Document:

<PAGE>

                                                                    Exhibit 10.7

                               FOURTH AMENDMENT TO
                                CREDIT AGREEMENT

     THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
                                                      ---------
into as of May 10, 2001 among PACKAGING DYNAMICS, L.L.C., a Delaware limited
liability company ("Packaging"), INTERNATIONAL CONVERTER, INC., a Delaware
                    ---------
corporation ("ICI"; together with Packaging, individually a "Borrower" and
              ---                                            --------
collectively the "Borrowers"), the Persons identified as "Guarantors" on the
                  ---------
signature pages hereto (the "Guarantors"), the Persons identified as "Lenders"
                             ----------
on the signature pages hereto (the "Lenders") and BANK OF AMERICA, N.A., a
                                    -------
national banking association, formerly known as NationsBank, N.A., as Agent (the
"Agent") for the Lenders. Capitalized terms used herein and not otherwise
 -----
defined herein shall have the respective meanings set forth, or incorporated, by
the Credit Agreement (defined below).

                                    RECITALS
                                    --------

     WHEREAS, the Borrowers, the Guarantors, the Agent and the Lenders are
parties to that certain Credit Agreement dated as of November 20, 1998 (as
previously amended and as amended, modified, supplemented, extended or restated
from time to time, the "Credit Agreement");
                        ----------------

     WHEREAS, the Borrowers and the Guarantors have requested that the Lenders
agree to amend certain provisions of the Credit Agreement; and

     WHEREAS, the Lenders have agreed to do so, as more fully set forth below,
but only upon the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

                                     PART 1

                         AMENDMENTS TO CREDIT AGREEMENT

     The Credit Agreement is hereby amended in accordance with this Part 1.
                                                                    ------

     SUBPART 1.1 Amendment to Section 1.1. The definition of "Revolving
                 ------------------------
Committed Amount" set forth in Section 1.1 of the Credit Agreement is hereby
amended in its entirety to read as follows:

          "Revolving Committed Amount" means TWENTY-FIVE MILLION DOLLARS
           --------------------------
     ($25,000,000) or such lesser amount as the Revolving Committed Amount may
     be reduced pursuant to Section 2.1(d) or 3.3(c).

<PAGE>

     SUBPART 1.2 Amendment to Section 1.1. The definition of "EBITDA" set forth
                 ------------------------
in Section 1.1 of the Credit Agreement is hereby amended in its entirety to read
as follows:

          "EBITDA" means, for any period, with respect to the Borrower and its
           ------
     Subsidiaries on a consolidated basis, the sum of (a) Net Income for such
     period (excluding the effect of any extraordinary or other non-recurring
     gains or losses (including any gain or loss from the sale of Property) or
     non-cash losses (including any non-cash charges resulting from the Stock
     Option Plan)) plus (b) an amount which, in the determination of Net Income
     for such period, has been deducted for (i) Interest Expense for such
     period, (ii) total Federal, state, foreign or other income or franchise
     taxes and Restricted Payments for Taxes for such period and (iii) all
     depreciation and amortization for such period, all as determined in
     accordance with GAAP; provided, however, that (1) EBITDA for the fiscal
                           --------  -------
     quarter of the Borrower ending June 30, 2000 shall be determined without
     giving effect to (A) a charge of up to $3,450,000 relating to the
     Ameriserve accounts receivable and (B) restructuring charges of up to
     $1,250,000 and (2) EBITDA shall be determined without giving effect to a
     charge of up to $1,000,000 relating to amounts actually paid by the Credit
     Parties (pursuant to an order of the bankruptcy court or in connection with
     a settlement) for preferential payment claims made against the Credit
     Parties in connection with the Ameriserve bankruptcy; provided further,
                                                           -------- -------
     however, any gain resulting from any recovery of amounts with respect to
     -------
     the Ameriserve accounts receivable shall not be included in the calculation
     of EBITDA.

     SUBPART 1.3 Amendments to Section 7.2. Sections 7.2(a), (b) and (d) of the
                 -------------------------
Credit Agreement are hereby amended in their entirety to read as follows:

          7.2  Financial Covenants.
               -------------------

               (a)  Leverage Ratio. The Credit Parties shall cause the Leverage
                    --------------
          Ratio, measured as of the last day of each fiscal quarter, to be less
          than or equal to the ratio shown below for the period corresponding
          thereto:

          ----------------------------------------------------------------------

          Period                                                   Ratio
          ------                                                   -----

          ----------------------------------------------------------------------
          January 1, 2001 through June 30, 2001                 4.35 to 1.00
          ----------------------------------------------------------------------
          July 1, 2001 through September 30, 2001               4.10 to 1.00
          ----------------------------------------------------------------------
          October 1, 2001 through December 31, 2001             4.00 to 1.00
          ----------------------------------------------------------------------
          January 1, 2002 through March 31, 2002                3.75 to 1.00
          ----------------------------------------------------------------------
          April 1, 2002 through September 30, 2002              3.50 to 1.00
          ----------------------------------------------------------------------
          October 1, 2002 through December 31, 2002             3.25 to 1.00
          ----------------------------------------------------------------------
          January 1, 2003 through March 31, 2003                2.75 to 1.00
          ----------------------------------------------------------------------
          April 1, 2003 through March 31, 2004                  2.50 to 1.00
          ----------------------------------------------------------------------
          April 1, 2004 and thereafter                          2.00 to 1.00
          ----------------------------------------------------------------------

                                       2

<PAGE>

               (b)  Interest Coverage Ratio. The Credit Parties shall cause the
                    -----------------------
          Interest Coverage Ratio, measured as of the last day of each fiscal
          quarter, to be greater than or equal to the ratio shown below for the
          period corresponding thereto:

          ----------------------------------------------------------------------

          Period                                                   Ratio
          ------                                                   -----

