Exhibit 10.1
 
$60,000,000
REVOLVING CREDIT AGREEMENT
dated as of July 18, 2006
among
THE PACIFIC LUMBER COMPANY
and
BRITT LUMBER CO., INC.,
as Borrowers
THE LENDERS PARTY HERETO,
MARATHON STRUCTURED FINANCE FUND L.P.,
as Administrative Agent
and
MARATHON STRUCTURED FINANCE FUND L.P.,
as Sole Bookrunner and Sole Lead Arranger
 

 

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TABLE OF CONTENTS

                              Page ARTICLE I. Defined Terms     1  
 
               
 
  SECTION 1.01   Defined Terms     1  
 
  SECTION 1.02   Terms Generally     27  
 
  SECTION 1.03   Classification of Loans and Borrowings     28  
 
  SECTION 1.04   Pro Forma Calculations     28  
 
                ARTICLE II. The Credits     28  
 
               
 
  SECTION 2.01   Commitments     28  
 
  SECTION 2.02   Loans     28  
 
  SECTION 2.03   Borrowing Procedure     30  
 
  SECTION 2.04   Repayment of Loans; Evidence of Debt     31  
 
  SECTION 2.05   Fees     31  
 
  SECTION 2.06   Interest on Loans     33  
 
  SECTION 2.07   Default Interest     33  
 
  SECTION 2.08   Alternate Rate of Interest     33  
 
  SECTION 2.09   Termination and Reduction of Commitments     34  
 
  SECTION 2.10   Conversion and Continuation of Borrowings     34  
 
  SECTION 2.11   [Reserved]     35  
 
  SECTION 2.12   Prepayment     35  
 
  SECTION 2.13   Mandatory Prepayments     36  
 
  SECTION 2.14   Reserve Requirements; Change in Circumstances     36  
 
  SECTION 2.15   Change in Legality     38  
 
  SECTION 2.16   Indemnity     38  
 
  SECTION 2.17   Pro Rata Treatment     39  
 
  SECTION 2.18   Sharing of Setoffs     39  
 
  SECTION 2.19   Payments     40  
 
  SECTION 2.20   Taxes     40  
 
  SECTION 2.21   Assignment of Commitments Under Certain Circumstances; Duty to
Mitigate     42  
 
  SECTION 2.22   Swingline Loans     43  
 
  SECTION 2.23   Letters of Credit     44  
 
  SECTION 2.24   Protective Advances     48  
 
  SECTION 2.25   Relationship Between the Borrowers     48  
 
                ARTICLE III. Representations and Warranties     53  
 
               
 
  SECTION 3.01   Organization; Powers     53  
 
  SECTION 3.02   Authorization; No Conflicts     53  
 
  SECTION 3.03   Enforceability     54  
 
  SECTION 3.04   Governmental Approvals     54  
 
  SECTION 3.05   Financial Statements     54  

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                              Page
 
  SECTION 3.06   No Material Adverse Change     54  
 
  SECTION 3.07   Title to Properties; Possession Under Leases     54  
 
  SECTION 3.08   Subsidiaries     56  
 
  SECTION 3.09   Litigation; Compliance with Laws     56  
 
  SECTION 3.10   Agreements     57  
 
  SECTION 3.11   Federal Reserve Regulations     57  
 
  SECTION 3.12   Investment Company Act; Public Utility Holding Company Act    
58  
 
  SECTION 3.13   Use of Proceeds     58  
 
  SECTION 3.14   Tax Returns     58  
 
  SECTION 3.15   No Material Misstatements     58  
 
  SECTION 3.16   Employee Benefit Plans     59  
 
  SECTION 3.17   Environmental Matters     59  
 
  SECTION 3.18   Insurance     60  
 
  SECTION 3.19   Security Documents     60  
 
  SECTION 3.20   Location of Real Property     61  
 
  SECTION 3.21   Labor Matters     61  
 
  SECTION 3.22   Liens     61  
 
  SECTION 3.23   Intellectual Property     61  
 
  SECTION 3.24   Solvency     61  
 
  SECTION 3.25   Permits     62  
 
  SECTION 3.26   Deposit and Disbursement Accounts     62  
 
                ARTICLE IV. Conditions of Lending     62  
 
               
 
  SECTION 4.01   All Credit Events     62  
 
  SECTION 4.02   First Credit Event     63  
 
                ARTICLE V. Affirmative Covenants     66  
 
               
 
  SECTION 5.01   Existence; Businesses and Properties     67  
 
  SECTION 5.02   Insurance     67  
 
  SECTION 5.03   Obligations and Taxes     67  
 
  SECTION 5.04   Financial Statements, Reports, etc.     67  
 
  SECTION 5.05   Litigation and Other Notices     71  
 
  SECTION 5.06   Information Regarding Collateral     71  
 
  SECTION 5.07   Maintaining Records; Access to Properties and Inspections;
Environmental Assessments     72  
 
  SECTION 5.08   Use of Proceeds     73  
 
  SECTION 5.09   Additional Collateral, etc.     73  
 
  SECTION 5.10   Further Assurances     74  
 
  SECTION 5.11   [Intentionally Omitted]     74  
 
  SECTION 5.12   Cash Management Systems; Bank Accounts     74  
 
  SECTION 5.13   Landlords’ Agreements, Mortgagee Agreements, Bailee Letters and
Real Estate Purchases     75  
 
  SECTION 5.14   Specified Asset Sales     75  

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                              Page ARTICLE VI. Negative Covenants     75  
 
               
 
  SECTION 6.01   Indebtedness     76  
 
  SECTION 6.02   Liens     77  
 
  SECTION 6.03   Sale and Lease-Back Transactions     78  
 
  SECTION 6.04   Investments, Loans and Advances     78  
 
  SECTION 6.05   Mergers, Consolidations, Sales of Assets and Acquisitions    
79  
 
  SECTION 6.06   Restricted Payments; Restrictive Agreements     79  
 
  SECTION 6.07   Transactions with Affiliates     80  
 
  SECTION 6.08   Business of the Borrowers and Subsidiaries; Limitation on
Hedging Agreements     81  
 
  SECTION 6.09   Other Indebtedness and Agreements     81  
 
  SECTION 6.10   Capital Expenditures     81  
 
  SECTION 6.11   Minimum Combined EBITDA     82  
 
  SECTION 6.12   Maximum Combined Total Leverage Ratio     83  
 
  SECTION 6.13   Minimum Combined Fixed Charge Coverage Ratio     84  
 
  SECTION 6.14   Fiscal Year     84  
 
  SECTION 6.15   The Salmon Creek Transaction     85  
 
  SECTION 6.16   Right to Cure     85  
 
                ARTICLE VII. Events of Default     86  
 
                ARTICLE VIII. The Administrative Agent and the Arranger     88  
 
                ARTICLE IX. Miscellaneous     91  
 
               
 
  SECTION 9.01   Notices     91  
 
  SECTION 9.02   Survival of Agreement     91  
 
  SECTION 9.03   Binding Effect     92  
 
  SECTION 9.04   Successors and Assigns     92  
 
  SECTION 9.05   Expenses; Indemnity     95  
 
  SECTION 9.06   Right of Setoff     97  
 
  SECTION 9.07   Applicable Law     97  
 
  SECTION 9.08   Waivers; Amendment     97  
 
  SECTION 9.09   Interest Rate Limitation     98  
 
  SECTION 9.10   Entire Agreement     98  
 
  SECTION 9.11   WAIVER OF JURY TRIAL     99  
 
  SECTION 9.12   Severability     99  
 
  SECTION 9.13   Counterparts     99  
 
  SECTION 9.14   Headings     99  
 
  SECTION 9.15   Jurisdiction; Consent to Service of Process     99  
 
  SECTION 9.16   Confidentiality     100  
 
  SECTION 9.17   Delivery of Lender Addenda     101  
 
  SECTION 9.18   Disclosures     101  

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Exhibits and Schedules

     
Exhibit A
  Form of Administrative Questionnaire
Exhibit B
  [Intentionally Omitted]
Exhibit C
  Form of Assignment and Acceptance
Exhibit D
  Form of Borrowing Request
Exhibit E
  Form of Lender Addendum
Exhibit F
  Form of Perfection Certificate
Exhibit G
  Form of Exemption Certificate
Exhibit H
  Form of Borrowing Base Certificate
Exhibit I
  Closing Checklist
Schedule 1.01(a)
  Mortgaged Properties
Schedule 3.08
  Subsidiaries
Schedule 3.09
  Litigation
Schedule 3.10
  Agreements
Schedule 3.17
  Environmental Matters
Schedule 3.18
  Insurance
Schedule 3.19(a)
  UCC Filing Offices
Schedule 3.19(c)
  Mortgage Filing Offices
Schedule 3.20
  Owned and Leased Real Property
Schedule 3.26
  Deposit and Disbursement Accounts
Schedule 5.14
  Specified Asset Sales
Schedule 6.01
  Existing Indebtedness
Schedule 6.02
  Existing Liens
Schedule 6.04
  Existing Investments
Schedule 6.05(b)
  Permitted Asset Sales
Schedule 6.07
  Transactions with Affiliates

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          REVOLVING CREDIT AGREEMENT dated as of July 18, 2006 (this
“Agreement”), among THE PACIFIC LUMBER COMPANY (“PALCO”), a Delaware corporation
and BRITT LUMBER CO., INC. (“Britt”), a California corporation, the LENDERS from
time to time party hereto, and MARATHON STRUCTURED FINANCE FUND L.P., as
administrative agent (in such capacity and together with its successors, the
“Administrative Agent”).
          The parties hereto agree as follows:
ARTICLE I.
DEFINED TERMS
     SECTION 1.01 Defined Terms. As used in this Agreement, the following terms
shall have the meanings specified below:
          “ABR”, when used in reference to any Loan or Borrowing, refers to
whether such Loan, or the Loans comprising such Borrowing, are bearing interest
at a rate determined by reference to the Alternate Base Rate.
          “Account Debtor” means each Person obligated in any way on or in
connection with an Account.
          “Accounts” means all now owned or hereafter acquired or arising
accounts of either Borrower, as defined in the UCC, including any rights to
payment for the sale or lease of goods or rendition of services, whether or not
they have been earned by performance.
          “Adjusted LIBO Rate” shall mean, with respect to any Eurodollar
Borrowing for any Interest Period, an interest rate per annum (rounded upwards,
if necessary, to the next 1/16 of 1%) equal to the product of (a) the LIBO Rate
in effect for such Interest Period and (b) Statutory Reserves.
          “Administrative Agent” shall have the meaning assigned to such term in
the preamble.
          “Administrative Agent Fees” shall have the meaning assigned to such
term in Section 2.05(b).
          “Administrative Borrower” shall have the meaning assigned to such term
in Section 2.25(a).
          “Administrative Questionnaire” shall mean an Administrative
Questionnaire in the form of Exhibit A, or such other form as may be supplied
from time to time by the Administrative Agent.

 

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          “Affiliate” shall mean, when used with respect to a specified person,
another person that directly, or indirectly through one or more intermediaries,
Controls or is Controlled by or is under common Control with the person
specified; provided, however, that, for purposes of Section 6.07, the term
“Affiliate” shall also include any person that directly or indirectly owns 5% or
more of any class of Equity Interests of the person specified or that is an
officer or director of the person specified.
          “Aggregate Revolving Credit Exposure” shall mean the aggregate amount
of the Lenders’ Revolving Credit Exposures.
          “Agreement” shall have the meaning assigned to such term in the
preamble.
          “Alternate Base Rate” shall mean, for any day, a rate per annum
(rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of
(a) the Prime Rate in effect on such day and (b) the Federal Funds Effective
Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate
due to a change in the Prime Rate or the Federal Funds Effective Rate shall be
effective as of the opening of business on the effective date of such change in
the Prime Rate or the Federal Funds Effective Rate, respectively.
          “Annexation” means (i) the annexation of the town of Scotia by the
City of Rio Dell, (ii) the approval of such annexation by the Local Area
Formation Council and (iii) the approval of the final subdivision map by the
City of Rio Dell.
          “Applicable Margin” shall mean (a) with respect to the Loans
comprising each ABR Borrowing, including each Swingline Loan, 0.75% per annum
and (b) with respect to the Loans comprising each Eurodollar Borrowing, 2.75%
per annum; provided that “Applicable Margin” shall mean (a) with respect to the
portion of the incremental Loans comprising each ABR Borrowing made available to
Borrowers during the Seasonal Overadvance Period utilizing the increased advance
rates set forth in the Borrowing Base for such Seasonal Overadvance Period,
including each Swingline Loan, 2.50% per annum and (b) with respect to the
portion of the incremental Loans comprising each Eurodollar Borrowing made
available to Borrowers during the Seasonal Overadvance Period utilizing the
increased advance rates set forth in the Borrowing Base for such Seasonal
Overadvance Period, 4.50% per annum.
          “Appraisal” means an appraisal delivered by Administrative Borrower,
at Borrowers’ expense, to Administrative Agent prior to the Closing Date and
thereafter pursuant to Section 5.04(k) setting forth the Net Orderly Liquidation
Value of the Inventory of each Borrower, in form and substance and prepared by
an independent appraiser reasonably acceptable to Administrative Agent.
          “Arranger” means Marathon Structured Finance Fund, L.P., as arranger.
          “Asset Sale” shall mean the sale, lease, sale and leaseback,
assignment, conveyance, transfer, issuance or other disposition (by way of
merger, casualty, condemnation or otherwise) by PALCO or any of the Subsidiaries
to any person other than PALCO or any Subsidiary Guarantor of (a) any Equity
Interests of any of the Subsidiaries (other than directors’ qualifying shares)
or (b) any other assets of PALCO or any of the Subsidiaries, including Equity
Interests of any person that is not a Subsidiary (other than inventory, obsolete
or worn out assets,

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scrap and Permitted Investments, in each case disposed of in the ordinary course
of business); provided that any asset sale or series of related asset sales
described in clause (b) above having a value not in excess of $25,000 shall be
deemed not to be an “Asset Sale” for purposes of this Agreement.
          “Assignment and Acceptance” shall mean an assignment and acceptance
entered into by a Lender and an assignee (with the consent of any person whose
consent is required by Section 9.04), and accepted by the Administrative Agent,
in the form of Exhibit C or such other form as shall be approved by the
Administrative Agent.
          “Benefit Plan” shall mean any employee pension benefit plan (other
than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or
Section 412 of the Tax Code or Section 307 of ERISA, and in respect of which the
Borrowers or any ERISA Affiliate is (or, if such plan were terminated, would
under Section 4069 of ERISA be deemed to be) an “employer” as defined in
Section 3(5) of ERISA.
          “Board” shall mean the Board of Governors of the Federal Reserve
System of the United States of America.
          “Borrowers” shall mean PALCO and Britt.
          “Borrowing” shall mean (a) Loans of the same Type made, converted or
continued on the same date and, in the case of Eurodollar Loans, as to which a
single Interest Period is in effect, or (b) a Swingline Loan.
          “Borrowing Availability” means as of any time of determination the
lesser of (i) the Total Revolving Credit Commitment at such time and (ii) the
Borrowing Base at such time, in each case, less the sum of (a) the Loans then
outstanding (including, without duplication, the outstanding balance of the
Swingline Loan then outstanding), (b) aggregate L/C Exposure at such time and
(c) Reserves established by the Administrative Agent in its reasonable credit
judgment.
          “Borrowing Base” means, at any time, an amount equal to the sum of:
     (a) (i) at all times other than during the Seasonal Overadvance Period
eighty-five percent (85%) of the Net Amount of Eligible Accounts or (ii) during
the Seasonal Overadvance Period ninety-five percent (95%) of the Net Amount of
Eligible Accounts; plus
     (b) (i) at all times other than during the Seasonal Overadvance Period the
lesser of (x) eighty percent (80%) of the value (being the lower of cost (on a
first-in first-out basis) or market) of Eligible Inventory or (y) eighty-five
percent (85%) of the Net Orderly Liquidation Value at such time of the value
(being the lower of cost (on a first-in first-out basis) or market) of Eligible
Inventory or (ii) during the Seasonal Overadvance Period the lesser of
(x) ninety percent (90%) of the value (being the lower of cost (on a first-in
first-out basis) or market) of Eligible Inventory or (y) ninety-five percent
(95%) of the Net Orderly Liquidation

