Form of Promissory Note

EXHIBIT 10.5


FORM OF PROMISSORY NOTE


THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED OR SOLD UNLESS IT HAS BEEN REGISTERED UNDER SUCH ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. THIS NOTE ALSO IS SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER BY THE HOLDER HEREOF AS SET FORTH HEREIN.


SUBORDINATED PROMISSORY NOTE


$_____________ Dated: April 15, 2003
New York, New York


FOR VALUE RECEIVED, SportRack, LLC, a Delaware limited liability company ("SPORTRACK") and Valley Industries, LLC, a Delaware limited liability company ("VALLEY", and together with SportRack, the "ISSUERS", and each individually, an "ISSUER"), each HEREBY PROMISES TO PAY, jointly and severally to _______________ (the "HOLDER"), or permitted registered assigns, the principal amount of ______________________ DOLLARS ($___________), or such other principal amount which may be outstanding hereunder as a result of the capitalization of interest, payments or prepayments, on the Final Maturity Date (as defined below), together with interest on the unpaid principal amount hereof outstanding from time to time until paid in full at a rate per annum equal to twelve percent (12%), and at a rate per annum equal to 2% above such interest rate (the "DEFAULT INTEREST RATE") on any overdue principal and on any overdue interest, from the date thereof until the obligation of the Issuers with respect to the payment thereof shall be discharged, in lawful money of the United States of America in immediately available funds at the address of the Holder set forth in the Purchase Agreement or at such other address as the Holder may designate by notice hereunder to the Issuers. For the avoidance of doubt, principal and interest shall be deemed to be "overdue" if such principal or interest is not paid on or before their due date, without any consideration given as to the reason why such payment was not made on such date, including, without limitation, by reason of Section 2 hereof or otherwise. Any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Purchase Agreement (as defined below).


This Note is one of the Promissory Notes referred to in the Purchase Agreement (as defined below).


Interest on the outstanding principal of this Note shall be capitalized quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, commencing June 30, 2003, and, accordingly, shall increase the principal amount hereof on each such date. Notwithstanding any other provision of this Note, interest becoming due hereunder shall in no event exceed the maximum rate permitted by applicable law. All interest shall be computed on the basis of a 365 or 366 day year for the actual number of days (including the first day but excluding the last day) elapsed.


The Holder may not sell, assign, or otherwise transfer or dispose of, in whole or in part, any interest in this Note, other than to an Affiliate of the Holder, without the prior written consent of the Issuers until June 30, 2007, or for such longer period until any claim against the Sellers under the Purchase Agreement remains unresolved or unpaid if any such claim exists on such date; PROVIDED, HOWEVER, that prior to any such sale, assignment, transfer or disposition, such Affiliate or other permitted transferee shall acknowledge in writing to the Issuers the set-off right of CHAAS Acquisition set forth in Section 6.2 hereof and the subordination of the obligations hereunder to Senior Indebtedness as provided herein. Notwithstanding the foregoing, Section 2 and Section 6.2 shall survive any sale, assignment or other transfer or disposition of all or any interest in this Note in violation of the foregoing sentence, and Section 2 and Section 6.2 hereof shall be binding upon the successors and assigns of the Holder.


One of the Issuers shall maintain at its office a register for recording the name and address of the Holder of each Note. No assignment or other sale, disposition or transfer of this Note or any other Note shall be effective unless and until such Issuer is notified in writing of such assignment or other sale, disposition or transfer and such assignment, sale, disposition or transfer is reflected in such register by recording the identity of the assignee or transferee of such Note in such register. Such Issuer shall reflect in such register any such assignment, sale, disposition or transfer upon written notice thereof from the Holder. Such Issuer shall treat the person whose name is recorded in the register as the holder of this Note (and any other Note) as the holder of this Note (and each such other Note) for all purposes.


Section 1. DEFINITIONS.