          ----------------------------------------------------------------------
          January 1, 2001 through June 30, 2001                 2.00 to 1.00
          ----------------------------------------------------------------------
          July 1, 2001 through September 30, 2001               2.25 to 1.00
          ----------------------------------------------------------------------
          October 1, 2001 through March 31, 2002                2.50 to 1.00
          ----------------------------------------------------------------------
          April 1, 2002 through September 30, 2002              2.75 to 1.00
          ----------------------------------------------------------------------
          October 1, 2002 through December 31, 2002             3.00 to 1.00
          ----------------------------------------------------------------------
          January 1, 2003 through June 30, 2003                 3.25 to 1.00
          ----------------------------------------------------------------------
          July 1, 2003 through December 31, 2003                3.50 to 1.00
          ----------------------------------------------------------------------
          January 1, 2004 through June 30, 2004                 3.75 to 1.00
          ----------------------------------------------------------------------
          July 1, 2004 and thereafter                           4.00 to 1.00
          ----------------------------------------------------------------------

                                   **********

               (d)  Fixed Charge Coverage Ratio. The Credit Parties shall cause
                    ---------------------------
          the Fixed Charge Coverage Ratio, for the twelve month period ending on
          the last day of each fiscal quarter of the Borrower, to be greater
          than or equal to the ratio shown below for the period corresponding
          thereto:

          ----------------------------------------------------------------------

          Period                                                   Ratio
          ------                                                   -----

          ----------------------------------------------------------------------
          January 1, 2001 through September 30, 2002            1.10 to 1.00
          ----------------------------------------------------------------------
          October 1, 2002 through December 31, 2002             1.15 to 1.00
          ----------------------------------------------------------------------
          January 1, 2003 and thereafter                        1.30 to 1.00
          ----------------------------------------------------------------------

                                     PART 2

                      CONDITIONS PRECEDENT TO EFFECTIVENESS

     SUBPART 2.1 Conditions Precedent. This Amendment shall become effective as
                 --------------------
of the date hereof upon the satisfaction (or waiver in writing by each of the
Lenders) of each of the following conditions precedent:

          (a)  Executed Amendment. Receipt by the Agent of counterparts of this
               ------------------
     Amendment, which collectively shall have been duly executed on behalf of
     (i) the Borrowers, (ii) the Guarantors and (iii) the Required Lenders.

                                       3

<PAGE>

          (b)  Resolutions and Incumbency. Receipt by the Agent of (i) copies of
               --------------------------
     resolutions of the Board of Directors or their equivalent for the Credit
     Parties, each approving and adopting this Amendment, the transactions
     contemplated herein and authorizing execution and delivery hereof (ii) an
     incumbency certificate of each Credit Party, in each case certified by a
     secretary or assistant secretary of the applicable Credit Party to be true
     and correct.

          (c)  Opinion of Counsel. The Agent shall have received a legal opinion
               ------------------
     of Skadden Arps Slate Meagher & Flom in form and substance reasonably
     satisfactory to the Agent.

          (d)  Fees. The Agent shall have received (i) on behalf of each Lender
               ----
     that approves this Amendment by delivery to the Agent of an executed
     signature page on or before 5:00 p.m. EDT, May 14, 2001, a fee equal to
     0.30% of the Commitments of such Lender (after giving effect to this
     Amendment) and (ii) such fees due and payable pursuant to that certain fee
     letter agreement dated as of the date hereof among the Borrowers and Bank
     of America, N.A.

                                     PART 3

                                  MISCELLANEOUS

     SUBPART 3.1 Authority/Enforceability. Each of the Credit Parties, the Agent
                 ------------------------
and the Lenders party hereto represents and warrants as follows:

          (a)  It has taken all necessary action to authorize the execution,
     delivery and performance of this Amendment.

          (b)  This Amendment has been duly executed and delivered by such
     Person and constitutes such Person's legal, valid and binding obligations,
     enforceable in accordance with its terms, except as such enforceability may
     be subject to (i) bankruptcy, insolvency, reorganization, fraudulent
     conveyance or transfer, moratorium or similar laws affecting creditors'
     rights generally and (ii) general principles of equity (regardless of
     whether such enforceability is considered in a proceeding at law or in
     equity).

          (c)  No consent, approval, authorization or order of, or filing,
     registration or qualification with, any court or Governmental Authority or
     third party is required in connection with the execution, delivery or
     performance by such Person of this Amendment.

     SUBPART 3.2 Representation and Warranties. The Credit Parties represent and
                 -----------------------------
warrant to the Lenders that:

                                       4

<PAGE>

          (a)  The representations and warranties of the Credit Parties set
     forth in Section 6 of the Credit Agreement are true and correct in all
     material respects as of the date hereof except for those that specifically
     relate to an earlier date.

          (b)  No event has occurred and is continuing which constitutes a
     Default or an Event of Default.

          (c)  The Collateral Documents continue to create a valid security
     interest in, and Lien upon, the Collateral, in favor of the Agent, for the
     benefit of the Lenders, which security interests and Liens are perfected in
     accordance with the terms of the Collateral Documents and prior to all
     Liens other than Permitted Liens.

          (d)  The Credit Party Obligations are not reduced or modified by this
     Amendment and are not subject to any offsets, defenses or counterclaims.

     SUBPART 3.3 Reaffirmation of Credit Party Obligations. Each Credit Party
                 -----------------------------------------
hereby ratifies the Credit Agreement and acknowledges and reaffirms (a) that it
is bound by all terms of the Credit Agreement applicable to it and (b) that it
is responsible for the observance and full performance of its respective Credit
Party Obligations.

     SUBPART 3.4 Cross-References. References in this Amendment to any Part or
                 ----------------
Subpart are, unless otherwise specified, to such Part or Subpart of this
Amendment.

     SUBPART 3.5 Instrument Pursuant to Credit Agreement. This Amendment is a
                 ---------------------------------------
Credit Document executed pursuant to the Credit Agreement and shall (unless
otherwise expressly indicated therein) be construed, administered and applied in
accordance with the terms and provisions of the Credit Agreement.