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Value at such time of the value (being the lower of cost (on a first-in
first-out basis) or market) of Eligible Inventory ; less
     (c) Reserves from time to time established by the Administrative Agent in
its reasonable credit judgment.
          “Borrowing Base Certificate” means a certificate by a Responsible
Officer of PALCO, substantially in the form of Exhibit H (or another form
acceptable to the Administrative Agent) setting forth the calculation of the
Borrowing Base, including a calculation of each component thereof, all in such
detail as shall be reasonably satisfactory to the Administrative Agent. All
calculations of the Borrowing Base in connection with the preparation of any
Borrowing Base Certificate shall originally be made by PALCO and certified to
the Administrative Agent; provided, that the Administrative Agent shall have the
right to review and adjust, in the exercise of its reasonable credit judgment,
any such calculation (1) to reflect its reasonable estimate of declines in value
of any of the Collateral described therein, and (2) to the extent that such
calculation is not in accordance with this Agreement.
          “Borrowing Request” shall mean a request by the Administrative
Borrower in accordance with the terms of Section 2.03 and substantially in the
form of Exhibit D, or such other form as shall be approved by the Administrative
Agent.
          “Breakage Event” shall have the meaning assigned to such term in
Section 2.16.
          “Business Day” shall mean any day other than a Saturday, Sunday or day
on which commercial banks in New York City are authorized or required by law to
close; provided, however, that when used in connection with a Eurodollar Loan
(including with respect to all notices and determinations in connection
therewith and any payments of principal, interest or other amounts thereon), the
term “Business Day” shall also exclude any day on which banks are not open for
dealings in dollar deposits in the London interbank market.
          “Capital Expenditures” shall mean, for any period, with respect to any
person, (a) the additions to property, plant and equipment and other capital
expenditures of such person and its subsidiaries that are (or should be) set
forth in a consolidated statement of cash flows of such person for such period
prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by
such person and its subsidiaries during such period. For financial covenant
purposes, Capital Expenditures shall exclude expenditures associated with the
preparation and sale of non-core assets, not to exceed $5,000,000 in the
aggregate.
          “Capital Lease Obligations” of any person shall mean the obligations
of such person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP,
and the amount of such obligations at any time shall be the capitalized amount
thereof at such time determined in accordance with GAAP.
          “Change in Control” shall be deemed to have occurred if (a) Maxxam
shall fail to own directly or indirectly, beneficially and of record, Equity
Interests representing at least 51% of the aggregate ordinary voting power and
aggregate equity value represented by the issued and

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outstanding Equity Interests in PALCO; (b) Maxxam, through direct representation
or through persons nominated by it, ceases to control a majority of the Board of
Directors of PALCO necessary to effectuate any actions of the Board of Directors
of PALCO; (c) Holdings shall at any time fail to own directly, beneficially and
of record, 100% of each class of issued and outstanding Equity Interests in
Palco, free and clear of all Liens (other than Liens created by the Guarantee
and Collateral Agreement); (d) PALCO shall at any time fail to own directly or
indirectly, beneficially and of record, 100% of each class of issued and
outstanding Equity Interests in Britt, free and clear of all Liens (other than
Liens created by the Guarantee and Collateral Agreement); (e) PALCO shall fail
to own directly or indirectly, beneficially and of record, Equity Interests
representing at least 100% of the aggregate ordinary voting power and aggregate
equity value represented by the issued and outstanding Equity Interests in
Scotia Pacific or (f) PALCO, through direct representation or through persons
nominated by it, ceases to control a majority of the Board of Managers of Scotia
Pacific necessary to effectuate any actions of the Board of Managers of Scotia
Pacific.
          “Change in Law” shall mean (a) the adoption of any law, rule or
regulation after the date of this Agreement, (b) any change in any law, rule or
regulation or in the interpretation or application thereof by any Governmental
Authority after the date of this Agreement or (c) compliance by any Lender (or,
for purposes of Section 2.14, by any lending office of such Lender or by such
Lender’s holding company, if any) with any request, guideline or directive
(whether or not having the force of law) of any Governmental Authority made or
issued after the date of this Agreement.
          “Charges” shall have the meaning assigned to such term in
Section 9.09.
          “Closing Date” shall mean July 18, 2006.
          “Collateral” shall mean all property and assets of the Loan Parties,
now owned or hereafter acquired, upon which a Lien is purported to be created by
any Security Document, and shall include the Mortgaged Properties.
          “Combined Cash Interest Expense” means, for any period, Combined
Interest Expense for such period less the sum of, in each case to the extent
included in the definition of Combined Interest Expense, (a) the amortized
amount of debt discount and debt issuance costs, (b) interest payable in
evidences of Indebtedness or by addition to the principal of the related
Indebtedness and (c) other non-cash interest.
          “Combined EBITDA” shall mean, for any period, Combined Net Income for
such period plus (a) without duplication and to the extent deducted in
determining such Combined Net Income, the sum of (i) Combined Interest Expense
for such period, (ii) combined income tax expense for such period, (iii) all
amounts attributable to depreciation and amortization for such period and
(iv) depletion for such period (provided that to the extent that all or any
portion of the income of any person is excluded from Combined Net Income
pursuant to the definition thereof for all or any portion of such period any
amounts set forth in the preceding clauses (i) through (iv) that are
attributable to such person shall not be included for purposes of this
definition for such period or portion thereof), and minus (b) without
duplication and to the extent included in determining such Combined Net Income,
any extraordinary gains and all non-cash items of

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income for such period, all determined on a combined basis in accordance with
GAAP (except that Inventory is presented on a FIFO basis).
          “Combined Fixed Charge Coverage Ratio” means, for any period, the
ratio of (a) Combined EBITDA for such period minus Capital Expenditures of
Borrowers and their Subsidiaries on a combined basis for such period minus the
total liability for United States federal income taxes and other taxes measured
by net income actually payable by Borrowers and their Subsidiaries on a combined
basis in respect of such period to (b) the Combined Fixed Charges for such
period.
          “Combined Fixed Charges” means, with respect to Borrowers and their
Subsidiaries on a combined basis for any period, the sum, determined on a
combined basis, of (a) the Combined Cash Interest Expense for such period,
(b) the principal amount of Combined Total Debt having a scheduled due date
during such period, (c) all cash dividends payable by Borrowers and their
Subsidiaries on Equity Interests in respect of such period to persons other than
Borrowers and their Subsidiaries and (d) all commitment fees and other costs,
fees and expenses payable by Borrowers and their Subsidiaries on a combined
basis during such period in order to effect, or because of, the incurrence of
any Indebtedness.
          “Combined Interest Expense” shall mean, for any period, the sum of
(a) the interest expense (including imputed interest expense in respect of
Capital Lease Obligations) of the Borrowers on a combined basis for such period
(including all commissions, discounts and other fees and charges owed by the
Borrowers on a combined basis with respect to letters of credit and bankers’
acceptance financing), net of interest income, in each case determined on a
combined basis in accordance with GAAP, plus (b) any interest accrued during
such period in respect of Indebtedness of the Borrowers on a combined basis that
is required to be capitalized rather than included in interest expense for such
period in accordance with GAAP. For purposes of the foregoing, interest expense
shall be determined after giving effect to any net payments made or received by
the Borrowers on a combined basis with respect to interest rate Hedging
Agreements.
          “Combined Net Income” shall mean, for any period, the net income or
loss of the Borrowers on a combined basis for such period determined on a
combined basis in accordance with GAAP; provided that there shall be excluded
(a) the income of any Subsidiary (other than Britt), (b) the income or loss of
any person accrued prior to the date it is merged into or consolidated with a
Borrower or the date that such person’s assets are acquired by a Borrower, (c)
the income of any person other than a Borrower, except to the extent of the
amount of dividends or other distributions actually paid to a Borrower by such
person during such period, and (d) any gains attributable to sales of assets out
of the ordinary course of business.
          “Combined Total Debt” means all Indebtedness (excluding any
Indebtedness evidenced by the Subordinated Intercompany Note) of a type
described in clause (a), (b), (f), (g), (h), (i) or (j) of the definition
thereof of the Borrowers and their Subsidiaries on a combined basis.

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          “Combined Total Leverage Ratio” means the ratio of (a) Combined Total
Debt outstanding as of the applicable date to (b) Combined EBITDA for the last
period of four consecutive Fiscal Quarters ending on or before such date.
          “Commitment” shall mean, with respect to any Lender, such Lender’s
Revolving Credit Commitment and Swingline Commitment.
          “Commitment Fee” shall have the meaning assigned to such term in
Section 2.05(a).
          “Commitment Fee Rate” shall mean a rate per annum equal to 1/2 of 1%.
          “Control” shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of the management or policies of a
person, whether through the ownership of voting securities, by contract or
otherwise, and the terms “Controlling” and “Controlled” shall have meanings
correlative thereto.
          “Control Agreement” means tri-party deposit account, securities
account or commodities account control agreements by and among the applicable
Loan Party, the Administrative Agent, certain other parties and the depository,
securities intermediary or commodities intermediary, and each in form and
substance satisfactory in all respects to the Administrative Agent and in any
event proving to the Administrative Agent “control” of such deposit account,
securities or commodities account within the meaning of Articles 8 and 9 of the
UCC.
          “Credit Event” shall have the meaning assigned to such term in
Section 4.01.
          “Default” shall mean any event or condition which constitutes an Event
of Default or which upon notice, lapse of time or both would constitute an Event
of Default.
          “dollars” or “$” shall mean lawful money of the United States of
America.
          “Eligible Accounts” shall mean the Accounts which the Administrative
Agent in the exercise of its reasonable commercial discretion determines to be
Eligible Accounts. Without limiting the discretion of the Administrative Agent
to establish other criteria of ineligibility, Eligible Accounts shall not,
unless the Administrative Agent in its sole discretion elects, include any
Account:
          (a) with respect to which more than 60 days have elapsed since the
date of the original invoice therefor or which is more than 30 days past due,
provided, that during the period from November 1 through March 31 in any year
any Account that is subject to an Extended Terms Invoice and with respect to
which no more than 120 days have elapsed since the date of the original invoice
therefor or which is no more than 30 days past due shall be eligible, provided,
that when such Account is aggregated with the gross amount of all other such
Accounts then outstanding, such aggregated amount shall not exceed $2,500,000;
          (b) with respect to which any of the representations, warranties,
covenants, and agreements contained in the Security Documents are incorrect or
have been breached;

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          (c) with respect to which Account (or any other Account due from such
Account Debtor), in whole or in part, a check, promissory note, draft, trade
acceptance or other instrument for the payment of money has been received,
presented for payment and returned uncollected for any reason;
          (d) which represents a progress billing (as hereinafter defined) or as
to which the applicable Borrower has extended the time for payment without the
consent of the Administrative Agent; for the purposes hereof, “progress billing”
means any invoice for goods sold or leased or services rendered under a contract
or agreement pursuant to which the Account Debtor’s obligation to pay such
invoice is conditioned upon the applicable Borrower’s completion of any further
performance under the contract or agreement;
          (e) with respect to which any one or more of the following events has
occurred to the Account Debtor on such Account: death or judicial declaration of
incompetency of an Account Debtor who is an individual; the filing by or against
the Account Debtor of a request or petition for liquidation, reorganization,
arrangement, adjustment of debts, adjudication as a bankrupt, winding-up, or
other relief under the bankruptcy, insolvency, or similar laws of the United
States, any state or territory thereof, or any foreign jurisdiction, now or
hereafter in effect; the making of any general assignment by the Account Debtor
for the benefit of creditors; the appointment of a receiver or trustee for the
Account Debtor or for any of the assets of the Account Debtor, including,
without limitation, the appointment of or taking possession by a “custodian,” as
defined in the Federal Bankruptcy Code; the institution by or against the
Account Debtor of any other type of insolvency proceeding (under the bankruptcy
laws of the United States or otherwise) or of any formal or informal proceeding
for the dissolution or liquidation of, settlement of claims against, or winding
up of affairs of, the Account Debtor; the sale, assignment, or transfer of all
or any material part of the assets of the Account Debtor; the nonpayment
generally by the Account Debtor of its debts as they become due; or the
cessation of the business of the Account Debtor as a going concern;
          (f) if fifty percent (50%) or more of the aggregate Dollar amount of
outstanding Accounts owed at such time by the Account Debtor thereon is
classified as ineligible under clause (a) above;
          (g) owed by an Account Debtor which: (i) does not maintain its chief
executive office in the United States of America or Canada (other than the
Province of Newfoundland); or (ii) is not organized under the laws of the United
States of America or Canada or any state or province thereof; or (iii) is the
government of any foreign country or sovereign state, or of any state, province,
municipality, or other political subdivision thereof, or of any department,
agency, public corporation, or other instrumentality thereof; except to the
extent that such Account is secured or payable by a letter of credit
satisfactory to the Administrative Agent in its discretion;
          (h) owed by an Account Debtor which is an Affiliate or employee of the
applicable Borrower;
          (i) except as provided in clause (k) below, with respect to which
either the perfection, enforceability, or validity of the Administrative Agent’s
Liens in such Account, or the

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Administrative Agent’s right or ability to obtain direct payment to the
Administrative Agent of the proceeds of such Account, is governed by any
federal, state, or local statutory requirements other than those of the UCC;
          (j) owed by an Account Debtor to which the applicable Borrower or any
of its Subsidiaries, is indebted in any way, or which is subject to any right of
setoff or recoupment by the Account Debtor, unless the Account Debtor has
entered into an agreement acceptable to the Administrative Agent to waive setoff
rights; or if the Account Debtor thereon has disputed liability or made any
claim with respect to any other Account due from such Account Debtor; but in
each such case only to the extent of such indebtedness, setoff, recoupment,
dispute, or claim;
          (k) owed by the government of the United States of America, or any
department, agency, public corporation, or other instrumentality thereof, unless
the Federal Assignment of Claims Act of 1940, as amended (31 U.S.C. ss. 3727 et
seq.), and any other steps necessary to perfect the Administrative Agent’s Liens
therein, have been complied with to the Administrative Agent’s satisfaction with
respect to such Account;
          (l) owed by any state, municipality, or other political subdivision of
the United States of America, or any department, agency, public corporation, or
other instrumentality thereof and as to which the Administrative Agent
determines that its Lien therein is not or cannot be perfected;
          (m) which represents a sale on a bill-and-hold, guaranteed sale, sale
and return, sale on approval, consignment, or other repurchase or return basis;
          (n) which is evidenced by a promissory note or other instrument or by
chattel paper;
          (o) if the Administrative Agent believes, in the exercise of its
reasonable judgment, that the prospect of collection of such Account is impaired
or that the Account may not be paid by reason of the Account Debtor’s financial
inability to pay;
          (p) with respect to which the Account Debtor is located in any state
requiring the filing of a Notice of Business Activities Report or similar report
in order to permit the applicable Borrower to seek judicial enforcement in such
State of payment of such Account, unless such Borrower has qualified to do
business in such state or has filed a Notice of Business Activities Report or
equivalent report for the then current year;
          (q) which arises out of a sale not made in the ordinary course of the
applicable Borrower’s business;
          (r) with respect to which the goods giving rise to such Account have
not been shipped and delivered to and accepted by the Account Debtor or the
services giving rise to such Account have not been performed by the applicable
Borrower, and, if applicable, accepted by the Account Debtor, or the Account
Debtor revokes its acceptance of such goods or services;
          (s) owed by an Account Debtor or a group of affiliated Account Debtors
which is obligated to the applicable Borrower respecting Accounts the aggregate
unpaid balance

