stock Option Plan), the Corporation shall have the option to purchase Shareholder's Shares at the price provided in Paragraph 2.5 as though Shareholder had given notice under Paragraph 2.2 that he desired to voluntarily transfer his Shares; provided, however, that for purposes of this Paragraph 2.4, the date specified in Paragraph 2.2 for the commencement of the Corporation's option shall be the date on which Shareholder's employment with the Corporation was terminated and the period of time in which the Corporation may exercise the option shall be twelve (12) months from the date of such termination of employment. Notwithstanding the foregoing, in the event of a termination of Shareholder's employment by reason of death or Disability, the date for commencement of the Corporation's option shall be the later of (i) the date on which Shareholder's employment with the Corporation was terminated by reason of death or Disability; or (ii) the date upon which such Shareholder receives the last of the Shares subject to this Agreement and the period of time in which the Corporation may exercise the option shall be thirty (30) days from such later date. The Corporation's option under this Section 2.4 shall take precedence over any other option hereunder and Section 2.2(e) shall only apply if the Corporation fails to exercise its option prior to the occurrence of an event described therein. (b) In the event the Corporation elects not to purchase Shareholder's Shares within the time provided in Paragraph 2.2, Shareholder shall thereafter be entitled to sell, in accordance with Paragraph 2.2 hereof. 2.5 Purchase Price of Shares. Except as provided in subparagraph ------------------------ 2.5(b) below, the purchase price of each Share shall be equal to (i) seven times earnings before interest, taxes, depreciation and amortization for the twelve month period ended as of the quarter ending immediately prior to the "event of purchase" (as defined in subparagraph 2.5(a) below), less funded debt existing at such quarter end, divided by (ii) the total number of shares outstanding on that date. The purchase price shall be determined by the Corporation and shall be adjusted for any stock splits, recapitalizations or stock dividends occurring after the date as of which the purchase price is determined and before the Closing of the purchase and sale. (a) For purposes of this Paragraph 2.5, "an event of purchase" shall mean the following: (i) In the case of the purchase of Shares under Paragraph 2.2, the "event of purchase" shall mean the date notice is received by the Corporation of Shareholder's desire to transfer his Shares. (ii) In the case of the purchase of Shares of a transferee under Paragraph 2.3, the event of purchase shall mean the date notice of the transferee's acquisition of Shares is received by the Corporation. (iii) In the case of the purchase of Shares upon the termination of Shareholder's employment under Paragraph 2.4, the "event of purchase" shall mean the date that Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability. (b) If the event of purchase shall be a termination of Shareholder's employment with the Corporation for "Cause," as defined in the 1997 Non-Qualified Stock Option Plan, the purchase price of each Share shall be the cash consideration paid by the Shareholder to acquire the Shares. 2.6 Obligations of Transferees. All transferees of Shares -------------------------- transferred in accordance with the terms of this Agreement shall take said Shares subject to the terms, conditions and restrictions of this Agreement, except the restrictions in Section 2.4 shall only apply to a transferee who is an employee of the Corporation. Such transferee shall, as a condition precedent to the transfer of Shares, sign a counterpart of this Agreement agreeing to be bound by its terms. 3. MISCELLANEOUS PROVISIONS. ------------------------ 3.1 Legend on Stock Certificates. The certificate representing the ---------------------------- Shares shall contain a legend substantially as follows: "The transfer or pledge of the Shares represented by this certificate is restricted by, and subject to, the provisions of a certain Stock Subscription and Repurchase Agreement dated as of ___________________ _____, 199__. A copy of said Agreement is on file with the Secretary of the Corporation. By acceptance of this certificate, the holder hereof agrees to be bound by the terms of said Agreement." A copy of this Agreement shall be filed with the Secretary of the Corporation. During the term of this Agreement, a legend as set forth above shall be conspicuously endorsed on each certificate representing Shares issued by the Corporation to Shareholder. 3.2 Right to Specific Performance. In recognition of the fact that ----------------------------- the Shares subject to this Agreement are of a closely-held corporation and in view of the purposes of this Agreement, the parties agree that in addition to any other relief which may be afforded by law arising out of a violation of this Agreement or a failure to perform its terms, an injured party may, at its option, have the right to compel the specific performance of the terms and provisions of this Agreement, the understanding of the parties being that both damages and injunction shall be proper forms of relief and are not to be considered alternative remedies. 3.3 Termination. ----------- (a) This Agreement shall terminate when a registration statement of the Corporation has been submitted to and accepted by the SEC authorizing the public trading of the Corporation's Shares and public trading of the Corporation's Shares is commenced on a nationally recognized exchange or over-the-counter market. (b) Upon the termination of this Agreement, Shareholder shall surrender to the Corporation each certificate bearing the legend set forth in Paragraph 3.1, and the Corporation shall issue in lieu thereof a new certificate for an equal number of Shares without such legend. 3.4 Notices. All notices, requests, and other communication from any ------- of the parties hereto to another shall be in writing and shall be considered to have been duly given or served if personally delivered, or sent by first class, certified or registered mail, return receipt requested, postage prepaid, to the address of the Shareholder as shown on the Share register of the Corporation (or such other address as may be known to the sender), or in the case of the Corporation, to its registered office. 3.5 Amendment. This Agreement may be altered or amended only by a --------- written amendment signed by the Corporation and Shareholder. 3.6 Parties in Interest. This Agreement shall be binding upon the ------------------- heirs, executors, administrators, successors and assigns of Shareholder and the Corporation. The parties hereby covenant and agree that they, their heirs, executors, administrators, successors, and assigns will take all action and execute any and all instruments, releases, assignments, and consents which may be reasonably required of them in order to carry out the provisions of this Agreement. 3.7 Counterparts. This Agreement may be executed in any number of ------------ counterparts each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 3.8 Severability. The invalidity or partial invalidity of any ------------ portion of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. 3.9 Captions. The captions at the beginning of paragraphs of this -------- Agreement are designed for convenience of reference only and are not to be used for the purpose of interpreting any provision of this Agreement. 3.10 Governing Law. This Agreement shall be subject to and governed ------------- by the laws of the State of Minnesota, and all questions concerning the meaning and intention of the terms of this Agreement and concerning the validity hereof and performance hereunder shall be determined and resolved in accordance with the laws of said State notwithstanding the fact that one or more of the parties now is or may hereafter become a resident of a different state. 3.11 Employment Rights. The Shareholder acknowledges that no right to ----------------- employment vests in Shareholder by reason of being a Shareholder and further, that the Corporation and its Board of Directors or Shareholders shall have no fiduciary duty or other obligation to provide employment or continuing employment to any Shareholder. 3.12 Dividends. The Shareholder is entitled only to such dividends as --------- may be declared by the Board of Directors out of funds legally available therefor. The Shareholder acknowledges that the Corporation may not pay dividends in the future other than S corporation distributions for taxes. Therefore, the Shareholder acknowledges that he has no entitlement to (unless declared by the Board) nor expectation of dividends with respect to shares of stock of the Corporation owned by such Shareholder. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. DIAMOND BRANDS INCORPORATED By_________________________ Its________________________ SHAREHOLDER ___________________________ EX-10.12 32 NON - QUALIFIED STOCK OPTION AGREEMENT DIAMOND BRANDS INCORPORATED NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement is made as of the 1st day of January, 1997 between Diamond Brands Incorporated, a Minnesota corporation (the "Company"), and Christopher Mathews, an employee of the Company (the "Optionee"). The Company desires, by affording the Optionee an opportunity to purchase shares of its common stock (the "Common Stock") as hereinafter provided to carry out the purpose of the 1997 Non-Qualified Stock Option Plan of the Company (the "Plan"). THEREFORE, the parties hereby agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right --------------- and option (hereinafter call the "Option") to purchase from the Company all or any part of an aggregate amount of 20,000 shares of the Common Stock of the Company on the terms and conditions herein set forth. 2. Purchase Price. The purchase price of the shares of the Common -------------- Stock covered by this Option shall be $7.50 per share. 3. Term of Option. The term of the Option shall be for a period of ten -------------- (10) years from the date hereof (the "Option Date"), subject to earlier termination as hereinafter provided. 4. Vesting of Option. The right to exercise the first 6,667 shares shall ----------------- vest on January 1, 1997; the right to exercise an additional 6,667 shares shall vest on January 1, 1998; and the right to exercise the remaining 6,666 shares shall vest on January 1, 1999. 5. Non-Transferability. The Option shall not be transferable otherwise ------------------- than by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of the Optionee only by the Optionee. 6. Method of Exercising Option. Subject to the terms and conditions of --------------------------- this Option Agreement, the Option may be exercised by written notice to the Company at the principal office of the Company. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised, and shall be signed by the person so exercising the Option. Such notice shall be accompanied by payment of the full purchase price of such shares, which payment shall be made by check or bank draft payable to the Company. In the event the Option shall be exercised by any person other than the Optionee, such notice shall be accompanied by appropriate proof of such right of such person to exercise the Option. 7. Termination of Employment. If an Optionee's employment by the Company ------------------------- terminates for any reason other than death or Disability (defined in the Plan), the Option shall terminate. If an Optionee' s employment is terminated by the Company, the Option shall terminate immediately upon notice by the Company of such termination. Neither the Plan nor this Agreement confers any right with respect to continuance of employment by the Company or by a subsidiary, nor will this Plan or this Agreement interfere in any way with the employee's right, or the Company's right, to terminate his employment at any time. 8. Death of Optionee. If Optionee dies while in the employ of the ----------------- Company, his Option rights may be exercised, without regard to any installment exercise restrictions, at any time within ninety (90) days following his death by his personal representative or by the person or persons to whom his rights under the Option shall pass by will or by the laws of descent and distribution. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 9. Disability. If the employment of Optionee is terminated because of ---------- Disability, the Optionee, or his legal representative, may at any time within not more than ninety (90) days after termination of his employment, exercise his rights, in whole or in part, without regard to any installment exercise restrictions. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 10. Option Plan. This Option is subject to certain additional terms and ----------- conditions set forth in the Plan pursuant to which this Option has been issued. Optionee acknowledges receipt of a copy of the Plan on file with the Secretary of the Company and, by acceptance hereof, agrees to and accepts this Option subject to the terms of the Plan. Except as otherwise defined herein, defined terms used in this Agreement shall have the meaning ascribed thereto in the Plan. 11. Disputes. As a condition of the granting of the Option herein -------- granted, the Optionee agrees, for the Optionee and the Optionee's personal representatives, that any dispute or disagreement which may arise under or as a result of or pursuant to this Agreement shall be determined by the Board of Directors of the Company, in its sole discretion, and that any interpretation by the Board of the terms of this Agreement shall be final, binding and conclusive. 12. Binding Effect. This Agreement shall be binding upon the heirs, -------------- executors, administrators and successors of the parties hereto. 13. Restrictions. Optionee understands that upon exercise of this Option, ------------ the shares purchased may not be sold, transferred, pledged or otherwise disposed of unless the shares are registered under the Securities Act of 1933 and applicable state laws, or unless the Company has received an opinion of counsel satisfactory to the Company that such registration is not required. Optionee agrees that the exercise of the Option is conditional upon receipt by the Company of a signed Subscription Agreement and Repurchase Agreement in the form attached hereto as Exhibit A certifying that the Optionee is acquiring the shares obtained by exercise of the option for investment purposes and not with the view or intent to resell or otherwise distribute such option shares and containing certain transfer restrictions and repurchase rights. The stock certificate evidencing such shares shall bear a legend referring to such transfer restrictions and repurchase rights. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the date and year first above written. DIAMOND BRANDS INCORPORATED By /s/ Edward A. Michael ------------------------- Its President ------------------------ /s/ Christopher Mathews --------------------------- Christopher Mathews EXHIBIT A STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT THIS AGREEMENT, made and entered into effective as of the _____ day of ___ ____________ 199__ by and __ between Diamond Brands Incorporated, a Minnesota corporation (the "Corporation") and ___________, an individual ("Shareholder"). RECITALS WHEREAS, Shareholder is employed by the Corporation and, pursuant to the terms of an Option Agreement dated January 1, 1997, desires to exercise options to purchase ________ shares of the Corporation's common stock (the "Shares" or "Share") at an exercise price of $7.50 per share; and WHEREAS, the parties hereto believe it to be in the best interests of the Corporation and its shareholders to limit the transferability of the Shares to be purchased by Shareholder hereunder, and, accordingly, such Shares shall be subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the parties hereto agree as follows: 1. SHARE ISSUANCE. -------------- 1.1 Share Issuance. Subject to the terms and upon the conditions -------------- hereinafter set forth, the Corporation hereby issues to Shareholder ___________ Shares. 1.2 Representations, Warranties and Covenants. Shareholder ----------------------------------------- acknowledges and represents as follows: (a) Shareholder has been given full and complete access to information concerning the business and finances of the Corporation, including the opportunity to ask questions and receive answers, and has used such access to evaluate the merits and risks of an investment in the Shares. (b) Shareholder understands that (i) the purchase of the Shares is a long-term investment; (ii) Shareholder must bear the economic risk of investment for an indefinite period of time because the Shares have not been registered under the Securities Act of 1933 or state securities laws and, therefore, cannot be sold unless they are subsequently registered under said laws or an exemption from such registration is available; (iii) there is presently no public market for the Shares and Shareholder may not be able to liquidate the investment in the event of an emergency or pledge the Shares as collateral security for loans; and (iv) the transferability of the Shares is restricted and requires conformity with the restrictions contained in paragraph (c) below, and will be further restricted by a legend placed on the certificates representing the Shares stating that the Shares have not been registered under the Securities Act of 1933 or state securities laws and referencing the restrictions on transferability of the Shares. (c) Shareholder represents and warrants that the Shares to be issued will be issued for his own account and for investment and without the intention of reselling or redistributing the same, and that Shareholder's financial condition is such that it is not likely that it will be necessary to dispose of any Shares in the foreseeable future. Shareholder shall not transfer any Shares in any manner without first obtaining the opinion of counsel designated by the Corporation that such proposed disposition or transfer lawfully may be made insofar as the Corporation's liability is concerned without the registration of the Shares for such purpose pursuant to the Securities Act of 1933 and applicable state securities laws. 2. REPURCHASE AGREEMENT. -------------------- 2.1 Restriction on Transfer of Shares. --------------------------------- (a) Except as otherwise provided in this Agreement, Shareholder may not, without the written consent of the Corporation, transfer any Shares subject to this Agreement, including additional shares which Shareholder may acquire at a future date by purchase, stock split, stock dividend or recapitalization, until he shall have given the Corporation the opportunity to buy such Shares on the terms and conditions hereinafter expressed. Any attempted transfer in contravention of this Agreement shall be null and void. (b) As used in this Paragraph 2, the term "transfer" shall mean any proposed disposition of Shareholder's Shares by any means whatsoever, including, without limitation, the occurrence of the following events: (i) voluntary sale, delivery, assignment, gift, devise, exchange or other transfer of the Shares; (ii) pledge, hypothecation or other encumbrance of the Shares; (iii) adjudication of Shareholder as bankrupt, Shareholder's assignment of his interest in the Shares, or any attachment, levy or other seizure of the Shares by any creditor, whether or not pursuant to the judicial process; or (iv) passage or distribution of such Shares under judicial order or legal process to any person other than Shareholder, including a guardian, trustee or conservator of such Shares. 2.2 Voluntary Transfer of Shares. ---------------------------- (a) If Shareholder desires at any time during the term of this Agreement to voluntarily transfer the Shares in any manner, then Shareholder shall give written notice to the Corporation of such desire and of the number of Shares he desires to transfer (such number of Shares being hereinafter referred to as the "Sale Shares"). Such notice shall further specify the identity of the proposed transferee, the nature of the transfer (for example, sale, gift or devise), and the terms thereof. (b) For a period of thirty (30) days after receipt of the aforesaid notice, the Corporation shall have the right to purchase the Sale Shares at the purchase price determined under the provisions of Paragraph 2.5; provided, however, that if the notice of desire to transfer the Sale Shares shall be occasioned by Shareholder's receipt of an offer from a third party to purchase the Sale Shares, the purchase price per Share to be paid hereunder shall be the lesser of the purchase price determined under Paragraph 2.5 or the purchase price offered by the third party. The Corporation shall exercise its right of purchase by delivering to Shareholder within said thirty (30) day period, written notice specifying the number of Sale Shares to be purchased by the Corporation. (c) The closing on any sale of Sale Shares to the Corporation shall occur within thirty (30) days after expiration of the option period described in subparagraph 2.2(b). At the closing, the Corporation shall pay, in cash, the entire purchase price for the Shares to be purchased, and Shareholder shall deliver to the Corporation stock certificates, duly endorsed for transfer, representing the Sale Shares purchased, free and clear of all liens and encumbrances. (d) If the Corporation does not elect to purchase all of the Sale Shares as heretofore provided, Shareholder shall be entitled, for a period of forty-five (45) days following the expiration of the Corporation's option period under subparagraph 2.2(b), to transfer said unpurchased Sale Shares to the person identified, in the manner and on the terms specified in the notice given by Shareholder pursuant to subparagraph 2.2(a). If said transfer has not been consummated within said forty-five (45) day period, said Sale Shares shall remain subject to all the provisions of this Paragraph 2. If, however, said transfer is consummated within said forty-five (45) day period, the Shares may be transferred to the transferee. (e) This Section 2.2 shall be inoperative and shall not apply in instances where a shareholder desires to transfer shares to a purchaser, where the purchaser is acquiring all or substantially all of the shares of the Corporation, or where a purchaser is acquiring all of the assets of the Corporation and the Corporation is redeeming all of the shares, or where a purchaser is acquiring the Corporation through a merger. 2.3 Involuntary Transfer of Shares. ------------------------------ (a) In case of the involuntary sale or other involuntary transfer or disposition of Shares (including without limitation any transfer of title or beneficial ownership upon default, forfeiture, court order, or otherwise than by a voluntary decision on the party of Shareholder), the Corporation shall have the right to purchase such Shares in the manner hereinafter set forth. Immediately upon the acquisition of such Shares, the transferee thereof shall furnish written notice to the Corporation indicating that said transferee has acquired the Shares and the price and payment terms therefore, accompanied by satisfactory evidence of the same. Upon receipt of such notice, the Corporation shall have the right to purchase all (but not less than all) of the Shares acquired by the transferee, in the same manner and upon the same terms and conditions hereinabove provided in Paragraph 2.2 with respect to the purchase of Shares as if Shareholder had proposed to voluntarily transfer his Shares. The purchase price for said Shares shall be the lesser of the price determined under Paragraph 2.5 or the price paid by the transferee. (b) If the Corporation does not elect to purchase all of the Shares acquired by the transferee, the options shall be deemed not to have been exercised and all of the Shares may be transferred to the transferee. 2.4 Transfer of Shares Upon Termination of Employment, Including ------------------------------------------------------------ Death or Disability. ------------------- (a) In the event Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability (as defined in the 1997 Non-Qualified Stock Option Plan), the Corporation shall have the option to purchase Shareholder's Shares at the price provided in Paragraph 2.5 as though Shareholder had given notice under Paragraph 2.2 that he desired to voluntarily transfer his Shares; provided, however, that for purposes of this Paragraph 2.4, the date specified in Paragraph 2.2 for the commencement of the Corporation's option shall be the date on which Shareholder's employment with the Corporation was terminated and the period of time in which the Corporation may exercise the option shall be twelve (12) months from the date of such termination of employment. Notwithstanding the foregoing, in the event of a termination of Shareholder's employment by reason of death or Disability, the date for commencement of the Corporation's option shall be the later of (i) the date on which Shareholder's employment with the Corporation was terminated by reason of death or Disability; or (ii) the date upon which such Shareholder receives the last of the Shares subject to this Agreement and the period of time in which the Corporation may exercise the option shall be thirty (30) days from such later date. The Corporation's option under this Section 2.4 shall take precedence over any other option hereunder and Section 2.2(e) shall only apply if the Corporation fails to exercise its option prior to the occurrence of an event described therein. (b) In the event the Corporation elects not to purchase Shareholder's Shares within the time provided in Paragraph 2.2, Shareholder shall thereafter be entitled to sell, in accordance with Paragraph 2.2 hereof. 2.5 Purchase Price of Shares. Except as provided in subparagraph ------------------------ 2.5(b) below, the purchase price of each Share shall be equal to (i) seven times earnings before interest, taxes, depreciation and amortization for the twelve month period ended as of the quarter ending immediately prior to the "event of purchase" (as defined in subparagraph 2.5(a) below), less funded debt existing at such quarter end, divided by (ii) the total number of shares outstanding on that date. The purchase price shall be determined by the Corporation and shall be adjusted for any stock splits, recapitalizations or stock dividends occurring after the date as of which the purchase price is determined and before the Closing of the purchase and sale. (a) For purposes of this Paragraph 2.5, "an event of purchase" shall mean the following: (i) In the case of the purchase of Shares under Paragraph 2.2, the "event of purchase" shall mean the date notice is received by the Corporation of Shareholder's desire to transfer his Shares. (ii) In the case of the purchase of Shares of a transferee under Paragraph 2.3, the event of purchase shall mean the date notice of the transferee's acquisition of Shares is received by the Corporation. (iii) In the case of the purchase of Shares upon the termination of Shareholder's employment under Paragraph 2.4, the "event of purchase" shall mean the date that Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability. (b) If the event of purchase shall be a termination of Shareholder's employment with the Corporation for "Cause," as defined in the 1997 Non-Qualified Stock Option Plan, the purchase price of each Share shall be the cash consideration paid by the Shareholder to acquire the Shares. 2.6 Obligations of Transferees. All transferees of Shares transferred -------------------------- in accordance with the terms of this Agreement shall take said Shares subject to the terms, conditions and restrictions of this Agreement, except the restrictions in Section 2.4 shall only apply to a transferee who is an employee of the Corporation. Such transferee shall, as a condition precedent to the transfer of Shares, sign a counterpart of this Agreement agreeing to be bound by its terms. 3. MISCELLANEOUS PROVISIONS. ------------------------ 3.1 Legend on Stock Certificates. The certificate representing the ---------------------------- Shares shall contain a legend substantially as follows: "The transfer or pledge of the Shares represented by this certificate is restricted by, and subject to, the provisions of a certain Stock Subscription and Repurchase Agreement dated as of ___________________, 199__. A copy of said Agreement is on file with the Secretary of the Corporation. By acceptance of this certificate, the holder hereof agrees to be bound by the terms of said Agreement." A copy of this Agreement shall be filed with the Secretary of the Corporation. During the term of this Agreement, a legend as set forth above shall be conspicuously endorsed on each certificate representing Shares issued by the Corporation to Shareholder. 3.2 Right to Specific Performance. In recognition of the fact that ----------------------------- the Shares subject to this Agreement are of a closely-held corporation and in view of the purposes of this Agreement, the parties agree that in addition to any other relief which may be afforded by law arising out of a violation of this Agreement or a failure to perform its terms, an injured party may, at its option, have the right to compel the specific performance of the terms and provisions of this Agreement, the understanding of the parties being that both damages and injunction shall be proper forms of relief and are not to be considered alternative remedies. 3.3 Termination. ----------- (a) This Agreement shall terminate when a registration statement of the Corporation has been submitted to and accepted by the SEC authorizing the public trading of the Corporation's Shares and public trading of the Corporation's Shares is commenced on a nationally recognized exchange or over-the-counter market. (b) Upon the termination of this Agreement, Shareholder shall surrender to the Corporation each certificate bearing the legend set forth in Paragraph 3.1, and the Corporation shall issue in lieu thereof a new certificate for an equal number of Shares without such legend. 3.4 Notices. All notices, requests, and other communication from any ------- of the parties hereto to another shall be in writing and shall be considered to have been duly given or served if personally delivered, or sent by first class, certified or registered mail, return receipt requested, postage prepaid, to the address of the Shareholder as shown on the Share register of the Corporation (or such other address as may be known to the sender), or in the case of the Corporation, to its registered office. 3.5 Amendment. This Agreement may be altered or amended only by a --------- written amendment signed by the Corporation and Shareholder. 3.6 Parties in Interest. This Agreement shall be binding upon the ------------------- heirs, executors, administrators, successors and assigns of Shareholder and the Corporation. The parties hereby covenant and agree that they, their heirs, executors, administrators, successors, and assigns will take all action and execute any and all instruments, releases, assignments, and consents which may be reasonably required of them in order to carry out the provisions of this Agreement. 3.7 Counterparts. This Agreement may be executed in any number of ------------ counterparts each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 3.8 Severability. The invalidity or partial invalidity of any ------------ portion of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. 3.9 Captions. The captions at the beginning of paragraphs of this -------- Agreement are designed for convenience of reference only and are not to be used for the purpose of interpreting any provision of this Agreement. 3.10 Governing Law. This Agreement shall be subject to and governed ------------- by the laws of the State of Minnesota, and all questions concerning the meaning and intention of the terms of this Agreement and concerning the validity hereof and performance hereunder shall be determined and resolved in accordance with the laws of said State notwithstanding the fact that one or more of the parties now is or may hereafter become a resident of a different state. 3.11 Employment Rights. The Shareholder acknowledges that no right to ----------------- employment vests in Shareholder by reason of being a Shareholder and further, that the Corporation and its Board of Directors or Shareholders shall have no fiduciary duty or other obligation to provide employment or continuing employment to any Shareholder. 3.12 Dividends. The Shareholder is entitled only to such dividends as --------- may be declared by the Board of Directors out of funds legally available therefor. The Shareholder acknowledges that the Corporation may not pay dividends in the future other than S corporation distributions for taxes. Therefore, the Shareholder acknowledges that he has no entitlement to (unless declared by the Board) nor expectation of dividends with respect to shares of stock of the Corporation owned by such Shareholder. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. DIAMOND BRANDS INCORPORATED By_________________________ Its________________________ SHAREHOLDER ___________________________ EX-10.13 33 NON-QUALIFIED STOCK OPTION AGREEMENT DIAMOND BRANDS INCORPORATED NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement is made as of the 1st day of January, 1997 between Diamond Brands Incorporated, a Minnesota corporation (the "Company"), and Richard Campbell, an employee of the Company (the "Optionee"). The Company desires, by affording the Optionee an opportunity to purchase shares of its common stock (the "Common Stock") as hereinafter provided to carry out the purpose of the 1997 Non-Qualified Stock Option Plan of the Company (the "Plan"). THEREFORE, the parties hereby agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right --------------- and option (hereinafter call the "Option") to purchase from the Company all or any part of an aggregate amount of 20,000 shares of the Common Stock of the Company on the terms and conditions herein set forth. 2. Purchase Price. The purchase price of the shares of the Common Stock -------------- covered by this Option shall be $7.50 per share. 3. Term of Option. The term of the Option shall be for a period of ten -------------- (10) years from the date hereof (the "Option Date"), subject to earlier termination as hereinafter provided. 4. Vesting of Option. The right to exercise the first 6,667 shares shall ----------------- vest on January 1, 1997; the right to exercise an additional 6,667 shares shall vest on January 1, 1998; and the right to exercise the remaining 6,666 shares shall vest on January 1, 1999. 5. Non-Transferability. The Option shall not be transferable otherwise ------------------- than by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of the Optionee only by the Optionee. 6. Method of Exercising Option. Subject to the terms and conditions of --------------------------- this Option Agreement, the Option may be exercised by written notice to the Company at the principal office of the Company. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised, and shall be signed by the person so exercising the Option. Such notice shall be accompanied by payment of the full purchase price of such shares, which payment shall be made by check or bank draft payable to the Company. In the event the Option shall be exercised by any person other than the Optionee, such notice shall be accompanied by appropriate proof of such right of such person to exercise the Option. 7. Termination of Employment. If an Optionee's employment by the Company ------------------------- terminates for any reason other than death or Disability (defined in the Plan), the Option shall terminate. If an Optionee' s employment is terminated by the Company, the Option shall terminate immediately upon notice by the Company of such termination. Neither the Plan nor this Agreement confers any right with respect to continuance of employment by the Company or by a subsidiary, nor will this Plan or this Agreement interfere in any way with the employee's right, or the Company's right, to terminate his employment at any time. 8. Death of Optionee. If Optionee dies while in the employ of the ----------------- Company, his Option rights may be exercised, without regard to any installment exercise restrictions, at any time within ninety (90) days following his death by his personal representative or by the person or persons to whom his rights under the Option shall pass by will or by the laws of descent and distribution. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 9. Disability. If the employment of Optionee is terminated because of ---------- Disability, the Optionee, or his legal representative, may at any time within not more than ninety (90) days after termination of his employment, exercise his rights, in whole or in part, without regard to any installment exercise restrictions. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 10. Option Plan. This Option is subject to certain additional terms and ----------- conditions set forth in the Plan pursuant to which this Option has been issued. Optionee acknowledges receipt of a copy of the Plan on file with the Secretary of the Company and, by acceptance hereof, agrees to and accepts this Option subject to the terms of the Plan. Except as otherwise defined herein, defined terms used in this Agreement shall have the meaning ascribed thereto in the Plan. 11. Disputes. As a condition of the granting of the Option herein granted, -------- the Optionee agrees, for the Optionee and the Optionee's personal representatives, that any dispute or disagreement which may arise under or as a result of or pursuant to this Agreement shall be determined by the Board of Directors of the Company, in its sole discretion, and that any interpretation by the Board of the terms of this Agreement shall be final, binding and conclusive. 12. Binding Effect. This Agreement shall be binding upon the heirs, -------------- executors, administrators and successors of the parties hereto. 13. Restrictions. Optionee understands that upon exercise of this Option, ------------ the shares purchased may not be sold, transferred, pledged or otherwise disposed of unless the shares are registered under the Securities Act of 1933 and applicable state laws, or unless the Company has received an opinion of counsel satisfactory to the Company that such registration is not required. Optionee agrees that the exercise of the Option is conditional upon receipt by the Company of a signed Subscription Agreement and Repurchase Agreement in the form attached hereto as Exhibit A certifying that the Optionee is acquiring the shares obtained by exercise of the option for investment purposes and not with the view or intent to resell or otherwise distribute such option shares and containing certain transfer restrictions and repurchase rights. The stock certificate evidencing such shares shall bear a legend referring to such transfer restrictions and repurchase rights. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the date and year first above written. DIAMOND BRANDS INCORPORATED By /s/ Edward A. Michael ------------------------- Its President ------------------------ /s/ Richard Campbell --------------------------- Richard Campbell EXHIBIT A STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT THIS AGREEMENT, made and entered into effective as of the _____ day of____ 199__ by and between Diamond Brands Incorporated, a Minnesota corporation (the "Corporation") and_____________, an individual ("Shareholder"). RECITALS WHEREAS, Shareholder is employed by the Corporation and, pursuant to the terms of an Option Agreement dated January 1, 1997, desires to exercise options to purchase ________ shares of the Corporation's common stock (the "Shares" or "Share") at an exercise price of $7.50 per share; and WHEREAS, the parties hereto believe it to be in the best interests of the Corporation and its shareholders to limit the transferability of the Shares to be purchased by Shareholder hereunder, and, accordingly, such Shares shall be subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the parties hereto agree as follows: 1. SHARE ISSUANCE. -------------- 1.1 Share Issuance. Subject to the terms and upon the conditions -------------- hereinafter set forth, the Corporation hereby issues to Shareholder ___________ Shares. 