     SUBPART 3.6 References in Other Credit Documents. At such time as this
                 ------------------------------------
Amendment shall become effective pursuant to the terms of Part 2, all references
                                                          ------
in the Credit Documents to the "Credit Agreement" shall be deemed to refer to
the Credit Agreement as amended by this Amendment.

     SUBPART 3.7 Further Assurances, The Credit Parties agree to promptly take
                 ------------------
such action, upon the request of the Agent, as is necessary to carry out the
intent of this Amendment.

     SUBPART 3.8 GENERAL RELEASE. IN CONSIDERATION OF THE REQUIRED LENDERS
                 ---------------
ENTERING INTO THIS AMENDMENT, THE CREDIT PARTIES HEREBY RELEASE THE AGENT, THE
LENDERS, AND THE AGENT'S AND THE LENDERS' RESPECTIVE OFFICERS, EMPLOYEES,
REPRESENTATIVES, AGENTS, COUNSEL AND DIRECTORS FROM ANY AND ALL ACTIONS, CAUSES
OF ACTION, CLAIMS, DEMANDS, DAMAGES AND LIABILITIES OF WHATEVER KIND OR NATURE,
IN LAW OR IN EQUITY, NOW KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED TO THE
EXTENT THAT ANY OF THE FOREGOING ARISES FROM ANY ACTION OR FAILURE TO ACT UNDER
THE

                                       5

<PAGE>

CREDIT AGREEMENT OR UNDER THE OTHER CREDIT DOCUMENTS ON OR PRIOR TO THE DATE
HEREOF.

     SUBPART 3.9  GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
                  -------------
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

     SUBPART 3.10 Counterparts/Telecopy. This Amendment may be executed by the
                  ---------------------
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. Delivery of executed counterparts of the Amendment by telecopy shall
be effective as an original and shall constitute a representation that an
original shall be delivered.

     SUBPART 3.11 Successors and Assigns. This Amendment shall be binding upon
                  ----------------------
and inure to the benefit of the parties hereto and their respective successors
and assigns.

     SUBPART 3.12 General. Except as amended hereby, the Credit Agreement and
                  -------
all other Credit Documents shall continue in full force and effect.

         [The remainder of this page has been left blank intentionally.]

                                       6

<PAGE>

     Each of the parties hereto has caused a counterpart of this Amendment to be
duly executed and delivered as of the date first above written.

BORROWERS:                           PACKAGING DYNAMICS, L.L.C.
---------

                                     By:    /s/ G. D. Patterson
                                        ----------------------------------
                                     Name:  G.D. Patterson
                                          --------------------------------
                                     Title: Vice President
                                           -------------------------------

                                     INTERNATIONAL CONVERTER, INC.,
                                     as a Borrower and a Guarantor

                                     By:    /s/ G. D. Patterson
                                        ----------------------------------
                                     Name:  G. D. Patterson
                                          --------------------------------
                                     Title: Vice President
                                           -------------------------------

GUARANTORS:                          PACKAGING HOLDINGS, L.L.C.
----------

                                     By:    /s/ G. D. Patterson
                                        ----------------------------------
                                     Name:  G. D. Patterson
                                          --------------------------------
                                     Title: Vice President
                                           -------------------------------

                                     BAGCRAFT PACKAGING, L.L.C.
                                     (f/k/a Bagcraft Acquisition, L.L.C.)

                                     By:    /s/ G. D. Patterson
                                        ----------------------------------
                                     Name:  G. D. Patterson
                                          --------------------------------
                                     Title: Vice President
                                           -------------------------------

                                     IPMC ACQUISITION, L.L.C.

                                     By:    /s/ G. D. Patterson
                                        ----------------------------------
                                     Name:  G. D. Patterson
                                          --------------------------------
                                     Title: Vice President
                                           -------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

LENDERS:                       BANK OF AMERICA, N.A., a national banking
-------
                               association, formerly known as NationsBank, N.A.,
                               in its individual capacity and as Agent

                               By:   /s/ Leesa C. Sluder
                                  ----------------------------------------
                               Name:  Leesa C. Sluder
                                    --------------------------------------
                               Title: Managing Director
                                     -------------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                     ALLSTATE LIFE INSURANCE COMPANY

                                     By:    /s/ Jerry D. Zinkula
                                        ----------------------------------
                                     Name:  Jerry D. Zinkula
                                          --------------------------------
                                     Title: Authorized Signatory
                                           -------------------------------

                                     By:    /s/ David Walsh
                                        ----------------------------------
                                     Name:  David Walsh
                                          --------------------------------
                                     Title: Authorized Signatory
                                           -------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                     ABN AMRO BANK N.V.

                                     By:    /s/ Stuart Murray
                                        ----------------------------------
                                     Name:  Stuart Murray
                                          --------------------------------
                                     Title: Group Vice President
                                           -------------------------------

                                     By:    /s/ C. David Allman
                                        ----------------------------------
                                     Name:  C. David Allman
                                          --------------------------------
                                     Title: Vice President
                                           -------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                        FIRST UNION NATIONAL BANK

                                        By:    /s/ J. Andrew [illegible]
                                           -----------------------------------
                                        Name:  J. Andrew [illegible]
                                             ---------------------------------
                                        Title: Vice President
                                              --------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                        SOCIETE GENERALE

                                        By:    /s/ Eric E. O. Siebert Jr.
                                           -----------------------------------
                                        Name:  Eric E. O. Siebert Jr.
                                             ---------------------------------
                                        Title: Director
                                              --------------------------------
                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                        VAN KAMPEN SENIOR INCOME TRUST

                                        By: Van Kampen Investment Advisory Corp.

