<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 1998
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DIAMOND BRANDS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 6719 411565294
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIALCLASSIFICATION IDENTIFICATION NUMBER)
OFINCORPORATION 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 INCORPORATED
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
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12 7/8% Senior
Discount
Debentures
due 2009 $84,000,000 100% $84,000,000 $24,780
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(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.
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<PAGE>
DIAMOND BRANDS INCORPORATED
REGISTRATION STATEMENT ON FORM S-4
(CROSS REFERENCE SHEET FURNISHED PURSUANT TO ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM LOCATION IN PROSPECTUS
---- ----------------------
<S> <C>
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 Debentures; Plan
of Distribution; Certain United States Federal
Income Tax Considerations
5.Pro Forma Financial Capitalization; Unaudited Pro Forma Consolidated
Information............. 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 Not Applicable
and Counsel.............
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 Prospectus Summary; Management; Capital Stock of
to be Solicited or in an Holdings and Operating Corp.; Certain
Exchange Offer.......... Relationships and Related Transactions
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 INCORPORATED
OFFER TO EXCHANGE SERIES B 12 7/8% 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 7/8% SENIOR DISCOUNT DEBENTURES DUE
2009
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1998,
UNLESS EXTENDED.
Diamond Brands Incorporated, a Minnesota corporation (the "Issuer" or
"Holdings"), 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 12 7/8% Senior Discount Debentures due 2009 of the Issuer (the "New
Debentures") 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 12 7/8% Senior Discount Debentures due 2009 of the Issuer (the "Old
Debentures") and of which $84,000,000 aggregate principal amount at maturity is
outstanding as of the date hereof. The New Debentures and the Old Debentures
are collectively referred to herein as the "Debentures."
Any and all Old Debentures 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
Debentures 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 Debentures 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 and Donaldson, Lufkin & Jenrette
Securities Corporation and Morgan Stanley & Co. Incorporated (the "Initial
Purchasers") (the "Registration Rights Agreement"). Old Debentures may only be
tendered in integral multiples of $1,000 of principal amount at maturity. See
"The Exchange Offer."
The New Debentures will be entitled to the benefits of the same Indenture (as
defined herein) that governs the Old Debentures and that will govern the New
Debentures. The form and terms of the New Debentures are the same in all
material respects as the form and terms of the Old Debentures, except that the
New Debentures 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 Debentures."
The New Debentures will be represented by permanent global debentures 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 debentures will be shown on,
and transfers thereof will be effected through, records maintained by DTC and
its participants.
(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
<PAGE>
(continued from cover page)
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 believes that the New Debentures 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 Debentures
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 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 a
distribution of such New Debentures. By tendering Old Debentures in exchange
for New Debentures, each holder, other than a broker-dealer, will represent to
the Issuer 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
Debentures acquired for its own account directly from the Issuer; (iii) any
New Debentures 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 Debentures and has no arrangement or understanding
to participate in a distribution of New Debentures. If a holder of Old
Debentures is engaged in or intends to engage in a distribution of New
Debentures or has any arrangement or understanding with respect to the
distribution of 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.
Each broker-dealer that receives New Debentures 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 Debentures. 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 Debentures
received in exchange for Old Debentures where such Old Debentures 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 has agreed that it 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."
The Issuer will not 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 DEBENTURES 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 Debentures 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 Debentures. If such a market were to develop, the New Debentures could
trade at prices that may be higher or lower than their principal amount. The
Issuer does not intend to apply for listing of the New Debentures on any
securities exchange or for quotation of the New Debentures on The Nasdaq Stock
Market's National Market or otherwise. The Initial Purchasers have previously
made a market in the Old Debentures, and the Issuer has been advised that the
Initial Purchasers currently intend to make a market in the New Debentures, 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 Debentures or the New Debentures 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 Debentures or that any active public market for
the New Debentures will develop or continue. If an active public market does
not develop or continue, the market price and liquidity of the New Debentures
may be adversely affected. See "Risk Factors--Risk Factors Relating to the
Debentures--Absence of Public Market."
ii
<PAGE>
AVAILABLE INFORMATION
The Issuer is not 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 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
Debentures 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 with the Commission, through the Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR"), under the Securities Act,
with respect to the New Debentures 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.
1
<PAGE>
PROSPECTUS SUMMARY
Prior to the Recapitalization (as defined herein), Holdings and its direct
subsidiaries carried on the business described herein. In connection with the
Recapitalization, Holdings organized Diamond Brands Operating Corp., a Delaware
corporation ("Operating Corp.") and immediately prior to the consummation of
the Recapitalization, Holdings transferred substantially all of its assets and
liabilities to Operating Corp. Holdings' current operations are, and future
operations are expected to be, limited to owning the stock of Operating Corp.
Unless the context otherwise requires, the "Company" or "Diamond Brands" refers
to Holdings, Operating Corp., and its direct and indirect subsidiaries. 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 Issuer and the Unaudited Pro Forma
Consolidated Financial Data (as defined herein) of the Issuer 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 Issuer for the year ended December 31, 1997 are to such
data that give effect to the Recapitalization, including the issuance of the
Debentures and the issuance of the Holdings Preferred Stock (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 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
2
<PAGE>
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 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,
3
<PAGE>
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,
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
4
<PAGE>
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.
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 Operating Corp.
and, immediately prior to the consummation of the Recapitalization, Holdings
transferred substantially all of its assets and liabilities to Operating Corp.
Holdings' current operations are, and future operations are expected to be,
limited to owning the stock of Operating Corp. Operating Corp. 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) $45.1 million of gross
proceeds from the offering of the Old Debentures (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) $100.0 million
of gross proceeds from the sale by Operating Corp. of 10 1/8% senior
subordinated notes due 2008 (the "Senior Subordinated Notes") in a separate
offering.
5
<PAGE>
The Equity Repurchase, the Offering, the Debt Retirement, the issuance and
sale by Holdings of Holdings Preferred Stock and the Warrants, the issuance and
sale by Operating Corp. of the Senior Subordinated Notes and the borrowing by
Operating Corp. 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.
The following table sets forth the sources and uses of funds in connection
with the Recapitalization as it occurred on April 21, 1998:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SOURCES:
Bank Facilities(1)............................................... $ 86,445
Senior Subordinated Notes........................................ 100,000
Debentures offered in the Offering............................... 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
========
</TABLE>
- --------
(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 Other Indebtedness."
(2) Represents cash proceeds associated with Holdings Preferred Stock,
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
<PAGE>
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 principal executive
offices of the Company are located at 1800 Cloquet Avenue, Cloquet, Minnesota
55720, and its telephone number is (218) 879-6700.
7
<PAGE>
THE EXCHANGE OFFER
Registration Rights
Agreement.............. The Old Debentures were issued on April 21, 1998 to
the Initial Purchasers. The Initial Purchasers placed
the Old Debentures with institutional investors. In
connection therewith, the Issuer 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 Debentures are being offered in exchange for an
equal principal amount at maturity of Old Debentures.
As of the date hereof, $84,000,000 aggregate principal
amount at maturity of Old Debentures is outstanding.
Old Debentures may be tendered only in integral
multiples of $1,000 of principal amount at maturity.
Resale of New
Debentures............. 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 believes that the New
Debentures 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 Debentures
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 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 a
distribution of such New Debentures. By tendering Old
Debentures in exchange for New Debentures, each
holder, other than a broker-dealer, will represent to
the Issuer 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
Debentures acquired for its own account directly from
the Issuer; (iii) any New Debentures 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
Debentures and has no arrangement or understanding to
participate in a distribution of the New Debentures.
If a holder of Old Debentures is engaged in or
intends to engage in a distribution of New Debentures
or has any arrangement or understanding with respect
to the distribution of 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. Each Participating Broker-Dealer
that receives New Debentures 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 Debentures. 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
8
<PAGE>
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 Debentures received in exchange for
Old Debentures where such Old Debentures were
acquired by such Participating Broker-Dealer as a
result of market-making activities or other trading
activities. The Issuer has agreed that it 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
Debentures prior to offering or selling such New
Debentures. The Issuer has agreed, pursuant to the
Registration Rights Agreement and subject to certain
specified limitations therein, to register or qualify
the New Debentures 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
Debentures............. Upon consummation of the Exchange Offer, subject to
certain exceptions, holders of Old Debentures who do
not exchange their Old Debentures for New Debentures
in the Exchange Offer will no longer be entitled to
registration rights and will not be able to offer or
sell their Old Debentures, unless such Old Debentures
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 Debentures--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.
Yield and Interest on
the New Debentures..... 12 7/8% (computed on a semi-annual bond equivalent
basis) calculated from April 21, 1998. The New
Debentures will accrete at a rate of 12 7/8%,
compounded semi-annually, to an aggregate principal
amount at maturity of $84.0 million by April 15, 2003.
Cash interest will not accrue on the New Debentures
prior to 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 each October 15 and April 15
commencing October 15, 2003.
Conditions to the
Exchange Offer......... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Debentures being
tendered for exchange. However, the Exchange Offer is
subject to certain customary conditions, which may,
under certain circumstances, be waived by the Issuer.
See "The Exchange Offer--Conditions." Except for the
requirements of applicable federal
9
<PAGE>
and state securities laws, there are no federal or
state regulatory requirements to be complied with or
obtained by the Issuer in connection with the
Exchange Offer.
Procedures for
Tendering Old
Debentures............. Each holder of Old Debentures 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
Debentures 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 Debentures 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 Debentures who wish to tender their
Old Debentures and whose Old Debentures are not
immediately available or who cannot deliver their Old
Debentures 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 Debentures
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights....... Tenders of Old Debentures 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
Debentures, 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
Debentures and
Delivery of New
Debentures............. Subject to certain conditions, any and all Old
Debentures 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 Debentures 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 Debentures for Old Debentures
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
from the issuance of the New Debentures pursuant to
the Exchange Offer. See "Use of Proceeds."
10
<PAGE>
SUMMARY OF TERMS OF NEW DEBENTURES
The Exchange Offer relates to the exchange of up to $84,000,000 aggregate
principal amount at maturity of Old Debentures for up to an equal aggregate
principal amount at maturity of New Debentures. The New Debentures will be
entitled to the benefits of the same Indenture that governs the Old Debentures
and that will govern the New Debentures. The form and terms of the New
Debentures are the same in all material respects as the form and terms of the
Old Debentures, except that the New Debentures have been registered under the
Securities Act and therefore will not bear legends restricting the transfer
thereof. See "Description of the New Debentures."
Maturity Date........... April 15, 2009.
Interest Rate and
Payment Dates........... 12 7/8% (computed on a semi-annual bond equivalent
basis) calculated from April 21, 1998. The New
Debentures will accrete at a rate of 12 7/8%,
compounded semi-annually, to an aggregate principal
amount at maturity of $84.0 million by April 15,
2003. Cash interest will not accrue on the New
Debentures prior to 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 each October 15
and April 15, commencing October 15, 2003.
Optional Redemption..... The New 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 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 at
maturity of the New Debentures originally issued at a
redemption price equal to 112.875% of the principal
amount Accreted Value (as defined herein) thereof
plus 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 at maturity of the New Debentures remains
outstanding immediately after each such redemption.
See "Description of the New Debentures--Optional
Redemption."
Mandatory Debenture
Redemption.............. On April 15, 2003, Holdings will be required to
redeem New 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
New Debentures then outstanding by (y) $84.0 million,
at a redemption price equal to 100% of the principal
amount at maturity of the New Debentures so redeemed
(the "Mandatory Debenture Redemption").
Ranking.................
The New Debentures will be senior obligations of
Holdings. The New Debentures will rank pari passu in
right of payment with all future senior indebtedness
of Holdings and will rank senior in right of payment
to all future subordinated indebtedness of Holdings.
The New Debentures will be effectively subordinated
to all liabilities of Holdings' subsidiaries. As of
March 31, 1998, on a pro forma basis after giving
effect to the
11
<PAGE>
Recapitalization, Holdings would have had outstanding
approximately $229.9 million of Indebtedness (as
defined herein) and Holdings' subsidiaries would have
had outstanding approximately $184.8 million of
Indebtedness, including Indebtedness under the Senior
Subordinated Notes and the Bank Facilities.
Change of Control....... Upon the occurrence of a Change of Control, each
holder of New Debentures will have the right to
require Holdings to repurchase any or all of its New
Debentures at a price in cash equal to 101% of the
Accreted Value thereof plus Liquidated Damages, if
any, thereon in the case of any such purchase prior
to April 15, 2003, or 101% of the aggregate principal
amount at maturity thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon in
the case of any such purchase on or after April 15,
2003. See "Description of the New Debentures--
Repurchase at the Option of Holders--Change of
Control."
Limitation on Access to
Subsidiary Cash Flow.... Holdings does not have, and may not in the future
have, any assets other than common stock of Operating
Corp. (which will be pledged to secure Operating
Corp.'s obligations under the Bank Facilities). As a
result, Holdings' ability to consummate the Mandatory
Debenture Redemption, to pay cash interest on the New
Debentures, and to purchase New Debentures upon the
occurrence of a Change of Control will depend upon
the receipt of dividends and other distributions from
its direct and indirect subsidiaries. The Bank
Facilities, the Operating Corp. Indenture (as defined
herein) and the Senior Subordinated Notes restrict
Operating Corp. from making dividends and other
distributions to Holdings, and without such dividends
or distributions, Holdings will likely not have the
financial resources to consummate the Mandatory
Debenture Redemption, to pay cash interest on the New
Debentures, or to purchase New Debentures upon a
Change of Control. In addition, there can be no
assurance that Holdings' subsidiaries will have the
resources available to pay any such dividends or
distributions. Holdings' failure to consummate the
Mandatory Debenture Redemption, to pay cash interest
on the New Debentures when due and payable, or to
make a Change of Control Offer when required or to
purchase New Debentures when tendered pursuant
thereto, would constitute an Event of Default (as
defined herein) under the Indenture. See "Description
of the New Debentures--Principal, Maturity and
Interest," "--Mandatory Redemption," and "--
Repurchase at Option of Holders--Change of Control."
Original Issue
Discount................ The New Debentures are being offered at an original
issue discount for United States federal income tax
purposes. Thus, although cash interest will not be
payable on the New Debentures prior to October 15,
2003, original issue discount will accrue from the
issue date of the New Debentures and will be included
as interest income periodically (including for
periods ending prior to April 15, 2003) in a holder's
gross income for United States federal income tax
purposes in advance of receipt of the cash payments
to which the income is attributable. See "Certain
United States Federal Income Tax Considerations."
12
<PAGE>
Restrictive Covenants... The Indenture contains certain covenants that limit,
among other things, the ability of Holdings and its
Restricted Subsidiaries (as defined herein) to: (i)
pay dividends, redeem capital stock or make certain
other restricted payments or investments; (ii) incur
additional indebtedness or issue preferred equity
interests; (iii) merge, consolidate or sell all or
substantially all of its assets; (iv) create liens on
assets; and (v) enter into certain transactions with
affiliates or related persons. In addition, under
certain circumstances, Holdings will be required to
offer to purchase New Debentures at a price of 100%
of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
thereon to the date of purchase with the proceeds of
certain asset sales. See "Description of the New
Debentures--Certain Covenants."
USE OF PROCEEDS
There will be no cash proceeds payable to the Issuer from the issuance of the
New Debentures pursuant to the Exchange Offer. The proceeds from the sale of
the Old Debentures 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
<PAGE>
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 Holdings
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 Holdings 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 Holdings 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 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 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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 (loss) (1)... 3,957 3,578 4,102 7,636 20,629 1,719 1,929 3,762 (559)
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:
Interest expense (2).... $ 22,817 -- -- $ 5,657
Ratio of EBITDA to
interest expense....... 1.3x -- -- 1.0x
Ratio of total debt to
EBITDA................. 7.3x -- -- N/A
Ratio of earnings to
fixed charges (5)...... 1.1x -- -- (6)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $16,529 $ 26,082
Total assets.............................................. 95,590 104,854
Total debt, including current maturities.................. 50,157 229,917
Stockholders' equity (deficit)............................ 29,879 (175,154)
</TABLE>
- --------
(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).
(6) Earnings were inadequate to cover fixed charges by $1.1 million.
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RISK FACTORS
Prospective holders of the New Debentures 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 Debentures. As of March
31, 1998 on a pro forma basis and after giving effect to the Recapitalization,
the Company would have had approximately $229.9 million of Indebtedness and
stockholders' deficit of approximately $175.2 million. On April 15, 2003,
Holdings will be required to redeem 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
Debentures then outstanding by (y) $84.0 million at a redemption price equal
to 100% of the principal amount of the Debentures so redeemed. Commencing
October 15, 2003, Holdings will be required to make semi-annual cash payments
of interest on the Debentures. Subject to the restrictions in the Bank
Facilities, the Operating Corp. Indenture 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
Operating Corp. Indenture restrict, but do not prohibit, the payment of
dividends by Operating Corp. to Holdings to finance the Mandatory Debenture
Redemption and the payment of interest on the Debentures. See "Description of
Other Indebtedness" and "Description of the New Debentures." There can be no
assurance that Operating Corp. will be entitled under the terms of the Bank
Facilities and the Operating Corp. Indenture to dividend sufficient funds to
Holdings to fund the Mandatory Debenture Redemption or payments of cash
interest on the Debentures. Holdings' failure to consummate the Mandatory
Debenture Redemption or to make interest payments on the Debentures would
cause an Event of Default under the Indenture. See "Description of the New
Debentures."
The level of the Company's indebtedness could have important consequences to
holders of the Debentures, 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 Operating
Corp.'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 Company 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, the Operating Corp. 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
Debentures; (vi) the Senior Subordinated Notes mature prior to the maturity of
the Debentures; (vii) the Company may be substantially more leveraged than
certain of its competitors, which may place it at a competitive disadvantage;
and (viii) 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 Other
Indebtedness" and "Description of the New Debentures."
The Company's ability to consummate the Mandatory Debenture Redemption, 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
Debentures), or to fund planned capital or other expenditures, will depend
upon its future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, many
of which are beyond its control. There can be no assurance that the Company's
operating
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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 Company 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 Company could realize therefrom. If the
Company 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 Debentures 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
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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."
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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 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 Debentures 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 DEBENTURES
LIMITATION ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE
Holdings is a holding company, and its ability to pay interest on the
Debentures and to consummate the Mandatory Debenture Redemption is dependent
upon the receipt of dividends from its direct and indirect subsidiaries.
Holdings does not have, and may not in the future have, any assets other than
the common stock of
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Operating Corp. (which will be pledged to secure Operating Corp.'s obligations
under the Bank Facilities). Operating Corp. and its subsidiaries are parties to
the Bank Facilities and the Operating Corp. Indenture, each of which imposes
substantial restrictions on Operating Corp.'s ability to pay dividends to
Holdings. Any payment of dividends will be subject to the satisfaction of
certain limitations and financial conditions set forth in the Operating Corp.
Indenture and the Bank Facilities. The ability of Operating Corp. and its
subsidiaries to comply with such conditions in the Operating Corp. Indenture and
the Bank Facilities may be affected by events that are beyond the control of the
Company. The breach of any such conditions could result in a default under the
Operating Corp. Indenture and the Bank Facilities, and in the event of any such
default, the holders of the Senior Subordinated Notes or the lenders under the
Bank Facilities could elect to accelerate the maturity of all the Senior
Subordinated Notes or the loans under such facilities, as applicable. If the
maturity of the Senior Subordinated Notes or the loans under the Bank Facilities
were to be accelerated, all such outstanding debt would be required to be paid
in full before Operating Corp. or its subsidiaries would be permitted to
distribute any assets or cash to Holdings. There can be no assurance that the
assets of Holdings would be sufficient to repay all of such outstanding debt and
to meet its obligations under the Indenture. Future borrowings by Operating
Corp. can be expected to contain restrictions or prohibitions on the payment of
dividends by Operating Corp. and its subsidiaries to Holdings. In addition,
under Delaware law, a subsidiary of a company is permitted to pay dividends on
its capital stock only out of its surplus or, in the event that it has no
surplus, out of its net profits for the year in which a dividend is declared or
for the immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay dividends in cash, Operating
Corp. must have surplus or net profits equal to the full amount of the cash
dividend at the time such dividend is declared. In determining Operating Corp.'s
ability to pay dividends, Delaware law permits the Board of Directors of
Operating Corp. to revalue its assets and liabilities from time to time to their
fair market values in order to create surplus. Holdings cannot predict what the
value of its subsidiaries' assets or the amounts of their liabilities will be in
the future and, accordingly, there can be no assurance that Holdings will be
able to pay its debt service obligations on the Debentures. In addition,
indebtedness outstanding under the Bank Facilities will be secured by
substantially all of the assets of the Company (including the common stock of
Operating Corp.)
As a result of the holding company structure, holders of Debentures will be
structurally junior to all creditors of Holdings' subsidiaries, except to the
extent that Holdings is itself recognized as a creditor of any such
subsidiary, in which case the claims of Holdings would still be subordinate to
any security in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by Holdings. In the event of insolvency,
liquidation, reorganization, dissolution or other winding-up of Holdings'
subsidiaries, Holdings will not receive any funds available to pay to
creditors of the subsidiaries. As of March 31, 1998, on a pro forma basis
after giving effect to the Recapitalization, Holdings' subsidiaries would have
had outstanding approximately $229.9 million of Indebtedness, including $184.8
million of Indebtedness under the Senior Subordinated Notes and the Bank
Facilities.
RESTRICTIVE DEBT COVENANTS
The Indenture, the Operating Corp. Indenture and the Bank Facilities contain
a number of significant covenants that, among other things, restrict the
ability of Holdings and its subsidiaries to dispose of assets, incur
additional indebtedness, prepay indebtedness (including the Debentures) 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 Holdings or its subsidiaries,
or engage in certain transactions with affiliates and otherwise restrict
certain corporate activities. In addition, under the Bank Facilities, Holdings
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 Other Indebtedness" and
"Description of the New Debentures."
Holdings' 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
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result in a default under the Bank Facilities, the Operating Corp. Indenture
and/or the Indenture, which would permit the senior lenders, or holders of
Senior Subordinated Notes and/or the Debentures, 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 Holdings 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 Other Indebtedness." See "--Limitation on Access to Cash Flow
of Subsidiaries; Holding Company Structure."
POSSIBLE INABILITY TO REPURCHASE DEBENTURES UPON CHANGE OF CONTROL
The Bank Facilities prohibit Holdings from purchasing any Debentures (except
in certain limited amounts) and also provide that certain change of control
events with respect to Holdings will constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
Holdings becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when Holdings is prohibited
from purchasing the Debentures, Holdings could seek the consent of its lenders
to the purchase of the Debentures or could attempt to refinance the borrowings
that contain the prohibition. If Holdings does not obtain that consent or
repay those borrowings, Holdings will remain prohibited from purchasing the
Debentures by the relevant Senior Debt. In that case, Holdings' failure to
purchase the tendered Debentures would constitute an Event of Default under
the Indenture which would, in turn, constitute a default under the Operating
Corp. Indenture and 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 Debentures.
Furthermore, no assurance can be given that Holdings will have sufficient
resources to satisfy its repurchase obligation with respect to the Debentures
following an occurrence of a Change of Control. See "Description of Other
Indebtedness" and "Description of the New Debentures."
FRAUDULENT TRANSFER STATUTES
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the Debentures were issued, Holdings (i) issued the
Debentures 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
Debentures, and (B)(1) was insolvent or was rendered insolvent by reason of
the issuance of the Debentures, (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 Holdings' obligations to holders of the
Debentures, subordinate Holdings' obligations to holders of the Debentures to
other existing and future indebtedness of Holdings, the effect of which would
be to entitle such other creditors to be paid in full before any payment could
be made on the Debentures, and take other action detrimental to holders of the
Debentures, including in certain circumstances, invalidating the Debentures.
In that event, there would be no assurance that any repayment on the
Debentures would ever be recovered by holders of the Debentures.
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, Holdings generally would be
considered insolvent at the time it incurs the indebtedness constituting the
Debentures, 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 Holdings
was "insolvent" as of the date the Debentures were issued, or that, regardless
of the method of valuation, a court would not determine that Holdings was
insolvent on that date. Nor can there be any assurance that a court would not
determine, regardless of whether Holdings was insolvent on the date the
Debentures were issued, that the
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payments constituted fraudulent transfers on another ground. To the extent
that proceeds from the sale of the Debentures 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 Holdings did
not receive fair consideration or reasonably equivalent value for the
incurrence of the indebtedness represented by the Debentures.
Based upon financial and other information currently available to it,
management of Holdings believes that the Debentures are being incurred for
proper purposes and in good faith and that Holdings (i) is solvent and will
continue to be solvent after issuing the Debentures, (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."
The Indenture limits the ability of Holdings 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 Holdings.
However, these limitations are subject to certain exceptions. See "Description
of the New Debentures."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Debentures who do not exchange their Old Debentures for New
Debentures pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Debentures as set forth in the legend
thereon as a consequence of the issuance of the Old Debentures 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 Debentures 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. Holdings does not currently anticipate that it will register the Old
Debentures under the Securities Act. To the extent that Old Debentures are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Debentures could be adversely affected.
ABSENCE OF PUBLIC MARKET
The Old Debentures 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 Debentures. If such a market were to develop, the New Debentures
could trade at prices that may be higher or lower than their principal amount.
Holdings does not intend to apply for listing of the New Debentures on any
securities exchange or for quotation of the New Debentures on The Nasdaq Stock
Market's National Market or otherwise. The Initial Purchasers have previously
made a market in the Old Debentures, and Holdings has been advised that the
Initial Purchasers currently intend to make a market in the New Debentures, 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 Debentures or the New Debentures 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 Debentures or that any active public market for
the New Debentures will develop or continue. If an active public market does
not develop or continue, the market price and liquidity of the New Debentures
may be adversely affected.
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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 Operating Corp.
and, immediately prior to the consummation of the Recapitalization, Holdings
transferred substantially all of its assets and liabilities to Operating Corp.
Holdings' current operation are, and future operations are expected to be,
limited to owning the stock of Operating Corp. Operating Corp. 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) $45.1 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) $100.0 million of gross proceeds from the sale by Operating
Corp. of the Senior Subordinated Notes in a separate offering.
The Equity Repurchase, the Offering, the Debt Retirement, the issuance and
sale by Holdings of Holdings Preferred Stock and the Warrants, the issuance
and sale by Operating Corp. of Senior Subordinated Notes and the borrowing by
Operating Corp. 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
<PAGE>
The following table sets forth the sources and uses of funds in connection
with the Recapitalization, as it occurred on April 21, 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
SOURCES:
Bank Facilities(1)............................................... $ 86,445
Senior Subordinated Notes........................................ 100,000
Debentures offered in the Offering............................... 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
========
</TABLE>
- --------
(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 Other
Indebtedness."
(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.
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
24
<PAGE>
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 Holdings from the issuance of the
New Debentures pursuant to the Exchange Offer. The proceeds from the sale of
the Old Debentures were used for the retirement of debt, to consummate the
other components of the Recapitalization and to pay related fees and expenses.
25
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998: (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the Recapitalization. See "The Recapitalization,"
"Use of Proceeds," "Description of Other Indebtedness" and "Description of the
New Debentures." 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.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
---------------------
ACTUAL PRO FORMA
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt (including current maturities):
Revolving Credit Facility (1).......................... $ -- $ 4,812
Term Loan Facilities (2)............................... -- 80,000
Senior Subordinated Notes.............................. -- 100,000
Debentures offered hereby.............................. -- 45,105
Existing indebtedness (3).............................. 50,157 --
--------- -----------
Total debt........................................... 50,157 229,917
Holdings Preferred Stock (4)............................. -- 33,802
Stockholders' equity (deficit) (4)....................... 29,879 (175,154)
--------- -----------
Total capitalization................................. $ 80,036 $ 88,565
========= ===========
</TABLE>
- --------
(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.
(4) Represents the purchase by the Sponsors and other investors of Holdings
Preferred Stock and the Warrants for an aggregate purchase price of $47.0
million, of which $1.2 million is officer notes receivable, $33.8 million
is allocated to Holdings Preferred Stock and $12.0 million is allocated to
the Warrants, which is included in Stockholders' equity (deficit).
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data of the Company
(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 Holdings' results of operations or financial position would
have been had the Recapitalization and the Empire Acquisition occurred on the
assumed dates, or to project Holdings' 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
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA ADJUSTMENTS
----------------------- -----------------------------------
EMPIRE OPERATING
HOLDINGS (1) EMPIRE (2) ACQUISITION CORP. (3) HOLDINGS PRO FORMA
------------ ---------- ----------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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) 6,170 (8) 23,662
-------- ------ ----- -------- ------- --------
Income (loss) before
income taxes......... 22,005 322 (430) (12,608) (6,170) 3,119
Provision (benefit) for
income taxes........... 1,376 -- -- 2,524 (7) (2,500)(7) 1,400
-------- ------ ----- -------- ------- --------
Net income (loss)..... $ 20,629 $ 322 $(430) $(15,132) $(3,670) $ 1,719
======== ====== ===== ======== ======= ========
</TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------
HISTORICAL OPERATING CORP. (3) HOLDINGS PRO FORMA
---------- ------------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales............... $26,486 $ -- $ -- $26,486
Cost of sales........... 18,277 -- -- 18,277
------- ------- ------- -------
Gross profit.......... 8,209 -- -- 8,209
Selling, general and ad-
ministrative expenses.. 2,980 -- -- 2,980
Goodwill amortization... 420 -- -- 420
------- ------- ------- -------
Operating income
(loss)............... 4,809 -- -- 4,809
Interest expense........ 1,047 3,325 (6) 1,496 (8) 5,868
------- ------- ------- -------
Income (loss) before
income taxes......... 3,762 (3,325) (1,496) (1,059)
Provision (benefit) for
income taxes........... -- 200 (7) 700 (7) (500)
------- ------- ------- -------
Net income (loss)..... $ 3,762 $(3,525) $ (796) $ (559)
======= ======= ======= =======
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Statements of
Operations.
28
<PAGE>
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Interest on the Senior Subordinated 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 adjust-
ment for Empire.......................... 270 --
------- ------
Adjustment to interest expense............ $12,608 $3,325
======= ======
</TABLE>
--------
(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.
(8) Represents the increase in non-cash interest expense of $6.2 million for
the year ended December 31, 1997 and $1.5 million for the three months
ended March 31, 1998 relating to the accretion of original issue discount
of the Debentures at an annual rate of 12.875%, compounded semi-annually,
and amortization of deferred financing costs of $0.2 million for the year
ended December 31, 1997 and $0.1 million for the three months ended March
31, 1998.