1.2 Representations, Warranties and Covenants. Shareholder ----------------------------------------- acknowledges and represents as follows: (a) Shareholder has been given full and complete access to information concerning the business and finances of the Corporation, including the opportunity to ask questions and receive answers, and has used such access to evaluate the merits and risks of an investment in the Shares. (b) Shareholder understands that (i) the purchase of the Shares is a long-term investment; (ii) Shareholder must bear the economic risk of investment for an indefinite period of time because the Shares have not been registered under the Securities Act of 1933 or state securities laws and, therefore, cannot be sold unless they are subsequently registered under said laws or an exemption from such registration is available; (iii) there is presently no public market for the Shares and Shareholder may not be able to liquidate the investment in the event of an emergency or pledge the Shares as collateral security for loans; and (iv) the transferability of the Shares is restricted and requires conformity with the restrictions contained in paragraph (c) below, and will be further restricted by a legend placed on the certificates representing the Shares stating that the Shares have not been registered under the Securities Act of 1933 or state securities laws and referencing the restrictions on transferability of the Shares. (c) Shareholder represents and warrants that the Shares to be issued will be issued for his own account and for investment and without the intention of reselling or redistributing the same, and that Shareholder's financial condition is such that it is not likely that it will be necessary to dispose of any Shares in the foreseeable future. Shareholder shall not transfer any Shares in any manner without first obtaining the opinion of counsel designated by the Corporation that such proposed disposition or transfer lawfully may be made insofar as the Corporation's liability is concerned without the registration of the Shares for such purpose pursuant to the Securities Act of 1933 and applicable state securities laws. 2. REPURCHASE AGREEMENT. -------------------- 2.1 Restriction on Transfer of Shares. --------------------------------- (a) Except as otherwise provided in this Agreement, Shareholder may not, without the written consent of the Corporation, transfer any Shares subject to this Agreement, including additional shares which Shareholder may acquire at a future date by purchase, stock split, stock dividend or recapitalization, until he shall have given the Corporation the opportunity to buy such Shares on the terms and conditions hereinafter expressed. Any attempted transfer in contravention of this Agreement shall be null and void. (b) As used in this Paragraph 2, the term "transfer" shall mean any proposed disposition of Shareholder's Shares by any means whatsoever, including, without limitation, the occurrence of the following events: (i) voluntary sale, delivery, assignment, gift, devise, exchange or other transfer of the Shares; (ii) pledge, hypothecation or other encumbrance of the Shares; (iii) adjudication of Shareholder as bankrupt, Shareholder's assignment of his interest in the Shares, or any attachment, levy or other seizure of the Shares by any creditor, whether or not pursuant to the judicial process; or (iv) passage or distribution of such Shares under judicial order or legal process to any person other than Shareholder, including a guardian, trustee or conservator of such Shares. 2.2 Voluntary Transfer of Shares. ---------------------------- (a) If Shareholder desires at any time during the term of this Agreement to voluntarily transfer the Shares in any manner, then Shareholder shall give written notice to the Corporation of such desire and of the number of Shares he desires to transfer (such number of Shares being hereinafter referred to as the "Sale Shares"). Such notice shall further specify the identity of the proposed transferee, the nature of the transfer (for example, sale, gift or devise), and the terms thereof. (b) For a period of thirty (30) days after receipt of the aforesaid notice, the Corporation shall have the right to purchase the Sale Shares at the purchase price determined under the provisions of Paragraph 2.5; provided, however, that if the notice of desire to transfer the Sale Shares shall be occasioned by Shareholder's receipt of an offer from a third party to purchase the Sale Shares, the purchase price per Share to be paid hereunder shall be the lesser of the purchase price determined under Paragraph 2.5 or the purchase price offered by the third party. The Corporation shall exercise its right of purchase by delivering to Shareholder within said thirty (30) day period, written notice specifying the number of Sale Shares to be purchased by the Corporation. (c) The closing on any sale of Sale Shares to the Corporation shall occur within thirty (30) days after expiration of the option period described in subparagraph 2.2(b). At the closing, the Corporation shall pay, in cash, the entire purchase price for the Shares to be purchased, and Shareholder shall deliver to the Corporation stock certificates, duly endorsed for transfer, representing the Sale Shares purchased, free and clear of all liens and encumbrances. (d) If the Corporation does not elect to purchase all of the Sale Shares as heretofore provided, Shareholder shall be entitled, for a period of forty-five (45) days following the expiration of the Corporation's option period under subparagraph 2.2(b), to transfer said unpurchased Sale Shares to the person identified, in the manner and on the terms specified in the notice given by Shareholder pursuant to subparagraph 2.2(a). If said transfer has not been consummated within said forty-five (45) day period, said Sale Shares shall remain subject to all the provisions of this Paragraph 2. If, however, said transfer is consummated within said forty-five (45) day period, the Shares may be transferred to the transferee. (c) This Section 2.2 shall be inoperative and shall not apply in instances where a shareholder desires to transfer shares to a purchaser, where the purchaser is acquiring all or substantially all of the shares of the Corporation, or where a purchaser is acquiring all of the assets of the Corporation and the Corporation is redeeming all of the shares, or where a purchaser is acquiring the Corporation through a merger. 2.3 Involuntary Transfer of Shares. ------------------------------ (a) In case of the involuntary sale or other involuntary transfer or disposition of Shares (including without limitation any transfer of title or beneficial ownership upon default, forfeiture, court order, or otherwise than by a voluntary decision on the party of Shareholder), the Corporation shall have the right to purchase such Shares in the manner hereinafter set forth. Immediately upon the acquisition of such Shares, the transferee thereof shall furnish written notice to the Corporation indicating that said transferee has acquired the Shares and the price and payment terms therefore, accompanied by satisfactory evidence of the same. Upon receipt of such notice, the Corporation shall have the right to purchase all (but not less than all) of the Shares acquired by the transferee, in the same manner and upon the same terms and conditions hereinabove provided in Paragraph 2.2 with respect to the purchase of Shares as if Shareholder had proposed to voluntarily transfer his Shares. The purchase price for said Shares shall be the lesser of the price determined under Paragraph 2.5 or the price paid by the transferee. (b) If the Corporation does not elect to purchase all of the Shares acquired by the transferee, the options shall be deemed not to have been exercised and all of the Shares may be transferred to the transferee. 2.4 Transfer of Shares Upon Termination of Employment, Including ------------------------------------------------------------ Death or Disability. ------------------- (a) In the event Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability (as defined in the 1997 Non-Qualified Stock Option Plan), the Corporation shall have the option to purchase Shareholder's Shares at the price provided in Paragraph 2.5 as though Shareholder had given notice under Paragraph 2.2 that he desired to voluntarily transfer his Shares; provided, however, that for purposes of this Paragraph 2.4, the date specified in Paragraph 2.2 for the commencement of the Corporation's option shall be the date on which Shareholder's employment with the Corporation was terminated and the period of time in which the Corporation may exercise the option shall be twelve (12) months from the date of such termination of employment. Notwithstanding the foregoing, in the event of a termination of Shareholder's employment by reason of death or Disability, the date for commencement of the Corporation's option shall be the later of (i) the date on which Shareholder's employment with the Corporation was terminated by reason of death or Disability; or (ii) the date upon which such Shareholder receives the last of the Shares subject to this Agreement and the period of time in which the Corporation may exercise the option shall be thirty (30) days from such later date. The Corporation's option under this Section 2.4 shall take precedence over any other option hereunder and Section 2.2(e) shall only apply if the Corporation fails to exercise its option prior to the occurrence of an event described therein. (b) In the event the Corporation elects not to purchase Shareholder's Shares within the time provided in Paragraph 2.2, Shareholder shall thereafter be entitled to sell, in accordance with Paragraph 2.2 hereof. 2.5 Purchase Price of Shares. Except as provided in subparagraph ------------------------ 2.5(b) below, the purchase price of each Share shall be equal to (i) seven times earnings before interest, taxes, depreciation and amortization for the twelve month period ended as of the quarter ending immediately prior to the "event of purchase" (as defined in subparagraph 2.5(a) below), less funded debt existing at such quarter end, divided by (ii) the total number of shares outstanding on that date. The purchase price shall be determined by the Corporation and shall be adjusted for any stock splits, recapitalizations or stock dividends occurring after the date as of which the purchase price is determined and before the Closing of the purchase and sale. (a) For purposes of this Paragraph 2.5, "an event of purchase" shall mean the following: (i) In the case of the purchase of Shares under Paragraph 2.2, the "event of purchase" shall mean the date notice is received by the Corporation of Shareholder's desire to transfer his Shares. (ii) In the case of the purchase of Shares of a transferee under Paragraph 2.3, the event of purchase shall mean the date notice of the transferee's acquisition of Shares is received by the Corporation. (iii) In the case of the purchase of Shares upon the termination of Shareholder's employment under Paragraph 2.4, the "event of purchase" shall mean the date that Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability. (b) If the event of purchase shall be a termination of Shareholder's employment with the Corporation for "Cause," as defined in the 1997 Non-Qualified Stock Option Plan, the purchase price of each Share shall be the cash consideration paid by the Shareholder to acquire the Shares. 2.6 Obligations of Transferees. All transferees of Shares transferred -------------------------- in accordance with the terms of this Agreement shall take said Shares subject to the terms, conditions and restrictions of this Agreement, except the restrictions in Section 2.4 shall only apply to a transferee who is an employee of the Corporation. Such transferee shall, as a condition precedent to the transfer of Shares, sign a counterpart of this Agreement agreeing to be bound by its terms. 3. MISCELLANEOUS PROVISIONS. ------------------------ 3.1 Legend on Stock Certificates. The certificate representing the ---------------------------- Shares shall contain a legend substantially as follows: "The transfer or pledge of the Shares represented by this certificate is restricted by, and subject to, the provisions of a certain Stock Subscription and Repurchase Agreement dated as of__________, 199__. A copy of said Agreement is on file with the Secretary of the Corporation. By acceptance of this certificate, the holder hereof agrees to be bound by the terms of said Agreement." A copy of this Agreement shall be filed with the Secretary of the Corporation. During the term of this Agreement, a legend as set forth above shall be conspicuously endorsed on each certificate representing Shares issued by the Corporation to Shareholder. 3.2 Right to Specific Performance. In recognition of the fact that ----------------------------- the Shares subject to this Agreement are of a closely-held corporation and in view of the purposes of this Agreement, the parties agree that in addition to any other relief which may be afforded by law arising out of a violation of this Agreement or a failure to perform its terms, an injured party may, at its option, have the right to compel the specific performance of the terms and provisions of this Agreement, the understanding of the parties being that both damages and injunction shall be proper forms of relief and are not to be considered alternative remedies. 3.3 Termination. ----------- (a) This Agreement shall terminate when a registration statement of the Corporation has been submitted to and accepted by the SEC authorizing the public trading of the Corporation's Shares and public trading of the Corporation's Shares is commenced on a nationally recognized exchange or over-the-counter market. (b) Upon the termination of this Agreement, Shareholder shall surrender to the Corporation each certificate bearing the legend set forth in Paragraph 3.1, and the Corporation shall issue in lieu thereof a new certificate for an equal number of Shares without such legend. 3.4 Notices. All notices, requests, and other communication from any ------- of the parties hereto to another shall be in writing and shall be considered to have been duly given or served if personally delivered, or sent by first class, certified or registered mail, return receipt requested, postage prepaid, to the address of the Shareholder as shown on the Share register of the Corporation (or such other address as may be known to the sender), or in the case of the Corporation, to its registered office. 3.5 Amendment. This Agreement may be altered or amended only by a --------- written amendment signed by the Corporation and Shareholder. 3.6 Parties in Interest. This Agreement shall be binding upon the ------------------- heirs, executors, administrators, successors and assigns of Shareholder and the Corporation. The parties hereby covenant and agree that they, their heirs, executors, administrators, successors, and assigns will take all action and execute any and all instruments, releases, assignments, and consents which may be reasonably required of them in order to carry out the provisions of this Agreement. 3.7 Counterparts. This Agreement may be executed in any number of ----------- counterparts each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 3.8 Severability. The invalidity or partial invalidity of any portion ------------ of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. 3.9 Captions. The captions at the beginning of paragraphs of this -------- Agreement are designed for convenience of reference only and not to be used for the purpose of interpreting any provision of this Agreement. 3.10 Governing Law. This Agreement shall be subject to and governed ------------- by the laws of the State of Minnesota, and all questions concerning the meaning and intention of the terms of this Agreement and concerning the validity hereof and performance hereunder shall be determined and resolved in accordance with the laws of said State notwithstanding the fact that one or more of the parties now is or may hereafter become a resident of a different state. 3.11 Employment Rights. The Shareholder acknowledges that no right to ----------------- employment vests in Shareholder by reason of being a Shareholder and further, that the Corporation and its Board of Directors or Shareholders shall have no fiduciary duty or other obligation to provide employment or continuing employment to any Shareholder. 3.12 Dividends. The Shareholder is entitled only to such dividends as --------- may be declared by the Board of Directors out of funds legally available therefor. The Shareholder acknowledges that the Corporation may not pay dividends in the future other than S corporation distributions for taxes. Therefore, the Shareholder acknowledges that he has no entitlement to (unless declared by the Board) nor expectation of dividends with respect to shares of stock of the Corporation owned by such Shareholder. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. DIAMOND BRANDS INCORPORATED By_________________________ Its________________________ SHAREHOLDER ___________________________ EX-10.14 34 NON - QUALIFIED STOCK OPTION AGREEMENT DIAMOND BRANDS INCORPORATED NON-QUALIFIED STOCK OPTION AGREEMENT This Option Agreement is made as of the 1st day of January, 1997 between Diamond Brands Incorporated, a Minnesota corporation (the "Company"), and John Beach, an employee of the Company (the "Optionee"). The Company desires, by affording the Optionee an opportunity to purchase shares of its common stock (the "Common Stock") as hereinafter provided to carry out the purpose of the 1997 Non-Qualified Stock Option Plan of the Company (the "Plan"). THEREFORE, the parties hereby agree as follows: 1. Grant of Option. The Company hereby grants to the Optionee the right --------------- and option (hereinafter call the "Option") to purchase from the Company all or any part of an aggregate amount of 20,000 shares of the Common Stock of the Company on the terms and conditions herein set forth. 2. Purchase Price. The purchase price of the shares of the Common Stock -------------- covered by this Option shall be $7.50 per share. 3. Term of Option. The term of the Option shall be for a period of ten -------------- (10) years from the date hereof (the "Option Date"), subject to earlier termination as hereinafter provided. 4. Vesting of Option. The right to exercise the first 6,667 shares shall ----------------- vest on January 1, 1997; the right to exercise an additional 6,667 shares shall vest on January 1, 1998; and the right to exercise the remaining 6,666 shares shall vest on January 1, 1999. 5. Non-Transferability. The Option shall not be transferable otherwise ------------------- than by will or the laws of descent and distribution, and the Option may be exercised during the lifetime of the Optionee only by the Optionee. 6. Method of Exercising Option. Subject to the terms and conditions of --------------------------- this Option Agreement, the Option may be exercised by written notice to the Company at the principal office of the Company. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised, and shall be signed by the person so exercising the Option. Such notice shall be accompanied by payment of the full purchase price of such shares, which payment shall be made by check or bank draft payable to the Company. In the event the Option shall be exercised by any person other than the Optionee, such notice shall be accompanied by appropriate proof of such right of such person to exercise the Option. 7. Termination of Employment. If an Optionee's employment by the Company ------------------------- terminates for any reason other than death or Disability (defined in the Plan), the Option shall terminate. If an Optionee' s employment is terminated by the Company, the Option shall terminate immediately upon notice by the Company of such termination. Neither the Plan nor this Agreement confers any right with respect to continuance of employment by the Company or by a subsidiary, nor will this Plan or this Agreement interfere in any way with the employee's right, or the Company's right, to terminate his employment at any time. 8. Death of Optionee. If Optionee dies while in the employ of the ----------------- Company, his Option rights may be exercised, without regard to any installment exercise restrictions, at any time within ninety (90) days following his death by his personal representative or by the person or persons to whom his rights under the Option shall pass by will or by the laws of descent and distribution. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 9. Disability. If the employment of Optionee is terminated because of ---------- Disability, the Optionee, or his legal representative, may at any time within not more than ninety (90) days after termination of his employment, exercise his rights, in whole or in part, without regard to any installment exercise restrictions. In no event, however, may any option rights be exercised by anyone after the expiration of the term of this Option. 10. Option Plan. This Option is subject to certain additional terms and ----------- conditions set forth in the Plan pursuant to which this Option has been issued. Optionee acknowledges receipt of a copy of the Plan on file with the Secretary of the Company and, by acceptance hereof, agrees to and accepts this Option subject to the terms of the Plan. Except as otherwise defined herein, defined terms used in this Agreement shall have the meaning ascribed thereto in the Plan. 11. Disputes. As a condition of the granting of the Option herein -------- granted, the Optionee agrees, for the Optionee and the Optionee's personal representatives, that any dispute or disagreement which may arise under or as a result of or pursuant to this Agreement shall be determined by the Board of Directors of the Company, in its sole discretion, and that any interpretation by the Board of the terms of this Agreement shall be final, binding and conclusive. 12. Binding Effect. This Agreement shall be binding upon the heirs, -------------- executors, administrators and successors of the parties hereto. 13. Restrictions. Optionee understands that upon exercise of this Option, ------------ the shares purchased may not be sold, transferred, pledged or otherwise disposed of unless the shares are registered under the Securities Act of 1933 and applicable state laws, or unless the Company has received an opinion of counsel satisfactory to the Company that such registration is not required. Optionee agrees that the exercise of the Option is conditional upon receipt by the Company of a signed Subscription Agreement and Repurchase Agreement in the form attached hereto as Exhibit A certifying that the Optionee is acquiring the shares obtained by exercise of the option for investment purposes and not with the view or intent to resell or otherwise distribute such option shares and containing certain transfer restrictions and repurchase rights. The stock certificate evidencing such shares shall bear a legend referring to such transfer restrictions and repurchase rights. IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the date and year first above written. DIAMOND BRANDS INCORPORATED By /s/ Edward A. Michael --------------------------- Its President -------------------------- /s/ John Beach ----------------------------- John Beach EXHIBIT A STOCK SUBSCRIPTION AND REPURCHASE AGREEMENT THIS AGREEMENT, made and entered into effective as of the _____ day of _____, ____________199__ by and between Diamond Brands Incorporated, a Minnesota corporation (the "Corporation") and ______, an individual ("Shareholder"). RECITALS -------- WHEREAS, Shareholder is employed by the Corporation and, pursuant to the terms of an Option Agreement dated January 1, 1997, desires to exercise options to purchase ________ shares of the Corporation's common stock (the "Shares" or "Share") at an exercise price of $7.50 per share; and WHEREAS, the parties hereto believe it to be in the best interests of the Corporation and its shareholders to limit the transferability of the Shares to be purchased by Shareholder hereunder, and, accordingly, such Shares shall be subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the parties hereto agree as follows: 1. SHARE ISSUANCE. -------------- 1.1 Share Issuance. Subject to the terms and upon the conditions -------------- hereinafter set forth, the Corporation hereby issues to Shareholder ___________ Shares. 1.2 Representations, Warranties and Covenants. Shareholder ----------------------------------------- acknowledges and represents as follows: (a) Shareholder has been given full and complete access to information concerning the business and finances of the Corporation, including the opportunity to ask questions and receive answers, and has used such access to evaluate the merits and risks of an investment in the Shares. (b) Shareholder understands that (i) the purchase of the Shares is a long-term investment; (ii) Shareholder must bear the economic risk of investment for an indefinite period of time because the Shares have not been registered under the Securities Act of 1933 or state securities laws and, therefore, cannot be sold unless they are subsequently registered under said laws or an exemption from such registration is available; (iii) there is presently no public market for the Shares and Shareholder may not be able to liquidate the investment in the event of an emergency or pledge the Shares as collateral security for loans; and (iv) the transferability of the Shares is restricted and requires conformity with the restrictions contained in paragraph (c) below, and will be further restricted by a legend placed on the certificates representing the Shares stating that the Shares have not been registered under the Securities Act of 1933 or state securities laws and referencing the restrictions on transferability of the Shares. (c) Shareholder represents and warrants that the Shares to be issued will be issued for his own account and for investment and without the intention of reselling or redistributing the same, and that Shareholder's financial condition is such that it is not likely that it will be necessary to dispose of any Shares in the foreseeable future. Shareholder shall not transfer any Shares in any manner without first obtaining the opinion of counsel designated by the Corporation that such proposed disposition or transfer lawfully may be made insofar as the Corporation's liability is concerned without the registration of the Shares for such purpose pursuant to the Securities Act of 1933 and applicable state securities laws. 2. REPURCHASE AGREEMENT. -------------------- 2.1 Restriction on Transfer of Shares. --------------------------------- (a) Except as otherwise provided in this Agreement, Shareholder may not, without the written consent of the Corporation, transfer any Shares subject to this Agreement, including additional shares which Shareholder may acquire at a future date by purchase, stock split, stock dividend or recapitalization, until he shall have given the Corporation the opportunity to buy such Shares on the terms and conditions hereinafter expressed. Any attempted transfer in contravention of this Agreement shall be null and void. (b) As used in this Paragraph 2, the term "transfer" shall mean any proposed disposition of Shareholder's Shares by any means whatsoever, including, without limitation, the occurrence of the following events: (i) voluntary sale, delivery, assignment, gift, devise, exchange or other transfer of the Shares; (ii) pledge, hypothecation or other encumbrance of the Shares; (iii) adjudication of Shareholder as bankrupt, Shareholder's assignment of his interest in the Shares, or any attachment, levy or other seizure of the Shares by any creditor, whether or not pursuant to the judicial process; or (iv) passage or distribution of such Shares under judicial order or legal process to any person other than Shareholder, including a guardian, trustee or conservator of such Shares. 2.2 Voluntary Transfer of Shares. ---------------------------- (a) If Shareholder desires at any time during the term of this Agreement to voluntarily transfer the Shares in any manner, then Shareholder shall give written notice to the Corporation of such desire and of the number of Shares he desires to transfer (such number of Shares being hereinafter referred to as the "Sale Shares"). Such notice shall further specify the identity of the proposed transferee, the nature of the transfer (for example, sale, gift or devise), and the terms thereof. (b) For a period of thirty (30) days after receipt of the aforesaid notice, the Corporation shall have the right to purchase the Sale Shares at the purchase price determined under the provisions of Paragraph 2.5; provided, however, that if the notice of desire to transfer the Sale Shares shall be occasioned by Shareholder's receipt of an offer from a third party to purchase the Sale Shares, the purchase price per Share to be paid hereunder shall be the lesser of the purchase price determined under Paragraph 2.5 or the purchase price offered by the third party. The Corporation shall exercise its right of purchase by delivering to Shareholder within said thirty (30) day period, written notice specifying the number of Sale Shares to be purchased by the Corporation. (c) The closing on any sale of Sale Shares to the Corporation shall occur within thirty (30) days after expiration of the option period described in subparagraph 2.2(b). At the closing, the Corporation shall pay, in cash, the entire purchase price for the Shares to be purchased, and Shareholder shall deliver to the Corporation stock certificates, duly endorsed for transfer, representing the Sale Shares purchased, free and clear of all liens and encumbrances. (d) If the Corporation does not elect to purchase all of the Sale Shares as heretofore provided, Shareholder shall be entitled, for a period of forty-five (45) days following the expiration of the Corporation's option period under subparagraph 2.2(b), to transfer said unpurchased Sale Shares to the person identified, in the manner and on the terms specified in the notice given by Shareholder pursuant to subparagraph 2.2(a). If said transfer has not been consummated within said forty-five (45) day period, said Sale Shares shall remain subject to all the provisions of this Paragraph 2. If, however, said transfer is consummated within said forty-five (45) day period, the Shares may be transferred to the transferee. (e) This Section 2.2 shall be inoperative and shall not apply in instances where a shareholder desires to transfer shares to a purchaser, where the purchaser is acquiring all or substantially all of the shares of the Corporation, or where a purchaser is acquiring all of the assets of the Corporation and the Corporation is redeeming all of the shares, or where a purchaser is acquiring the Corporation through a merger. 2.3 Involuntary Transfer of Shares. ------------------------------ (a) In case of the involuntary sale or other involuntary transfer or disposition of Shares (including without limitation any transfer of title or beneficial ownership upon default, forfeiture, court order, or otherwise than by a voluntary decision on the party of Shareholder), the Corporation shall have the right to purchase such Shares in the manner hereinafter set forth. Immediately upon the acquisition of such Shares, the transferee thereof shall furnish written notice to the Corporation indicating that said transferee has acquired the Shares and the price and payment terms therefore, accompanied by satisfactory evidence of the same. Upon receipt of such notice, the Corporation shall have the right to purchase all (but not less than all) of the Shares acquired by the transferee, in the same manner and upon the same terms and conditions hereinabove provided in Paragraph 2.2 with respect to the purchase of Shares as if Shareholder had proposed to voluntarily transfer his Shares. The purchase price for said Shares shall be the lesser of the price determined under Paragraph 2.5 or the price paid by the transferee. (b) If the Corporation does not elect to purchase all of the Shares acquired by the transferee, the options shall be deemed not to have been exercised and all of the Shares may be transferred to the transferee. 2.4 Transfer of Shares Upon Termination of Employment, Including ------------------------------------------------------------ Death or Disability. ------------------- (a) In the event Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability (as defined in the 1997 Non-Qualified Stock Option Plan), the Corporation shall have the option to purchase Shareholder's Shares at the price provided in Paragraph 2.5 as though Shareholder had given notice under Paragraph 2.2 that he desired to voluntarily transfer his Shares; provided, however, that for purposes of this Paragraph 2.4, the date specified in Paragraph 2.2 for the commencement of the Corporation's option shall be the date on which Shareholder's employment with the Corporation was terminated and the period of time in which the Corporation may exercise the option shall be twelve (12) months from the date of such termination of employment. Notwithstanding the foregoing, in the event of a termination of Shareholder's employment by reason of death or Disability, the date for commencement of the Corporation's option shall be the later of (i) the date on which Shareholder's employment with the Corporation was terminated by reason of death or Disability; or (ii) the date upon which such Shareholder receives the last of the Shares subject to this Agreement and the period of time in which the Corporation may exercise the option shall be thirty (30) days from such later date. The Corporation's option under this Section 2.4 shall take precedence over any other option hereunder and Section 2.2(e) shall only apply if the Corporation fails to exercise its option prior to the occurrence of an event described therein. (b) In the event the Corporation elects not to purchase Shareholder's Shares within the time provided in Paragraph 2.2, Shareholder shall thereafter be entitled to sell, in accordance with Paragraph 2.2 hereof. 2.5 Purchase Price of Shares. Except as provided in subparagraph ------------------------ 2.5(b) below, the purchase price of each Share shall be equal to (i) seven times earnings before interest, taxes, depreciation and amortization for the twelve month period ended as of the quarter ending immediately prior to the "event of purchase" (as defined in subparagraph 2.5(a) below), less funded debt existing at such quarter end, divided by (ii) the total number of shares outstanding on that date. The purchase price shall be determined by the Corporation and shall be adjusted for any stock splits, recapitalizations or stock dividends occurring after the date as of which the purchase price is determined and before the Closing of the purchase and sale. (a) For purposes of this Paragraph 2.5, "an event of purchase" shall mean the following: (i) In the case of the purchase of Shares under Paragraph 2.2, the "event of purchase" shall mean the date notice is received by the Corporation of Shareholder's desire to transfer his Shares. (ii) In the case of the purchase of Shares of a transferee under Paragraph 2.3, the event of purchase shall mean the date notice of the transferee's acquisition of Shares is received by the Corporation. (iii) In the case of the purchase of Shares upon the termination of Shareholder's employment under Paragraph 2.4, the "event of purchase" shall mean the date that Shareholder's employment with the Corporation is terminated for any reason whatsoever, including the Shareholder's death or Disability. (b) If the event of purchase shall be a termination of Shareholder's employment with the Corporation for "Cause," as defined in the 1997 Non-Qualified Stock Option Plan, the purchase price of each Share shall be the cash consideration paid by the Shareholder to acquire the Shares. 2.6 Obligations of Transferees. All transferees of Shares transferred -------------------------- in accordance with the terms of this Agreement shall take said Shares subject to the terms, conditions and restrictions of this Agreement, except the restrictions in Section 2.4 shall only apply to a transferee who is an employee of the Corporation. Such transferee shall, as a condition precedent to the transfer of Shares, sign a counterpart of this Agreement agreeing to be bound by its terms. 3. MISCELLANEOUS PROVISIONS. ------------------------ 3.1 Legend on Stock Certificates. The certificate representing the ---------------------------- Shares shall contain a legend substantially as follows: "The transfer or pledge of the Shares represented by this certificate is restricted by, and subject to, the provisions of a certain Stock Subscription and Repurchase Agreement dated as of _________________ , 199__. A copy of said Agreement is on file with the Secretary of the Corporation. By acceptance of this certificate, the holder hereof agrees to be bound by the terms of said Agreement. " A copy of this Agreement shall be filed with the Secretary of the Corporation. During the term of this Agreement, a legend as set forth above shall be conspicuously endorsed on each certificate representing Shares issued by the Corporation to Shareholder. 3.2 Right to Specific Performance. In recognition of the fact that ----------------------------- the Shares subject to this Agreement are of a closely-held corporation and in view of the purposes of this Agreement, the parties agree that in addition to any other relief which may be afforded by law arising out of a violation of this Agreement or a failure to perform its terms, an injured party may, at its option, have the right to compel the specific performance of the terms and provisions of this Agreement, the understanding of the parties being that both damages and injunction shall be proper forms of relief and are not to be considered alternative remedies. 3.3 Termination. ----------- (a) This Agreement shall terminate when a registration statement of the Corporation has been submitted to and accepted by the SEC authorizing the public trading of the Corporation's Shares and public trading of the Corporation's Shares is commenced on a nationally recognized exchange or over-the-counter market. (b) Upon the termination of this Agreement, Shareholder shall surrender to the Corporation each certificate bearing the legend set forth in Paragraph 3.1, and the Corporation shall issue in lieu thereof a new certificate for an equal number of Shares without such legend. 3.4 Notices. All notices, requests, and other communication from ------- any of the parties hereto to another shall be in writing and shall be considered to have been duly given or served if personally delivered, or sent by first class, certified or registered mail, return receipt requested, postage prepaid, to the address of the Shareholder as shown on the Share register of the Corporation (or such other address as may be known to the sender), or in the case of the Corporation, to its registered office. 3.5 Amendment. This Agreement may be altered or amended only by a --------- written amendment signed by the Corporation and Shareholder. 3.6 Parties in Interest. This Agreement shall be binding upon the ------------------- heirs, executors, administrators, successors and assigns of Shareholder and the Corporation. The parties hereby covenant and agree that they, their heirs, executors, administrators, successors, and assigns will take all action and execute any and all instruments, releases, assignments, and consents which may be reasonably required of them in order to carry out the provisions of this Agreement. 3.7 Counterparts. This Agreement may be executed in any number of ------------ counterparts each of which shall be deemed an original, but all of which shall constitute one and the same instrument. 3.8 Severability. The invalidity or partial invalidity of any portion ------------ of this Agreement shall not invalidate the remainder thereof, and said remainder shall remain in full force and effect. 3.9 Captions. The captions at the beginning of paragraphs of this -------- Agreement are designed for convenience of reference only and are not to be used for the purpose of interpreting any provision of this Agreement. 3.10 Governing Law. This Agreement shall be subject to and governed by ------------- the laws of the State of Minnesota, and all questions concerning the meaning and intention of the terms of this Agreement and concerning the validity hereof and performance hereunder shall be determined and resolved in accordance with the laws of said State notwithstanding the fact that one or more of the parties now is or may hereafter become a resident of a different state. 3.11 Employment Rights. The Shareholder acknowledges that no right to ----------------- employment vests in Shareholder by reason of being a Shareholder and further, that the Corporation and its Board of Directors or Shareholders shall have no fiduciary duty or other obligation to provide employment or continuing employment to any Shareholder. 3.12 Dividends. The Shareholder is entitled only to such dividends as --------- may be declared by the Board of Directors out of funds legally available therefor. The Shareholder acknowledges that the Corporation may not pay dividends in the future other than S corporation distributions for taxes. Therefore, the Shareholder acknowledges that he has no entitlement to (unless declared by the Board) nor expectation of dividends with respect to shares of stock of the Corporation owned by such Shareholder. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. DIAMOND BRANDS INCORPORATED By____________________________ Its___________________________ SHAREHOLDER ______________________________ EX-10.15 35 DIAMOKNDS BRANDS INCORPORATED DIAMOND BRANDS INCORPORATED 1997 NON-QUALIFIED STOCK OPTION PLAN SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. ------------------------------------ The name of this Plan is the Diamond Brands Incorporated 1997 Non-Qualified Stock Option Plan (the "Plan"). The purpose of the Plan is to enable Diamond Brands Incorporated (the "Company") and its Subsidiaries to retain and attract key employees who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Board" means the Board of Directors of the Company. ----- b. "Cause" means (i) a felony conviction of a participant or the failure ----- of a participant to contest prosecution for a felony, or a participant's misconduct or dishonesty, any of which is harmful to the business or reputation of the Company; or (ii) the failure of the participant to perform the duties of his position or the violation by the participant of any existing or future policies of the Company, in each case after being given written notice of such failure or violation and a fourteen (14) day period to remedy such failure or violation, to the extent such failure or violation can be remedied. c. "Code" means the Internal Revenue Code of 1986, as amended. ---- d. "Company" means Diamond Brands Incorporated, a corporation organized ------- under the laws of the State of Minnesota (or any successor corporation). e. "Disability" means permanent and total disability as determined by the ---------- Board. f. "Non-Qualified Stock Option" means any Stock Option that is intended -------------------------- to be and is designated as a "Non-Qualified Stock Option." g. "Parent Corporation" means any corporation (other than the Company) in ------------------ an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. h. "Stock" means the Common Stock of the Company. ----- i. "Stock Option" means any option to purchase shares of Stock granted ------------ pursuant to Section 5 below. j. "Subsidiary" means any corporation (other than the Company) in an ---------- unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. ADMINISTRATION. -------------- The Plan shall be administered by the Board of Directors. The Board shall have the power and authority to grant Stock Options to eligible parties pursuant to the terms of the Plan. In particular, the Board shall have the authority: (i) to select the key employees of the Company and its Subsidiaries to whom Stock Options may from time to time be granted hereunder; (ii) to determine whether and to what extent Non-Qualified Stock Options are to be granted hereunder; (iii) to determine the number of shares to be covered by each such award granted hereunder; and (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, any restriction on any Stock Option and/or the shares of Stock relating thereto). The Board shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Board may delegate its authority to officers of the Company for the purpose of selecting employees who are not officers of the Company for purposes of (i) above. All decisions made by the Board pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. 2 SECTION 3. STOCK SUBJECT TO PLAN. --------------------- The total number of shares of Stock reserved and available for distribution under the Plan shall be 90,000 shares. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan, and in the number and option price of shares subject to outstanding options granted under the Plan, as may be determined to be appropriate by the Board, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. SECTION 4. ELIGIBILITY. ----------- Key employees of the Company and its Subsidiaries who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options under the Plan. The optionees and participants under the Plan shall be selected from time to time by the Board, in its sole discretion, from among those eligible, and the Board shall determine, in its sole discretion, the number of shares covered by each award. SECTION 5. STOCK OPTIONS. ------------- Any Stock Option granted under the Plan shall be in such form as the Board may from time to time approve. The Stock Options granted under the Plan shall be Non-Qualified Stock Options. Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Board shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under ------------ a Stock Option shall be determined by the Board at the time of grant. (b) Option Term. The term of each Stock Option shall be fixed by the ----------- Board. (c) Exercisability. Stock Options shall be exercisable at such time or -------------- times as determined by the Board at or after grant. If the Board provides, in its discretion, that any option is exercisable only in installments, the Board may waive such installment exercise provisions at 3 any time. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise provisions, for a period specified by the Company, but not to exceed sixty (60) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity or (iii) the transfer of substantially all of the assets of the Company or 75% or more of the outstanding Stock of the Company. (d) Method of Exercise. Stock Options may be exercised in whole or in part ------------------ at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Board and consistent with the Plan's purpose and applicable law, including promissory notes. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 8 and otherwise fulfilled all other obligations set forth in the Stock Option Agreement. (e) Non-transferability of Options. No Stock Option shall be transferable ------------------------------ by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (f) Termination by Death. If an optionee's employment by the Company and -------------------- any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Board shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of ninety (90) days from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by ----------------------------------- the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Board shall determine at or after grant), but may not be exercised after ninety (90) days from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. 4 (h) Other Termination. If an optionee's employment by the Company and any ----------------- Subsidiary or Parent Corporation terminates for any reason other than death or Disability, the Stock Option shall thereupon terminate. If an optionee's employment is terminated by the Company, the Stock Option shall terminate immediately upon notice by the Company of such termination. 5 SECTION 6. TRANSFER, LEAVE OF ABSENCE, ETC. ------------------------------- For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Board, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Board may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Board, but only if the employee's right to re- employment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 7. AMENDMENTS AND TERMINATION. -------------------------- The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the rights of an optionee or participant under a Stock Option theretofore granted without the optionee's or participant's consent. The Board may amend the terms of any option theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without his or her consent except to the extent authorized under the Plan. The Board may also substitute new Stock Options for previously granted options, including previously granted options having higher option prices. SECTION 8. GENERAL PROVISIONS. ------------------ (a) If any law or regulation of the Securities and Exchange Commission or of any other body having jurisdiction shall require the Company or the participant to take any action in connection with the exercise of a Stock Option, then notwithstanding any contrary provision of a Stock Option Agreement or this Plan, the date for exercise of such Stock Option and the delivery of the shares purchased thereunder shall be deferred until the completion of the necessary action. In the event that the Company shall deem it necessary, the Company may condition the grant or exercise of a Stock Option granted under this Plan upon the receipt of a satisfactory certificate that the Optionee is acquiring the Stock Option or the shares obtained by exercise of the Stock Option for investment purposes and not with the view or intent to resell or otherwise distribute 6 such Stock Option or shares. In such event, the stock certificate evidencing such shares shall bear a legend referring to applicable laws restricting transfer of such shares. In the event that the Company shall deem it necessary to register under the Securities Act of 1933, as amended, or any other applicable statute, any Stock Options or any shares with respect to which a Stock Option shall have been granted or exercised, then the participant shall cooperate with the Company and take such action as is necessary to permit registration or qualification of such Stock Options or shares. (b) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (c) Each participant shall, no later than the date as of which any part of the value of an award first becomes includible as compensation in the gross income of the participant for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Board regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. Notwithstanding anything herein to the contrary, in no event shall the Company have any liability to optionee for federal or state taxes incurred by optionee, which are the sole and absolute responsibility of optionee under this Plan. (d) At the time of grant, the Board may provide in connection with any grant made under this Plan that the shares of Stock received as a result of such grant shall be subject to such restrictions on transfer as the Board may determine at the time of the grant and to a repurchase right in favor of the Company, pursuant to which the participant shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan. SECTION 9. EFFECTIVE DATE OF PLAN. ---------------------- The Plan shall be effective on January 1, 1997. 7 EX-10.16 36 NON - QUALIFIED STOCK OPTION AGREEMENT 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 Naresh K. Nakra (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 95,402 shares of Common Stock of the Company at an exercise price equal to $ 27.95 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 180th day after the date hereof and shall vest and become exercisable as to 1/30 of the shares subject to this option on the first day 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/ Thomas W. Knuesel ------------------------------ Its VP-CFO ----------------------------- ACCEPTED: /s/ Naresh K. Nakra - ---------------------- Naresh K. Nakra -4- EX-10.17 37 NON - QUALIFIED STOCK OPTION AGREEMENT 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 Naresh K. Nakra (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 286,205 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 180th day after the date hereof and shall vest and become exercisable as to 1/30 of the shares subject to this option on the first day 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/ Thomas W. Knuesel ------------------------------ Its VP-CFO ----------------------------- ACCEPTED: /s/ Naresh K. Nakra - ---------------------- Naresh K. Nakra -4- EX-10.18 38 NON - QUALIFIED STOCK OPTION AGREEMENT 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/ Edward A. Michael ----------------------------- Its President ---------------------------- ACCEPTED: /s/ Thomas W. Knuesel - ------------------------ OPTIONEE -4- EX-10.19 39 NON - QUALIFIED STOCK OPTION AGREEMENT 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 John Young (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 __________________________________ Its __________________________________ ACCEPTED: - ---------------- OPTIONEE -4- EX-10.20 40 NON - QUALIFIED STOCK OPTION AGREEMENT 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 Christopher Mathews (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. -2- 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 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 _____________________ Its ____________________ ACCEPTED: _______________ OPTIONEE -4- EX-10.21 41 NON - QUALIFIED STOCK OPTION AGREEMENT 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 Richard Campbell (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 ____________________ Its ____________________ ACCEPTED: _______________ OPTIONEE -4- EX-10.22 42 NON - QUALIFIED STOCK OPTION AGREEMENT 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 John Beach (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 23,850 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 _____________________ Its _____________________ ACCEPTED: _______________ OPTIONEE -4- EX-10.23 43 TERM LEASE AGREEMENT IBM CREDIT CORPORATION Stamford, CT 06904 TERM LEASE MASTER AGREEMENT Name and Address of Lessee: Agreement No.: MC34461 DIAMOND BRANDS IBM Branch Office No.: MC3/3TU 1804 CLOQUET AVE IBM Customer No.: 2494519 CLOQUET MN 55720 IBM Branch Office Address: TWIN CITIES RIVERSIDE 100 WASHINGTON SQUARE MINNEAPOLIS MN 55401 The Lessor pursuant to this Term Lease Master Agreement (Agreement) will be (a) IBM Credit Corporation, or a subsidiary or affiliate thereof, (b) a partnership in which IBM Credit Corporation is a partner, or (c) a related business enterprise for whom IBM Credit Corporation is the agent (Lessor). The subject matter of the lease shall be machines, field installable upgrades, feature additions or accessories marketed by International Business Machines Corporation (IBM) and shall be referred to as Equipment. Any lease transaction requested by Lessee and accepted by Lessor shall be specified in a Term Lease Supplement (Supplement). A Supplement shall refer to and incorporate by reference this Agreement and, when signed by the parties, shall constitute the lease (Lease) for the Equipment specified therein, additional details pertaining to a Lease shall be specified in a Supplement. A Supplement may also specify additional terms and conditions as well as other amounts, to be financed (Financing). Financing may include licensed program material charges (LPM Charges) for licensed programs marketed by IBM under the referenced IBM license agreement (License Agreement). 1. OPTIONS. The Supplement shall designate various lease and financing options. Option A is a Lease available only for Modifications (Paragraph 23) to Equipment under Option A prior to enactment of the Tax Reform Act of 1986. Option B is a Lease with a fair market purchase option at the end of the Lease. For Equipment under Option B Prime (B), Lessor assumes for tax purposes that Lessee is the owner. For financing LPM Charges, Option S will apply. 2. CREDIT REVIEW. For each Lease, Lessee consents to any reasonable credit investigation and review by Lessor. 3. AGREEMENT TERM. This Agreement shall be effective when signed by both parties and may be terminated by either party upon one month's written notice. However, each Lease then in effect shall survive any termination of this Agreement. 4. CHANGES. Lessor may, upon prior written notice, change the terms and conditions of this Agreement. Any change will apply on the effective date specified in the notice to Leases which have an Estimated Shipment Date, or Effective Date for Additional License, one month or more after the date of notice. By notice to Lessor in writing prior to delivery, or Effective Date for Additional License, and within 15 days after receipt of such notice, Lessee may terminate the Lease for an affected item. Otherwise, the change shall apply. 5. ADVANCE RENT. Lessee shall pay to Lessor, prior to Lessor's acceptance of a Lease, Advance Rent, if specified. Advance Rent shall be refunded if Lessor for any reason does not accept the Lease or Lessee terminates the Lease in accordance with Paragraph 4, 12 or 15. 6. SELECTION AND USE OF EQUIPMENT, PROGRAMMING AND LICENSED PROGRAM MATERIALS. Lessee agrees that it shall be responsible for the selection, use of, and results obtained from, the Equipment, any programming supplied by IBM without additional charge for use on the Equipment (Programming), licensed program materials, and any other associated equipment, programs or services. 7. ASSIGNMENT TO LESSOR. Lessee hereby assigns, exclusively to Lessor, Lessee's right to purchase the Equipment from. IBM. This assignment is effective when Lessor accepts the applicable Supplement and Lessor shall then be obligated to purchase and pay for the Equipment. Other than the obligation to pay the purchase price, all responsibilities and limitations applicable to Customer as defined in the referenced IBM purchase agreement in effect at the time the Lease is accepted by Lessor (Purchase Agreement) shall apply to Lessee. If the Equipment is subject to a volume procurement amendment to the Purchase Agreement or to another discount offering, (a) Lessor will pay the same amount for the Equipment that would have been payable by Lessee, and (b) Lessee well remain responsible to IBM for any late order change charges, settlement charges, adjustment charges or any other charges incurred under the volume procurement amendment or other discount offering. 8. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE: Lessee's obligation to pay shall be absolute and unconditional and shall not be subject to any delay, reduction, set-off, defense, counterclaim or recoupment for any reason whatsoever, including, any failure of the Equipment, Programming or licensed program materials or any representations by IBM. If the Equipment, Programming or licensed program materials are unsatisfactory for any reason, Lessee shall make any claim solely against IBM and shall, nevertheless, pay Lessor all amounts payable under the Lease. 9. WARRANTIES. Lessor grants to Lessee the benefit of any and all warranties made available by IBM in the Purchase Agreement. Lessor warrants that neither Lessor nor anyone acting or claiming through Lessor, by assignment or otherwise, will interfere with Lessee's quiet enjoyment of the use of the Equipment so long as no event of default shall have occurred and be continuing. EXCEPT FOR LESSOR'S WARRANTY OF QUIET ENJOYMENT, LESSOR MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. AS TO LESSOR LESSEE LEASES THE EQUIPMENT AND TAKES ANY PROGRAMMING "AS IS" IN NO EVENT SHALL LESSOR HAVE ANY LIABILITY FOR, NOR SHALL LESSEE HAVE ANY REMEDY AGAINST LESSOR FOR, CONSEQUENTIAL DAMAGES, ANY LOSS OF PROFITS OR SAVINGS, LOSS OF USE, OR ANY OTHER COMMERCIAL LOSS. 10. LESSEE AUTHORIZATION. So long as Lessee is not in default under the Lease (a) Lessee is authorized to act on Lessor's behalf concerning delivery and installation of the Equipment, any IBM warranty service for the Equipment, and any programming services for the Programming, and (b) Lessee shall have, solely for these purposes, all rights Lessor may have against IBM under the Purchase Agreement. The foregoing authorization shall not constitute any surrender of Lessor's interest in the Equipment. 11. DELIVERY AND INSTALLATION. Lessee shall arrange with IBM for the delivery of the Equipment and Programming and for installation of the Equipment at the Equipment Location. Lessee shall pay any delivery and installation charges. Lessor shall not be liable to Lessee for any delay in, or failure of, delivery of the Equipment and Programming. Lessee shall examine the Equipment and Programming immediately upon delivery. If the Equipment is not in good condition or the Equipment or Programming does not correspond to IBM's specifications, Lessee shall promptly give IBM written notice and shall provide IBM reasonable assistance to cure the defect or discrepancy. 12. LATE DELIVERY. If the Equipment or licensed program materials are not delivered to the Equipment Location on or before the 15th day after the Estimated Shipment Date, Lessor may, upon written notice to Lessee, increase the Lease Rate. Lessee may terminate the Lease for the affected item by giving Lessor written notice prior to delivery. Otherwise, the Rent shall be adjusted to reflect such increase. 13. RENT COMMENCEMENT DATE. The Rent Commencement Date, unless otherwise specified in the Supplement, shall be the date payment is due IBM under the applicable referenced agreement. Lessee shall be notified of the Rent Commencement Date and the serial numbers of the Equipment. 14. LEASE TERM. The Lease shall be effective when signed by both parties. The initial Term of the Lease shall expire at the end of the number of Payment Periods, specified as "Term" in the Supplement, after the Rent Commencement Date. However, obligations under the Lease shall continue until they have been performed in full. 15. RATE PROTECTION. Unless modified pursuant to Paragraph 12, the Rent shall be based on the Lease Rate specified in the Supplement or such greater Lease Rate as may be specified by written notice to Lessee more than one month before the Estimated Shipment Date or Effective Date for Additional License. By notice to Lessor in writing prior to delivery, or Effective Date for Additional License, and within 15 days after receipt of such notice, Lessee may terminate the Lease for the affected item. Otherwise, the Rent shall be adjusted to reflect the increase. The Unit Purchase Price and LPM Charges are subject to change in accordance with the referenced agreements. 16. RENT. During the initial Term, Lessee shall pay Lessor, for each Payment Period, Rent as determined in Paragraph 15. Lessee's obligation to pay shall begin on the Rent Commencement Date. Rent will be invoiced in advance as of the first day of each Payment Period and will be due on the day following the last day of the Payment Period. When the Rent Commencement Date is not on the First day of a calendar month and/or when the initial Term does not expire on the last day of a calendar month, the applicable Rent will be prorated on the basis of 30-day months. Advance Rent, if any, will be applied to the initial invoice(s). 17. RENEWAL. If Lessee is not then in default under the Lease, Lessee may renew the Lease one or more times but not beyond six years from the expiration of the initial Term. Lessor shall offer renewal Terms of one year and may offer longer Terms if then generally available. For a renewal Term, upon request by Lessee, at least five months prior to Lease expiration, Lessor shall notify Lessee, at least four months prior to expiration, of the Rent, any changes to the Payment Period and due dates, and of any required Purchase Option or Renewal Option Percents not specified in the Supplement. The Rent shall be objectively determined by Lessor by using the projected fair market rental value of the Equipment as of the commencement of such renewal Term. However, for Option B', the Rent shall be as specified in the Supplement. Lessee may renew for any renewal Term only by so notifying Lessor in writing at least three months before expiration. 18. PURCHASE OF EQUIPMENT. If Lessee is not then in default under the Lease, Lessee may, upon three months prior written notice to Lessor, purchase Equipment upon expiration of the Lease. Under Option A or B, the purchase price shall be objectively determined by Lessor by using the projected fair market sales value of the Equipment as of such expiration date plus, for Equipment under Option A, any recapture of investment tax credit and any tax due thereon. Under Option B Price (B') the purchase price shall be an amount determined by multiplying the Unit Purchase Price by the Purchase Option Percent for such Equipment. If Lessee purchases any Equipment, Lessee shall, on or before the date of purchase, pay to Lessor the purchase price any applicable taxes, all Rent due through the day preceding the date of purchase, any other amounts due, and the prepayment of Financing (Paragraph 35). Lessor shall, on the date of purchase, transfer to Lessee buy bill of sale, without recourse or warranty of any kind express or implied, all of Lessor's right, title and interest in and to such Equipment on an "As Is, Where is" basis except that Lessor shall warrant title free and clear of all encumbrances. 19. OPTIONAL EXTENSION. If Lessee has not elected to renew or purchase, and as long as Lessee is not in default under the Lease, the Lease will be extended unless Lessee notifies Lessor in writing, not less than three months prior to Lease expiration, that Lessee does not want the extension. The extension will be under the same terms and conditions then in effect, including Rent (but, for Options A or B, not less than fair market rental value) and will continue until the earlier of termination by either party upon three months' prior written notice or six years after expiration of the initial Term. 20. INSPECTION; MARKING; FINANCING STATEMENT. Upon request, Lessee shall make the Equipment and its maintenance records available for inspection by Lessor during Lessee's normal business hours. Lessee shall affix to the Equipment any labels indicating ownership supplied by Lessor. Lessee shall execute and deliver to Lessor for filing any Uniform Commercial Code financing statements or similar documents Lessor may reasonably request. 21. EQUIPMENT USE. Lessee agrees that Equipment will be operated by competent, qualified personnel, in accordance with applicable operating instructions, laws and government regulations and that Equipment under Option A will be used only for business purposes. 22. MAINTENANCE. Lessee, at its expense, shall keep the Equipment in a suitable environment as specified by IBM and in good condition and working order, ordinary wear and tear excepted. 23. ALTERATIONS; MODIFICATIONS; PARTS. Lessee may alter or modify the Equipment only upon written notice to Lessor. Any non-IBM alteration is to be removed and the Equipment restored to its normal, unaltered condition at Lessee's expense prior to its return to Lessor. At Lessee's option, any IBM field installable upgrade, feature addition or accessory added to any item of Equipment (Modification) may be removed. If removed, the Equipment is to be restored at Lessee's expense to its normal, unmodified condition. If not removed, such Modification shall, upon return of the Equipment, become, without charge, the property of Lessor free of all encumbrances. Restoration will include replacement of any parts removed in connection with the installation of an alteration or Modification. Any part installed in connection with warranty or maintenance service shall be the property of Lessor. 24. LEASES FOR MODIFICATIONS AND ADDITIONS. Lessor will arrange for leasing of Modifications and Additions under terms and conditions then generally in effect, subject to satisfactory credit review. Additions shall be machines, or LPM Charges for licensed program materials, which are associated with the Equipment. These Modifications and Additions must be ordered by Lessee from IBM. Any lease for modifications shall, and any Lease for Additions may, expire at the same time as the Lease for the Equipment. The rent shall be determined by Lessor and specified in a Supplement. If Lessee purchases Equipment prior to Lease expiration, Lessee shall simultaneously purchase any Modifications under the Lease. 25. RETURN OF EQUIPMENT. Upon expiration or termination of the Lease for any item of Equipment, or upon demand by Lessor pursuant to Paragraph 38, Lessee shall promptly return the Equipment, freight prepaid, to a location in the continental United States specified by Lessor. Except for Casualty Loss, Lessee shall pay any costs and expenses incurred by Lessor to inspect and qualify the equipment for IBM's maintenance agreement service. Any parts removed in connection therewith shall become Lessor's property. 26. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessor will maintain, at its own expense, insurance covering loss of or damage to the Equipment (but excluding any Modifications not subject to a Lease and any non-IBM alterations) with a $5,000 deductible per incident. If any item of Equipment shall be lost, stolen, destroyed or irreparably damaged for any cause whatsoever (Casualty Loss) before the Date of Installation as defined in the Purchase Agreement, the Lease for that item shall terminate. If any item of Equipment suffers Casualty Loss, or shall be otherwise damaged, on or after the Date of Installation, Lessee shall promptly inform Lessor. If Lessor determines that the item can be economically repaired, Lessee shall place the item in good condition and working order and Lessor will reimburse Lessee the reasonable cost of such repair, less the deductible. If not so repairable, Lessee shall pay Lessor the lesser of $5,000 or the fair market value of the Equipment immediately prior to the Casualty Loss. Upon Lessor's receipt of payment the Lease for that item shall terminate. 27. TAXES. Lessee shall promptly, reimburse Lessor for, or shall pay directly if so requested by Lessor, as additional Rent, all taxes, charges, and fees imposed or levied by any governmental body or agency upon or in connection with the purchase, ownership, leasing, possession, use or relocation of the Equipment or Programming or in connection with the financing of LPM Charges or otherwise in connection with the transactions contemplated by the Lease, excluding, however, all taxes on or measured by the net income of Lessor. Upon request, Lessee will provide proof of payment. Any other taxes, charges and fees relating to the licensing, possession or use of licensed program materials will be governed by the License Agreement. 28. LESSOR'S PAYMENT. If Lessee fails to perform its obligations under Paragraph 27 or 31 or to discharge any encumbrances created by Lessee, Lessor shall have the right to substitute performance, in which case, Lessee shall pay Lessor the cost thereof. 29. TAX INDEMNIFICATION (APPLIES ONLY FOR EQUIPMENT UNDER OPTIONS A OR B). The Lease is entered into on the basis that under the Internal Revenue Code of 1986, as amended (Code), Lessor shall be entitled to (1) maximum Accelerated Cost Recovery System (ACRS) deductions for 5-year property, and (2) deductions for interest expense incurred to finance purchase of the Equipment. The Bulletin "Lessor's Tax Assumptions" will be giver, to Lessee on request. Lessee represents, warrants and covenants that at all times during the Lease: (a) no item of Equipment will constitute "public utility property" as defined in the Code; (b) Lessee will not make any election under the Code or take any action, or fail to take any action, if such election, action or failure to act would cause any item of Equipment to cease to be eligible for any ACRS deductions or interest deductions; (c) Lessee will keep and make available to Lessor the records required to establish the matters referred to in this Paragraph 29; and (d) for Equipment located in a United States possession, Lessee represents that Lessee is a tax exempt entity as defined in the Code. Furthermore, if Lessee is a tax exempt entity, Lessee covenants that it will not renew or extend the Lease if such action shall cause Lessor a Tax Loss as described below. If, as a result of any act, failure to act, misrepresentation, inaccuracy, or breach of any warranty or covenant, or default under the Lease, by Lessee, an affiliate of Lessee, or any person who shall obtain the use of possession of any item of Equipment through Lessee, Lessor shall lose the right to claim or shall suffer any disallowance or recapture of all or any portion of any ACRS deductions or interest deductions (Tax Loss) with respect to any item of Equipment, then, promptly upon written notice to Lessee that a Tax Loss has occurred, Lessee shall reimburse Lessor the amount determined below. The reimbursement shall be an amount that, in the reasonable opinion of Lessor, shall make Lessor's after-tax rate of return and cash flows (Financial Returns), over the term of the Lease for such item of Equipment, equal to the expected Financial Returns that would have been otherwise available. The reimbursement shall take into account the effects of interest, penalties and additions to tax required to be paid by Lessor as a result of such Tax Loss and all taxes required to be paid by Lessor as a result of any payments pursuant to this paragraph. Financial Returns shall be Leased on economic and tax assumptions used by Lessor in entering into the Lease. All the rights and privileges of Lessor arising from this Paragraph 29 shall survive the expiration or termination of the Lease. For purposes of determining tax effects under Paragraphs 18, 27, 29 and 30, the term "Lessor" shall include, to the extent of interests, any partner in Lessor and any affiliated group of corporations, and each member thereof, of which Lessor or any such partner is or shall become a member and with which Lessor or any such partner joins in the filing of consolidated or combined returns. 30. GENERAL INDEMNITY. This Lease is a net lease. Therefore, Lessee shall indemnify Lessor against, and hold Lessor harmless from, any and all claims, actions, damages, obligations, liabilities and liens; and all costs and expenses, including legal fees, incurred by Lessor in connection therewith; arising out of the Lease including, without limitation, the purchase, ownership, lease, licensing, possession, maintenance, condition, use or return of the Equipment, Programming or licensed program materials; or arising by operation of law; excluding, however, any of the foregoing which result from the sole negligence or willful misconduct of Lessor. Lessee agrees that upon written notice by Lessor of the assertion of any claim, action, damage, obligation, liability or lien, Lessee shall assume full responsibility for the defense thereof. Any payment pursuant to this paragraph shall be of such amount as shall be necessary so that, after payment of any taxes required to be paid thereon by Lessor, including taxes on or measured by the net income of Lessor, the balance will equal the amount due hereunder. Lessee's obligations under this paragraph shall not constitute a guarantee of the residual value or useful life of any item of Equipment or a guarantee of any debt of Lessor. The provisions of this paragraph with regard to matters arising during the Lease shall survive the expiration or termination of the Lease. 31. LIABILITY INSURANCE. Lessee shall obtain and maintain comprehensive general liability insurance, in an amount of $1,000,000 or more for each occurrence, with an insurer having a "Best's Policyholders" rating of B+ or better. The policy shall name Lessor as an additional insured as Lessor's interests may appear and shall contain a clause requiring the insurer to give Lessor at least one month's prior written notice of the cancellation, or any alteration in the terms, of the policy. Lessee shall furnish to Lessor, upon request, evidence that such insurance coverage is in effect. 32. SUBLEASE AND RELOCATION OF EQUIPMENT, ASSIGNMENT BY LESSEE. Upon Lessor's prior written consent, which will not be unreasonably withheld, Lessee may sublet the Equipment or relocate it from the Equipment Location. No sublease or relocation shall relieve Lessee of its obligations under the Lease. In no event shall Lessee remove the Equipment from the United States. Lessee shall not assign, transfer or otherwise dispose of the Lease or Equipment, or any interest therein, or create or suffer any levy, lien or encumbrance thereof except those created by Lessor. 33. ASSIGNMENT BY LESSOR. Lessee acknowledges and understands that the terms and conditions of the Lease have been fixed to enable Lessor to sell and assign its interest or grant a security interest or interests in the Lease and the Equipment individually or together, in whole or in part, for the purpose of securing loans to Lessor or otherwise. If Lessee is given written notice of any assignment, it shall promptly acknowledge receipt thereof in writing. Each such assignee shall have all of the rights of Lessor under the Lease. Lessee shall not assert against any such assignee any setoff, defense or counterclaim that Lessee may have against Lessor or any other person. Lessor shall not be relieved of its obligations hereunder as a result of any such assignment unless Lessee expressly consents thereto. 34. FINANCING. If the Lease provides for financing of LPM Charges, Lessor will pay such Charges directly to IBM. Any other charges due IBM under the License Agreement shall be paid directly to IBM by Lessee. Lessee's obligation to pay Rent shall not be affected by any discontinuance, return or destruction of any license or licensed program materials under the License Agreement on or after the date LPM Charges are due. If Lessee discontinues any of the licensed program materials in accordance with the terms of the License Agreement prior to the date LPM Charges are due, the financing of affected LPM Charges shall be canceled. 35. FINANCING PREPAYMENT (Does Not Apply For Items of Equipment). Lessee may terminate an item of Financing (but not an item of Equipment) by prepaying its remaining Rent. Lessee shall provide Lessor with notice of the intended prepayment date which shall be at least one month after the date of the notice. Lessor may, depending on market conditions at the time, make an adjustment in the remaining Rent to reflect such prepayment and shall advise Lessee of the balance to be paid. If, prior to Lease Expiration, Lessee purchases the Equipment or if the Lease is terminated, Lessee shall at the same time prepay any related Financing including that for programs licensed to the Equipment. 36. DELINQUENT PAYMENTS. If any amount to be paid to Lessor is not paid on or before its due date, Lessee shall pay Lessor on demand 2% of such late payment for each month or part thereof from the due date until the date paid or, if less, the maximum allowed by law. 37. DEFAULT; NO WAIVER. Lessee shall be in default under the Lease upon the occurrence of any of the following events: (a) Lessee fails to pay when due any amount required to be paid by Lessee under the Lease and such failure shall continue for a period of seven days after the due date; (b) Lessee fails to perform any other provisions under the Lease or violates any of the covenants or representations made by Lessee in the Lease, or Lessee fails to perform any of its obligations under any other Lease entered into pursuant to this Agreement, and such failure or breach shall continue unremedied for a period of 15 days after written notice is received by Lessee from Lessor; (c) Lessee violates any of the covenants or representations made by Lessee in any application for credit or in any agreement with IBM with respect to the Equipment or licensed program materials or fails to perform any provision in any such agreement (except the obligation to pay the purchase price or LPM Charges); (d) Lessee makes an assignment for the benefit of creditors, whether voluntary or involuntary, or consents to the appointment of a trustee or receiver, or if either shall be appointed for Lessee or for a substantial part of its property without its consent; (e) any petition or proceeding if filed by or against Lessee under any Federal or State bankruptcy or insolvency code or similar law; or (f) if applicable, Lessee makes a bulk transfer subject to the provisions of the Uniform Commercial Code. Any failure of Lessor to require strict performance by Lessee or any waiver by Lessor of any provision in the Lease shall not be construed as a consent or waiver of any other breach of the same or of any other provision. 38. REMEDIES. If Lessee is in default under the Lease, Lessor shall have the right, in its sole discretion, to exercise any one or more of the following remedies in order to protect its interests, Reasonably expected profits and economic benefits. Lessor may (a) declare any Lease entered into pursuant to this Agreement to be in default; (b) terminate in whole or in part any Lease; (c) recover from Lessee any and all amounts then due and to become due; (d) take possession of any or all items of Equipment, wherever located, without demand or notice, without any court order or other process of law; and (e) demand that Lessee return any or all such items of Equipment to Lessor in accordance with Paragraph 25 and, for each day that Lessee shall fail to return any item of Equipment, Lessor may demand an amount equal to the Rent, prorated on the basis of a 30-day month, in effect immediately prior to such default. Upon repossession or return of such item or items of Equipment, Lessor shall sell, lease or otherwise dispose of such item or items in a commercially reasonable matter, with or without notice and on public or private bid, and apply the net proceeds, thereof towards the amounts due under the Lease but only after deducting (i) in the case of sale, the estimated fair market value of such item or items as of the scheduled expiration of the Lease; or (ii) in the case of any replacement lease, the rent due for any period beyond the scheduled expiration of the Lease for such item or items (iii) in either case, all expenses, including legal fees, incurred in connection therewith; and (iv) where appropriate, any amount in accordance with Paragraph 29. Any excess net proceeds are to be retained by Lessor. Lessor may pursue any other remedy available at law or in equity, including, but not limited to, seeking damages, specific performance and an injunction. No right or remedy is exclusive of any other provided herein or permitted by law or equity. All such rights and remedies shall be cumulative and may be enforced concurrently or individually from time to time. 39. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all costs and expense, including legal and collection fees, incurred by Lessor in enforcing the terms, conditions or provisions of the Lease or in protecting Lessor's rights and interests in the Lease and the Equipment. 40. OWNERSHIP; PERSONAL PROPERTY; LICENSED PROGRAM MATERIALS. The Equipment under Lease is and shall be the property of Lessor. Lessee shall have no right, title or interest therein except as set forth in the Lease. The Equipment is, and shall at all times be and remain, personal property and shall not become a fixture or realty. Licensed program materials are licensed and provided by IBM directly to Lessee under the terms and conditions of the License Agreement. 41. NOTICES; ADMINISTRATION. Service of all notices under the Lease shall be sufficient if delivered personally or mailed to Lessee at its address specified in the Supplement or to IBM Credit Corporation as Lessor in care of the IBM Branch Office specified in the Supplement. Notice by mail shall be effective when deposited in the United States mail, duly addressed and with postage prepaid. Notices, consents and approvals from or by Lessor shall be given by Lessor or on its behalf by IBM and all payments shall be made to IBM until Lessor shall notify Lessee otherwise. 42. LESSEE REPRESENTATION. If the Lease includes Financing, Lessee represents that it is (a) a corporation if any item of Equipment is located in Ohio, Mississippi, Virginia or West Virginia, and/or (b) a business corporation if any item of Equipment is located in Pennsylvania. 43. REVISIONS FOR PREVIOUSLY INSTALLED EQUIPMENT Equipment installed with Lessee under an IBM lease or rental agreement may be purchased by Lessor, on the Effective Date of Purchase (as defined in the Purchase Agreement), for lease to Lessee under Option B or B'. For such Equipment, the Lease shall be revised as follows: Paragraphs 4 and 26 - replace "Estimated Shipment Date" by "Intended Effective Date of Purchase"; replace "delivery" and "Date of Installation" by "Effective Date of Purchase"; Paragraph 7 - add at the end of the first paragraph, "Assignment of the option to purchase installed Equipment at the net purchase option price under an IBM lease or rental agreement will be permitted only when Lessee submits the Supplement in sufficient time to achieve the Intended Effective Date of Purchase. The Effective Date of Purchase under this assignment shall be the later of the first day of the Quotation Month or the day on which the applicable Supplement is accepted by Lessor. If the Quotation Month expires and the purchase of Equipment is not concluded, this assignment and Lease will be null and void regarding any such Equipment and all rights, duties and obligations of Lessee and IBM will remain in accordance with the provisions of the IBM agreement under which the Equipment is currently installed."; Paragraphs 11 and 12 - delete both paragraphs; and Paragraph 15 - replace the entire paragraph with the following: "The Rent shall be based on the Lease Rate specified in the Supplement or such greater Lease Rate as may be specified by written notice to Lessee more than one month before the Effective Date of Purchase. The Unit Purchase Price is subject to change in accordance with the referenced Purchase Agreement. Lessee may terminate the Lease for any item subject to an increase by giving Lessor written notice on or before the Effective Date of Purchase." 44. APPLICABLE LAW, SEVERABILITY. The Lease shall be governed by the laws of the State of Connecticut. If any provision shall be held to be invalid or unenforceable, the validity and enforceability of the remaining provisions shall not in any way be affected or impaired. THE ADDITIONAL TERMS AND CONDITIONS ON PAGES 2 THROUGH 4 ARE A PART OF THIS AGREEMENT. LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND ITS SUPPLEMENT, UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND CONDITIONS. FURTHER, LESSEE AGREES THAT THIS AGREEMENT AND ITS SUPPLEMENT ARE THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, SUPERSEDING ALL PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HER Accepted by: DIAMOND BRANDS INC IBM Credit Corporation Lessee BY: BY Name and Title Name and Title TERM LEASE SUPPLEMENT Supp. No.: D00253180 Additional Terms and Conditions