                                        By:    /s/ Douglas L. Winchell
                                           -------------------------------------
                                        Name:  Douglas L. Winchell
                                             -----------------------------------
                                        Title: Vice President
                                              ----------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                        VAN KAMPEN PRIME RATE INCOME TRUST

                                        By: Van Kampen Investment Advisory Corp.

                                        By:    /s/ Douglas L. Winchell
                                           -----------------------------------
                                        Name:  Douglas L. Winchell
                                             ---------------------------------
                                        Title: Vice President
                                              --------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                        THE CIT GROUP/EQUIPMENT FINANCING, INC.

                                        By:    /s/ Scott A. Hopkins
                                           -----------------------------------
                                        Name:  Scott A. Hopkins
                                             ---------------------------------
                                        Title: Portfolio Officer
                                              --------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT

<PAGE>

                                        COMERICA BANK

                                        By:    Comerica Bank
                                          ------------------------------------
                                        Name:  /s/ Felecia Turner
                                            ----------------------------------
                                        Title: Account Officer
                                               -------------------------------

                                                               SIGNATURE PAGE TO
                                                                FOURTH AMENDMENT<PAGE>

                                                                    Exhibit 10.8

                                  NONNEGOTIABLE
                             7.5 % SUBORDINATED NOTE
                                DUE JULY __, 2004

                                  JULY __, 1999

     FOR VALUE RECEIVED, Packaging Holdings, L.L.C., a limited liability company
(the "Company", which term shall include any entity which shall succeed to or
assume the obligations of the Company), promises to pay to Lombard Investments,
Inc., (the "Holder") as representative of the Sellers, except as otherwise
provided, the principal sum of Three Million Dollars ($3,000,000) in lawful
money of the United States of America, on July __, 2004 or, in the event there
is a Change of Control (as hereinafter defined) or an IPO (as hereinafter
defined), on the later to occur of (x) the date of the Change of Control or the
IPO, or (y) July __, 2003 (the "Note Maturity Date"), together with interest on
the outstanding principal balance payable in like money at the rate of seven and
one-half percent (7.5%) per annum which interest shall accrue from the date
hereof until paid in full. Subject to the terms of Paragraph 3 and Paragraph 8,
interest shall be payable semi-annually in arrears on June 30 and December 31 in
each year, commencing on December 31, 1999, until paid in full.

     To the extent permitted by law, overdue interest shall bear interest at a
rate equal to twelve percent (12.0%) per annum. Interest shall be computed on a
360-day- year, 30-day-month basis.

     1.   This Note is delivered to the Holder, on behalf of the Sellers, by the
Company in accordance with the terms of the Stock Purchase Agreement dated as of
July __, 1999 (the "Stock Purchase Agreement"), relating to the acquisition by
an indirect, wholly-owned subsidiary of the Company of all of the outstanding
capital stock of Alupac Holding, Inc. Terms defined and used in the Stock
Purchase Agreement shall have the same meanings in this Note.

     2.   All payments of principal and interest shall be payable at the
Company's option by wire transfer to an account or accounts designated in
writing by the Holder to the Company, in cash or by the Company's check(s) at
the Holder's address indicated in the Stock Purchase Agreement, or at such other
place(s) as the Holder may from time to time in writing designate to the Company
(by notice given in accordance with the Stock Purchase Agreement) at least ten
(10) days before a

                                       1

<PAGE>

payment is due and payment by the Company in accordance with the Holder's
directions shall discharge in full the Company's obligations with respect to
such payments.

     3.   The Company and the Holder, by its acceptance of this Note, agree that
(a) the payment of the principal of and interest on this Note and (b) any other
payment in respect of this Note, is expressly made and shall be subordinated in
right of payment, to the extent and in the manner provided in this Paragraph 3,
to the prior payment in full in cash of all existing and future Senior Debt (as
defined below) of the Company and that these subordination provisions are for
the benefit of the holders of Senior Debt.

          This Paragraph 3 shall constitute a continuing offer to all persons
who, in reliance upon such provisions, become holders of, or continue to hold,
Senior Debt, and such provisions are made for the benefit of the holders of
Senior Debt, and such holders are made obligees hereunder and any one or more of
them may enforce such provisions.

               (a)   Except pursuant to the set-off provisions in Paragraph 8,
until all of the obligations arising under or relating to the Senior Debt have
irrevocably been paid in full and the commitments thereunder terminated, (i) the
Company shall not, directly or indirectly, make any payment or other
distribution with respect to any of the obligations arising under or relating to
this Note nor shall any property or assets of the Company be applied to the
acquisition or retirement of any of the payments due under this Note, (ii) the
Company shall not allow a lien on any of its assets to secure or satisfy any of
the payment obligations under this Note; and (iii) the Holder shall not demand
from the Company or any other person any payments or other distributions or
collateral with respect to any payment obligations under this Note.

               (b)   Until the date ninety-one (91) days after the Senior Debt
has been paid in full and the commitments thereunder terminated, the Holder will
not commence or join with any other creditors of the Company in commencing any
bankruptcy, reorganization, receivership or insolvency proceeding against the
Company. Until the earlier to occur of (x) the date ninety-one days after the
Credit Agreement, dated as of November 20, 1998, as amended as of July __, 1999
by and among Packaging Dynamics, L.L.C., the banks party thereto and
NationsBank, N.A., as agent, as amended, modified, restated, increased or
otherwise changed from time to time, has been paid in full and the commitments
thereunder terminated or (y)

                                        2

<PAGE>

November 18, 2006, the Holder will not exercise any remedies hereunder other
than the acceleration of the obligations hereunder and the demand for payment
hereunder.

                    (c)   Notwithstanding the foregoing, subject to the terms
and conditions of Section 8.9 of the Credit Agreement, so long as no Event of
Default has occurred and is continuing (as defined in the Credit Agreement (as
defined herein)), the Company may pay, and the Holder may receive, regularly
scheduled payments of interest on this Note as and when due in accordance with
its terms, and the Company may pay, and the Holder may receive the principal
amount outstanding under this Note at the maturity of this Note.