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of which exceeds fifteen percent (15%) of the aggregate unpaid balance of all
Accounts owed to such Borrower at such time by all of the Borrower’s Account
Debtors, but only to the extent of such excess;
          (t) which is not subject to a first priority and perfected security
interest in favor of the Administrative Agent for the benefit of the Secured
Parties;
          (u) as to which any Borrower is not able to bring suit or otherwise
enforce its remedies against the Account Debtor through judicial process;
          (v) that is not a true and correct statement of bona fide indebtedness
incurred in the amount of the Account for merchandise sold to or services
rendered and accepted by the applicable Account Debtor;
          (w) with respect to which an invoice, reasonably acceptable to the
Administrative Agent in form and substance, has not been sent to the applicable
Account Debtor;
          (x) that (i) is not owned by any Borrower or (ii) is subject to any
Lien of any other person, other than Liens in favor of the Administrative Agent,
on behalf of itself and the Lenders;
          (y) to the extent such Account exceeds any credit limit established by
the Administrative Agent, in its reasonable credit judgment, following prior
notice of such limit by the Administrative Agent to the Administrative Borrower;
and
          (z) that is payable in any currency other than dollars.
          In addition, (i) to the extent that the amounts in respect of any
Account in the general ledger are lower than the amounts in respect of such
Account in the monthly aging reports submitted to the Administrative Agent, the
difference between such amounts shall be excluded from the calculation of
Eligible Accounts and (ii) if PALCO does not own any Equity Interest in Britt,
no Account of Britt shall constitute an Eligible Account.
          If any Account at any time ceases to be an Eligible Account, then such
Account shall promptly be excluded from the calculation of Eligible Accounts.
          “Eligible Inventory” means Inventory which the Administrative Agent,
in its reasonable discretion, determines to be Eligible Inventory. Without
limiting the discretion of the Administrative Agent to establish other criteria
of ineligibility, Eligible Inventory shall not, unless the Administrative Agent
in its sole discretion elects, include any Inventory:
          (a) that is not owned by the applicable Borrower;
          (b) that is not subject to the Administrative Agent’s Liens, which are
perfected as to such Inventory, or that are subject to any other Lien whatsoever
(other than the Liens described in clause (d) of Section 6.02 provided that such
Permitted Liens (i) are junior in priority to the Administrative Agent’s Liens
or subject to Reserves and (ii) do not impair directly

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or indirectly the ability of the Administrative Agent to realize on or obtain
the full benefit of the Collateral);
          (c) that does not consist of finished goods or raw materials;
          (d) that consists of chemicals, samples, prototypes, supplies, or
packing and shipping materials;
          (e) that is not in good condition, is unmerchantable, or does not meet
all standards imposed by any Governmental Authority, having regulatory authority
over such goods, their use or sale;
          (f) that is not currently either usable or salable, at prices
approximating at least cost, in the normal course of the applicable Borrower’s
business, or that is slow moving or stale;
          (g) that is obsolete or returned or repossessed or used goods taken in
trade;
          (h) that is located outside the United States of America (or that is
in-transit from vendors or suppliers);
          (i) that is located in a public warehouse or in possession of a bailee
or in a facility leased by the applicable Borrower, if the warehouseman, or the
bailee, or the lessor has not delivered to the Administrative Agent, if
requested by the Administrative Agent, a subordination agreement in form and
substance satisfactory to the Administrative Agent or if a Reserve for rents or
storage charges has not been established for Inventory at that location;
          (j) that contains or bears any proprietary rights licensed to the
applicable Borrower by any Person, if the Administrative Agent is not satisfied
that it may sell or otherwise dispose of such Inventory in accordance with the
terms of the Security Documents and Section 6.05 without infringing the rights
of the licensor of such proprietary rights or violating any contract with such
licensor (and without payment of any royalties other than any royalties due with
respect to the sale or disposition of such Inventory pursuant to the existing
license agreement), and, as to which the applicable Borrower has not delivered
to the Administrative Agent a consent or sublicense agreement from such licensor
in form and substance acceptable to the Administrative Agent if requested;
          (k) that is Inventory placed on consignment;
          (l) that consists of the difference between any Borrower’s first-in,
first-out log costs and estimated market value log costs;
          (m) that consists of the difference between any Borrower’s first-in,
first-out lumber costs and reported market value lumber costs;
          (n) (i) is not located on premises owned, leased or rented by
Borrowers and set forth in Disclosure Schedule 3.20 or (ii) is located at an
owned location subject to a mortgage

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in favor of a lender other than the Administrative Agent, unless a reasonably
satisfactory mortgagee waiver has been delivered to the Administrative Agent;
          (o) that is covered by a negotiable document of title, unless such
document has been delivered to the Administrative Agent with all necessary
endorsements, free and clear of all Liens except those in favor of the
Administrative Agent and Lenders;
          (p) that is not of a type held for sale in the ordinary course of the
applicable Borrower’s business;
          (q) that breaches any of the representations or warranties pertaining
to Inventory set forth in the Loan Documents;
          (r) that consists of any costs associated with “freight-in” charges;
          (s) that consists of Hazardous Materials or goods that can be
transported or sold only with licenses that are not readily available; or
          (t) that is not covered by casualty insurance reasonably acceptable to
the Administrative Agent.
          In addition, (i) to the extent that the amounts in respect of any
Inventory in the general ledger are lower than the amounts in respect of such
Inventory in the monthly aging reports submitted to the Administrative Agent,
the difference between such amounts shall be excluded from the calculation of
Eligible Inventory and (ii) to the extent that PALCO does not own an Equity
Interest in Britt, no Inventory of Britt shall constitute Eligible Inventory.
          If any Inventory at any time ceases to be Eligible Inventory, such
Inventory shall promptly be excluded from the calculation of Eligible Inventory.
          “Environmental Laws” shall mean all former, current and future
Federal, state, local and foreign laws (including common law), treaties,
regulations, rules, ordinances, codes, decrees, judgments, directives, orders
(including consent orders), and agreements in each case, relating to protection
of the environment, natural resources, human health and safety or the presence,
Release of, threatened Release, or exposure to, Hazardous Materials, or the
generation, manufacture, processing, distribution, use, treatment, storage,
transport, recycling or handling of, or the arrangement for such activities with
respect to, Hazardous Materials.
          “Environmental Liability” shall mean all liabilities, obligations,
damages, losses, claims, actions, suits, judgments, orders, fines, penalties,
fees, expenses and costs (including administrative oversight costs, natural
resource damages and remediation costs), whether contingent or otherwise,
arising out of or relating to (a) compliance or non-compliance with any
Environmental Law, (b) the generation, use, handling, transportation, storage,
treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous
Materials, (d) the Release or threatened Release of any Hazardous Materials or
(e) any contract, agreement or other consensual arrangement pursuant to which
liability is assumed or imposed with respect to any of the foregoing.

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          “Environmental Permit” shall mean any Permit under Environmental Law.
          “Equipment” means all now owned and hereafter acquired machinery,
equipment, furniture, furnishings, fixtures, of either Borrower and other
tangible personal property (except Inventory), including embedded software,
motor vehicles with respect to which a certificate of title has been issued,
aircraft, dies, tools, jigs, molds and office equipment, as well as all of such
types of property leased by either Borrower and all of such Borrower’s rights
and interests with respect thereto under such leases (including, without
limitation, options to purchase); together with all present and future additions
and accessions thereto, replacements therefor, component and auxiliary parts and
supplies used or to be used in connection therewith, and all substitutes for any
of the foregoing, and all manuals, drawings, instructions, warranties and rights
with respect thereto; wherever any of the foregoing is located.
          “Equity Interests” shall mean shares of capital stock, partnership
interests, membership interests in a limited liability company, beneficial
interests in a trust or other equity interests in any person, or any obligations
convertible into or exchangeable for, or giving any person a right, option or
warrant to acquire, such equity interests or such convertible or exchangeable
obligations.
          “Equity Issuance” shall mean any issuance or sale by PALCO of any
Equity Interests of PALCO, or the receipt by PALCO of any capital contribution,
as applicable, except in each case for (a) any issuance of directors’ qualifying
shares and (b) sales or issuances of common stock of PALCO to management or
employees of PALCO or any Subsidiary under any employee stock option or stock
purchase plan or employee benefit plan in existence from time to time in the
ordinary course of business.
          “ERISA” shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time.
          “ERISA Affiliate” shall mean any trade or business (whether or not
incorporated) that, together with the Borrowers, is treated as a single employer
under Section 414(b) or (c) of the Tax Code, or solely for purposes of
Section 302 of ERISA and Section 412 of the Tax Code, is treated as a single
employer under Section 414 of the Tax Code.
          “ERISA Event” shall mean (a) any “reportable event”, as defined in
Section 4043 of ERISA or the regulations issued thereunder, with respect to a
Benefit Plan (other than an event for which the 30-day notice period is waived);
(b) the existence with respect to any Benefit Plan of an “accumulated funding
deficiency” (as defined in Section 412 of the Tax Code or Section 302 of ERISA),
whether or not waived; (c) the filing pursuant to Section 412(d) of the Tax Code
or Section 303(d) of ERISA of an application for a waiver of the minimum funding
standard with respect to any Benefit Plan; (d) the incurrence by the Borrowers
or any of its ERISA Affiliates of any liability under Title IV of ERISA with
respect to the termination of any Benefit Plan or the withdrawal or partial
withdrawal of the Borrowers or any of its ERISA Affiliates from any Benefit Plan
or Multiemployer Plan; (e) the receipt by the Borrowers or any of its ERISA
Affiliates from the PBGC or a plan administrator of any notice relating to the
intention to terminate any Benefit Plan or Plans or to appoint a trustee to
administer any Benefit Plan; (f) the adoption of any amendment to a Benefit Plan
that would require the provision of

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security pursuant to Section 401(a)(29) of the Tax Code or Section 307 of ERISA;
(g) the receipt by the Borrowers or any of their ERISA Affiliates of any notice,
or the receipt by any Multiemployer Plan from the Borrowers or any of their
ERISA Affiliates of any notice, concerning the imposition of Withdrawal
Liability or a determination that a Multiemployer Plan is, or is expected to be,
insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the
occurrence of a “prohibited transaction” with respect to which the Borrowers or
any of the Subsidiaries is a “disqualified person” (within the meaning of
Section 4975 of the Tax Code) or with respect to which the Borrowers or any such
Subsidiary could otherwise be liable; or (i) any other event or condition with
respect to a Benefit Plan or Multiemployer Plan that could result in liability
of any Loan Party in an amount in excess of $2,500,000.
          “Eurodollar”, when used in reference to any Loan or Borrowing, refers
to whether such Loan, or the Loans comprising such Borrowing, are bearing
interest at a rate determined by reference to the Adjusted LIBO Rate.
          “Event of Default” shall have the meaning assigned to such term in
Article VII.
          “Excluded Taxes” shall mean, with respect to the Administrative Agent,
any Lender, or any other recipient of any payment to be made by or on account of
any obligation of the Borrowers hereunder, (a) taxes imposed on (or measured by)
its net income as a result of a connection between such recipient and the
jurisdiction imposing such tax (or any political subdivision thereof), other
than any such connection arising solely from such recipient having executed,
delivered or performed its obligations or received a payment under, or enforced,
this Agreement or any other Loan Document and (b) in the case of a Foreign
Lender (other than an assignee pursuant to a request by the Administrative
Borrower under Section 2.21(a)), any United States withholding tax that is
imposed on amounts payable to such Foreign Lender at the time such Foreign
Lender becomes a party to this Agreement (or designates a new lending office) or
is attributable to such Foreign Lender’s failure to comply with Section 2.20(d),
except to the extent that such Foreign Lender (or its assignor, if any) was
entitled, at the time of designation of a new lending office (or assignment), to
receive additional amounts from PALCO with respect to such withholding tax
pursuant to Section 2.20(a).
          “Existing Credit Facilities” shall mean (i) that certain Term Loan
Agreement dated as of April 19, 2005 among the Borrowers, the Lenders (as
defined therein) and Credit Suisse First Boston, as administrative agent and
(ii) that certain Revolving Credit Agreement dated as of April 19, 2005 among
the Borrowers, the Lenders (as defined therein) and The CIT Group/Business
Credit, Inc., as administrative agent.
          “Extended Terms Invoice” means any invoice issued by a Borrower that
states that payment in respect of such invoice is due more than 30 days past the
date of such invoice.
          “Facility” shall mean the Commitments and the extensions of credit
made thereunder.
          “Federal Funds Effective Rate” shall mean, for any day, the weighted
average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on
overnight Federal funds transactions with members of the Federal Reserve System
arranged by Federal funds brokers, as

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published on the next succeeding Business Day by the Federal Reserve Bank of New
York, or, if such rate is not so published for any day that is a Business Day,
the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the
quotations for the day for such transactions received by the Administrative
Agent from three Federal funds brokers of recognized standing selected by it.
          “Fee Letter” shall mean that certain Fee Letter dated as of the
Closing Date between PALCO and Marathon Structured Finance Fund L.P.
          “Fees” shall mean the Commitment Fees, the Administrative Agent Fees,
the L/C Guaranty Fees and the Issuing Bank Fees.
          “Financial Officer” of any person shall mean the chief financial
officer, principal accounting officer, treasurer or controller of such person
and in addition to such persons, for purposes of certifying compliance with
financial covenants and the preparation of a Borrowing Base Certificate, the
“Financial Officer” shall include the financial reporting manager and general
accounting manager or any other person having substantially the same authority
and responsibility.
          “Foreign Lender” shall mean any Lender that is organized under the
laws of a jurisdiction other than that in which the Borrower is located. For
purposes of this definition, the United States of America, each State thereof
and the District of Columbia shall be deemed to constitute a single
jurisdiction.
          “GAAP” shall mean generally accepted accounting principles in the
United States.
          “Governmental Authority” shall mean the government of the United
States of America or any other nation, any political subdivision thereof,
whether state or local, and any agency, authority, instrumentality, regulatory
body, court, central bank or other entity exercising executive, legislative,
judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.
          “Granting Lender” shall have the meaning assigned to such term in
Section 9.04(i).
          “Guarantee” of or by any person (the “guarantor”) shall mean any
obligation, contingent or otherwise, of (a) the guarantor or (b) another person
(including any bank under a letter of credit) to induce the creation of which
the guarantor has issued a reimbursement, counterindemnity or similar
obligation, in either case guaranteeing or having the economic effect of
guaranteeing any Indebtedness or other obligation of any other person (the
“primary obligor”) in any manner, whether directly or indirectly, and including
any obligation, contingent or otherwise, of the guarantor, direct or indirect,
(i) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation or to purchase (or to advance or
supply funds for the purchase of) any security for the payment of such
Indebtedness or other obligation, (ii) to purchase or lease property, securities
or services for the purpose of assuring the owner of such Indebtedness or other
obligation of the payment of such Indebtedness or other obligation, (iii) to
maintain working capital, equity capital or any other financial

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statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness or other obligation, (iv) as an account
party in respect of any letter of credit or letter of guaranty issued to support
such Indebtedness or obligation or (v) to otherwise assure or hold harmless the
owner of such Indebtedness or other obligation against loss in respect thereof;
provided, however, that the term “Guarantee” shall not include endorsements for
collection or deposit in the ordinary course of business.
          “Guarantee and Collateral Agreement” shall mean each Guarantee and
Collateral Agreement executed and delivered by one or more Loan Parties, each in
form and substance reasonably satisfactory to the Administrative Agent.
          “Guarantors” shall mean the Subsidiary Guarantors.
          “Hazardous Materials” shall mean any petroleum (including crude oil or
fraction thereof) or petroleum products or byproducts, or any pollutant,
contaminant, chemical, compound, constituent, or hazardous, toxic or other
substances, materials or wastes defined, or regulated as such by, or pursuant
to, any Environmental Law, or requires removal, remediation or reporting under
any Environmental Law, including asbestos, or asbestos containing material,
radon or other radioactive material, polychlorinated biphenyls and urea
formaldehyde insulation.
          “Hedging Agreement” shall mean any agreement with respect to any swap,
forward, future or derivative transaction or option or similar agreement
involving, or settled by reference to, one or more rates, currencies, fuel or
other commodities, equity or debt instruments or securities, or economic,
financial or pricing indices or measures of economic, financial or pricing risk
or value or any similar transaction or any combination of these transactions.
          “Holdings” shall mean MAXXAM Group Inc.
          “Indebtedness” of any person shall mean, without duplication, (a) all
obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such person
under conditional sale or other title retention agreements relating to property
or assets acquired by such person, (d) all obligations of such person in respect
of the deferred purchase price of property or services (other than current trade
accounts payable incurred in the ordinary course of business), (e) all
obligations of such person, contingent or otherwise, to purchase, redeem, retire
or otherwise acquire for value any Equity Interests in such person, (f) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such person, whether or not the Indebtedness
secured thereby has been assumed, (g) all Guarantees by such person of
Indebtedness of others, (h) all Capital Lease Obligations of such person,
(i) all obligations, contingent or otherwise, of such person as an account party
in respect of letters of credit and letters of guaranty and (j) all obligations,
contingent or otherwise, of such person in respect of bankers’ acceptances. The
Indebtedness of any person shall include the Indebtedness of any other person
(including any partnership in which such person is a general partner) to the
extent such person is liable therefor as a result of such person’s ownership
interest in, or other relationship with, such other person, except to the extent
the terms of such Indebtedness provide that such person is not liable therefor.