Option Codes B, B+, C, C+ Lease with fair market value end of lease renewal and purchase options. B', C' Lease with prestated end of lease purchase and renewal options B$, C$ Lease with one dollar ($1) end of lease purchase option L Lease for Used Equipment S Financing of IBM One-Time Charges T Financing of non-IBM One-Time Charges PURCHASE OPTION (PURCHASE OPTION - END OF LEASE ONLY) FM Fair market sales value, as determined by Lessor, at end of Lease CL Contact IBM Credit for purchase price NA Not Applicable $1 Purchase Price is One Dollar ($1.00) Number Prestated Purchase Percent - Purchase price will be the Unit Purchase Price times this percent MAINT. INCLUD. (MAINTENANCE INCLUDED) Y Lease includes maintenance coverage
TERM The initial Term starts on the Rent Commencement Date and continues for the number of payment Periods stated under Term. If the Term has a prefix of "CO" then the Lease is coterminous with the Lease for the Equipment with the referenced serial number. ESTIMATED COMMENCEMENT For Leases, the month stated is the month the Lease must commence for Lessee to receive the stated Lease Rate. For Financing, the date stated is the intended start date of the Financing. INTEREST RATE The Interest Rate, if stated, is the Annual Percentage Rate (APR) for the Lease or Financing. In the State of Texas the interest rate for the Lease or Financing will not exceed the stated interest rate. RENEWAL OF LEASES WITH PRESTATED PURCHASE OPTIONS Lessee may renew a Lease with a prestated purchase option for a Term of one year. The Rent will be one-half of the Prestated Purchase Percent times the Unit Purchase Price stated in the Supplement. Renewal Rent payments will be annual and due and payable in advance. LEASES WITH MAINTENANCE INCLUDED For Leases that include basic maintenance coverage, Lessor will arrange for maintenance service on the Equipment. The coverage starts at the end of the warranty period and ends with the Initial Term. The cost will be included in the Rent. Coverage beyond the basic maintenance will be Lessee responsibility. The maintenance service provider alone will be responsible for fulfilling all contractual commitments. Lessee may finance additional maintenance coverage at the end of the initial Term under then current terms. LESSEE RESPONSIBILITIES FOR LEASES WITH MAINTENANCE INCLUDED Lessee agrees, that before requesting maintenance service to ensure that: 1. operational problems have been corrected; 2. error recovery procedures have been followed; 3. failures are clearly identified and logged; and 4. Customer Problem Analysis and Resolution (CPAR) procedures have been completed for equipment requiring maintenance under this lease. Lessee also agrees to complete and return to IBM, a self-initialization review form ("Form"). Lessee agrees to ensure that the Equipment location qualifies as a qualified customer location (as determined by IBM). Lessee acknowledges having received a copy of that Form. If Lessee has a Corporate Service Option Attachment to the IBM Customer Agreement then Lessee agrees to perform all "Customer" obligations under that agreement for the Equipment on a Lease that includes maintenance. LESSEE REPRESENTATIONS Lessee represents that for Financing In: 1. Ohio, Maryland, Mississippi, Virginia, or West Virginia, Lessee is a corporation as defined by the applicable state law; 2. Pennsylvania, Lessee is a business corporation as defined by Pennsylvania laws; and 3. Alabama or Wisconsin, the Financed Items are not being purchased for agricultural purposes. AUTHORITY TO SIGN FINANCING STATEMENTS Lessee authorizes Lessor or its agent as attorney-in-fact to prepare, execute in Lessee's name and file any Uniform Commercial Code financing statements or similar documents covering this Equipment. Lessee authorizes Lessor to fill in serial numbers on this Supplement after execution by Lessee for the Equipment listed on the Supplement. BASE EXTENSIONS For machines designated as "Base Extension", this Supplement supersedes the prior Lease for these machines and incorporates the terms of the Lease Agreement effective for this Supplement, including these terms with respect to Purchase of Equipment, which may be different than the terms governing the superseded lease. This Lease amends and supersedes the prior lease for these machines with respect to Term, Lease Rate, Rent, Payment Period, Purchase Option Code, and Lease Option. These changes shall become effective on the Rent Commencement Date specified in this Supplement. AMENDMENT TO TERM LEASE MASTER AGREEMENT This amends the Term Lease Master Agreement referenced on page 1. 1. In the preamble in line 4 after "(IBM)", insert "to Lessee's Supplier"; In line 9 after "programs" delete balance of the sentence. 2. Replace all subsequent occurrences of "IBM" with "Lessee's Supplier" except in Paragraph 23, 26, 37 and 41 or where it appears as IBM Corporation or except as it appears in this Supplement. 3. Delete all occurrences of "or Effective Date for Additional License". 4. Replace all occurrences of "Estimated Shipment Date" with "Estimate Commencement". 5. Replace all occurrences of "License Agreement" with "license agreement". 6. Paragraph 1 - Options - delete the last sentence. 7. Paragraph 7 - Assignment to Lessor - replace lines 7 thru 16 with "the buyers as defined in Lessee's Supplier's contract in effect at the time the Lease is accepted by Lessor (Purchase Agreement) shall apply to Lessee." 8. Paragraph 13 - Rent Commencement Date - in line 3 replace "the date payment is due IBM under the applicable referenced agreement" with "the date Lessee designates on the Certificate of Acceptance". 9. Paragraph 15 - Rate Protection - replace in its entirety with the following: The Rent shall be based on the Lease Rate and are not subject to change provided the signed Certificate of Acceptance is received within the month of the Estimated Commencement." 10. Paragraph 18 - Purchase of Equipment - in line 4 replace "Under Option A or B" with "Equipment with a Purch. Option of "FM", in line 19 after "encumbrances" insert "arising solely from claims against Lessor". 11. Paragraph 19 - Optional Extension - in line 7 replace "Option A or B" with "Equipment with a Purch. Option of `FM'". 12. Paragraph 24 - Leases for Modification and Additions - in line 7 replace "by Lessee from IBM" with "by Lessee's Supplier from IBM for Lessee". 13. Paragraph 34 - Financing - delete the first two sentences. 14. Delete Paragraph 43. EX-10.24 44 LEASE AGREEMENT DATED AS OF NOVEMBER 22, 1996 MASTER LEASE AGREEMENT LESSOR: MERIDIAN LEASING CORPORATION an Illinois corporation ADDRESS: 570 Lake Cook Road Suite 300 Deerfield, Illinois 60015 LESSEE: DIAMOND BRANDS, INC. a Minnesota Corporation ADDRESS: 1800 Cloquet Avenue Cloquet, MN 55720 AGREEMENT DATE: November 22,1996 This contract is a Master Lease Agreement. The terms of each Supplement hereto are subject to any and all conditions and provisions set forth herein at the time of execution of such Supplement as the same may have been amended prior to the execution of such Supplement. Each Supplement shall provide a description of Equipment, Lease Term, Rental Payment(s), Location of Equipment, Supplement Commencement Date and such other information as may be required. Each Supplement is enforceable according to the terms and conditions contained therein and in the event of a conflict between the language of the Master Lease Agreement and any Supplement hereto, the language of the Supplement shall prevail in respect to that Supplement. Each Supplement together with the terms and conditions of this Master Lease Agreement incorporated therein is referred to herein as the "Lease" or "Lease Agreement" and constitutes a "finance lease" as defined in Section 2-A-103(g) of the Uniform Commercial Code. Lessor, by its acceptance hereof, hereby leases to Lessee, and the Lessee hereby leases from Lessor, in accordance with the terms and conditions set forth herein and in the applicable Supplement, the Equipment described on the Supplement and in any attachments thereto (the "Equipment"). Lessor and Lessee acknowledge that in the case of certain Supplements, Schedule A thereto constitutes only a summary of the Equipment necessitated by space limitations. However, both parties further acknowledge that the totality of the Equipment is contained in the invoices and related documents pursuant to which the Equipment was originally procured from its manufacturer (and the exhibits and attachments thereto), which items, (including applicable serial numbers) are incorporated by Preference into the applicable Supplement. At the expiration of the term of each Supplement, Lessee shall return the exact items specified in such invoices and related documents. 1. LEASE TERM This Master Lease Agreement shall be effective from the date hereof. As to any particular item of Equipment, the term shall continue as stated in the applicable Supplement, from the respective Supplement Commencement Date, as, from time to time, Equipment described in any Supplement is accepted by Lessee. Said term shall be automatically extended at the monthly lease rate in effect at the end of said term unless and until terminated by either party hereto giving the other not less than ninety (90) days prior written notice. Acceptance ("Acceptance") shall occur on or before the fifth day after the Equipment has been delivered and, if applicable, approved for coverage under a prime shift maintenance contract by the manufacturer thereof or other applicable maintenance organization. Lessee agrees both to advise Lessor on Acceptance date and thereupon to execute and deliver to Lessor a certificate of Acceptance. 2. PAYMENTS OF RENT Unless otherwise set forth in the respective Supplement, the following shall apply: The first rental payment shall be due upon the Acceptance of the Equipment by Lessee, and such payment shall cover the lease month or other period commencing on the Supplement Commencement Date. Each Subsequent rental payment shall be due and payable in advance, for the lease period covered by such payment, on the first day thereof. In the event Acceptance occurs prior to the Supplement Commencement Date, interim rental shall be paid by Lessee in the amount equal to a proration on a per them basis of the Monthly Rent, as hereinafter defined, for the period commencing as of the date of Acceptance to the Supplement Commencement Date. All rental and other payments by Lessee under this Lease shall be made to Lessor at its address stated above or at such other address as Lessor may designate in writing and if payment shall be made by check, such check shall arrive at such address in sufficient time so that the same shall arrive on or before the date the rental payment shall be due. Monthly rent payable with respect to each item of Equipment ("Monthly Rent") shall be as set forth for such item in the applicable Supplement. Any and all amounts payable to Lessor hereunder other than Monthly Rent shall be considered and referred to herein as "Supplemental Rent. Monthly Rent, together with Supplemental Rent, shall be referred to herein as "Rent". This Lease provides for a net lease, and the rent due hereunder from Lessee to Lessor shall be absolute and unconditional and shall not be subject to any abatement, recoupment, defense, claim, counterclaim, reduction, set-off, or any other adjustment of any kind for any reason whatsoever. 3. ADDITIONAL SUMS PAYABLE BY LESSEE (a) All transportation, transit insurance and other charges payable for delivery of the Equipment to Lessee, and for installation of the Equipment, shall be paid by Lessee. (b) Lessee shall promptly pay all costs, expenses and obligations of every kind and nature incurred in connection with the use, maintenance, servicing. repair or operation of the Equipment which may arise or be payable during the lease term of such Equipment hereunder, except as specifically provided herein, and shall keep the Equipment in as good repair, condition and working order as when delivered to Lessee hereunder, reasonable wear and tear from the proper use thereof alone excepted, and shall furnish any and all parts, mechanisms and devices required to keep the Equipment in such good repair, condition and working order, at the expense of Lessee, and in addition will permit the manufacturer to make all free-of-charge engineering changes, all so that the Equipment will remain acceptable to the manufacturer for maintenance. Without limiting the foregoing, Lessee shall, during the continuance of this Lease, at its own expense, make appropriate arrangements for maintenance of each item of Equipment, including without limitation with respect to each item of Equipment entering into and maintaining in force a contract with the manufacturer of the Equipment or other person or entity approved in writing by Lessor covering at least prime shift maintenance. (c) Lessee shall indemnify and hold harmless Lessor against and shall pay all federal, state, county or local taxes, fees or other charges, however designated (together with any related interest or penalties not arising from negligence on the part of Lessor), imposed or assessed against or with respect to this Lease, Rent hereunder, the Equipment, Lessor or Lessee or payable by Lessor or Lessee with respect to the use, lease, sale, purchase, delivery, possession, sublease or ownership of the Equipment, excepting only (i) taxes on or to the extent measured by the net income of Lessor; and (ii) sales, use or similar taxes paid by Lessor if, and only if, any such taxes are included as part of the acquisition cost of any Equipment. Lessor shall give Lessee and Lessee shall give Lessor written notice of any event or condition which requires indemnification by Lessee hereunder or any allegation of such event or condition, promptly upon obtaining knowledge thereof. Lessee shall not be obligated to pay any amount under this Section 3 so long as Lessee shall in good faith and by appropriate proceedings contest and diligently prosecute the validity or the amount thereof unless such contest would adversely affect the title of the Lessor to the Equipment or would subject it to forfeiture or sale, provided that Lessee shall make any required deposits during such contest. Upon resolution of such contest, Lessee shall promptly pay all amounts then owing. In case any report or return is required to be made with respect to any obligation of Lessee arising out of this Section 3, Lessee will either make such report or return in such manner as shall be satisfactory to Lessor or, if requested by Lessor, furnish information to Lessor necessary to complete such report or return by Lessor. 4. WARRANTIES (a) Lessor hereby warrants and covenants to Lessee that so long as no Event of Default has occurred and is continuing under the applicable Supplement hereto, Lessee shall and may quietly have, hold and enjoy the Equipment and every part thereof Leased hereunder for the term of this Lease, as such term may be extended hereunder, free from disturbance by Lessor or its agents, employees, successors or assigns, or by anyone (whether the holder of a lien or otherwise) claiming solely by. through or under Lessor. LESSOR HAS NOT MADE AND MAKES NO, AND HEREBY EXPRESSLY DISCLAIMS ANY OTHER, EXPRESS OR IMPLIED WARRANTY WHATSOEVER HEREUNDER, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR ANY PURPOSE, OR OTHERWISE, REGARDING THE EQUIPMENT OR ANY PART OR THE DESIGN OR CONDITION THEREOF. Subject to the provisions of Section 10 here Lessor hereby transfers and assigns to Lessee during the term of this Lease all of its right, title and interest in any express or implied warranties and covenants of any Equipment manufacturer or vendor which are assignable by Lessor. Lessor and Lessee agree to execute any manufacturer's transfer of "Patent and Copyright Indemnity" and "Warranties" documents with respect to the Equipment leased hereunder. (b) Lessee, at the time of execution of this Agreement and any Supplement hereto, hereby warrants and represents to Lessor, Secured Party, as hereinafter defined, and their respective successors and assigns: (i) that execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on its part and are not in conflict with its charter or bylaws or with or constitute a breach of or default under any indenture, contract or agreement by which it is bound, or with any statute, judgment, decree, rule or regulation binding upon it; (ii) that no consent or approval of any trustee or holder of any indebtedness or obligation, and consent or approval of, or taking of any other action with respect to, any governmental authority, is necessary for execution, delivery or performance of this Agreement (iii) that this Agreement is legal, valid, binding, and enforceable against the Lessee in accordance with its terms, subject to enforcement limitations imposed by rules of equity or by bankruptcy or similar laws; (iv) Lessee is a corporate validly existing and in good standing under the laws of the jurisdiction of its incorporation and the jurisdiction(s) where the Equipment will be located and has adequate corporate power to enter into and perform this Lease; and (v) there are no actions, suits or proceedings pending or, to the knowledge of Lessee threatened against or affecting Lessee in any court or before any governmental commission, board or authority which, if adversely determined will have a materially adverse effect on, the ability of Lessee to perform its obligations under this Lease. 5. POSSESSION, USE AND MAINTENANCE OF THE EQUIPMENT (a) The Equipment shall be kept by Lessee (1) subject to inspection by Lessor at reasonable times and manner, (2) at Lessee's address, as stated on each Supplement hereto, which Equipment shall not be relocated without prior written consent of Lessor, which consent shall not be unreasonably withheld, (3) free of all security interests of any kind whatsoever, liens, encumbrances and other claims, except (i) those of persons claiming solely against Lessor but not Lessee on account of obligations which Lessee is not required by this Lease to discharge, (ii) liens of current taxes not delinquent (except liens for taxes which are being contested by Lessee as provided in Section 3 hereof, (4) marked with the manufacturer's identification marks or numbers and, if, requested by Lessor or Secured Party conspicuously labeled with labels to disclose Lessor's and any Secured Party's interest in the Equipment, and (5) in good and efficient working order, condition and repair, reasonable wear and tear expected, and acceptable for maintenance under the manufacturers maintenance agreement at the expiration of the Lease Term, with the Equipment covered by a manufacturers band (or similar indication, where available). Lessee will, within ten (10) working days of receiving notice thereof, promptly notify Lessor in writing of any mortgage, pledge, lien, attachment, charge, encumbrance or right of others which has arisen with respect to the Equipment. (b) Lessee shall use the Equipment with due care to prevent injury thereto, and to any person or property, and in conformity with all applicable laws, ordinances, rules, regulations and other requirements of any insurer or governmental body and with all requirements of the manufacturer with respect to the use, maintenance and operation of the Equipment. Lessee shall not modify any Equipment without the prior written consent of Lessor, which may be granted or withheld in its sole discretion. It is the intention and understanding of both Lessor and Lessee that the Equipment shall be and at all times remain separately identifiable personal property. Lessee shall not permit any Equipment to be installed in, or used, stored or maintained with, any personal property (except other Equipment leased hereunder) in such manner or under such circumstances that such Equipment might be or become an accession to or confused with such other personal property. Lessee shall not permit any Equipment to be installed in or used, stored or maintained with, any real property such a manner or under such circumstances that any person might acquire any rights in such Equipment paramount to the rights of Lessor or Security Party by reason of such Equipment being deemed to be real property or a fixture thereon. 6. RISK OF LOSS (a) Lessee assumes and shall bear the entire risk of partial or complete loss theft, damage, destruction, condemnation, requisition, taking by eminent domain or other interruption or termination of use of the Equipment from any cause whatsoever, whether or not insured against, from the date of delivery of the Equipment until the Equipment is returned to and received by Lessor. Except as otherwise expressly provided herein, no such loss, theft, damage, destruction, condemnation, requisition, taking by eminent domain or other interruption or termination of use of the Equipment, and no delay, deficiency or absence of insurance proceeds, and no unavailability, delay or failure of supplies, parts, mechanisms, devices or service for the Equipment or any failure of the Equipment to function for any cause, shall relieve Lessee of the obligation to pay Rent hereunder. Lessee's obligation to pay all Rent, and the rights of Lessor and the Secured Party in and to such payments, shall be absolute and unconditional and except as otherwise expressly provided herein this lease shall not terminate nor shall the respective obligations of the Lessor or the Lessee be affected, by reason of any defect or in Total Casualty (as defined in this Section 6) to or obsolescence of the Equipment or an item thereof from whatever cause, or the interference with the use thereof by any private person, corporation governmental authority, or any other disability of the Lessee to use the Equipment, or war, act of God, or governmental regulations, any present or future law or regulation to the contrary notwithstanding. Lessee shall promptly notify Lessor in writing of the occurrence of any of the above events and all pertinent details connected therewith. Except during any period when an Event of Default shall have occurred and shall be continuing, Lessee shall be entitled to the proceeds of any claim or right of Lessor or Lessee against any third party on account of any Of the foregoing events and Lessee shall be subrogated to the Lessor's right of recovery therefor against any third party. Lessor shall execute and deliver from time to time such instruments and take such other action as may be necessary or appropriate to more fully vest in Lessee such proceeds or effect such subrogation, provided, however, that all costs and expenses, including court costs and attorneys' fees, incurred in connection with enforcing or realizing upon any such claim or right to proceeds or obtaining enforcement of or realizing upon such right of subrogation, shall be paid by Lessee. (b) In the event any item of Equipment is physically damaged to a material extent by any occurrence whatsoever, Lessee shall immediately notify Lessor of such damage and, unless Lessor shall determine that Section 6(c) hereof is applicable to such damage, Lessee, at Lessee's expense, shall promptly cause such item of Equipment to be returned to the condition described in Sections 3 and 5 hereof. (c) In the event any item of Equipment shall be lost, stolen, destroyed, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, or shall be subjected to a requisition, taking by eminent domain or other interruption or termination of use for a stated period which exceeds the term of this Lease (any such occurrence being referred to as "Total Casualty"), Lessee shall promptly notify Lessor and either: (i) obtain replacement equipment of like mode, and features, having utility and remaining useful life at least equal to that of each such replaced item of Equipment and, in which case, Lessee shall immediately convey to Lessor good title for all such replacement equipment free of all liens, claims or encumbrances and such replacement equipment shall be substituted for each such item of Equipment replaced hereunder; or (ii) pay to Lessor, on the next Monthly Rent payment date for such item of Equipment following such Total Casually an amount equal to the Casualty Value (specified in the applicable Supplement) of such item of Equipment on such Monthly payment date. If Lessee elects to pay the Casualty Value rather than replace the Equipment, after the payment of such Casualty Value and all Monthly Rent due and owing for the period prior to the date of the Total Casualty with respect to such item of Equipment, Lessee's obligation to pay further Monthly Rent for such item of Equipment shall cease, but Lessee's obligation to pay Rent for all other items of Equipment, shall remain unchanged. So long as no Event of Default shall have occurred and be continuing under this Lease, and provided Lessee shall have made the Casualty Value payment identified above, Lessor shall pay Lessee any insurance proceeds received by Lessor by reason of such Total Casualty up to the amount of the Casualty Value paid by the Lessee. 7. INSURANCE Lessee shall at all times during the term of this Lease and until the Equipment has been returned to Lessor as provided below, at its own expense, maintain physical damage insurance in an amount not less than the replacement value of the Equipment but in no event less than the Casualty Value thereof, and liability and property damage insurance covering the Equipment (including Lessee's contractual liability under Section 9 hereof), in such amount, and with such companies (which shall be licensed by the state in which the Equipment is located) and such endorsements and covering such hazards, as are in general usage by companies owning or operating similar property and engaged in a business similar to Lessee's, in order to adequately protect the parties hereto. All insurance so maintained shall provide for a thirty-day prior written notice to Lessor and its assigns of any cancellation or reduction of coverages and an option in Lessor or its assignees to prevent cancellation by payment of premiums, shall cover both the interest of the Lessor and any assigns of which the Lessee has notice and of the Lessee in the Equipment, and shall provide that all insurance proceeds shall be payable to the Lessee, Lessor and any such assignee as their respective interests may appear at the time of any such payment. Lessor and any such assignee shall be named as additional insureds on any public liability insurance policies so maintained. Lessee shall furnish to Lessor satisfactory evidence of any insurance so maintained no later than the date of delivery of each item of Equipment and once annually, upon Lessor's request, during the term hereof. Lessee's above the initial date of delivery of the Equipment and obligation shall commence one shall continue until the Lease term hereof expires and the Equipment is returned to Lessor. Lessee shall cooperate and, to the extent possible, cause others to cooperate with Lessor and all companies providing any insurance to Lessee or Lessor or both with respect to the Equipment in collection on or enforcement of any such insurance. By this Section 7, Lessor does not modify or limit any provision of this Lease relating to disclaimer of warranties and liability or indemnity. 8. RETURN OF EQUIPMENT Upon the expiration or earlier termination of the Lease term, Lessee shall return the Equipment to Lessor in the same condition and configuration including original serial number, as received, reasonable wear and tear excepted and in the condition required by Sections 3 and 5 hereof, and shall cause the Equipment to be inspected by agent(s) of the respective manufacturer(s), if Lessor so requests, repaired, if necessary, so as to place the Equipment in the foregoing condition, crated, and shipped by truck or other normal ground transportation to such address as Lessor may designate. Lessee shall pay all expenses arising from the above requirements, provided that shipping charges payable by Lessee shall be limited to an amount equal to the cost of shipping the Equipment to any location within the Continental United States. Notwithstanding the provision of any notice contemplated by Section 1 above, in the event that, in contravention of said notice, any item of Equipment is not returned at the expiration of any Supplement, Lessor shall be entitled without notice or demand to receive Supplemental Rent for each day that such return is delayed at the rate of 150% of the daily proration of Monthly Rent. Lessee's failure to return the Equipment in accordance with the original notice shall also cause the applicable Supplement to continue in effect until terminated by either party upon not less than 90 days additional prior written notice. 9. DISCLAIMER OF LIABILITY AND INDEMNITY Lessor shall not be liable for, and Lessee agrees to indemnify and hold Lessor, Secured Party, and their respective successors and assigns harmless against any loss, claim, action, suit, demand, proceeding, liability, penalty, cost, damage, obligation, lien or expense of any kind on account of personal injury, property damage or otherwise, including but not limited to any matter arising under strict liability in tort, imposed on or incurred by or asserted against Lessor or Secured Party, or its or their successors or assigns, including without limitation attorneys' fees incurred on account of any of the foregoing, in any way relating to this Lease or any document contemplated hereby, or in any way relating to the selection, manufacture, purchase, acceptance, ownership, delivery, installation, lease, sublease, possession, use, operation, maintenance, condition, return or storage of any item of Equipment, or any accident in connection therewith, or arising by operation of law as a consequence of any of the foregoing. The provisions of this Section 9 shall survive any termination of this Lease, provided, however, that the Lessee shall not be required to indemnify the Lessor for (a) any claim in respect of any item of Equipment arising from acts or events which occur after possession of such item has been redelivered to the Lessor, (b) any claim resulting from the willful misconduct or negligence of the Lessor. Lessee shall give Lessor prompt written notice of any matter hereby indemnified against and agrees that unless directed to the contrary by written notice by the indemnified party, Lessee shall assume full responsibility for the defense thereof on behalf of such party. 10. EVENTS OF DEFAULT (a) Each of the following shall constitute an Event of Default hereunder: (i) default in the payment of any Rent hereunder and continuance thereof for ten days after notice by Lessor to Lessee of said default; (ii) failure by Lessee to make any other payment required by this Lease, or to perform any other of Lessee's agreements set forth in this Lease, within 30 days after notice thereof is given by Lessor to Lessee; (iii) Lessee becomes insolvent or admits in writing its inability to pay its debts as they mature, or applies for, consents to, or acquiesces in the appointment of a trustee or a receiver or similar officer for it or any of its property, or, in the absence of such application, consent or acquiescence, a trustee or receiver or similar officer is appointed for Lessee or for a substantial part of its property and is not discharged within 60 days, or any bankruptcy, reorganization, debt, dissolution or other proceeding under any bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is instituted by or against Lessee, and if instituted against Lessee is consented to or acquiesced in by Lessee or remains for 60 days undismissed; (iv) Lessee shall make an assignment for the benefit of creditors; (v) any warranty, representation, statement or report made in writing by Lessee in this Lease or in any document or certificate furnished in connection with this Lease or any financing obtained in connection therewith proves to have been untrue or incorrect in any material respect; or (vi) Lessee shall be a party to a transaction governed by Section 11 (a) below without complying with such Section. (b) Upon the occurrence of an Event of Default and so long as the same is continuing, Lessor may, at its option, declare the applicable Supplement(s) to be in default by notice to Lessee, and thereafter exercise one or more of the following remedies, as Lessor in its sole discretion lawfully elects: (1) Proceed by court action, either at law or in equity, to enforce performance by Lessee of this Lease or to recover damages for the breach thereof. (2) By notice terminate the applicable Supplement, whereupon all rights of Lessee in the Equipment subject to said Supplement will absolutely cease but Lessee will remain liable as hereinafter provided; and thereupon Lessee, if so requested, will at its expense promptly return the Equipment to Lessor at the place designated by Lessor within the Continental United States and in the condition, required pursuant to the terms hereof, or Lessor, at its option, may enter the premises where the Equipment is located and take immediate possession of and remove the same in a lawful manner. Lessee will, without further demand, forthwith pay Lessor an amount equal to any past due Rent which was due and payable for all periods up to and including the Monthly Rent payment date following the date on which Lessor has declared the Supplement to be in default plus, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the Casualty Value of the Equipment then subject to the applicable Supplement, computed as of such Monthly Rent payment date. Following the return of the Equipment to Lessor pursuant to this clause (2), Lessor will proceed to sell or release the Equipment in a commercially reasonable manner. The proceeds of such sale or release will be applied by Lessor (A) first, to pay all costs and expenses, including reasonable legal fees and disbursements, incurred by Lessor as a result of the default and the exercise of its remedies with respect thereto, (B) second, to pay Lessor an amount equal to any unpaid past due Rent due and payable plus the Casualty Value, to the extent not previously paid by Lessee, and (C) third, to reimburse Lessee for the Casualty Value to the extent previously paid as liquidated damages. Any surplus remaining thereafter will be retained by Lessor. To the extent Lessee has not paid Lessor the amounts specified in this clause (2), Lessee will forthwith pay such amounts to Lessor plus interest provided in Section 12 on such amounts, computed from the date the Casualty Value is payable hereunder until such amounts are paid. (c) In addition, Lessee shall be liable for any damages and expenses which Lessor shall have sustained by reason of the breach of any covenant, representation or warranty of this Lease other than for the payment of the Monthly Rent, and shall be liable for any and all unpaid amounts due hereunder before, during or after the exercise of any of the foregoing remedies and for all reasonable attorneys' fees and other costs and expenses incurred by reason of the occurrence of any Event of Default or the exercise of Lessor's remedies with respect thereto, including all costs and expenses incurred in connection with the return of any item of Equipment. Upon the occurrence and during the continuance of an Event of Default hereunder, Lessor shall be exclusively entitled to enforce the warranties assigned to Lessee under Section 4 hereof, notwithstanding such assignment. (d) A cancellation or termination hereunder shall occur only upon written notice by Lessor to Lessee, or repossession as provided above, and only with respect to such items of equipment as Lessor specifically elects to cancel or terminate by such notice or repossession. Except as to any such item of Equipment with respect to which there is a cancellation or termination, this Lease shall remain in full force and effect and Lessee shall be and remain liable for the full performance of all its obligations. 