                    In the event that, notwithstanding the foregoing provisions
of this Paragraph 3, any payment or distribution of assets in respect of this
Note, including principal of or interest on this Note for cash, property or
securities, shall be made by the Company and received by the Holder or any
Seller, at a time when such payment or distribution was prohibited by the
provisions of this Paragraph 3, then, unless such payment or distribution is no
longer prohibited by this Paragraph 3, such payment or distribution shall be
delivered by the Holder (or the Seller which has received such payment) to the
Agent (as hereinafter defined) and to be paid or delivered by the Agent to the
holders of Senior Debt of the Company remaining unpaid or their representative
or representatives, or to the trustee or trustees under any indenture pursuant
to which any instruments evidencing such Senior Debt of the Company may have
been issued, ratably according to the aggregate amounts unpaid on account of
such Senior Debt held or represented by each, for application to the payment of
all Senior Debt in full in cash or otherwise to the extent each of the holders
of such Senior Debt accept satisfaction of amounts due by settlement in other
than cash after giving effect to all concurrent payments and distributions to or
for the holders of such Senior Debt. In no event shall the Holder have any
responsibility with respect to payments received by the Sellers.

                    (d)   Upon any distribution of assets of the Company or upon
any dissolution, winding up, total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary, in bankruptcy, insolvency,
receivership or a similar proceeding or upon assignment for the benefit of
creditors or any marshalling of assets or liabilities, but only until all of the
obligations arising under or relating to the Senior Debt have been irrevocably
paid in full and the commitments thereunder terminated:

                                  (1) the holders of all Senior Debt of the
Company shall first be entitled to receive irrevocable payment in

                                        3

<PAGE>

               full of all obligations arising under or relating to the Senior
               Debt in cash or otherwise to the extent each of such holders
               accepts satisfaction of amounts due by settlement in other than
               cash before the Holder is entitled to receive any payment or
               distribution on account of the principal of, premium, if any, and
               any interest on, or other amounts with respect to, this Note;

                                (2) any payment or distribution of assets of the
               Company of any kind or character from any source, whether in
               cash, property or securities, to which the Holder would be
               entitled (except pursuant to the set-off provisions in Paragraph
               8) except for the provisions of this Paragraph 3, shall be paid
               by the liquidating trustee or agent or other person making such a
               payment or distribution, directly to the holders of such Senior
               Debt or their representative to the extent necessary to make
               payment in full on all such Senior Debt remaining unpaid, after
               giving effect to all concurrent payments and distributions to the
               holders of such Senior Debt;

                                (3) the Holder shall not object to any motion
               supported by the Agent (as hereinafter defined) with respect to
               the use of any cash collateral by the Company;

                                (4) the Holder shall not (A) file any motion,
               application or other pleading seeking affirmative relief,
               including without limitation for the appointment of a trustee or
               examiner, for the conversion of the case to a liquidation
               proceeding, for the substantive consolidation of the Company's
               bankruptcy case with the case of any other entity, for the
               creation of a separate official committee representing only the
               Holder or any other form of affirmative relief of any other kind
               or nature nor (B) file any objection or other responsive pleading
               opposing any relief requested by the Agent provided such relief
               sought does not prejudice the rights of the Holder as expressly
               limited hereunder;

                                (5) the Agent shall have the right to file
               proofs of claim in respect of this Note to the extent not filed
               by the Holder; and

                                (6) in the event that, notwithstanding the
               foregoing, any payment or distribution of assets of the Com

                                        4

<PAGE>

               pany shall be received by the Holder or any Seller at a time when
               such payment or distribution shall be prohibited by the foregoing
               provisions, such payment or distribution shall be delivered by
               the Holder (or the Seller which has received such payment) to the
               Agent, to be paid or delivered by the Agent to the holders of
               such Senior Debt remaining unpaid or to their representative or
               representatives, or to the trustee or trustees under any
               indenture pursuant to which any instruments evidencing any such
               Senior Debt may have been issued, ratably according to the
               aggregate principal amounts remaining unpaid on account of such
               Senior Debt held or represented by each, for application to the
               payment of all such Senior Debt in full in cash or otherwise to
               the extent each of the holders of such Senior Debt accept
               satisfaction of amounts due by settlement in other than cash
               after giving effect to any concurrent payment or distribution to
               the holders of such Senior Debt. In no event shall the Holder
               have any responsibility with respect to payments received by the
               Sellers.

                         (e)  The Holder shall not be entitled to be subrogated
to the rights of the holders of the Senior Debt to receive payments or
distributions of assets of the Company applicable to the Senior Debt until all
obligations arising under or relating to the Senior Debt have been irrevocably
paid in full and the commitments thereunder terminated, and for the purpose of
such subrogation no such payments or distributions to the holders of such Senior
Debt by or on behalf of the Company, or by or on behalf of the Holder by virtue
of this Paragraph 3, which otherwise would have been made to the Holder shall,
as between the Company and the Holder, be deemed to be payment by the Company on
account of such Senior Debt, it being understood that the provisions of this
Paragraph 3 are and are intended solely for the purpose of defining the relative
rights of the Holder, on the one hand, and the holders of such Senior Debt, on
the other hand.

                    If any payment or distribution to which the Holder would
otherwise have been entitled but for the provisions of this Paragraph 3 shall
have been applied, pursuant to the provisions of this Paragraph 3, to the
payment of amounts payable under Senior Debt of the Company, then the Holder
shall be entitled to receive from the holders of such Senior Debt any payments
or distributions received by such holders of Senior Debt in excess of the amount
sufficient to pay all amounts payable under or in respect of such Senior Debt in
full in cash or otherwise to the extent each of such holders accepts
satisfaction of amounts due by settlement in other than cash.