As used in this Note, the following terms shall have the respective meanings indicated below, such meanings to be applicable equally to the singular, plural, masculine, feminine and neuter forms of such terms:


"ADJUSTED CONSOLIDATED EBITDA" means, for any period, the net income (or net loss) of CHAAS Acquisition and its consolidated Subsidiaries, determined in accordance with GAAP, plus (a) any provision for (or less any benefit from) Income Taxes, (b) any deduction for interest expense, net of interest income and (c) depreciation and amortization expense (including the amortization of capitalized tooling that is customer owned and non-reimbursed), and as adjusted for the following items (to the extent that they are reflected in net income or net loss):


(i) elimination of: (A) all extraordinary gains and losses determined in accordance with GAAP (APB 30), (B) gains and losses from sales or dispositions of property and equipment or other fixed assets, (C) all non-recurring income and expense items not incurred in the ordinary course of business to the extent included in the determination of net income for the relevant determination period and (D) foreign currency transaction gains and losses, to the extent included in the determination of net income for the relevant determination period;


(ii) add-back for all management fees (but not reimbursed or advanced expenses) paid or accrued to members of the Castle Harlan Group, pursuant to the Management Agreement or otherwise and all expenses of CHAAS Acquisition or any member of the Castle Harlan Group that were paid by the Company in connection with the Transaction (as defined in the Purchase Agreement) and all transactions occurring in connection with the Closing to the


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extent such expenses are included in the determination of net income for the relevant determination period;


(iii) elimination of any income statement impact from the reserve established by the Company in connection with the G3.0 Model Recall, to the extent losses arising from the G3.0 Model Recall are actually paid for or reimbursed by the Sellers or are subject to a continuing obligation of indemnification of the Sellers pursuant to Article IX under the Purchase Agreement under which the Sellers are not in default in respect thereof; and


(iv) elimination of any income statement impact in respect of fees and expenses of law firms, accounting firms and other advisors paid or accrued by the Company in connection with the negotiation of the Transaction (as defined in the Purchase Agreement) to the extent such fees and expenses are taken into account in computing Net Indebtedness (as defined in the Purchase Agreement) as of the date of issuance of this Note under the Purchase Agreement or are otherwise treated as current liabilities in the determination of Adjusted Working Capital in accordance with the Purchase Agreement and Exhibit J thereto.


Each of the financial accounting terms used in this definition of Adjusted Consolidated EBITDA shall be determined in accordance with GAAP, to the extent such items are addressed by GAAP.


"AFFILIATE" means, with respect to any specified Person, a Person that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with, such specified Person (it being understood that a Person shall be deemed to "control" another Person, for purposes of this definition, if such Person directly or indirectly has the power to direct or cause the direction of the management and policies of such other Person, whether through holding beneficial ownership interests in such other Person, through contracts or otherwise). For purposes of a natural person, an Affiliate shall also mean (i) the spouse or any lineal descendant (including adopted children) of such person or (ii) any Person acting as custodian or trustee for (A) any trust solely for the benefit of such person or the spouse or lineal descendants (including adopted children) of such person, (B) any family trust, partnership or limited liability company established solely for the benefit of such person or such person's spouse or lineal descendants (including adopted children) or for estate planning purposes, provided such trust, family trust, partnership or limited liability company remains under the control of such person, or (C) the estate of such person.


"CASTLE HARLAN GROUP" means CHP IV, CHI and any other accounts or funds managed by CHI or any Affiliate of CHI, other than members of the CHAAS Group.


"CHAAS ACQUISITION" means CHAAS Acquisitions, LLC, a Delaware limited liability company.


"CHAAS GROUP" means CHAAS Acquisition and its direct and indirect Subsidiaries.


"CHANGE IN CONTROL" means the initial event or series of events, other than, for the avoidance of doubt, the Transaction (as defined in the Purchase Agreement) in which:


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(a) any Persons who are not Equityholders as of the date hereof shall become the direct or indirect beneficial owners (within the meaning of Section 13(d) of the Exchange Act) of equity interests in CHAAS Acquisition which represent a majority of the voting power of all classes of equity interests of CHAAS Acquisition taken together as one class, except pursuant to an underwritten Public Offering of such equity interests by CHAAS Acquisition; or


(b) there shall occur a sale or other disposition of all or substantially all of the assets of CHAAS Acquisition, other than to CHAAS Acquisition and/or to one or more Subsidiaries of CHAAS Acquisition that are and that remain a corporation, partnership, association or other business entity of which securities or other ownership interests representing more than 50% of the equity and more than 50% of the ordinary voting power or more than 50% of the general partnership interests are owned by CHAAS Acquisition or any Subsidiaries of CHAAS Acquisition; or


(c) so long as no Change in Control has occurred under clauses (a) or (b) above at such time, CHP IV, John K. Castle or Leonard M. Harlan shall cease to have the right to designate and elect a majority of the members of the Board of Managers of CHAAS Acquisition; or


(d) a CHP IV Distribution has occurred.