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          “Indemnified Taxes” shall mean Taxes other than Excluded Taxes and
Other Taxes.
          “Indemnitee” shall have the meaning assigned to such term in
Section 9.05(b).
          “Information” shall have the meaning assigned to such term in
Section 9.16.
          “Intellectual Property Collateral” shall have the meaning assigned to
such term in the Guarantee and Collateral Agreement.
          “Intellectual Property Security Agreement” shall mean all Intellectual
Property Security Agreements to be executed and delivered by the Loan Parties,
each substantially in the applicable form required by the Guarantee and
Collateral Agreement.
          “Intercreditor Agreement” shall mean that certain Intercreditor
Agreement dated as of the Closing Date by and among the Borrowers, the
Guarantors, Holdings, the Administrative Agent and the Administrative Agent (as
defined in the Term Loan Agreement).
          “Interest Payment Date” shall mean (a) with respect to any ABR Loan
(including a Swingline Loan), the last Business Day of each calendar month, and
(b) with respect to any Eurodollar Loan, the last day of the Interest Period
applicable to the Borrowing of which such Loan is a part and, in the case of a
Eurodollar Borrowing with an Interest Period of more than three months’
duration, each day that would have been an Interest Payment Date had successive
Interest Periods of three months’ duration been applicable to such Borrowing.
          “Interest Period” shall mean, with respect to any Eurodollar
Borrowing, the period commencing on the date of such Borrowing and ending on the
numerically corresponding day in the calendar month that is 1, 2, 3 or 6 months
thereafter (or 9 or 12 months thereafter if, at the time of the relevant
Borrowing, an interest period of such duration is available to all Lenders
participating therein), as the Borrowers may elect; provided, however, that
(a) if any Interest Period would end on a day other than a Business Day, such
Interest Period shall be extended to the next succeeding Business Day unless
such next succeeding Business Day would fall in the next calendar month, in
which case such Interest Period shall end on the next preceding Business Day and
(b) any Interest Period that commences on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the
last calendar month of such Interest Period) shall end on the last Business Day
of the last calendar month of such Interest Period. Interest shall accrue from
and including the first day of an Interest Period to but excluding the last day
of such Interest Period. For purposes hereof, the date of a Borrowing initially
shall be the date on which such Borrowing is made and thereafter shall be the
effective date of the most recent conversion or continuation of such Borrowing.
          “Inventory” means all now owned and hereafter acquired inventory,
goods and merchandise of either Borrower, wherever located, to be furnished
under any contract of service or held for sale or lease, all returned goods, raw
materials, work-in-process, finished goods (including embedded software), other
materials and supplies of any kind, nature or description which are used or
consumed in either Borrower’s business or used in connection with the packing,
shipping, advertising, selling or finishing of such goods, merchandise, and all
documents of title or other Documents representing them.

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          “Investments” shall have the meaning assigned to such term in
Section 6.04.
          “Issuing Bank” shall mean, as the context may require, or a bank
selected by or acceptable to Administrative Agent in its sole discretion, in
such Person’s capacity as an issuer of Letters of Credit.
          “Issuing Bank Fees” shall have the meaning assigned to such term in
Section 2.05(c).
          “L/C Disbursement” shall mean a payment or disbursement made by the
Administrative Agent under a Letter of Credit Guaranty.
          “L/C Exposure” shall mean, at any time, the sum of (a) the aggregate
undrawn amount of all Letters of Credit at such time and (b) the aggregate
amount of all L/C Disbursements that have not been reimbursed at such time. The
L/C Exposure of any Lender at any time shall equal its Pro Rata Percentage of
the aggregate L/C Exposure at such time.
          “L/C Fee Payment Date” shall have the meaning assigned to such term in
Section 2.05(c).
          “L/C Guaranty Fee” shall have the meaning assigned to such term in
Section 2.05(c).
          “Lender Addendum” shall mean, with respect to any initial Lender, a
Lender Addendum in the form of Exhibit E, or such other form as may be supplied
by the Administrative Agent, to be executed and delivered by such Lender on the
Closing Date.
          “Lenders” shall mean (a) the persons that deliver a Lender Addendum
(other than any such person that has ceased to be a party hereto pursuant to an
Assignment and Acceptance) and (b) any person that has become a party hereto
pursuant to an Assignment and Acceptance. Unless the context otherwise requires,
the term “Lenders” shall include the Swingline Lender.
          “Letter of Credit” shall mean any letter of credit issued pursuant to
Section 2.23.
          “Letter of Credit Guaranty” shall mean any guaranty or similar
agreement delivered by the Administrative Agent to an Issuing Bank of one or
more Borrowers’ reimbursement obligation under such Issuing Bank’s reimbursement
agreement, application for letter of credit or other like document.
          “LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for
any Interest Period, the rate per annum determined by the Administrative Agent
at approximately 11:00 a.m., London time, on the date that is two Business Days
prior to the commencement of such Interest Period by reference to the British
Bankers’ Association Interest Settlement Rates for deposits in dollars (as set
forth by the Bloomberg Information Service or any successor thereto or any other
service selected by the Administrative Agent which has been nominated by the
British Bankers’ Association as an authorized information vendor for the purpose
of displaying such rates) for a period equal to such Interest Period; provided
that, to the extent that an interest rate is not ascertainable pursuant to the
foregoing provisions of this definition, the

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“LIBO Rate” shall be the interest rate per annum determined by the
Administrative Agent to be the average of the rates per annum at which deposits
in dollars are offered for such relevant Interest Period to major banks in the
London interbank market in London, England by the Administrative Agent at
approximately 11:00 a.m. (London time) on the date that is two Business Days
prior to the beginning of such Interest Period.
          “Lien” shall mean, with respect to any asset, (a) any mortgage, deed
of trust, lien (statutory or otherwise), pledge, hypothecation, encumbrance,
collateral assignment, charge or security interest in, on or of such asset,
(b) the interest of a vendor or a lessor under any conditional sale agreement,
capital lease or title retention agreement (or any financing lease having
substantially the same economic effect as any of the foregoing) relating to such
asset and (c) in the case of securities, any purchase option, call or similar
right of a third party with respect to such securities.
          “Loan Documents” shall mean this Agreement and the Security Documents.
          “Loan Parties” shall mean the Borrowers and each Subsidiary that is or
becomes a party to a Loan Document.
          “Loans” means Loans made by or on behalf of the Lenders to the
Borrowers pursuant to Sections 2.01, 2.22 and 2.24.
          “Margin Stock” shall have the meaning assigned to such term in
Regulation U.
          “Material Adverse Effect” shall mean a material adverse condition or
material adverse change in or materially affecting (a) the business, assets,
liabilities, operations or condition (financial or otherwise) or prospects of
PALCO and the Subsidiaries, taken as a whole, or (b) the validity or
enforceability of any of the Loan Documents or the rights and remedies of the
Arranger, the Administrative Agent, or the Secured Parties thereunder.
          “Material Indebtedness” shall mean Indebtedness (other than the Loans
and Letters of Credit), or obligations in respect of one or more Hedging
Agreements, of any one or more of PALCO and the Subsidiaries in an aggregate
outstanding principal amount exceeding $1,000,000. For purposes of determining
Material Indebtedness, the “principal amount” of the obligations of PALCO or any
Subsidiary in respect of any Hedging Agreement at any time shall be the maximum
aggregate amount (giving effect to any netting agreements) that PALCO or such
Subsidiary would be required to pay if such Hedging Agreement were terminated at
such time.
          “Maturity Date” shall mean July 18, 2011.
          “Maximum Rate” shall have the meaning assigned to such term in
Section 9.09.
          “Maxxam” means MAXXAM Inc.
          “Moody’s” shall mean Moody’s Investors Service, Inc.

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          “Mortgaged Properties” shall mean, initially, each parcel of real
property and the improvements thereto owned or leased by a Loan Party and
specified on Schedule 1.01(a), and shall include each other parcel of real
property and improvements thereto with respect to which a Mortgage is granted
pursuant to Section 5.09 or 5.10.
          “Mortgages” shall mean the fee or leasehold mortgages or deeds of
trust, assignments of leases and rents and other security documents granting a
Lien on any Mortgaged Property to secure the Obligations, each in form and
substance reasonably satisfactory to the Administrative Agent, with such changes
as shall be advisable under the law of the jurisdiction in which such Mortgage
is to be recorded and as are reasonably satisfactory to the Administrative
Agent, as the same may be amended, supplemented, replaced or otherwise modified
from time to time in accordance with this Agreement.
          “Multiemployer Plan” shall mean a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
          “Net Amount of Eligible Accounts” means, at any time, the gross amount
of Eligible Accounts less sales, excise or similar taxes, and less returns,
discounts, claims, credits and allowances, accrued rebates, and deductions of
any nature at any time issued, owing, granted, outstanding, available or
claimed.
          “Net Cash Proceeds” shall mean (a) with respect to any Asset Sale or
Recovery Event, the proceeds thereof in the form of cash (including any such
proceeds subsequently received (as and when received) in respect of noncash
consideration initially received), net of (i) selling expenses (including
reasonable and customary broker’s fees or commissions, legal fees, transfer and
similar taxes incurred by the Borrowers and the Subsidiaries in connection
therewith and the Borrowers’ good faith estimate of income taxes paid or payable
in connection with such sale, after taking into account any available tax
credits or deductions and any tax sharing arrangements), (ii) amounts provided
as a reserve, in accordance with GAAP and acceptable to the Administrative
Agent, against any liabilities under any indemnification obligations or purchase
price adjustment associated with such Asset Sale (provided that, to the extent
and at the time any such amounts are released from such reserve, such amounts
shall constitute Net Cash Proceeds), (iii) the principal amount, premium or
penalty, if any, interest and other amounts on any Indebtedness for borrowed
money which is secured by the asset sold in such Asset Sale and which is
required to be repaid with such proceeds (other than Indebtedness hereunder or
any such Indebtedness assumed by the purchaser of such asset) and (iv) to the
extent not otherwise included in clause (i) above, Capital Expenditures
associated with the preparation and sale of non-core assets, not to exceed
$5,000,000 in the aggregate; and (b) with respect to any issuance or disposition
of Indebtedness or any Equity Issuance, the cash proceeds thereof, net of all
taxes and reasonable and customary fees, commissions, costs and other expenses
incurred by the Borrowers and the Subsidiaries in connection therewith.
          “Net Orderly Liquidation Value” means at any time, with respect to
Inventory, the orderly liquidation value (expressed as a percentage of the book
value and on a non-conversion basis), if any, of such Inventory (less estimated
liquidation expenses) at such time, as determined by reference to the most
recent Appraisal thereof delivered to Administrative Agent pursuant to
Section 5.04(k), which is reasonably satisfactory to Administrative Agent.

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          “Obligations” shall mean all obligations defined as “Obligations” in
the Guarantee and Collateral Agreement and the other Security Documents.
          “Other Taxes” shall mean any and all present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies (including interest, fines, penalties and additions to tax) arising from
any payment made under any Loan Document or from the execution, delivery or
enforcement of, or otherwise with respect to, any Loan Document.
          “PBGC” shall mean the Pension Benefit Guaranty Corporation referred to
and defined in ERISA and any successor entity performing similar functions.
          “Perfection Certificate” shall mean the Pre-Closing UCC Diligence
Certificate substantially in the form of Exhibit F or any other form approved by
the Administrative Agent.
          “Permits” shall mean any and all franchises, licenses, leases,
permits, approvals, notifications, certifications, registrations,
authorizations, exemptions, qualifications, easements, rights of way, Liens and
other rights, privileges and approvals required under any Requirement of Law.
          “Permitted Discretion” means a determination made in good faith and in
the exercise of reasonable business judgment.
          “Permitted Investments” shall mean:
          (a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent such obligations are backed by
the full faith and credit of the United States of America), in each case
maturing within one year from the date of acquisition thereof;
          (b) investments in commercial paper maturing within 270 days from the
date of acquisition thereof and having, at such date of acquisition, the highest
credit rating obtainable from S&P or from Moody’s;
          (c) investments in certificates of deposit, banker’s acceptances and
time deposits maturing within 180 days from the date of acquisition thereof
issued or guaranteed by or placed with, and money market deposit accounts issued
or offered by, the Administrative Agent or any domestic office of any commercial
bank organized under the laws of the United States of America or any State
thereof that has a combined capital and surplus and undivided profits of not
less than $500,000,000;
          (d) fully collateralized repurchase agreements with a term of not more
than 30 days for securities described in clause (a) above and entered into with
a financial institution satisfying the criteria of clause (c) above;
          (e) investments in “money market funds” within the meaning of
Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all
of whose assets are invested in investments of the type described in clauses
(a) through (d) above;

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          (f) taxable auction rate securities commonly known as “money market
notes” that at the time of purchase have been rated and the ratings for which
(A) for direct issues, must not be less than “P1” if rated by Moody’s Investors
Services, Inc. and not less than “A1” if rated by Standard and Poor’s
Corporation, or (B) for collateralized issues which follow the asset coverage
tests set forth in the Investment Company Act of 1940, as amended, must have
long-term ratings of at least “AAA” if rated by Standard & Poor’s Corporation
and “Aaa” if rated by Moody’s Investors Services, Inc.; and
          (g) other short-term investments utilized by Subsidiaries in
accordance with normal investment practices for cash management in investments
of a type analogous to the foregoing.
          “Permitted Refinancing Indebtedness” shall mean Indebtedness issued or
incurred (including by means of the extension or renewal of existing
Indebtedness) to refinance, refund, extend, renew or replace existing
Indebtedness (“Refinanced Indebtedness”); provided that (a) the principal amount
of such refinancing, refunding, extending, renewing or replacing Indebtedness is
not greater than the principal amount of such Refinanced Indebtedness plus the
amount of any premiums or penalties and accrued and unpaid interest paid thereon
and reasonable fees and expenses, in each case associated with such refinancing,
refunding, extension, renewal or replacement, (b) such refinancing, refunding,
extending, renewing or replacing Indebtedness has a final maturity that is no
sooner than, and a weighted average life to maturity that is no shorter than,
such Refinanced Indebtedness, (c) if such Refinanced Indebtedness or any
Guarantees thereof are subordinated to the Obligations, such refinancing,
refunding, extending, renewing or replacing Indebtedness and any Guarantees
thereof remain so subordinated on terms no less favorable to the Lenders,
(d) the obligors in respect of such Refinanced Indebtedness immediately prior to
such refinancing, refunding, extending, renewing or replacing are the only
obligors on such refinancing, refunding extending, renewing or replacing
Indebtedness and (e) such refinancing, refunding, extending, renewing or
replacing Indebtedness contains covenants and events of default and is benefited
by Guarantees, if any, which, taken as a whole, are determined in good faith by
a Financial Officer of PALCO to be no less favorable to the Borrowers or the
applicable Subsidiary and the Lenders in any material respect than the covenants
and events of default or Guarantees, if any, in respect of such Refinanced
Indebtedness.
          “person” shall mean any natural person, corporation, trust, business
trust, joint venture, joint stock company, association, company, limited
liability company, partnership, Governmental Authority or other entity.
          “Pledged Collateral” shall have the meaning assigned to such term in
the Guarantee and Collateral Agreement.
          “Prime Rate” shall mean the rate of interest per annum announced from
time to time by JP Morgan Chase Bank, N.A as its prime rate in effect at its
principal office in New York City; each change in the Prime Rate shall be
effective as of the opening of business on the date such change is announced as
being effective. The Prime Rate is a reference rate and does not necessarily
represent the lowest or best rate actually available.