29
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------
HISTORICAL OPERATING CORP. HOLDINGS PRO FORMA
---------- --------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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) 1,938 (5) 7,866
------- --------- -------- ---------
Total assets........... $95,590 $ 7,326 $ 1,938 $ 104,854
======= ========= ======== =========
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 -- 735
Long term debt, net of
current maturities...... 42,260 142,052 (3) 45,105 (6) 229,417
------- --------- -------- ---------
Total liabilities...... 65,711 135,390 45,105 246,206
------- --------- -------- ---------
Redeemable Preferred
Stock................... -- -- 33,802 (7) 33,802
Stockholders' equity
(deficit)............... 29,879 (128,064)(4) (76,969)(7)(8) (175,154)
------- --------- -------- ---------
Total liabilities and
stockholders' equity
(deficit)............. $95,590 $ 7,326 $ 1,938 $ 104,854
======= ========= ======== =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet.
30
<PAGE>
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.
(5) Represents deferred financing costs of $1.9 million associated with the
Debentures.
(6) Represents the issuance of the Debentures for gross proceeds of $45.1
million.
(7) Represents the purchase by the Sponsors and other investors of Holdings
Preferred Stock and the Warrants for aggregate cash proceeds of $45.8
million and officer notes receivable of $1.2 million. Of $45.8 million in
cash proceeds, $33.8 million are allocated to Holdings Preferred Stock and
$12.0 million are allocated to the Warrants, which is included in
Stockholders' equity (deficit).
(8) Represents the net change in stockholders' equity (deficit) as a result of
the Recapitalization:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Equity Repurchase........................................... $(213,543)
Purchase by the Sponsors and other investors of the War-
rants...................................................... 11,981
Operating Corp. distribution................................ 127,401
Transaction fees and expenses............................... (2,808)
---------
Total..................................................... $ (76,969)
=========
</TABLE>
31
<PAGE>
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 Holdings
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 Holdings 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 Holdings 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 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 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.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, PRO FORMA MARCH 31, PRO FORMA
-------------------------------------------- DECEMBER 31, ---------------- MARCH 31,
1993 1994 1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- -------- ------------ ------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 23,662 952 1,047 5,868
------- ------- ------- ------- -------- -------- ------- ------- -------
Income (loss) before
provision for income
taxes................. 5,784 3,578 6,454 13,443 22,005 3,119 3,305 3,762 (1,059)
Provision (benefit) for
income taxes........... 1,827 -- 2,352 5,807 1,376 1,400 1,376 -- (500)
------- ------- ------- ------- -------- -------- ------- ------- -------
Net income (loss)...... $ 3,957 $ 3,578 $ 4,102 $ 7,636 $ 20,629 $ 1,719 $ 1,929 $ 3,762 $ (559)
======= ======= ======= ======= ======== ======== ======= ======= =======
UNAUDITED PRO FORMA
INCOME TAX DATA:
Income (loss) before
income taxes........... $ 5,784 $ 3,578 $ 6,454 $13,443 $ 22,005 $ 3,119 $ 3,305 $ 3,762 $(1,059)
Provision (benefit) for
income taxes(1)........ 2,140 1,324 2,700 5,807 9,000 1,400 1,400 1,500 (500)
------- ------- ------- ------- -------- -------- ------- ------- -------
Pro forma net income
(loss)................. $ 3,644 $ 2,254 $ 3,754 $ 7,636 $ 13,005 $ 1,719 $ 1,905 $ 2,262 $ (559)
======= ======= ======= ======= ======== ======== ======= ======= =======
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:
Interest expense(2).............................................. $ 22,817 -- -- $ 5,657
Ratio of EBITDA to interest expense.............................. 1.3 x -- -- 1.0 x
Ratio of total debt to EBITDA.................................... 7.3 x -- -- N/A
Ratio of earnings to fixed charges(5)............................ 1.1 x -- -- (6)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $16,529 $ 26,082
Total assets.............................................. 95,590 104,854
Total debt, including current maturities.................. 50,157 229,917
Stockholders' equity (deficit)............................ 29,879 (175,154)
</TABLE>
- --------
(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).
(6) Earnings were inadequate to cover fixed charges by $1.1 million.
33
<PAGE>
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.
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<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- -----------------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
allowances............. (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 Debentures 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.
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------- -----------------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
administrative
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 14.3%
===== ===== ===== ===== ====== ===== ======= ======= ======= =======
</TABLE>
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.
35
<PAGE>
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.
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.
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<PAGE>
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
<PAGE>
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 aggregate principal amount of Senior Subordinated Notes; $80.0
million of Term Loan Facilities; the Revolving Credit Facility, of which
approximately $6.4 million was used to consummate the Recapitalization; $84.0
million aggregate principal amount at maturity of Debentures, of which $45.1
million was received in gross proceeds and $47.0 million of Holdings Preferred
Stock. In April 2003, the Company will be required to redeem a certain amount of
Debentures equal to (i) $33.2 million multiplied by (ii) the quotient obtained
by dividing (x) the aggregate principal amount at maturity of Debentures then
outstanding by (y) $84.0 million, at a redemption price equal to 100% of the
principal amount of Debentures so redeemed. See "Capital Stock of Holdings and
Operating Corp." and "Description of Other Indebtedness." Commencing October 15,
2003, the Company will be required to make semi-annual cash payments of interest
on the Debentures. Holdings' ability to make the foregoing payments will depend
upon the ability of Operating Corp. to distribute funds to Holdings, which in
turn will be subject to certain restrictions contained in the Operating Corp.
Indenture and the Bank Facilities. See "Risk Factors--Risk Factors Relating to
the Debentures--Limitation on Access to Cash Flow of Subsidiaries; Holding
Company Structure."
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 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 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 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
38
<PAGE>
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.
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
<PAGE>
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.
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<PAGE>
. 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.
. 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
41
<PAGE>
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.
PRODUCTS
The following table sets forth the Company's gross sales and percentage of
total gross sales by product category.
<TABLE>
<CAPTION>
GROSS SALES PERCENTAGE OF GROSS SALES
---------------------------------------- -------------------------------------------
FISCAL YEAR THREE MONTHS FISCAL YEAR THREE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
-------------------------- ------------- ---------------------------- --------------
PRO PRO
FORMA FORMA
1995 1996 1997 1997(1) 1997 1998 1995 1996 1997 1997(1) 1997 1998
----- ----- ------ ------- ------ ------ ----- ----- ----- ------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
===== ===== ====== ====== ====== ====== ===== ===== ===== ===== ====== ======
</TABLE>
- --------
(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.
42
<PAGE>
WOODEN LIGHTS
The Company's Wooden Lights products include kitchen matches, penny matches
(smaller wooden matches), fireplace matches and fire starter products. The
Company focuses on the retail consumer market, which it believes offers higher
margins and less competition than the institutional market. The Company sells
its wooden match products primarily under the Diamond, Ohio Blue Tip and Fire
Chief names and its fire starter products under the SuperMatch and Superstart
names. Diamond Brands' Wooden Lights products are primarily sold through
grocery stores, drug stores and mass merchandisers. The Company manufactures
its Wooden Lights products at its Cloquet, Minnesota facility.
The Company believes it is the sole manufacturer of wooden matches in the
United States and that it holds the leading domestic retail market share in
the wooden match category with a market share of more than double that of its
nearest branded competitor. The Company competes in the domestic retail wooden
match market with foreign manufacturers, particularly from Sweden, Chile,
China and Korea. The wooden match market is mature, and the Company has
maintained relatively stable sales and attractive gross margins. Although the
market for penny match and kitchen match products is affected by smoking
patterns, the Company believes that its wooden match product mix makes it
somewhat less dependent on smoking patterns than manufacturers of book matches
and disposable lighters. The market for fire starter products, which are used
by consumers in both household and camping applications, is growing in the
United States, and the Company competes with First Brands, Duraflame and Pine
Mountain, each of which the Company believes has a greater market share than
that of the Company.
Diamond Brands' kitchen match products are sold primarily in 250 count boxes
in both the "strike anywhere" and "strike on box" format. Penny matches are
sold in 32 and 40 count boxes in both strike formats. The Company's fireplace
matches are imported. Retail prices for the Company's wooden matches generally
range from $0.59 to $1.99. Retail prices for the Company's fire starter
products generally range from $1.29 to $4.99.
The Company's strategy in Wooden Lights focuses on maintaining and
increasing retail shelf space. In addition, the Company plans to focus on
increasing its presence in the fire starter category by expanding consumer and
trade promotions.
CUTLERY
The Company offers a wide range of plastic cutlery and straws. The Company
focuses on the retail consumer market which it believes offers higher margins
and less competition than the institutional market. The Company significantly
expanded its Cutlery business through the Forster Acquisition in March 1995.
In 1997, Diamond Brands entered the retail plastic straw market to offer its
customers a more complete product line. The Company's Cutlery products are
sold under both the Diamond and Forster brand names. The Company is also a
major supplier of private label plastic cutlery to retailers. Diamond Brands'
Cutlery products are primarily sold through grocery stores, drug stores and
mass merchandisers. The Company manufactures its Cutlery products at its East
Wilton, Maine facility.
The retail plastic cutlery market includes four major branded participants
(Diamond Brands, OWD, Maryland Plastic and Envirodyne Inc.'s Clear Shield
division) and a sizable private label component. The Company believes that it
holds the leading domestic retail market share in the plastic cutlery category
with a market share of more than double that of its nearest branded
competitor. The Company also believes that private label sales will continue
to represent an attractive growth area. Consumer demand for convenience and
the growing popularity of prepared foods are positively impacting the
Company's Cutlery product growth.
The Company produces its plastic cutlery products in various weights (heavy
duty, full size and lightweight), colors (including holiday themes) and
packages (boxes and bags of 24, 48, 72, 100 and 288 pieces). The Company also
manufactures seasonal products for Christmas and Halloween. Heavy duty cutlery
is the Company's largest plastic cutlery product line, followed by full-size
cutlery, which is marketed as dinnerware. Servingware consists of large
plastic serving spoons and forks. Retail prices for the Company's Cutlery
products generally range from $0.59 to $1.49.
43
<PAGE>
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 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).
44
<PAGE>
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 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.
45
<PAGE>
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.
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.
46
<PAGE>
RAW MATERIALS
The primary raw materials used by Diamond Brands are generally available
from multiple suppliers, and the Company has not experienced any significant
interruption in the availability of such materials. However, the price of
polystyrene resin, the key raw material from which the Company's Cutlery
products is produced, can be volatile. The polystyrene resin used by the
Company is produced from petrochemical intermediates which are, in turn,
derived from petroleum. Polystyrene resin prices may fluctuate as a result of,
among other things, worldwide changes in natural gas and crude oil prices and
supply, as well as changes in supply and demand for polystyrene resin and
petrochemical intermediates from which it is produced. Among other industries,
the automotive and housing industries are significant users of polystyrene
resin. As a result, significant changes in worldwide capacity and demand in
these and other industries may cause significant fluctuations in the prices of
polystyrene resin. In an attempt to mitigate the impact of changing
polystyrene resin prices, the Company in January 1997 entered into a three-
year supply contract with a major supplier of polystyrene resin, under which
the Company believes it receives the lowest price available to any customer
purchasing similar volume, and receives short-term price protection during
periods of rising prices. During periods of rising prices, the Company
generally has been able to pass through the majority of the polystyrene resin
price increases to its customers on a delayed basis. During periods of
declining polystyrene resin prices, the Company generally has reduced prices
to its customers.
Other primary raw materials required by Diamond Brands in its business
include glass and metal containers, wax and fragrances to produce the
Company's Candles products, birch and maple wood to produce the Company's
Woodenware products, and aspen wood and commodity chemicals to produce the
Company's Wooden Lights products. Other major raw materials include paperboard
and corrugated cardboard.
GENERAL
TRADEMARKS
The Company owns over 30 United States trademark registrations with respect
to certain of its products. All of the Company's United States trademark
registrations can be maintained and renewed provided that the trademarks are
still in use for the goods and services covered by such registrations. The
Company regards its trademarks and tradenames as valuable assets.
EMPLOYEES
At 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.
47
<PAGE>
PROPERTIES
The following table sets forth certain information regarding the Company's
facilities:
<TABLE>
<CAPTION>
SIZE LEASE
LOCATION PRIMARY USE (SQUARE FEET) TITLE EXPIRATION
- -------- ----------- ------------- ------ -----------
<S> <C> <C> <C> <C>
Cloquet, Minnesota...... Manufacturing of matches, toothpicks 290,000 Owned --
and ice cream and corn dog sticks;
warehouse; administration
Minneapolis, Minnesota.. Sales and marketing 5,000 Leased April 2000
East Wilton, Maine...... Manufacturing of plastic cutlery and 75,000 Owned --
plastic clothespin; administration
East Wilton, Maine...... Warehouse 150,000 Owned --
East Wilton, Maine...... Printing; warehouse 240,000 Owned --
Strong, Maine........... Manufacturing of toothpicks,clothespins 62,000 Owned --
and wooden crafts
Kansas City, Kansas..... Manufacturing of candles;warehouse; 282,000 Leased July 2000(1)
administration
</TABLE>
- --------
(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.
48
<PAGE>
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 and Operating
Corp. Each director of Holdings and Operating Corp. will hold office until the
next annual meeting of stockholders or until his or her successor has been
elected and qualified. Officers of Holdings and Operating Corp. are elected by
their respective Boards of Directors and serve at the discretion of such
Boards.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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
</TABLE>
NARESH K. NAKRA
PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR
Dr. Nakra has been President, CEO and a director of Holdings and Operating
Corp. 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 and Operating Corp. 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 and Operating Corp. 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
49
<PAGE>
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").
<TABLE>
<CAPTION>
NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- --------------------------- ---- -------- -------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
Edward A. Michael....... 1997 $225,000 $118,102 -- $13,021(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 1996 -- -- -- --
Officer, Empire Candle, 1995 -- -- -- --
Inc.
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(6)
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(9)
Operations--Maine 1995 105,000 20,000 -- 7,370(10)
</TABLE>
- --------
(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
$6,087 to the profit sharing plan.
50
<PAGE>
The option grants in 1997 for the named executive officers are shown in the
following table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE
APPRECIATION
FOR OPTION TERM
---------------------------
NUMBER OF
SECURITIES EXERCISE OF
UNDERLYING OPTION BASE PRICE
NAME AND PRINCIPAL POSITION GRANTED ($/SHARE) EXPIRATION DATE 5% 10%
- --------------------------- ----------------- ----------- ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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, 2006 244,334 389,061
Vice President of
Operations--Minnesota
Thomas W. Knuesel....... 20,000 7.50 December 31, 2006 244,334 389,061
Vice President of
Finance and Chief
Finance Officer
Richard S. Campbell..... 20,000 7.50 December 31, 2006 244,334 389,061
Vice President of
Operations--Maine
</TABLE>
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.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-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
- --------------------------- --------------- -------- -------------------------- -------------------------
<S> <C> <C> <C> <C>
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
Financial Officer
Richard S. Campbell..... 0 0 6,667/13,333 72,204/144,396
Vice President of
Operations--Maine
</TABLE>
51
<PAGE>
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 also 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.
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
52
<PAGE>
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.
The Company maintains a bonus program pursuant to which each of Messrs.
Knuesel, Mathews, 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
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 pursuant to
which Seaver Kent is entitled 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 Company 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 Company
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).
53
<PAGE>
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."
54
<PAGE>
CAPITAL STOCK OF HOLDINGS AND OPERATING CORP.
GENERAL
Holdings is authorized by the terms of its Articles of Incorporation to
issue an aggregate total of 50,000,000 shares of capital stock. Holdings
currently has outstanding 1,490,650 shares of common stock and 47,000 shares
of Holdings Preferred Stock.
Operating Corp.'s Certificate of Incorporation authorizes Operating Corp. to
issue 1,000 shares of common stock, par value $.01 per share. Operating Corp.
has issued and outstanding 1,000 shares of common stock, each share is which
is entitled to one vote. Holdings owns all of the issued and outstanding stock
of Operating Corp. Holdings does not have any material assets other than the
common stock of Operating Corp.
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 Operating Corp.
Indenture, the Bank Facilities, the New Debentures offered hereby and other
documents relating to the Company'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 Operating Corp.
Indenture, the Bank Facilities, the New Debentures offered hereby and other
documents relating to the Company'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
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS TITLE OF BENEFICIAL OWNERSHIP PERCENT OF
OF BENEFICIAL OWNER CLASS (NUMBER OF SHARES) CLASS
------------------- --------------------- -------------------- ----------
<S> <C> <C> <C>
Seaver Kent-TPG
Partners, L.P.......... Holdings Common Stock 2,659,320(1) 55.75%(3)
3000 Sand Hill Road,
Suite 230
Menlo Park, California
94025
Seaver Kent I
Parallel, L.P.......... Holdings Common Stock 265,217(2) 5.56%(4)
3000 Sand Hill Road,
Suite 230
Menlo Park, California
94025
Alexander M. Seaver..... -- -- (5) --
Bradley R. Kent......... -- -- (6) --
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
Edward A. Michael....... Holdings Common Stock 97,272 2.04%
4901 Golf Share Blvd.
Suite #201
Naples, Florida 34103
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS TITLE OF BENEFICIAL OWNERSHIP PERCENT OF
OF BENEFICIAL OWNER CLASS (NUMBER OF SHARES) CLASS
------------------- --------------------- -------------------- ----------
<S> <C> <C> <C>
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
</TABLE>
- --------
(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) Includes 49.45% represented by unexercised, issuable Warrants as described
in note (1) above.
(4) Includes 4.93% represented by unexercised, issuable Warrants as described
in note (2) above.
(5) Seaver Kent TPG Partners, L.P. is an entity affiliated with Alexander M.
Seaver. Mr. Seaver disclaims beneficial ownership of all shares owned by
such entity.
(6) Seaver Kent TPG Partners, L.P. is an entity affiliated with Bradley R.
Kent. Mr. Kent disclaims beneficial ownership of all shares owned by such
entity.
SECURITY OWNERSHIP OF MANAGEMENT
<TABLE>
<CAPTION>
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
------------------------ ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
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....... 92,272 -- 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%
</TABLE>
- --------
(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.
56
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
THE BANK FACILITIES
On the closing date of the Recapitalization (the "Closing Date"), Operating
Corp. entered into the Bank Facilities among Operating Corp., 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 Operating Corp. 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 Operating Corp.'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 Operating Corp.
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:
<TABLE>
<CAPTION>
AMOUNT AMORTIZED
-----------------
FISCAL YEAR TERM A TERM B
----------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
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
======== ========
</TABLE>
SECURITY; GUARANTY
Operating Corp.'s obligations under the Bank Facilities are guaranteed by
each of its 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 Operating Corp. and
each of its existing and future direct and indirect domestic subsidiaries,
(ii) all of the capital stock of Operating Corp. and (iii) all of the capital
stock (or similar equity interests) of Operating Corp.'s existing and future
direct and indirect domestic subsidiaries.
57
<PAGE>
INTEREST; MATURITY
At Operating Corp.'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
Operating Corp. 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. Operating
Corp. 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), Operating
Corp. and its subsidiaries to dispose of assets, incur additional indebtedness,
prepay other indebtedness (including the Senior Subordinated Notes) or amend
certain debt instruments (including the Operating Corp. 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 Operating Corp. 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, Operating Corp. 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 Operating Corp., invalidity of any guarantee or
security interest and a change of control of Operating Corp. in certain
circumstances as set forth therein.
SENIOR SUBORDINATED NOTES
The Senior Subordinated Notes were issued in an aggregate principal amount
of $100.0 million and will mature on April 15, 2008. The Senior Subordinated
Notes were issued under an Indenture dated as of April 21, 1998 (the
"Operating Corp. Indenture") among Operating Corp., as issuer, each of
Operating Corp.'s direct and indirect subsidiaries (other than such
subsidiaries that do not guarantee any indebtedness of Operating Corp. or any
other subsidiary), as guarantors, and State Street Bank and Trust Company, as
trustee, and are senior subordinated unsecured obligations of Operating Corp.
The Senior Subordinated Notes will bear interest at the rate of 10 1/8% per
annum, payable semi-annually on October 15 and April 15, commencing October
15, 1998, to the holders of record on the immediately preceding October 1 and
April 1, respectively.
On or after April 15, 2003, the Senior Subordinated Notes may be redeemed at
the option of Operating Corp., in whole or in part, at any time, at the
redemption price (expressed as percentages of the principal amount) set forth
below, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date, if redeemed during the twelve-month period
commencing on April 15 in the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003...................................................... 105.063%
2004...................................................... 103.375%
2005...................................................... 101.688%
2006 and thereafter....................................... 100.000%
</TABLE>
58
<PAGE>
Notwithstanding the foregoing, at any time prior to April 15, 2001,
Operating Corp. may redeem up to 35% of the aggregate principal amount of the
Senior Subordinated 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 therein); provided that
at least 65% of the original aggregate principal amount of the Senior
Subordinated Notes remains outstanding immediately after such redemption.
In the event of a Change of Control (as defined in the Operating Corp.
Indenture), each holder of Senior Subordinated Notes has the right to require
the repurchase of such holder's Senior Subordinated Notes in cash 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 Operating Corp. Indenture contains covenants that will limit, among
other things, the ability of Operating Corp. and its Restricted Subsidiaries
(as defined therein) to: (i) pay dividends, redeem capital stock or make
certain other restricted payments or investments; (ii) incur additional
indebtedness or issue preferred equity interests; (iii) merge, consolidate or
sell all or substantially all of its assets; (iv) create liens on assets; and
(v) enter into certain transactions with affiliates or related persons. In
addition, under certain circumstances Operating Corp. will be required to make
an offer to purchase Senior Subordinated Notes at a price equal to 100% of the
principal amount thereof, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase with the proceeds of certain
Asset Sales (as defined therein). The Operating Corp. Indenture contains
certain customary events of default, which include the failure to pay interest
and principal, the failure to comply with certain covenants in the Senior
Subordinated Notes or such Operating Corp. Indenture, a default under certain
indebtedness, the imposition of certain final judgments or warrants of
attachment and certain events occurring under bankruptcy laws. See "Risk
Factors--Risk Factors Relating to the Debentures--Limitation on Access to Cash
Flow of Subsidiaries; Holding Company Structure."
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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 Debentures pursuant to a Purchase
Agreement dated as of April 15, 1998, by and among the Issuer 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 is 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 Debentures. Under the Registration Rights Agreement, the Issuer is
required to (i) use its best efforts to cause such Exchange Offer Registration
Statement to become effective within 150 days after the Closing Date, (ii) use
its best efforts to keep the Exchange Offer open for at least 20 business days
(or longer if required by applicable law), (iii) use its best efforts to
consummate the Exchange Offer on or prior to 195 days after the Closing Date 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 Debentures 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 Debentures of the same class will be issued in
exchange for an equal principal amount at maturity of outstanding Old Debentures
accepted in the Exchange Offer. Old Debentures may be tendered only in integral
multiples of $1,000 of principal amount at maturity. 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 at maturity of Old Debentures being tendered in exchange. However, the
obligation to accept Old Debentures for exchange pursuant to the Exchange Offer
is subject to certain conditions as set forth herein under "--Conditions."
Old Debentures 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 Debentures for the purposes of receiving the New Debentures and
delivering New Debentures 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 believes that the New Debentures 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
Debentures 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
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 a distribution of such New Debentures. By tendering the Old
Debentures in exchange for New Debentures, each holder, other than a
Participating Broker-Dealer, will represent to the Issuer 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 Debentures acquired for its own
account directly from the Issuer; (iii) any New Debentures to be received by
it
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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
Debentures and has no arrangement or understanding to participate in a
distribution of the New Debentures. If a holder of New 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. Each
Participating Broker-Dealer that receives New Debentures 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 Debentures. 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 Debentures
received in exchange for Old Debentures where such Old Debentures were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that it 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 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 Debentures 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 Debentures
acquired directly from the Issuer or one of its affiliates, then the Issuer 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 its 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 will use its 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 (as defined below) 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 Debenture, until the earliest to occur of (a) the
date on which such Old Debenture 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
Debenture has been disposed of in accordance with a Shelf Registration
Statement, (c) the date on which such Old Debenture 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 Debenture 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
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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 has agreed 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 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 Debentures 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 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 Debentures who do not exchange their Old Debentures for New
Debentures in the Exchange Offer will no longer be entitled to registration
rights and will not be able to offer or sell their Old Debentures, unless such
Old Debentures 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 Debentures--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 Debentures 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 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 herein under "--Conditions" has occurred and has not 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
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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.
YIELD AND INTEREST ON THE NEW DEBENTURES
12 7/8% (computed on a semi-annual bond equivalent basis) calculated from
April 21, 1998. The New Debentures will accrete at a rate of 12 7/8%, compounded
semi-annually, to an aggregate principal amount at maturity of $84.0 million by
April 15, 2003. Cash interest will not accrue on the New Debentures prior to
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 each October 15 and April 15 commencing October 15, 2003.
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 Debentures 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 Debentures, 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 DEBENTURES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS OF OLD
DEBENTURES. 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 DEBENTURES 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 Debentures 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 Debentures 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 Debentures may tender such Old Debentures in the
Exchange Offer. The term "holder" with respect to the Exchange Offer means any
person in whose name Old Debentures 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 Debentures 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 Debentures, either
make appropriate arrangements to register ownership of the Old Debentures 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 Debentures tendered pursuant thereto are tendered (i) by a registered
holder who has
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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.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Debentures listed therein, such Old Debentures must be
endorsed or accompanied by bond powers and a proxy which authorizes such
person to tender the Old Debentures on behalf of the registered holder, in
each case as the name of the registered holder or holders appears on the Old
Debentures.
If the Letter of Transmittal or any Old Debentures 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 Debentures 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
Debentures not properly tendered or any Old Debentures 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 Debentures. 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
Debentures must be cured within such time as the Issuer will determine.
Neither the Issuer, 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 Debentures, nor will any of them incur any liability for failure to
give such notification. Tenders of Old Debentures will not be deemed to have
been made until such irregularities have been cured or waived. Any Old
Debentures 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 Debentures, 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
Debentures 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 Debentures 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 DEBENTURES FOR EXCHANGE; DELIVERY OF NEW DEBENTURES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
all Old Debentures properly tendered will be accepted, promptly after the
Expiration Date, and the New Debentures will be issued promptly after
acceptance of the Old Debentures. See "--Conditions" below. For purposes of
the Exchange Offer, Old Debentures 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 Debentures for Old Debentures 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 Debentures
or a timely Book-Entry Confirmation of such Old Debentures 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 Debentures are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Old Debentures are submitted for a
greater principal amount than the holder desires to exchange, such unaccepted
or nonexchanged Old Debentures will be returned without expense to the
tendering holder thereof (or, in the case of Old Debentures tendered by book-
entry transfer procedures described below, such nonexchanged Old Debentures
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.
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BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Debentures 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 Debentures by causing
the Book-Entry Transfer Facility to transfer such Old Debentures 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 Debentures 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 Debentures desires to tender such Old
Debentures, and the Old Debentures are not immediately available, or time will
not permit such holder's Old Debentures 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
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, 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 Debentures, 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 Debentures 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 Debentures to be withdrawn, identify the Old
Debentures to be withdrawn (including the principal amount of such Old
Debentures) and (where certificates for Old Debentures have been transmitted)
specify the name in which such Old Debentures are registered, if different
from that of the withdrawing holder. If certificates for Old Debentures 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 Debentures 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
Debentures 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 Debentures so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Debentures which have been tendered for exchange but
which are not exchanged for
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any reason will be returned to the holder thereof without cost to such holder
(or, in the case of Old Debentures tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Debentures will be
credited to an account maintained with such Book-Entry Transfer Facility for
the Old Debentures) as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Old Debentures
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 Debentures will not
be required to be accepted for exchange, nor will New Debentures be issued in
exchange for any Old Debentures, and the Issuer may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Old Debentures,
if because of any change in law, or applicable interpretations thereof by the
Commission, the Issuer determines that it is not permitted to effect the
Exchange Offer. The Issuer has no obligation to, and will not knowingly, permit
acceptance of tenders of Old Debentures from affiliates (within the meaning of
Rule 405 under the Securities Act) of the Issuer 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
Debentures to be received by such holder or holders of Old Debentures 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 Attention: Corporate Trust
Department 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
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services and will reimburse the Exchange Agent for its reasonable out-of-
pocket expenses in connection 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 Debentures, 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 Debentures pursuant to the Exchange Offer. If, however, certificates
representing New Debentures or Old Debentures 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 New the Old Debentures tendered, or if tendered Old Debentures 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 Debentures 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.
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DESCRIPTION OF THE NEW DEBENTURES
GENERAL
The Old Debentures were issued, and the New Debentures offered hereby will
be issued pursuant to an Indenture (the "Indenture") dated as of April 21,
1998 between the Issuer and State Street Bank and Trust Company, as trustee
(the "Trustee")." The terms of the New Debentures 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
Debentures will be subject to all such terms, and prospective holders of New
Debentures 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 Debentures will be general unsecured obligations of the Issuer and
will be pari passu in right of payment to all current and future
unsubordinated Indebtedness of the Issuer and senior in right of payment to
all subordinated Indebtedness of the Issuer. The operations of the Issuer are
conducted entirely through its Subsidiaries and, therefore, the Issuer is
substantially dependent upon the cash flow of its Subsidiaries to meet its
obligations, including its obligations under the New Debentures. See "Risk
Factors--Risk Factors Relating to the Debentures--Limitation on Access to Cash
Flow of Subsidiaries; Holding Company Structure." The Bank Facilities and the
Senior Subordinated Notes will restrict Operating Corp. from paying any
dividends or making any other distributions to the Issuer. The ability of
Operating Corp. to comply with the conditions in the Senior Subordinated Notes
may be affected by certain events that are beyond the Issuer's control. The
New Debentures will be effectively subordinated to all Indebtedness and other
liabilities (including, without limitation, to Operating Corp.'s obligations
under the Bank Facilities and the Senior Subordinated Notes). Any right of the
Issuer to receive assets of any of its Subsidiaries upon such Subsidiary's
liquidation or reorganization (and the consequent right of holders of the
Senior Subordinated Notes to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors except to the extent
that the Issuer itself is recognized as a creditor of such Subsidiary, in
which case the claims of the Issuer would still be subordinate to the claims
of such creditors who hold security in the assets of such Subsidiary and to
the claims of such creditors who hold Indebtedness of such Subsidiary senior
to that held by the Issuer. As of March 31, 1998, on a pro forma basis giving
effect to the Recapitalization, the Issuer would have had Indebtedness of
approximately $45.1 million (all of which would have been attributable to the
Old Debentures) and the Company's Subsidiaries would have had outstanding
approximately $229.9 million of Indebtedness, including $184.8 million of
Indebtedness under the Senior Subordinated Notes and the Bank Facilities. The
Indenture will permit the incurrence of certain additional Indebtedness of the
Issuer and the Issuer's Subsidiaries in the future. See "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock."