11. SUBLEASE AND ASSIGNMENT (a) LESSEE SHALL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR AND SECURED PARTY WHICH MAY BE GRANTED OR WITHHELD IN THEIR SOLE DISCRETION, (i) SUBLEASE, ASSIGN, PLEDGE, HYPOTHECATE OR IN ANY OTHER WAY TRANSFER THIS LEASE, THE EQUIPMENT OR ANY PART THEREOF, OR ANY INTEREST THEREIN, OR (ii) PERMIT THE EQUIPMENT OR ANY PART THEREOF TO BE USED BY ANYONE OTHER THAN LESSEE OR LESSEE'S EMPLOYEES. Any assignment, sublease, pledge, hypothecation or transfer for which consent is required hereby and which is made without such consent shall be void. The consent of Lessor or Secured Party to any of the foregoing applies only to the specific instance in which given, and shall not be deemed a consent to any subsequent like act by Lessee or any other person. Subject to the foregoing, this Lease inures to the benefit of, and is binding upon, the successors and assigns of the parties hereto. Lessee's interest herein shall not be assigned by operation of law. Notwithstanding the foregoing, Lessee shall be entitled to assign or transfer this Lease, the Equipment and its interests in this Lease and the Equipment in connection with a sale of all or substantially all of its assets to, or a consolidation of Lessee with, or a merger of Lessee into, any corporation, so long as Lessee provides Lessor with 45 days prior written notice and such corporation assumes the obligations of Lessee under this Lease and Lessee provides written evidence satisfactory to Lessor that immediately following such sale, consolidation or merger such corporation is in the opinion of Lessor no less credit-worthy than Lessee immediately prior to such sale, consolidation or merger. Lessor and any direct or remote assignee of any right, title and interest of Lessor hereunder shall have the right at any time or from time to time to assign to any third party all or any part of its right, title and interest in and to this Lease or the Equipment. (b) Lessor may obtain financing through financial institutions and secure such financial institutions ("Secured Party") by granting a security interest in or lien on all or any part of Lessor's interest in the Equipment, the applicable Supplement, any collateral therefor, and amounts payable by Lessee under the applicable Supplement. Such financing may include the purchase of the Equipment by the Secured Party. In the event of such financing (1) the lien instrument or security agreement will specifically provide that it is subject to Lessee's rights as herein provided; (2) such assignment of the applicable Supplement or any interest herein will not relieve Lessor from its obligations hereunder or be construed to be an assumption by Secured Party of such obligations (but Secured Party may perform, at its option, some or all of Lessor's obligations); (3) upon appropriate notice and upon request by Secured Party. Lessee will execute such acknowledgements and other documentation as may be requested by Lessor or Secured Party and Lessee will thereafter pay directly to Secured Party all Rent and other amounts payable hereunder; and (4) Lessee's obligations hereunder, including, without limitation, its obligation to pay Rent and other amounts hereunder, shall be absolute and unconditional and shall not be subject to any reduction, abatement, defense, set-off, counterclaim or recoupment for any reason whatsoever. Lessee acknowledges that any assignment or transfer by Lessor permitted under this Lease shall not materially change Lessee's duties or obligations under this Lease or materially increase the burdens or risks imposed upon Lessee. 12. GENERAL (a) Any provision herein that Lessee shall take any action shall require Lessee to do so at its sole cost and expense. Lessee shall pay Lessor interest at the maximum rate permitted by applicable law, but in no event in excess of a rate of 1-1/2% per month, on any amount past due from the date it is required to make any payment of Rent or other amount hereunder. Such interest shall be payable with respect to the period commencing on the date such payment is due through the date such payment is actually made. (b) Any notice hereunder shall be in writing and shall be deemed to be given when delivered, including but not limited to overnight courier or electronic transmission or, if mailed, on the third day after mailing by registered or certified mail, postage prepaid and addressed to Lessee or Lessor at its respective address shown on the first page hereof, or to either party at such other address it has designated as its address for purposes of notice hereunder. (c) Promptly upon Lessor's written request, Lessee agrees to execute, acknowledge and deliver such instruments, and to take such other action, as may reasonably be necessary in the opinion of Lessor, or Lessor's counsel, to protect Lessor's or any Secured Party's interests in the Equipment, this Lease and any Rent, including, but without limitation, the obtaining and execution of landlord and mortgage waivers and Uniform Commercial Code financing statements in recordable form, incumbency certificates and, at Lessee's expense, opinion of Lessee's legal counsel regarding the matters contained in Section 4(b) hereof. Upon Lessor's written request, Lessee also agrees to provide quarterly financial statements and annual audited financial statements in the form previously furnished to Lessor within 120 days of the end of each quarter and Lessee's fiscal year end. Lessor may file or record a copy of this Lease, as a financing statement or for any other purpose. (d) Lessor hereby informs Lessee of the following: i) Lessor did not select, Manufacture or supply the Equipment; ii) Lessor acquired the Equipment or the right to possession and use of the Equipment in conjunction with the lease; iii) in the case of new equipment, the party supplying the Equipment to Lessor ("Supplier") is as stated on the applicable Supplement hereto or schedules thereto; iv) Lessee is entitled under Article 2A of the Uniform Commercial Code to the promises and warranties, including those of any third party, provided to Lessor by Supplier in connection with, or as part of contract by which Lessor acquired the Equipment or the right to possession and use of the Equipment; and v) Lessee may communicate with Supplier and receive an accurate and complete statement of those promises and warranties, including any disclaimers and limitations of them or of remedies. Lessee hereby acknowledges that it received this notification from Lessor prior to Lessee signing the Lease. Lessee hereby certifies that the Lessor is not known to be in default under the terms of said Lease and Lessee has no known claim against Lessor under the Lease as of the date hereof. Lessee hereby waives any right it may have under Section 2A-517 of the Uniform Commercial Code or otherwise to revoke its acceptance for any reason whatsoever including but not limited to: i) any assumption by Lessee that a nonconformity would be cured; ii) any inducement of acceptance by the Lessors assurances or any difficulty to discover a nonconformity before acceptance; or iii) any Lessor default under the Lease. Lessee further hereby waives its rights under Section 2A-401 and 2A-402 of the Uniform Commercial Code to suspend performance of any of its obligations under the Lease with respect to the Equipment hereby accepted. (e) This Agreement is, and is intended to be, a lease, and Lessee does not acquire hereby any right, title or interest in or to the Equipment except the right to use the same as Lessee under the terms hereof. Both Lessor and Lessee agree to characterize this Agreement as a lease for Federal income tax purposes, such that Lessor shall receive the benefits of any depreciation and investment tax credit, allowance or similar benefit associated with any item of Equipment. (f) This Master Lease Agreement and all Supplements duly executed and attached hereto from time to time constitute the entire agreement between the parties hereto with respect to the Equipment, and any change or modification hereto and any related agreement must be in writing and sighed by the parties hereto. There shall be a single executed original of this Master Lease Agreement which shall be marked and for the purposes hereof shall be referred to as the "Original"; all other counterparts shall be marked "Duplicate". With respect to any Supplement to this Master Lease Agreement executed by the parties hereto, the following shall apply: (i) each such Supplement shall constitute a new lease between the parties; (ii) there shall be a single executed original of each such Supplement marked "Original"; (iii) all other counterparts of such Supplement shall be marked "Duplicate"; and (iv) to the extent, if any, that any such Supplement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction) no security interest therein may be created through the transfer or possession of the Original of this Master Lease Agreement or any Duplicate of such a Supplement, but such security interest may be created by the transfer or possession of the Original of such Supplement together with a certified copy of this Master Lease Agreement. (g) Lessor is not, and shall not be deemed to be, an agent, employee or representative of Lessee or any manufacturer of any Equipment, for any purpose whatsoever. (h) If this Lease or any provision hereof shall be deemed invalid, illegal or unenforceable in any respect or in any jurisdiction, the validity, legality and enforceability of this Lease in other respects and in other jurisdictions shall not be in any way impaired or affected thereby. No covenant or condition of this Lease can be waived except by the written consent of the party to be bound by such waiver. No waiver by Lessor of any Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. Forbearance or indulgence by Lessor or Lessee in any regard whatsoever shall not constitute a waiver of the covenant or condition to be performed by the other party to which such forbearance or indulgence may apply, and, until complete performance by such party of such covenant or condition, Lessor or Lessee, as the case may be, shall be entitled to invoke any remedy available to such party under this Lease or by law or in equity or otherwise despite said forbearance or indulgence. This Lease shall be governed by the laws of the State of Illinois. Lessee hereby submits to the Jurisdiction of the state and federal courts located in Illinois. (i) Should Lessee fail to make any payment or to do any act as herein provided, after notice to Lessee which is reasonable under the circumstances, Lessor shall have the right, but not the obligation and without releasing Lessee from any obligation hereunder or waiving Lessor's right to declare a default hereunder, to make or do the same, and to pay, purchase, contest or compromise any encumbrance, charge or lien which in the reasonable judgment of Lessor appears to materially and adversely affect Lessor's interest in the Equipment, and in exercising any such rights Lessor may incur and liability and expend whatever amount in its reasonable discretion it may deem necessary therefor. All sums so incurred or expended by Lessor shall be without demand immediately due and payable by Lessee. (j) Whenever the context of this Lease requests, the singular number includes the plural. Section headings contained herein are solely for the convenience of the parties, and are not an aid in the interpretation of the instrument. Although this Lease is dated as of the date first above written for convenience, the Supplement Commencement Date shall be as specified in the applicable Supplement. (k) This Master Lease Agreement may be canceled by Lessee in writing, provided all outstanding Supplements hereunder have either expired or have been terminated with respect to their individual termination provisions and that no Events of Default are continuing under any Supplements, and Lessee has fulfilled all obligations under all such Supplements. LESSOR: LESSEE: MERIDIAN LEASING CORPORATION DIAMOND BRANDS INCORPORATED By: By: Title: Title: 12/23/96 fe SUPPLEMENT NUMBER 1 LESSEE: DIAMOND BRANDS, INC. MASTER LEASE AGREEMENT DATE: November 22, 1996 This Supplement is issued pursuant to the Master Lease Agreement identified above. All of the terms and conditions of the Master Lease Agreement are hereby incorporated herein and made a part hereof as if such terms and conditions were set forth in this Supplement. This Supplement, together with the terms and conditions as incorporated herein, constitutes a separately enforceable lease agreement with respect to the Equipment. SUPPLEMENT COMMENCEMENT DATE: January 1, 1997 The Lease Term shall begin on the Supplement Commencement Date. To the extent that the Equipment is accepted prior to that date, the Lessee shall pay to the Lessor an interim rental representing a proration on a per diem basis of the initial monthly rental. EQUIPMENT: Manufactured by BAY NETWORKS, TRANSITION ENGINEERING, SHIVA, U.S. ROBOTICS, ADC, 3COM, APC, COMPAQ, KINGSTON, MICROSOFT See Equipment/Location Schedule A to Supplement Number 1. LEASE TERM AND RENTAL PAYMENTS: Term 48 months, payable monthly on the first day of each month. The amount of payment for months 1 through 48 is $2,321.00 per month. LOCATION OF EQUIPMENT: See Equipment/Location Schedule A to Supplement Number 1. ADDITIONAL PROVISIONS TO SUPPLEMENT: Casualty Values........................................... Schedule B Purchase Option........................................... Schedule C MERIDIAN LEASING CO DIAMOND BRANDS, INC. (Lessor), (Lessee) By: By: Title: Title: EQUIPMENT/LOCATION SCHEDULE A TO SUPPLEMENT 1 To Master Lease Agreement Dated November 22, 1996 Between MERIDIAN LEASING CORPORATION (Lessor) And DIAMOND BRANDS, INC. (Lessee) EQUIPMENT: Manufactured by BAY NETWORKS, TRANSITION ENGINEERING, SHIVA, U.S. ROBOTICS, ADC, 3COM, APC, COMPAQ, KINGSTON, MICROSOFT LOCATION: DIAMOND BRANDS, INC. 1800 CLOQUET AVENUE CLOQUET, MN 55720
Qty Model/Type Description 3 CG1001X02 24 PORT 10BASE T HUB 2 CG1007002 ADVANCED AGNT NNM (BAYSTACK) 1 CG0018001 CASCADE CABLE 1 810M-A 8 PRT MANAGED HUB 2 78392 AUI 10 B 2 TRANSCEIVER 2 27890 10 B T TRANSCEIVERS 1 280131 SHIVA NETMODEM 1 940707 USR SPORTSTER MODEM 1 AE1001010 ANH: 1 ETH X 2 SYNC 8 1 AE1001007 AN: 1ETH X 2 SYNC 8MB 2 AE1001014 ANH: 1 ETH X 2 SYNC 12 1 AE1001006 AN: 1 ETH X 2 SYNC 4M D 5 AE0008024 REMOTE OFFICE SUITE 5 7220 V.35 CABLE FOR WAN 1 78741 ADC KENTROX ADD/DROP 4 78285 ADC CSU/DSU 64KB 1 636-03 OPTIVITY 6.0 FOR HP 4 3C562-TP ETHERLINK PCMCIA 2 3C509B-TPO ETHERLINK III RJ45 2 3C509B-TPO-20PK ETHERLINK III RJ45 (20) 4 3C509B-TPC ETHERLINK III RJ45 BNC 1 SU1000RM APC SMART UPS (1000VA) 1 SU3000 SMART UPS (3000VA) 1 SU1400 APC SMART UPS (1400VA) 5 BF2300-001 AN NXT DAY HARDWARE 1 S6-02 WINDOWS SOFTWARE LICENSE 3 BF2300-037 BAYSTACK NXT DAY HARD. 1 219720-007 PROLIANT 1500 5/166 2 KTC1691/64 64MB MEMORY U/G 1 146742-006 4.3GB PLUGGABLE F/W SCSI 1 1141564-601 1024 COLOR MONITOR 1 455787 M/S BACK OFFICE 80 543888 75 USER LICENSE 70 454902 U/G WIN 95 39 454124 MS OFFICE PRO (COMP U.G)
This Schedule is hereby attached to and made a part of the Supplement to the Master Lease Agreement bearing date as set forth above, between MERIDIAN LEASING CORPORATION and Lessee named above. Lessee Address: DIAMOND BRANDS, INC. 1800 CLOQUET AVENUE CLOQUET, MN 55720 SCHEDULE B TO SUPPLEMENT NUMBER 1 TO Master Lease Agreement Dated November 22, 1996 Between MERIDIAN LEASING CORPORATION (Lessor) And DIAMOND BRANDS, INC. (Lessee) CASUALTY VALUES The Casualty Value of the Equipment covered by the Supplement identified above, as of any date, shall be the amount indicated below opposite the period of time in which such date occurs. Values for those periods between the ones indicated below can be calculated through interpolation of nearest values.
Months Expired After Casualty Supplement Commencement Date Value 0 $113,236 12 $ 88,598 24 $ 69,872 36 $ 55,638 48 $ 44,820
After the term of lease for such Equipment, and until such item of Equipment has been surrendered to Lessor, as provided in the Master Lease Agreement, the Casualty Value of such Equipment shall be $44,820.00. Following payment of the Casualty Value, the Lessor and the Lessee shall each make reasonable efforts to obtain bids for the purchase of any existing Equipment suffering such Total Casualty. Such Equipment shall be sold for the highest cash offer then available, or if higher, other offer acceptable to Lessor and Lessee. Upon such sale, the Lessee shall be refunded the amount of the proceeds of the sale less the actual expenses incurred by Lessor in making the sale, including, without limitation, storage, insurance, advertising and sales taxes, but such refund shall not be in excess of the Casualty Value previously paid. Following payment of the Casualty Value, the Lessee shall be entitled to the proceeds of any insurance covering the Equipment suffering such Total Casualty up to an amount not in excess of the Casualty Value previously paid, but in no event shall the aggregate of amounts refunded to or received by Lessee pursuant to this Schedule B exceed the Casualty Value. This Schedule is hereby attached to and made a part of the Supplement of the Master Lease Agreement bearing date as set forth above, between MERIDIAN LEASING CORPORATION and Lessee named above. SCHEDULE C TO SUPPLEMENT NUMBER I To Master Lease Agreement Dated November 22, 1996 Between MERIDIAN LEASING CORPORATION (Lessor) And DIAMOND BRANDS, INC. (Lessee) PURCHASE OPTION: Lessee has the option, with 3 months prior written notice, provided it has not previously received written notice of default under the terms of the Lease, or if it received such notice of default, has cured such default, to purchase the Equipment at the end of the Lease Term for Fair Market Value, such Fair Market Value to be determined objectively by Lessor. Upon payment of the purchase price, Lessor hereby releases any interest it may have in the software subject to this Supplement. In the event Lessee does not exercise said purchase option, the Lease Term shall be automatically extended at the monthly lease rate in effect at the end of said term, unless and until terminated by either party giving the other not less than 3 months prior written notice, and any software shall be returned with the Equipment. This Schedule is hereby attached to and made a part of the Supplement of the Master Lease Agreement bearing date as set forth above, between MERIDIAN LEASING CORPORATION and Lessee named above. EX-10.25 45 LEASE AGREEMENT DATED AS OF JUNE 23, 1997 COMMERCIAL AND INDUSTRIAL LEASE AGREEMENT THIS LEASE is made as of this 23rd day of June, 1997 between LNPJ,L.L.C., a Missouri limited liability company, 1330 Burlington, North Kansas City, Missouri 64116 Attn: Mike Rainen ("Landlord") and Empire Candle, Inc., a Missouri corporation, located at 2925 Fairfax Trafficway, Kansas City, Kansas 66115 ("Tenant") who agree as follows: 1. PREMISES - Subject to the covenants and conditions of this Lease, Landlord leases to Tenant and Tenant leases from Landlord the premises (the "Premises") commonly known and numbered as 2925 Fairfax Road/209 Donovan in the City of Kansas City, County of Wyandotte, State of Kansas, and further described on Exhibits A (owned by Landlord) and B (leased by Landlord) attached hereto, together with the right of ingress and egress and subject to reservations and easements of record. 2. USE OF PREMISES - The premises will be used on for manufacturing, warehousing and administration. 3. TERM - The term of this lease (the "Term") is for three years and no months, commencing on the 15'h day of July, 1997 and ending on the 14th day of July 2000. 4. RENT PAYMENTS- Tenant shall pay to Landlord an aggregate sum of One Million Two Hundred Forty Thousand and no/100 Dollars ($1,240,000.00) as rent in monthly installments ("Rent Payments"), each due and payable in advance without notice or demand at Landlord's above stated address, or at any other place Landlord designates in writing. The first monthly rent payment of $33,333.34 will be paid on or before July 15, 1997 and all subsequent monthly rent installments will be due on the 15th day of each succeeding month during the Term. The amount of each monthly rent installment will be as follows: year one- $33,333.33 year two- $35,000.00 year three- $35,000.00 5. SECURITY DEPOSIT - Concurrently with its execution of this Lease, Tenant shall deliver to Landlord $35,000.00 as security for the performance by Tenant of every covenant and condition of this Lease (the "Security Deposit"). Said Security Deposit may be commingled with other funds of Landlord and bear no interest. If Tenant shall default with respect to any covenant or condition of this Lease, including but not limited to the payment of rent, Landlord may apply the whole or any part of such Security Deposit to the payment of any sum in default or any sum which Landlord may be required to spend by reason of Tenant's default. If any portion of the Security Deposit is so applied, Tenant, upon demand by Landlord, will deposit cash with the Landlord in an amount sufficient to restore the Security Deposit to its original amount. Should Tenant comply with all of the covenants and conditions of this Lease, 1 the Security Deposit or any balance thereof shall be returned to Tenant promptly after the expiration of the term thereof. 6. POSSESSION AT BEGINNING OF TERM - Tenant currently occupies the Premises under a lease with Sealright Packaging Co. 7. PROPERTY INSURANCE - Tenant shall comply with all insurance regulations so the lowest property damage insurance and liability insurance rates possible for the Tenant's use pursuant to Section 3 of this Lease may be obtained and nothing shall be done or kept in or on the Premises by Tenant which will cause an increase in the premium for any such insurance on the Premises or on any building of which the Premises are a part of on any contents located therein, over the rate usually obtained for the proper use of the Premises permitted by this Lease or which will cause cancellation or make void any such insurance. If, during the Term, the premiums for any property damage insurance maintained by Landlord with respect to the Premises are increased, or if the amount of property damage coverage that must be maintained with respect to the Premises is increased, then Tenant will pay to landlord, as additional rent, the amount of all such increases in excess of the premium covering the Premises for the policy year 1997 within thirty (30) days after receipt of Landlord's billing statement and demand for payment of the same together with documentation confirming the same. The amount payable by Tenant under this section will be prorated on a per diem basis for the partial years, if any, in which this Lease commences and terminates. The amounts payable due to increased premiums will be capped at a rate comparable to rates for similarly situated property in Wyandotte County, Kansas. Tenant shall maintain, at all times during the Term, adequate insurance on its personal property used, stored or kept in the Premises. 8. INDEMNITY AND LIABILITY INSURANCE - Tenant shall at all times indemnify, defend, and hold Landlord harmless from all loss, liability, costs, damages and expenses that may occur or be claimed with respect to any person or persons, or property on or about the Premises or to the Premises resulting from any act done or omission by or through Tenant, its agents, employees, invitees or any person on the Premises by reason of Tenant's use or occupancy or resulting from Tenant's non-use or possession of said property and any and all loss, cost, liability or expense resulting therefrom. Tenant shall maintain, at all times during the Term, comprehensive general liability insurance in a responsible insurance company licensed to do business in the state in which the Premises are located and satisfactory to Landlord, properly protecting and indemnifying Landlord with single limit coverage of not less than $2,000,000.00 for injury to or death of persons and for property damage. During the Term, Tenant shall furnish Landlord with a certificate or certificates of insurance covering such insurance so maintained by Tenant and naming landlord and Landlord's mortgagees, if any, as additional insureds. Landlord agrees to maintain fire and extended coverage insurance on the improvements on the Premises in a minimum amount of $ 3,000,000.00. 2 9. ASSIGNMENT AND SUBLETTING - Tenant shall not assign, transfer, or encumber this Lease and shall not sublease the Premises or any part thereof or allow any other person to be in possession thereof without the prior written consent of Landlord, in each and every instance, which consent or consents shall not be unreasonable withheld. For the purpose of this provision, any transfer of a majority or controlling interest in Tenant (whether in one or more related or unrelated transactions), whether by transfer of stock, consolidation, merger, transfer of a partnership interest or transfer of any or all of Tenant's assets or otherwise, or by operation of law, shall be deemed an assignment of this Lease. Notwithstanding any permitted assignment or subletting, Tenant shall at all times remain directly, primarily and fully responsible and liable for the payment of the rent herein specified and for compliance with all of its obligations under the terms and provisions of this Lease. Landlord may assign or transfer this lease without the consent of Tenant. 10. SIGNS AND ADVERTISEMENTS - Tenant shall not place nor permit to be placed upon any part of the Premises, any signs, billboards, or advertisements whatever, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. 11. CONDITION OF PREMISES AT BEGINNING AND END OF TERM - Tenant acknowledges Tenant has inspected the Premises and, except as may be provided otherwise in this Lease and without abrogating Landlord's obligations under Paragraph 15 hereof, Tenant accepts the Premises in their present condition. At the end of the Term, except for (damage caused by fire or other perils, Tenant's expense, will (i) surrender the Premises in as good a condition is the Permitted Use will have reasonably permitted, subject to Tenant's obligations stated in Paragraphs 12 and 14 herein; (ii) have removed all of Tenant's property from the Premises; (iii) have promptly repaired any damage to the Premises caused by the removal of Tenant's Property; and (iv) leave the Premises free of trash and debris and the building in "broom clean" condition. 12. MAINTENANCE AND REPAIR BY TENANT - Except for the obligations imposed upon Landlord in Paragraph 15 hereof, and except for damage resulting from an Insurable Loss, during the Term and at Tenant's sole cost and expense, Tenant will maintain and keep in good order, repair and condition and, when necessary, will replace all parts of the Premises (except those for which Landlord is expressly responsible under the terms of this Lease), including, but not limited to, dock bumpers and other dock equipment and apparatus, utility service lines form the point where they enter the building(s) of which the Premises are a part, interior walls, inside surfaces of exterior walls, fixtures, floor coverings, lighting fixtures, heating, ventilating, air-conditioning, plumbing, sprinkler system, glass, windows, doors, elevator, electrical and other mechanical equipment, appliances and systems, railroad spur tract, if any, improvements made by and at the expense of Tenant and Tenant's property, including, but not limited to, Tenant's signs and advertisements. Tenant will keep the driveways, approaches, sidewalks, parking areas and adjacent alleys that are a part of the Premises clean, orderly, sightly, unobstructed and free from ice and snow and will keep railroad spur tracts that are a part of the Premises unobstructed. Tenant will regularly water, mow, trim, fertilize and otherwise maintain the lawn, shrubs, plants, trees and other landscaping of the Premises and will prevent water pipes in the Premises from freezing. 3 13. LANDLORD'S RIGHT OF ENTRY - Landlord or Landlord's agent may enter the Premises at reasonable hours to examine the same, to show the same to prospective lenders and purchasers, and to do anything Landlord may be required to do hereunder or which Landlord may deem necessary for the good of the Premises or any building of which they are a part; and, during the last 365 days of this Lease, landlord may display a "For Rent" sign on and show the Premises if the Tenant fails to exercise the Option to Renew described in Section 38 of this Lease. 14. PARKING LOT MAINTENANCE - Tenant shall be responsible for maintenance, cleaning, repainting and repairs of the parking areas, driveways, sidewalks and approaches, including snow removal. Tenant will repair all damage to parking areas, driveways, sidewalks and approaches caused by placement or movement of trash containers, truck trailer dollies, trucks, etc. Tenant understand and agrees that no personal property shall be stored in the parking area or any place outside of the building without the prior written consent of Landlord. 15. MAINTENANCE AND REPAIR BY LANDLORD - Landlord, during the term and at Landlord's sole cost and expense, will maintain and keep in good repair the roof, exterior walls (exclusive of inside surfaces and glass, windows and doors), gutters, down spouts, foundations and all other structural components of the building(s) of which the Premises are a part. All costs for repairs and maintenance to the underground plumbing and sewer lines, and water, gas and electric service lines from the property lines to the point where such service lines enter the building(s) of which the Premises are a part shall be paid by the Tenant up to the first $5,000.00 of repairs or maintenance per occurrence and shall be equally split between the parties for any amounts over $5,000.00 per occurrence. Tenant shall obtain landlord's written permission to proceed prior to commencement of any repairs or maintenance for which Landlord and Tenant would be mutually liable which consent shall not be unreasonable withheld or delayed. 16. DAMAGE BY CASUALTY - In case, during the Term or previous thereto, the Premises hereby let, or the building of which said premises are a part, shall be destroyed or shall be so damaged by fire or other casualty as to become untenantable, then in such event, at the option of Landlord, the Term shall cease and this Lease shall become null and void from the date of such damage or destruction and Tenant shall immediately surrender said Premises and all interest therein to Landlord, and Tenant shall pay rent within said Term only to the time of such surrender; provided, however, that Landlord shall exercise such option to so terminate this Lease by notice in writing delivered to Tenant within thirty days after such damage or destruction. In case Landlord shall not so elect to terminate this Lease, this Lease shall continue in full force and effect and Landlord shall repair the Premises with all reasonable promptitude, and in any event complete the same within 180 days of commencement, placing the same in as good a condition as they were at the time of the damage or destruction and for that purpose may enter said Premises and rent shall abate in proportion to the extent and duration of untenantability. In either event, Tenant shall remove all tenant's rubbish, debris, merchandise, furniture, equipment and other of its personal property, within twenty days after the request of Landlord. If the Premises shall be but slightly injured by fire or other casualty, so as not to render the same untenantable and unfit for occupancy, then Landlord shall repair the same with all reasonable promptitude to substantially the same utility and use, and in that case the rent shall not abate. Except as provided herein, no compensation of claim shall be made by or allowed to Tenant by reason of any inconvenience or annoyance arising from the necessity of repairing any portion of the building or the Premises, however the necessity may occur. 4 17. PERSONAL PROPERTY - Landlord shall not be liable for any loss or damage to any merchandise inventory, goods, fixtures, improvements or personal property of tenant in or about the Premises, regardless of the cause of such loss or damage. 18. ALTERATIONS - Tenant shall not make any alterations or additions in or to the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Landlord hereby approves Tenant's installation of six storage tanks ("Tanks") to hold wax integral to Tenant's operations in and on the Premises Tenant shall, at Tenant's sole cost and expense, remove the Tanks at the expiration or earlier termination of this Lease. 19. UTILITIES AND SERVICES - Tenant shall furnish and pay for all electricity, gas, water, fuel, trash removal and any services or utilities used in or assessed against the Premises, unless otherwise herein expressly provided. 20. LEGAL REQUIREMENTS - Tenant shall comply with all laws, orders, ordinances and other public requirements now or hereafter affecting the Premises or the use thereof, including without limitation ADA, OSHA and like requirements, and indemnify, defend and hold Landlord Harmless from expense or damage resulting from failure to do so. 21. MULTIPLE TENANCY BUILDING- N/A 22. FIXTURES - Except for Tenant's property and business fixtures, all buildings, repairs alterations, additions, improvements, installations and other non-business fixtures installed or erected on the Premises, whether by or at the expense of Landlord or Tenant, will belong to Landlord and will remain on and be surrendered with the Premised at the expiration or termination of this Lease. Notwithstanding the foregoing, at the time of Landlord's approval of any alterations, additions or improvements to the Premises, Landlord shall provide Tenant with notice as to whether or not Landlord expects Tenant to remove the same prior to the expiration of this Lease, which notice shall be observed by Tenant. In all other events, upon the expiration of this Lease, Tenant shall return the Premises to the condition they were in as of the commencement of this Lease, except for (i) normal wear and tear, (ii) damage by casualty and (iii) loss by condemnation. 23. INCREASE IN REAL ESTATE TAXES AND SPECIAL ASSESSMENTS - In the event the real estate taxes and installments of special assessments, payable with respect to the Premises during any lease year shall be greater than the amount of such taxes and installments due and payable during the base year of 1997, whether by reason of an increase in tax rate or an increase in the assessed valuation or otherwise, Tenant shall pay to Landlord the full amount of such increase as additional rent within thirty (30) days after notice that the same is due together with documentation confirming the same. 24. EMINENT DOMAIN - If the Premises or any substantial part thereof shall be taken under the power of eminent domain or be acquired for any public or quasi-public use or 5 purpose, the Term shall cease and terminate upon the date when the possession of said Premises or the part thereof so taken shall be required for such use or purpose and without apportionment of the award, and Tenant shall have no claim against Landlord for the value of any unexplored Term. If any condemnation proceeding shall be instituted in which it is sought to take or damage any part of the Premises or the building of which the Premises are a part of the land under it, or if the grade of any street or alley adjacent to the Premises is changed by any legal authority and such change of grade makes it necessary or desirable to remodel the Premised to conform to the changed grade, Landlord shall have the right to cancel this Lease after having given written notice of cancellation to Tenant not less than ninety (90) days prior to the date of cancellation designated in the notice. If Landlord does not cancel this Lease pursuant to the foregoing sentence, Landlord shall remodel, change and restore the Premises with all reasonable promptitude, placing the same in as good condition as the Premises were at the time of the condemnation and in all events to a complete architectural unit and rent shall abate in proportion to the extent and duration of untenantability during Landlord's construction, which shall in any event be completed within 180 days of commencement of the same. 25. WAIVER OF SUBROGATION- As part of the consideration for this Lease, each of the parties hereby releases the other party hereto from all liability for damage due to any act or neglect of the other party (except as hereinafter provided) occasioned to property owned by said parties which is or might be incident to or the result of a fire or any other casualty against loss for which either parties is now carrying or hereafter may carry insurance or is required to carry insurance pursuant to this Lease; provided, however, that the releases herein continued shall not apply to any loss or damage occasioned by intentional acts of either of the parties hereto, and the parties hereto further covenant that any insurance they obtain on their respective properties shall contain an appropriate provision whereby the insurance company, or companies, consent to the mutual release of liability contained in this paragraph. 26. DEFAULT REMEDIES - In the event: (i) Tenant fails to comply with any term, provision, condition or covenant of this Lease; (ii) N/A; (iii) any petition is filed by or against Tenant under any section or chapter of the Federal Bankruptcy Act, as amended, or under any similar law or statute of the United States or any state thereof; (iv) Tenant becomes insolvent or makes a transfer in fraud of creditors; (v) tenant makes an assignment for benefit of creditors; or (vi) a receiver is appointed for Tenant or any of the assets of Tenant, then in any of such events, Tenant shall be in default and Landlord shall have the option to do any one or more of the following: upon ten (10) days prior written notice, for the payment of rent or additional rent upon thirty (30) days prior written notice for non-monetary defaults, provided, however, that Tenant shall not be in default of this Lease if it has commenced the cure within the thirty (30) day period and diligently prosecutes the same thereafter, in addition to and not in limitation of any remedy permitted by law, to enter upon the Premised either with or without process of law, and to expel, remove and put out Tenant or any other persons who might be thereon, together with all personal property found therein; and, Landlord may terminate this Lease or it may from time to time without terminating this Lease, rent said Premised or any part thereof for such term or terms (which may be for a term extending beyond the Term) and at such rental or rentals and upon such other terms, and conditions as Landlord in its sole discretion may deem advisable, with the right to repair, renovate, remodel, redecorate, alter and change said Premises. At the 6 option of Landlord, rents received by Landlord from such reletting shall be implied first to the payment of any indebtedness from Tenant to Landlord other than rent and additional rent due hereunder; second, to payment of any costs and expenses of such, including, but not limited to, attorney's fees, advertising fees and brokerage fees, and to the payment of, any repairs, renovation, remodeling, redecorations, alterations and changes in the Premises; third, to the payment of rent and additional rent due and payable hereunder the interest thereon; and, if after applying said rentals there is any deficiency in the rent and additional rent and interest to be paid by Tenant to under this Lease, Tenant shall pay any such deficiency to Landlord and such deficiency shall be calculated and collected by landlord monthly. No such re-entry or taking possession of said Premises shall be construed as an election of Landlord's part to terminate this lease unless a written notice of such intention be given to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach and default. Should thereafter elect to terminate this Lease by reason of any default, in addition to any other Landlord at any time terminate this Lease by reason of any default, in addition to any other remedy it may have, it may recover from Tenant the worth at the time of such termination of the excess of the amount of rent and additional rent reserved in this Lease for the balance of the Term over the then reasonable rental value of the Premises for the same period. Landlord shall have the right and remedy to seek redress in the courts at any time to correct or remedy any default of Tenant by injunction or otherwise, without such resulting or being deemed a termination of this Lease, and Landlord, whether this Lease has been or is terminated or not, shall have the absolute right by court action or otherwise to collect any and all amounts of unpaid rent or are unpaid at the date of termination. In case it should be necessary for Landlord to bring any action under this Lease, to consult or place said lease or any amount payable by Tenant hereunder with an attorney concerning or for the enforcement of any of Landlord's rights hereunder, then Tenant agrees in each and any such case to pay to Landlord, Landlord's reasonable attorney's fees. 27. WAIVER - The rights and remedies of Landlord under this Lease, as well as those provided or accorded by law, shall be cumulative, and none shall be exclusive of any other rights or remedies hereunder or allowed by law. A waiver by Landlord of any breach or breaches, default or defaults of Tenant hereunder shall not be deemed or construed to be a continuing waiver of such breach or default nor as a waiver of or permission, expressed or implied, for any subsequent breach or default, an it is agreed that the acceptance by Landlord of any installment of rent subsequently to the date the same should have been paid hereunder, shall in no manner alter or affect the covenant and obligation of tenant to pay subsequent installments of rent promptly upon the due date thereof. No receipt of money by Landlord after the termination of this lease shall in any way reinstate, continue or extend the term above demised. 