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          “Pro Rata Percentage” of any Lender, at any time, shall mean the
percentage of the total Commitments represented by such Lender’s Commitment. In
the event the Commitments shall have expired or been terminated, the Pro Rata
Percentage of any Lender shall be determined on the basis of the Commitments
most recently in effect prior thereto.
          “Protective Advances” shall have the meaning assigned to such term in
Section 2.24.
          “Real Property” shall mean all Mortgaged Property and all other real
property owned or leased from time to time by any Loan Party.
          “Recovery Event” shall mean any settlement of or payment in respect of
any property or casualty insurance claim or any taking under power of eminent
domain or by condemnation or similar proceeding of or relating to any property
or asset of the Borrowers or any Subsidiary.
          “Register” shall have the meaning assigned to such term in
Section 9.04(d).
          “Regulation T” shall mean Regulation T of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
          “Regulation U” shall mean Regulation U of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
          “Regulation X” shall mean Regulation X of the Board as from time to
time in effect and all official rulings and interpretations thereunder or
thereof.
          “Related Parties” shall mean, with respect to any specified person,
such person’s Affiliates and the respective directors, officers, employees,
agents and advisors of such person and such person’s Affiliates.
          “Release” shall mean any release, spill, seepage, emission, leaking,
pumping, injection, pouring, emptying, deposit, disposal, discharge, dispersal,
dumping, escaping, leaching, or migration into, onto or through the environment
or within or upon any building, structure, facility or fixture.
          “Required Lenders” shall mean, at any time, Lenders having Loans
(excluding Swingline Loans), L/C Exposure, Swingline Exposure and unused
Commitments representing at least a majority of the sum of all Loans (excluding
Swingline Loans), outstanding L/C Exposure, Swingline Exposure and unused
Commitments at such time.
          “Requirement of Law” shall mean as to any person, the governing
documents of such person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental Authority, in
each case applicable to or binding upon such person or any of its Real Property
or personal property or to which such person or any of its property of any
nature is subject.

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          “Reserves” shall mean reserves that limit the availability of credit
hereunder, consisting of reserves against the Commitments, Eligible Accounts or
Eligible Inventory, established by the Administrative Agent from time to time in
the Administrative Agent’s reasonable credit judgment. Without limiting the
generality of the foregoing, the following reserves shall be deemed to be a
reasonable exercise of the Administrative Agent’s credit judgment: (a) a reserve
for accrued, unpaid interest on the Obligations, (b) reserves for rent at leased
locations subject to statutory or contractual landlord liens, (c) reserves for
any lumberman’s liens, logger’s liens or other priming liens, (d) Inventory
shrinkage, (e) environmental compliance reserves, (f) dilution, and
(g) warehousemen’s or bailees’ charges.
          “Responsible Officer” of any person shall mean any executive officer
or Financial Officer of such person and any other officer or similar official
thereof responsible for the administration of the obligations of such person in
respect of this Agreement.
          “Restricted Payment” shall mean any dividend or other distribution
(whether in cash, securities or other property) with respect to any Equity
Interests in PALCO or any Subsidiary, or any payment (whether in cash,
securities or other property), including any sinking fund or similar deposit, on
account of the purchase, redemption, defeasance, retirement, acquisition,
cancellation or termination of any Equity Interests in PALCO or any Subsidiary
or any option, warrant or other right to acquire any such Equity Interests in
PALCO or any Subsidiary.
          “Revolving Credit Commitment” shall mean, with respect to each Lender,
the commitment, if any, of such Lender to make Loans (and to acquire
participations in Letters of Credit, Swingline Loans and Protective Advances)
hereunder as set forth on the Lender Addendum delivered by such Lender, or in
the Assignment and Acceptance pursuant to which such Lender assumed its
Commitment, as applicable, as the same may be (i) reduced from time to time
pursuant to Section 2.09 and (ii) reduced or increased from time to time
pursuant to assignments by or to such Lender pursuant to Section 9.04.
          “Revolving Credit Exposure” shall mean, with respect to any Lender, at
any time, the aggregate principal amount at such time of all outstanding Loans
of such Lender, plus the aggregate amount at such time of such Lender’s L/C
Exposure, plus the aggregate amount at such time of such Lender’s Swingline
Exposure.
          “S&P” shall mean Standard & Poor’s Ratings Group, Inc.
          “Salmon Creek” shall mean Salmon Creek LLC, a Delaware limited
liability company.
          “Salmon Creek CD” shall mean the certificate of deposit shown on
Schedule 3.26 and Schedule 6.02 hereto which has been issued by Bank of America
in the name of Salmon Creek, account number 14892-83984, and which has been
pledged by Salmon Creek to secure the obligations of Salmon Creek, PALCO and
Scotia Pacific under Items 1 and 2 of Schedule 6.07 hereto and under the related
Habitat Conservation Plan and “incidental take” permits.
          “Salmon Creek Transaction” shall mean (i) a dividend distribution from
Salmon Creek to PALCO consisting of all of the assets of Salmon Creek (other
than the Salmon Creek

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CD), followed by (ii) a dividend distribution from PALCO to Holdings consisting
of all of the membership interests of Salmon Creek, so that immediately after
the foregoing transactions PALCO shall be the owner of all of the assets of
Salmon Creek (other than the Salmon Creek CD), and Salmon Creek shall be a
direct subsidiary of Holdings. Such transfer of assets from Salmon Creek to
PALCO (other than the Salmon Creek CD) shall be subject to the Liens of the
Administrative Agent under the Security Documents, and all of the assets so
transferred from Salmon Creek to PALCO (other than the Salmon Creek CD) shall
continue to be “Collateral” as defined herein, and the Administrative Agent
shall continue to have a first priority security interest in such Collateral,
subject only to Liens permitted by Section 6.02. For avoidance of doubt, the
Salmon Creek Transaction shall not affect any of the rights or obligations of
Salmon Creek or PALCO under any agreements listed on Schedule 6.07 hereto, and
both Salmon Creek and PALCO shall retain all of their rights and obligations
under such agreements.
          “Scotia Inn” shall mean Scotia Inn Inc., a Delaware corporation.
          “Scotia Pacific” shall mean Scotia Pacific Company LLC, a Delaware
limited liability company.
          “Seasonal Overadvance Period” shall mean a period from and including
October 15 of any year until and including January 15 of the following year.
          “Secured Parties” shall have the meaning assigned to such term in the
Guarantee and Collateral Agreement.
          “Security Documents” shall mean the Guarantee and Collateral
Agreement, the Mortgages, the Intellectual Property Security Agreements, the
Intercreditor Agreement and each of the other security agreements, pledges,
mortgages, consents and other instruments and documents executed and delivered
pursuant to any of the foregoing or pursuant to Section 5.09 or 5.10.
          “Settlement Property” shall mean the approximately 200 acres of real
property to be deeded from Scotia Pacific to PALCO, and then substantially
concurrently deeded from PALCO to Ms. Kristi Wrigley, pursuant to that certain
Stipulation for Settlement CCP Section 664.6 in Kristi Wrigley, et al. v Charles
Hurwitz, et al., State of California, Humboldt County Superior Court, Case
No. DR 9700399.
          “Special Agent Advance” shall have the meaning assigned to such term
in Section 9.05(e).
          “SPC” shall have the meaning assigned to such term in Section 9.04(i).
          “Specified Asset” means each asset set forth on Schedule 5.14.
          “Statutory Reserves” shall mean a fraction (expressed as a decimal),
the numerator of which is the number one and the denominator of which is the
number one minus the aggregate of the maximum reserve percentages (including any
marginal, special, emergency or supplemental reserves) expressed as a decimal
established by the Board and any other banking authority, domestic or foreign,
to which the Administrative Agent or any Lender (including any

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branch, Affiliate or other fronting office making or holding a Loan) is subject
for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in
Regulation D of the Board). Eurodollar Loans shall be deemed to constitute
eurocurrency funding and to be subject to such reserve requirements without
benefit of or credit for proration, exemptions or offsets that may be available
from time to time to any Lender under such Regulation D or any comparable
regulation. Statutory Reserves shall be adjusted automatically on and as of the
effective date of any change in any reserve percentage.
          “Subordinated Intercompany Note” means that certain Subordinated
Intercompany Note dated as of the Closing Date by and among the Loan Parties.
          “subsidiary” shall mean, with respect to any person (herein referred
to as the “parent”), any corporation, partnership, limited liability company,
association or other entity (a) of which securities or other ownership interests
representing more than 50% of the equity or more than 50% of the ordinary voting
power or more than 50% of the general partnership interests are, at the time any
determination is being made, owned, controlled or held, or (b) that is, at the
time any determination is made, otherwise Controlled, by the parent or one or
more subsidiaries of the parent or by the parent and one or more subsidiaries of
the parent.
          “Subsidiary” shall mean any subsidiary of PALCO, other than Scotia
Pacific or a subsidiary of Scotia Pacific.
          “Subsidiary Guarantor” shall mean each Subsidiary other than Britt.
          “Swingline Commitment” shall mean the commitment of the Swingline
Lender to make loans pursuant to Section 2.22, as the same may be reduced from
time to time pursuant to Section 2.09 .
          “Swingline Exposure” shall mean, at any time, the aggregate principal
amount at such time of all outstanding Swingline Loans. The Swingline Exposure
of any Lender at any time shall equal its Pro Rata Percentage of the aggregate
Swingline Exposure at such time.
          “Swingline Lender” shall mean Marathon Structured Finance Fund L.P.,
in its capacity as lender of Swingline Loans hereunder.
          “Swingline Loan” shall mean any loan made by the Swingline Lender
pursuant to Section 2.22.
          “Tax Code” shall mean the Internal Revenue Code of 1986, as amended
from time to time.
          “Taxes” shall mean any and all present or future taxes, levies,
imposts, duties, deductions, charges, liabilities or withholdings imposed by any
Governmental Authority.
          “Term Loan Agreement” shall mean that certain Term Loan Agreement
dated the date hereof among PALCO, Britt, Marathon Structured Finance Fund L.P,
as the administrative agent and a lender, and the financial institutions from
time to time party thereto as lenders, as amended, restated, modified,
supplemented or otherwise modified from time to time.

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          “Title Insurance Company” shall have the meaning assigned to such term
in Section 4.02(n).
          “Total Revolving Credit Commitment” shall mean, at any time, the
aggregate amount of the Revolving Credit Commitments, as in effect at such time.
The Total Revolving Credit Commitment as of the Closing Date is $60,000,000.
          “Transactions” shall mean, collectively, (a) the execution, delivery
and performance by the Loan Parties of the Loan Documents to which they are a
party, (b) the borrowings hereunder, the issuance of Letters of Credit and the
use of proceeds of each of the foregoing, (c) the granting of Liens pursuant to
the Security Documents, (d) the repayment of all obligations under the Existing
Credit Facilities and (e) any other transactions related to or entered into in
connection with any of the foregoing.
          “Type”, when used in respect of any Loan or Borrowing, shall refer to
the Rate by reference to which interest on such Loan or on the Loans comprising
such Borrowing is determined. For purposes hereof, the term “Rate” shall include
the Adjusted LIBO Rate and the Alternate Base Rate.
          “UCC” shall mean the Uniform Commercial Code.
          “Uniform Customs” shall have the meaning assigned to such term in
Section 9.07.
          “United States” or “U.S.” shall mean the United States of America.
          “wholly owned subsidiary” of any person shall mean a subsidiary of
such person of which securities (except for directors’ qualifying shares) or
other ownership interests representing 100% of the Equity Interests are, at the
time any determination is being made, owned, controlled or held by such person
or one or more wholly owned subsidiaries of such person or by such person and
one or more wholly owned subsidiaries of such person; a “wholly owned
Subsidiary” shall mean any wholly owned Subsidiary of one or more of the
Borrowers.
          “Withdrawal Liability” shall mean liability to a Multiemployer Plan as
a result of a complete or partial withdrawal from such Multiemployer Plan, as
such terms are defined in Part I of Subtitle E of Title IV of ERISA.
     SECTION 1.02 Terms Generally. The definitions in Section 1.01 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words “include”, “includes” and “including”, and
words of similar import, shall not be limiting and shall be deemed to be
followed by the phrase “without limitation”. The word “will” shall be construed
to have the same meaning and effect as the word “shall”. The words “asset” and
“property” shall be construed as having the same meaning and effect and to refer
to any and all rights and interests in tangible and intangible assets and
properties of any kind whatsoever, whether real, personal or mixed, including
cash, securities, Equity Interests, accounts and contract rights. The words
“herein”, “hereof” and “hereunder”, and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any particular
provision of this Agreement unless the context shall otherwise require. All
references herein to Articles,

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Sections, Exhibits and Schedules shall be deemed references to Articles and
Sections of, and Exhibits and Schedules to, this Agreement unless the context
shall otherwise require. Except as otherwise expressly provided herein, (a) any
definition of, or reference to, any Loan Document or any other agreement,
instrument or document in this Agreement shall mean such Loan Document or other
agreement, instrument or document as amended, restated, supplemented or
otherwise modified from time to time (subject to any restrictions on such
amendments, restatements, supplements or modifications set forth herein) and
(b) all terms of an accounting or financial nature shall be construed in
accordance with GAAP, as in effect from time to time; provided, however, that if
the Administrative Borrower notifies the Administrative Agent that the Borrowers
wish to amend any covenant in Article VI or any related definition to eliminate
the effect of any change in GAAP occurring after the date of this Agreement on
the operation of such covenant (or if the Administrative Agent notifies the
Administrative Borrower that the Required Lenders wish to amend Article VI or
any related definition for such purpose), then the Borrowers’ and their
Subsidiaries’ compliance with such covenant shall be determined on the basis of
GAAP in effect immediately before the relevant change in GAAP became effective,
until either such notice is withdrawn or such covenant is amended in a manner
satisfactory to the Borrowers and the Required Lenders.
     SECTION 1.03 Classification of Loans and Borrowings. For purposes of this
Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar
Loan”). Borrowings also may be classified and referred to by Type (e.g., a
“Eurodollar Borrowing”).
     SECTION 1.04 Pro Forma Calculations. All pro forma calculations permitted
or required to be made by PALCO or any Subsidiary pursuant to this Agreement
shall include only those adjustments that would be permitted or required by
Regulation S-X under the Securities Act of 1933, as amended, together with those
adjustments that (a) have been certified by a Financial Officer of PALCO as
having been prepared in good faith based upon reasonable assumptions and (b) are
based on reasonably detailed written assumptions reasonably acceptable to the
Administrative Agent.
ARTICLE II.
THE CREDITS
     SECTION 2.01 Commitments. Subject to the terms and conditions hereof and
relying upon the representations and warranties set forth herein, each Lender
agrees, severally and not jointly, to make Loans to the Borrowers, at any time
and from time to time on or after the Closing Date and until the earlier of the
Maturity Date and the termination of the Commitment of such Lender in accordance
with the terms hereof, in an aggregate principal amount at any time outstanding
that (i) will not result in such Lender’s Revolving Credit Exposure exceeding
such Lender’s Revolving Credit Commitment and (ii) will not result in the
Aggregate Revolving Credit Exposure exceeding the Borrowing Base, subject to the
Administrative Agent’s authority to make Protective Advances pursuant to the
terms of Section 2.24. Within the limits set forth in clause (ii) of the
preceding sentence and subject to the terms, conditions and limitations set
forth herein, the Borrowers may borrow, pay or prepay and reborrow Loans.
     SECTION 2.02 Loans.