"CHI" means Castle Harlan, Inc., a Delaware corporation.


"CHP IV" means Castle Harlan Partners IV, L.P., a Delaware limited partnership.


"CHP IV DISTRIBUTION" shall mean the distribution by CHP IV of all of its equity interests in CHAAS Acquisition (or the securities issued in respect thereof or in exchange therefor) to its limited partners, other than by reason of the dissolution, liquidation or termination of CHP IV.


"COMMON UNITS" means the common units and any other equity interests of CHAAS Acquisition, the holders of which have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any equity interests entitled to a preference.


"COMPANY" means Advanced Accessory Systems, LLC, a Delaware limited liability company.


"DESIGNATED CHP SALE" means a sale of equity interests or assets, directly or indirectly, of CHAAS Acquisition, in a single transaction or a series of related transactions, that does not constitute a Change in Control under clauses (a) or (b) of such definition in which the Castle Harlan Group sells to one or more unaffiliated third parties or, in the context of an asset sale where proceeds therefrom are distributed to member(s) of the Castle Harlan Group, where Castle Harlan Group member(s) receive payments (excluding in all cases, tax distributions and management fees paid or payable to members of the Castle Harlan Group) in respect of its equity interests in CHAAS Acquisition, whether in the form of distributions, the redemption of equity interests, or the repayment or prepayment of Indebtedness held by members of the Castle Harlan


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Group that is, by its terms, convertible into or exercisable or exchangeable for equity securities of CHAAS Acquisition or any of its Subsidiaries, but excluding in all cases any Indebtedness held by any member of the Castle Harlan Group under the Senior Subordinated Loan Document outstanding or in effect on the date hereof, with a dollar value equal to at least one-third of its economic equity interest, whether in the form of Common Units, Preferred Units or otherwise, in CHAAS Acquisition or any of its Subsidiaries as of the date of the sale (when combined with prior sales), it being understood and agreed that, for the avoidance of doubt, any benefit to the Buyer or any of its Subsidiaries arising from any Designated CHP Sale, including an increase in cash or Cash Equivalents (as defined in the Purchase Agreement) or reduction in Indebtedness of the Buyer or any of its Subsidiaries, shall not constitute an "indirect" dividend, distribution or proceed to any member of the Castle Harlan Group; PROVIDED, HOWEVER, that in determining whether such one-third threshold has been satisfied, the value of the interests of the Castle Harlan Group shall be calculated based on the value allocated to such interests at the time any such interests were sold in the Designated CHP Sale (with all interests of the same kind that were not sold in the Designated CHP Sale being calculated on the same basis), or, for any portion of the equity interests that has not been attributed a value that may be clearly extrapolated from the express provisions of the agreements or instruments governing the Designated CHP Sale, the price allocated to such interests at the time acquired.


"DESIGNATED PUBLIC OFFERING" means a Public Offering that does not constitute a Change in Control in which or in connection with which the Castle Harlan Group has sold or has redeemed at least one-third of its economic equity interest, whether in the form of Common Units, Preferred Units or otherwise, in CHAAS Acquisition or any of its Subsidiaries, (when combined with prior sales) as of the date of the Designated Public Offering; PROVIDED, HOWEVER, that in determining whether such one-third threshold has been satisfied, the value of the interests of the Castle Harlan Group shall be calculated based on the price allocated to any such interests at the time such interests were sold or redeemed in, or in connection with, the Designated Public Offering, (with all interests of the same kind that were not sold in the Designated Public Offering being calculated on the same basis) or, for any portion of the equity interests that have not been attributed a value that may be clearly extrapolated from the express provisions of the agreements or instruments governing the Designated Public Offering, the price allocated to such interests at the time acquired.