28. TOXIC OR HAZARDOUS MATERIALS - Tenant shall not store, use or dispose of any toxic or hazardous materials in violation of applicable laws in, on or about the Premises without the prior written consent of Landlord. Tenant, at its sole cost, will comply with all laws relating to Tenant's storage, use and disposal of hazardous or toxic materials. Tenant shall be solely responsible for and will defend, indemnify and hold Landlord, its agents and employees, harmless from and against all claims, costs and liabilities, including attorney's fees and costs, 7 arising out of or in connection with the removal, clean-up and restoration work and materials necessary to return the Premises, and any other property of whatever nature located on the Premises, to their condition existing prior to the appearance of toxic or hazardous materials which were placed or used or caused to be placed or used by the Tenant, its agents, employees, suppliers, guests, assigns or any person in its name or on its behalf, on the Premises. Tenant's obligations under this paragraph will survive the termination of this Lease. Tenant acknowledges that there may exist on the Premises certain known or unknown hazardous materials that were brought upon or caused to he brought upon the Premises by parties other than Landlord (Prior Contamination). Tenant further acknowledges that the Sealriglit Company, Inc., the entity from whom Landlord purchased the Premises, is currently remediating certain Prior Contamination under a Consent Order with the Kansas Department of Health & Environment (KDHE) in case 93-E-355. Tenant agrees to permit the continuance of the remediation for the time period and under the conditions required by the KDHE. Tenant also acknowledges that Landlord has advised Tenant that Landlord intends to conduct certain remediation on other Prior Contamination in certain areas of the Premises and Tenant agrees to permit the Landlord and or its agents to enter into the Premises to complete the remediation. Landlord agrees to indemnify and hold Tenant harmless against all losses, costs and expenses, including reasonable attorney's fees, which result from Tenant's liability to any person or entity (including governmental authorities) for any claims, judgments, penalties or fines which arise from the presence on the Premises of toxic or hazardous materials which were placed or used or caused to be placed or used on the Premises by the Landlord, its agents, employees, suppliers, guests, assigns or any person in its name or on its behalf. As an express condition precedent to Tenant obtaining the benefit of this indemnity from Landlord, Tenant agrees that the loss, cost or expense will not arise from information provided by Tenant to any governmental agency or third party except as required by law or would be reasonable or prudent under the circumstances after giving thirty (30) written notice to Landlord. Landlord's obligation under this paragraph will survive the termination of this lease but shall terminate on July 18, 2007. Notwithstanding the above, the indemnity referred to in this paragraph shall not extend to Prior Contamination existing on that part of the Premises legally described on Exhibit B attached hereto. 29. REAL ESTATE COMMISSION - Neither party has dealt with any broker, finder or any other person to whom a leasing commission is due. Any party to this Lease through whom a claim to any broker's, finder's or other fee is made, contrary to the representations made above in this paragraph, shall indemnify, defend and hold harmless the other party to this Lease from any other loss, liability, damage, cost or expense including, without limitation, reasonable attorney's fees, court costs and other legal expenses paid or incurred by the other party, that is in any way related to such a claim. 30. NOTICES - Any notice hereunder shall be sufficient if sent by certified mail, addressed to Tenant at the Premises, and to Landlord where rent is payable. 8 31. SUBORDINATION - In the event Landlord holds title to said Premises by virtue of a lease, then this sublease is and shall remain subject to all of the terms and conditions of such underlying lease, so far as shall be applicable to the Premises. This Lease shall also be subject and subordinate in law and equity to any existing or future mortgage or deeds of trust priced by landlord upon the Premises or the property of which the Premises form a part, provided, however, that the holder of any such existing or future Mortgage or Deed of Trust shall not disturb Tenant's tenancy pursuant to this Lease so long as Tenant is not in default pursuant to than terms of this Lease. 32. SUCCESSORS - The provisions, covenants and conditions of this Lease shall bind and inure to the benefit of the legal representatives, heirs, successors and assigns of each of the parties hereto, except that no assignment or subletting by Tenant without the written consent of Landlord shall vest any rights in the assignee or subtenant of Tenant. 33. QUIET POSSESSION - Landlord agrees, so long as Tenant fully complies with all of the terms, covenants and conditions herein contained on Tenant's part to be kept and performed, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises for the Term aforesaid, it being expressly understood and agreed that the aforesaid covenant of quiet enjoyment shall be binding upon Landlord, its heirs, successors or assigns, but only during such party's ownership of the Premises. Landlord and Tenant further covenant and represent that each has full right, title, power and authority to make, execute and deliver this Lease. 34. BANKRUPTCY - N/A 35. ENTIRE AGREEMENT - This Lease contains the entire agreement between the parties, and no modification of this Lease shall be binding upon the parties unless evidenced by an agreement in writing signed by Landlord and Tenant after the date hereof. If there be more than one tenant named herein, the provisions of this Lease shall be applicable to and binding upon such Tenants, jointly and severally. 36. SUBORDINATION - Tenant shall attorn to any successor to Landlord upon request and to execute any documents reasonably required or appropriate to effectuate such an attornment, or the subordination, aforesaid, upon written notice thereof, and if Tenant this to execute within ten (10) days of receipt of Landlord's request for the same, Tenant shall be in immediate default this Lease. 37. ESTOPPEI, CERTIFICATES- Tenant shall at any time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord or to any lender of or purchaser from Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or if modified stating the nature of such modification) and the date to which the rent and other charges are paid in advance, if any, and acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord or specifying such defaults if any are claimed. Any such statement may be conclusively relied 9 upon by any prospective purchaser or encumbrances of the Premises or of the business of Landlord. 38. RENEWAL OPTION - Subject to the terms of this paragraph, Landlord grants to Tenant the option to renew the Lease for one term of one to three years. Said option shall be exercised by Tenant, if not then in default under the terms of this Lease, by giving Landlord written notice of its intention to renew on or before July 15, 1999 and to specify the term of the renewal. The Rent Payments for such renewal period shall be at an agreed fair market rental rate ("Renewal Rate") for similar property in the metropolitan Kansas City area for the same period of time and on the same terms, without taking into account the value of any improvements made by the Tenant from funds other that those described in Paragraph 39 below. In the event the parties are unable to agree on the rental rate for the renewal period by August 30, 1999, then the parties shall select two individuals ("Individuals") by September 30, 1999, who shall jointly determine the Renewal Rate and whose determination shall be binding on the parties. If the above Individuals are unable to make a joint determination of the Renewal Rate by October 30, 1999, then they shall select a third individual (Arbitrator) who shall determine the Renewal Rate by January 30, 2000, which determination shall be binding on the parties. The parties agree that the Individuals and Arbitrator will be individuals with an least ten (10) years experience in the commercial real estate market in the metropolitan Kansas City area and who have not been employees or independent contractors of either of the parties nor hold any interest in either of the parties. Each party shall pay the costs, if any, associated with the individual it selects. The parties shall equally split the costs associated with the Arbitrator. 39. REIMBURSEMENT OF IMPROVEMENTS - Landlord agrees to reimburse Tenant for improvements made by Tenant to the Premises to upgrade the existing office space and rest rooms, to repair the warehouse floor, to repair or replace the boiler, lighting, sprinkler systems, dock doors, dock revelers, to paint, and for other repairs to the Premises agreed to in advance by the Landlord. The maximum amount of the reimbursement shall be $100,000.00 and shall be payable by Landlord to Tenant within 15 days after the Tenant provides proof to landlord of payment for the improvements. All improvements shall be approved by Landlord prior to commencement, which approval shall not be unreasonably or delayed. 40. RELEASE OF FINANCIAL STATEMENTS - Upon written request from Landlord, Tenant shall deliver to Landlord its most recent financial statements, as filed with the Internal Revenue Service. Landlord agrees to keep the information contained therein confidential and to only release same after consent is received from the Tenant, which consent shall not be unreasonably withheld or delayed. Landlord Tenant LNPJ, L.L.C. Empire Candle, Inc. 10 By: By: Printed Name: Printed Name: Title: Title: 11 TRACT 1: Lot 9, FAIRFAX INDUSTRIAL PARK, SECOND PLAT, a subdivision in Kansas City, Wyandotte County, Kansas. TRACT II (Parcel A): A piece or parcel of land situated in Southeast Quarter of Section 34, Township 10, Range 25, in Kansas City, Wyandotte County, Kansas, described as: Beginning at a point on the East line of Fairfax Road, as now established, which is a straight line parallel with and 556 feet distant East Measured at right angles from the West line of the Southeast Quarter of said Section 34, and 340 feet South of the North line of the Southeast Quarter of said Section 34, when measured along the East line of said Fairfax Road; thence North along the East line of said Fairfax Road, a distance of 189.44 feet to a point; thence Northeasterly along a line curving to the right having a radius of 129 feet a distance of 169.06 feet to a point 40 feet South measured at right angles from the North line of Southeast Quarter of said Section 34, and 110.56 feet East of the East line of said Fairfax Road, when measured alone, a line parallel with and 40 feet distance South measured at right angles from the North line of the Southeast Quarter of said Section 34; thence East along a parallel with and 40 feet distant South measured at right angles from the North line of the Southeast Quarter of said Section 34, a distance of 89.45 feet to a point; thence South along a straight line parallel with the West line of the Southeast Quarter of said Section - 34, a distance of 302.21 feet to a point; thence West along a straight line at right angles to the West line of the Southeast Quarter of said Section 34, a distance of 200 feet, more or less to the point of beginning, except that certain mineral estate reserved in the deed executed by the Kansas City Industrial Land Corn any to Oswego Falls Corporation, dated February 28, 1947 and recorded March 21, 1947, as Document No. 436248 in Book 1091 at Page 355, and all rights and easements thereunder. TRACT II (Parcel C): A parcel of land in the Northeast Quarter Section 34, Township 10, Range 25, Wyandotte County, Kansas, described as follows: Beginning at a point that is 556 feet distant East measured at right angles from the West line of said Northeast Quarter and that is 40 feet distant North measured at right angles from the South line of said Northeast Quarter and which said point of beginning is on the Easterly right-of-way line of Fairfax Road as now established; thence North alone, said East line of Fairfax Road which is a straight line that is parallel with and 556 feet distant East measured at right angles from said West line of the Northeast Quarter a distance of 901.6 feet to a point; thence East alone, a straight line at right angles to said West line of the Northeast Quarter a distance of 208 feet to a point; thence South along a straight line that is parallel with and 764 feet distant East measured at right angles from the West line of said Northeast Quarter a distance of 901.6 feet, more or less to a point 40 feet distant North measured at right angles from the South line of said Northeast Quarter; thence West along a straight line parallel with and 40 feet distant measured at right angles from the South line of said Northeast Quarter a distance of 208 feet, more or less to the point of beginning except that certain mineral 12 estate reserved in the deeds executed by the Kansas City Industrial Land Company to Oswego Falls Corporation, dated February 6, 1946, and recorded February 19, 1946 as Document No. 419136 in Book 1048 at Pace 606, and dated October 10, 1958 recorded February 9, 1959 as Document No. 595963 in Book 1649 at Page 11 and all rights and easements thereunder. 13 TRACT II - PARCEL B: All that part of the Southeast Quarter of Section 34, Township 10 South, Range 25, East of the Sixth -Principal Meridian, in Kansas City, Wyandotte County, Kansas, described as follows: Beginning at a point in the South line of Sunshine Road as now established 60 feet wide at a point thereon that is 799 feet distant East measured at right angles, from the West line of said Southeast Quarter, said point also being 30 feet distant South, measured at right angles, from the North line of said Southeast Quarter; thence South along a straight line that is parallel with and 799 feet distant East, measured at right angles, from said West line of said Southeast Quarter, pipe lines was heretofore granted by The Kansas City Industrial Land Company to Great Lakes Pipe Line Company, Phillips Petroleum Company and Standish Pipe Line Company by agreement dated June 16, 1947 and recorded in Book 1109 at Pages 27 to 45 inclusive, records of said Wyandotte County; thence East along the Northerly line of said 60 foot strip of land heretofore granted for nine lines by said agreement dated June 16, 1947, which is a straight line at right angles to the West line of said Southeast Quarter a distance of 64.21 feet, more or less, to an angle point there that is Go feet distant Northwesterly measured at right angles, from the Northwesterly line of the property of the Missouri Pacific Railroad Company; thence Northeasterly along the Northwesterly line of said 60 foot strip heretofore granted to pipe lines by said agreement dated June 16, 1.947, which is a straight line that is parallel with and 60 feet distant Northwesterly, measured at right angles, from said Northwesterly line of the property of the Missouri Pacific Railroad Company, a distance of 437.31 feet more or less, to a point in said South line of Sunshine Road 60 feet wide; thence Westerly along said South line of Sunshine Road which is a straight line that is parallel with and 30 feet distance Southerly, measured at right angles, from said North line of said southeast Quarter a distance of 202.32 feet, more or less, to the point of beginning except that certain mineral estate reserved in the deed executed by the Kansas City Industrial Land Company to Oswego Falls Corporation, dated June 19, 1948 recorded August 18, 1948 as Document No. 454466 in Book 1163 at Page 166 and all rights and easements thereunder. 14 GUARANTY OF COMMERCIAL AND INDUSTRIAL LEASE AGREEMENT THIS GUARANTY OF COMMERCIAL AND INDUSTRIAL LEASE is entered into this 23rd day of June 1997 in favor of LNPJ, L.L.C. ("Landlord") by Diamond Brands Incorporated, a Minnesota corporation ("Guarantor"). WHEREAS, Landlord is entering into a Commercial and Industrial Lease Agreement ("Lease") with Empire Candle, Inc. ("Empire") in which Landlord is leasing to Empire and Empire is leasing from Landlord certain real property and improvements located at 2925 Fairfax Trafficway, Kansas City, Wyandotte County, Kansas ("Premises") for an initial term of three years with total rent payments, as detailed in Section 4 of the Lease, of $1,240,000.00. WHEREAS, to induce Landlord to enter into the Lease with Empire and as Guarantor has a financial interest in Empire and therefore will benefit from Empire's use of the Premises, the Guarantor has agreed to guarantee all of Empire's obligations under the Terms of the Lease. WHEREAS, Guarantor has reviewed the Lease and is familiar with its terms. NOW THEREFORE, in consideration of entering into the Lease and other good and valuable consideration receipt of which is hereby acknowledged, the Guarantor agrees as follows: 1. Guarantor unconditionally guarantees the prompt and punctual of all rental payments and other sums due to Landlord under the terms of the Lease. 2. Guarantor guarantees the performance by Tenant of all of its other obligations under the Terms of the Lease. 3. Guarantor waives notice of any default, including default in the payment of rental payments and consents to all extensions of the Lease and to all other actions taken by Tenant under terms of the Lease. 4. Guarantor guarantees the amount of any loss or damage to the Premises or to the Landlord for which Tenant is liable under the terms of the Lease. 5. Guarantor waives any rights it may have to require Landlord, as a condition precedent to enforcement of this Guaranty, to exhaust any remedies or rights it may have against the Tenant. 6. Guarantor agrees that this Guaranty shall be governed in all respects by the law of the State of Kansas. 7. This Guaranty may be executed via facsimile. 15 8. Any notices which are required to be given by law shall be mailed certified mail, return receipt requested: If to the landlord, to: Michael J. Rainen c/o Rainen Business Interiors 1330 Burlington North Kansas City, Missouri 64116 If to Guarantor, to: Thomas W. Knuesel Chief Financial Officer Diamond Brands Incorporated 1800 Cloquet Avenue Cloquet, MN 55720 IN WITNESS WHEREOF, the Guarantor has executed this Guaranty of Commercial and Industrial Lease, by its duly authorized as of the year and date above written. Guarantor: Diamond Brands Incorporated By: Thomas W. Knuesel Chief Financial Officer 16 STATE OF MAINE ) ) ss. COUNTY OF FRANKLIN ) Comes now, Thomas W. Knuesel, known to me to be the person who executed the above and foregoing on behalf of the Guarantor as its Chief Financial Officer and who acknowledged to me that he did so with full authority of the Guarantor as his free act and deed and as the free act and deed of the Guarantor. Notary Public DEBRA M. MASON Notary Public, Maine My Commission Expires February 9, 2003 17 EX-10.26 46 LEASE AGREEMENT DATED AS OF MARCH 17, 1995 MINNEAPOLIS WEST BUSINESS CENTER LEASE This Lease is entered into as of, March 17, 1995 between MEPC AMERICAN -------------- PROPERTIES INC., a Delaware corporation ("Lessor") and DIAMOND BRANDS -------------- INCORPORATED, a Minnesota Corporation ("Tenant"). - ------------ --------------------- 1. Definitions. In this Lease: ----------- (a) "Building" means the building at 1660 South Highway 100, St. Louis Park, Minnesota, located on the Land, commonly known as the Parkdale Plaza Building,. (b) "Premises" means the space referred to as Suite No. 590 on the fifth floor of the Building, which space is shown crosshatched on the drawing attached to this Lease as Exhibit A, and which for purposes of this Lease will be deemed to contain 3874 square feet regardless of actual measurements, (c) "Term" means the period of five years and no months, beginning on May 1, 1995 and ending on April 30, 2000, subject to the provisions of Section 7 and the other provisions of this Lease. (d) "Commencement Date" means the first day of the Term. (e) "Monthly Base Rent" means $3,228.00 per month, which amount will not change during the Term unless space is added to or deleted from the Premises as provided in this Lease or by written amendment of this Lease. (f) "Costs" means the estimated monthly Tax Costs plus the estimated monthly Operating Costs. (g) "Monthly Rent" means the Monthly Base Rent plus the Costs. The initial Monthly Rent is $5,892.00, comprised of a Monthly Base Rent of $3,228.00 plus estimated monthly Operating Costs of $1,808 and estimated monthly Tax Costs of $856.00. (h) "Tenant's Share" means the percentage obtained by dividing the square foot area of the Premises by the total square foot area of the rentable office space in the Building, which percentage on the date of this Lease is 1.85% based on the number of square feet stated in paragraph (b) above and based upon a current total rentable square footage for the Building of 209,139 square feet. (i) "Operating Costs" means all costs, charges and expenses incurred by Lessor in connection with ownership, operation, security, maintenance and repair of the Land, the Building, other improvements on the Land, appurtenances to the Building, parking, roadways, landscaping, lighting, sidewalks, and common or public areas, including but not limited to real estate taxes and insurance on common areas, interior and exterior maintenance, insurance, utilities, fees or expenses for management by Lessor or any other parry, amortization of capital investments made to reduce Operating Costs, and amortization of repairs made to extend the life of the Building and other improvements. Operating Costs will not include mortgage interest, depreciation on the Building or fixtures, advertising expenses, real estate brokers' commissions or the cost of tenant improvements. (j) "Tax Costs" means all real estate taxes, levies, charges, and installments of assessments (including interest on deferred assessments) assessed, levied or imposed on, or allocated to, the Land and Building and all attorneys' fees, witness fees, court costs and other expenses of Lessor in connection with any proceeding to contest these amounts. (k) "Normal Business Hours" means 8:00 a.m. to 5:00 p.m. Monday through Friday and 8:00 a.m. to 1:00 p.m. on Saturdays, excluding Sundays and legal holidays. (1) "Lease" means this Lease, all Exhibits attached to this Lease, and all properly executed amendments, modifications and supplements to this Lease. (m) "Section" means a section of this Lease. (n) "Exhibit" means an Exhibit attached to and thereby made a part of this Lease. (o) "Land" means the land described on Exhibit B attached to this Lease. (p) "Taking" means acquisition by a public authority having the power of eminent domain of all or part of the Land or Building by condemnation or conveyance in lieu of condemnation. (q) "Casualty" means a fire, explosion, tornado, or other cause of damage to or destruction of the Building. 2. Premises. -------- Lessor leases the Premises to Tenant, and Tenant leases the Premises from Lessor, for the Term, under the terms and conditions of this Lease. 3. Rent. ---- Tenant will pay the Monthly Rent to Lessor at P.O. Box 73547 Chicago, Illinois 60673-7547, or such other place as Lessor may designate, in advance on or before the Commencement Date and on or before the first day of each month during the Term, without demand, deduction or setoff. The Monthly Rent may change as the Costs are adjusted annually under Sections 4 and 5. Monthly Rent will begin on the Commencement Date. If the Term begins on a day other than the first day of a month, the Monthly Rent for that month will be prorated by multiplying the Monthly Rent by the number of days of that month included in the Term and dividing the product by the number of days in that month. Any Monthly Rent or other amounts payable by Tenant to Lessor under this Lease which are not paid within 10 days after the date due will bear interest from the date due to the date paid at the rate of 18% per annum or the maximum rate of interest permitted by law, whichever is less, and the interest will be paid to Lessor on demand. In addition, Tenant will pay Lessor a $100 service charge for all Monthly Rent not paid by the 10/th/ day of the month for which it is payable, which service charge is to partially cover expense involved in handling delinquent payments. All amounts to be paid by Tenant to Lessor under this Lease will be deemed to be additional rent for purposes of payment and collection. If any taxes, special assessments, fees or other charges are imposed against Lessor by any governmental unit or agency with respect to rentals under this Lease, Tenant will pay these amounts to Lessor when due, except that Tenant will have no obligation to pay any income tax on rentals unless the tax is imposed in lieu of real estate taxes. 4. Cost Adjustments. ---------------- The initial Monthly Rent is based in part on the estimated Operating Costs and Tax Costs. Prior to the first day of each calendar year after the date of this Lease, or as soon as reasonably possible after the first day of the year, Lessor will furnish Tenant with an estimate of the Costs if greater than the initial Costs, and the Monthly Rent will be increased by 1/12th of Tenant's Share of the difference between the initial estimate of Costs and the current estimate. After the end of each calendar year, including the year in which the Term expires, Lessor will give Tenant a statement of the actual Costs for that calendar year. If the actual Costs exceed the estimated Costs for that year, Tenant will pay Tenant's Share of the excess to Lessor within 20 days after receiving the statement. If the actual Costs are less than the estimated Costs for that year, Lessor will pay Tenant's Share of the difference to Tenant with the statement. If Tenant does not give Lessor written notice within one year after receiving Lessor's statement that Tenant disagrees with the statement and specifying the amounts in dispute, Tenant will be deemed to have waived the right to contest the statement. Tenant will file no petition in Tax Court regarding the Tax Costs without Lessor's prior written consent. If Lessor contests Tax Costs and receives a refund or incurs additional Tax Costs after adjustments for actual Tax Costs have been made, the actual Tax Costs will be corrected accordingly and the appropriate adjustment will be made between Lessor and Tenant. The portion of Costs to be paid by Tenant for the years in which the Term begins and ends will be prorated by multiplying the actual Costs by a fraction, the numerator of which is the number of days of that year in the Term and the denominator of which is 365. 5. Cost Computations and Allocations. --------------------------------- Notwithstanding any other provision of this Lease to the contrary, it is agreed that Lessor will in its reasonable discretion, determine from time to time, the method of computing and allocating Costs, the allocation of Costs to various types of space within the Building, and Tenant will be bound thereby. If the Building is not fully occupied during any partial or full year, an adjustment will be made in computing the actual Operating Costs for such year so that it is computed as though the Building had been fully occupied during that year. 6. Fiscal Year. ----------- The year used to determine Costs may be changed to a different 12-month period designated by Lessor. If the calendar year is changed to a fiscal year, or if a fiscal year is changed to a different fiscal year, prorations will be made for the estimated Costs and the actual Costs so that the same time period is used to determine each and so that Costs are not included in more than one time period. 7. Possession. ---------- If Tenant begins to conduct business in all or any portion of the Premises before the Commencement Date, Tenant will pay to Lessor Monthly Rent for the period from the date Tenant begins to conduct business in the Premises to the Commencement Date and all other provisions of this Lease will be applicable during that period. If Lessor is delayed in delivering possession of all or any portion of the Premises to Tenant on the Commencement Date, Tenant will take possession of the Premises on the date when Lessor delivers possession of all of the Premises, which date will then become the Commencement Date, and the last day of the term will be extended so that the length of the Term remains the same. If the extended Term would end on a day other than the last day of a month, the Term will be further extended to the last day of the month in which the Term ends. This Lease will not be void or voidable and Lessor will not be liable to Tenant for any loss or damage resulting from any delay in delivering possession of the Premises to Tenant, but unless the delay is principally caused by or attributable to Tenant, its employees, agents or contractors, no Monthly Rent will be due for the period prior to the date Lessor delivers possession of the Premises, unless Tenant elects to take possession of a portion of the Premises, in which case Monthly Rent will be due for the portion of the Premises taken. Tenant's occupancy of the Premises will constitute Tenant's acceptance of the Premises. If Tenant pays the Monthly Rent and other charges and performs all of Tenant's obligations under this Lease, Lessor promises that Tenant may peaceably and quietly possess and enjoy the Premises under this Lease. 8. Use. --- Tenant will use the Premises for general business office purposes and for no -------------------------------- other purpose. Tenant will not commit or permit any act or omission which results in the violation of any law, governmental regulation, or insurance policy of Lessor, relating to the Building, or which will increase Lessor's insurance rates on the Building. Tenant will not permit any conduct or condition which may unduly disturb or endanger other occupants of the Building. 9. Care of Premises. ---------------- Tenant will keep the Premises and the fixtures and equipment in the Premises in as good condition and repair as they were in at the time possession of the Premises is tendered to Tenant, except for ordinary wear and damage from fire or other casualty beyond Tenant's control. If Tenant fails to do so, Lessor may enter the Premises to perform the maintenance and repairs and charge the costs to Tenant, together with interest as provided in Section 3. 10. Building Rules. --------------- Rules and Regulations for the Premises and the Building in effect on the date of this Lease are attached as Exhibit C. Lessor will have the right to adopt different or additional reasonable rules and regulations, and to rescind or amend the attached rules and regulations from time to time. Tenant will abide by the rules and regulations then in force and will cause Tenant's employees to observe and comply with them. 11. Compliance with Laws. -------------------- Tenant will, at its expense, promptly comply with all laws, ordinances, rules, orders, regulations and other requirements of governmental authorities now or subsequently pertaining to the Premises. Tenant will pay any taxes or other charges by any governmental authority on Tenant's property or trade fixtures in the Premises or relating to Tenant's use of the Premises. 12. Signs. ------ Lessor will provide Building standard signage for the Premises at Lessor's expense in an amount not to exceed $150.00. Tenant will not place or permit any other signs on the exterior or windows of the Building, or within the Premises if visible from the exterior of the Building or from hallways or other common areas of the Building, except lettering and numerals for identification purposes on or near doorways as approved in advance by Lessor. 13. Alterations. ----------- Tenant accepts the Premises in their present condition and Lessor will have no obligation to do any redecorating or remodeling or to make any repairs or alterations, except for the alterations, if any, shown on the attached Exhibit D. Tenant will not make any alterations, additions or improvements in or to the Premises without first obtaining the written consent of Lessor. Tenant will get Lessor's prior written approval of any contractor or subcontractor who is to perform work on the Premises at Tenant's request. Lessor may require Tenant to post a bond, cash or other security to protect the Premises from mechanic's liens. All alterations by Tenant will be constructed with new materials, in a good and workmanlike manner, and in compliance with the plans and specifications approved by Lessor and all applicable laws, ordinances, rules, orders, regulations, or other requirements of governmental authorities. Tenant will pay for any labor, services, materials, supplies or equipment furnished or alleged to have been furnished to Tenant in or about the Premises, and will pay and discharge any mechanic's, materialmen's or other lien against the Premises resulting from Tenant's failure to make such payment, or will contest the lien and deposit with Lessor cash equal to 150% of the amount of the lien. If the lien is reduced to final judgment, Tenant will discharge the judgment and Lessor will return the cash deposited by Tenant. Lessor may post notices of nonresponsibility on the Premises as provided by law. All alterations, additions and improvements to the Premises made at Lessor's or Tenant's expense, except movable office furniture and Tenant's movable trade fixtures and equipment, will become the property of Lessor upon installation and will be surrendered with the Premises upon termination of this Lease unless Lessor elects otherwise in writing. 14. Utilities and Services. ---------------------- Lessor will supply reasonable janitor service, elevator service (if elevators exist in the Building), heat and air conditioning appropriate to the season during Normal Business Hours, and electricity in reasonable amounts for ordinary office purposes. The cost of all such services will be a part of the Operating Costs, Lessor will not be liable for any loss or damage resulting from any temporary interruption of these services due to repairs, alterations or improvements, or any variation, interruption or failure of these services due to governmental controls, unavailability of energy, or any other cause beyond Lessor's control. No such interruption or failure of these services will be deemed as an eviction of Tenant or will relieve Tenant from any of its obligations under this Lease. Except for payment of Monthly Rent, Tenant will not be required to pay for these services for ordinary office purposes, but Tenant will pay to Lessor any charges Lessor establishes for utilities or services provided outside Normal Business Hours at Tenant's request, or provided because of uses other than ordinary office uses. 15. Entry by Lessor. --------------- Lessor and its agents and contractors and mortgagees will have the right to enter the Premises at reasonable times for inspecting, cleaning, repairing, or exhibiting the Premises, but Lessor will have no obligation to make repairs, alterations or improvements except as expressly provided in this Lease. 16. Relocation. ---------- Lessor may relocate Tenant in substitute leased premises of equal square footage and approximately equal configuration within the office complex known as Minneapolis West Business Center upon 60 days written notice to Tenant specifying the effective date of the relocation. If this is done, Lessor will provide Tenant with paint, wallcovering and carpeting comparable to those in the original location, and will move Tenant's office furnishings to the new location, all at Lessor's expense. If the then current base rental rate at the new location is less than the Monthly Base Rent, the Monthly Base Rent will be reduced accordingly. If the then current base rental rate at the new location is higher than the Monthly Base Rent, the Monthly Base Rent will not be increased. If Lessor requests Tenant to relocate and Tenant gives Lessor written notice of objection to relocation within 10 days after Lessor's notice, Lessor may withdraw the request for relocation by written notice to Tenant within 10 days after the notice from Tenant. If the request is not withdrawn by Lessor within the 10-day period, Tenant may terminate this Lease effective as of the relocation date specified in Lessor's original notice by written notice to Lessor within 10 days after expiration of the 10-day period for Lessor to withdraw its request to relocate Tenant. 17. Subordination. ------------- At the request of any mortgagee or ground lessor, this Lease will be subject and subordinate to any mortgage or ground lease which may now or hereafter encumber the Building, and Tenant will execute, acknowledge and deliver to Lessor any document requested by Lessor to evidence the subordination, Such subordination is on the condition that Tenant's right of possession of the Premises as provided in this Lease will not be disturbed by the mortgagee or ground lessor so long as Tenant is not in default under this Lease. If the interest of Lessor is transferred to any party by reason of foreclosure of a mortgage or cancellation of a ground lease, or by delivery of a deed in lieu of foreclosure or cancellation, Tenant will immediately and automatically attorn to such party. Tenant agrees that upon notification by Lessor or any mortgagee or ground lessor of the election of a mortgagee or ground lessor to subordinate its interest in the Premises to this Lease, this Lease will become prior to the mortgage or ground lease. 18. Estoppel Certificates. --------------------- Within 10 days after written request from Lessor, Tenant will execute, acknowledge and deliver to Lessor a document furnished by Lessor, which document may be relied upon by Lessor and any prospective purchaser or mortgagee of the Building, stating (a) that this Lease is unmodified and is in full force and effect (or if modified, that the Lease is in full force and effect as modified and stating the modifications), (b) the dates to which rent and other charges have been paid, (c) the current Monthly Rent, (d) the dates on which the Term begins and ends, (e) that Tenant has accepted the Premises and is in possession, (f) that Lessor is not in default under this Lease, or, if Lessor is in default, specifying any such default, and (g) including such other information as the prospective purchaser or mortgagee may require. 19. Waiver of Claims and Assumption of Risks. ---------------------------------------- Lessor and Tenant release each other from any liability for loss or damage by fire or other casualty covetable by a standard form of 'all risk" insurance policy, whether or not the loss or damage resulted from the negligence of the other, its agents or employees. Each party will use reasonable efforts to obtain policies of insurance which provide that this release will not adversely affect the rights of the insureds under the policies. The releases in this Section will be effective whether or not the loss was actually covered by insurance. Tenant assumes all risk of loss or damage of Tenant's property within the Premises, including any loss or damage caused by water leakage, fire, windstorm, explosion, theft, act of any other tenant, or other cause. Lessor will not be liable to Tenant, or its employees, for loss of or damage to any property in the Premises. 20. Indemnification. --------------- Tenant will indemnify Lessor and its agents and employees against all claims, demands and actions, and all related costs and expenses (including attorneys' fees) for injury, death, disability or illness of any person, or damage to property, occurring in the Premises or arising out of Tenant's use of the Premises, except to the extent caused by the willful misconduct or negligence of Lessor or someone acting on its behalf. 