As of the Issue Date, all of the Issuer's subsidiaries will be 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.
PRINCIPAL, MATURITY AND INTEREST
New Debentures in an aggregate principal amount at maturity of up to $84.0
million will be issued in the Exchange Offer. The New Debentures will mature
on April 15, 2009. The Debentures will be issued at a substantial discount
from their aggregate principal amount at maturity. Until April 15, 2003, no
cash interest will accrue or be payable on the New Debentures, but the
Accreted Value will increase (representing amortization of original issue
discount) between the date of original issuance and April 15, 2003, on a semi-
annual bond equivalent basis using a 360-day year comprised of twelve 30-day
months, such that the Accreted Value shall be equal to the full principal
amount at maturity of the New Debentures on April 15, 2003. Beginning on April
15,
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2003, interest on the New Debentures will accrue at the rate of 12 7/8% per
annum and will be payable semi-annually in arrears on October 15 and April 15,
commencing October 15, 2003, to holders of record on the immediately preceding
October 1 and April 1, respectively. Interest on the New Debentures will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from April 15, 2003. 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 Debentures
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 New Debentures at their respective addresses set
forth in the register of holders of New Debentures; provided that all payments
of principal, premium, interest and Liquidated Damages with respect to New
Debentures represented by one or more permanent global debentures ("Global
Debentures") 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
Debentures will be issued in denominations of $1,000 of principal amount at
maturity and integral multiples thereof.
OPTIONAL REDEMPTION
Except as described below, the New Debentures will not be redeemable at the
Issuer's option prior to April 15, 2003. Thereafter, the New Debentures 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:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003...................................................... 106.438%
2004...................................................... 104.292%
2005...................................................... 102.146%
2006 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to April 15, 2001, the
Issuer may (but shall not have the obligation to) redeem, on one or more
occasions, up to an aggregate of 35% of the principal amount at maturity of New
Debentures originally issued at a redemption price equal to 112.875% of the
Accreted Value thereof plus 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% of the aggregate principal amount at maturity of the
New Debentures originally issued remains outstanding immediately after the
occurrence of such redemption; and provided further, that such redemption will
occur within 90 days of the date of the closing of such Equity Offering.
MANDATORY REDEMPTION
Except as described herein, the Issuer may not redeem the New Debentures prior
to April 15, 2003. On April 15, 2003, the Issuer will be required to redeem New
Debentures with an aggregate principal amount at maturity equal to (i) $33.2
million multiplied by (ii) the quotient obtained (other than New Debentures then
held by the Issuer or its Subsidiaries or entities with respect to which the
Issuer is a direct or indirect subsidiary) by dividing (x) the aggregate
principal amount at maturity of New Debentures then outstanding by (y) $84.0
million, at a redemption price equal to 100% of the principal amount at maturity
of the New Debentures so redeemed. The Operating Corp. Indenture, the Bank
Facilities and the Senior Subordinated Notes restrict Operating Corp. from
paying any dividends or making any other distributions to the Issuer. If the
Issuer is unable to obtain dividends from Operating Corp. sufficient to permit
the Mandatory Debenture Redemption, the Issuer will likely not have the
financial resources to consummate the Mandatory Debenture Redemption. In any
event, there can be no assurance that the Issuer's Subsidiaries will have the
resources available to pay any such dividend or make any such distribution. The
Issuer's failure to consummate the Mandatory Debenture Redemption when required
would constitute an Event
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of Default under the Indenture. See "Risk Factors--Risk Factors Relating to
the Company--Substantial Leverage; Liquidity; Stockholders' Deficit" and "--
Risk Factors Relating to the Debentures--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of New Debentures will
have the right to require the Issuer to repurchase all or any part (equal to the
principal amount at maturity of $1,000 or an integral multiple thereof) of such
holder's New Debentures 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 at maturity thereof plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of purchase or, in the case of
repurchases of New Debentures prior to April 15, 2003, at a purchase price equal
to 101% of the Accreted Value thereof as of the date of repurchase (the "Change
of Control Payment"). Within 65 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 Debentures
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 New Debentures 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 Debentures 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 New
Debentures or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the New Debentures so accepted together with an
Officers' Certificate stating the aggregate principal amount of New Debentures
or portions thereof being purchased by the Issuer. The Paying Agent will
promptly mail to each holder of New Debentures so tendered the Change of
Control Payment for such New Debentures, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each
holder a new New Debenture equal in principal amount to any unpurchased
portion of the New Debentures surrendered, if any; provided that each such New
Debenture will be in a principal amount at maturity of $1,000 or an integral
multiple thereof. 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 the holders of New Debentures to require that
the Issuer repurchase or redeem the New Debentures in the event of a takeover,
recapitalization or similar transaction.
The Operating Corp. Indenture, the Bank Facilities and the Senior Subordinated
Notes restrict Operating Corp. from paying any dividends or making any other
distributions to the Issuer. If the Issuer is unable to obtain dividends from
Operating Corp. sufficient to permit the repurchase of the New Debentures or
does not refinance such Indebtedness, the Issuer will likely not have the
financial resources to repurchase the New Debentures. In any event, there can be
no assurance that the Issuer's Subsidiaries will have the resources available to
pay any such dividend or make any such distribution. Prior to complying with the
provisions of the preceding paragraphs, but in any event within 90 days
following a Change of Control, the Issuer will either repay all outstanding
Indebtedness of its Subsidiaries or obtain the requisite consents, if any, under
the Bank Facilities and the Senior Subordinated Notes to permit the repurchase
of the New Debentures required by this covenant. See "Risk Factors--Risk Factors
Relating to
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the Company--Substantial Leverage; Liquidity; Stockholders' Deficit" and "--
Risk Factors Relating to the Debentures--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
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 Debentures 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 Debentures to
require the Issuer to repurchase such New Debentures 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 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 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
Debentures) 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 395 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 Indebtedness of a Restricted Subsidiary of the Issuer, 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) to 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) to 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 Indebtedness of a Restricted
Subsidiary of the Issuer 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 Debentures 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 purchase the maximum principal amount at maturity of
Debentures 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 at maturity thereof plus accrued and unpaid interest and
Liquidated Damages thereon, if any, to the date of purchase (or, in the case of
repurchases of Debentures prior to April 15, 2003, at a purchase price equal to
100% of the Accreted Value thereof plus Liquidated Damages, as of the date of
repurchase), in accordance with the procedures set forth in the Indenture or
such Pari Passu Indebtedness, as
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applicable. To the extent any Excess Proceeds remain after consummation of 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 at
maturity (or Accreted Value, as the case may be) of New Debentures and any
such Pari Passu Indebtedness surrendered by holders thereof exceeds the amount
of Excess Proceeds, the Trustee shall select the New Debentures 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.
The Operating Corp. Indenture, the Bank Facilities and the Senior Subordinated
Notes restrict Operating Corp. from paying any dividends or making any other
distributions to the Issuer. If the Issuer is unable to obtain dividends from
Operating Corp. sufficient to permit the repurchase of the New Debentures or
does not refinance such Indebtedness, the Issuer will likely not have the
financial resources to purchase New Debentures. In any event, there can be no
assurance that the Issuer's Subsidiaries will have the resources available to
pay any such dividend or make any such distribution. The Issuer's failure to
make an Asset Sale Offer when required or to purchase tendered New Debentures
when tendered would constitute an Event of Default under the Indenture. See
"Risk Factors--Risk Factors Relating to the Company--Substantial Leverage;
Liquidity; Stockholders' Deficit" and "--Risk Factors Relating to the
Debentures--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure."
SELECTION AND NOTICE
If less than all of the New Debentures are to be redeemed or repurchased in
an offer to purchase at any time, selection of New Debentures 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
Debentures are listed, or, if the New Debentures 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 Debentures redeemed pursuant to the Mandatory
Debenture Redemption, purchased pursuant to an Asset Sale Offer or redeemed
with the proceeds of an Equity Offering shall be selected on a pro rata basis;
provided further that, except for New Debentures redeemed pursuant to the
Mandatory Debenture Redemption, no New Debentures of $1,000 of principal
amount at maturity or less shall be redeemed or repurchased in part. Notices
of redemption may not be conditional. Notices of redemption or repurchase must
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 Debentures to be
redeemed or repurchased at its registered address. If any New Debenture is to
be redeemed or repurchased in part only, the notice of redemption or
repurchase that relates to such New Debenture must state the portion of the
principal amount thereof to be redeemed or repurchased. A new New Debenture 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 Debenture. On and after the redemption or repurchase date, interest and
Liquidated Damages will cease to accrue on New Debentures 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 in connection
with any merger or consolidation involving the Issuer or any Restricted
Subsidiary), 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 Debentures, except a
payment of interest or a
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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 has occurred and is 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 Payments
permitted by clauses (ii), (iii), (iv) and (vi) 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
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
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 Issuer 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 Issuer, or
any Restricted Subsidiary of the Issuer, held by any member of the Issuer's
(or any of its Restricted 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 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 Issuer from any reissuance of
Equity Interests by the Issuer to members of management of the Issuer and its
Subsidiaries (provided that the cash proceeds referred to in this clause (B)
shall be excluded from clause (c)(ii)
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of the preceding paragraph); (vi) distributions made by the Issuer on the date
of the Indenture, the proceeds of which are utilized solely to consummate the
Recapitalization; and (vii) 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 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."
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) 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 Issuer 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 Issuer 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 exceeds $10.0
million. Not later than the date of making any Restricted Payment, the Issuer
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 the covenant described under "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 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) and that the Issuer will not issue any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue any shares of preferred stock; provided, however, that the Issuer or any
of its Restricted Subsidiaries 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 1.75 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 Indenture also provides that the Issuer will not incur any Indebtedness
that is contractually subordinated in right of payment to any other
Indebtedness of the Issuer unless such Indebtedness is also contractually
subordinated in right of payment to the Debentures on substantially identical
terms; provided, however, that no Indebtedness of the Issuer shall be deemed
to be contractually subordinated in right of payment to any other Indebtedness
of the Issuer solely by virtue of being unsecured.
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) Indebtedness of the Issuer and its Restricted Subsidiaries under
Credit Facilities; provided that the aggregate principal amount of all
Indebtedness (with letters of credit being deemed to have a principal
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amount equal to the maximum potential liability of the Issuer and its
Restricted Subsidiaries 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 of Indebtedness represented by the
Debentures and the incurrence by Operating Corp. and its Subsidiaries of
Indebtedness represented by the Senior Subordinated Notes and any guarantee
thereof;
(iii) the incurrence by the Issuer or any of its Restricted Subsidiaries
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 Restricted Subsidiary, 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 Debentures 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 its Restricted Subsidiaries
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 Restricted Subsidiary 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 any Restricted Subsidiary of the Issuer of
Indebtedness of any Restricted Subsidiary of the Issuer 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;
(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
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(xiii) the incurrence by the Issuer or any Restricted Subsidiary 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 $20.0 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 Debentures, the New Debentures 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 Debentures) and (y) in all other cases, the New Debentures
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, or (iii) 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 and the Senior Subordinated Notes, 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 or the Senior Subordinated Notes, as
the case may be, as in effect on the date of the Indenture, (b) the Indenture
and the Debentures, (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, 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 (iii) 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.
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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 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 Issuer) or the Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made assumes all the obligations of the Issuer under the New
Debentures 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 shall have been
made 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, shall 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 the Issuer
created for the purpose of holding the Capital Stock of the Issuer, (b) a
merger between the Issuer and a Wholly Owned Restricted Subsidiary of the
Issuer or (c) a merger between the Issuer and an Affiliate incorporated solely
for the purpose of reincorporating the Issuer in another State of the United
States so long as, in the case of each of clause (a), (b) and (c), 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 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 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,"
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(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.
BUSINESS ACTIVITIES
The Issuer will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any New Debentures are outstanding,
the Issuer will furnish to holders of New Debentures (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 has agreed
that, for so long as any New Debentures 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 ("Event of Default"): (i) default for 30 days in the payment when due
of interest on, or Liquidated Damages with respect to, the New Debentures;
(ii) default in payment when due, upon redemption or otherwise, of the
principal of or premium, if any, on the New Debentures; (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 Debentures
then outstanding to comply with the provisions described under the captions
"--Repurchase at the Option of Holders--Change of Control" or "--Asset Sales"
or "--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 Debentures then outstanding to
comply with any of its other agreements in the Indenture or the New
Debentures; (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
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judgments aggregating in excess of $10.0 million (net of any amounts with
respect to which a reputable and creditworthy insurance company has
acknowledged liabilities in writing), which judgments are not paid, discharged
or stayed for a period of 60 days; and (vii) certain events of bankruptcy or
insolvency with respect to the Issuer or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or holders of
at least 25% in principal amount of the then outstanding New Debentures may
declare all the New Debentures 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 Debentures will become due and
payable without further action or notice. Upon any acceleration of maturity of
the New Debentures, all principal of and accrued interest and Liquidated
Damages, if any, on (if on or after April 15, 2003) or Accreted Value of and
Liquidated Damages, if any, on (if prior to April 15, 2003) the New Debentures
shall be due and payable immediately. Holders of the New Debentures may not
enforce the Indenture or the New Debentures except as provided in the
Indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding New Debentures may direct the Trustee in its
exercise of any trust or power. The Trustee may withhold from holders of the
New Debentures 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 Debentures 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 Debentures 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 Debentures 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 Debentures that becomes due solely because of the acceleration of the New
Debentures, have been cured or waived.
Holders of a majority in aggregate principal amount of the New Debentures
then outstanding by notice to the Trustee may on behalf of holders of all New
Debentures 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 Debentures.
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, shall have any liability for any obligations of the Issuer under the
New Debentures or the Indenture or for any claim based on, in respect of, or
by reason of, such obligations or their creation. Each holder of New
Debentures by accepting a New Debenture waives and releases all such
liability. The waiver and release are part of the consideration for issuance
of the New Debentures. 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 discharged with respect to the outstanding New Debentures ("Legal
Defeasance") except for (i) the rights of holders of outstanding New
Debentures to receive payments in respect of the principal of, premium, if
any, and interest and Liquidated Damages on such New Debentures when such
payments are due from the trust referred to below, (ii) the Issuer's
obligations with respect to the New Debentures concerning issuing temporary
New Debentures, registration of New Debentures, mutilated, destroyed, lost or
stolen New Debentures and the maintenance of an office or agency
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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 Debentures. 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 Debentures.
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 the New Debentures, 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 amount at maturity of or Accreted Value (as
applicable) of, premium, if any, and interest and Liquidated Damages on the
outstanding New Debentures on the stated maturity or on the applicable
redemption date, as the case may be, and the Issuer must specify whether the
New Debentures 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 Debentures 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 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, holders of the outstanding New Debentures 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 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; (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
exclusions 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 Debentures 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 Debentures 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 Debentures selected for redemption. Also,
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the Issuer is not required to transfer or exchange any New Debentures for a
period of 15 days before a selection of Debentures to be redeemed.
The registered holder of a New Debenture 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 or
the New Debentures may be amended or supplemented with the consent of holders
of at least a majority in principal amount at maturity of the New Debentures
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, New
Debentures), and any existing default or compliance with any provision of the
Indenture or the New Debentures may be waived with the consent of holders of a
majority in principal amount of the then outstanding New Debentures (including
consents obtained in connection with a purchase of, or tender offer or
exchange offer for, New Debentures).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any New Debentures held by a non-consenting holder): (i)
reduce the principal amount of New Debentures whose holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any New Debentures or alter the provisions with respect to
the redemption of the New Debentures (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders") or amend or modify the calculation of the Accreted Value so as to
reduce the amount of the Accreted Value of the New Debentures, (iii) reduce
the rate of or change the time for payment of interest on any New Debenture,
(iv) waive a Default or Event of Default in the payment of principal of or
premium, if any, or interest on the New Debentures (except a rescission of
acceleration of the New Debentures by the holders of at least a majority in
aggregate principal amount at maturity of the New Debentures and a waiver of
the payment default that resulted from such acceleration), (v) make any New
Debenture payable in money other than that stated in the New Debentures, (vi)
make any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of holders of New Debentures to receive payments of
principal of or premium, if any, or interest on the New Debentures, (vii)
waive a redemption payment with respect to any New Debenture (other than a
payment required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), or (viii) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of New
Debentures, the Issuer and the Trustee may amend or supplement the Indenture
or the New Debentures to cure any ambiguity, defect or inconsistency, to
provide for uncertificated New Debentures in addition to or in place of
certificated New Debentures, to provide for the assumption of the Issuer's
obligations to holders of New Debentures in the case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to holders of New Debentures 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.
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 at maturity of the then
outstanding New Debentures 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 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
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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 Debentures,
unless such holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
The Old Debentures were offered and sold to qualified institutional buyers
in reliance on Rule 144A. New Debentures will be issued in registered, global
form in minimum denominations of $1,000 principle amount at maturity and
integral multiples of $1,000 in excess thereof.
The Global Debentures will be deposited upon issuance with the Trustee as
custodian for DTC, in New York, New York, and registered in the name of DTC or
its nominee, in each case for credit to an account of a direct or indirect
participant in DTC as described below.
Except as set forth below, the Global Debentures 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 Debentures may not be
exchanged for New Debentures in certificated form except in the limited
circumstances described below. See "--Exchange of Book-Entry Debentures for
Certificated Debentures."
In addition, transfer of beneficial interests in the Global Debentures 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 with respect
to the New Debentures. The New Debentures 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 company
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 Debentures, DTC will credit the accounts of
Participants tendering Old Debentures with portions of the applicable Global
Debentures and (ii) ownership of such interests in the Global Debentures 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 Debentures).
Investors in the Global Debentures 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 or CEDEL will hold interests in the Global Debentures 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, will hold such interests in the Global
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Debentures in customers' securities accounts in the depositaries' names on the
books of DTC. All interests in a Global Debenture, 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 Debenture 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 Debenture to pledge such interests to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such interests, may be affected by the lack of a
physical certificate evidencing such interests. For certain other restrictions
on the transferability of the New Debentures, see "--Exchange of Book-Entry
Debentures for Certificated Debentures" and "--Exchange of Certificated
Debentures for Book-Entry Debentures."
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL DEBENTURES WILL
NOT HAVE NEW DEBENTURES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF NEW DEBENTURES 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, premium, if any, interest and
Liquidated Damages, if any, on a Global Debenture 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
Debentures, including the Global Debentures, 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 nor 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 Debentures, 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 Debentures 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 Debentures
(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
Debentures 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
Debentures, 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, interests
in the Global Debentures 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
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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 Debentures 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 Global Debentures 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 Debenture 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 a holder of New Debentures only at the direction of one or more
Participants to whose account with DTC interests in the Global Debentures are
credited and only in respect of such portion of the aggregate principal amount
of the New Debentures as to which such Participant or Participants has or have
given such direction. However, if there is an Event of Default under the New
Debentures, DTC reserves the right to exchange the Global Debentures for
legended New Debentures in certificated form, and to distribute such New
Debentures 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 Debentures 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 DEBENTURES FOR CERTIFICATED DEBENTURES
A Global Debenture is exchangeable for definitive New Debentures in
registered certificated form if (i) DTC (x) notifies the Issuer that it is
unwilling or unable to continue as depositary for the Global Debentures 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 Debentures in certificated form or (iii) there shall have
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
Debentures. In addition, beneficial interests in a Global Debenture may be
exchanged for certificated New Debentures 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
Debentures delivered in exchange for any Global Debenture 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 Debentures
represented by the Global Debentures (including principal, premium, if any,
and interest and Liquidated Damages, if any) be made by wire
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transfer of immediately available funds to the accounts specified by the
Global Debenture holder. With respect to New Debentures 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 Debentures represented by the Global Debentures 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 Debentures will, therefore, be required by the Depositary
to be settled in immediately available funds. The Issuer expects that
secondary trading in any certificated New Debentures will also be settled in
immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
CEDEL participant purchasing an interest in a Global Debenture 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 Debenture 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 Debentures. Upon the
effectiveness of the Exchange Offer Registration Statement, the Issuer will
offer to holders of Transfer Restricted Securities pursuant to the Exchange
Offer who are able to make certain representations the opportunity to exchange
their Transfer Restricted Securities for New Debentures. 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 Debentures 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 Debentures 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 Debentures by 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.
The Registration Rights Agreement will provide 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 Debentures in exchange for all Debentures tendered
prior thereto in the Exchange Offer and
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(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
"Registration Default"), then the Issuer will pay Liquidated Damages to each
holder of Debentures, 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 at maturity of Debentures held by such Holder.
The amount of the Liquidated Damages will increase by an additional $0.05 per
week per $1,000 principal amount at maturity of Debentures 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 at maturity of Debentures. All accrued Liquidated Damages will be paid by
the Issuer to the Global Debenture holder by wire transfer of immediately
available funds or by federal funds check and to holders of Certificated
Debentures 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 Debentures 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 Debentures
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.
"Accreted Value" means, as of any date of determination prior to April 15,
2003, with respect to any Debenture, the sum of (a) the initial offering price
(which shall be calculated by discounting the aggregate principal amount at
maturity of such Debenture at a rate of 12 7/8% per annum, compounded semi-
annually on each October 15 and April 15 from April 15, 2003 to the date of
issuance) of such Debenture and (b) the portion of the excess of the principal
amount of such Debenture over such initial offering price which shall have
been accreted thereon through such date, such amount to be so accreted on a
daily basis at a rate of 12 7/8% per annum of the initial offering price of
such Debenture, compounded semi-annually on each October 15 and April 15 from
the date of issuance of the Debentures through the date of determination,
computed on the basis of a 360-day year of twelve 30-day months.
"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.
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"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
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 "--
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 Operating Corp., 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 whole or in part
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
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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 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) 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.
"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,
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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 Person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded, and
(iii) 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 Issuer or any holding company of the Issuer 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.
"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 Debentures 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, 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).
"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
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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 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 included in the interest expense of such
Person 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 Issuer, 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 (ii) 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
Issuer to 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.
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"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.
"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.
"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 Debentures 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
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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 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 Debentures.
"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 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 on assets of Restricted Subsidiaries securing Indebtedness of Restricted
Subsidiaries permitted to be incurred under the Indenture; (iii) Liens
securing the Debentures; (iv) Liens securing the Issuer's obligations under
the Bank Facilities; (v) Liens of the Issuer or a Wholly Owned Restricted
Subsidiary on assets of any Restricted Subsidiary of the Issuer; (vi) 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 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 Issuer or any of its Restricted Subsidiaries not securing the
Indebtedness so refinanced; (vii) 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
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shall have set aside on its books such reserves as may be required pursuant to
GAAP; (viii) 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; (ix) 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); (x) 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; (xi) 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; (xii) 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; (xiii) 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; (xiv) 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; (xv) 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; (xvi) 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; (xvii) Liens securing Hedging Obligations which Hedging Obligations
relate to Indebtedness that is otherwise permitted under the Indenture;
(xviii) 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 (xix) 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 "--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
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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 Debentures, 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 Debentures on terms at least as favorable to the
holders of Debentures 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 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.
"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.
"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.
"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).
"Unrestricted Subsidiary" means any Subsidiary (other than the Subsidiaries
of the Issuer 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
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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, and (ii) no Default or Event of Default would exist following such
designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
95
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain United States federal income
tax considerations of the ownership and disposition of the New Debentures and
the exchange of Old Debentures for New Debentures that may be relevant to a
holder of an Old Debenture or New Debenture. 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 Debentures at
original issuance and will hold New Debentures 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 Debentures 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 Debenture 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 Debentures. The term "United States person" means a holder of a New
Debenture 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 DEBENTURES FOR NEW DEBENTURES
The exchange of Old Debentures for New Debentures (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 Debentures for New Debentures.
A tendering holder's tax basis in the New Debentures will be the same as such
holder's tax basis in its Old Debentures. A tendering holder's holding period
for the New Debentures received pursuant to the Exchange Offer will include
its holding period for the Old Debentures surrendered therefor. For purposes
of original issue discount, the issue price of the New Debentures will be the
same as the issue price of the Old Debentures surrendered therefor, and the
adjusted issue price of the New Debentures on the day of the Exchange will be
the same as the adjusted issue price of the Old Debentures for which they are
exchanged on that day.
ALL HOLDERS OF OLD DEBENTURES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE OF OLD DEBENTURES FOR NEW DEBENTURES AND OF THE OWNERSHIP AND
DISPOSITION OF NEW DEBENTURES RECEIVED IN THE EXCHANGE OFFER IN VIEW OF THEIR
OWN PARTICULAR CIRCUMSTANCES.
UNITED STATES HOLDERS
ORIGINAL ISSUE DISCOUNT
For purposes of the following discussion, it is assumed that the New
Debentures will constitute debt for federal income tax purposes. The New
Debentures will be issued with original issue discount for federal income tax
purposes. Accordingly, each holder of New Debentures generally will be
required to include original issue discount in income as it accrues under a
constant yield method in advance of cash payments attributable to such income
(regardless of whether the holder is a cash or accrual basis taxpayer). The
amount of original issue discount with respect to a New Debenture will be the
excess of the stated redemption price at maturity of such New Debenture over
its issue price. The issue price of a New Debenture will be equal to the issue
price of an Old Debenture. The stated redemption price at maturity will
include all cash payments required to be made on the Old Debentures and New
Debentures whether denominated as principal or interest.
96
<PAGE>
Holdings will report annually to the Internal Revenue Service ("IRS") and to
record holders of the New Debentures information with respect to original
issue discount accruing during the calendar year.
Each United States holder of a New Debenture will be required to include in
gross income an amount equal to the sum of the daily portions of original
issue discount for each day during a taxable year in which the New Debenture
is held without regard to when the cash or other payments attributable to such
income are received. The daily portions of original issue discount will be
determined by allocating the pro rata portion of the original issue discount
that is allocable to the accrual period to each day in an accrual period. The
amount of original issue discount that is allocable to an accrual period is
generally equal to the product of the adjusted issue price of the New
Debentures at the beginning of the accrual period (the adjusted issue price of
the New Debentures determined as described above, generally increased by all
prior accruals of original issue discount and reduced by any cash payments on
the New Debentures) and the yield-to-maturity of the New Debentures (the
discount rate, which, when applied to all payments under the Old Debentures
and New Debentures, results in a present value equal to the issue price of the
Old Debentures). In the case of the final accrual period, the allocable
original issue discount is the difference between the amount payable at
maturity and the adjusted issue price at the beginning of the accrual period.
Each payment made under a New Debenture will be treated first as a payment of
any accrued original issue discount that has not been allocated to prior
payments and second as a payment of principal (which is not includable in
income).
Holdings does not intend to treat the possibility of an optional redemption
of the New Debentures as giving rise to any additional accrual of original
issue discount or recognition of ordinary income upon redemption, sale or
exchange of a New Debenture.
Generally, any sale, redemption or other taxable disposition of a New
Debenture by a United States holder will result in taxable gain or loss equal to
the difference between: (i) the sum of the amount of cash and the fair market
value of other property received with respect to such taxable sale, redemption
or other distribution and (ii) the United States holder's adjusted tax basis in
the New Debenture. A United States holder's adjusted tax basis for such New
Debenture will equal the tax basis of such New Debenture on the day it is
received in the Exchange, increased by any accrued original issue discount
includable in such United States holder's gross income and decreased by any cash
payments received by such United States holder with respect to the New Debenture
regardless of whether such payments are denominated as principal or interest.
Any gain or loss upon a sale or other disposition of a New Debenture will
generally be capital gain or loss, which will be long term if the holding period
for the New Debenture 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 Debentures 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.
LIQUIDATED DAMAGES
Any Liquidated Damages (described above under "Description of the New
Debentures--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 accounting for tax purposes.
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 on,
or proceeds from a disposition of, a New Debenture, 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 federal
income tax liability, provided that the required information is furnished to
the IRS.
97
<PAGE>
NON-UNITED STATES HOLDERS
Under current United States federal income tax law: (i) a payment of
interest (including original issue discount) 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 taxation, 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 taxation on gain realized on the disposition of a
New Debenture. 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 Debenture generally will be subject to the
same rules to which a United States holder is subject with respect to the
accrual of interest (including original issue discount) on a New Debenture and
with respect to gain or loss realized or recognized on the disposition of a
New Debenture. 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 Debenture 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
U.S. information reporting requirements and backup withholding tax will not
apply to payments on, or proceeds from the disposition of, a New Debenture 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.
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 Debenture. Prospective investors
should consult their tax advisors regarding the effect, if any, of such new
Treasury Regulations on an investment in the New Debentures.
With respect to payments made after December 31, 1999, for purposes of
applying the rules set forth in the four preceding paragraphs to an entity
that is treated as fiscally transparent (e.g., a partnership or certain
trusts) for United States federal income taxation purposes, the beneficial
owner means each of the ultimate beneficial owners of the entity.
98
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Debentures 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 Debentures. 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 Debentures received in exchange for Old Debentures where such Old
Debentures were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that it 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 Debentures may be required to
deliver a prospectus.
The Issuer will not receive any proceeds from any sale of New Debentures by
broker-dealers. New Debentures 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 Debentures 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 Debentures. Any
broker-dealer that resells New Debentures 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 Debentures may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Debentures 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 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 Debentures) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Old Debentures (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the New Debentures has been passed upon for the Issuer by
Cleary, Gottlieb, Steen & Hamilton, New York, New York.