                         (f)  For purposes of this Paragraph 3:

                                        5

<PAGE>

               "Indebtedness" means (a) all indebtedness for borrowed money, (b)
all obligations with respect to the Company or the Borrower (as hereinafter
defined) for the deferred purchase price of property or services (other than
current trade payables incurred in the ordinary course of business), (c) all
obligations evidenced by notes, bonds, debentures or other similar instruments,
(d) all indebtedness created or arising under any conditional sale or other
title retention agreement with respect to property acquired (even though the
rights and remedies of the seller or lender under such agreement in the event of
default are limited to repossession or sale of such property), (e) all capital
lease obligations, (f) all obligations, contingent or otherwise, as an account
party under acceptance, letter of credit or similar facilities, (g) all
obligations, contingent or otherwise, to purchase, redeem, retire or otherwise
acquire for value any equity interests of the Company or the Borrower, (h) all
obligations of others of the kind referred to in clauses (a) through (g) above
that the Company or the Borrower has guaranteed or that is otherwise its legal
liability and, (i) all obligations of the kind referred to in clauses (a)
through (h) above secured by (or for which the holder of such obligation has an
existing right, contingent or otherwise, to be secured by) any lien on property
(including, without limitation, accounts and contract rights) owned by the
Company or the Borrower, whether or not the Company has assumed or become liable
for the payment of such obligations.

               "Senior Debt" means (i) all Senior Liabilities, and (ii) any
other Indebtedness incurred by the Company, the Borrower or any of the
Borrower's subsidiaries unless the instrument under which such Indebtedness is
incurred expressly provides that it is subordinated in right of payment to this
Note; provided, however, that Senior Liabilities in excess of $200 million and
Indebtedness in clause (ii) above in excess of $15 million in the aggregate
shall not be considered Senior Debt. 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 or the Borrower, (x)
any Indebtedness of the Company or the Borrower to any of their subsidiaries or
other affiliates, or (y) any trade payables.

               "Senior Liabilities" means all payment obligations arising under
or relating to the Credit Agreement, dated as of November 20, 1998, as amended
as of July __, 1999, by and among Packaging Dynamics, L.L.C. (the "Borrower"),
the banks party thereto and NationsBank, N.A., as agent (the "Agent"), as
amended, modified, restated, increased, replaced, refinanced or otherwise
changed from time to time (the "Credit Agreement"), as guaranteed by the Company
and the subsidiaries of the Borrower.

                                        6

<PAGE>

     4. The Company covenants that until all of the obligations under this Note
are paid in full:

              (i)   it shall not enter into any line of business other than
                    holding the common interests or equivalent equity interests
                    of the Borrower, acting as a guarantor of any Senior Debt,
                    pledging its assets to the holder of any Senior Debt, and
                    otherwise assuming obligations relating to any Senior Debt,

              (ii)  it shall (A) promptly notify the Holder of any Event of
                    Default under the Credit Agreement of which the Company or
                    the Borrower becomes aware, (B) promptly deliver to the
                    Holder a copy of any written notice of default under the
                    Credit Agreement, (C) provide the Holder with the Company's
                    audited financial statements for each year during the term
                    hereof within ninety (90) days after the end of each such
                    year and unaudited quarterly financial statements for each
                    quarter during the term hereof (other than the quarters
                    ending on the end of the Company's fiscal years) within
                    forty-five (45) days after the end of each such quarter, and
                    (D) provide reasonable opportunity for the Holder to consult
                    with the President of the Company regarding the Company's
                    financial condition at mutually agreeable times during
                    normal business hours,

              (iii) it shall not incur or permit to exist any Indebtedness
                    other than (A) the indebtedness and obligations payable to
                    IPMC, Inc. (or its successors or assigns) under the Amended
                    and Restated Non-negotiable Subordinated Note due November
                    19, 2005 as amended from time to time (the "IPMC Debt") and
                    (B) its guarantees of the Senior Debt and pledge of its
                    assets to the holder of any Senior Debt and (C) except as
                    permitted by the Credit Agreement,

              (iv)  it shall not (A) prepay or repay the principal amount of the
                    IPMC Debt, (B) consent to IPMC, Inc.'s assignment of the
                    IPMC Debt to any Person who is not an Affiliate of any of
                    the Company's members, or (C) amend Section 8.9(c) of the
                    Credit Agreement in a manner which would further restrict
                    the Holder's right to payment without the Holder's prior

                                        7

<PAGE>

                    written consent or include or permit to be included in the
                    Credit Agreement any other provision that pertains to the
                    matters contained in Section 8.9(c), and

               (v)  neither the Company, the Borrower nor the Borrower's
                    subsidiaries shall make any dividends, distributions or any
                    other payments to the Company's members or their Affiliates
                    except for (A) distributions to enable such members to pay
                    all taxes resulting from such Member's allocation of income
                    and profits from the Company, (B) payments to Ivex Packaging
                    Corporation and its affiliates for goods received or
                    services rendered from them in the ordinary course of
                    business on terms and conditions substantially as favorable
                    as would be obtainable in a comparable arm's-length
                    transaction with a Person other than an officer, director,
                    shareholder, subsidiary or Affiliate, (C) payments of the
                    annual consulting fee and reasonable out-of-pocket expenses
                    pursuant to the Consulting Agreement, dated as of November
                    20, 1998 as amended and modified from time to time with the
                    consent of the Agent, and (D) any dividends, distributions
                    and other payments to the Company, the Borrower or any of
                    the Borrower's subsidiaries;

provided, however, that the Company may undertake any of the actions described
--------  -------
in clauses (i), (iii), (iv) and (v) above if, prior thereto, the Company
delivers to LaSalle National Bank or to such other escrow agent that is mutually
acceptable to the Holder (the "Escrow Agent"), cash in an amount equal to the
sum of (x) the then outstanding principal amount hereof plus (y) all accrued and
unpaid interest and other obligations due hereon minus (z) the aggregate amount
of any set-off amounts permitted under Section 8 hereof (collectively, the "Note
Payoff/Escrow Amount"), such amount to be held in an escrow account in
accordance with the terms of an escrow agreement substantially in the form of
Exhibit B to the Stock Purchase Agreement (the "Escrow Agreement"). The Holder
hereby acknowledges and agrees that if the Note Payoff/Escrow Amount is so
delivered to the Holder, (i) the Escrow Amount shall be delivered by the Company
to the Escrow Agent in full payment of all amounts due under this Note and for
the purposes of settling (in accordance with Section 8 hereof and Section 7.8 of
the Stock Purchase Agreement) the indemnification claims under the Stock
Purchase Agreement, and (ii) upon delivery of the Note Payoff/Escrow Amount to
the Escrow Agent, the Holder shall return this Note to the Company for
cancellation.