21. Insurance. --------- Tenant will keep public liability insurance in force at its expense by an insurer and policy acceptable to Lessor in its reasonable opinion, The policy will name Lessor and its mortgagee as additional insureds, for limits of at least $1,000,000 for bodily injuries or death of one or more persons and at least $100,000 for property damage, Tenant will carry fire and "all risk" coverage insurance for Tenant's property and improvements in the Premises. Tenant will deliver to Lessor the liability and casualty policies or certificates by the insurer showing this coverage to be in effect with premiums paid. The insurance will provide that Lessor will be notified in writing 30 days prior to cancellation of, material change in, or failure to renew, the insurance. 22. Assignmgnt and Subletting. ------------------------- Tenant may assign this Lease or sublet all or part of the Premises only with Lessor's prior written consent. If Tenant receives a bona fide offer for an assignment of Tenant's interest under this Lease or to sublease all or part of the Premises and Tenant requests Lessor's consent, a copy of the offer will be furnished to Lessor. In the case of a proposed assignment or sublease of all of the Premises, Lessor may terminate this Lease, either conditioned on execution of a new lease between Lessor and the party making the offer on the same terms as the offer to Tenant or without that condition. In the case of a proposed sublease for less than all of the Premises, Lessor may amend this Lease to exclude the portion of the Premises to be subleased, either conditioned on execution of a new lease between Lessor and the party making the offer on the same terms as in the offer to Tenant or without that condition. If Lessor fails to give Tenant written notice of its decision to terminate or amend this Lease within 20 days after receiving a copy of the offer to Tenant, Lessor will not unreasonably withhold its consent to the assignment or sublease described in the offer. The provisions of this Section will be binding on Tenant and any assignee or subtenant of Tenant and will apply to all portions of the Premises remaining subject to this Lease and to each request by Tenant, or its assignee or subtenant, for Lessor's consent to a further or subsequent assignment or subletting. If Lessor consents to one or more assignments or subleases, Tenant will still remain liable for all obligations of the Tenant under this Lease. Lessor's interest in this Lease will be freely assignable and the obligations of the Lessor arising or accruing under this Lease after an assignment will be enforceable only against the assignee. 23. Damage or Destruction. --------------------- If the Premises or Building is damaged by Casualty, the damage (excluding damage to improvements paid for by Tenant or trade fixtures, equipment or personal property of Tenant) will be repaired by Lessor at its expense to a condition as near as reasonably possible to the condition prior to the Casualty, but if more than 25% of the total rentable area of the Building is rendered untenantable, Lessor may terminate this Lease as of the date of the Casualty by giving written notice to Tenant within 30 days after the Casualty. If this Lease is not terminated, Lessor will begin repairs within 90 days after the Casualty and complete the repairs within a reasonable time, subject to acts of God, strikes and other matters not within the control of Lessor. If Lessor fails to begin and proceed with repairs as required, Tenant may give Lessor notice to do so. If Lessor has not begun the repairs within 30 days after Tenant's notice, Tenant may terminate this Lease by written notice to Lessor within 15 days after expiration of the 30-day period. If this Lease is terminated because or the Casualty, rents an(i other payments will be prorated as of the termination and will be proportionately refunded to Tenant or paid to Lessor, as the case may be. During any period in which the Premises or any portion of the Premises is made untenantable as a result of the Casualty, the Monthly Rent will be abated for the period of time untenantable in proportion to the square foot area untenantable. 24. Eminent Domain. -------------- If there is a Taking of 25% or more of the Premises or 25% or more of the total rentable area of the Building, either party may terminate this Lease as of the date the public authority takes possession, by written notice to the other party within 30 days after the Taking. If this Lease is so terminated, any rents and other payments will be prorated as of the termination and will be proportionately refunded to Tenant, or paid to Lessor, as the case may be. All damages, awards and payments for the Taking will belong to Lessor irrespective of the basis upon which they were made or awarded, except that Tenant will be entitled to any amounts specifically awarded for Tenant's trade fixtures or equipment or as a relocation payment or allowance, If this Lease is not terminated as a result of the Taking, Lessor will restore the remainder of die Premises to a condition as near as reasonably possible to the condition prior to the Taking, the rent will be abated for the period of time the space is untenantable in proportion to the square foot area untenantable and this Lease will be amended appropriately to reflect the deletion of the space taken. 25. Defaults. -------- If (a) Tenant defaults in the payment of rent or other amounts under this Lease and the default continues for 10 days after written notice by Lessor to Tenant, (b) Tenant defaults in any other obligation under this Lease and the default continues for 30 days after written notice by Lessor to Tenant, (c) any proceeding is begun by or against Tenant to subject the assets of Tenant to any bankruptcy or insolvency law or for an appointment of a receiver of Tenant or for any of Tenant's assets, or (d) Tenant makes a general assignment of Tenant's assets for the benefit of creditors, then Lessor may, with or without terminating this Lease, cure the default and charge Tenant all costs and expenses of doing so, and Lessor also may reenter the Premises, remove all persons and property, and regain possession of the Premises, without waiver or loss of any of Lessor's rights under this Lease, including Lessor's right to payment of Monthly Rent. Lessor also may terminate this Lease as to all future rights of Tenant, without terminating Lessor's right to payment of Monthly Rent and other charges due under this Lease. Tenant waives any right of restoration to possession of the Premises after reentry, notice of termination, or after judgment for possession. If this Lease is terminated under this Section, Tenant promises and agrees to pay all Monthly Rent and other charges due for the remainder of the original Term, and all attorneys' fees and other expenses. If Tenant defaults in any of its obligations under this Lease, it will promptly pay all costs (including attorneys' fees) of enforcing Tenant's obligations, whether or not this Lease is terminated and whether or not suit is brought. No right or remedy will preclude any other right or remedy, no right or remedy will be exclusive of or dependent upon any other right or remedy, and any right or remedy may be exercised independently or in combination. If Tenant is in default and notice of termination of Tenant's right to possession has been mailed to Tenant at the Premises and it appears in Lessor's reasonable judgment that Tenant has abandoned or vacated the Premises, Lessor may reenter the Premises and retake possession without legal action, without relieving Tenant of the obligation to pay Monthly Rent or any other obligations under this Lease, and without any liability to Tenant for re-entry removal of Tenant's property. 26. Waiver of Lease Provisions. -------------------------- No waiver of any provision of this Lease will be deemed a waiver of any other provision or a waiver of that same provision on a subsequent occasion. The receipt of rent by Lessor with knowledge of a default under this Lease by Tenant will not be deemed a waiver of the default, Lessor will not be deemed to have wived any provision of this Lease by any action or inaction and no waiver will be effective unless it is done by expressed written agreement signed by Lessor. Any payment by Tenant and acceptance by Lessor of a lesser amount than the full amount of all Monthly Rent and other charges then due will be applied to the earliest amounts due. No endorsement or statement on any check or letter for payment of rent or other amount will be deemed an accord and satisfaction, and Lessor may accept such check or payment without prejudice to its right to recover the balance of any rent or other amount or to pursue any other remedy provided in this Lease. No acceptance of payment of less than the full amount due will be deemed a waiver of the right to the full amount due together with any interest and service charges. 27. Return of Possession to Lessor. ------------------------------ On expiration of the Term or sooner termination of this Lease, Tenant will return possession of the Premises to Lessor, without notice from Lessor, in good order and condition, except for ordinary wear and damage, destruction or conditions Tenant is not required to remedy under this Lease. If Tenant does not return possession of the Premises to Lessor, Tenant will pay Lessor all resulting damages Lessor may suffer and will indemnify Lessor against all claims made by any new tenant of all or any part of the Premises. Tenant will give Lessor all keys for the Premises and will inform Lessor of combinations on any locks and safes on the Premises. Any property left in the Premises after expiration or termination of this Lease or after the Premises have been vacated by Tenant will become the property of Lessor to dispose of as Lessor chooses. 28. Holding Over. ------------ If Tenant remains in possession of the Premises after expiration of the Term without a new lease, it may do so only with written consent by Lessor, and any such holding over will be from month-to-month subject to all the same provisions of this Lease, except that the Monthly Base Rent will be the Monthly Base Rent stated in Lessor's consent if a new Monthly Base Rent is stated, or double the Monthly Base Rent under this Lease if no new Monthly Base Rent is stated in Lessor's consent. Any holding over without Lessor's consent will be at double the Monthly Rent under this Lease. The month-to-month occupancy may be terminated by Lessor or Tenant on the last day of any month by at least 30 days' prior written notice to the other. 29. Security Deposit. ---------------- Tenant deposits $none with Lessor as a security deposit. Lessor may commingle the security deposit with other funds but will refund this amount to Tenant without interest on termination of this Lease, less any amounts necessary in Lessor's reasonable opinion to pay the cost of repair or restoration of the Premises to the condition required under this Lease or to cure any defaults of Tenant under this Lease. 30. Brokers. ------- Lessor and Tenant represent and warrant one to another that except as set forth by addendum attached to this Lease, neither of them has employed or otherwise used any broker or agent in relation to this Lease. Lessor will indemnify and hold Tenant harmless, and Tenant will indemnify and hold Lessor harmless, from and against any claims for brokerage or other commissions or fees arising out of any breach of the foregoing representation and warranty by the respective indemnitors. 31. Notices. ------- Any notice under this Lease will be in writing, and will be sent by prepaid certified mail, or by telegram confirmed by certified mail, addressed to Tenant at the Premises and to Lessor at 1550 Utica Avenue South, Suite 120, St. Louis Park, Minnesota 55416, or to such other address as is designated in a notice given under this Section. A notice will be deemed given on the date mailed. Lessor's statements of Costs and other routine mailings to tenants need not be sent by certified mail. 32. Governing Law. ------------- This Lease will be construed under and governed by the laws of Minnesota. If any provision of this Lease is illegal or unenforceable, it will be severable and all other provisions will remain in force as though the severable provision had never been included. 33. Entire Agreement. ----------------- This Lease contains the entire agreement between Lessor and Tenant regarding the Premises. Tenant agrees that it has not relied on any statement, representation or warranty of any person except as set out in this Lease. This Lease may be modified only by an agreement in writing signed by Lessor and Tenant. No surrender of the Premises, or of the remainder of the Term, will be valid unless accepted by Lessor in writing. 34. Successors and Assigns. ---------------------- All provisions of this Lease will be binding on and for the benefit of the successors and assigns of Lessor and Tenant, except that no person or entity holding under or through Tenant in violation of any provision of this Lease will have any right or interest in this Lease or the Premises. Lessor and Tenant have executed this Lease to be effective as of the date stated in the first paragraph of this Lease. Lessor: MEPC AMERICAN PROPERTIES INC. Its: Senior Vice President --------------------- And By: Its: Vice President -------------- TENANT: DIAMOND BRANDS INCORPORATED By: Its: And By: Its: EXHIBIT A FLOOR PLAN EXHIBIT B LAND ON WHICH PARKDALE BUILDINGS ARE LOCATED Tracts C, D, H and I, Registered Land Survey No. 1481, Files of the Registrar of Titles, Hennepin County, Minnesota. EXHIBIT C RULES AND REGULATIONS 1. Tenant will not use the Premises in any manner which conflicts with any law, ordinance, or governmental rule or regulation now or subsequently in force. 2. Tenant will not install any awnings or other attachments or structures on the exterior of the Building. 3. Curtains, draperies or other window coverings will not be installed in the Premises without first obtaining written approval by Lessor of the exterior color and material. 4. No food will be prepared or cooked in the Premises without prior written consent by Lessor, and the Premises will not be used for housing, lodging, sleeping or for any immoral or illegal purpose. 5. Tenant will not connect any apparatus, equipment or device to the water lines in the Building without first obtaining the written consent of Lessor. 6. No electrically powered machines or equipment will be used by Tenant in the Premises except typewriters, adding machines, dictating equipment, personal computers, microwave ovens and similar small electric units, including --------- copiers and refrigerators. -------------------------- 7. Tenant will not operate or permit to be operated in the Premises any musical or sound producing instrument or device which can be heard outside the Premises, 8. Tenant will not bring into the Building any pollutants, contaminants or hazardous substances (as now or later defined under state or federal law) or any items likely to cause fire or explosion. Lessor understands that ----------------------- Diamond Brands will have samples of its products on the Premises including -------------------------------------------------------------------------- matches, toothpicks, ice cream and corn dog sticks and other miscellaneous -------------------------------------------------------------------------- woodenware products. -------------------- 9. Tenant will not bring or permit to be brought into the Building any animals or birds. 10. Tenant will not disturb, solicit or canvass any occupant of the Building and will cooperate to prevent same. 11. Tenant will not use any power for the operation of any equipment or device other than electricity provided by Lessor. 12. Tenant will refer to Lessor all contractors or installation technicians rendering any service for Tenant for approval by Lessor before any contractual services are performed. This will include but is not limited to installation of telephone or telegraph equipment, electrical devices and attachments, and any installations affecting floors, walls, woodwork, trim, windows, ceilings, equipment or other portions of the Building. 13. The work of the janitor or cleaning personnel after 5:00 p.m. will not be hindered by Tenant, and the windows may be cleaned at any time. Tenant will provide adequate waste and rubbish receptacles to facilitate cleaning services. 14. Movement in or out of the Building of furniture or office equipment, or the sending or receipt by Tenant of merchandise or materials which requires use of elevators or stairways or movement through Building entrances will be restricted to hours designated by Lessor, All such movement will be as directed by Lessor and will be done in a manner approved by Lessor in advance. Tenant assumes all risk of damage to any items moved and for any injury to any person or property, and Tenant will indemnify Lessor against any resulting, loss or damages. 15. Lessor will not be responsible for any property, equipment, money or jewelry lost or stolen from the Premises or the public areas of the Building, regardless of whether or not the loss occurs when the Premises are locked. 16. Lessor may designate the maximum weight and proper position of any heavy equipment, including safes and large files to be placed in the Building, and only those which in the opinion of Lessor will not damage the floors, structures or elevators may be moved into the Building. 17. Any damage in connection with the moving or installing of Tenant's furniture, equipment, appliances or other articles will be paid for by Tenant. 18. Lessor may permit entrance to the Premises by use of pass keys controlled by Lessor or its employees, contractors or service personnel, for the purpose of performing Lessor's janitorial services. 19. Lessor may at its option set aside a parking area to be used by Tenant and its employees, which area will be used by Tenant and its employees to the exclusion of other areas. 20. Tenant may have no vending machines in the Premises. EXHIBIT 'D' LEASEHOLD IMPROVEMENTS DATE: 03.17.95. RE: DIAMOND BRANDS INCORPORATED PARKDALE PLAZA, SUITE 590 GENERAL NOTES: 1. WALL CONSTRUCTION: Existing walls. Walls to be removed. Typical tenant partition; .5" gypsum board each side of 2.5" steel studs, walls to extend to u/s of ceiling only. Tenant demising wall; .5" gypsum board each side of 2.5" steels studs, walls to extend to u/s of structure above. Corridor wall, 1 HR. RATED; .5" type "C" gypsum board each side of 2.5" steel studs, walls to extend to u/s of structure above. Note: Stud space in all walls to be filled with thermal fiber 1.5" acoustical batt. 2. All plan dimensions are approximate. Verify existing conditions and dimensions before construction begins. 3. Demolish all existing walls/electrical in conflict with new Tenant layout, FROM CONCRETE SLAB TO CONCRETE SLAB. 4. Front entry and sidelight shall be MEPC Building standard oak with 3' oak framed sidelight. Assembly shall provide 2OMN rated protection into the common corridor, with rabbited stops, smoke gasket, automatic door closer, and lever lockset. 5. Doors and frames shall be new and reused, solid core, oak veneer, 3', building standard, finished to MEPC building standard. 6. Modify existing ceiling tile and grid to suit new Tenant layout. 7. HVAC shall be modified to suit new Tenant layout as per MEPC building standards with existing building equipment. 8. Lighting shall be modified to suit new Tenant layout with building standard light fixtures, and shall maintain illumination level of 50-60 foot candles at desk level throughout the premises. All rooms shall have switches to control their appropriate lighting fixtures. Page 1 of 4 LEASEHOLD IMPROVEMENTS, CONT. DATE: 03.17.95. RE: DIAMOND BRANDS INCORPORATED PARKDALE PLAZA, SUITE 590 9. Electrical: ALL NEW BOXES SHALL BE INSTALLED 18" AFF CENTERED WALL OUTLET WALL TELEPHONE (Empty J-box 18" AFF, .5" conduit to ceiling plenum) SWITCH EXISTING ELECTRICAL EXISTING ELECTRICAL TO BE REMOVED. TELEPHONE/LAN EQUIPMENT & CABLING: Shall be provided and installed at Tenant's sole direction and cost. 10. Tenant shall provide at Tenant's sole expense, all telephone equipment, cabling and space within office for such equipment. All cabling passing through ceiling plenum shall be teflon sheathed and meet with all State and Local building codes. It shall be the responsibility of Tenant's contractor to adhere to building codes pertaining to any low-voltage cabling. Tenant shall provide all furnishings and equipment. 11. All existing cabling not meeting with current building codes shall be removed in its entirety "from the leasehold space, and any adjoining space through which cabling passes, by Lessor's contractor, at Lessor's expense. 12. Floor covering and Wall covering shall be as shown on Plan P5, dated 03.14.95. Color selections shall be made from Building standard books. 13. Provide and install plumbing, casework and shelving as shown on Plan P5, Page a2 and where shown on Plan P5, Dated 03.14.95. ESTOPPEL CERTIFICATE Parkdale Associates C/o The Taylor Simpson Group One Rockefeller Plaza, Suite 2300 New York, NY 10020 ("Purchaser") Re: Lease, identified within Paragraph 14 hereof (as amended, assigned, modified and supplemented within Paragraph 14 hereof, collectively, the "Lease'), between MEPC American Properties Inc. ("Owner') and the undersigned ("Tenant") relating to premises located in the building identified with Paragraph 14 hereof and located in St. Louis Park, Minnesota (the "Property") Ladies and Gentlemen: The undersigned is the Tenant under the Lease. With tile understanding that (i) Purchaser will rely upon the statements and representations made by Tenant herein in purchasing the Property and (ii) Purchaser will be seeking a lender to provide a loan to Purchaser which lender has not yet been selected (the "Lender") and Lender will rely upon the statements and representations made by Tenant herein in providing a loan to Purchase, Tenant hereby certifies, represents, warrants and confirms to Lender (with the same effect as if this certificate was addressed to Lender) and Purchaser and their respective successors and assigns, that, as of the date hereof, 1) The Lease sets forth all of the agreements and understandings of Owner and Tenant with respect to the portion of the Property demises under the Lease (the "Leased Premises"); there are no other written or oral agreements or understandings between Tenant and Owner with respect to the Leased Premises or the Property; Tenant has not subleased any portion of the Leased Premises except as described on Exhibit A attached hereto and has not assigned, whether outright or by collateral assignment, all or any portion of its rights Linder the Lease; the Lease is in full force and effect in accordance with its terms; a list describing the original lease and all of the amendments, assignments, modifications and supplements of or to the original lease are described within Paragraph 14 hereof-, and the Lease is not otherwise or further amended, assigned, modified or supplemented. 2) The Commencement Date (as defined in the Lease) is as set forth within Paragraph 15 hereof. The primary term of the Lease expires on the date set forth within Paragraph 15 hereof (the "Expiration Date"). Except as expressly set forth in the Lease, Tenant has no right to review, extend or reduce the Leased Premises nor any option, right of First offer, right of first refusal or any similar right with respect to leasing any portion of the Property. Tenant has not exercised any of the aforementioned rights which exist under the Lease except to the extent evidenced by one or more agreements which comprise(s) a part of the Lease. Tenant has accepted and is in possession or the Leased Premises, without reservations Owner and Tenant have fulfilled and compiled with all conditions precedent to the acceptance and possession of the Leased Premises by Tenant; any and all improvements required to be furnished by Owner to Tenant by the terms of the Lease have been completed and furnished to the full satisfaction of Tenant; and all duties of Owner of an inducement nature under the Lease have been fully performed by Owner. Owner has paid all costs and expenses, if any, which the Lease requires Owner, as landlord, to pay to or on behalf of Tenant. All expenditures have been made and costs paid that are required of Tenant under the Lease for the construction of such improvements. 3) The execution of the Lease by Tenant was duly authorized and the Lease was properly executed. No notice describing or alleging any default in the performance of either Tenant's or Owner's obligations under the Lease has been delivered or received by Tenant. To the best of Tenant's knowledge, no default by Owner or Tenant in the performance of the Lease to be by them respectively performed exists on the date hereof, and no facts, conditions, events or nonevent exist which, after the passage of nine, giving of notice or both would constitute a default under the Lease on the part of either Owner or Tenant, the right to cancel or terminate the Lease or reduce the Leased Premises. 4) To the best of Tenant's knowledge, there are no events currently existing which give Tenant the right to cancel or terminate the Lease or reduce the Leased Premises. 5) Tenant does not now have any claim, counter-claim, abatement, allowance or credit against Owner which might be set-off against or reduce past, current or future rents due under the Lease or which might be used as a defense to enforcement of the Lease. Upon Purchaser's purchase of the Property and absent a future default under the Lease by Purchaser, as lessor under the Lease, Tenant is obligated to pay all sums due and payable to Purchaser pursuant to the terms of the Lease throughout the term of the Lease without set off, discount, reduction or relief due to any rental concession, abatement, credit or otherwise. 6) No rents have been prepaid under the Lease, except for the normal prepayment thereof for no more than one (1) month in advance nor will Tenant pay any rent more than one (1) month in advance. 7) The Monthly Base Rent (as defined in the Lease) payable under the Lease, is currently in the amount set forth within Paragraph 15 hereof attached hereto and has been paid through the date set forth within Paragraph 15 hereof-. The current Tenant's Share (as defined in the Lease) of estimated Additional Cost (as defined in the Lease) payable under the Lease is currently in the amount set forth within Paragraph 15 hereof and has been paid through the date set forth within Paragraph 15 hereof+. 8) Tenant acknowledges, confirms and conclusively agrees that the Leased Premises consist of the number of net rentable square feet set forth within Paragraph 15 hereof and Tenant's Share is the percentage stated within Paragraph 15 hereof. 9) Tenant has paid Owner a security deposit (the "Security Deposit") in the amount stated within Paragraph 15 hereof and no portion of the security deposit has been applied against amounts owing pursuant to the Lease. Tenant has no claim against Owner for any other deposits or sums. 10) Tenant has not been granted and has not exercised any options or rights of purchase concerning all or any portion of the Property. 11) There has not been filed by or against nor, to the best knowledge of Tenant, is there threatened against or contemplated by Tenant, a petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws, of the United States or of any state thereof, or any other action brought under said bankruptcy laws. 12) Unless otherwise indicated on within Paragraph 15 hereof ("the "Tenant's Current Notice Address"), the address for notices to be sent to Tenant is as set forth in the Lease. 13) Tenant understands that Purchaser will assign the Lease to Lender and agrees that if Lender so requests by written notice pursuant to such assignment, Tenant will pay all rents and other charges due and payable under the Lease directly to Lender. * Said date to be no earlier than the last day of the month prior to the month in which the Closing occurs unless and to the extent said arrears are set forth in the Submission Matters (as defined in the Contract). + Said date to be no earlier than the last day of the month prior to the month in which the Closing occurs unless and to the extent said arrears are set forth in the Submission Matters (as defined in the Contract). 14) The term "Lease" shall mean the aggregate of the following: Lease dated March 17, 1995, between MEPC American Properties Inc. and Diamond BRANDS Incorporated. Located at 1660 South Highway 100 in the building commonly known as the Parkdale Plaza Building. 15) The following relevant facts concern the Lease: Conunencement Date: 05/01/95 Expiration Date: 04/30/00 Monthly Base Rent: $3,228.00 Monthly Base Rent has been paid through April , 1997 Tenant's Share of current estimated monthly Additional Costs: $3,078.00 Tenant's Share of current estimated monthly Additional Costs has been paid through April, 1997 Leased Premises consists of: 3,874 net rentable square feet. Tenant's Share: 1.85 % ---- Security Deposit: -0- Tenant's Current Notice Address: Mr. Thomas Knuesel Diamond Brands, Inc. 1800 Cloquet Avenue Cloquet, MN 55720 16) The agreements, certification and covenants of Tenant hereunder shall inure to the benefit of Lender and Owner and their respective heirs, executors, administrators, personal representatives, successors and assigns, including any purchaser of the Leased Premises or the Property at a foreclosure sale or pursuant to a deed-in-lieu of foreclosure or otherwise. 17) The person signing this letter on behalf of Tenant is a duly authorized agent of the Tenant. AGREED TO THIS 8/TH/ DAY OF MAY 1997. (TENANT] By: Its: EXHIBIT A TO ESTOPPEL CERTIFICATE [Insert a description of approved sublease(s), if any] Tenant is in compliance with all of its obligations under all of the above- mentioned subleases (collectively, the "Sublease") and has neither received nor delivered a notice alleging a default of any party's obligations under the Sublease; to the best of Tenant's knowledge, no default by Tenant or any party under the Sublease in the performance of the Sublease to be by them respectively performed exists on the date hereof and no event has occurred which, after the passage of time, giving of notice or expiration of any notice, grace or right to cure period, would constitute a default under the Sublease. Owner has approved the Sublease and the subtenants(s) thereunder. EX-10.27 47 SUPPLY AGREEMENT DATED AS OF JANUARY 1, 1997 OHIO VALLEY PLASTICS, INC. - ------------------------- PLASTICS FOR TODAY & THE FUTURE P.O. Box 6964 Evansville, IN 47719 Phone: (812) 425-8544 FAX: (812)-425-1520 Mr. John Beach 10-27-95 Forster Inc. P.O. Box 657 Wilton, Maine 04294 Dear John, Enclosed you will find two original copies of the proposed Sales Agreement between Forster Inc. and Ohio Valley Plastics. It is common practice that these be signed by both parties. Having known you, Rich, and many others in your organization, signature is not necessary unless you would prefer. We sincerely appreciate the opportunity to partner with Forster Inc. during the coming years, as you continue to grow your dynamic business. In addition to the value package as outlined in the proposed sales agreement, Ohio Valley Plastics and Huntsman Chemical would be pleased to entertain any additional venues which will impact your business. We ask that you allow Ohio Valley Plastics and Huntsman Chemical to provide you with the finest products, service, cost, and market intelligence available in the industry today. Regards, Dan Raher Ohio Valley Plastics 1. SOLD TO: Forster Inc. P.O. Box 657 Wilton, Maine 04294 2. SHIP TO: Forster Inc. Mill St. E. Wilton, Maine 04234 3. PERIOD: January 1, 1996 through December 31, 1996 and year to year thereafter, unless terminated by either party, giving 90 day written notice. 4. PRODUCT: Huntsman Prime Polystyrene grades 203, 213, and 334; or other grades to be mutually agreed upon. 5. QUANTITY: It is understood that Forster's level of purchase will be approximately 15 million pounds per year. 6. PRICE: The price to Forster Inc. on October 27, 1995 for Huntsman crystal polystyrene products delivered in hoppertruck to E. Wilton, Maine will be $0.48/lb. 7. PAYMENT TERMS: Net 30 days from date of invoice or 2% ten days 8. REBATE: Ohio Valley Plastics is pleased to offer rebate monies as follows: 1. A $0.035/lb volume rebate will be issued monthly (or directly off invoice if preferred) on all lbs. of prime Huntsman polystyrene shipped to Forster. 2. A $0.005/lb transition allowance will be issued directly off invoice, on all lbs of prime Huntsman polystyrene shipped to Forster. 3. A $0.02/lb rebate will be issued directly off invoice, on all lbs. of transition/off-grade crystal shipped to Forster. 9. FREIGHT: F.O.B. East Wilton, Maine by carrier of sellers choice 10. CONFIDENTIALITY: The terms and conditions stated within this agreement are confidential, and shall be seen only by Mr. John Beach and Mr. Rich Campbell unless given prior consent of Seller. EX-12.1 48 RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 12.1 Diamond Brands Operating Corp. Ratio of Earnings to Fixed Charges - Issuer
Year Ended December 31, Three Months Ended March 31, ----------------------------------------------- ------------------------------ Pro forma Pro Forma 1993 1994 1995 1996 1997 1997 1997 1998 1998 ------ ------ ------ ------ ------ ------ ------ ----- ----- Earnings - Income before income taxes 5,784 3,578 6,454 13,443 22,005 9,383 3,305 3,762 460 Fixed charges 679 524 4,038 3,971 4,771 17,619 1,011 1,111 4,413 ------ ------ ------ ------ ------ ------ ------ ----- ------ Total Earnings (A) 6,463 4,102 10,492 17,414 26,776 27,002 4,316 4,873 4,873 ====== ====== ====== ====== ====== ====== ====== ===== ====== Fixed Charges - Interest 639 492 3,921 3,509 4,210 16,553 818 929 4,182 Amortization of deferred financing costs - - 42 349 340 845 134 118 167 Interest component of operating leases 40 32 75 113 221 221 59 64 64 ------ ------ ------ ------ ------ ------ ------ ----- ------ Total fixed charges (B) 679 524 4,038 3,971 4,771 17,619 1,011 1,111 4,413 ------ ------ ------ ------ ------ ------ ------ ----- ------ Ratio of Earnings to Fixed Charges (A divided by B) 9.5 7.8 2.6 4.4 5.6 1.5 4.3 4.4 1.1 ====== ====== ====== ====== ====== ====== ====== ===== ====== The ratio of earnings to fixed charges has been calculated by dividing income before taxes and fixed charges by fixed charges. Fixed charges for this purpose include accretion of debt discounts, cash interest expense, amortization of deferred financing costs and one third of operating lease payments (the portion deemed to be representative of the interest factor).
EX-21.1 49 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT ------------------------------ DIAMOND BRANDS OPERATING CORP.
NAME OF SUBSIDIARY STATE OF INCORPORATION NAME UNDER WHICH - ------------------ ---------------------- ---------------- SUBSIDIARY DOES BUSINESS ------------------------ Empire Candle, Inc. Kansas Empire Candle, Inc. Forster Inc. Maine Forster Inc. and Forster, Inc.
EX-23.1 50 CONSENT OF ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement on Form S-4. EX-25.1 51 FORM T-1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM T-1 _________ STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE Check if an Application to Determine Eligibility of a Trustee Pursuant to Section 305(b)(2) STATE STREET BANK AND TRUST COMPANY (Exact name of trustee as specified in its charter) Massachusetts 04-1867445 (Jurisdiction of incorporation or (I.R.S. Employer organization if not a U.S. national bank) Identification No.) 225 Franklin Street, Boston, Massachusetts 02110 (Address of principal executive offices) (Zip Code) Maureen Scannell Bateman, Esq. Executive Vice President and General Counsel 225 Franklin Street, Boston, Massachusetts 02110 (617) 654-3253 (Name, address and telephone number of agent for service) (DIAMOND BRANDS OPERATINGCORP.) (Exact name of obligor as specified in its charter) DELAWARE (411905675) (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) (1800 CLOQUET AVENUE CLOQUET, MN 55720) (Address of principal executive offices) (Zip Code) (10 1/8% SENIOR SUBORDINATED NOTES DUE 2008) (Title of indenture securities) GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (A) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISORY AUTHORITY TO WHICH IT IS SUBJECT. Department of Banking and Insurance of The Commonwealth of Massachusetts, 100 Cambridge Street, Boston, Massachusetts. Board of Governors of the Federal Reserve System, Washington, D.C., Federal Deposit Insurance Corporation, Washington, D.C. (B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Trustee is authorized to exercise corporate trust powers. ITEM 2. AFFILIATIONS WITH OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. The obligor is not an affiliate of the trustee or of its parent, State Street Corporation. (See note on page 2.) ITEM 3. THROUGH ITEM 15. NOT APPLICABLE. ITEM 16. LIST OF EXHIBITS. LIST BELOW ALL EXHIBITS FILED AS PART OF THIS STATEMENT OF ELIGIBILITY. 1. A COPY OF THE ARTICLES OF ASSOCIATION OF THE TRUSTEE AS NOW IN EFFECT. A copy of the Articles of Association of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 1 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 2. A COPY OF THE CERTIFICATE OF AUTHORITY OF THE TRUSTEE TO COMMENCE BUSINESS, IF NOT CONTAINED IN THE ARTICLES OF ASSOCIATION. A copy of a Statement from the Commissioner of Banks of Massachusetts that no certificate of authority for the trustee to commence business was necessary or issued is on file with the Securities and Exchange Commission as Exhibit 2 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22- 17940) and is incorporated herein by reference thereto. 3. A COPY OF THE AUTHORIZATION OF THE TRUSTEE TO EXERCISE CORPORATE TRUST POWERS, IF SUCH AUTHORIZATION IS NOT CONTAINED IN THE DOCUMENTS SPECIFIED IN PARAGRAPH (1) OR (2), ABOVE. A copy of the authorization of the trustee to exercise corporate trust powers is on file with the Securities and Exchange Commission as Exhibit 3 to Amendment No. 1 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Morse Shoe, Inc. (File No. 22-17940) and is incorporated herein by reference thereto. 4. A COPY OF THE EXISTING BY-LAWS OF THE TRUSTEE, OR INSTRUMENTS CORRESPONDING THERETO. A copy of the by-laws of the trustee, as now in effect, is on file with the Securities and Exchange Commission as Exhibit 4 to the Statement of Eligibility and Qualification of Trustee (Form T-1) filed with the Registration Statement of Eastern Edison Company (File No. 33-37823) and is incorporated herein by reference thereto. 1 5. A COPY OF EACH INDENTURE REFERRED TO IN ITEM 4. IF THE OBLIGOR IS IN DEFAULT. Not applicable. 6. THE CONSENTS OF UNITED STATES INSTITUTIONAL TRUSTEES REQUIRED BY SECTION 321(B) OF THE ACT. The consent of the trustee required by Section 321(b) of the Act is annexed hereto as Exhibit 6 and made a part hereof. 7. A COPY OF THE LATEST REPORT OF CONDITION OF THE TRUSTEE PUBLISHED PURSUANT TO LAW OR THE REQUIREMENTS OF ITS SUPERVISING OR EXAMINING AUTHORITY. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority is annexed hereto as Exhibit 7 and made a part hereof. NOTES In answering any item of this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor or any underwriter for the obligor, the trustee has relied upon information furnished to it by the obligor and the underwriters, and the trustee disclaims responsibility for the accuracy or completeness of such information. The answer furnished to Item 2. of this statement will be amended, if necessary, to reflect any facts which differ from those stated and which would have been required to be stated if known at the date hereof. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the trustee, State Street Bank and Trust Company, a corporation organized and existing under the laws of The Commonwealth of Massachusetts, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Boston and The Commonwealth of Massachusetts, on the {JUNE 22, 1998}. STATE STREET BANK AND TRUST COMPANY By: /s/ Steven Cimalore NAME: STEVEN CIMALORE TITLE: VICE PRESIDENT 2 EXHIBIT 6 CONSENT OF THE TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939, as amended, in connection with the proposed issuance by {DIAMOND BRANDS OPERATING CORP.}. of its {10 1/8% SENIOR SUBORDINATED NOTES DUE 2008}, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefor. STATE STREET BANK AND TRUST COMPANY By: /s/ Steven Cimalore NAME: STEVEN CIMALORE TITLE: VICE PRESIDENT DATED: JUNE 22, 1998 3 EXHIBIT 7 Consolidated Report of Condition of State Street Bank and Trust Company, Massachusetts and foreign and domestic subsidiaries, a state banking institution organized and operating under the banking laws of this commonwealth and a member of the Federal Reserve System, at the close of business March 31, 1998, -------------- published in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act and in accordance with a call made by the Commissioner of Banks under General Laws, Chapter 172, Section 22(a).