EXPERTS
The audited consolidated financial statements and schedules of Diamond
Brands Incorporated and subsidiaries in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and
are included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
99
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements as of December 31, 1996 and 1997 and
for the Years Ended December 31, 1995, 1996 and 1997:
Report of Independent Public Accountants............................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997........... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997................................................... F-4
Consolidated Statements of Stockholders' Equity........................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997................................................... F-6
Notes to Consolidated Financial Statements............................. F-7
Unaudited Consolidated Financial Statements as of December 31, 1997 and
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
</TABLE>
F-1
<PAGE>
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
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
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
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996 1997
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------
NUMBER OF ADDITIONAL PAID-IN
SHARES PAR VALUE CAPITAL RETAINED EARNINGS TOTAL
--------- --------- ------------------ ----------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
====== ==== ==== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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
activities................................ 36,562 (11,868) 7,433
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (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
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Goodwill...................................................... $27,862
Deferred financing costs...................................... (603)
Accrued expenses.............................................. (2,059)
-------
$25,200
=======
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Net sales..................................................... $84,798
=======
Net income.................................................... $ 3,456
=======
</TABLE>
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 Issuer 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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Goodwill...................................................... $14,436
Property, plant and equipment................................. 383
-------
$14,819
=======
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net sales.................................................. $113,926 $120,714
======== ========
Net income................................................. $ 10,050 $ 20,521
======== ========
</TABLE>
F-7
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials................................................ $ 3,777 $ 8,111
Work in process.............................................. 526 433
Finished goods............................................... 7,487 12,200
------- -------
Total...................................................... $11,790 $20,744
======= =======
</TABLE>
F-8
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======= =======
</TABLE>
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
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Company 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 Company. 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:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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%
</TABLE>
Future maturities of long-term debt were as follows as of December 31, 1997:
<TABLE>
<CAPTION>
FISCAL YEAR
----------- (IN THOUSANDS)
<S> <C>
1998........................................................ $ 7,892
1999........................................................ 7,930
2000........................................................ 12,941
2001........................................................ 7,627
2002........................................................ 13,107
-------
$49,497
=======
</TABLE>
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
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's income tax provision for the years ended December 31 consisted
of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $2,518 $4,703 $ --
State................................................ 445 944 --
Deferred............................................... (611) 160 1,376
------ ------ ------
$2,352 $5,807 $1,376
====== ====== ======
</TABLE>
A reconciliation from the federal statutory tax rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
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%
==== ====
</TABLE>
Components of deferred income taxes are as follows as of December 31, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
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
======
</TABLE>
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
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1996 1997
---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
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
====== ======
</TABLE>
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, 1997 at an exercise
price of $7.50 per share. Options generally expire 10 years from the date of
grant or at an
F-12
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARE
SHARES PRICE
------ --------
<S> <C> <C>
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
======
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Net income:
As reported.............................................. $20,629
Pro forma................................................ 20,592
</TABLE>
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.
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:
<TABLE>
<CAPTION>
FISCAL YEAR
----------- (IN THOUSANDS)
<S> <C>
1998....................................................... $715
1999....................................................... 703
2000....................................................... 438
2001....................................................... 152
2002....................................................... 114
Thereafter................................................. 79
</TABLE>
F-13
<PAGE>
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
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH DECEMBER
31, 31,
1998 1997
------- -------
<S> <C> <C>
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 28,995
------- -------
Total stockholders' equity................................. 29,879 27,930
------- -------
$95,590 $94,550
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1997 1998
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
DIAMOND BRANDS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------
1997 1998
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income................................................. $ 1,929 $ 3,762
Adjustments to reconcile net income to cash provided by
operating 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...................... -- --
-------- -------
$ $
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE>
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 Debentures 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
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS 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 AU-
THORIZED 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 COM-
PANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AT ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Available Information.................................................. 1
Prospectus Summary..................................................... 2
Risk Factors........................................................... 16
The Recapitalization................................................... 23
New Chief Executive Officer............................................ 24
The Sponsors........................................................... 24
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............................................................. 49
Certain Relationships and Related Transactions......................... 53
Capital Stock of Holdings and the Operating Corp....................... 55
Description of Other Indebtedness...................................... 57
The Exchange Offer..................................................... 60
Description of the New Debentures...................................... 68
Certain United States Federal Income Tax Considerations................ 96
Plan of Distribution................................................... 99
Legal Matters.......................................................... 99
Experts................................................................ 99
Index to Consolidated Financial Statements............................. F-1
</TABLE>
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIAMOND BRANDS INCORPORATED
OFFER TO EXCHANGE
SERIES B 12 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009,
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED,
FOR ANY AND ALL OUTSTANDING
12 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009
---------------
PROSPECTUS
---------------
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation provide that no director of the
Company shall be personally liable to the corporation or its shareholders 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 shareholders; (ii) for acts or omissions not in good faith
or that involved intentional misconduct of a knowing violation of law; (iii)
under Sections 302A.559 and 80A.23 of the Minnesota Business Corporation Act
(the "MBCA"); (iv) to any act or omission occurring prior to the date when
such provision became effective, to the extent permitted by law. If the MBCA
is amended to authorize corporation action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
corporation shall be eliminated or limited to the fullest extent permitted by
the MBCA, as amended.
The Bylaws of the Company provide that the corporation shall indemnify
persons for such expenses and liabilities in such manner, under such
circumstances, and to the full extent required by the MBCA.
Section 302A.521 of the MBCA provides:
302A.521 INDEMNIFICATION.--Subdivision 1. Definitions. (a) For purposes of
this section, the terms defined in this subdivision have the meanings given
them.
(b) "Corporation" includes a domestic or foreign corporation that was the
predecessor of the corporation referred to in this section in a merger or
other transaction in which the predecessor's existence ceased upon
consummation of the transaction.
(c) "Official capacity" means (1) with respect to a director, the position
of director in a corporation, (2) with respect to a person other than a
director, the elective or appointive office or position held by an officer,
member of a committee of the board, or the employment relationship undertaken
by an employee of the corporation, and (3) with respect to a director,
officer, or employee of the corporation who, while a director, officer or
employee, of the corporation, is or was serving a the request of the
corporation or whose duties in that position involve or involved service as a
director, officer, partner, trustee, employee, or agent of another
organization or employee benefit plan, the position of that person as a
director, officer, partner, trustee, employee, or agent, as the case may be,
of the other organization or employee benefit plan.
(d) "Proceeding" means a threatened, pending, or completed civil, criminal,
administrative, arbitration, or investigative proceeding, including a
proceeding by or in the right of the corporation.
(e) "Special legal counsel" means counsel who has not represented the
corporation or a related organization, or a director, officer, member of a
committee of the board, or employee, whose indemnification is in issue.
Subd. 2. Indemnification mandatory; standard. (a) Subject to the provisions
of subdivision 4, a corporation shall indemnify a person made or threatened to
be made a party to a proceeding by reason of the former or present official
capacity of the person against judgments, penalties, fines, including, without
limitation, excise taxes assessed against the person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by the person in connection with
the proceeding, if, with respect to the acts or omissions of the person
complained of in the proceeding, the person:
(1) Has not been indemnified by another organization or employee benefit
plan for the same judgments, penalties, fines, including, without limitation,
excise taxes assessed against the person with respect to an employee benefit
plan, settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions;
II-1
<PAGE>
(2) Acted in good faith;
(3) Received no improper personal benefit and section 302A.255, if
applicable, has been satisfied;
(4) In the case of a criminal proceeding, had no reasonable cause to believe
the conduct was unlawful; and
(5) In the case of acts or omissions occurring in the official capacity
described in subdivision 1, paragraph (c), clause (1) or (2), reasonably
believed that the conduct was in the best interests of the corporation, or in
the case of acts or omissions occurring in the official capacity described in
subdivision 1, paragraph (c), clause (3), reasonably believed that the conduct
was not opposed to the best interests of the corporation. If the person's acts
or omissions complained of in the proceeding relate to conduct as a director,
officer, trustee, employee, or agent of an employee benefit plan, the conduct
is not considered to be opposed to the best interests of the corporation if
the person reasonably believed that the conduct was in the best interests of
the participants or beneficiaries of the employee benefit plan.
(b) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent does not, of
itself, establish that the person did not meet the criteria set forth in this
subdivision.
Subd. 3. Advances. Subject to the provisions of subdivision 4, if a person
is made or threatened to be made a party to a proceeding, the person is
entitled, upon written request to the corporation, to payment or reimbursement
by the corporation of reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in advance of the final disposition of
the proceeding, (a) upon receipt by the corporation of a written affirmation
by the person of a good faith belief that the criteria for indemnification set
forth in subdivision 2 have been satisfied and a written undertaking by the
person to repay all amounts so paid or reimbursed by the corporation, if it is
ultimately determined that the criteria for indemnification have not been
satisfied, and (b) after a determination that the facts then known to those
making the determination would not preclude indemnification under this
section. The written undertaking required by clause (a) is an unlimited
general obligation of the person making it, but need not be secured and shall
be accepted without reference to financial ability to make the repayment.
Subd. 4. Prohibition or limit on indemnification or advances. The articles
or bylaws either may prohibit indemnification or advances of expenses
otherwise required by this section or may impose conditions on indemnification
or advances of expenses in addition to the conditions contained in
subdivisions 2 and 3 including, without limitation, monetary limits on
indemnification or advances of expenses, if the prohibition or conditions
apply equally to all persons or to all persons within a given class. A
prohibition or limit on indemnification or advances may not apply to or affect
the right of a person to indemnification or advances of expenses with respect
to any acts or omissions of the person occurring prior to the effective date
of a provision in the articles or the date of adopting of a provision in the
bylaws establishing the prohibition or limit on indemnification or advances.
Subd. 5. Reimbursement to witnesses. This section does not require, or limit
the ability of, a corporation to reimburse expenses, including attorneys' fees
and disbursements, incurred by a person in connection with an appearance as a
witness in a proceeding at a time when the person has not been made or
threatened to be made a party to a proceeding.
Subd. 6. Determination of eligibility. (a) All determinations whether
indemnification of a person is required because the criteria set forth in
subdivision 2 have been satisfied and whether a person is entitled to payment
or reimbursement of expenses in advance of the final disposition of a
proceeding as provided in subdivision 3 shall be made:
(1) By the board by a majority of a quorum, if the directors who are at
the time parties to the proceedings are not counted for determining either
a majority or the presence of a quorum;
II-2
<PAGE>
(2) If a quorum under clause (1) cannot be obtained, by a majority of a
committee of the board, consisting solely of two or more directors not at
the time parties to the proceedings, duly designated to act in the matter
by a majority of the full board including directors who are parties;
(3) If a determination is not made under clause (1) or (2), by special
legal counsel, selected either by a majority of the board or a committee by
vote pursuant to clause (1) or (2) or, if the requisite quorum of the full
board cannot be obtained and the committee cannot be established, by a
majority of the full board including directors who are parties;
(4) If a determination is not made under clauses (1) to (3), by the
shareholders, but the shares held by parties to the proceeding or
(5) If an adverse determination is made under clauses (1) to (4) or under
paragraph (b), or if no determination is made under clauses (1) to (4) or
under paragraph (b) within 60 days after (i) the later to occur of the
termination of a proceeding or a written request for indemnification to the
corporation request for an advance of expenses, as the case may be, by a
court in this state, which may be the same court in which the proceeding
involving the person's liability took place, upon application of the person
and any notice the court requires. The person seeking indemnification or
payment or reimbursement of expenses pursuant to this clause has the burden
of establishing that the person is entitled to indemnification or payment
or reimbursement of expenses.
(b) With respect to a person who is not, and was not at the time of the acts
or omissions complained of in the proceedings, a director, officer, or person
possessing, directly or indirectly, the power to direct or cause the direction
of the management or policies of the corporation, the determination whether
indemnification of this person is required because the criteria set forth in
subdivision 2 have been satisfied and whether this person is entitled to
payment or reimbursement of expenses in advance of the final disposition of a
proceeding as provided in subdivision 3 may be made by an annually appointed
committee of the board, having at least one member who is a director. The
committee shall report at least annually to the board concerning its actions.
Subd. 7. Insurance. A corporation may purchase and maintain insurance on
behalf of a person in that person's official capacity against any liability
asserted against and incurred by the person in or arising from that capacity,
whether or not the corporation would have been required to indemnify the
person against the liability under the provisions of this section.
Subd. 8. Disclosure. A corporation that indemnifies or advances expenses to
a person in accordance with this section in connection with a proceeding by or
on behalf of the corporation shall report to the shareholders in writing the
amount of the indemnification or advance and to whom and on whose behalf it
was paid not later than the next meeting of shareholders.
Subd. 9. Indemnification of other persons. Nothing in this section shall be
construed to limit the power of the corporation to indemnify persons other
than a director, officer, employee, or member of a committee of the board of
the corporation by contract or otherwise.
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 Debentures
thereto.
II-3
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
----------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER ACCOUNTS- DEDUCTIONS END OF
OF PERIOD EXPENSES DESCRIBE (A) DESCRIBE (B) PERIOD
---------- ---------- --------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... $341 97 248 (80) $ 606
====== ====== ====== ====== ======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
----------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER ACCOUNTS- DEDUCTIONS END OF
OF PERIOD EXPENSES DESCRIBE (A) DESCRIBE (B) PERIOD
---------- ---------- --------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... $606 116 -- (83) $639
====== ====== ====== ====== ======
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
----------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COST AND OTHER ACCOUNTS- DEDUCTIONS END OF
OF PERIOD EXPENSES DESCRIBE (A) DESCRIBE (B) PERIOD
---------- ---------- --------------- ------------ -------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts............... $639 758 225 (427) $1,195
====== ====== ====== ====== ======
</TABLE>
- --------
(a) Incurred in conjunction with acquisitions of companies.
(b) Write off of account balances during the year.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the 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.
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 the registrant 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, the 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 registrant hereby undertakes 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 registrant hereby undertakes 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.
II-4
<PAGE>
The undersigned registrant hereby undertakes:
(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-5
<PAGE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE 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 Incorporated
/s/ Naresh K. Nakra
By: _________________________________
Name: Naresh K. Nakra
Title: President, CEO
S-1
<PAGE>
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.
SIGNATURE TITLE
/s/ Naresh K. Nakra Director, President and Chief Executive
- ------------------------------------- Officer
NARESH K. NAKRA
/s/ Alexander M. Seaver Director
- -------------------------------------
ALEXANDER M. SEAVER
/s/ Bradley R. Kent Director
- -------------------------------------
BRADLEY R. KENT
/s/ Richard S. Campbell Vice President of Supply Chain
- -------------------------------------
RICHARD S. CAMPBELL
/s/ Thomas W. Knuesel Vice President of Finance and Chief
- ------------------------------------- Financial Officer
THOMAS W. KNUESEL
/s/ Christopher A. Mathews Vice President of Manufacturing
- -------------------------------------
CHRISTOPHER A. MATHEWS
/s/ John F. Young Vice President of Sales and Marketing
- -------------------------------------
JOHN F. YOUNG
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
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 Articles of Incorporation of Diamond Brands Incorporated
3.2 Amendment to Articles of Incorporation of Diamond Brands Incorporated
dated as of March 11, 1991
3.3 By-laws of Diamond Brands Incorporated
4.1 Indenture dated April 21, 1998, among Diamond Brands Incorporated and
State Street Bank and Trust Company, as trustee, relating to the
Debentures (the "Indenture")
4.2 Form of Series B 12 7/8% Senior Discount Debentures due 2009 of Diamond
Brands Incorporated (the "New Debentures") (included as Exhibit A of the
Indenture filed as Exhibit 4.1)
4.3 Holdings Pledge Agreement, dated as of April 21, 1998, among Diamond
Brands Incorporated and Wells Fargo Bank, N.A.
4.4 Holdings Guaranty Agreement, dated as of April 21, 1998, among Diamond
Brands Incorporated and Wells Fargo Bank, N.A.
4.5 Registration Rights Agreement, dated as of April 21, 1998, by and among
Diamond Brands Incorporated, 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
5.1 Opinion of Cleary, Gottlieb, Steen & Hamilton regarding legality of the
New Debentures
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
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
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
Diamond Brands Incorporated and Matchmaker Local 970
10.10 Non-Qualified Stock Option Agreement, made as of January 1, 1997,
between Diamond Brands Incorporated and Thomas W. Knuesel
10.11 Non-Qualified Stock Option Agreement, made as of January 1, 1997,
between Diamond Brands Incorporated and John F. Young
10.12 Non-Qualified Stock Option Agreement, made as of January 1, 1997,
between Diamond Brands Incorporated and Christopher A. Mathews
10.13 Non-Qualified Stock Option Agreement, made as of January 1, 1997,
between Diamond Brands Incorporated and Richard S. Campbell
10.14 Non-Qualified Stock Option Agreement, made as of January 1, 1997,
between 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, between
Diamond Brands Incorporated and Naresh K. Nakra
10.17 Non-Qualified Stock Option Agreement, made as April 21, 1998, between
Diamond Brands Incorporated and Naresh K. Nakra
10.18 Non-Qualified Stock Option Agreement, made as of April 21, 1998 between
Diamond Brands Incorporated and Thomas W. Knuesel
10.19 Non-Qualified Stock Option Agreement, made as of April 21, 1998, between
Diamond Brands Incorporated and John F. Young
10.20 Non-Qualified Stock Option Agreement, made as of April 21, 1998, between
Diamond Brands Incorporated and Christopher A. Mathews
10.21 Non-Qualified Stock Option Agreement, made as of April 21, 1998, between
Diamond Brands Incorporated and Richard S. Campbell
10.22 Non-Qualified Stock Option Agreement, made as of April 21,1998, between
Diamond Brands Incorporated and John Beach
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
Empire Candle, Inc.
10.26 Lease Agreement dated as of March 17, 1995 between MEPC American
Properties Inc. and Diamond Brands Incorporated
10.27 Supply Agreement dated as of January 1, 1997 between Ohio Valley
Plastics and Forster Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1 Subsidiaries of the Registrant
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
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
</TABLE>
3
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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,
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<PAGE>
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
<PAGE>
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
<PAGE>
"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
<PAGE>
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.
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<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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.
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<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
CERTIFICATE OF INCORPORATION
I, Joan Anderson Growe, Secretary of State of Minnesota, do certify
that: Articles of Incorporation, duly signed and acknowledged under oath, have
been filed on this date in the Office of the Secretary of State, for the
incorporation of the following corporation, under and in accordance with the
provisions of the chapter of Minnesota Statutes listed below.
This corporation is now legally organized under the laws of Minnesota.
Corporate Name: Diamond Brands Incorporated
Corporate Charter Number: 5H-704
Chapter Formed Under: 302A
This certificate has been issued on 07/28/1986.
/s/ Joan Anderson Grove
---------------------------
Secretary of State
<PAGE>
ARTICLES OF INCORPORATION
OF
DIAMOND BRANDS INCORPORATED
The undersigned incorporator, a natural person of full age, in order
to form a corporate entity under Minnesota Statutes, Chapter 302A, hereby adopts
the following Articles of Incorporation:
ARTICLE I
The name of this corporation is Diamond Brands Incorporated.
ARTICLE II
The registered office of this corporation is located at 5100 IDS
Center, Minneapolis, Minnesota, 55402 and the registered agent at that address
is Andrew M. Hunter, III.
ARTICLE III
The corporation is authorized to issue an aggregate total of
10,000,000 shares of stock. All shares shall be of one class and one series,
except that hereafter the Board of Directors by its action may establish more
than one class or series.
ARTICLE IV
The name and address of the incorporator is J. Robert Paulson, Jr.,
4200 IDS Center, Minneapolis, Minnesota 55402.
ARTICLE V
No shareholder of this corporation shall have any cumulative voting
rights except that hereafter if the Board of Directors by its action establishes
an additional class or series, which class or series has voting rights, it may
at the same time establish cumulative voting rights with respect to the same
class or series as is being established.
ARTICLE VI
No shareholder of this corporation shall have 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 except that hereafter if the Board of Directors by its action
establishes an additional class or series, it may, at the same time, establish
preferential, preemptive or other rights to subscribe for, purchase, or acquire
shares of the corporation of the same class or series as is being established.
<PAGE>
ARTICLE VII
The affirmative vote of the holders of a majority of the voting power
of the shares represented and voting at a duly held meeting of the shareholders
of this corporation is required for an action of the shareholders, except where
Minnesota Statutes, Chapter 302A, requires the affirmative vote of a majority of
the voting power of all voting shares.
ARTICLE VIII
The number of directors of this corporation shall be fixed in the
manner provided in the Bylaws.
ARTICLE IX
Any action required or permitted to be taken at a meeting of the Board
or Directors of this corporation not needing approval by the shareholders under
Minnesota Statutes, Chapter 302A, may be taken by written action signed by the
number of directors that would be required to take such action at a meeting of
the Board of Directors at which all directors were present.
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of July,
1986.
/s/ J. Robert Paulson, Jr.
----------------------------
J. Robert Paulson, Jr.
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
On this 24th day of July, 1986, personally appeared before me J.
Robert Paulson, Jr., to me known to be the person described in and who executed
the foregoing Articles of Incorporation, and he acknowledged that he was a
person of full age and that he executed the foregoing Articles of Incorporation
for the uses and purposes therein expressed.
/s/ Farol J. Kauers
----------------------------
Notary Public
<PAGE>
CERTIFICATE
OF
RIGHTS AND PREFERENCES
OF
7% SENIOR PREFERRED SHARES
OF
DIAMOND BRANDS INCORPORATED
The undersigned, being the Chief Executive Officer of Diamond Brands
Incorporated, a Minnesota Corporation, hereby certifies that (a) the
following resolution was duly adopted on September 24, 1986, by the Board of
Directors of such corporation, acting pursuant to the provision of Section
302A.401, subdivision 3 of the Minnesota Business Corporation Act, for the
purpose of establishing a separate class of preferred stock of such
corporation's authorized shares of stock and fixing the relative rights and
preferences of such class of preferred stock, and (b) such resolution has not
been subsequently modified or rescinded;
RESOLVED, that 43,500 shares of this corporation's authorized stock
shall be designated as "7% Senior Preferred Shares," $100.00 par value, and the
rights, preferences, privileges and restrictions granted to or imposed upon the
7% Senior Preferred Shares are as follows:
1. Certain Definitions. Unless the context requires otherwise, the
-------------------
following terms shall have the following meanings:
(a) Common Shares. The term "Common Sh ares" means all shares
-------------
now or hereafter authorized of the class of Common Shares of the
Corporation presently authorized and any other capital shares into
which such shares may hereafter have been changed from time to time.
(b) Senior Shares. The term "Junior Shares" means Common Shares
-------------
and any other capital shares of the Corporation, whether now or
hereafter authorized, not entitled to receive any dividends until all
dividends accrued on shares of 7% Senior Preferred Shares shall have
been paid or declared and set apart for payment or not entitled to
receive any assets upon liquidation, dissolution or winding up of the
affairs of the Corporation until the holders of shares of 7% Senior
Preferred Shares shall have received the entire amount to which they
shall be entitled upon such liquidation, dissolution or winding up.
(c) Accrued and Unpaid Dividends. The term "accrued and unpaid
----------------------------
dividends" with respect to any shares of 7% Senior Preferred Shares
means an amount equal to $7.00 per annum per share thereof for the
period from the date of issuance of such shares to the date as of
which accrued and unpaid dividends are being determined, less the
amount of all dividends theretofore paid in respect of such shares.
<PAGE>
(d) Person. The term "Person" means an individual, a
------
corporation, a partnership, a trust or estate, an unincorporated
organization or a governmental organization of any agency or political
subdivision thereof.
(e) Subsidiary. The term "Subsidiary" means any corporation 50%
----------
or more of whose outstanding voting shares at the time is owned
directly or indirectly by the Corporation or by one or more
Subsidiaries or by the Corporation and one or more Subsidiaries.
2. Dividends. The holders of 7% Senior Preferred Shares, in
---------
preference to the holders of Junior Shares, shall be entitled to receive, when
and as declared by the Board of Directors of the Corporation, but only out of
any funds legally available for the declaration of dividends, cumulative
dividends in cash at the annual rate of $7.00 per share, and no more, payable
annually on the last day of December in each year. Such dividends shall commence
to accrue and be cumulative from and after the date of issuance of 7% Senior
Preferred Shares and shall be deemed to accumulate and accrue from day to day
thereafter. Accrued and unpaid dividends on shares of 7% Senior Preferred Shares
shall bear interest (a) from and after the last day of December on which such
dividends shall have become payable pursuant to this Section 2 (without giving
effect to the requirement that such dividends be declared by the Board of
Directors of the Corporation) to the day on which such accrued and unpaid
dividends shall be paid, (b) at the rate per annum equal to the sum of (1) 2%,
plus (ii) the weighted average of the prime rates of interest (expressed as
percentages) in effect each day during the period in respect of which interest
on the accrued and unpaid dividends is being calculated, as such prime rates are
announced from time to time by Norwest Bank of Minneapolis, N.A. (or the bank
successor thereto or, at any time neither such bank nor any bank successor
thereto shall exist, such other national bank as the Corporation and the holders
of a majority of the then outstanding shares of 7% Senior Preferred Shares shall
agree to in writing, which agreement shall not be unreasonably withheld), (c)
compounded annually, and (d) payable simultaneously with the payment of the
accrued and unpaid dividends on which h the interest has accrued.
3. Optional Redemption.
-------------------
(a) The Corporation, at the option of its Board of Directors,
may at any time redeem all or any of the shares of 7% Senior Preferred
Shares then outstanding, upon notice duly given as hereinafter
provided, by paying therefor the amount of $100 per share, together
with the sum of the accrued and unpaid dividends thereon, and the
interest, if any, accrued on such dividends pursuant to Section 2, to
the date fixed for redemption.
(b) If less than all of the outstanding shares of 7% Senior
Preferred Shares are to be redeemed pursuant to this Section 3 and on
the date fixed for redemption there shall be more than one holder of
such shares, the shares to be redeemed shall be selected pro rata.
Written notice of redemption of shares of 7% Senior Preferred Shares
pursuant to this Section 3 shall be mailed, postage prepaid, to the
holders of record of the shares to be redeemed at their respective
addresses then
2
<PAGE>
appearing on the books of the Corporation, not less than twenty (20)
and not more than sixty (60) days prior to the date designated for
such redemption. From: and after the date fixed in such notice as the
date of redemption, unless default shall be made in providing moneys
at the time and place specified for the payment of the amount
necessary for redemption pursuant to this Section 3, the shares so
called for redemption shall no longer be deemed outstanding, and the
holders of the certificate or certificates representing such shares
shall have with respect to such shares no rights in or with respect to
the Corporation except the right to receive, upon the surrender of
such certificate or certificates, the redemption price therefor,
together with an amount equal no the sum of the accrued and unpaid
dividends thereon, and the interest, if any, accrued on such dividends
pursuant to Section 2, to the date designated for redemption.
4. Mandatory Redemption.
--------------------
(a) The Corporation shall redeem from the holder or holders of
7% Senior Preferred Shares, by paying therefor in cash the amount of
$100 per share, together with the sum of the accrued and unpaid
dividends thereon, and the interest, if any, accrued on such dividends
pursuant to Section 2, to the date fixed for redemption, on the dates
set forth below, the number of shares of 7% Senior preferred Shares
set forth opposite such dates:
<TABLE>
<CAPTION>
Date No. of Shares
---- -------------
<S> <C>
December 31, 1992 7,700
December 31, 1993 7,700
December 31, 1994 7,700
December 31, 1995 7,700
December 31, 1996 12,700
------
43,500
</TABLE>
If on any date fixed for mandatory n of shares of 7% Senior Preferred
Shares there shall be more than one holder of such shares, then the
Corporation shall redeem each such holder's pro-rata portion of the
total number of such shares which the Corporation shall be required to
redeem on such date. The Corporation may reduce the number of shares
of 7% Senior Preferred Shares to be redeemed pursuant to this Section
4 by subtracting any shares of 7% Senior Preferred Shares that the
Corporation has (i) redeemed pursuant to Section 3 or (ii) acquired
pursuant to this Section 5; provided, however,that any such reduction
-------- -------
resulting from the acquisition of shares pursuant to Section 5 shall
be on a pro-rata basis so that the number of shares required to be
redeemed in each succeeding year shall be reduced proportionately. For
instance, if 10% of the total number of outstanding shares were
acquired pursuant to Section 5, the number of shares to be redeemed in
each succeeding year would be reduced by 10%.
3
<PAGE>
(b) Written notice of redemption of shares of 7% Senior
Preferred Shares pursuant to this Section 4 shall be mailed, postage
prepaid, to the holders of record of the shares to be redeemed at
their respective addresses then appearing on the books of the
Corporation, not less than twenty (20) and not more than sixty (60)
days prior to the date designated for such redemption. From and after
the date fixed in such notice as the date of redemption, unless
default shall be made in providing moneys at the time and place
specified for the payment of the amount necessary for redemption
pursuant to this Section 4, the shares so called for redemption shall
no longer be deemed outstanding, and the holder of the certificate or
certificates representing such shares shall have with respect to such
shares no rights in or with respect to the Corporation except the
right to receive, upon the surrender of such certificate or
certificates, the redemption price therefor, together with an amount
equal to the sum of the accrued and unpaid dividends thereon, and the
interest, if any, accrued on such dividends pursuant to Section 2, to
the date designated for redemption.
5. Exchange.
--------
(a) The 7% Senior preferred Shares shall be exchangeable in
whole or from time to time in part, at any time prior to December 31,
1994, at the option of the Corporation, for the Corporation's 9%
Subordinated Notes due 1994 (the "Notes"), which Notes shall be in
substantially the form of Exhibit A attached hereto, and the holders
of the outstanding shares of 7% Senior Preferred Shares will be
entitled to receive $100 principal amount of the Notes dated the date
fixed for exchange in exchange for each share of 7% Senior Preferred
Shares exchanged hereunder; provided, however, that
-------- -------
(i) in the case of any such exchange occurring as of any
date during the period December 31, 1992 through December 30,
1993 (both such dates being included in such period), (m) the
Corporation shall redeem 40% of the shares of 7% Senior Preferred
Shares it has elected then to exchange pursuant to this Section
5, and (n) the Notes issued in exchange for the other 60% of the
shares of 7% Senior Preferred Shares the Corporation shall have
elected then to exchange shall provide that two-thirds (2/3) and
one-third (1/3) of the principal amount of such Notes shall be
due and payable on December 31, 1993 and December 21, 1994,
respectively, and
(ii) in the case of any such exchange occurring as of any
date during the period December 31, 1993 through December 30,
1994 (both such dates being included in such period), (x) the
Corporation shall redeem 80% of the shares of 7% Senior Preferred
Shares it has elected then to exchange pursuant to this Section
5, and (y) the Notes issued in exchange for the other 20% of the
shares of 7% Senior Preferred Shares the Corporation shall have
elected then to exchange shall provide that the
4
<PAGE>
entire principal amount of such Notes shall be due and payable on
December 31, 1994.
If on any date fixed for exchange of shares of 7% Senior
Preferred Shares there shall be more than one holder of such
shares, then the Corporation shall exchange (and, it required
hereby, redeem in accordance with this Section 5) each such
holder's pro-rata portion of the total number of such shares
which the Corporation elects to exchange on such date. Any
redemption of shares of 7% Senior Preferred Shares pursuant to
this Section 5 shall be made in accordance with the provisions of
Section 3.
(b) Written notice of exchange (and, if applicable, redemption)
of shares of 7% Senior Preferred Shares pursuant to this Section 5
shall be mailed, postage prepaid, to the holders of record of the
shares to be exchanged at their respective addresses then appearing on
the books of the Corporation, not less than twenty (20) and not more
than sixty (60) days prior to the date designated for such exchange.