"ENFORCEMENT ACTION" shall mean (a) to take from or for the account of any Issuer or any guarantor or any other obligor on the Subordinated Indebtedness, by set-off or in any other manner, the whole or any part of any moneys which may now or hereafter be owing by any Issuer or any such guarantor or obligor with respect to the Subordinated Indebtedness, other than the capitalizing of interest in accordance with the terms hereof and the set-off of payments due hereunder as provided in Section 6.2 hereof, (b) to sue for payment of, or to initiate or participate with others in any suit, action or proceeding against any Issuer or any such guarantor or obligor to (i) enforce payment of or to collect the whole or any part of the Subordinated Indebtedness or (ii) commence judicial enforcement of any of the rights and remedies under this Note or under any guaranty hereof or other agreement or applicable law with respect to the Subordinated Indebtedness, (c) accelerate the Subordinated Indebtedness, (d) exercise any put option or to cause any Issuer or any such guarantor or obligor to honor any redemption or mandatory prepayment obligation under this Note or under any guaranty hereof or any other agreement related to the Subordinated Indebtedness or (e) to take any action under the provisions of any


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state or federal law, including, without limitation, the Uniform Commercial Code, or under any contract or agreement, to enforce, foreclose upon, take possession of or sell any property or assets of any Issuer or any such guarantor or obligor to satisfy obligations hereunder.


"EQUITYHOLDERS" means holders of equity interests of CHAAS Acquisition, or any member of the Castle Harlan Group and their respective Affiliates but only to the extent the foregoing hold interests in CHAAS Acquisition, the voting control over which interests is vested with an officer, director or senior employee of CHI.


"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.


"FINAL MATURITY DATE" means January 17, 2011; PROVIDED that the Final Maturity Date shall automatically be extended, without further action on the part of any Person, to the date 91 days after the scheduled maturity date under any Senior Indebtedness incurred or created after the date of the issuance of this Note to refinance or replace the Indebtedness owing under the Senior Subordinated Loan Document in effect on the date hereof but in no event shall the Final Maturity Date extend beyond October 17, 2011.


"G3.0 MODEL RECALL" means the recall initiated by Volvo, Saab and Volkswagen prior to the date of original issuance of this Note as set forth on the respective recall notices issued in or about July 2002.


"GAAP" means US generally accepted accounting principles, Consistently Applied (as such term is defined in the Purchase Agreement).


"GOVERNMENTAL ENTITY" means any nation or government, any foreign, federal, state, province, city, town, municipality, county, local or other political subdivision thereof or thereto and any department, commission, court or arbitrator of competent jurisdiction, stock exchange board, bureau, instrumentality, agency, organization, self-regulatory authority or other entity exercising executive, legislative, judicial, taxing, regulatory, quasi-governmental or administrative powers or functions of or pertaining to government.


"HEDGE AGREEMENTS" means interest rate swap, cap or collar agreements, interest rate future or option contracts, commodity future or option contracts, currency swap agreements, currency future or option contracts and other similar agreements.


"INCOME TAXES" means Taxes imposed upon, or measured by, net income.


"INCREMENTAL AMOUNT" shall have the meaning ascribed thereto in Section 6.9 hereof.


"INDEBTEDNESS" means (without duplication), with respect to any Person, whether recourse to all or a portion of the assets of such Person and whether or not contingent, (a) every obligation of such Person for money borrowed, (b) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (d) every obligation of such Person issued or assumed as the deferred


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purchase price of property or services, (e) every capitalized lease obligation of such Person, (f) every obligation of such Person under Hedge Agreements, and (g) every obligation of the type referred to in clauses (a) through (f) of another Person and all other obligations of another Person (i) the payment of which, in either case, such Person has guaranteed or (ii) which is secured by any Lien on any property or asset of such Person, the amount of such Indebtedness being deemed to be the lesser of the actual amount of the guarantee or the value of such property or assets subject to such Lien, as the case may be, and the amount of the Indebtedness so guaranteed or secured, as the case may be. Notwithstanding the foregoing, trade accounts payable arising in the ordinary course of business and any liability for federal, state or local taxes or other taxes owed by such Person will not be considered Indebtedness for purposes of this definition. The amount outstanding at any time of any Indebtedness issued with original issue discount shall be the aggregate principal amount at maturity of such Indebtedness, less the remaining unamortized portion of the original issued discount of such Indebtedness at such time, as determined in accordance with GAAP. ...