Thousands of ASSETS Dollars Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin...................................................... 1,144,309 Interest-bearing balances............................................................................... 9,914,704 Securities........................................................................................................ 10,062,052 Federal funds sold and securities purchased under agreements to resell in domestic offices of the bank and its Edge subsidiary..................................................................... 8,073,970 Loans and lease financing receivables: Loans and leases, net of unearned income ............................................................... 6,433,627 Allowance for loan and lease losses..................................................................... 88,820 Allocated transfer risk reserve......................................................................... 0 Loans and leases, net of unearned income and allowances................................................. 6,344,807 Assets held in trading accounts................................................................................... 1,117,547 Premises and fixed assets......................................................................................... 453,576 Other real estate owned........................................................................................... 100 Investments in unconsolidated subsidiaries........................................................................ 44,985 Customers' liability to this bank on acceptances outstanding...................................................... 66,149 Intangible assets................................................................................................. 263,249 Other assets...................................................................................................... 1,066,572 ---------- Total assets...................................................................................................... 38,552,020 ========== LIABILITIES Deposits: In domestic offices..................................................................................... 9,266,492 Noninterest-bearing................................................................................ 6,824,432 Interest-bearing................................................................................... 2,442,060 In foreign offices and Edge subsidiary.................................................................. 14,385,048 Noninterest-bearing................................................................................ 75,909 Interest-bearing................................................................................... 14,309,139 Federal funds purchased and securities sold under agreements to repurchase in domestic offices of the bank and of its Edge subsidiary..................................................................... 9,949,994 Demand notes issued to the U.S. Treasury and Trading Liabilities.................................................. 171,783 Trading liabilities............................................................................................... 1,078,189 Other borrowed money.............................................................................................. 406,583 Subordinated notes and debentures................................................................................. 0 Bank's liability on acceptances executed and outstanding.......................................................... 66,149 Other liabilities................................................................................................. 878,947 Total liabilities................................................................................................. 36,203,185 ---------- EQUITY CAPITAL Perpetual preferred stock and related surplus........................................................................................................... 0 Common stock...................................................................................................... 29,931 Surplus........................................................................................................... 450,003 Undivided profits and capital reserves/Net unrealized holding gains (losses)...................................... 1,857,021 Net unrealized holding gains (losses) on available-for-sale securities............................................ 18,136 Cumulative foreign currency translation adjustments............................................................... (6,256) Total equity capital.............................................................................................. 2,348,835 ---------- Total liabilities and equity capital.............................................................................. 38,552,020 ----------
4 I, Rex S. Schuette, Senior Vice President and Comptroller of the above named bank do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true to the best of my knowledge and belief. Rex S. Schuette We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the Board of Governors of the Federal Reserve System and is true and correct. David A. Spina Marshall N. Carter Truman S. Casner 5 EX-27.1 52 FINANCIAL DATA SCHEDULE
5 1000 12-MOS 3-MOS DEC-31-1997 DEC-31-1998 DEC-31-1997 MAR-31-1998 0 0 0 0 16721 16031 1195 981 20744 23020 36676 38394 34177 34771 16633 17366 94550 95590 23429 21865 41605 42260 0 0 0 0 161 161 27769 29718 94550 95590 118072 26486 118072 26486 78582 18277 78582 18277 12935 3400 0 0 4550 1047 22005 3762 1376 0 20629 3762 0 0 0 0 0 0 20629 3762 0 0 0 0
EX-99.3 53 FORM OF LETTER TO BROKERS 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 TO: BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER NOMINEES: Upon and subject to the terms and conditions set forth in the Prospectus, dated ___________, 1998 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of Transmittal"), an offer to exchange (the "Exchange Offer") the registered Series B 10 1/8% Senior Subordinated Notes due 2008 (the "New Notes") for any and all outstanding Series A 10 1/8% Senior Subordinated Notes due 2008 (the "Old Notes") (CUSIP No. 25256E AA 5 for Old Notes issued pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") and CUSIP No. U25260 AA 5 for Old Notes issued pursuant to Regulation S under the Securities Act) is being made pursuant to such Prospectus. The Exchange Offer is being made in order to satisfy certain obligations of Diamond Brands Operating Corp. (the "Issuer") and the Issuer's subsidiaries (each a "Guarantor" and collectively, the "Guarantors") contained in the Registration Rights Agreement, dated as of April 21, 1998, between the Issuer, the Guarantors, and Donaldson, Lufkin and Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated (the "Initial Purchasers"). We are requesting that you contact your clients for whom you hold Old Notes regarding the Exchange Offer. For your information and for forwarding to your clients for whom you hold Old Notes registered in your name or in the name of your nominee, or who hold Old Notes registered in their own names, we are enclosing the following documents: 1. Prospectus dated ____________, 1998; 2. The Letter of Transmittal for your use and for the information of your clients; 3. A Notice of Guaranteed Delivery to be used to accept the Exchange Offer if certificates for Old Notes are not immediately available or time will not permit all required documents to reach the Exchange Agent prior to the Expiration Date (as defined below) or if the procedure for book-entry transfer cannot be completed on a timely basis; and 4. A form of letter which may be sent to your clients for whose account you hold Old Notes registered in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Exchange Offer. Your prompt action is requested. The Exchange Offer will expire at 5:00 p.m., New York City time, on _______________, 1998 (the "Expiration Date") (30 calendar days following the commencement of the Exchange Offer), unless extended by the Issuer. Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time before the Expiration Date. To participate in the Exchange Offer, a duly executed and properly completed Letter of Transmittal, with any required signature guarantees and any other required documents, should be sent to the Exchange Agent and certificates representing the Old Notes should be delivered to the Exchange Agent, all in accordance with the instructions set forth in the Letter of Transmittal and the Prospectus. If holders of Old Notes wish to tender, but it is impracticable for them to forward their certificates for Old Notes prior to the expiration of the Exchange Offer or to comply with the book-entry transfer procedures on a timely basis, a tender may be effected by following the guaranteed delivery procedures described in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures." Additional copies of the enclosed material may be obtained from the Exchange Agent, State Street Bank and Trust Company, 61 Broadway, 15th Floor, Corporate Trust Window, New York, New York 10006, telephone: (617) 664-5587. Very truly yours, DIAMOND BRANDS OPERATING CORP. Enclosures 2 EX-99.1 54 FORM OF LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL DIAMOND BRANDS INCORPORATED Offer to Exchange SERIES B 12% SENIOR DISCOUNT DEBENTURES DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OUTSTANDING SERIES A 12% SENIOR DISCOUNT DEBENTURES DUE 2009 Pursuant to the Prospectus, dated _____________, 1998 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME, ON ________________, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON ___________, 1998. DELIVERY TO: STATE STREET BANK AND TRUST COMPANY, EXCHANGE AGENT
By Mail: By Overnight Mail or Courier: P.O. Box 778 Two International Place Boston, Massachusetts 02102 Boston, Massachusetts 02110 Attention: Corporate Trust Department Attention: Corporate Trust Department Kellie Mullen Kellie Mullen By Hand in New York to 5:00 p.m. (as drop agent): By Hand in Boston to 5:00 p.m. 61 Broadway Two International Place 15th Floor Fourth Floor Corporate Trust Window Corporate Trust New York, New York 10006 Boston, Massachusetts 02110
For information call: (617) 664-5587 Delivery of this instrument to an address other than as set forth above will not constitute a valid delivery. The undersigned acknowledges receipt of the Prospectus, dated ______________, 1998 (the "Prospectus"), of Diamond Brands Incorporated, a Minnesota corporation, (the "Issuer"), and this Letter of Transmittal (this "Letter"), which together constitute the offer (the "Exchange Offer") to exchange an aggregate principal amount at maturity of up to $84,000,000 of Series B 12% Senior Discount Debentures due 2009 (the "New Debentures") for an equal principal amount at maturity of the outstanding Series A 12% Senior Discount Debentures due 2009 (the "Old Debentures"). State Street Bank and Trust Company is the exchange agent for the Exchange Offer (the "Exchange Agent"). For each Old Debenture accepted for exchange, the holder of such Old Debenture will receive a New Debenture having a principal amount at maturity equal to that of the surrendered Old Debenture. The New Debentures will accrete at a rate of 12 7/8%, compounded semi-annually, to an aggregate principal amount of $84,000,000 by April 15, 2003. Beginning on April 15, 2003, cash interest on the New Debentures will accrue and be payable, at a rate of 12 7/8% per annum, semi-annually in arrears on October 15 and April 15 of each year commencing October 15, 2003. Notwithstanding the foregoing, liquidated damages ("Liquidated Damages") shall become payable in respect of the Old Debentures as follows: If (a) the Issuer fails to file a registration statement with respect to the New Debentures (the "Exchange Offer Registration Statement") or a shelf registration statement covering resales of the Old Debentures (the "Shelf Registration Statement" and, collectively, the "Registration Statements") as required by the Registration Rights Agreement on or before the date specified for such filing, (b) any of such Registration Statements is not declared effective by the Commission on or prior to the date specified for such effectiveness (the "Effectiveness Target Date"), (c) the Issuer fails to consummate the Exchange Offer within 195 days after the date at which the Old Debentures were issued as required by the Registration Rights Agreement, 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 (as defined in "The Exchange Offer -- Terms of the Exchange Offer" section of the Prospectus) during the periods specified in the Registration Rights Agreement (each such event referred to in clauses (a) through (d) above a "Registration Default"), then the Issuer will pay 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. Following the cure of all Registration Defaults, the accrual of Liquidated Damages will cease. The Issuer reserves the right (i) to delay acceptance of any Old Debentures, to extend the Exchange Offer or to terminate the Exchange Offer and not permit acceptance of Old Debentures not previously accepted if any of the conditions set forth in "The Exchange Offer-- Conditions" section of the Prospectus shall have occurred and shall not have been waived by the Issuer, 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 Debentures. 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 Debentures of such amendment. This Letter is to be completed by a holder of Old Debentures either if Old Debentures are to be forwarded herewith or if a tender of Old Debentures, if available, is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in "The Exchange Offer" section of the Prospectus. Holders of Old Debentures whose certificates are not immediately available, or who are unable to deliver their certificates or confirmation of the book-entry tender of their Old Debentures into the Exchange Agent's account at the Book-Entry Transfer Facility (a "Book-Entry Confirmation") and all other documents required by this Letter to the Exchange Agent on or prior to the Expiration Date, must tender their Old Debentures according to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section 2 of the Prospectus. See Instruction 1. Delivery of documents to the Book-Entry Transfer Facility does not constitute delivery to the Exchange Agent. The undersigned has completed the appropriate boxes below and signed this Letter to indicate the action the undersigned desires to take with respect to the Exchange Offer. 3 List below the Old Debentures to which this Letter relates. If the space provided below is inadequate, the certificate numbers and principal amount of Old Debentures should be listed on a separate signed schedule affixed hereto. - ---------------------------------------------------------------------------------------------- DESCRIPTION OF OLD DEBENTURES 1 2 3 - ---------------------------------------------------------------------------------------------- Aggregate Name(s) and Address(es) of Certificate Principal Amount Principal Amount Registered Holder(s) Number(s)* at Maturity of at Maturity (Please fill in, if blank) Old Debenture(s) Tendered** - ---------------------------------------------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- Total - ---------------------------------------------------------------------------------------------- * Need not be completed if Old Debentures are being tendered by book-entry transfer. ** Unless otherwise indicated in this column, a holder will be deemed to have tendered ALL of the Old Debentures represented by the Old Debentures indicated in column 2. See Instruction 2. Old Debentures tendered hereby must be in denominations of principal amount at maturity of $1,000 and any integral multiple thereof. See Instruction 1. - ----------------------------------------------------------------------------------------------
[_] CHECK HERE IF TENDERED OLD DEBENTURES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution ____________________________________________ Account Number _____________ Transaction Code Number ____________________ [_] CHECK HERE IF TENDERED OLD DEBENTURES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s) __________________________________________ Window Ticket Number (if any)_____________________________________________ Date of Execution of Notice of Guaranteed Delivery________________________ Name of Institution which guaranteed delivery_____________________________ IF DELIVERED BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING: Account Number____________________ Transaction Code Number ______________ [_] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name:_____________________________________________________________________ Address:__________________________________________________________________ __________________________________________________________________________ 4 PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: Upon the terms and subject to the conditions of the Exchange Offer, the undersigned hereby tenders to the Issuer the aggregate principal amount at maturity of Old Debentures indicated above. Subject to, and effective upon, the acceptance for exchange of the Old Debentures tendered hereby, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Issuer all right, title and interest in and to such Old Debentures as are being tendered hereby. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Old Debentures tendered hereby and that the Issuer will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim when the same are accepted by the Issuer. The undersigned hereby further represents that any New Debentures acquired in exchange for Old Debentures tendered hereby will have been acquired in the ordinary course of business of the person receiving such New Debentures, whether or not such person is the undersigned, that neither the holder of such Old Debentures nor any such other person is engaged in, or intends to engage in a distribution of such New Debentures, or has an arrangement or understanding with any person to participate in the distribution of such New Debentures, and that neither the holder of such Old Debentures nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act of 1933, as amended (the "Securities Act"), of the Issuer. The undersigned also acknowledges that this Exchange Offer is being made based upon the Issuer's understanding of an interpretation 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), that the New Debentures issued in exchange for the Old Debentures pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by each holder thereof (other than a broker-dealer who acquires such New Debentures directly from the Issuer for resale pursuant to Rule 144A under the Securities Act or any other available exemption under the Securities Act or any such holder that is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Debentures 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 Debentures and has no arrangement with any person to participate in the distribution of such New Debentures. If a holder of Old Debentures is engaged in or intends to engage in a distribution of the New Debentures or has any arrangement or understanding with respect to the distribution of the New Debentures 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. If the undersigned is a broker-dealer that will receive New Debentures for its own account in exchange for Old Debentures, it represents that the Old Debentures to be exchanged for the New Debentures were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Debentures; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Issuer to be necessary or desirable to complete the sale, assignment and transfer of the Old Debentures 5 tendered hereby. All authority conferred or agreed to be conferred in this Letter and every obligation of the undersigned hereunder shall be binding upon the successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. This tender may be withdrawn only in accordance with the procedures set forth in "The Exchange Offer--Withdrawal of Tenders" section of the Prospectus. Unless otherwise indicated herein in the box entitled "Special Issuance Instructions" below, please deliver the New Debentures (and, if applicable, substitute certificates representing Old Debentures for any Old Debentures not exchanged) in the name of the undersigned or, in the case of a book-entry delivery of Old Debentures, please credit the account indicated above maintained at the Book-Entry Transfer Facility. Similarly, unless otherwise indicated under the box entitled "Special Delivery Instructions" below, please send the New Debentures (and, if applicable, substitute certificates representing Old Debentures for any Old Debentures not exchanged) to the undersigned at the address shown above in the box entitled "Description of Old Debentures." THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF OLD DEBENTURES" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE OLD DEBENTURES AS SET FORTH IN SUCH BOX ABOVE. 6 - -------------------------------------------------------------------------------- SPECIAL ISSUANCE INSTRUCTIONS (See Instructions 3 and 4) To be completed ONLY if certificates for Old Debentures not exchanged and/or New Debentures are to be issued in the name of and sent to someone other than the person(s) whose signature(s) appear(s) on this Letter above, or if Old Debentures delivered by book-entry transfer which are not accepted for exchange are to be returned by credit to an account maintained at the Book- Entry Transfer Facility other than the account indicated above. Issue New Debentures and/or Old Debentures to: Name(s): ____________________________________________________________________ (Please Type or Print) _____________________________________________________________________________ (Please Type or Print) Address:_____________________________________________________________________ (Including Zip Code) (Complete accompanying Substitute Form W-9) Credit unexchanged Old Debentures delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below. (Book-Entry Transfer Facility Account Number, if applicable) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (See Instructions 3 and 4) To be completed ONLY if certificates for Old Debentures not exchanged and/or New Debentures are to be sent to someone other than the person(s) whose signature(s) appear(s) on this Letter above or to such person(s) at an address other than shown in the box entitled "Description of Old Debentures" on this Letter above. Mail New Debentures and/or Old Debentures to: Name(s):________________________________________________________________________ (Please Type or Print) ________________________________________________________________________________ (Please Type or Print) Address:________________________________________________________________________ (Including Zip Code) - -------------------------------------------------------------------------------- IMPORTANT: THIS LETTER (TOGETHER WITH THE CERTIFICATES FOR OLD DEBENTURES OR A BOOK-ENTRY CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS OR THE NOTICE OF GUARANTEED DELIVERY) MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. PLEASE READ THIS LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING ANY BOX ABOVE. 7 - -------------------------------------------------------------------------------- PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS) (COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9) Dated:..................................................................., 1998 ..............................................................................x ..............................................................................x (Signature(s) of Owner) (Date) Area Code and Telephone Number:......................................... If a holder is tendering any Old Debentures, this Letter must be signed by the registered holder(s) as the name(s) appear(s) on the certificate(s) for the Old Debentures or by any person(s) authorized to become registered holder(s) by endorsements and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, officer or other person acting in a fiduciary or representative capacity, please set forth full title. See Instruction 3. Name(s):.................................................................. .......................................................................... (Please Type or Print) Capacity:................................................................. Address:.................................................................. .......................................................................... (Including Zip Code) SIGNATURE GUARANTEE (IF REQUIRED BY INSTRUCTION 3) Signature(s) Guaranteed by an Eligible Institution:.................................................... (Authorized Signature) ............................................................................ (Title) ............................................................................ (Name and Firm) Dated:..................................................................., 1998 - -------------------------------------------------------------------------------- 8 INSTRUCTIONS Diamond Brands Incorporated Forming Part of the Terms and Conditions of the Offer to Exchange Series B 12% SENIOR DISCOUNT DEBENTURES DUE 2009, WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR ANY AND ALL OUTSTANDING Series A 12% SENIOR DISCOUNT DEBENTURES DUE 2009 1. DELIVERY OF THIS LETTER AND OLD DEBENTURES; GUARANTEED DELIVERY PROCEDURES. This Letter is to be completed by holders of Old Debentures either if certificates are to be forwarded herewith or if tenders are to be made pursuant to the procedures for delivery by book-entry transfer set forth in "The Exchange Offer -- Book-Entry Transfer" section of the Prospectus. Certificates for all physically tendered Old Debentures, or Book-Entry Confirmation, as the case may be, as well as a properly completed and duly executed Letter of Transmittal and any other documents required by this Letter, must be received by the Exchange Agent at the address set forth herein on or prior to the Expiration Date, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Old Debentures tendered hereby must be in denominations of principal amount at maturity of $1,000 and any integral multiple thereof. Holders of Old Debentures whose certificates for Old Debentures are not immediately available or who cannot deliver their certificates and all other required documents to the Exchange Agent on or prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may tender their Old Debentures pursuant to the guaranteed delivery procedures set forth in "The Exchange Offer--Guaranteed Delivery Procedures" section of the Prospectus. Pursuant to such procedures, (i) such tender must be made through an Eligible Institution (as defined below), (ii) prior to the Expiration Date, the Exchange Agent must receive 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 Old Debentures and the amount of Old Debentures 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 Debentures, or a Book-Entry Confirmation, as the case may be, and any other documents required by this Letter will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Debentures, in proper form for transfer, or Book-Entry Confirmation, as the case may be, and all other documents required by this Letter, are received by the Exchange Agent within three NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. The method of delivery of this Letter, the Old Debentures and all other required documents is at the election and risk of the tendering holders, but the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. If Old Debentures are sent by mail, it is suggested that the mailing be made sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer" section of the Prospectus. 9 2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD DEBENTURES WHO TENDER BY BOOK-ENTRY TRANSFER). If less than all of the Old Debentures evidenced by a submitted certificate are to be tendered, the tendering holder(s) should fill in the aggregate principal amount at maturity of Old Debentures to be tendered in the box above entitled "Description of Old Debentures--Principal Amount at Maturity Tendered." A reissued certificate representing the balance of nontendered Old Debentures will be sent to such tendering holder, unless otherwise provided in the appropriate box on this Letter, promptly after the Expiration Date. ALL OF THE OLD DEBENTURES DELIVERED TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE INDICATED. 3. SIGNATURES OF THIS LETTER; BOND POWERS AND ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter is signed by the registered holder of the Old Debentures tendered hereby, the signature must correspond exactly with the name as written on the face of the certificates without any change whatsoever. If any tendered Old Debentures are owned of record by two or more joint owners, all such owners must sign this Letter. If any tendered Old Debentures are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter as there are different registrations of certificates. When this Letter is signed by the registered holder of the Old Debentures specified herein and tendered hereby, no endorsements of certificates or separate bond powers are required. If, however, the New Debentures are to be issued, or any untendered Old Debentures are to be reissued, to a person other than the registered holder, then endorsements of any certificates transmitted hereby or separate bond powers are required. Signatures on such certificates must be guaranteed by an Eligible Institution. If this Letter is signed by a person other than the registered holder of any certificates specified herein, such certificates must be endorsed or accompanied by appropriate bond powers, in either case signed exactly as the name of the registered holder appears on the certificates and the signatures on such certificates must be guaranteed by an Eligible Institution. If this Letter or any certificates 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, proper evidence satisfactory to the Issuer of their authority to so act must be submitted. ENDORSEMENTS ON CERTIFICATES FOR OLD DEBENTURES OR SIGNATURES ON BOND POWERS REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., BY A COMMERCIAL BANK OR TRUST COMPANY HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES OR BY AN "ELIGIBLE GUARANTOR" INSTITUTION WITHIN THE MEANING OF RULE 17AD-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934 (AN "ELIGIBLE INSTITUTION"). SIGNATURES ON THIS LETTER NEED NOT BE GUARANTEED BY AN ELIGIBLE INSTITUTION, PROVIDED THE OLD DEBENTURES ARE TENDERED: (I) BY A REGISTERED HOLDER OF OLD DEBENTURES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES ANY PARTICIPANT IN THE BOOK-ENTRY TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY POSITION LISTING AS THE HOLDER OF SUCH OLD DEBENTURES) TENDERED WHO 10 HAS NOT COMPLETED THE BOX ENTITLED "SPECIAL ISSUANCE INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON THIS LETTER OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION. 4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders of Old Debentures should indicate in the applicable box the name and address to which New Debentures issued pursuant to the Exchange Offer and/or substitute certificates evidencing Old Debentures not exchanged are to be issued or sent, if different from the name or address of the person signing this Letter. In the case of issuance in a different name, the employer identification or social security number of the person named must also be indicated. A holder of Old Debentures tendering Old Debentures by book-entry transfer may request that Old Debentures not exchanged be credited to such account maintained at the Book-Entry Transfer Facility as such holder of Old Debentures may designate hereon. If no such instructions are given, such Old Debentures not exchanged will be returned to the name or address of the person signing this Letter. 5. TAX IDENTIFICATION NUMBER. Federal income tax law generally requires that a tendering holder whose Old Debentures are accepted for exchange must provide the Issuer (as payor) with such Holder's correct Taxpayer Identification Number ("TIN") on Substitute Form W-9 below, which, in the case of a tendering holder who is an individual, is his or her social security number. If the Issuer is not provided with the current TIN or an adequate basis for an exemption, such tendering holder may be subject to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery of New Debentures to such tendering holder may be subject to backup withholding in an amount equal to 31% of all reportable payments made after the exchange. If withholding results in an overpayment of taxes, a refund may be obtained. Exempt holders of Old Debentures (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. See the enclosed Guidelines of Certification of Taxpayer Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for additional instructions. To prevent backup withholding, each tendering holder of Old Debentures must provide its correct TIN by completing the "Substitute Form W-9" set forth below, certifying that the TIN provided is correct (or that such holder is awaiting a TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder has not been notified by the Internal Revenue Service that such holder is subject to a backup withholding as a result of a failure to report all interest or dividends or (iii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the tendering holder of Old Debentures is a nonresident alien or foreign entity not subject to backup withholding, such holder must give the Issuer a completed Form W-8, Certificate of Foreign Status. These forms may be obtained from the Exchange Agent. If the Old Debentures are in more than one name or are not in the name of the actual owner, such holder should consult the W-9 Guidelines for information on which TIN to report. If such holder does not have a TIN, such holder should consult the W-9 Guidelines for instructions on applying for a TIN, check the box in Part 2 of the Substitute Form W-9 and write "applied for" in lieu of its TIN. Debenture: checking this box and writing "applied for" on the form means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide its TIN to the Issuer within 60 days, backup withholding will begin and continue until such holder furnishes its TIN to the Issuer. 6. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any, applicable to the transfer of Old Debentures to it or its order pursuant to the Exchange Offer. If, however, New Debentures and/or substitute Old Debentures 11 not exchanged 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 Debentures tendered hereby, or if tendered Old Debentures are registered in the name of any person other than the person signing this Letter, or if a transfer tax is imposed for any reason other than the transfer of Old Debentures to the Issuer or its order pursuant to the Exchange Offer, 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 herewith, the amount of such transfer taxes will be billed directly to such tendering holder. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT IS NOT NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE OLD DEBENTURES SPECIFIED IN THIS LETTER. 7. WAIVER OF CONDITIONS. The Issuer reserves the absolute right to waive satisfaction of any or all conditions enumerated in the Prospectus. 8. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or contingent tenders will be accepted. All tendering holders of Old Debentures, by execution of this Letter, shall waive any right to receive notice of the acceptance of their Old Debentures for exchange. Neither the Issuer, the Exchange Agent nor any other person is obligated to give notice of any defect or irregularity with respect to any tender of Old Debentures nor shall any of them incur any liability for failure to give any such notice. 9. MUTILATED, LOST, STOLEN OR DESTROYED OLD DEBENTURES. Any holder whose Old Debentures have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the procedure for tendering, as well as requests for additional copies of the Prospectus and this Letter, may be directed to the Exchange Agent, at the address and telephone number indicated above. 12 TO BE COMPLETED BY ALL TENDERING HOLDERS (SEE INSTRUCTION 5) PAYOR'S NAME: DIAMOND BRANDS INCORPORATED
- ------------------------------------------------------------------------------------------------------------- SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN THE Form W-9 BOX AT RIGHT AND CERTIFY BY SIGNING AND TIN:_____________________________ DATING BELOW. (Social Security Number or Employer Identification Number) ---------------------------------------------------------------------------------------- Department of the Part 2 -- TIN Applied For [_] Treasury ---------------------------------------------------------------------------------------- Internal Revenue CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT: Service (1) the number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me). Payor's Request For (2) I am not subject to backup withholding either because: (a) I am exempt from Taxpayer backup withholding or (b) I have not been notified by the Internal Revenue Service Identification Number (the "IRS") that I am subject to backup withholding as a result of a failure to ("TIN") and report all interest or dividends, or (c) the IRS has notified me that I am no longer Certification subject to backup witholding, and (3) any other information provided on this form is true and correct. SIGNATURE...................................................... DATE................. - ---------------------------------------------------------------------------------------------------------------- You must cross out item (2) of the above certification if you have been notified by the IRS that you are subject to backup withholding because of underreporting of interest or dividends on your tax return and you have not been notified by the IRS that you are no longer subject to backup withholding. - ----------------------------------------------------------------------------------------------------------------
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 2 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of the exchange, 31% of all reportable payments made to me thereafter will be withheld until I provide a number. ________________________________________________________ ___________________ Signature Date - -------------------------------------------------------------------------------- 13 EX-99.2 55 FORM OF NOTICE OF GUARANTEED DELIVERY NOTICE OF GUARANTEED DELIVERY FOR DIAMOND BRANDS OPERATING CORP. This form or one substantially equivalent hereto must be used to accept the Exchange Offer of Diamond Brands Operating Corp. (the "Issuer") made pursuant to the Prospectus, dated ___________, 1998 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of Transmittal") if certificates for Old Notes are not immediately available or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Issuer prior to 5:00 P.M., New York City time, on the Expiration Date of the Exchange Offer. Such form may be delivered by mail or hand delivery to State Street Bank and Trust Company (the "Exchange Agent") as set forth below. In addition, in order to utilize the guaranteed delivery procedure to tender Old Notes pursuant to the Exchange Offer, a completed, signed and dated Letter of Transmittal must also be received by the Exchange Agent prior to 5:00 P.M., New York City time, on the Expiration Date. Capitalized terms not defined herein are defined in the Prospectus. DELIVERY TO: STATE STREET BANK AND TRUST COMPANY, EXCHANGE AGENT By Mail: By Overnight Mail or Courier: P.O. Box 778 Two International Place Boston, Massachusetts 02102 Boston, Massachusetts 02110 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 Corporate Trust Corporate Trust Window Boston, Massachusetts 02110 New York, New York 10006 For information call: (617) 664-5587 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. Ladies and Gentlemen: Upon the terms and conditions set forth in the Prospectus and the accompanying Letter of Transmittal, the undersigned hereby tenders to the Issuer the principal amount of Old Notes set forth below, pursuant to the guaranteed delivery procedure described in "The Exchange Offer -- Guaranteed Delivery Procedures" section of the Prospectus. Principal Amount of Old Notes Tendered: Name(s) of Record Holders(s): $________________________________________ ___________________________________ (Please Type or Print) Address(es): (Please Type or Print Certificate Nos. (if available): _________________________________________ ___________________________________ _________________________________________ ___________________________________ (Including Zip Code) If Old Notes will be delivered by book-entry transfer to The Depositary Area Code and Telephone Number(s): Trust Company, provide account number. ___________________________________ Signature(s): Account Number___________________________ ___________________________________ Dated____________________________________ ___________________________________ THE ACCOMPANYING GUARANTEE MUST BE COMPLETED. 2 GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a firm that is a 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 correspondent in the United States or any "eligible guarantor" institution within the meaning of Rule 17Ad- 15 of the Securities Exchange Act of 1934, as amended, hereby (a) guarantees to deliver to the Exchange Agent, at one its address set forth above, the certificates representing all tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, together with a properly completed and duly executed Letter of Transmittal), with any required signature guarantees, and any other documents required by the Letter of Transmittal within three New York Stock Exchange trading days after the date of execution of this Notice of Guaranteed Delivery. Name of Firm:__________________________ ___________________________________ (Authorized Signature) Address:_______________________________ Title:_____________________________ _______________________________________ Name:______________________________ (Including Zip Code) (Please Type or Print) Area Code and Telephone Number:______________________ Dated:_______________________, 1998 EX-99.4 56 FORM OF LETTER TO CLIENT 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 TO OUR CLIENTS: Enclosed for your consideration is a Prospectus of Diamond Brands Operating Corp., a Delaware corporation (the "Issuer"), dated _________, 1998 (the "Prospectus"), and the enclosed Letter of Transmittal (the "Letter of Transmittal") relating to the offer to exchange (the "Exchange Offer") of registered Series B 10 1/8% Senior Subordinated Notes due 2008 (the "New Notes") for any and all outstanding Series A 10 1/8% Senior Subordinated Notes due 2008 (the "Old Notes") (CUSIP No. 25256E AA 5 for Old Notes issued pursuant to Rule 144A under the Securities Act of 1933, as amended (the "Securities Act") and CUSIP No. 425260 AA 5 for Old Notes issued pursuant to Regulation S under the Securities Act), upon the terms and subject to the conditions described in the Prospectus. The Exchange Offer is being made in order to satisfy certain obligations of the Issuer and the Issuer's subsidiaries (each a "Guarantor" and collectively, the "Guarantors") contained in the Registration Rights Agreement, dated as of April 21, 1998, between the Issuer, the Guarantors and Donaldson, Lufkin & Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated (the "Initial Purchasers"). This material is being forwarded to you as the beneficial owner of the Old Notes carried by us in your account but not registered in your name. A TENDER OF SUCH OLD NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. Accordingly, we request instructions as to whether you wish us to tender on your behalf the Old Notes held by us for your account, pursuant to the terms and conditions set forth in the enclosed Prospectus and Letter of Transmittal. We also request that you confirm that we may, on your behalf, make the representations and warranties contained in the Letter of Transmittal. Your instructions should be forwarded to us as promptly as possible in order to permit us to tender the Old Notes on your behalf in accordance with the provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ____________, 1998 (THE "EXPIRATION DATE") (30 CALENDAR DAYS FOLLOWING THE COMMENCEMENT OF THE EXCHANGE OFFER), UNLESS EXTENDED BY THE ISSUER. ANY OLD NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME BEFORE 5:00 P.M., NEW YORK CITY TIME ON THE EXPIRATION DATE. Your attention is directed to the following: 1. The Exchange Offer is for any and all Old Notes. 2. The Exchange Offer is subject to certain conditions set forth in the Prospectus in the section captioned "The Exchange Offer -- Conditions." 3. Any transfer taxes incident to the transfer of Old Notes from the holder to the Issuer will be paid by the Issuer, except as otherwise provided in the Instructions in the Letter of Transmittal. 4. The Exchange Offer expires at 5:00 p.m., New York City time, on the Expiration Date unless extended by the Issuer. If you wish to have us tender your Old Notes, please so instruct us by completing, executing and returning to us the instruction form set forth below. The Letter of Transmittal is furnished to you for information only and may not be used directly by you to tender Old Notes. INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER The undersigned acknowledge(s) receipt of your letter enclosing the Prospectus, dated ___________, 1998, of Diamond Brands Operating Corp., a Delaware corporation, and the related specimen Letter of Transmittal. - -------------------------------------------------------------------------------- This will instruct you to tender the number of Old Notes indicated below held by you for the account of the undersigned, pursuant to the terms and conditions set forth in the Prospectus and the related Letter of Transmittal. (Check one). Box 1 [_] Please tender my Old Notes held by you for my account. If I do not wish to tender all of the Old Notes held by you for my account, I have identified on a signed schedule attached hereto the number of Old Notes that I do not wish tendered. Box 2 [_] Please do not tender any Old Notes held by you for my account. - -------------------------------------------------------------------------------- Dated____________________, 1998 ____________________________________________ Signature(s) ____________________________________________ ____________________________________________ Please print name(s) ____________________________________________ Area Code and Telephone Number(s) ____________________________________________ Tax Identification or Social Security Number UNLESS A SPECIFIC CONTRARY INSTRUCTION IS GIVEN IN THE SPACE PROVIDED, YOUR SIGNATURE(S) HEREON SHALL CONSTITUTE AN INSTRUCTION TO US TO TENDER ALL OLD NOTES. 2 -----END PRIVACY-ENHANCED MESSAGE-----