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          (a) Each Loan (other than Swingline Loans) shall be made as part of a
Borrowing consisting of Loans of the same Type made by the Lenders ratably in
accordance with their respective Commitments; provided, however, that the
failure of any Lender to make any Loan required to be made by it shall not in
itself relieve any other Lender of its obligation to lend hereunder (it being
understood, however, that no Lender shall be responsible for the failure of any
other Lender to make any Loan required to be made by such other Lender). Except
for Loans deemed made pursuant to Section 2.02(f) or Section 2.24, and subject
to Section 2.22 relating to Swingline Loans, the Loans comprising any Borrowing
shall be in an aggregate principal amount that is (i) an integral multiple of
$250,000 and not less than $750,000 or (ii) equal to the remaining available
balance of the applicable Commitments.
          (b) Subject to Sections 2.08, 2.15 and 2.24, each Borrowing shall be
comprised entirely of ABR Loans or Eurodollar Loans as the Administrative
Borrower may request pursuant to Section 2.03; provided that all Borrowings made
on the Closing Date and during the period ending seven days thereafter must be
made as ABR Borrowings (and may not be converted into Eurodollar Borrowings
until the end of such seven-day period), and no Borrowings may be converted into
or continued as a Eurodollar Borrowing having an Interest Period in excess of
one month prior to the date which is 60 days after the Closing Date. Each Lender
may at its option make any Eurodollar Loan by causing any domestic or foreign
branch or Affiliate of such Lender to make such Loan; provided that any exercise
of such option shall not affect the obligation of the Borrowers to repay such
Loan in accordance with the terms of this Agreement. Borrowings of more than one
Type may be outstanding at the same time; provided, however, that the
Administrative Borrower shall not be entitled to request any Borrowing that, if
made, would result in more than five (5) Eurodollar Borrowings outstanding
hereunder at any time. For purposes of the foregoing, Borrowings having
different Interest Periods, regardless of whether they commence on the same
date, shall be considered separate Borrowings.
          (c) Except with respect to Loans made pursuant to Section 2.02(f) or
Section 2.24 and subject to Section 2.22 relating to Swingline Loans, each
Lender shall make each Loan to be made by it hereunder on the proposed date
thereof by wire transfer of immediately available funds to such account in New
York City as the Administrative Agent may designate not later than 2:00 p.m.,
New York City time, and the Administrative Agent shall promptly credit the
amounts so received to an account in the name of the applicable Borrower,
designated by the Administrative Borrower in the applicable Borrowing Request
or, if a Borrowing shall not occur on such date because any condition precedent
herein specified shall not have been met, return the amounts so received to the
respective Lenders.
          (d) Unless the Administrative Agent shall have received notice from a
Lender prior to the date of any Borrowing that such Lender will not make
available to the Administrative Agent such Lender’s portion of such Borrowing,
the Administrative Agent may assume that such Lender has made such portion
available to the Administrative Agent on the date of such Borrowing in
accordance with paragraph (c) of this Section and the Administrative Agent may,
in reliance upon such assumption, make available to the Borrowers on such date a
corresponding amount. If the Administrative Agent shall have so made funds
available then, to the extent that such Lender shall not have made such portion
available to the Administrative Agent, such Lender and the Borrowers severally
agree to repay to the Administrative Agent forthwith on

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demand such corresponding amount together with interest thereon, for each day
from the date such amount is made available to the Borrowers to but excluding
the date such amount is repaid to the Administrative Agent at (i) in the case of
the Borrowers, the interest rate applicable at the time to the Loans comprising
such Borrowing or (ii) in the case of such Lender, a rate determined by the
Administrative Agent to represent its cost of overnight or short-term funds
(which determination shall be conclusive absent manifest error). If such Lender
shall repay to the Administrative Agent such corresponding amount, such amount
shall constitute such Lender’s Loan as part of such Borrowing for purposes of
this Agreement.
          (e) Notwithstanding any other provision of this Agreement, the
Administrative Borrower shall not be entitled to request any Borrowing if the
Interest Period requested with respect thereto would end after the Maturity
Date.
          (f) If the Administrative Agent shall not have received from the
Borrowers the payment required to be made by Section 2.23(e) with respect to a
Letter of Credit within the time specified in such Section, the Administrative
Agent will promptly notify each Lender of such L/C Disbursement and its Pro Rata
Percentage thereof. Each Lender shall pay by wire transfer of immediately
available funds to the Administrative Agent not later than 2:00 p.m., New York
City time, on such date (or, if such Lenders shall have received such notice
later than 12:00 (noon), New York City time, on any day, not later than
10:00 a.m., New York City time, on the immediately following Business Day), an
amount equal to such Lender’s Pro Rata Percentage of such L/C Disbursement (it
being understood that such amount shall be deemed to constitute an ABR Loan of
such Lender and such payment shall be deemed to have reduced the L/C Exposure).
If any Lenders shall not have made its Pro Rata Percentage of such L/C
Disbursement available to the Administrative Agent as provided above, such
Lender and the Borrowers severally agree to pay interest on such amount, for
each day from and including the date such amount is required to be paid in
accordance with this paragraph to but excluding the date such amount is paid, to
the Administrative Agent at (i) in the case of the Borrowers, a rate per annum
equal to the interest rate applicable to Loans pursuant to Section 2.06(a), and
(ii) in the case of such Lender, for the first such day, the Federal Funds
Effective Rate, and for each day thereafter, the Alternate Base Rate.
     SECTION 2.03 Borrowing Procedure. In order to request a Borrowing (other
than a Swingline Loan or a deemed Borrowing pursuant to Section 2.02(f) or
Section 2.24, as to which this Section 2.03 shall not apply), the Administrative
Borrower shall hand deliver or fax to the Administrative Agent a duly completed
Borrowing Request (a) in the case of a Eurodollar Borrowing, not later than 2:00
p.m., New York City time, three Business Days before a proposed Borrowing and
(b) in the case of an ABR Borrowing, not later than 2:00 p.m., New York City
time, one Business Day before a proposed Borrowing. Each Borrowing Request shall
be irrevocable, shall be signed by or on behalf of the Administrative Borrower
and shall specify the following information: (i) whether the Borrowing then
being requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the
date of such Borrowing (which shall be a Business Day); (iii) the number and
location of the account to which funds are to be disbursed (which shall be an
account that complies with the requirements of Section 2.02(c)); (iv) the amount
of such Borrowing; (v) if such Borrowing is to be a Eurodollar Borrowing, the
initial Interest Period with respect thereto and (vi) a Borrowing Base
Certificate as of such date; provided, however, that, notwithstanding any
contrary specification in any Borrowing Request, each requested

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Borrowing shall comply with the requirements set forth in Section 2.02. If no
election as to the Type of Borrowing is specified in any such notice, then the
requested Borrowing shall be an ABR Borrowing. If no Interest Period with
respect to any Eurodollar Borrowing is specified in any such notice, then the
Administrative Borrower shall be deemed to have selected an Interest Period of
one month’s duration. The Administrative Agent shall promptly advise the
applicable Lenders of any notice given in accordance with this Section 2.03 (and
the contents thereof), and of each Lender’s portion of the requested Borrowing.
     SECTION 2.04 Repayment of Loans; Evidence of Debt.
          (a) The Borrowers hereby unconditionally promise to pay to the
Administrative Agent for the account of each Lender the then unpaid principal
amount of each Loan of such Lender made to the Borrowers on the Maturity Date.
The Borrowers hereby unconditionally promise to pay to the Swingline Lender the
then unpaid principal amount of each Swingline Loan made to the Borrowers on the
Maturity Date or the last day of each calendar month.
          (b) Each Lender shall maintain in accordance with its usual practice
an account or accounts evidencing the indebtedness of the Borrowers to such
Lender resulting from each Loan made by such Lender to the Borrowers from time
to time, including the amounts of principal and interest payable and paid to
such Lender from time to time under this Agreement.
          (c) The Administrative Agent shall maintain accounts in which it will
record (i) the amount of each Loan made hereunder, the Type thereof and the
Interest Period applicable thereto, (ii) the amount of any principal or interest
due and payable or to become due and payable from the Borrowers to each Lender
hereunder and (iii) the amount of the sum received by the Administrative Agent
hereunder from the Borrowers or any Guarantor and each Lender’s share thereof.
          (d) The entries made in the accounts maintained pursuant to paragraphs
(b) and (c) of this Section shall be prima facie evidence of the existence and
amounts of the obligations therein recorded; provided, however, that the failure
of any Lender or the Administrative Agent to maintain such accounts or any error
therein shall not in any manner affect the obligations of the Borrowers to repay
the Loans made to the Borrowers in accordance with the terms of this Agreement.
          (e) Any Lender may request that Loans made by it hereunder be
evidenced by a promissory note. In such event, the Borrowers shall execute and
deliver to such Lender a promissory note payable to such Lender and its
registered assigns and in a form and substance reasonably acceptable to the
Administrative Agent. Notwithstanding any other provision of this Agreement, in
the event any Lender shall request and receive such a promissory note, the
interests represented by such note shall at all times (including after any
assignment of all or part of such interests pursuant to Section 9.04) be
represented by one or more promissory notes payable to the payee named therein
or its registered assigns.
     SECTION 2.05 Fees.

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          (a) The Borrowers agree to pay to each Lender, through the
Administrative Agent, on the last Business Day of each calendar month in each
year and on each date on which any Commitment of such Lender shall expire or be
terminated as provided herein, a commitment fee (a “Commitment Fee”) equal to
the Commitment Fee Rate on the average daily unused amount of the Commitment of
such Lender (other than the Swingline Commitment) during the preceding month (or
other period commencing with the date hereof or ending with the Maturity Date or
the date on which the Commitments of such Lender shall expire or be terminated).
All Commitment Fees shall be computed on the basis of the actual number of days
elapsed in a year of 360 days. The Commitment Fee due to each Lender shall
commence to accrue on the date hereof and shall cease to accrue on the date on
which the Commitment of such Lender shall expire or be terminated as provided
herein. For purposes of calculating Commitment Fees, no portion of the
Commitments shall be deemed utilized under Section 2.22 as a result of
outstanding Swingline Loans.
          (b) The Borrowers agree to pay to the Administrative Agent and the
Arranger, for its own account, the fees in the amounts and at the times from
time to time agreed to in writing by the Borrowers (or any Affiliate) and the
Administrative Agent, including pursuant to the Fee Letter (the “Administrative
Agent Fees”).
          (c) The Borrowers agree to pay (i) to each Lender, through the
Administrative Agent, on the last Business Day of each calendar month and on the
date on which the Commitment of such Lender shall be terminated as provided
herein (each, an “L/C Fee Payment Date”) a fee (an “L/C Guaranty Fee”)
calculated on such Lender’s Pro Rata Percentage of the daily aggregate L/C
Exposure (excluding the portion thereof attributable to unreimbursed L/C
Disbursements which are earning interim interest pursuant to Section 2.23(h))
during the preceding quarter (or shorter period commencing with the date hereof
or ending with the Maturity Date or the date on which all Letters of Credit have
been canceled or have expired and the Commitments of all Lenders shall have been
terminated) at a rate per annum equal to the interest rate on Borrowings
comprised of Eurodollar Loans pursuant to Section 2.06, and (ii) to the
Administrative Agent, any and all charges, fees, commissions, costs and expenses
charged to the Administrative Agent by an Issuing Bank in connection with, or
arising out of, Letters of Credit or out of transactions relating thereto, when
charged to or paid by the Administrative Agent, or as may be due upon any
termination of this Agreement (the amounts in this clause (ii), collectively,
the “Issuing Bank Fees”) (in the case of this clause (ii), as long as such
amounts are consistent with amounts charged to similarly situated borrowers).
All L/C Guaranty Fees shall be computed on the basis of the actual number of
days elapsed in a year of 360 days.
          (d) If, on or prior to the second anniversary of the Closing Date, the
Revolving Credit Commitment of any Lender is reduced or terminated, the
Borrowers agree to pay to the Administrative Agent for the benefit of such
Lender on the date of such reduction or termination a fee equal to the
Applicable Percentage (as defined below) multiplied by the amount of each
reduction (or the entire amount of such Revolving Credit Commitment in the event
of a termination thereof). As used herein, the term “Applicable Percentage”
shall mean (w) 3%, in the case of a reduction or termination of the Revolving
Credit Commitment on or prior to the first anniversary of the Closing Date,
(x) 2%, in the case of a reduction or termination of the Revolving Credit
Commitment after the first anniversary of the Closing Date but on or prior to
the second anniversary thereof, (y) 1% in the case of a reduction or termination
of the Revolving

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Credit Commitment after the second anniversary of the Closing Date or on or
prior to the third anniversary of the Closing Date, and (z) 0%, in the case of a
prepayment after the third anniversary of the Closing Date.
          (e) All Fees shall be paid on the dates due, in immediately available
funds, to the Administrative Agent for distribution, if and as appropriate,
among the Lenders, except that the Issuing Bank Fees shall be paid for the
account of the Administrative Agent. Once paid, none of the Fees shall be
refundable under any circumstances.
     SECTION 2.06 Interest on Loans.
          (a) Subject to the provisions of Section 2.07, the Loans comprising
each ABR Borrowing, including each Swingline Loan, shall bear interest (computed
on the basis of the actual number of days elapsed over a year of 360 days) at a
rate per annum equal to the Alternate Base Rate plus the Applicable Margin in
effect from time to time.
          (b) Subject to the provisions of Section 2.07, the Loans comprising
each Eurodollar Borrowing shall bear interest (computed on the basis of the
actual number of days elapsed over a year of 360 days) at a rate per annum equal
to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing
plus the Applicable Margin in effect from time to time.
          (c) Interest on each Loan shall be payable on the Interest Payment
Dates applicable to such Loan except as otherwise provided in this Agreement.
The applicable Alternate Base Rate or Adjusted LIBO Rate for each Interest
Period or day within an Interest Period, as the case may be, shall be determined
by the Administrative Agent, and such determination shall be conclusive absent
manifest error.
     SECTION 2.07 Default Interest. If an Event of Default has occurred and is
continuing and the Administrative Agent or the Required Lenders so elect, the
Borrowers shall on written demand from time to time pay interest, to the extent
permitted by law, on all Obligations, to but excluding the date of actual
payment (after as well as before judgment) at the rate otherwise applicable to
Loans pursuant to Section 2.06 plus 2.00% per annum.
     SECTION 2.08 Alternate Rate of Interest. In the event, and on each
occasion, that prior to the commencement of any Interest Period for a Eurodollar
Borrowing (a) the Administrative Agent shall have determined that adequate and
reasonable means do not exist for determining the Adjusted LIBO Rate for such
Interest Period or (b) the Administrative Agent is advised by the Required
Lenders in respect of the Facility that the Adjusted LIBO Rate for such Interest
Period will not adequately and fairly reflect the cost to such Lenders of making
or maintaining their Loans included in such Borrowing for such Interest Period,
the Administrative Agent shall, as soon as practicable thereafter, give written
or fax notice of such determination to the Borrowers and the Lenders. In the
event of any such determination, until the Administrative Agent shall have
advised the Borrowers and the Lenders that the circumstances giving rise to such
notice no longer exist, (i) any request by the Administrative Borrower for a
Eurodollar Borrowing pursuant to Section 2.03 or 2.10 shall be deemed to be a
request for an ABR Borrowing and (ii) any Interest Period election that requests
the conversion of any

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Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall
be ineffective. Each determination by the Administrative Agent under this
Section 2.08 shall be conclusive absent manifest error.
     SECTION 2.09 Termination and Reduction of Commitments.
          (a) Unless previously terminated in accordance with the terms hereof,
the Commitments shall automatically terminate on the Maturity Date.
Notwithstanding the foregoing, all the Commitments shall automatically terminate
at 5:00 p.m., New York City time, on July 18, 2006, if the initial Credit Event
shall not have occurred by such time.
Upon at least three Business Days’ prior irrevocable written or fax notice to
the Administrative Agent, the Borrowers may at any time in whole permanently
terminate, or from time to time in part permanently reduce, the Commitments;
provided, however, that (i) each partial reduction of the Commitments shall be
in an integral multiple of $1,000,000 and in a minimum amount of $1,000,000 and
(ii) the Commitments shall not be reduced to an amount that is less than the
Aggregate Revolving Credit Exposure then in effect.
          (b) Each reduction in the Commitments hereunder shall be made ratably
among the applicable Lenders in accordance with their Pro Rata Percentages. The
Borrowers shall pay to the Administrative Agent for the account of the
applicable Lenders, on the date of each termination or reduction, the Commitment
Fees on the amount of the Commitments so terminated or reduced accrued to but
excluding the date of such termination or reduction.
     SECTION 2.10 Conversion and Continuation of Borrowings. The Administrative
Borrower shall have the right at any time upon prior irrevocable notice to the
Administrative Agent (a) not later than 12:00 p.m., New York City time, one
Business Day prior to conversion, to convert any Eurodollar Borrowing of the
Borrowers into an ABR Borrowing, (b) not later than 2:00 p.m., New York City
time, three Business Days prior to conversion or continuation, to convert any
ABR Borrowing of the Borrowers into a Eurodollar Borrowing or to continue any
Eurodollar Borrowing of the Borrowers as a Eurodollar Borrowing for an
additional Interest Period and (c) not later than 2:00 p.m., New York City time,
three Business Days prior to conversion, to convert the Interest Period with
respect to any Eurodollar Borrowing of the Borrowers to another permissible
Interest Period, subject in each case to the following:
               (i) each conversion or continuation shall be made pro rata among
the Lenders in accordance with the respective principal amounts of the Loans
comprising the converted or continued Borrowing;
               (ii) if less than all the outstanding principal amount of any
Borrowing shall be converted or continued, then each resulting Borrowing shall
satisfy the limitations specified in Sections 2.02(a) and 2.02(b) regarding the
principal amount and maximum number of Borrowings of the relevant Type;
               (iii) each conversion shall be effected by each Lender and the
Administrative Agent by recording for the account of such Lender the new Loan of
such Lender resulting from such conversion and reducing the Loan (or portion
thereof) of such Lender being converted by an equivalent principal amount;
accrued interest on any