From and after the date fixed in such notice as the date of exchange,
unless default shall be made by the Corporation in executing and
delivering the Notes issuable upon such exchange (and, if applicable,
paying in accordance with Section 3 the amount to be paid in
redemption of the shares to be redeemed), the rights of the holders of
the shares so exchanged (and, if applicable, redeemed) as stockholders
of the Corporation shall cease (except the right to receive on the
date of exchange the Notes to be exchanged therefor (and the
redemption price for the shares, if any, to be redeemed pursuant to
this Section 5), together with an amount equal to the sum of the
accrued and unpaid dividends on the shares exchanged (and, if
applicable, redeemed), and the interest, if any, accrued on such
dividends pursuant to Section 2, to the date of exchange), and the
person or persons entitled to receive the Notes issuable upon exchange
shall be treated for all purposes as the registered holder or holders
of such Notes. On the date of the exchange the Corporation shall pay
all accrued and unpaid dividends on the shares exchanged (and, if
applicable, redeemed) and all interest accrued on such dividends
pursuant to Section 2.
6. Deferrals: Compliance with Laws; Retirement of Shares. The
-----------------------------------------------------
Corporation shall in no event be obligated to apply to the redemption of 7%
Senior Preferred Shares any funds not legally available therefor under the
Minnesota Business Corporation Act, but any redemption so deferred shah be made
promptly after, and to the full extent that, any funds of the Corporation become
legally available for such purposes. The Corporation shall not exchange any
shares of 7% Senior Preferred Shares for Notes unless such exchange shall comply
with all applicable requirements of the Minnesota Business Corporation Act.
Shares of 7% Senior Preferred Shares redeemed by the Corporation pursuant to
Section 3, Section 4 or Section 5 or exchanged for Notes under Section 5, or
shares of 7% Senior Preferred Shares otherwise purchased or acquired by the
Corporation, shall not be reissued and shall be cancelled and retired in the
manner provided by the laws of the State of Minnesota.
5
<PAGE>
7. Liquidation. In the event of any voluntary or involuntary
-----------
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of the 7% Senior Preferred Shares shall be entitled to receive $100 in
cash for each share thereof, together with the sum of the accrued and unpaid
dividends thereon, and the interest, if any, accrued on such dividends pursuant
to Section 2, to the date fixed for such payment, before any distribution of the
assets of the Corporation shall be made to the holders of the outstanding Junior
Shares. The holders of the outstanding shares of 7% Senior Preferred Shares
shall be entitled to no further participation in such distribution of the assets
of the Corporation. If upon such liquidation, dissolution or winding up of the
affairs of the Corporation, the assets of the Corporation available for
distribution among the holders of all outstanding shares of 7% Senior Preferred
Shares shall be insufficient to permit the payment in full to such holders of
the preferential amounts to which they are entitled, then the assets of the
Corporation available for distribution shall be distributed among the holders of
the 7% Senior Preferred Shares ratably in proportion to the full amounts to
which they would otherwise be entitled. A consolidation or merger of the
Corporation or a sale or transfer of all or substantially all of its assets as
an entirety shall not be regarded as a "liquidation, dissolution or winding up
of the affairs of the Corporation" within the meaning of this Section 7.
8. Contingent Voting Rights. Except as otherwise expressly provided
------------------------
by law or provided herein, the 7% Senior Preferred Shares shall have no voting
rights. In any matter on which the holders of 7% Senior Preferred Shares shall,
as a matter of law or in accordance with the provisions herein, be entitled to
vote, they shall be entitled to one vote for each share of 7% Senior Preferred
Shares held.
If at any time a Voting Right Event (as hereinafter defined) shall
occur, the number of directors of the Corporation shall be increased as provided
in the next sentence of this Section 8 automatically upon the occurrence of the
Voting Right Event and the holders of 7% Senior Preferred Shares shall have
voting rights and as a class be entitled to elect the directors to fill the
director positions thereby created. If prior to such increase the Board of
Directors of the Corporation consists (i) of five (5) directors, the number of
directors of the Corporation shall thus be increased by two (2); (ii) of six (6)
directors, the number of directors of the Corporation shall thus be increased by
three (3) , (iii) of more than six (6) directors, the number of directors of the
Corporation shall thus be increased by such number (rounded to the next higher
whole number if necessary to cause the number of the increase to be a whole
number) as shall constitute one-third (1/3) of the total number of directors
after giving effect to such increase. At such time as the Voting Right Event
which gave rise to the exercise of the voting rights provided for in this
Section 8 has been cured and all other events creating a Voting Right Event, if
any, shall have been cured, the rights of the holders of 7% Senior Preferred
Shares so to vote as provided in this Section 8 shall cease, subject to renewal
from time to time upon the same terms and conditions, and the terms of office of
the directors elected to office by the holders of the 7% Senior Preferred Shares
shall terminate as of the day on which the rights of the holders of the 7%
Senior Preferred Shares to vote as provided in this Section 8 shall cease,
whereupon the number of directors of the Corporation shall be reduced
accordingly. At any time during which the holders of 7% Senior Preferred Shares
shall have voting rights, the holders of 7% Senior Preferred Shares as a class
6
<PAGE>
shall be entitled to designate a representative who shall be permitted by the
Corporation to inspect the Corporation's books and records.
At any time after the voting power to elect directors of the
Corporation shall have become vested in the holders of shares of 7% Senior
Preferred Shares as provided in this Section 8, the President of the Corporation
may, and, upon the written request of the record holders of at least ten percent
of the 7% Senior Preferred Shares then outstanding addressed to him at the
principal office of the Corporation, shall, call a special meeting of the
holders of 7% Senior Preferred Shares for the election of the directors to be
elected by such holders, to be held at the place and upon the notice provided in
the bylaws of the Corporation for the holding of meetings of shareholders. If
such meeting shall not be so called within ten days after personal service of
the request, or within fifteen days after mailing of the same by registered mail
within the United States of America, then the record holders of at least ten
percent of the shares of 7% Senior Preferred Shares may designate in writing one
of their numbers to call such meeting, and the person so designated may call
such meeting at the place and upon the notice above provided, and for that
purpose shall have access to the stock books of the Corporation. At any meeting
so called or at any annual or other special meeting held while the holders of 7%
Senior Preferred Shares have the voting power to elect directors of the
Corporation pursuant to this Section 8, the holders of a majority of the then
outstanding shares of 7% Senior Preferred Shares present in person or by proxy
shall be sufficient to constitute a quorum for the election of directors by the
holders of 7% Senior Preferred Shares as herein provided.
If, at any time while the holders of 7% Senior Preferred Shares have
the voting power to elect directors of the Corporation pursuant to this Section
8, the number of directors in office who have been elected by the holders of 7%
Senior Preferred Shares shall be less than the total number the holders of 7%
Senior Preferred Shares shall then be entitled to have elected to office,
whether by reason of resignation, death, removal or otherwise, the holders of 7%
Senior Preferred Shares shall be entitled to fill such vacancy or vacancies in
an election held at an annual meeting of stockholders or at a special meeting of
the holders of 7% Senior Preferred Shares called and held as provided in the
immediately preceding paragraph of this Section 8; no such vacancy may be filled
other than by an action of the holders of 7% Senior Preferred Shares. A
director of the Corporation elected by the holders of 7% Senior Preferred Shares
may be removed from office only by action of the holders of 7% Senior Preferred
Shares; a special meeting of such holders for such purpose may be called and
held as provided in the immediately preceding paragraph of this Section 8.
"Voting Right Event" shall mean any of the following events or
conditions:
(a) the dividends payable with respect to the 7% Senior preferred
Shares pursuant to Section 2 hereof shall be in arrears in respect of
any two annual payments thereof; or
(b) the Corporation shall have failed to redeem, on any
redemption date specified in Section 4 hereof, any shares of 7% Senior
preferred Shares which it shall have been required to redeem on such
date, or which, but for the provisions
7
<PAGE>
of Section 6 hereof or any provision of the Minnesota Business
Corporation Act, it would have been required to redeem on such date;
or
(c) the Corporation shall be in default of any of the covenants
contained in Section 9 hereof.
9. Protection Provisions. As long as any shares of 7% Senior
---------------------
Preferred Shares are outstanding, the Corporation:
(a) shall not, without the approval by the vote or written
consent of the holders of a majority of the outstanding 7% Senior
Preferred Shares:
(i) Amend or repeal any provision of, or add any provision
to, the Corporation's Articles of Incorporation if such action
would alter or change adversely the 7% Senior Preferred Shares or
the designations and preferences, qualifications, limitations,
restrictions and special or relative rights thereof provided for
the benefit of the 7% Senior Preferred Shares,
(ii) Authorize, create or issue shares (or securities of
any kind convertible into shares) of any class of stock having
any preference or priority as to dividends or assets superior to
or on a parity with any such preference or priority of the 7%
Senior Preferred Shares;
(iii) Reclassify any shares into shares having any
preference or priority as to dividends or assets superior to or
on a parity with that of the 7% Senior preferred Shares;
(iv) Effect any merger or consolidation of the Corporation
with any other person if (1) the net worth of the surviving
corporation immediately after the merger or consolidation, less
the amount of all payments (including without limitation
dividends and interest) payable upon a liquidation, dissolution
or winding up of the surviving corporation, whether voluntary or
involuntary, on all shares (other than the 7% Senior Preferred
Shares) having any preference or priority as to dividends or
assets superior to or on a parity with any preference or priority
of the 7% Senior Preferred Shares, would be less than (2) the net
worth of the Corporation immediately prior to the merger or
consolidation; provided, however, that in the event that the
-------- -------
transaction expenses of the merger or consolidation are expensed
for financial reporting purposes, the net worth of the surviving
corporation will not be deemed to have been decreased by such
transaction expenses for purposes of this clause (iv) to the
extent that such transaction expenses do not exceed the lessor of
an amount equal to 2% of the assets acquired or $200,000;
8
<PAGE>
(v) Declare or pay any dividend on any Junior Shares
other than a dividend payable solely in Junior Shares of the
Corporation, or buy, or permit any Subsidiary to buy, any Junior
Shares or make any payment on account of the purchase, redemption
or other retirement of any shares of Junior Shares or of any
warrants, options or similar rights to purchase Junior Shares, or
make any other distribution in respect of Junior Shares, either
directly or indirectly; provided, however, that the Corporation
-------- -------
may pay cash dividends on Junior Shares, or take any such action
in respect of the redemption or retirement of shares of Junior
Shares, if (1) at the time such cash dividends are paid or such
action is taken, no Voting Right Event shall have occurred and be
continuing, the Corporation shall have paid all dividends then
accrued and payable on 7% Senior Preferred Shares (without giving
effect to the requirement that dividends be declared by the Board
of Directors of the Corporation), and the Corporation shall have
redeemed all shares of 7% Senior preferred Shares which the
Corporation shall have been required then to have redeemed (or
which, but for the provisions of Section 6 hereof or any
provision of the Minnesota Business Corporation Act, it would
have been required then to have redeemed), and (2) all amounts
paid as cash dividends on, or paid in respect of the redemptions
or retirement of, Junior Shares are paid out of the retained
earnings of the Corporation.
(b) shall furnish to each holder of 7% Senior Preferred Shares:
(i) promptly upon their becoming available to the
Corporation, copies of all financial statements and other
reports, notices and documents sent or made available by the
Corporation to the holders of any class of its equity securities
(including, without limitation, holders of Common Shares); and
(ii) (1) at the same time they are made available to any
lender to the Corporation, copies of the financial statements
which the Corporation is required to deliver to any such lender
pursuant to any agreement between the Corporation and any such
lender, and (2) in the event that such lenders shall not require
audited financial statements of the Corporation within 120 days
after the end of each fiscal year of the Corporation, financial
statements of the Corporation for each fiscal year of the
Corporation, certified by a nationally recognized firm of
independent certified public accountants as having been audited
in accordance with generally accepted auditing standards, which
financial statements and certification shall be furnished to each
holder of 7% Senior Preferred Shares within 120 days after the
end of the fiscal year covered by the financial statements.
9
<PAGE>
RESOLVED FURTHER, that the appropriate officers are
authorized and directed to file a certificate containing the foregoing
resolution with the Secretary of State of Minnesota in accordance with
Section 302A.401, Subdivision 3 of the Minnesota Business Corporation
Act.
IN WITNESS WHEREOF, the undersigned has executed this certificate as
of the _____ day of September, 1986.
DIAMOND BRANDS INCORPORATED
By:_______________________
Andrew M. Hunter, III,
Chief Executive Officer
STATE OF MINNESOTA )
) ss:
COUNTY or HENNEPIN )
The foregoing instrument was signed before me this ____ day of
September, 1986 by Andrew M. Hunter, III. who represented to me that he is the
Chief Executive Officer of Diamond Brands Incorporated and that he has executed
such instrument as his free act and deed as an authorized officer of such
corporation.
Notary Public
_____________________________________
10
<PAGE>
Exhibit A
---------
DIAMOND BRANDS INCORPORATED
9% SUBORDINATED NOTE DUE 1994
$___________ Dated: ___________, 19__
FOR VALUE RECEIVED, the undersigned, DIAMOND BRANDS INCORPORATED, a
Minnesota corporation (the "Company"), hereby promises to pay to
_________________ the principal sum of __________________ Dollars ($________),
payable in three consecutive annual installments of 40%, 40% and 20% of the
principal sum on December 31 of the years 1992 through 1994, respectively, and
to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the unpaid principal hereof from the date hereof at the rate of 9%
per annum semiannually on June 30 and December 31 in each year, and (to the
extent permitted by applicable law) to pay interest at the Penalty Rate (as
defined below) per annum on any overdue principal and interest, from the date
such amount was due and payable until the obligation of the Company with respect
to the payment thereof shall be fully discharged. "Penalty Rate" shall mean the
rate per annum equal to the greater of (a) the sum of (i) 2%, plus (ii) the
weighted average of the prime rates of interest (expressed as percentages) in
effect each day during the period in respect of which interest is being
calculated, as such prime rates are announced from time to time by Norwest Bank
of Minneapolis, N.A. (or the bank successor thereto or, at any time neither such
bank nor any bank successor thereto shall exist, such other national bank as the
Company and the holder of this Note shall agree to in writing, which agreement
shall not be unreasonably withheld) and (b) 15%.
This Note (this "Note") may be prepaid in whole or in part at any time
without penalty. Prepayments shall be applied against payments of principal in
the inverse order of their maturity.
1. Payments. Payments of principal and interest becoming due and
--------
payable on this Note shall be paid in lawful money of the United States of
America, in same day funds, at the principal office of Bankers Trust Company in
New York, New York (or at such other address or account as shall be designated
from time to time in writing to the Company by the holder hereof), without the
presentation or surrender of this Note or the making of any notation hereon,
except that upon payment in full hereof, this Note shall be surrendered to the
Company at its principal office.
2. Certain Covenants. As long as this Note is outstanding, the
-----------------
Company:
(a) shall not, without the written approval of the holder of
this Note:
(1) Effect any merger or consolidation of the Company with
any other person or entity if the net worth of the surviving
corporation
<PAGE>
immediately after the merger or consolidation would be less than
the net worth of the Company immediately prior to the merger or
consolidation; provided, however, that in the event that the
-------- -------
transaction expenses of the merger or consolidation are expensed
for financial reporting purposes, the net worth of the surviving
corporation will not be deemed to have been decreased by such
transaction expenses for purposes of this clause (1) to the
extent that such transaction expenses do not exceed the lesser of
an amount equal to 2% of the assets acquired or $200,000; or
(2) Declare or pay any dividend on any shares of the
capital stock of the Company ("Shares") other than a dividend
payable solely in Shares, or buy, or permit any subsidiary of the
Company to buy, any Shares or make any payment on account of the
purchase, redemption or other retirement of any Shares or of any
warrants, options or similar rights to purchase Shares, or make
any other distribution in respect of Shares, either directly or
indirectly; provided, however, that the Company may pay cash
-------- -------
dividends on Shares, or take any such action in respect of the
redemption or retirement of Shares, if (i) at the time such cash
dividends are paid or such action is taken, no Event of Default
(as defined in Section 3 hereof) shall have occurred and be
continuing, the Company shall have paid all amounts then due and
payable on this Note, and no Voting Right Event (as defined in
Exhibit F to the Asset Purchase Agreement dated August 21, 1986
between The Diamond Match Company and the Company) shall have
occurred and be continuing, and (ii) all amounts paid as cash
dividends on, or paid in respect of the redemption or retirement
of, Shares are paid out of the retained earnings of the Company.
(b) shall furnish to the holder of this Note:
(1) promptly upon their becoming available to the Company,
copies of all financial statements and other reports, notices and
documents sent or made available by the Company to the holders of
any class of its equity securities (including, without
limitation, holders of Shares); and
(2) (i) at the same time they are made available to any
lender to the Company, copies of the financial statements which
the Company is required to deliver to any such lender pursuant to
any agreement between the Company and any such lender, and (ii)
in the event that such lenders shall not require audited
financial statements of the Company within 120 days after the end
of each fiscal year of the Company, financial statements of the
Company for each fiscal year of the Company, certified by a
nationally recognized firm of independent certified public
accountants as having been audited in accordance with generally
accepted auditing standards, which financial statements shall be
furnished to the holder of
2
<PAGE>
this Note within 120 days after the end of the fiscal year
covered by the financial statements.
3. Events of Default. Upon the occurrence of any of the following
-----------------
events (collectively, "Events of Default"):
(a) any payment of principal on this Note is not paid when
due;
(b) any payment of interest on this Note is not paid when
due and remains unpaid for 30 days;
(c) any default occurs under any of the other provisions of
this Note, and such default shall continue for a period of ten
days after notice thereof from the holder of this Note;
(d) the Company shall fail to pay, at the maturity thereof,
the principal of any existing or future indebtedness for money
borrowed by the Company from a bank or other institutional lender
or there shall occur an event of default as defined in any
mortgage, indenture, instrument or other agreement under which
there may be issued, or by which there may be secured or
evidenced, any indebtedness for money borrowed by the Company
from a bank or other institutional lender, whether such
indebtedness now exists or shall hereafter be created, which
event of default shall result in such indebtedness being declared
due and payable prior to the date on which it would otherwise
become due and payable;
(e) the appointment of a custodian (as defined in section
101(10) of the Bankruptcy Code) of the Company or any of the
properties or assets of the Company;
(f) the Company shall be the subject of an order of relief
entered by a court under the Bankruptcy Code; or
(g) the Company shall file a petition or answer to take
advantage of any bankruptcy, reorganization, insolvency,
readjustment of debts, dissolution or liquidation law or statute
or any answer admitting the material allegations of a petition
filed against it in any proceeding under any such law or if
action shall be taken by it for the purpose of effecting any of
the foregoing;
then, and in any such event, (x) upon the occurrence of any Event of Default
described in clause (e), (f) or (g) of this Section 3, the unpaid principal
amount of, and accrued interest on, and all other amounts owing under this Note
shall automatically, without any further action of any person or entity, mature
and become due and payable or (y) upon the occurrence and during the
continuation of any other Event of Default, the holder of this Note may at any
time (unless all Events of Default shall theretofore have been remedied) at its
option, by written notice or notices
3
<PAGE>
to the Company, declare this Note to be due and payable, whereupon the unpaid
principal amount of and accrued interest on and all other amounts owing under
this Note shall forthwith mature and become due and payable, all without
presentment, demand, protest or other notice, all of which are hereby expressly
waived except as expressly provided above in this Section 3.
At any time after this Note is declared due and payable, the holder of
this Note, by written notice to the Company, may rescind and annul any such
declaration in respect of this Note and its consequences; but no such rescission
and annulment shall extend to or affect any subsequent Event of Default or
impair any right consequent thereon.
4. Remedies, Etc. In case any one or more Events of Default shall
-------------
occur and be continuing, the holder of this Note may proceed to protect and
enforce the rights of such holder by an action at law, suit in equity or other
appropriate proceeding, whether for the specific performance of any agreement
contained herein, or for an injunction against a violation of any of the terms
hereof, or in aid of the exercise of any power granted hereby or by law or
otherwise. No course of dealing and no failure to exercise or delay in
exercising any right, power or remedy by or on the part of any holder of this
Note shall operate as a waiver thereof or otherwise prejudice any holder's
rights, powers or remedies, nor shall any single or partial exercise of any such
right, power or remedy preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. No right, power or remedy
conferred by this Note upon any holder hereof shall be exclusive of any other
right, power or remedy referred to herein or flow or hereafter available by law,
in equity or otherwise.
5. Subordination. The Company is now or hereafter may be indebted to
-------------
Sanwa Business Credit Corporation, a Delaware corporation ("Senior Lender"), on
account of loans or other extensions of credit or financial accommodations from
Senior Lender to the Company ("Senior Indebtedness") while the Company is also
indebted to the holder of this Note in the amount evidenced by it ("Subordinated
Indebtedness"). The holder of this Note acknowledges that Senior Lender is
unwilling to continue the presently existing Senior Indebtedness or to make
future loans or to continue to extend financial accommodations to the Company
except and unless the Subordinated Indebtedness is made subordinate to the
Senior Indebtedness as set forth in this paragraph 5. The holder of this Note is
of the opinion that it would be for its best interest to assist the Company in
obtaining credit accommodations from Senior Lender and therefore is willing to
subordinate the Subordinated Indebtedness to the Senior Indebtedness. Therefore,
notwithstanding any other provision of this Note which may expressly or
implicitly be to the contrary, the holder of this Note does hereby agree with
Senior Lender as follows:
(a) The holder of this Note hereby agrees that the Subordinated
Indebtedness shall be and it is hereby made fully subordinate to the Senior
Indebtedness.
(b) Until such time as this Note is paid in full and surrendered and
cancelled, the holder of this Note will not ask for or demand, receive or accept
payment of the Subordinated Indebtedness, or any part thereof, and the holder of
this Note will bring no action or proceeding to collect or enforce the payment
of the Subordinated Indebtedness or any part thereof, and if
4
<PAGE>
payments are made contrary to the terms of this paragraph 5, the holder of this
Note shall forthwith pay over the same to the Senior Lender, provided, however,
that nothing in this Section 5 shall prevent the Company from making, or the
holder hereof from demanding, receiving and accepting, payment of interest on
this Note as long as: (i) no default exists with respect to the Senior
Indebtedness, and (ii) the Company has earnings in the year of payment.
(c) In the event of the insolvency, bankruptcy or other liquidation
of the Company or in the event of proceedings to reorganize the Company under
any appropriate bankruptcy or reorganization statute, the holder of this Note
will file a claim against the Company on account of the Subordinated
Indebtedness and will order and direct by appropriate instruments in writing
that all payments made on said claim shall be paid over to the Senior Lender and
will further order and direct that in case of reorganization of the Company any
new obligations and securities which the holder of this Note would be entitled
to receive shall be delivered to the Senior Lender, or the Senior Lender may
itself file a claim for or on account of the Subordinated Indebtedness and for
such purpose the holder of this Note hereby nominates, constitutes and appoints
the Senior Lender his, her or its true and lawful attorney either in the name of
the holder of this Note or in the name of the Senior Lender to file such claim
and to take any and all other actions or proceedings in respect thereto which it
deems necessary or desirable. The holder of this Note agrees that the power of
attorney herein given to Senior Lender is coupled with an interest and is not
subject to revocation by the holder of this Note and that it shall not become
terminated by reason of the death or disability of the holder of this Note. The
holder of this Note agrees, upon request of the Senior Lender, to give the
Senior Lender such further instruments of assignment or assurance as are
necessary to more fully enable the Senior Lender to file said claim and to carry
out the provisions of this paragraph. Notwithstanding anything to the contrary
contained herein, as long as the Senior Indebtedness remains unpaid or
unsatisfied, the holder hereof will not commence, or join with any other
creditor of the Company in commencing, any bankruptcy, reorganization or
insolvency proceeding against the Company without the prior written consent of
Senior Lender, which consent shall not be unreasonably withheld.
(d) All monies or other properties received by the Senior Lender from
or on account of the Subordinated Indebtedness pursuant to the provisions of
either subparagraphs (b) or (c) above may be held by it either as additional
security for payment of the Senior Indebtedness or, at its or their election,
may be applied in payment thereof.
(e) This paragraph 5 and every part thereof shall be binding upon
the holder of this Note and upon the heirs, legal representatives, successors
and assigns to the holder of this Note.
(f) All monies or other properties received by the Senior Lender from
or on account of the Subordinated Indebtedness pursuant to the provisions of
this Section 5 shall be applied to the payment of the Senior Indebtedness;
provided, however, that the holder of this Note (i) shall be entitled to receive
from the Senior Lender any payments or distributions received by such Senior
Lender in excess of the amount sufficient to satisfy the Senior Indebtedness in
full, and (ii) upon the full satisfaction of the Senior Indebtedness shall be
5
<PAGE>
subrogated to any rights of the Senior Lender to receive all further payments or
distributions applicable to the Senior Indebtedness, until all principal of,
premium, if any, and interest on the Subordinated Indebtedness shall be paid in
full. No holder of this Note shall exercise any right of subrogation which it
may have with respect to Senior Indebtedness, whether pursuant to this Section
5, at common law or otherwise, until cash, securities, or other property
otherwise payable or deliverable to the holder of this Note shall have been
applied pursuant to this Section 5 to the satisfaction of Senior Indebtedness in
full.
6. Payment of Expenses. In case of a default in the payment of any
-------------------
principal of or interest on or other amount owing under this Note, the Company
will pay to the holder hereof promptly upon demand from time to time such
further amounts as shall be sufficient to cover the costs and expenses of
collection and the enforcement and preservation of such holder's rights, powers
and remedies hereunder, including, without limitation, reasonable attorneys'
fees and disbursements.
7. Notices; Etc. All notices, waivers and other communications
------------
provided for hereunder shall be in writing (including telex, telecopier and
other readable communication) and mailed, telexed, telecopied or otherwise
transmitted or delivered, if to the Company, at 5100 IDS Center, Minneapolis,
Minnesota 55402 and if to the holder hereof, at such address as shall be
designated by such holder in a notice given pursuant hereto. All such notices,
waivers and communications shall, if mailed, telexed, telecopied or otherwise
transmitted, be effective when deposited in the mails or telexed, telecopied or
otherwise transmitted.
8. Modification. No modification or amendment of this Note shall be
------------
effective unless in writing and signed by the holder of this Note.
9. Governing Law. This Note shall be construed in accordance with
-------------
and governed by the laws of the State of Minnesota.
10. No Holder in Due Course. In the event of the assignment of this
-----------------------
Note (or any portion thereof), the assignee shall not be deemed a holder in due
course and the Company shall be entitled to assert against such assignee any
defense to the payment of this Note which the Company shall be entitled to
assert against the assignor hereof.
IN WITNESS WHEREOF, the Company has executed this Note by its duly
authorized officer as of the date first above written.
DIAMOND BRANDS INCORPORATED
By:______________________
6
<PAGE>
ARTICLES OF AMENDMENT
OF
DIAMOND BRANDS INCORPORATED
The undersigned, being the Secretary of Diamond Brands Incorporated, a
Minnesota corporation. hereby certifies that (a) the following resolution was
duly adopted on December 8, 1986, by unanimous written authorization pursuant to
Section 302A.441, Minnesota Statutes, for the purpose of amending the rights and
preferences of 7% Senior Preferred Shares as follows:
1. Adding as clause (g) to Section 5 of Exhibit A to the Certificate
of Rights and Preferences the following:
(g) nothing contained in this Section 5 shall affect any other
provision of this Note as to when any amount of interest or
principal is due and payable under this Note for purposes of
determining when interest accrues thereon at the Penalty Rate;
any amount which by reason of this Section 5 is paid when so due
and payable shall accrue interest at the Penalty Rate.
IN WITNESS WHEREOF, I have subscribed my name this _____ day of
December, 1986.
-----------------------------------------
Edward A. Michael, Secretary
STATE OF MINNESOTA )
) ss.
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this ____ day of
December, 1986, by Edward A. Michael, Secretary of Diamond Brands Incorporated,
a Minnesota corporation, on behalf of the corporation.
------------------------------
Notary Public
<PAGE>
ARTICLES OF AMENDMENT
OF
DIAMOND BRANDS INCORPORATED
The undersigned, being the Secretary of Diamond Brands Incorporated, a
Minnesota corporation, hereby certifies that the following resolution was duly
adopted on March 27, 1987, by unanimous written authorization pursuant to
Section 302A.441, Minnesota Statutes, for the purpose of amending the Articles
as follows:
That the Articles of Incorporation be amended by adding a new Article
X to read as follows:
"ARTICLE X
No director of this corporation shall be personally liable
to the corporation or its shareholders 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 shareholders; (ii) for
acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii)
under Sections 302A.559 and 80A.23 of the Minnesota
Statutes; (iv) for any transaction from which the director
derived any improper personal benefit; or (v) for any act or
omission occurring prior to the date when this provision
becomes effective.
The provisions of this Article shall not be deemed to limit
or preclude indemnification of a director by the corporation
for any liability of a director which has not been
eliminated by the provisions of this Article.
If the Minnesota Statutes are hereafter amended to authorize
corporate action further eliminating or limiting the
personal liability of directors, the liability of a director
of the corporation shall be eliminated or limited to the
fullest extent permitted by the Minnesota Statutes, as so
amended."
IN WITNESS WHEREOF, I have subscribed my name this ______ day of
______, 1987.
_______________________________________
Edward A. Michael, Secretary
<PAGE>
STATE OF MINNESOTA)
) ss.
COUNTY OF HENNEPIN)
The foregoing instrument was acknowledged before me this _____ day of
_______, 1987, by Edward A. Michael, Secretary of Diamond Brands Incorporated, a
Minnesota corporation, on behalf of the corporation.
___________________________________
Notary Public
<PAGE>
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
DIAMOND BRANDS INCORPORATED
The undersigned, President of Diamond Brands Incorporated, a
corporation formed pursuant to Minnesota Statutes, Chapter 302A (the
"Corporation"), to amend the Articles of Incorporation of the Corporation,
hereby states that the following amendment to the Articles of Incorporation of
the Corporation was adopted by an action of the shareholders taken in writing in
lieu of a meeting in accordance with Minnesota Statutes, Chapter 302A.441:
The Certificate of Rights and Preferences of 7% Senior
Preferred Shares of Diamond Brands Incorporated adopted by
resolution of the Board of Directors of Diamond Brands
Incorporated on September 24, 1986 and filed with the
Secretary of State, State of Minnesota, on September 25,
1986 is hereby cancelled and terminated.