                                        8

<PAGE>

     The Company also agrees that simultaneously with the consummation of (i)
the initial public offering of the common equity interests or other equivalent
equity interests of the Company or the Borrower in connection with an offering
of at least twenty percent (20%) of the Company's or the Borrower's equity
interests (an "IPO"), or (ii) a Change of Control (as hereinafter defined), it
shall, subject to the terms and conditions of Section 8.9 of the Credit
Agreement, deliver to the Escrow Agent the then outstanding amount of the Note
Payoff/Escrow Amount to be held pursuant to the Escrow Agreement, in full
payment of all amounts due under this Note, and for purposes of settling (in
accordance with Section 8 hereof and Section 7.8 of the Stock Purchase
Agreement) the indemnification claims under the Stock Purchase Agreement. The
Holder hereby agrees that upon delivery of the Note Payoff/Escrow Amount to the
Escrow Agreement, the Holder shall return this Note to the Company for
cancellation.

     For purposes of this Note, a "Change of Control" shall mean any of the
following: (i) the direct or indirect sale, lease, conveyance or other
disposition of all or substantially all of the Company's or the Borrower's
assets to any Person or "group" (within the meaning of Section 13(d)(3) of the
Securities and Exchange Act as amended (the "Exchange Act") in one or a series
of transactions, other than (A) the sale or other disposition to, or to any such
"group" that is controlled by, Ivex Packaging Corporation, Packaging Investors,
L.L.C. or their Affiliates and (B) any pledge by the Company or the Borrower of
any stock or membership interests owned by such entity; (ii) the liquidation or
dissolution of the Company; or (iii) any transaction or series of transactions
(as a result of a tender offer, merger, consolidation or otherwise) that results
in, or that is in connection with, any Person or "group" (within the meaning of
Section 13(d)(3) of the Exchange Act) acquiring after the date hereof
"beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, more than 50% of the aggregate voting power of all
classes of common equity of the Company or the Borrower (other than any such
acquisition by, or by any such "group" that is controlled by Ivex Packaging
Corporation, Packaging Investors, L.L.C. or their Affiliates); provided,
                                                               --------
however, that, to the extent that any of the following would otherwise
-------
constitute a Change of Control, a Change of Control shall not be deemed to occur
upon (i) the acquisition by the current partners of Packaging Investors, L.L.C.,
DCBS Investors, L.L.C. or CB Investors, L.L.C. of the shares or equivalent
equity interests of the Company's or the Borrower's common equity pursuant to a
distribution made in connection with the winding-up of any such entity or (ii)
the acquisition of the shares or equivalent equity interests of the Company's or
the Borrower's common equity by any Person, the majority of the equity of which
is owned by one or more Persons (or their Affiliates) that in the aggregate
currently control, or own a majority of the equity of, Packaging

                                        9

<PAGE>

Investors, L.L.C.; provided, further, however, that the acquisition of the
                   --------  -------
beneficial ownership of more than eighty percent (80.0%) of the shares or
equivalent equity interests of the Company or the Borrower by Ivex Packaging
Corporation and its subsidiaries shall constitute a Change of Control.

     5.   If (i) the Company shall fail to pay any principal of or interest on
this Note when due and payable whether at maturity or prepayment or otherwise,
and such amount shall remain unpaid for thirty (30) business days after the due
date thereof; (ii) the Senior Debt (or any portion thereof) shall be declared
immediately due and payable; (iii) the Company shall default in the due
performance or observance of any term or covenant contained within this Note
(other than with respect to the payment of principal or interest on this Note
referred to in (i) above), and such default shall remain unremedied for a period
of thirty (30) business days after written notice thereof is provided to the
Company by the Holder; or (iv) the Company shall admit in writing its inability
to pay its debts; or suffer a receiver or custodian (or other person performing
a similar function) for it or substantially all of its property to be appointed
and, if appointed without its consent, not to be discharged within sixty (60)
days; or make a general assignment for the benefit of its creditors, or suffer
proceedings under any law relating to bankruptcy, insolvency, reorganization or
relief of debtors to be instituted by or against it and if contested by it not
to be dismissed or stayed within sixty (60) days; or suffer any judgment, writ
of attachment, or execution of any similar process to be issued or levied
against a substantial part of its property which is not released, stayed,
bonded, or vacated within thirty (30) days after its issue or levy, then, and in
every such event (each of which is herein referred to as a "Note Event of
Default") so long as such Note Event of Default shall be continuing, the Holder
hereof may declare the Note to be in default and to be due and payable, and it
shall, at the Holder's election, thereupon forthwith become due and payable in
full, without presentment, demand, protest, or any notice of any kind (other
than notice of such election), all of which are hereby expressly waived.
Notwithstanding the foregoing, if a Note Event of Default specified in Section
5(iv) shall occur, then all principal, interest and other amounts owing to the
Holder hereunder shall immediately become due and payable without the giving of
any notice or other action by the Holder, which notice or other action is
expressly waived by the Company.