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Eurodollar Loan (or portion thereof) being converted shall be paid by the
Borrowers at the time of conversion;
               (iv) if any Eurodollar Borrowing is converted at a time other
than the end of the Interest Period applicable thereto, the Borrowers shall pay,
upon demand, any amounts due to the Lenders pursuant to Section 2.16;
               (v) any portion of a Borrowing maturing or required to be repaid
in less than one month may not be converted into or continued as a Eurodollar
Borrowing;
               (vi) any portion of a Eurodollar Borrowing that cannot be
converted into or continued as a Eurodollar Borrowing by reason of the
immediately preceding clause shall be automatically converted at the end of the
Interest Period in effect for such Borrowing into an ABR Borrowing;
               (vii) after the occurrence and during the continuance of a
Default or Event of Default, no outstanding Loan may be converted into, or
continued as, a Eurodollar Loan.
          Each notice pursuant to this Section 2.10 shall be irrevocable and
shall refer to this Agreement and specify (i) the identity and amount of the
Borrowing that the Administrative Borrower request be converted or continued,
(ii) whether such Borrowing is to be converted to or continued as a Eurodollar
Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the
date of such conversion (which shall be a Business Day) and (iv) if such
Borrowing is to be converted to or continued as a Eurodollar Borrowing, the
Interest Period with respect thereto. If no Interest Period is specified in any
such notice with respect to any conversion to or continuation as a Eurodollar
Borrowing, the Administrative Borrower shall be deemed to have selected an
Interest Period of one month’s duration. The Administrative Agent shall advise
the Lenders of any notice given pursuant to this Section 2.10 and of each
Lender’s portion of any converted or continued Borrowing. If the Administrative
Borrower shall not have given notice in accordance with this Section 2.10 to
continue any Borrowing into a subsequent Interest Period (and shall not
otherwise have given notice in accordance with this Section 2.10 to convert such
Borrowing), such Borrowing shall, at the end of the Interest Period applicable
thereto (unless repaid pursuant to the terms hereof), automatically be converted
or continued into an ABR Borrowing.
     SECTION 2.11 [Reserved]
     SECTION 2.12 Prepayment.
          (a) The Borrowers shall, subject to the requirements of
Section 2.05(b), have the right at any time and from time to time to prepay any
Borrowing, in whole or in part, upon at least three Business Days’ prior written
or fax notice (or telephone notice promptly confirmed by written or fax notice)
in the case of Eurodollar Loans, or written or fax notice (or telephone notice
promptly confirmed by written or fax notice) at least one Business Day prior to
the date of prepayment in the case of ABR Loans, to the Administrative Agent
before 2:00 p.m., New York City time; provided, however, that each partial
prepayment shall be in an amount that is an integral multiple of $250,000 and
not less than $750,000.

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          (b) Each notice of prepayment shall specify the prepayment date and
the principal amount of each Borrowing (or portion thereof) to be prepaid, shall
be irrevocable and shall commit the Borrowers to prepay such Borrowing by the
amount stated therein on the date stated therein. All prepayments under this
Section 2.12 shall be subject to Section 2.16, but otherwise without premium or
penalty. All prepayments under this Section 2.12 shall be accompanied by accrued
and unpaid interest on the principal amount to be prepaid to but excluding the
date of payment.
     SECTION 2.13 Mandatory Prepayments.
          (a) In the event of any termination of all the Commitments, the
Borrowers shall, on the date of such termination, repay or prepay all its
outstanding Borrowings and all its outstanding Swingline Loans and replace all
its outstanding Letters of Credit and/or deposit an amount equal to the L/C
Exposure in cash in a cash collateral account established with the
Administrative Agent for the benefit of the Secured Parties. If as a result of
any partial reduction of the Commitments the Aggregate Revolving Credit Exposure
would exceed the Commitments after giving effect thereto, then the Borrowers
shall, on the date of such reduction, repay or prepay Borrowings or Swingline
Loans (or a combination thereof) and/or cash collateralize obligations in
respect of Letter of Credit Guaranties in an amount sufficient to eliminate such
excess.
          (b) In the event and on each occasion that Aggregate Revolving Credit
Exposure (other than amounts constituting Protective Advances) exceeds the
Borrowing Base, the Borrowers shall immediately repay Loans and/or cash
collateralize outstanding Letters of Credit to the extent necessary to cause the
Aggregate Revolving Credit Exposure not to exceed the Borrowing Base.
          (c) In connection with any Asset Sale which consists of (i) the sale
of all of the Equity Interests in Britt or (ii) the sale of Eligible Accounts
and/or Eligible Inventory (or the sale of certain of such assets and other
assets of a Borrower), the Borrowers shall apply the Net Cash Proceeds of such
sale to repay outstanding Revolving Loans and/or provide cash collateral with
respect to L/C Exposure in an amount equal to the lesser of (i) the amount
necessary to cause the Borrowers to comply with Section 2.13(b) or (ii) the sum
of (a) 85% of the Net Amount of the Eligible Accounts sold in such Asset Sale
plus (b) 75% of the value (being the lower of cost (on a first-in first out
basis) or market) of the Eligible Inventory sold in such Asset Sale.
     SECTION 2.14 Reserve Requirements; Change in Circumstances.
          (a) Notwithstanding any other provision of this Agreement, if any
Change in Law shall:
               (i) impose, modify or deem applicable any reserve, special
deposit or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Lender or the Administrative Agent
(except any such reserve requirement which is reflected in the Adjusted LIBO
Rate) or

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               (ii) impose on any Lender or the Administrative Agent or the
London interbank market any other condition affecting this Agreement or
Eurodollar Loans made by such Lender or any Letter of Credit or participation
therein,
and the result of any of the foregoing shall be to increase the cost to such
Lender of making or maintaining any Eurodollar Loan (or of maintaining its
obligation to make any such Loan) or to increase the cost to any Lender or the
Administrative Agent of issuing or maintaining any Letter of Credit or Letter of
Credit Guaranty or purchasing or maintaining a participation therein or to
reduce the amount of any sum received or receivable by such Lender hereunder
(whether of principal, interest or otherwise) by an amount deemed by such Lender
or the Administrative Agent to be material, then the Borrowers will pay to such
Lender or the Administrative Agent, as the case may be, upon demand such
additional amount or amounts as will compensate such Lender or the Issuing Bank,
as the case may be, for such additional costs incurred or reduction suffered.
          (b) If any Lender or the Administrative Agent shall have determined
that any Change in Law regarding capital adequacy has or would have the effect
of reducing the rate of return on such Lender’s, the Administrative Agent’s
capital or on the capital of such Lender’s, the Administrative Agent’s holding
company, if any, as a consequence of this Agreement or the Loans made by, or
participations in Letter of Credit Guaranties purchased by, such Lender or the
Letter of Credit Guaranties issued by the Administrative Agent to a level below
that which such Lender, the Administrative Agent or such Lender’s or the
Administrative Agent’s holding company could have achieved but for such Change
in Law (taking into consideration such Lender’s or the Administrative Agent’s
policies and the policies of such Lender’s or the Administrative Agent’s holding
company with respect to capital adequacy) by an amount deemed by such Lender or
the Administrative Agent to be material, then from time to time the Borrowers
shall pay to such Lender or the Administrative Agent, as the case may be, such
additional amount or amounts as will compensate such Lender or the
Administrative Agent or such Lender’s or the Administrative Agent’s holding
company for any such reduction suffered.
          (c) A certificate of a Lender or the Administrative Agent setting
forth the amount or amounts necessary to compensate such Lender or the
Administrative Agent or its holding company, as applicable, as specified in
paragraph (a) or (b) of this Section 2.14 shall be delivered to the Borrowers
and shall be conclusive absent manifest error. The Borrowers shall pay such
Lender or the Administrative Agent, as the case may be, the amount or amounts
shown as due on any such certificate delivered by it within 10 days after its
receipt of the same.
          (d) Failure or delay on the part of any Lender or the Administrative
Agent to demand compensation pursuant to this Section shall not constitute a
waiver of such Lender’s or the Administrative Agent’s right to demand such
compensation; provided that the Borrowers shall not be under any obligation to
compensate any Lender or the Administrative Agent under paragraph (a) or
(b) above for increased costs or reductions with respect to any period prior to
the date that is 180 days prior to such request if such Lender or the
Administrative Agent knew or could reasonably have been expected to know of the
circumstances giving rise to such increased costs or reductions and of the fact
that such circumstances would result in a claim for increased compensation by
reason of such increased costs or reductions; provided further that the
foregoing limitation shall not apply to any increased costs or reductions
arising out of the

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retroactive application of any Change in Law within such 180-day period. The
protection of this Section shall be available to each Lender and the
Administrative Agent regardless of any possible contention of the invalidity or
inapplicability of the Change in Law that shall have occurred or been imposed.
     SECTION 2.15 Change in Legality.
          (a) Notwithstanding any other provision of this Agreement, if any
Change in Law shall make it unlawful for any Lender to make or maintain any
Eurodollar Loan or to give effect to its obligations as contemplated hereby with
respect to any Eurodollar Loan, then, by written notice to the Administrative
Borrower and to the Administrative Agent:
               (i) such Lender may declare that Eurodollar Loans will not
thereafter (for the duration of such unlawfulness) be made by such Lender
hereunder (or be continued for additional Interest Periods and ABR Loans will
not thereafter (for such duration) be converted into Eurodollar Loans),
whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing
to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an
additional Interest Period) shall, as to such Lender only, be deemed a request
for an ABR Loan (or a request to continue an ABR Loan as such for an additional
Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case
may be), unless such declaration shall be subsequently withdrawn; and
               (ii) such Lender may require that all outstanding Eurodollar
Loans made by it be converted to ABR Loans, in which event all such Eurodollar
Loans shall be automatically converted to ABR Loans as of the effective date of
such notice as provided in paragraph (b) below.
In the event any Lender shall exercise its rights under (i) or (ii) above, all
payments and prepayments of principal that would otherwise have been applied to
repay the Eurodollar Loans that would have been made by such Lender or the
converted Eurodollar Loans of such Lender shall instead be applied to repay the
ABR Loans made by such Lender in lieu of, or resulting from the conversion of,
such Eurodollar Loans. Any such conversion of a Eurodollar Loan under (i) above
shall be subject to Section 2.16.
          (b) For purposes of this Section 2.15, a notice to the Administrative
Borrower by any Lender shall be effective as to each Eurodollar Loan made by
such Lender, if lawful, on the last day of the Interest Period then applicable
to such Eurodollar Loan; in all other cases such notice shall be effective on
the date of receipt by the Borrowers.
     SECTION 2.16 Indemnity. The Borrowers shall indemnify each Lender against
any loss or expense that such Lender may sustain or incur as a consequence of
(a) any event, other than a default by such Lender in the performance of its
obligations hereunder, which results in (i) such Lender receiving or being
deemed to receive any amount on account of the principal of any Eurodollar Loan
prior to the end of the Interest Period in effect therefor, (ii) the conversion
of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period
with respect to any Eurodollar Loan, in each case other than on the last day of
the Interest Period in effect therefor or (iii) any Eurodollar Loan to be made
by such Lender (including any Eurodollar

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Loan to be made pursuant to a conversion or continuation under Section 2.10) not
being made after notice of such Loan shall have been given by the Administrative
Borrower hereunder (any of the events referred to in this clause (a) being
called a “Breakage Event”) or (b) any default in the making of any payment or
prepayment required to be made hereunder. In the case of any Breakage Event,
such loss shall include an amount equal to the excess, as reasonably determined
by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that
is the subject of such Breakage Event for the period from the date of such
Breakage Event to the last day of the Interest Period in effect (or that would
have been in effect) for such Loan over (ii) the amount of interest likely to be
realized by such Lender in redeploying the funds released or not utilized by
reason of such Breakage Event for such period. A certificate of any Lender
setting forth any amount or amounts which such Lender is entitled to receive
pursuant to this Section 2.16 shall be delivered to the Borrowers and shall be
conclusive absent manifest error.
     SECTION 2.17 Pro Rata Treatment. Except as provided below in this
Section 2.17 with respect to Swingline Loans and as required under Section 2.15,
each Borrowing, each payment or prepayment of principal of any Borrowing, each
payment of interest on the Loans, each payment of the Commitment Fees, each
reduction of the Commitments and each conversion of any Borrowing to or
continuation of any Borrowing as a Borrowing of any Type shall be allocated pro
rata among the Lenders in accordance with their respective applicable
Commitments (or, if such Commitments shall have expired or been terminated, in
accordance with the respective principal amounts of their outstanding Loans).
For purposes of determining the available Revolving Credit Commitments of the
Lenders at any time, each outstanding Swingline Loan shall be deemed to have
utilized the Revolving Credit Commitments of the Lenders (including those
Lenders which shall not have made Swingline Loans) pro rata in accordance with
such respective Revolving Credit Commitments. Each Lender agrees that in
computing such Lender’s portion of any Borrowing to be made hereunder, the
Administrative Agent may, in its discretion, round each Lender’s percentage of
such Borrowing to the next higher or lower whole dollar amount.
     SECTION 2.18 Sharing of Setoffs. Each Lender agrees that if it shall,
through the exercise of a right of banker’s lien, setoff or counterclaim against
the Borrowers or any other Loan Party, or pursuant to a secured claim under
Section 506 of Title 11 of the United States Code or other security or interest
arising from, or in lieu of, such secured claim, received by such Lender under
any applicable bankruptcy, insolvency or other similar law or otherwise, or by
any other means, obtain payment (voluntary or involuntary) in respect of any
Loan or Loans or L/C Disbursement as a result of which the unpaid principal
portion of its Loans and participations in the Letter of Credit Guaranty shall
be proportionately less than the unpaid principal portion of the Loans and
participations in the Letter of Credit Guaranty of any other Lender, it shall be
deemed simultaneously to have purchased from such other Lender at face value,
and shall promptly pay to such other Lender the purchase price for, a
participation in the Loans and L/C Exposure of such other Lender, so that the
aggregate unpaid principal amount of the Loans and L/C Exposure and
participations in Loans and L/C Exposure held by each Lender shall be in the
same proportion to the aggregate unpaid principal amount of all Loans and L/C
Exposure then outstanding as the principal amount of its Loans and L/C Exposure
prior to such exercise of banker’s lien, setoff or counterclaim or other event
was to the principal amount of all Loans and L/C Exposure outstanding prior to
such exercise of banker’s lien, setoff or counterclaim or other event; provided,
however, that if any such purchase or purchases or adjustments shall be made

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pursuant to this Section 2.18 and the payment giving rise thereto shall
thereafter be recovered, such purchase or purchases or adjustments shall be
rescinded to the extent of such recovery and the purchase price or prices or
adjustment restored without interest. The Borrowers expressly consent to the
foregoing arrangements and agrees that any Lender holding a participation in a
Loan or Letter of Credit Guaranty deemed to have been so purchased may exercise
any and all rights of banker’s lien, setoff or counterclaim with respect to any
and all moneys owing by the Borrowers to such Lender by reason thereof as fully
as if such Lender had made a Loan directly to the Borrowers in the amount of
such participation.
     SECTION 2.19 Payments.
          (a) The Borrowers shall make each payment (including principal of or
interest on any Borrowing or any L/C Disbursement or any Fees or other amounts)
hereunder and under any other Loan Document not later than 12:00 (noon), New
York City time, on the date when due in immediately available dollars, without
setoff, defense or counterclaim. Each such payment (other than principal of and
interest on Swingline Loans, which shall be paid directly to the Swingline
Lender except as otherwise provided in Section 2.21(e)) shall be made to the
Administrative Agent at its offices at 461 Fifth Avenue, New York, New York
10017. All payments hereunder and under each other Loan Document shall be made
in dollars.
          (b) Except as otherwise expressly provided herein, whenever any
payment (including principal of or interest on any Borrowing or any Fees or
other amounts) hereunder or under any other Loan Document shall become due, or
otherwise would occur, on a day that is not a Business Day, such payment may be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of interest or Fees, if applicable.
     SECTION 2.20 Taxes.
          (a) Any and all payments by or on account of any obligation of the
Borrowers or any other Loan Party hereunder or under any other Loan Document
shall be made free and clear of and without deduction for any Indemnified Taxes
or Other Taxes; provided that if any Indemnified Taxes or Other Taxes are
required to be withheld or deducted from such payments, then (i) the sum payable
by the Borrowers shall be increased as necessary so that after all required
deductions or withholding (including deductions or withholdings applicable to
additional sums payable under this Section 2.20) the Administrative Agent or
such Lender (as the case may be) receives an amount equal to the sum it would
have received had no such deductions been made, (ii) the Borrowers or such other
Loan Party shall make (or cause to be made) such deductions and (iii) the
Borrowers or such other Loan Party shall pay (or cause to be paid) the full
amount deducted to the relevant Governmental Authority in accordance with
applicable law. In addition, the Borrowers or any other Loan Party hereunder
shall pay (or cause to be paid) any Other Taxes to the relevant Governmental
Authority in accordance with applicable law.
          (b) The Borrowers shall indemnify the Administrative Agent and each
Lender, within 10 days after written demand therefor, for the full amount of any
Indemnified Taxes or Other Taxes paid by the Administrative Agent or such
Lender, as the case may be, or