In lieu thereof a new Article XI is added to the Articles of
Incorporation of Diamond Brands Incorporated as follows:
"ARTICLE XI
Senior Preferred Shares. A total of 58,670 shares of this Corporation's
- -----------------------
authorized stock shall be designated as "7% Senior Preferred Shares" $100.00 par
value. The rights, preferences, privileges and restrictions granted to or
imposed upon the 7% Senior Preferred Shares are as follows:
1. Certain Definitions. Unless the context requires otherwise, the
-------------------
following terms shall have the following meanings:
(a) Common Shares. The term "Common Shares" means all shares
-------------
now or hereafter authorized of the class of Common Shares of the
Corporation presently authorized and any other capital shares into
which such shares may hereafter have been changed from time to time.
(b) Junior Shares. The term "Junior Shares" means Common Shares
-------------
and any other capital shares of the Corporation whether now or
hereafter authorized, not entitled to receive any dividends until all
dividends accrued on shares of 7% Senior Preferred Shares shall have
been paid or declared and set apart for payment or not entitled to
receive any assets upon liquidation, dissolution or winding up of the
affairs of the Corporation until the holders of shares of 7% Senior
Preferred
<PAGE>
Shares shall have received the entire amount to which they shall be
entitled upon such liquidation, dissolution or winding up.
(c) Accrued and Unpaid Dividends. The term "accrued and unpaid
----------------------------
dividends" with respect to any shares of the 7% Senior Preferred
Shares means an amount equal to $7.00 per annum per share thereof for
the period from and after January 1, 1990 to the date as of which
accrued and unpaid dividends are being determined less the amount of
all dividends theretofore paid from and after such date in respect of
such shares.
(d) Person. The term "Person" means an individual, a
------
corporation, a partnership, trust or estate, an unincorporated
organization or a governmental organization of any agency or political
subdivision thereof.
(e) Subsidiary. The term "Subsidiary" means any corporation 50%
----------
or more of whose outstanding voting shares at the time is owned
directly or indirectly by the corporation or by one or more
Subsidiaries or by the Corporation and one or more Subsidiaries.
(f) Net Income After Taxes. The term "Net Income After Taxes"
----------------------
means the Corporation's net income before any income and similar taxes
as set forth in the Corporation's audited financial statements less
any income or similar taxes which, after giving effect to the benefit
of any tax loss carry forwards, are payable with respect to such net
income .
2. Dividends. The holders of the 7% Senior Preferred Shares, in
---------
preference to the holders of Junior Shares, shall be entitled to receive, when
and as declared by the Board of Directors of the Corporation, but only out of
any funds legally available for the declaration of dividends, cumulative
dividends in cash at the annual rate of $7.00 per share, and no more, payable
annually on the last day of December in each year. Such dividends shall commence
to accrue and be cumulative from and after January 1, 1990 and shall be deemed
to accumulate and accrue from day to day thereafter. Accrued and unpaid
dividends on shares of 7% Senior Preferred Shares shall bear interest (a) from
and after the last day of December on which such dividends shall have become
payable pursuant to this Section 2 (without giving effect to the requirement
that such dividends be declared by the Board of Directors of the corporation) to
the day on which such accrued and unpaid dividends shall be paid, (b) at the
rate per annum equal to the sum of (i) 2%, plus (ii) the weighted average of the
prime rates of interest (expressed as percentages) in effect each day during the
period in respect of which interest on the accrued and unpaid dividends is being
calculated, as such prime rates are announced from time to time by Norwest Bank
of Minneapolis, N.A. (or the bank successor thereto or, at any time neither such
bank nor any bank successor thereto shall exist, such other national bank as the
Corporation and the holders of the majority of the then outstanding shares of 7%
Senior Preferred Shares shall agree to in writing, which agreement shall not be
unreasonably withheld), (c) compounded annually, and (d) payable simultaneously
with the payment of the accrued and unpaid dividends on which the interest has
accrued.
2
<PAGE>
3. Optional Redemption.
-------------------
(a) The Corporation, at the option of its Board of Directors,
may at any time redeem all or any of the shares of 7% Senior Preferred
Shares then outstanding, upon notice duly given as provided below, by
paying therefor the amount of $100 per share, together with the sum of
the accrued and unpaid dividends thereon, and the interest, if any,
accrued on such dividends pursuant to Section 2 to the date fixed for
redemption.
(b) If less than all of the outstanding shares of 7% Senior
Preferred Shares are to be redeemed pursuant to this Section 3 and on
the date fixed for redemption there shall be more than one holder of
such shares, the shares to be redeemed shall be selected pro rata.
Written notice of redemption of shares of 7% Senior Preferred Shares
pursuant to this Section 3 shall be mailed, postage prepaid, to the
holders of record of the shares to be redeemed at their respective
addresses then appearing on the books of the corporation, not less
than twenty (20) and not more than sixty (60) days prior to the date
designated for such redemption. From and after the date fixed in such
notice as the date of redemption, unless default shall be made in
providing monies at the time and place specified for the payment of
the amount necessary for redemption pursuant to this Section 3, the
shares so called for redemption shall no longer be deemed outstanding,
and the holders of the certificate or certificates representing such
shares shall have with respect to such shares no rights in or with
respect to the Corporation except the right to receive, upon the
surrender of such certificate or certificates, the redemption price
therefor, together with an amount equal to the sum of the accrued and
unpaid dividends thereon, and the interest, if any, accrued on such
dividends pursuant to Section 2, to the date designated for
redemption.
4. Mandatory Redemption.
--------------------
(a) The Corporation shall redeem from the holder or holders of
7% Senior Preferred Shares, by paying therefor in cash the amount of
$100 per share, together with the sum of the accrued and unpaid
dividends thereon, and the interest, if any, accrued on such dividends
pursuant to Section 2, to the date fixed for redemption on the dates
set forth below, the number of shares of 7% Senior Preferred Shares
set forth opposite such dates ("Minimum Mandatory Redemption"):
Date No. of Shares
---- -------------
December 31, 1992 3,000
December 31, 1993 3,000
December 31, 1994 3,000
December 31, 1995 and each
December 31 thereafter 4,000
3
<PAGE>
(b) In addition, no later than 120 days after the end of the
year in question, the Corporation shall redeem from the holder or
holders of 7% Senior Preferred Shares, by paying therefor in cash the
amount of $100 per share, together with the sum of the accrued and
unpaid dividends thereon and the interest, if any, accrued on such
dividends pursuant to Section 2 to the date fixed for redemption an
additional number of 7% Senior Preferred Shares depending upon the net
income after taxes earned by the Corporation in the year ending
December 31, 1992 and each year thereafter until all of the 7% Senior
Preferred Shares shall have been redeemed. The number of additional
7% Senior Preferred Shares to be redeemed each year shall be
determined as follows ("Additional Mandatory Redemption"):
(i) begin with the amount, stated in dollars, of Net
Income After Taxes earned by the Corporation that year;
(ii) subtract the sum of:
(A) the number of 7% Senior Preferred Shares
redeemed that year pursuant to the Minimum Mandatory
Redemption provisions of the preceding paragraph multiplied
by $100; and
(B) payments of dividends on the 7% Senior
Preferred Shares for that year; and
(C) payments of principal made by the corporation
on its long term debt for borrowed money during that year;
and
(iii) Multiply the result by 20%; and
(iv) divide the result by $100.
(c) However, in no event shall the Corporation be required to
redeem more than 6,000 7% Senior Preferred Shares in the years 1992,
1993 and 1994 ("Maximum Mandatory Redemption"). There shall be no
maximum limitation with respect to the mandatory redemption of the
Corporation's 7% Senior Preferred Shares in the year 1995 and years
subsequent to 1995.
(d) If on any date fixed for mandatory redemption of shares of
7% Senior Preferred Shares there shall be more than one holder of such
shares, then the Corporation shall redeem each such holder's pro rata
portion of the total number of such shares which the Corporation shall
be required to redeem on such date. The Corporation may reduce the
number of shares of 7% Senior Preferred Shares to be redeemed pursuant
to this Section 4 by subtracting any shares of 7% Senior Preferred
Shares that the Corporation has redeemed pursuant to Section 3 or
acquired pursuant to Section 5, provided, however, that any such
reduction resulting from the acquisition of shares pursuant to Section
5 shall be on a pro rata basis so that the number of shares required
to be redeemed in each succeeding
4
<PAGE>
year shall be reduced proportionately. For instance, if 10% of the
total number of outstanding shares were acquired pursuant to Section
5, the number of shares to be redeemed in any succeeding year would be
reduced by 10%.
(e) Written notice of redemption of shares of 7% Senior
Preferred Shares pursuant to this Section 4 shall be mailed, postage
prepaid, to the holders of record of the shares to be redeemed at
their respective addresses then appearing on the books of the
Corporation not less than twenty (20) nor more than sixty (60) days
prior to the date designated for such redemption. From and after the
date fixed in such notice as the date of redemption, unless default
shall be made in providing monies at the time and place specified for
the payment of the amount necessary for redemption pursuant to this
Section 4, the shares so called for redemption shall no longer be
deemed outstanding, and the holder of the certificate or certificates
representing such shares shall have with respect to such shares no
rights in or with respect to the Corporation except the right to
receive, upon the surrender of such certificate or certificates, the
redemption price therefor, together with an amount equal to the sum of
the accrued and unpaid dividends thereon, and the interest, if any,
accrued on such dividends pursuant to Section 2, to the date
designated for redemption .
5. Exchange.
--------
(a) The 7% Senior Preferred Shares shall be exchangeable in
whole or from time to time in part, at any time prior to December 31,
1994, at the option of the Corporation, for the Corporation's 9%
Subordinated Notes due 1994 (the "Notes"), which Notes shall be in
substantially the form of Exhibit A attached hereto, and the holders
of the outstanding shares of 7% Senior Preferred Shares will be
entitled to receive $100 principal amount of the Notes dated the date
fixed for exchange in exchange for each share of 7% Senior Preferred
Shares exchanged hereunder; provided, however, that
-------- -------
(i) in the case of any such exchange occurring as of any
date during the period December 31, 1992 through December 30,
1993 (both such dates being included in such period) , (m) the
Corporation shall redeem 40% of the shares of 7% Senior Preferred
Shares it has elected then to exchange pursuant to this Section
5, and (n) the Notes issued in exchange for the other 60% of the
shares of 7% Senior Preferred Shares the Corporation shall have
elected then to exchange shall provide that two-thirds of such
Notes shall be due and payable on December 31, 1993 and December
31, 1994, respectively, and
(ii) in the case of any such exchange occurring as of any
date during the period December 31, 1993 through December 30,
1994 (both such dates being included in such period), (x) the
Corporation shall redeem 80% of the shares of 7% Senior Preferred
Shares it has elected
5
<PAGE>
then to exchange pursuant to this Section 5, and (y) the Notes
issued in exchange for the other 20% of the shares of 7% Senior
Preferred Shares the Corporation shall have elected then to
exchange shall provide that the entire principal amount of such
Notes shall be due and payable on December 31, 1994.
If on any date fixed for exchange of shares of 7% Senior Preferred
Shares there shall be more than one holder of such shares, then the
Corporation shall exchange (and, if required hereby redeem in
accordance with this Section 5) each such holder's pro rata portion of
the total number of such shares which the corporation elects to
exchange on such date. Any redemption of shares of 7% senior
Preferred Shares pursuant to this Section 5 shall be made in
accordance with the provisions of Section 3.
(b) Written notice of exchange (and, if applicable, redemption)
of shares of 7% Senior Preferred Shares pursuant to this Section 5
shall be mailed, postage prepaid, to the holders of record of the
shares to be exchanged at their respective addresses then appearing on
the books of the Corporation, not less than twenty (20) and not more
than sixty (60) days prior to the date designated for such exchange.
From and after the date fixed in such notice as the date of exchange,
unless default shall be made by the Corporation in executing and
delivering the Notes issuable upon such exchange (and, if applicable,
paying in accordance with Section 3 the amount to be paid in
redemption of the shares to be redeemed) , the rights of the holders
of the shares so exchanged (and, if applicable, redeemed) as
stockholders of the Corporation shall cease (except the right to
receive on the date of exchange the Notes to be exchanged therefor
(and the redemption price for the shares, if any, to be redeemed
pursuant to this Section 5) , together with an amount equal to the sum
of the accrued and unpaid dividends on the shares exchanged (and, if
applicable, redeemed), and the interest, if any, accrued on such
dividends pursuant to Section 2, to the date of exchange), and the
person or persons entitled to receive the Notes issuable upon exchange
shall be treated for all purposes as the registered holder or holders
of such Notes. On the date of the exchange the Corporation shall pay
all accrued and unpaid dividends on the shares exchanged (and, if
applicable, redeemed) and all interest accrued on such dividends
pursuant to Section 2.
6. Deferrals; Compliance with Laws; Retirement of Shares. The
-----------------------------------------------------
Corporation shall in no event be obligated to apply to the redemption of 7%
Senior Preferred Shares any funds not legally available therefor under the
Minnesota Business Corporation Act, but any redemption so deferred shall be made
promptly after, and to the full extent that, any funds of the Corporation become
legally available for such purposes. The Corporation shall not exchange any
shares of 7% Senior Preferred Shares for Notes unless such exchange shall comply
with all applicable requirements of the Minnesota Business Corporation Act.
Shares of 7% Senior Preferred Shares redeemed by the Corporation pursuant to
Section 3, Section 4 or Section 5 or exchanged for Notes under Section 5, or
shares of 7% Senior Preferred Shares otherwise
6
<PAGE>
purchased or acquired by the Corporation, shall not be reissued and shall be
cancelled and retired in the manner provided by the laws of the State of
Minnesota.
7. Liquidation. In the event of any voluntary or involuntary
-----------
liquidation, dissolution or winding up of the affairs of the Corporation, the
holders of the 7% Senior Preferred Shares shall be entitled to receive $100 in
cash for each share thereof, together with the sum of the accrued and unpaid
dividends thereon, and the interest, if any, accrued on such dividends pursuant
to Section 2, to the date fixed for such payment, before any distribution of the
assets of the Corporation shall be made to the holders of the outstanding Junior
Shares. The holders of the outstanding shares of 7% Senior Preferred Shares
shall be entitled to no further participation in such distribution of the assets
of the Corporation. If upon such liquidation, dissolution or winding up of the
affairs of the Corporation, the assets of the corporation available for
distribution among the holders of all outstanding shares of 7% Senior Preferred
Shares shall be insufficient to permit the payment in full to such holders of
the preferential amounts to which they are entitled, then the assets of the
Corporation available for distribution shall be distributed among the holders of
the 7% Senior Preferred Shares ratably in proportion to the full amounts to
which they would otherwise be entitled. A consolidation or merger of the
Corporation or a sale or transfer of all or substantially all of its assets as
an entirety shall not be regarded as a "liquidation, dissolution or winding up
of the affairs of the Corporation" within the meaning of this Section 7.
8. Contingent Voting Rights. Except as otherwise expressly provided
------------------------
by law or provided herein, the 7% Senior Preferred Shares shall have no voting
rights. In any matter on which the holders of 7% Senior Preferred Shares shall,
as a matter of law or in accordance with the provisions herein, be entitled to
vote, they shall be entitled to one vote for each share of 7% Senior Preferred
Shares held.
If at any time a Voting Right Event (as hereinafter defined) shall occur, the
number of directors of the Corporation shall be increased as provided in the
next sentence of this Section 8 automatically upon the occurrence of the Voting
Right Event and the holders of 7% Senior Preferred Shares shall have voting
rights and as a class be entitled to elect the directors to fill the director
positions thereby created. If prior to such increase the Board of Directors of
the Corporation consists (i) of five (5) directors, the number of directors of
the Corporation shall thus be increased by two (2); (ii) of six (6) directors,
the number of directors of the Corporation shall thus be increased by three (3);
(iii) of more than six (6) directors, the number of directors of the Corporation
shall thus be increased by such number (rounded to the next higher whole number
if necessary to cause the number of the increase to be a whole number) as shall
constitute one-third (1/3) of the total number of directors after giving effect
to such increase. At such time as the Voting Right Event which gave rise to the
exercise of the voting rights provided for in this Section 8 has been cured and
all other events creating a Voting Right Event, if any, shall have been cured,
the rights of the holders of 7% Senior Preferred Shares so to vote as provided
in this Section 8 shall cease, subject to renewal from time to time upon the
same terms and conditions, and the terms of office of the directors elected to
office by the holders of 7% Senior Preferred Shares shall terminate as of the
day on which the rights of the holders of the 7% Senior Preferred Shares to vote
as provided in this Section 8 shall cease, whereupon the number of directors of
the
7
<PAGE>
Corporation shall be reduced accordingly. At any time during which the holders
of 7% Senior Preferred Shares shall have voting rights, the holders of 7% Senior
Preferred as a class shall be entitled to designate a representative who shall
be permitted by the Corporation to inspect the Corporation's books and records.
At any time after the voting power to elect directors of the Corporation shall
have become vested in the holders of shares of 7% Senior Preferred Shares as
provided in this Section 8, the President of the Corporation may, and, upon the
written request of the record holders of at least ten percent of the 7% Senior
Preferred Shares then outstanding addressed to him at the principal office of
the Corporation, shall call a special meeting of the holders of 7% Senior
Preferred Shares for the election of the directors to be elected by such
holders, to be held at the place and upon the notice provided in the bylaws of
the Corporation for the holding of meetings of shareholders. If such meeting
shall not be so called within ten days after personal service of the request, or
within fifteen days after mailing of the same by registered mail within the
United States of America, then the record holders of at least ten percent of the
shares of 7% Senior Preferred Shares may designate in writing one of their
number to call such meeting at the place and upon the notice above provided, and
for that purpose shall have access to the stock books of the Corporation. At
any meeting so called or at any annual or other special meeting held while the
holders of 7% Senior Preferred shares have the voting power to elect directors
of the Corporation pursuant to this Section 8, the holders of a majority of the
then outstanding shares of 7% Senior Preferred Shares present in person or by
proxy shall be sufficient to constitute a quorum for the election of directors
by the holders of 7% Senior Preferred Shares as herein provided.
If, at any time while the holders of 7% Senior Preferred Shares have the voting
power to elect directors of the Corporation pursuant to this Section 8, the
number of directors in office who have been elected by the holders of 7% Senior
Preferred Shares shall be less than the total number the holders of 7% Senior
Preferred Shares shall then be entitled to have elected to office, whether by
reason of resignation, death, removal or otherwise, the holders of 7% Senior
Preferred Shares shall be entitled to fill such vacancy or vacancies in an
election held at an annual meeting of stockholders or at a special meeting of
the holders of 7% Senior Preferred Shares called and held as provided in the
immediately preceding paragraph of this Section 8; no such vacancy may be filled
other than by an action of the holders of 7% Senior Preferred Shares. A
director of the Corporation elected by the holders of 7% Senior Preferred Shares
may be removed from office only by action of the holders of 7% Senior Preferred
Shares; a special meeting of such holders for such purpose may be called and
held as provided in the immediately preceding paragraph of this Section 8.
"Voting Right Event" shall mean any of the following events or conditions:
(a) the dividends payable with respect to the 7% Senior
Preferred Shares pursuant to Section 2 hereof shall be in arrears in
respect of any two annual payments thereof; or
(b) the Corporation shall have failed to redeem, on any
redemption date specified in Section 4 hereof, any shares of 7% Senior
Preferred Shares which it
8
<PAGE>
shall have been required to redeem on such date, or which, but for the
provisions of Section 6 hereof or any provision of the Minnesota
Business Corporation Act, it would have been required to redeem on
such date; or
(c) the Corporation shall be in default of any of the covenants
contained in Section 9 hereof.
9. Protection Provisions. As long as any shares of 7% Senior
---------------------
Preferred Shares are outstanding, the Corporation:
(a) shall not, without the approval by the vote or written
consent of the holders of a majority of the outstanding 7% Senior
Preferred Shares:
(i) Amend or repeal any provision of, or add any provision
to, the Corporation's Articles of Incorporation if such action
would alter or change adversely the 7% Senior Preferred Shares or
the designations and the preferences, qualifications,
limitations, restrictions and special or relative rights thereof
provided for the benefit of the 7% Senior Preferred Shares;
(ii) Authorize, create or issue shares (or securities of
any kind convertible into shares) of any class of stock having
any preference or priority as to dividends or assets superior to
or on a parity with any such preference or priority of the 7%
Senior Preferred Shares;
(iii) Reclassify any shares into shares having any
preference or priority as the dividends or assets superior to or
on a parity with that of the 7% Senior Preferred Shares;
(iv) Effect any merger or consolidation of the Corporation
with any other Person if (i) the net worth of the surviving
corporation immediately after the merger or consolidation, less
the amount of all payments (including without limitation
dividends and interest) payable upon a liquidation, dissolution
or winding up of the surviving corporation, whether voluntary or
involuntary, on all shares (other than the 7% Senior Preferred
Shares) having any preference or priority as to dividends or
assets superior to or on a parity with any preference or priority
of the 7% Senior Preferred Shares, would be less than (ii) the
net worth of the Corporation immediately prior to the merger or
consolidation; provided, however, that in the event that the
-------- -------
transaction expenses of the merger or consolidation are expenses
for financial reporting purposes, the net worth of the surviving
corporation will not be deemed to have been decreased by such
transaction expenses for purposes of this clause (iv) to the
extent that such transaction expenses do not exceed the lesser of
an amount equal to 2% of the assets acquired or $200,000;
9
<PAGE>
or
(v) Declare or pay any dividend on any Junior Shares other
than a dividend payable solely in Junior Shares of the
Corporation, or buy, or permit any Subsidiary to buy, any Junior
Shares or make any payment on account of the purchase, redemption
or other retirement of any shares of Junior Shares or of any
warrants, options or similar rights to purchase Junior Shares, or
make any other distribution in respect of Junior Shares, either
directly or indirectly; provided, however, that the Corporation
-------- -------
may pay cash dividends on Junior Shares, or take any such action
in respect of the redemption or retirement of shares of Junior
Shares, if (i) at the time such cash dividends are paid or such
action is taken, no Voting Right Event shall have occurred and be
continuing, the Corporation shall have paid all dividends then
accrued and payable on 7% Senior Preferred Shares (without giving
effect to the requirement that dividends be declared by the Board
of Directors of the Corporation), and the corporation shall have
redeemed all shares of 7% Senior Preferred Shares which the
Corporation shall have been required then to have redeemed (or
which, but for the provisions of Section 6 hereof or any
provision of the Minnesota Business Corporation Act, it would
have been required then to have been redeemed), and (ii) all
amounts paid as cash dividend on, or paid in respect of the
redemptions or retirement of, Junior Shares are paid out of the
retained earnings of the Corporation.
(b) shall furnish to each holder of 7% Senior Preferred Shares:
(i) promptly upon their becoming available to the
Corporation, copies of all financial statements and other
reports, notices and documents sent or made available by the
Corporation to the holders of any class of its equity securities
(including, without limitation, holders of Common Shares); and
(ii) (1) at the time they are made available to any lender
to the Corporation, copies of the financial statements which the
Corporation is required to deliver to any such lender pursuant to
any agreement between the Corporation and any such lender, and
(2) in the event that such lender shall not require audited
financial statements of the Corporation within 120 days after the
end of each fiscal year of the Corporation, financial statements
of the Corporation for each fiscal year of the corporation,
certified by a nationally recognized firm of independent
certified public accountants as having been audited in accordance
with generally accepted auditing standards, which financial
statements and certification shall be furnished to each holder of
7% Senior Preferred Shares within 120 days after the end of the
fiscal year covered by the financial statements."
10
<PAGE>
IN WITNESS WHEREOF, the undersigned has signed this Amendment as of
the 24th day of January, 1989.
__________________________
11
<PAGE>
STATE OF MINNESOTA )
) ss:
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this ___ day of
_____________, 19__, by _________________________, the ________________ of
Diamond Brands Incorporated, a Minnesota corporation, on behalf of the
corporation.
________________________________
Notary Public
12
<PAGE>
Exhibit A
---------
DIAMOND BRANDS INCORPORATED
9% SUBORDINATED NOTE DUE 1994
$___________ Dated: ____________, 19
FOR VALUE RECEIVED, the undersigned, DIAMOND BRANDS INCORPORATED, a
Minnesota corporation (the "Company"), hereby promises to pay to
________________ the principal sum of __________ Dollars ($_________ ), payable
in three consecutive annual installments of 40%, 40% and 20% of the principal
sum on December 31 of the years 1992 through 1994, respectively, and to pay
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the unpaid principal hereof from the date hereof at the rate of 9% per annum
semiannually on June 30 and December 31 in each year, and (to the extent
permitted by applicable law) to pay interest at the Penalty Rate (as defined
below) per annum on any overdue principal and interest, from the date such
amount was due and payable until the obligation of the Company with respect to
the payment thereof shall be fully discharged. "Penalty Rate" shall mean the
rate per annum equal to the greater of (a) the sum of (i) 2%, plus (ii) the
weighted average of the prime rates of interest (expressed as percentages) in
effect each day during the period in respect of which interest is being
calculated, as such prime rates are announced from time to time by Norwest Bank
of Minneapolis, N.A. (or the bank successor thereto or, at any time neither such
bank nor any bank successor thereto shall exist, such other national bank as the
Company and the holder of this Note shall agree to in writing, which agreement
shall not be unreasonably withheld) and (b) 15%.
This Note (this "Note") may be prepaid in whole or in part at any time
without penalty. Prepayments shall be applied against payments of principal in
the inverse order of their maturity.
l. Payments. Payments of principal and interest becoming due and
--------
payable on this Note shall be paid in lawful money of the United States of
America, in same day funds, at the principal office of Bankers Trust Company in
New York, New York (or at such other address or account as shall be designated
from time to time in writing to the Company by the holder hereof), without the
presentation or surrender of this Note or the making of any notation hereon,
except that upon payment in full hereof, this Note shall be surrendered to the
Company at its principal office.
2. Certain Covenants. As long as this Note is outstanding, the
-----------------
Company:
(a) shall not, without the written approval of the holder of
this Note:
(1) Effect any merger or consolidation of the Company with
any other person or entity if the net worth of the surviving
corporation immediately after the merger or consolidation would
be less than the net worth of the Company immediately prior to
the merger or consolidation;
<PAGE>
provided, however, that in the event that the transaction
-------- -------
expenses of the merger or consolidation are expensed for
financial reporting purposes, the net worth of the surviving
corporation will not be deemed to have been decreased by such
transaction expenses for purposes of this clause (1) to the
extent that such transaction expenses do not exceed the lesser of
an amount equal to 2% of the assets acquired or $200,000; or
(2) Declare or pay any dividend on any shares of the
capital stock of the Company ("Shares") other than a dividend
payable solely in Shares, or buy, or permit any subsidiary of the
Company to buy, any Shares or make any payment on account of the
purchase, redemption or other retirement of any Shares or of any
warrants, options or similar rights to purchase Shares, or make
any other distribution in respect of Shares, either directly or
indirectly; provided, however, that the Company may pay cash
-------- -------
dividends on Shares, or take any such action in respect of the
redemption or retirement of Shares, if (i) at the time such cash
dividends are paid or such action is taken, no Event of Default
(as defined in Section 3 hereof) shall have occurred and be
continuing, the Company shall have paid all amounts then due and
payable on this Note, and no Voting Right Event (as defined in
Exhibit F to the Asset Purchase Agreement dated August 21, 1986
between The Diamond Match Company and the Company) shall have
occurred and be continuing, and (ii) all amounts paid as cash
dividends on, or paid in respect of the redemption or retirement
of, Shares are paid out of the retained earnings of the Company.
(b) shall furnish to the holder of this Note:
(1) promptly upon their becoming available to the Company,
copies of all financial statements and other reports, notices and
documents sent or made
(f) the Company shall be the subject of an order of relief
entered by a court under the Bankruptcy Code; or
(g) the Company shall file a petition or answer to take
advantage of any bankruptcy, reorganization, insolvency, readjustment
of debts, dissolution or liquidation law or statute or any answer
admitting the material allegations of a petition filed against it in
any proceeding under any such law or if action shall be taken by it
for the purpose of effecting any of the foregoing;
then, and in any such event, (x) upon the occurrence of any Event of Default
described in clause (e), (f) or (g) of this Section 3, the unpaid principal
amount of, and accrued interest on, and all other amounts owing under this Note
shall automatically, without any further action of any person or entity, mature
and become due and payable or (y) upon the occurrence and during the
continuation of any other Event of Default, the holder of this Note may at any
time (unless all Events of Default shall theretofore have been remedied) at its
option, by written notice or notices
2
<PAGE>
to the Company, declare this Note to be due and payable, whereupon the unpaid
principal amount of and accrued interest on and all other amounts owing under
this Note shall forthwith mature and become due and payable, all without
presentment, demand, protest or other notice, all of which are hereby expressly
waived except as expressly provided above in this Section 3.
At any time after this Note is declared due and payable, the holder of
this Note, by written notice to the Company, may rescind and annul any such
declaration in respect of this Note and its consequences; but no such rescission
and annulment shall extend to or affect any subsequent Event of Default or
impair any right consequent thereon.
4. Remedies, Etc. In case any one or more Events of Default shall
--------------
occur and be continuing, the holder of this Note may proceed to protect and
enforce the rights of such holder by an action at law, suit in equity or other
appropriate proceeding, whether for the specific performance of any agreement
contained herein, or for an injunction against a violation of any of the terms
hereof, or in aid of the exercise of any power granted hereby or by law or
otherwise. No course of dealing and no failure to exercise or delay in
exercising any right, power or remedy by or on the part of any holder of this
Note shall operate as a waiver thereof or otherwise prejudice any holder's
rights, powers or remedies, nor shall any single or partial exercise of any such
right, power or remedy preclude any other or further exercise thereof or the
exercise of any other right, power or remedy. No right, power or remedy
conferred by this Note upon any holder hereof shall be exclusive of any other
right, power or remedy referred to herein or now or hereafter available by law,
in equity or otherwise.
5. Subordination. The Company is now or hereafter may be indebted
-------------
to Sanwa Business Credit Corporation, a Delaware corporation ("Senior Lender"),
on account of loans or other extensions of credit or financial accommodations
from Senior Lender to the Company ("Senior Indebtedness") while the Company is
also indebted to the holder of this Note in the amount evidenced by it
("Subordinated Indebtedness"). The holder of this Note acknowledges that Senior
Lender is unwilling to continue the presently existing Senior Indebtedness or to
make future loans or to continue to extend financial accommodations to the
Company except and unless the Subordinated Indebtedness is made subordinate to
the Senior Indebtedness as set forth in this paragraph 5. The holder of this
Note is of the opinion that it would be for its best interest to assist the
Company in obtaining credit accommodations from Senior Lender and therefore is
willing to subordinate the Subordinated Indebtedness to the Senior Indebtedness.
Therefore, notwithstanding any other provision of this Note which may expressly
or implicitly be to the contrary, the holder of this Note does hereby agree with
Senior Lender as follows:
(a) The holder of this Note hereby agrees that the Subordinated
Indebtedness shall be and it is hereby made fully subordinate to the Senior
Indebtedness.