     6.   In any case where the date of payment or any prepayment of the
principal of or interest on this Note shall be at any place of payment a Sunday,
a legal holiday, or a day on which banking institutions are authorized or
obliged by law or regulation to close, then payment of principal or interest
need not be made on such date at such place but may be made on the next
succeeding day that is not at such

                                       10

<PAGE>

place of payment a Sunday, a legal holiday or a day on which banking
institutions are authorized or obligated by law or regulation to close, with the
same force and effect as if made on the date of maturity or the date fixed for
payment, and no interest shall accrue for the period after such date.

         7.  The Holder shall not be deemed to have waived or amended any of the
Holder's rights hereunder unless such waiver or amendment is in writing and
signed by the Holder. This Note shall not be amended or otherwise modified
except by an instrument in writing executed by the Company and the Holder,
provided, however, that any amendment of Section 3 hereof or to any other
--------  -------
section hereof that would adversely affect the holders of the Senior Debt shall
require the written consent of the Required Lenders (as defined in the Credit
Agreement). No delay or omission on the part of the Holder in exercising any
such right shall operate as a waiver of such right or any other right. A waiver
on any one occasion shall not be construed as a bar to or waiver of any right or
remedy on any future occasion.

         8.  In accordance with Section 7 of the Stock Purchase Agreement, the
Company shall have the right to set-off against its principal payment
obligations hereunder, the full amount of any losses, liabilities, damages,
deficiencies, costs or expenses (including without limitation interest,
penalties and reasonable attorney's fees and disbursements and all compliance
and remediation obligations under Environmental Laws (as defined in the Stock
Purchase Agreement) and all costs and expenses enforcing the indemnity
obligations in Section 7 of the Stock Purchase Agreement) required to be paid to
the Buyer Indemnitees pursuant to Section 7 of the Stock Purchase Agreement.

         9.  Prior to the payment in full of all Senior Liabilities, this Note
may not be assigned without the prior written consent of the Company and the
Agent (which consents shall not be unreasonably withheld).

         10. The Company hereby represents and warrants to the Holder that:

             (a) The Company is a limited liability company duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and has the requisite limited liability company power and authority to enter
into this Promissory Note and to perform its obligations hereunder. The
execution and delivery of this Promissory Note by the Company and the
performance by the Company of its obligations hereunder have been duly
authorized in accordance with the provisions of the limited liability company
agreement of the Company. This

                                       11

<PAGE>

Promissory Note has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable
against the Company in accordance with its terms.

                  (b) The execution, delivery and performance of this Promissory
Note by the Company does not (a) violate or conflict with the Amended and
Restated Limited Liability Agreement of the Company, (b) conflict with or
violate any Law or Governmental Order applicable to the Company or (c) result in
any breach of, or constitute a default (or event which with the giving of notice
or lapse of time, or both, would become a default) under any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument to which the Company is a party or by which any of such assets
or properties is bound or affected.

                  (c) The Company owns all of the issued and outstanding member
interests of the Borrower, and the Borrower owns all of the issued and
outstanding member interests or shares of capital stock, as the case may be, of
each of Bagcraft Packaging, L.L.C., IPMC Acquisition, L.L.C. and CB Acquisition,
Inc.

                  (d) No consent, approval, authorization, license, order or
permit of, or declaration, filing or registration with, or notification to, any
person or entity is required to be made or obtained by the Company in connection
with the execution, delivery and performance of this Note and the consummation
of the transactions contemplated hereby.

                  (e) No claim, action, suit, arbitration or proceeding of any
type whatsoever is pending or, to the knowledge of the Company, threatened
against the Company or any of the assets or properties of the Company that would
affect the ability of the Company to perform its obligations under this Note.

           11.    Subject to the terms of Paragraph 3, the principal sum of this
Note may be prepaid by the Company in whole or in part at any time and from time
to time without penalty or premium, with interest prorated up to the date of any
such prepayment by either paying cash to the Holder hereof or by delivering the
Note Payoff/Escrow Amount to the Escrow Agent as contemplated by Section 4
hereof.

           12.    This Note shall bear the legend attached hereto, the
provisions of which are incorporated herein by reference.

           13.    This Note shall be governed by and construed and enforced in
accordance with State of Delaware laws which apply to contracts executed and
per-

                                       12

<PAGE>

formed solely in Delaware. The Company and the Holder, by its acceptance of this
Note, hereby consent to the nonexclusive personal jurisdiction of the U.S.
District Court for the Northern District of Illinois, and to the jurisdiction of
any other competent court of the State of Illinois located in the County of Cook
(collectively the "Illinois Courts"), preserving, however, all rights of removal
                   ---------------
to such federal court under 28 U.S.C. (S)1441, in connection with all disputes
arising out of or in connection with this Note. If the aforementioned courts do
not have subject-matter jurisdiction, then the proceeding shall be brought in
any other state or federal court located in the State of Illinois, preserving,
however, all rights of removal to such federal court under 28 U.S.C. (S)1441.
Each of the Company and the Holder shall be deemed to waive the right to any
other jurisdiction or venue for any litigation arising out of or in connection
with this Note to which any of them may be entitled by reason of its present or
future domicile. Notwithstanding the foregoing, each of the Company and the
Holder shall be deemed to agree that each of the other shall have the right to
bring any action or proceeding for enforcement of a judgment entered by the
Illinois Courts in any other court or jurisdiction. The Company and the Holder
shall be deemed to assent to the service of process by registered mail as
provided in Section 10.2 of the Stock Purchase Agreement.

                                       13

<PAGE>

         This Note has been executed by the Company under seal as of the day,
month and year first above written.

                                                    PACKAGING HOLDINGS, L.L.C.

                                                    By:________________________

[SEAL]

Attest:________________________

                                       14

<PAGE>

                                     LEGEND
                                     ------

                  This Note has not been registered under the Securities Act of
1933 or qualified under any state securities laws. This Note may not be sold,
assigned or transferred in the absence of an effective registration statement
under such Act and qualification under such laws, or an opinion of counsel
satisfactory to the Company that such registration and qualification are not in
the circumstances required.

                                       15

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