(b) Until such time as this Note is paid in full and surrendered and
cancelled, the holder of this Note will not ask for or demand, receive or accept
payment of the Subordinated Indebtedness, or any part thereof, and the holder of
this Note will bring no action or proceeding to collect or enforce the payment
of the Subordinated Indebtedness or any part thereof, and if
3
<PAGE>
payments are made contrary to the terms of this paragraph 5, the holder of this
Note shall forthwith pay over the same to the Senior Lender, provided, however,
that nothing in this Section 5 shall prevent the Company from making, or the
holder hereof from demanding, receiving and accepting, payment of interest on
this Note as long as: (i) no default exists with respect to the Senior
Indebtedness, and (ii) the Company has earnings in the year of payment.
(c) In the event of the insolvency, bankruptcy or other liquidation
of the Company or in the event of proceedings to reorganize the Company under
any appropriate bankruptcy or reorganization statute, the holder of this Note
will file a claim against the Company on account of the Subordinated
Indebtedness and will order and direct by appropriate instruments in writing
that all payments made on said claim shall be paid over to the Senior Lender and
will further order and direct that in case of reorganization of the Company any
new obligations and securities which the holder of this Note would be entitled
to receive shall be delivered to the Senior Lender or, the Senior Lender may
itself file a claim for or on account of the Subordinated Indebtedness and for
such purpose the holder of this Note hereby nominates, constitutes and appoints
the Senior Lender his, her or its true and lawful attorney either in the name of
the holder of this Note or in the name of the Senior Lender to file such claim
and to take any and all other actions or proceedings in respect thereto which it
deems necessary or desirable. The holder of this Note agrees that the power of
attorney herein given to Senior Lender is coupled with an interest and is not
subject to revocation by the holder of this Note and that it shall not become
terminated by reason of the death or disability of the holder of this Note. The
holder of this Note agrees, upon request of the Senior Lender, to give the
Senior Lender such further instruments of assignment or assurance as are
necessary to more fully enable the Senior Lender to file said claim and to carry
out the provisions of this paragraph. Notwithstanding anything to the contrary
contained herein, as long as the Senior Indebtedness remains unpaid or
unsatisfied, the holder hereof will not commence, or join with any other
creditor of the Company in commencing any bankruptcy, reorganization or
insolvency proceeding against the Company without the prior written consent of
Senior Lender, which consent shall not be unreasonably withheld.
(d) All monies or other properties received by the Senior Lender from
or on account of the Subordinated Indebtedness pursuant to the provisions of
either subparagraphs (b) or (c) above may be held by it either as additional
security for payment of the Senior Indebtedness or, at its or their election,
may be applied in payment thereof.
(e) This paragraph 5 and every part thereof shall be binding upon the
holder of this Note and upon the heirs, legal representatives, successors and
assigns to the holder of this Note.
(f) All monies or other properties received by the Senior Lender from
or on account of the Subordinated Indebtedness pursuant to the provisions of
this Section 5 shall be applied to the payment of the Senior Indebtedness;
provided, however, that the holder of this Note (i) shall be entitled to receive
from the Senior Lender any payments or distributions received by such Senior
Lender in excess of the amount sufficient to satisfy the Senior Indebtedness in
full, and (ii) upon the full satisfaction of the Senior Indebtedness shall be
4
<PAGE>
subrogated to any rights of the Senior Lender to receive all further payments or
distributions applicable to the Senior Indebtedness, until all principal of,
premium, if any, and interest on the Subordinated Indebtedness shall be paid in
full. No holder of this Note shall exercise any right of subrogation which it
may have with respect to Senior Indebtedness, whether pursuant to this Section
5, at common law or otherwise, until cash, securities, or other property
otherwise payable or deliverable to the holder of this Note shall have been
applied pursuant to this Section 5 to the satisfaction of Senior Indebtedness in
full.
(g) Nothing contained in this Section 5 shall affect any other
provision of this Note as to when any amount of interest or principal is due and
payable under this Note for purposes of determining when interest accrues
thereon at the Penalty Rate; any amount which by reason of this Section 5 is
paid when so due and payable shall accrue interest at the Penalty Rate.
6. Payment of Expenses. In case of a default in the payment of any
-------------------
principal of or interest on or other amount owing under this Note, the Company
will pay to the holder hereof promptly upon demand from time to time such
further amounts as shall be sufficient to cover the costs and expenses of
collection and the enforcement and preservation of such holder's rights, powers
and remedies hereunder, including, without limitation, reasonable attorneys'
fees and disbursements.
7. Notices; Etc. All notices, waivers and other communications
-------------
provided for hereunder shall be in writing (including telex, telecopier and
other readable communication) and mailed, telexed, telecopied or otherwise
transmitted or delivered, if to the company, at 5100 IDS center, Minneapolis,
Minnesota 55402 and if to the holder hereof, at such address as shall be
designated by such holder in a notice given pursuant hereto. All such notices,
waivers and communications shall, if mailed, telexed, telecopied or otherwise
transmitted, be effective when deposited in the mails or telexed, telecopied or
otherwise transmitted.
8. Modification. No modification or amendment of this Note shall be
------------
effective unless in writing and signed by the holder of this Note.
9. Governing Law. This Note shall be construed in accordance with
-------------
and governed by the laws of the State of Minnesota.
10. No Holder in Due Course. In the event of the assignment of this
-----------------------
Note (or any portion thereof), the assignee shall not be deemed a holder in due
course and the Company shall be entitled to assert against such assignee any
defense to the payment of this Note which the Company shall be entitled to
assert against the assignor hereof.
IN WITNESS WHEREOF, the Company has executed this Note by its duly
authorized officer as of the date first above written.
DIAMOND BRANDS INCORPORATED
By _______________________________
5
<PAGE>
DIAMOND BRANDS INCORPORATED
STATEMENT OF CANCELLATION
The undersigned, being the Secretary of Diamond Brands Incorporated, a
Minnesota corporation, hereby certifies pursuant to Section 302A.553, Minnesota
Statutes, as follows:
1. The name of the corporation is Diamond Brands Incorporated (the
"Company").
2. 58,670 7% Senior Preferred Shares of the Company have been
reacquired and cancelled. The Company's Articles of Incorporation provide that
such preferred shares may not be reissued.
3. The Company has an aggregate 9,941,330 authorized common shares,
all of one class and one series, except that the Board of Directors may
establish more than one class or series.
IN WITNESS WHEREOF, I have submitted my name this 11th day of March,
1991.
__________________________________
Edward A. Michael, Secretary
<PAGE>
ARTICLES OF AMENDMENT
OF
DIAMOND BRANDS INCORPORATED
The undersigned, being the Secretary of Diamond Brands Incorporated, a
Minnesota corporation, hereby certifies that the following resolution was duly
adopted pursuant to chapter 302A, Minnesota Statutes, for the purpose of
amending the Articles as follows:
RESOLVED, that Article III of the Articles of Incorporation of the
Corporation is amended in its entirety as follows:
"Article III
The Corporation is authorized to issue an aggregate
total of 50,000,000 shares of stock. All shares shall
be of one class and one series, except that the Board
of Directors by its action may establish more than one
class or series."
IN WITNESS WHEREOF, I subscribe my name this ____ day of March, 1991.
______________________________________
Edward A. Michael, Secretary
<PAGE>
ARTICLES OF AMENDMENT
OF
DIAMOND BRANDS INCORPORATED
The undersigned, being the Secretary of Diamond Brands Incorporated, a
Minnesota corporation, hereby certifies that the following resolution was duly
adopted pursuant to Chapter 302A, Minnesota Statutes, for the purpose of
amending the Articles as follows:
RESOLVED, that the Article III of the Articles of Incorporation of the
Corporation is amended in its entirety as follows:
"Article III
The Corporation is authorized to issue an aggregate total of
50,000,000 shares of stock. All shares shall be of one class and one
series, except that the Board of Directors by its action may establish
more than one class or series."
IN WITNESS WHEREOF, I subscribe my name this 22nd day of March, 1991.
/s/ Edward A. Michael
-------------------------------
Edward A. Michael, Secretary
<PAGE>
BY-LAWS
OF
DIAMOND BRANDS INCORPORATED
ARTICLE I
---------
OFFICES AND CORPORATE SEAL
Section 1.01. Registered and Other Offices. The registered office of
----------------------------
the corporation in Minnesota shall be that 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
Minnesota changing the registered office in the manner prescribed by law. The
corporation may have such other offices, within or without the State of
Minnesota, as the Board of Directors shall, from time to time, determine.
Section 1.02. Corporate Seal. The corporation shall have 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, shall be held on the date and at the time
and place fixed by the Chairman of the Board of Directors in the absence of
Board action, or the Board, except that a special meeting called by, or at the
demand of a shareholder or shareholders, shall 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 shall be an election of qualified successors for directors
who serve for an indefinite term and whose terms have expired or are due to
expire within six months after the date of the meeting. Any business
appropriate for action by the shareholders may be transacted at a regular
meeting. No meeting shall 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
Minnesota Statutes, Sections 302A.431, Subd. 2, and 302A.433, Subd. 2,
respectively.
Section 2.04. Quorum; Adjourned Meetings. The holders of fifty
--------------------------
percent (50%) 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. If a quorum is present when a duly
called or held meeting is convened, the shareholders present
<PAGE>
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 shall 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 shall have one vote for each share held. Upon demand of any
shareholder, the vote upon any question before the meeting shall be by ballot.
Section 2.06. Notice of Meetings. Notice of all meetings of
------------------
shareholders shall be given to every holder of voting shares, except where the
meeting is an adjourned meeting and the date, time and place of the meeting were
announced at the time of adjournment. The notice shall be given at least five
(5), but not more than sixty (60) days before the date of the meeting, except
that written notice of a meeting at which an agreement of merger is to be
considered shall be given to all shareholders, whether entitled to vote or not,
at least fourteen (14) days prior thereto. Every notice of any special meeting
shall state the purpose or purposes for which the meeting has been called, and
the business transacted at all special meetings shall 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 as authorized by law.
ARTICLE III
-----------
DIRECTORS
Section 3.01. General Purposes. Except as authorized by the
----------------
shareholders by unanimous affirmative vote, the business and affairs of the
corporation shall be managed by and shall 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 shall consist of not less than one nor more
than three persons. The initial Board of Directors shall consist of one person.
The number of directors may be increased or, subject to Minnesota Statutes,
Section 302A.223, decreased at any time by amendment of these Bylaws. Directors
need not be shareholders. Each of the directors shall hold office until the
regular meeting of the shareholders next held after his election, until his
successor shall have been elected and shall qualify, or until he shall resign or
shall have been removed as hereinafter provided.
2
<PAGE>
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 Minnesota that the Board of Directors may designate. In the absence of
designation by the Board of Directors, Board meetings shall 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 Chief Executive
Officer, or directors comprising at least one third of the number of directors
then in office may call a Board meeting by giving 5 days notice if by mail or
two days notice if by telephone, telex, 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. (a) Advance Written Consent or Opposition. Any member
-------------------------------------
of the Board or a committee thereof, as the case may be, may give advance
written consent or opposition to a proposal to be acted on at a Board or
committee meeting. If a director or committee member is not present at the
meeting, advance written consent or opposition to a proposal does not constitute
presence for the purpose of determining whether a quorum exists, but such
advance written consent or opposition shall be a vote in favor of or against the
proposal or resolution if the proposal or resolution acted upon at the meeting
is substantially the same or has substantially the same effect as the proposal
or resolution to which the member of the Board or committee has consented or
objected.
(b) Action Without Meeting. Any action, other than an action
----------------------
requiring shareholder approval, may be taken by written action signed by the
number of directors that would be required to take the same action at a meeting
of the board at which all directors were present. An action requiring
shareholder approval 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 the required number of directors, unless a different
effective time is provided in the written action. When written action is taken
by less than all directors, all directors shall be notified immediately of its
text and effective date. Failure to provide the notice does not invalidate the
written notice. A director who does not sign or consent to the written action
has no liability for the action or actions taken thereby.
Section 3.05. Waiver of Notice. A director may waive notice of a
----------------
meeting of the Board. A waiver of notice by a director is effective, whether
given before, at or after the meeting and whether given in writing, orally or by
attendance.
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 withdrawal of directors
originally present leaves less than the proportion or number otherwise required
for a quorum.
Section 3.07. Vacancies. Vacancies on the Board resulting from the
---------
death, resignation or removal of a director may be filled by the affirmative
vote of a majority of the
3
<PAGE>
remaining directors, even though less than a quorum. Each director elected under
this Section to fill a vacancy shall hold office until a qualified successor is
elected by the shareholders at the next regular or special meeting of the
shareholders.
ARTICLE IV
----------
OFFICERS
Section 4.01. Numbers. The officers of the corporation shall be a
-------
Chief Executive Officer and a Chief Financial Officer, and such other officers
as the Board of Directors, in its discretion, may deem necessary. The Board of
Directors, in its discretion, may elect a Chairman of the Board of Directors,
who, when present, shall preside at all meetings of the Board of Directors, and
who shall have such other powers as the Board shall prescribe.
Section 4.02. Term. Officers shall hold office at the will of the
----
Board for an indefinite term until their successors are elected and qualified.
Any officer elected or appointed by the Board of Directors may be removed by the
Board at any time with or without cause.
Section 4.03. Chief Executive Officer. The Chief Executive Officer
-----------------------
shall have such powers and duties as are designated by the Board of Directors.
The Chief Executive Officer and the Chief Financial Officer unless some other
person is specifically authorized by vote of the Board of Directors, shall sign
all certificates of stock, bonds, deeds, mortgages, agreements, modification of
mortgage agreements, leases and contracts of the corporation.
Section 4.04. Chief Financial Officer. The Chief Financial Officer,
-----------------------
subject to the order of the Board of Directors, shall have the care and custody
of the money, funds, valuable papers, and documents of the corporation and shall
have and exercise, under the supervision of the Board of Directors, all the
powers and duties commonly incident to his office, and shall give bond in such
form and amount and with such sureties as shall be required by the Board of
Directors. The Chief Financial Officer shall keep accurate accounts of all
monies of the corporation received or disbursed. He shall deposit all monies,
drafts and checks in the name of, and to the credit of, the corporation in such
banks and depositaries as a majority of the whole Board of Directors shall from
time to time designate. He shall have power to endorse for deposit all notes,
checks and drafts received by the corporation. He shall disburse the funds of
the corporation in the manner prescribed by the Board of Directors, making
proper vouchers therefor. He shall render to the directors, whenever required,
an account of all his transactions as Chief Financial Officer and of the
financial condition of the corporation and shall perform such other duties as
may be prescribed from time to time by the Board of Directors.
Section 4.05. Additional Officers and Agents. The Board of
------------------------------
Directors, at its discretion, may appoint one or more assistant secretaries, and
such other officers or agents as it may deem advisable, and may prescribe the
duties of any such officer or agent.
Section 4.06. Compensation. The officers of the corporation shall
------------
receive such compensation for their services as may be determined from time to
time by resolution of the Board of Directors.
4
<PAGE>
ARTICLE V
---------
SHARES AND THEIR TRANSFER
Section 5.01. Certificates for Shares. Every shareholder of this
-----------------------
corporation shall be 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 him. The certificates shall be numbered in the order in
which they are issued and shall be signed by the Chief Executive Officer and
Chief Financial Officer.
Section 5.02. Transfer of Shares. Transfer of shares on the books of
------------------
the corporation may be authorized only by the shareholder named in the
certificate or the shareholder's legal representative, or the shareholder's duly
authorized attorney in fact, and upon surrender of the certificate or the
certificates for such shares. The corporation may treat, as the absolute owner
of shares of the corporation, the person or persons in whose name or names the
shares are registered on the books of the corporation.
ARTICLE VI
----------
AMENDMENTS
Section 6.01. Subject to the power of shareholders to adopt, amend, or
repeal these Bylaws as provided in Minnesota Statutes Section 302A.181,
subdivision 3, any Bylaw may be amended or repealed by the Board of Directors at
any meeting, provided that, after adoption of the initial Bylaws, the Board
shall 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. The Board may adopt or amend a Bylaw to
increase the number of directors.
INDEMNIFICATION
Section 7.01. The corporation shall indemnify persons for such
expenses and liabilities in such manner, under such circumstances, and to the
extent required by Minnesota Statutes Section 302A.521.
Adopted: July 28, 1986. _________________________
5
<PAGE>
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
___________________________________
<PAGE>
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
<PAGE>
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
<PAGE>
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
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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
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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.
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<PAGE>
"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
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<PAGE>
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
<PAGE>
"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
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<PAGE>
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.
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"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
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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
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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.
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"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
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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.
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<PAGE>
"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
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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
<TABLE>
<CAPTION>
Defined In
Term Section
<S> <C>
"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
</TABLE>
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<TABLE>
<S> <C>
"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
</TABLE>
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
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(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)
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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
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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
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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
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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).
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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
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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
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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
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<PAGE>
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
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
(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.
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<PAGE>
(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.
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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
<PAGE>
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.
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<PAGE>
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
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<PAGE>
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;
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<PAGE>
(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
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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:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
<S> <C>
2003 105.063%
2004 103.375%
2005 101.688%
2006 and thereafter 100.000%
</TABLE>
(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
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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
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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
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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
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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
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<PAGE>
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 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
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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
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(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
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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
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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
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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
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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
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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;
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(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.
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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
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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.
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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
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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.
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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.
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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.
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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;
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(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
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(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
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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.
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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
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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
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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
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(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.
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(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
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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
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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;
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(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
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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,
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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
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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;
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(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,
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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;
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(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
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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
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(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.
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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
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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.
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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.
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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.
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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.
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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
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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
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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
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(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
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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.
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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
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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
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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
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(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
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(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
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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
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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.
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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
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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]
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SIGNATURES
Dated as of April 21, 1998
DIAMOND BRANDS OPERATING CORP.
By: /s/ Thomas W. Knuesel
------------------------------------
Name: Thomas W. Knuesel
Title: Vice President of Finance and
Chief Financial Officer
EMPIRE CANDLE, INC.
By: /s/ Thomas W. Knuesel
------------------------------------
Name: Thomas W. Knuesel
Title: Vice President of Finance and
Chief Financial Officer
FORSTER, INC.
By: /s/ Thomas W. Knuesel
------------------------------------
Name: Thomas W. Knuesel
Title: Vice President of Finance and
Chief Financial Officer
STATE STREET BANK AND TRUST COMPANY
as trustee
By: /s/ Steve Cimalove
--------------------------
Name:
Title:
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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:_________________________________
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(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.
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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.
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<PAGE>
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
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<PAGE>
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
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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.
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(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.
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12. Amendment, Supplement adn 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
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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.
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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.
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<PAGE>
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:
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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:
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SCHEDULE OF EXCHANGES OF NOTES3/
THE FOLLOWING EXCHANGES OF A PART OF THIS GLOBAL NOTE FOR OTHER NOTES HAVE BEEN
MADE:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
</TABLE>
_____________________________
3
This should be included only if the Note is issued in global form.
109
<PAGE>
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
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(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.
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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.
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<PAGE>
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 Globe 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
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<PAGE>
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
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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:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2003 105.063%
2004 103.375%
2005 101.688%
2006 and thereafter 100.000%
</TABLE>
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.
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(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.
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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
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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
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<PAGE>
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).
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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.
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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;
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(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
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<PAGE>
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
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[_] 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
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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.
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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
<PAGE>
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
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
<S> <C>
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
</TABLE>
143
<PAGE>
<TABLE>
<S> <C>
(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
</TABLE>
N.A. means not applicable
*This Cross-Reference is not part of the Indenture
144
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE 1
Section 1.01. Definitions 1
Section 1.02. Other Definitions.................................... 16
Section 1.03. Incorporation by Reference of Trust Indenture Act.... 17
Section 1.04. Rules of Construction................................ 17
ARTICLE 2 THE NOTES.................................... 17
Section 2.01. Form and Dating...................................... 17
Section 2.02. Execution and Authentication......................... 19
Section 2.03. Registrar and Paying Agent........................... 20
Section 2.04. Paying Agent to Hold Money in Trust.................. 20
Section 2.05. Holder Lists......................................... 20
Section 2.06. Transfer and Exchange................................ 21
Section 2.07. Replacement Notes.................................... 28
Section 2.08. Outstanding Notes.................................... 29
Section 2.09. Treasury Notes....................................... 29
Section 2.10. Temporary Notes...................................... 29
Section 2.11. Cancellation......................................... 29
Section 2.12. Defaulted Interest................................... 30
Section 2.13. Record Date.......................................... 30
Section 2.14. Computation of Interest.............................. 30
Section 2.15. CUSIP Number......................................... 30
ARTICLE 3. REDEMPTION AND PREPAYMENT................... 30
Section 3.02. Selection of Notes to be Redeemed or Purchased....... 31
Section 3.03. Section 3.03.Notice of Redemption.................... 31
Section 3.04. Effect of Notice of Redemption....................... 32
Section 3.05. Deposit of Redemption or Purchase Price.............. 32
Section 3.06. Notes Redeemed in Part............................... 33
Section 3.07. Optional Redemption.................................. 33
Section 3.08. Mandatory Redemption................................. 33
Section 3.09. Repurchase Offers.................................... 33
ARTICLE 4 COVENANTS.................................... 35
</TABLE>
145
<PAGE>
<TABLE>
<S> <C>
Section 4.01. Payment of Notes............................................................ 35
Section 4.02. Maintenance of Office or Agency............................................. 36
Section 4.03. Commission Reports.......................................................... 36
Section 4.04. Compliance Certificate...................................................... 37
Section 4.05. Taxes....................................................................... 38
Section 4.06. Stay, Extension and Usury Laws.............................................. 38
Section 4.07. Restricted Payments......................................................... 38
Section 4.08. Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries... 40
Section 4.09. Incurrence of Indebtedness and Issuance of Preferred Stock.................. 41
Section 4.10. Asset Sales................................................................. 43
Section 4.11. Transactions With Affiliates................................................ 44
Section 4.12. Liens....................................................................... 45
Section 4.13. Offer to Purchase Upon Change of Control.................................... 45
Section 4.14. Corporate Existence......................................................... 46
Section 4.15. Business Activities......................................................... 47
Section 4.16. Senior Subordinated Debt.................................................... 47
Section 4.17. Limitation on Issuances of Guarantees of Indebtedness....................... 47
ARTICLE 5 SUCCESSORS.......................................................... 47
Section 5.01. Merger, Consolidation of Sale of Assets..................................... 47
Section 5.02. Successor Corporation Substituted........................................... 48
ARTICLE 6 DEFAULTS AND REMEDIES............................................... 48
Section 6.01. Events of Default........................................................... 49
Section 6.02. Acceleration................................................................ 50
Section 6.03. Other Remedies.............................................................. 51
Section 6.04. Waiver of Past Defaults..................................................... 51
Section 6.05. Control by Majority......................................................... 51
Section 6.06. Limitation on Suits......................................................... 52
Section 6.07. Rights of Holders of Notes to Receive Payment............................... 52
Section 6.08. Collection Suit by Trustee.................................................. 52
Section 6.09. Trustee May File Proofs of Claim............................................ 52
Section 6.10. Priorities.................................................................. 53
Section 6.11. Undertaking for Costs....................................................... 53
ARTICLE 7 TRUSTEE............................................................. 53
Section 7.01. Duties of Trustee........................................................... 54
</TABLE>
146
<PAGE>
<TABLE>
<S> <C>
Section 7.02. Rights of Trustee....................................................................... 55
Section 7.03. Individual Rights of Trustee............................................................ 55
Section 7.04. Trustee's Disclaimer.................................................................... 55
Section 7.05. Notice of Defaults...................................................................... 56
Section 7.06. Reports by Trustee to Holders of the Notes.............................................. 56
Section 7.07. Compensation and Indemnity.............................................................. 56
Section 7.08. Replacement of Trustee.................................................................. 57
Section 7.09. Successor Trustee by Merger, etc........................................................ 58
Section 7.10. Eligibility; Disqualification........................................................... 58
Section 7.11. Preferential Collection of Claims Against the Company................................... 58
ARTICLE 8 LEGAL DEFEASANCE AND COVENANT DEFEASANCE........................................ 58
Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance................................ 58
Section 8.02. Legal Defeasance and Discharge.......................................................... 58
Section 8.03. Covenant Defeasance..................................................................... 59
Section 8.04. Conditions to Legal or Covenant Defeasance.............................................. 59
Section 8.05. Deposited Money and U.S. Government Securities to be Held in Trust; Other Miscellaneous
Provisions............................................................................................ 61
Section 8.06. Repayment to the Company................................................................ 61
Section 8.07. Reinstatement........................................................................... 61
ARTICLE 9 AMENDMENT, SUPPLEMENT AND WAIVER................................................ 62
Section 9.01. Without Consent of Holders of the Notes................................................. 62
Section 9.02. With Consent of Holders of Notes........................................................ 62
Section 9.03. Compliance with Trust Indenture Act..................................................... 64
Section 9.04. Revocation and Effect of Consents....................................................... 64
Section 9.05. Notation on or Exchange of Notes........................................................ 64
Section 9.06. Trustee to Sign Amendments, etc......................................................... 64
ARTICLE 10 SUBORDINATION.................................................................. 64
Section 10.01 Agreement to Subordinate................................................................ 64
Section 10.02 Liquidation; Dissolution; Bankruptcy.................................................... 65
Section 10.03 Default on Designated Senior Debt....................................................... 65
Section 10.04. Acceleration of Notes.................................................................. 66
Section 10.05. When Distribution Must Be Paid Over.................................................... 66
Section 10.06. Notice by the Company.................................................................. 66
Section 10.07. Subrogation............................................................................ 66
Section 10.08. Relative Rights........................................................................ 66
</TABLE>
147
<PAGE>
<TABLE>
<S> <C>
Section 10.09. Subordination May Not Be Impaired by the Company...................... 67
Section 10.10. Distribution or Notice to Representative.............................. 68
Section 10.11. Rights of Trustee and Paying Agent.................................... 68
Section 10.12. Authorization to Effect Subordination................................. 68
Section 10.13. Amendments............................................................ 68
ARTICLE 11 GUARANTEE OF NOTES............................................ 69
Section 11.01. Note Guarantee........................................................ 69
Section 11.02. Execution and Delivery of Subsidiary Guarantee........................ 70
Section 11.03. Guarantors May Consolidate, etc., on Certain Terms.................... 70
Section 11.04. Releases Following Sale of Assets, Merger, Sale of Capital Stock Etc.. 71
Section 11.05. Additional Guarantors................................................. 71
Section 11.06. Limitation on Guarantor Liability..................................... 71
Section 11.07. "Trustee" to Include Paying Agent..................................... 72
ARTICLE 12 SUBORDINATION OF SUBSIDIARY GUARANTEE......................... 72
Section 12.01. Agreement to Subordinate.............................................. 72
Section 12.02. Liquidation; Dissolution; Bankruptcy.................................. 72
Section 12.03. Default on Designated Senior Debt..................................... 72
Section 12.04. Acceleration of Notes................................................. 73
Section 12.05. When Distribution Must Be Paid Over................................... 73
Section 12.06. Notice by Guarantor................................................... 73
Section 12.07. Subrogation........................................................... 74
Section 12.08. Relative Rights....................................................... 74
Section 12.09. Subordination May Not Be Impaired by the Guarantors................... 74
Section 12.10. Distribution or Notice to Representative.............................. 75
Section 12.11. Rights of Trustee and Paying Agent.................................... 75
Section 12.12. Authorization to Effect Subordination................................. 76
Section 12.13. Amendments............................................................ 76
ARTICLE 13 MISCELLANEOUS................................................. 76
Section 13.01. Trust Indenture Act Controls.......................................... 76
Section 13.02. Notices............................................................... 76
Section 13.03. Communication by Holders of Notes with Other Holders of Notes......... 77
Section 13.04. Certificate and Opinion as to Conditions Precedent.................... 77
Section 13.05. Statements Required in Certificate or Opinion......................... 78
Section 13.06. Rules by Trustee and Agents........................................... 78
</TABLE>
148
<PAGE>
<TABLE>
<S> <C>
Section 13.07. No Personal Liability of Directors, Officers, Employees and Stockholders... 78
Section 13.08. Governing Law.............................................................. 78
Section 13.09. No Adverse Interpretation of Other Agreements.............................. 78
Section 13.10. Successors................................................................. 79
Section 13.11. Severability............................................................... 79
Section 13.12. Counterpart Originals...................................................... 79
Section 13.13. Table of Contents, Headings, etc........................................... 79
</TABLE>
149
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
- ----------- ----------------------
<PAGE>
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
- ----------- ----------------------
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
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(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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;
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(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Part A
Class of Stock Certi- Par Number of
Stock Issuer Stock ficate Nos. Value Shares
- ------------ -------- ------------ ----- ---------
<S> <C> <C> <C> <C>
<CAPTION>
Part B
Debt Issuer Amount of Indebtedness
- ----------- ----------------------
<S> <C>
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
Class of Stock Certi- Par Number of
Stock Issuer Stock ficate Nos. Value Shares
- ------------ -------- ------------- ----- ---------
<S> <C> <C> <C> <C>
<CAPTION>
Debt Issuer Amount of Indebtedness
- ----------- ----------------------
<S> <C>
</TABLE>
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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(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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
A/B EXCHANGE
REGISTRATION RIGHTS AGREEMENT
Dated as of April 21, 1998
by and among
DIAMOND BRANDS INCORPORATED
and
Donaldson, Lufkin & Jenrette Securities Corporation
MORGAN STANLEY & CO. INCORPORATED
<PAGE>
This Registration Rights Agreement (this "AGREEMENT") is made and entered into
---------
as of April 21, 1998, by and among Diamond Brands Incorporated, a Minnesota
corporation (the "COMPANY"), 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 12.875% Series A Senior Discount Debentures
due 2009 (the "SERIES A DEBENTURES") 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, and the Initial
------------------
Purchasers. In order to induce the Initial Purchasers to purchase the Series A
Debentures, 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 Debentures and the Series B Debentures (as
defined herein)
The parties hereby agree as follows:
I. 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.
BROKER-DEALER: Any broker or dealer registered under the Exchange Act.
-------------
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.
CERTIFICATED SECURITIES: Definitive Debentures, as defined in the
-----------------------
Indenture.
CLOSING DATE: The date hereof.
------------
COMMISSION: The Securities and Exchange Commission.
----------
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
2
<PAGE>
Offer Registration Statement relating to the Series B Debentures 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 Debentures in the same aggregate principal amount as the aggregate
principal amount of Series A Debentures tendered by Holders thereof pursuant to
the Exchange Offer.
CONSUMMATION DEADLINE: As defined in Section 3(b) hereof.
---------------------
DEBENTURES: The Series A Debentures and the Series B Debentures
-----------
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 Debentures (which shall be registered under the Act pursuant
to the Exchange Offer Registration Statement) equal to the outstanding principal
amount of Series A Debentures 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 Debentures 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.
-----
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.
--------------------
3
<PAGE>
REGISTRATION STATEMENT: Any registration statement of the Company relating
----------------------
to (a) an offering of Series B Debentures 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 DEBENTURES: The Company's 12 7/8% Series B Senior Discount
-------------------
Debentures due 2009 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 Debenture, until the
------------------------------
earliest to occur of (a) the date on which such Series A Debenture is exchanged
in the Exchange Offer for a Series B Debenture 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 Debenture has been
disposed of in accordance with a Shelf Registration Statement (and the
purchasers thereof have been issued Series B Debentures), or (c) the date on
which such Series A Debenture is distributed to the public pursuant to Rule 144
under the Act (and purchasers thereof have been issued Series B Debentures) and
each Series B Debenture until the date on which such Series B Debenture 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).
II. 1.1.1. SECTION HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities (each,
a "HOLDER") whenever such Person owns Transfer Restricted Securities.
------
III. 1.1.1. SECTION REGISTERED EXCHANGE OFFER
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 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
4
<PAGE>
Statement to become effective at the earliest possible time, but 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 Debentures 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 Debentures to be offered in exchange for the Series
A Debentures that are Transfer Restricted Securities and (ii) resales of Series
B Debentures by any Broker-Dealer that tendered into the Exchange Offer Series A
Debentures that such Broker-Dealer acquired for its own account as a result of
market making activities or other trading activities (other than Series A
Debentures acquired directly from the Company or any of its Affiliates) as
contemplated by Section 3(c) below.
(a) A. The Company shall use its 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
shall cause the Exchange Offer to comply with all
applicable federal and state securities laws. No
securities other than the Series B Debentures shall be
included in the Exchange Offer Registration Statement.
The Company shall use its 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").
---------------------
(b) B. 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 Debentures 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
5
<PAGE>
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
Debentures received by such Broker-Dealer in the Exchange Offer, the Company
shall permit the use of the Prospectus contained in the Exchange 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
Debentures by Broker-Dealers, the Company agrees to use its 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(a) 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 one year from the date on which the
Exchange Offer is Consummated. The Company 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.
IV. SECTION
I. SHELF REGISTRATION
I. A. Shelf Registration. If (i) the Exchange Offer is not permitted by
--- ------------------
applicable law (after the Company 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 Debentures 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
Debentures acquired directly from the Company or any of its Affiliates, then the
Company 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
---------------
6
<PAGE>
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")), 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 its 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
Statement shall be deemed to satisfy the requirements of clause (x) above;
provided that, in such event, the Company shall remain obligated to meet the
Effectiveness Deadline set forth in clause (y) above.
(a) 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 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) A. 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
7
<PAGE>
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.
V. SECTION
1. 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 hereby
--------------------
agrees 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 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
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
8
<PAGE>
more fully set forth in the Indenture and the Debentures. Notwithstanding the
fact that any securities for which liquidated damages are due cease to be
Transfer Restricted Securities, all obligations of the Company 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.
VI. 1.1.1. SECTION REGISTRATION PROCEDURES
VII. 1.1.1. B. EXCHANGE OFFER REGISTRATION STATEMENT. IN CONNECTION WITH THE
----------------------------------------
EXCHANGE OFFER, THE COMPANY SHALL (X) COMPLY WITH ALL APPLICABLE PROVISIONS OF
SECTION 6(C) BELOW, (Y) USE ITS RESPECTIVE BEST EFFORTS TO EFFECT SUCH
EXCHANGE AND TO PERMIT THE RESALE OF SERIES B DEBENTURES BY BROKER-DEALERS
THAT TENDERED IN THE EXCHANGE OFFER SERIES A DEBENTURES 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 DEBENTURES
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) II. 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 hereby agrees to seek a no-action letter or
other favorable decision from the Commission allowing
the Company to Consummate an Exchange Offer for such
Transfer Restricted Securities. The Company hereby
agrees to pursue the issuance of such a decision to the
Commission staff level. In connection with the
foregoing, the Company hereby agrees 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)
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.
9
<PAGE>
(ii) III. 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 (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
Debentures to be issued in the Exchange Offer and (C)
it is acquiring the Series B Debentures 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 Debentures shall acknowledge and agree
that, if the resales are of Series B Debentures
obtained by such Holder in exchange for Series A
Debentures 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) IV. Prior to effectiveness of the Exchange
Offer Registration Statement, the Company shall provide
a supplemental letter to the
10
<PAGE>
Commission (A) stating that the Company is 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 date
-------- ----------
July 2, 1993, and, if applicable, any no-action letter
obtained pursuant to clause (i) above, (B) including a
representation that neither the Company has entered
into any arrangement or understanding with any Person
to distribute the Series B Debentures to be received in
the Exchange Offer and that, to the best of the
Company's information and belief, each Holder
participating in the Exchange Offer is acquiring the
Series B Debentures in its ordinary course of business
and has no arrangement or understanding with any Person
to participate in the distribution of the Series B
Debentures received in the Exchange Offer and (C) any
other undertaking or representation required by the
Commission as set forth in any no-action letter
obtained pursuant to clause (i) above, if applicable.
(b) A. Shelf Registration Statement. In
-------------------------------
connection with the Shelf Registration Statement, the
Company shall: Shelf Registration Statement. B. In
----------------------------
connection with the Shelf Registration Statement, the
Company shall:
(i) V. comply with all the provisions of Section 6(c) below and use
its 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 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
(ii) VI. issue, upon the request of any Holder or purchaser of Series
A Debentures covered by any Shelf Registration Statement contemplated by this
Agreement, Series B Debentures having an aggregate principal amount equal to the
aggregate principal amount of Series A Debentures sold pursuant to the Shelf
Registration Statement and surrendered to the Company for cancellation; the
Company shall register Series B Debentures on the Shelf
11
<PAGE>
Registration Statement for this purpose and issue the Series B Debentures to the
purchaser(s) of securities subject to the Shelf Registration Statement in the
names as such purchaser(s) shall designate.
(d) A. General Provisions. In connection with
----------------------
any Registration Statement and any related Prospectus
required by this Agreement, the Company shall:
(i) VII. use its 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 shall file promptly an appropriate
amendment to such Registration Statement curing
such defect, and, if Commission review is
required, use its 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 obligations to use its
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, but in no event will any such
suspension, individually or in the aggregate,
exceed ninety (90) days since the Closing Date.
12
<PAGE>
(ii) VIII. 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) IX. 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
13
<PAGE>
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 shall use
its respective best efforts to obtain the
withdrawal or lifting of such order at the
earliest possible time;
(ix) X. 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) XI. 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
14
<PAGE>
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) XII. 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 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) XIII. 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 cause the Company's officers,
directors and employees to supply all information
reasonably requested by any such Holder, attorney
or accountant in connection with such Registration
15
<PAGE>
Statement or any post-effective amendment thereto
subsequent to the filing thereof and prior to its
effectiveness;
(viii) XIV. 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 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) XV. 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) XVI. 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 hereby consents 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
16
<PAGE>
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) XVII. 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 shall:
B. (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. (1) a certificate, dated such date, signed on behalf of the
Company by (x) the President or any Vice President and (y) a principal
financial or accounting officer of the Company, 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;
2. (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 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, representatives of the
independent public accountants for the Company 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
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
17
<PAGE>
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, Debentures and schedules and
other financial and statistical data included in any Registration
Statement contemplated by this Agreement or the related Prospectus;
and
3. (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
C. (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 the indemnification provisions and procedures of Section
8 hereof with respect to all parties to be indemnified pursuant to said Section;
and
D. (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 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 contemplated in (A)(1) above cease
to be true and correct, the Company 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;
(i) I. 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
18
<PAGE>
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 the Company
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;
(ii) II. 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;
(iii) III. use its 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;
(iv) IV. 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 Restricted
Securities which are in a form eligible for
deposit with the Depository Trust Company;
19
<PAGE>
(v) V. 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 its 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;
(vi) VI. otherwise use its 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);
(vii) VII. 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
(viii) VIII. provide promptly to each Holder
and Affiliated Market Maker, upon request, a copy
of each document filed with the Commission
20
<PAGE>
pursuant to the requirements of Section 13 or
Section 15(d) of the Exchange Act.
(b) A. 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
---------------------
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 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.
VIII. SECTION
1. REGISTRATION EXPENSES
1. A. All expenses incident to the Company's 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 (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
21
<PAGE>
certificates for the Series B Debentures 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 and the Holders of Transfer Restricted
Securities; (v) all application and filing fees in connection with listing the
Series B Debentures on an automated quotation system pursuant to the
requirements hereof; and (vi) all fees and disbursements of independent
certified public accountants of the Company (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 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.
(a) A. 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 will reimburse the Initial Purchasers and the
Holders of Transfer Restricted Securities who are
tendering Series A Debentures into in the Exchange
Offer and/or selling or reselling Series A Debentures
or Series B Debentures 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.
IX. SECTION
1. INDEMNIFICATION
1. A. The Company agrees to indemnify and hold harmless each Holder, its
directors, officers and each Person, if any, who controls such 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 Debentures or registered Series A
Debentures, or caused by any omission or alleged omission to state therein a
material fact
22
<PAGE>
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 Debentures 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 Debentures 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.
(a) B. Each Holder of Transfer Restricted agrees,
severally and not jointly, to indemnify and hold
harmless the Company, and its 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, to the same extent as
the foregoing indemnity from the Company 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.
(b) 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
23
<PAGE>
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
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, 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
24
<PAGE>
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.
(c) 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,
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, 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 Debentures (before deducting expenses) received by
the Company, and the total discounts and commissions
received by the Initial Purchasers bear to the total
price to investors of Series A Debentures, in each case
as set forth in the table on the cover page of the
Offering Memorandum. The relative fault of the
Company, 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, 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.
25
<PAGE>
The Company 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.
(d) A. The Company agrees 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.
X. SECTION
1. RULE 144A and RULE 144
The Company agrees with each Holder, for so long as any Transfer Restricted
Securities remain outstanding and during any period in which the Company (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
required thereby in a timely manner in order to permit resales of such Transfer
Restricted Securities pursuant to Rule 144.
XI 1.1.1. SECTION MISCELLANEOUS
XII. 1.1.1.B. REMEDIES. THE COMPANY ACKNOWLEDGES AND AGREES THAT ANY
-----------
FAILURE BY THE COMPANY TO COMPLY WITH ITS RESPECTIVE OBLIGATIONS UNDER
SECTIONS 3 AND 4 HEREOF MAY RESULT IN MATERIAL IRREPARABLE INJURY TO THE
INITIAL PURCHASERS OR THE HOLDERS OR
26
<PAGE>
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 OBLIGATIONS UNDER SECTIONS 3 AND 4 HEREOF.
THE COMPANY FURTHER AGREES TO WAIVE THE DEFENSE IN ANY ACTION FOR SPECIFIC
PERFORMANCE THAT A REMEDY AT LAW WOULD BE ADEQUATE.
(a) C. No Inconsistent Agreements. The Company
------------------------------
will not, 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, the Company has not 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 securities under any agreement
in effect on the date hereof.
(b) D. 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.
(c) E. Third Party Beneficiary. The Holders
---------------------------
shall be third party beneficiaries to the agreements
made
27
<PAGE>
hereunder between the Company, on the one hand, and the
Initial Purchasers, on the other hand, and Holders of
at least 25% in principal amount at maturity of the
then outstanding Debentures 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.
(d) F. 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) II. 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) III. if to the Company:
Diamond Brands Incorporated
1800 Cloquet Avenue
Cloquet, Minnesota 55720-2141
Telecopier: (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.
28
<PAGE>
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.
(e) A. 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.
(f) B. 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.
(g) C. Headings. The headings in this Agreement
------------
are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof.
29
<PAGE>
(h) D. 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.
(i) E. 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.
(j) F. 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.
30
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DIAMOND BRANDS INCORPORATED
By: /s/ Thomas W. Knuesel
--------------------------------------
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:
31
<PAGE>
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 Incorporated
12 7/8% Senior Discount Debentures due 2009
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.
32
<PAGE>
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.
33
<PAGE>
Exhibit 5.1
Conformed Copy
[Letterhead of Cleary Gottlieb, Steen & Hamilton]
June 30, 1998
Diamond Brands Incorporated
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 12-7/8% Senior Discount Debentures due 2009 (the
"New Debentures") of Diamond Brands Incorporated, a Minnesota
corporation (the "Issuer"), to be offered in exchange for all
outstanding Series A 12-7/8% Senior Discount Debentures due 2009
(the "Old Debentures") of the Issuer. The New Debentures will be
issued pursuant to an indenture (the "Indenture"), dated as of
April 21, 1998, between the Issuer and State Street Bank and
Trust Company, as trustee (the "Trustee").
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 such other instruments
and other certificates of public officials, officers and
representatives of the Issuer 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.
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
<PAGE>
Diamond Brands Incorporated, p. 2
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 Debentures and
the New Debentures 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 Debentures 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 at maturity of Old
Debentures pursuant to the terms of the Registration Rights
Agreement (in the form filed as an exhibit to the Registration
Statement), the New Debentures will constitute valid, binding
and enforceable obligations of the Issuer, entitled to the
benefits of the Indenture.
2. The Indenture has been duly executed and delivered
by the Issuer under the law of the State of New York.
Insofar as the foregoing opinions relate to the
validity, binding effect or enforceability of any agreement or
obligation of the Issuer, (a) we have assumed that the Issuer 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 regarding matters of the law of the State of New York);
and (b) such opinions are subject to applicable bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting
creditors' rights generally and to general principles of equity.
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.
Very truly yours,
CLEARY, GOTTLIEB, STEEN & HAMILTON
By /s/ Paul J. Shim
-------------------------------
Paul J. Shim, a Partner
<PAGE>
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,
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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-
<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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 [SIGNATURE ILLEGIBLE]^^
------------------------
EMPLOYEE
/s/ Thomas Knuesel
---------------------------
Thomas Knuesel
-8-
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this agreement on the
date first written above.
DIAMOND BRANDS INCORPORATED
By: /s/ Naresh K. Nakra
------------------------------
Its: President
-----------------------------
/s/ Thomas Knuesel
---------------------------------
Thomas Knuesel
2
<PAGE>
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
<PAGE>
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-
<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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/ John Young
--------------------------------
John Young
-8-
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this agreement on the
date first written above.
DIAMOND BRANDS INCORPORATED
By: /s/ Naresh K. Nakra
-----------------------------
Its: President
----------------------------
/s/ John Young
---------------------------------
John Young
2
<PAGE>
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
<PAGE>
(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-
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this agreement on the
date first written above.
DIAMOND BRANDS INCORPORATED
By: /s/ Naresh K. Nakra
---------------------------
Its: President
--------------------------
_______________________________
Christopher Mathews
2
<PAGE>
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
<PAGE>
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:
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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,
/s/ Richard J. Corbin
- --------------------------
Accepted:
Richard Campbell
- --------------------------
Richard Campbell Date 5/10/92
<PAGE>
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
<PAGE>
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
<PAGE>
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
------------------------
<PAGE>
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.
<PAGE>
1997 - 2003
AGREEMENT BETWEEN
DIAMOND
BRANDS
INCORPORATED
CLOQUET, MINNESOTA
AND
MATCHMAKERS LOCAL
NO. 970
UNITED PAPERWORKERS
INTERNATIONAL UNION
AFL-CIO
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
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
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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 BENEFITSACTIVE EMPLOYEES AND ELIGIBLE DEPENDENTS 33
COMPANY CONTRIBUTION TO GROUP HEALTHINSURANCE PLAN PREMIUM 34
GENERAL RULES 35
ATTENDANCE 36
PERSONAL BUSINESS 37
SEXUAL HARASSMENT POLICY 38
LETTERS OF AGREEMENT AND OTHER INFORMATION 38
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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 standing. If any employee named on that list asserts that he or she is
not a member and any dispute
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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
I hereby voluntarily assign to my Local Union affiliated with the United
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 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
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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
employees covered by this Agreement:
5-1-2000 Two and nine-tenths percent (2.90%)
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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.
The payroll schedule begins at 11:00 p.m., Sunday night and ends at 11:00 p.m.
the following Sunday night.
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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.
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.
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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.
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
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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
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 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.
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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 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.
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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.
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
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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.
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.
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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 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.
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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 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
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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 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
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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 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.
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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 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.
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(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 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
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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.
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
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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.
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)
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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
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.
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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 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
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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.
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
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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.
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.
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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).
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.
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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 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
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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 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.
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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:
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
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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.
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
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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 $40.00 per
year clothing allowance, unless the Company provides uniforms in lieu of this
allowance.
ARTICLE 31 --SCOPE OF AGREEMENT
This agreement contains the full and complete Agreement on all bargaining issues
between the Parties. Any side agreements, memoranda of understanding of any
kind, written or oral, which are not incorporated into this Agreement are null
and void. Other agreements can be made during the term of the contract, such
agreements must be reduced to writing and signed by both the Company and the
Union.
ARTICLE 32 --REQUEST FOR MEETINGS
It is agreed that all reasonable requests by the Union for hearings or meetings
with Management will be granted without unnecessary delay.
ARTICLE 33--UNION - MANAGEMENT COOPERATION
The Union and the Company will cooperate fully to produce products in the most
economical manner through increasing production and efficiency in the plant in
all departments.
Except as specifically limited by provision of the Agreement, all rights and
authority as customarily exercised by Management in the operation of the
business are retained by the Company and are not subject to arbitration.
ARTICLE 34 --SHIFT PREMIUM PAY
A shift bonus of fifteen cents ($.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
28
<PAGE>
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 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.
29
<PAGE>
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
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.
30
<PAGE>
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
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<PAGE>
International Representative
_____________________________
Bradley L. Engh
President, Local #970
____________________________
Brad R. Erickson
Vice President, Local #970
______________________________
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
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<PAGE>
(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.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(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
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(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
Maintenance/Craft Helper 11.32 11.65 11.99 12.39 12.81 13.25 12.33 12.69 13.06
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(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)
</TABLE>
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.
<TABLE>
<CAPTION>
Life Insurance Maximum Amount
<S> <C>
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
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
<TABLE>
<S> <C>
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
</TABLE>
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:
37
<PAGE>
<TABLE>
<CAPTION>
Employee Company Total
<S> <C> <C> <C>
Single $22.74 $120.95 $143.69
Family (1 or more dependents) $92.72 $270.87 $363.59
</TABLE>
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.
38
<PAGE>
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.
Destruction of Company property or the property of employees is prohibited.
Falsifying production or other reports is prohibited.
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<PAGE>
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.
PERSONAL BUSINESS
Personal business should not be conducted on Company time.
40
<PAGE>
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 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.
41
<PAGE>
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.
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
42
<PAGE>
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.
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)
43
<PAGE>
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.
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,
44
<PAGE>
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:
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:
45
<PAGE>
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.
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)
46
<PAGE>
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.
47
<PAGE>
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
<PAGE>
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.
<PAGE>
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_________________________
____________________________
Thomas Knuesel
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
DIAMOND BRANDS INCORPORATED
By__________________________
Its_________________________
SHAREHOLDER
____________________________
<PAGE>
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
<PAGE>
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.
<PAGE>
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___________________________
______________________________
John Young
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
DIAMOND BRANDS INCORPORATED
By_________________________
Its________________________
SHAREHOLDER
___________________________
<PAGE>
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
<PAGE>
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.
<PAGE>
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________________________
___________________________
Christopher Mathews
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
DIAMOND BRANDS INCORPORATED
By_________________________
Its________________________
SHAREHOLDER
___________________________
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
DIAMOND BRANDS INCORPORATED
By_________________________
Its________________________
SHAREHOLDER
___________________________
<PAGE>
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
<PAGE>
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.
<PAGE>
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__________________________
_____________________________
John Beach
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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,
<PAGE>
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
<PAGE>
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.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year first above written.
DIAMOND BRANDS INCORPORATED
By____________________________
Its___________________________
SHAREHOLDER
______________________________
<PAGE>
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.
-----
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<PAGE>
(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-
<PAGE>
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-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this non-qualified stock option
to be executed on the date first above written.
DIAMOND BRANDS INCORPORATED
By /s/ Naresh K. Nakra
--------------------------
Its President
-------------------------
ACCEPTED:
_______________
OPTIONEE
-4-
<PAGE>
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:
<PAGE>
(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-
<PAGE>
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-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this non-qualified stock option
to be executed on the date first above written.
DIAMOND BRANDS INCORPORATED
By /s/ Naresh K. Nakra
----------------------------------
Its President
---------------------------------
ACCEPTED:
- ----------------
OPTIONEE
-4-
<PAGE>
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.
<PAGE>
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-
<PAGE>
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-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this non-qualified stock option
to be executed on the date first above written.
DIAMOND BRANDS INCORPORATED
By /s/ Naresh K. Nakra
-------------------------
Its President
------------------------
ACCEPTED:
_______________
OPTIONEE
-4-
<PAGE>
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:
<PAGE>
(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-
<PAGE>
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-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this non-qualified stock option
to be executed on the date first above written.
DIAMOND BRANDS INCORPORATED
By /s/ Naresh K. Nakra
-----------------------------
Its President
----------------------------
ACCEPTED:
_______________
OPTIONEE
-4-
<PAGE>
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:
<PAGE>
(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-
<PAGE>
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-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this non-qualified stock option
to be executed on the date first above written.
DIAMOND BRANDS INCORPORATED
By /s/ Naresh K. Nakra
------------------------------
Its President
-----------------------------
ACCEPTED:
_______________
OPTIONEE
-4-
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
TERM LEASE SUPPLEMENT
Supp. No.: D00253180
Additional Terms and Conditions
<TABLE>
<CAPTION>
Option Codes
<S> <C>
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
</TABLE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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")
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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,
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
LESSOR: LESSEE:
MERIDIAN LEASING CORPORATION DIAMOND BRANDS INCORPORATED
By: By:
Title: Title:
<PAGE>
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)
<PAGE>
By: By:
Title: Title:
<PAGE>
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
<TABLE>
<CAPTION>
Qty Model/Type Description
<S> <C> <C>
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)
</TABLE>
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.
<PAGE>
Lessee Address:
DIAMOND BRANDS, INC.
1800 CLOQUET AVENUE
CLOQUET, MN 55720
<PAGE>
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.
<TABLE>
<CAPTION>
Months Expired After Casualty
Supplement Commencement Date Value
<S> <C>
0 $113,236
12 $ 88,598
24 $ 69,872
36 $ 55,638
48 $ 44,820
</TABLE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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.
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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
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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
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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,
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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.
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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
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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.
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By: By:
Printed Name: Printed Name:
Title: Title:
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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
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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.
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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.
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
(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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
-------
<PAGE>
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:
<PAGE>
MEPC AMERICAN PROPERTIES INC.
Its: Senior Vice President
---------------------
And
By:
Its: Vice President
--------------
TENANT: DIAMOND BRANDS INCORPORATED
By:
Its:
And
By:
Its:
<PAGE>
EXHIBIT A
FLOOR PLAN
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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.
<PAGE>
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
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
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:
<PAGE>
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.
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<PAGE>
EXHIBIT 12.1
Diamond Brands Incorporated
Ratio of Earnings to Fixed Charges - Holdings
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
----------------------------------------------- ------------------------------
Pro forma Pro Forma
1993 1994 1995 1996 1997 1997 1997 1998 1998
------ ------ ------ ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings -
Income before income taxes 5,784 3,578 6,454 13,443 22,005 9,213 3,305 3,762 (586)
Fixed charges 679 524 4,038 3,971 4,771 23,789 1,011 1,111 5,909
------ ------ ------ ------ ------ ------ ------ ----- ------
Total Earnings (A) 6,463 4,102 10,492 17,414 26,776 27,002 4,316 4,873 5,323
====== ====== ====== ====== ====== ====== ====== ===== ======
Fixed Charges -
Interest 639 492 3,921 3,509 4,210 22,723 818 929 5,678
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 23,789 1,011 1,111 5,909
------ ------ ------ ------ ------ ------ ------ ----- ------
Ratio of Earnings to Fixed Charges
(A divided by B) 9.5 7.8 2.6 4.4 5.6 1.1 4.3 4.4 (a)
====== ====== ====== ====== ====== ====== ====== ===== ======
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 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).
Earnings were inadequate to cover fixed charges by $0.6 million.
</TABLE>
<PAGE>
SUBSIDIARIES OF THE REGISTRANT
------------------------------
DIAMOND BRANDS INCORPORATED
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF INCORPORATION NAME UNDER WHICH SUBSIDIARY
- ------------------- ---------------------- ---------------------------
DOES BUSINESS
-------------
<S> <C> <C>
Diamond Brands Operating Corp. Delaware Diamond Brands Operating Corp.
Empire Candle, Inc. Kansas Empire Candle, Inc.
Forster Inc. Maine Forster Inc. and Forster, Inc.
</TABLE>
<PAGE>
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.
<PAGE>
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 INCORPORATED)
(Exact name of obligor as specified in its charter)
MINNESOTA (41156294)
(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)
(12 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009)
(Title of indenture securities)
<PAGE>
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
<PAGE>
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
<PAGE>
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
INCORPORATED}, of its {12 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009}, 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
<PAGE>
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).
<TABLE>
<CAPTION>
Thousands of
ASSETS Dollars
<S> <C>
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
----------
</TABLE>
4
<PAGE>
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 16721 16031
<ALLOWANCES> 1195 981
<INVENTORY> 20744 23020
<CURRENT-ASSETS> 36676 38394
<PP&E> 34177 34771
<DEPRECIATION> 16633 17366
<TOTAL-ASSETS> 94550 95590
<CURRENT-LIABILITIES> 23429 21865
<BONDS> 41605 42260
0 0
0 0
<COMMON> 161 161
<OTHER-SE> 27769 29718
<TOTAL-LIABILITY-AND-EQUITY> 94550 95590
<SALES> 118072 26486
<TOTAL-REVENUES> 118072 26486
<CGS> 78582 18277
<TOTAL-COSTS> 78582 18277
<OTHER-EXPENSES> 12935 3400
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4550 1047
<INCOME-PRETAX> 22005 3762
<INCOME-TAX> 1376 0
<INCOME-CONTINUING> 20629 3762
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 20629 3762
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
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
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
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").
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
- ----------------------------------------------------------------------------------------------
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**
- ----------------------------------------------------------------------------------------------
<S> <C>
---------------------------------------------------------
---------------------------------------------------------
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.
- ----------------------------------------------------------------------------------------------
</TABLE>
[_] 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
<PAGE>
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
<PAGE>
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: DIAMOND BRANDS INCORPORATED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C>
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.
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
NOTICE OF GUARANTEED DELIVERY FOR
DIAMOND BRANDS OPERATING INCORPORATED
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.
<PAGE>
Principal Amount of Old Notes Tendered: Name(s) of Record Holders(s):
$______________________________________ ___________________________________
(Please Type or Print)
Certificate Nos. (if available): Address(es): (Please Type or Print)
_______________________________________ ___________________________________
_______________________________________ ___________________________________
(Including Zip Code)
If Old Notes will be delivered by
book-entry transfer to The Depositary
Trust Company, provide account number. Area Code and Telephone Number(s):
___________________________________
Signature(s):
Account Number_________________________ ___________________________________
Dated__________________________________ ___________________________________
THE ACCOMPANYING GUARANTEE MUST BE COMPLETED.
2
<PAGE>
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
<PAGE>
DIAMOND BRANDS INCORPORATED
OFFER TO EXCHANGE
SERIES B 12 7/8% 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 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009
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 12 7/8% Senior Discount Debentures due
2009 (the "New Debentures") for any and all outstanding Series A 12 7/8% Senior
Discount Debentures due 2009 (the "Old Debentures") (CUSIP No. 252564 AA 7 for
Old Debentures issued pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Securities Act") and CUSIP No. 425258 AA 9 for Old Debentures
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 Incorporated (the "Issuer") contained in the
Registration Rights Agreement, dated as of April 21, 1998, between the Issuer
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
Debentures regarding the Exchange Offer. For your information and for forwarding
to your clients for whom you hold Old Debentures registered in your name or in
the name of your nominee, or who hold Old Debentures 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 Debentures 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 Debentures 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
<PAGE>
Exchange Offer), unless extended by the Issuer. Old Debentures 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 Debentures 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 Debentures wish to tender, but it is impracticable
for them to forward their certificates for Old Debentures 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 INCORPORATED
Enclosures
2
<PAGE>
DIAMOND BRANDS INCORPORATED
OFFER TO EXCHANGE
SERIES B 12 7/8% 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 7/8% SENIOR DISCOUNT DEBENTURES DUE 2009
TO OUR CLIENTS:
Enclosed for your consideration is a Prospectus of Diamond Brands
Incorporated, a New York 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 12 7/8% Senior Discount Debentures due 2009 (the "New
Debentures") for any and all outstanding Series A 12 7/8 1/8% Senior Discount
Debentures due 2009 (the "Old Debentures") (CUSIP No. 252564 AA 7 for Old
Debentures issued pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Securities Act") and CUSIP No. U25258 AA 9 for Old Debentures
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 contained in
the Registration Rights Agreement, dated as of April 21, 1998, between the
Issuer 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 Debentures carried by us in your account but not registered in your name. A
TENDER OF SUCH OLD DEBENTURES 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 Debentures 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 Debentures 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 DEBENTURES 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 Debentures.
2. The Exchange Offer is subject to certain conditions set forth in
the Prospectus in the section captioned "The Exchange Offer--Conditions."
<PAGE>
3. Any transfer taxes incident to the transfer of Old Debentures 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 Debentures, 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 Debentures.
INSTRUCTIONS WITH RESPECT TO THE EXCHANGE OFFER
The undersigned acknowledge(s) receipt of your letter enclosing the
Prospectus, dated ___________, 1998, of Diamond Brands Incorporated, a Minnesota
corporation, and the related specimen Letter of Transmittal.
- --------------------------------------------------------------------------------
This will instruct you to tender the number of Old Debentures
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 Debentures held by you for my account. If I do
not wish to tender all of the Old Debentures held by you for my
account, I have identified on a signed schedule attached hereto the
number of Old Debentures that I do not wish tendered.
Box 2 [_] Please do not tender any Old Debentures held by you for my account.
- --------------------------------------------------------------------------------
Dated________________________________, 1998 __________________________________
Signature(s)
__________________________________
__________________________________
Please print name(s) here
__________________________________
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
DEBENTURES.