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any of their respective Affiliates, on or with respect to any payment by or on
account of any obligation of any Loan Party hereunder or under any other Loan
Document (including Indemnified Taxes or Other Taxes imposed or asserted on or
attributable to amounts payable under this Section) and any penalties, interest
and expenses arising therefrom or with respect thereto, whether or not such
Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted
by the relevant Governmental Authority. A certificate as to the amount of such
payment or liability delivered to the Borrowers by a Lender, or by the
Administrative Agent on its behalf or on behalf of a Lender, shall be conclusive
absent manifest error.
          (c) As soon as practicable after any payment of Indemnified Taxes or
Other Taxes pursuant to Section 2.20(a), and in any event within 30 days of any
such payment being due, the Borrowers shall deliver (or cause to be delivered)
to the Administrative Agent the original or a certified copy of a receipt issued
by such Governmental Authority evidencing such payment, a copy of the return
reporting such payment or other evidence of such payment reasonably satisfactory
to the Administrative Agent.
          (d) Any Foreign Lender that is entitled to an exemption from or
reduction of withholding tax under the law of the jurisdiction in which the
Borrowers is located, or any treaty to which such jurisdiction is a party, with
respect to payments under this Agreement shall deliver to the Administrative
Borrower (with a copy to the Administrative Agent), at the reasonable written
request of the Administrative Borrower, such properly completed and executed
documentation prescribed by applicable law as will permit such payments to be
made without withholding or at a reduced rate; provided that such Lender is
legally entitled to complete, execute and deliver such documentation and in such
Lender’s judgment such completion, execution or delivery would not materially
prejudice the legal position of such Lender. In addition, each Foreign Lender
shall (i) furnish on or before it becomes a party to the Agreement either
(a) two accurate and complete originally executed U.S. Internal Revenue Service
Form W-8BEN (or successor form) or (b) an accurate and complete U.S. Internal
Revenue Service Form W-8ECI (or successor form), certifying, in either case, to
such Foreign Lender’s legal entitlement to an exemption or reduction from U.S.
Federal withholding tax with respect to all interest payments hereunder, and
(ii) provide a new Form W-8BEN (or successor form) or U.S. Internal Revenue
Service Form W-8ECI (or successor form) upon the expiration or obsolescence of
any previously delivered form to reconfirm any complete exemption from, or any
entitlement to a reduction in, U.S. Federal withholding tax with respect to any
interest payment hereunder; provided that any Foreign Lender that is not a
“bank” within the meaning of Section 881(c)(3)(A) of the Tax Code and is relying
on the so-called “portfolio interest exemption” shall also furnish a “Non-Bank
Certificate” in the form of Exhibit G together with a U.S. Internal Revenue
Service Form W-8BEN. Notwithstanding any other provision of this paragraph, a
Foreign Lender shall not be required to deliver any form pursuant to this
paragraph that such Foreign Lender is not legally able to deliver.
          (e) Any Lender that is a United States person, as defined in
Section 7701(a)(30) of the Tax Code, and is not an exempt recipient within the
meaning of Treasury Regulations Section 1.6049-4(c) shall deliver to the
Borrowers (with a copy to the Administrative Agent) two accurate and complete
original signed copies of Internal Revenue Service Form W-9, or any successor
form that such person is entitled to provide at such time in order to comply
with United States back-up withholding requirements.

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          (f) Without prejudice to the survival of any other agreement of the
Borrowers hereunder, the agreements and obligations of the Borrowers contained
in this Section 2.20 shall survive the payment in full of all amounts due
hereunder.
     SECTION 2.21 Assignment of Commitments Under Certain Circumstances; Duty to
Mitigate.
          (a) In the event (i) any Lender delivers a certificate requesting
compensation pursuant to Section 2.14, (ii) any Lender delivers a notice
described in Section 2.15, (iii) the Borrowers are required to pay any
additional amount to any Lender or any Governmental Authority on account of any
Lender pursuant to Section 2.20 or (iv) any Lender does not consent to a
proposed amendment, modification or waiver of this Agreement requested by the
Administrative Borrower which requires the consent of all of the Lenders or all
of the Lenders under any Facility to become effective (and which is approved by
at least the Required Lenders), the Borrowers may, at their sole expense and
effort (including with respect to the processing and recordation fee referred to
in Section 9.04(b)), upon notice to such Lender and the Administrative Agent,
require such Lender to transfer and assign, without recourse (in accordance with
and subject to the restrictions contained in Section 9.04), all of its
interests, rights and obligations under this Agreement to an assignee that shall
assume such assigned obligations (which assignee may be another Lender, if a
Lender accepts such assignment); provided that (x) such assignment shall not
conflict with any law, rule or regulation or order of any court or other
Governmental Authority having jurisdiction, (y) solely with respect to
replacements of Lenders pursuant to clauses (i), (ii) or (iii) of this Section,
the Borrowers shall have received the prior written consent of the
Administrative Agent (and, if a Revolving Credit Commitment is being assigned,
of the Swingline Lender), which consent shall not unreasonably be withheld, and
(z) the Borrowers or such assignee shall have paid to the affected Lender in
immediately available funds an amount equal to the sum of the principal of and
interest accrued to the date of such payment on the outstanding Loans or L/C
Disbursements of such Lender, plus all Fees and other amounts accrued for the
account of such Lender hereunder (including any amounts under Section 2.14 and
Section 2.16); provided further that, if prior to any such transfer and
assignment the circumstances or event that resulted in such Lender’s claim for
compensation under Section 2.14 or notice under Section 2.15 or the amounts paid
pursuant to Section 2.20, as the case may be, cease to cause such Lender to
suffer increased costs or reductions in amounts received or receivable or
reduction in return on capital, or cease to have the consequences specified in
Section 2.15, or cease to result in amounts being payable under Section 2.20, as
the case may be (including as a result of any action taken by such Lender
pursuant to paragraph (b) below), or if such Lender shall waive its right to
claim further compensation under Section 2.14 in respect of such circumstances
or event or shall withdraw its notice under Section 2.15 or shall waive its
right to further payments under Section 2.20 in respect of such circumstances or
event, as the case may be, then such Lender shall not thereafter be required to
make any such transfer and assignment hereunder. In connection with any such
replacement, if the replaced Lender does not execute and deliver to the
Administrative Agent a duly completed Assignment and Acceptance reflecting such
replacement within five Business Days of the date on which the replacement
Lender executes and delivers such Assignment and Acceptance to the replaced
Lender, then such replaced Lender shall be deemed to have executed and delivered
such Assignment and Acceptance.

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          (b) If (i) any Lender shall request compensation under Section 2.14,
(ii) any Lender delivers a notice described in Section 2.15 or (iii) the
Borrowers are required to pay any additional amount to any Lender or any
Governmental Authority on account of any Lender, pursuant to Section 2.20, then
such Lender shall use reasonable efforts (which shall not require such Lender to
incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any
action inconsistent with its internal policies or legal or regulatory
restrictions or suffer any disadvantage or burden deemed by it to be
significant) (x) to file any certificate or document reasonably requested in
writing by the Administrative Borrower or (y) to assign its rights and delegate
and transfer its obligations hereunder to another of its offices, branches or
affiliates, if such filing or assignment would reduce its claims for
compensation under Section 2.14 or enable it to withdraw its notice pursuant to
Section 2.15 or would reduce amounts payable pursuant to Section 2.20, as the
case may be, in the future. The Borrowers hereby agree to pay all reasonable
costs and expenses incurred by any Lender in connection with any such filing or
assignment, delegation and transfer.
     SECTION 2.22 Swingline Loans.
          (a) Swingline Commitment. Subject to the terms and conditions hereof
and relying upon the representations and warranties set forth herein, the
Swingline Lender agrees to make loans to the Borrowers, at any time and from
time to time after the Closing Date, and until the earlier of the Maturity Date
and the termination of the Commitments in accordance with the terms hereof, in
an aggregate principal amount at any time outstanding that will not result in
(i) the aggregate principal amount of all Swingline Loans exceeding $2,000,000
in the aggregate or (ii) the Aggregate Revolving Credit Exposure, after giving
effect to any Swingline Loan, exceeding the Commitment. Each Swingline Loan
shall be in a principal amount that is an integral multiple of $100,000. The
Swingline Commitment may be terminated or reduced from time to time as provided
herein. Within the foregoing limits, the Borrowers may borrow, pay or prepay and
reborrow Swingline Loans hereunder, subject to the terms, conditions and
limitations set forth herein.
          (b) Swingline Loans. The Administrative Borrower shall notify the
Administrative Agent by fax, or by telephone (confirmed by fax), not later than
11:00 a.m., New York City time, on the day of a proposed Swingline Loan to be
made to it. Such notice shall be delivered on a Business Day, shall be
irrevocable and shall refer to this Agreement and shall specify the requested
date (which shall be a Business Day) and amount of such Swingline Loan. The
Administrative Agent will promptly advise the Swingline Lender of any notice
received from the Administrative Borrower pursuant to this paragraph (b). The
Swingline Lender shall make each Swingline Loan available to the Borrowers by
means of a credit to the general deposit account of the Borrowers with the
Swingline Lender by 3:00 p.m. on the date such Swingline Loan is so requested.
          (c) Prepayment. The Borrowers shall have the right at any time and
from time to time to prepay any Swingline Loan, in whole or in part, upon giving
written or fax notice (or telephone notice promptly confirmed by written or fax
notice) to the Swingline Lender and to the Administrative Agent before 12:00
(noon), New York City time, on the date of prepayment at the Swingline Lender’s
address for notices specified in the Lender Addendum delivered by the

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Swingline Lender. All principal payments of Swingline Loans shall be accompanied
by accrued interest on the principal amount being repaid to the date of payment.
          (d) Interest. Each Swingline Loan shall be an ABR Loan and, subject to
the provisions of Section 2.07, shall bear interest as provided in
Section 2.06(a).
          (e) Participations. The Swingline Lender may by written notice given
to the Administrative Agent not later than 10:00 a.m., New York City time, on
any Business Day require the Lenders to acquire participations on such Business
Day in all or a portion of the Swingline Loans outstanding. Such notice shall
specify the aggregate amount of Swingline Loans in which Lenders will
participate. The Administrative Agent will, promptly upon receipt of such
notice, give notice to each Lender, specifying in such notice such Lender’s Pro
Rata Percentage of such Swingline Loan or Loans. In furtherance of the
foregoing, each Lender hereby absolutely and unconditionally agrees, upon
receipt of notice as provided above, to pay to the Administrative Agent, for the
account of the Swingline Lender, such Lender’s Pro Rata Percentage of such
Swingline Loan or Loans. Each Lender acknowledges and agrees that its obligation
to acquire participations in Swingline Loans pursuant to this paragraph is
absolute and unconditional and shall not be affected by any circumstance
whatsoever, including the occurrence and continuance of a Default or an Event of
Default, and that each such payment shall be made without any offset, abatement,
withholding or reduction whatsoever. Each Lender shall comply with its
obligation under this paragraph by wire transfer of immediately available funds,
in the same manner as provided in Section 2.02(c) with respect to Loans made by
such Lender (and Section 2.02(c) shall apply, mutatis mutandis, to the payment
obligations of the Lenders under this Section) and the Administrative Agent
shall promptly pay to the Swingline Lender the amounts so received by it from
the Lenders. The Administrative Agent shall notify the Borrowers of any
participations in any Swingline Loan acquired pursuant to this paragraph and
thereafter payments in respect of such Swingline Loan shall be made to the
Administrative Agent and not to the Swingline Lender. Any amounts received by
the Swingline Lender from the Borrowers (or other party on behalf of the
Borrowers) in respect of a Swingline Loan after receipt by the Swingline Lender
of the proceeds of a sale of participations therein shall be promptly remitted
to the Administrative Agent; any such amounts received by the Administrative
Agent shall be promptly remitted by the Administrative Agent to the Lenders that
shall have made their payments pursuant to this paragraph and to the Swingline
Lender, as their interests may appear. The purchase of participations in a
Swingline Loan pursuant to this paragraph shall not relieve the Borrowers (or
other party liable for obligations of the Borrowers) of any default in the
payment thereof.
     SECTION 2.23 Letters of Credit.
          (a) General. Subject to the terms and conditions hereof, the
Administrative Borrower may request the issuance of a Letter of Credit at any
time and from time to time while the Commitments remain in effect for its own
account, in a form reasonably acceptable to Administrative Agent and the Issuing
Bank. In order to assist the Administrative Borrower in establishing or opening
Letters of Credit with an Issuing Bank, the Administrative Borrower has
requested that the Administrative Agent join in the applications for such
Letters of Credit, and/or guarantee payment or performance of such Letters of
Credit and any drafts or acceptances thereunder through the issuance of one or
more Letter of Credit Guaranties, thereby lending the

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Administrative Agent’s credit to the Borrowers, and Administrative Agent has
agreed to do so. This Section shall not be construed to impose an obligation to
issue any Letter of Credit.
          (b) Notice of Issuance, Amendment, Renewal, Extension; Certain
Conditions. In order to request the issuance of a Letter of Credit (or to amend,
renew or extend an existing Letter of Credit), the Administrative Borrower shall
hand deliver or fax to Administrative Agent (no less than three Business Days
(or such shorter period of time acceptable to the Issuing Bank) in advance of
the requested date of issuance, amendment, renewal or extension) a notice
requesting the issuance of a Letter of Credit, or identifying the Letter of
Credit to be amended, renewed or extended, the date of issuance, amendment,
renewal or extension, the date on which such Letter of Credit is to expire
(which shall comply with paragraph (c) below), the amount of such Letter of
Credit, the name and address of the beneficiary thereof and such other
information as shall be necessary to prepare such Letter of Credit. A Letter of
Credit shall be issued, amended, renewed or extended only if, and upon issuance,
amendment, renewal or extension of each Letter of Credit the Borrowers shall be
deemed to represent and warrant that, after giving effect to such issuance,
amendment, renewal or extension (i) the L/C Exposure shall not exceed
$20,000,000 and (ii) the Aggregate Revolving Credit Exposure shall not exceed
the lesser of (a) total Commitments and (b) the Borrowing Base, subject to the
Administrative Agent’s authority to make Protective Advances pursuant to the
terms of Section 2.24.
          (c) Expiration Date. Each Letter of Credit shall expire at the close
of business on the earlier of (i) the date one year after the date of the
issuance of such Letter of Credit and (ii) the date that is five Business Days
prior to the Maturity Date, unless such Letter of Credit expires by its terms on
an earlier date; provided, however, that a Letter of Credit may, upon the
request of the Administrative Borrower and subject to the Issuing Bank’s
consent, include a provision whereby such Letter of Credit shall be renewed
automatically for additional consecutive periods of 12 months or less (but not
beyond the date that is five Business Days prior to the Maturity Date) unless
the Issuing Bank notifies the beneficiary thereof at least 30 days prior to the
then-applicable expiration date that such Letter of Credit will not be renewed.
          (d) Participations. Upon the issuance of a Letter of Credit and
without any further action on the part of the Issuing Bank or the Lenders,
Administrative Agent hereby grants to each Lender, and each such hereby acquires
from Administrative Agent, a participation to the extent of the applicable
Letter of Credit Guaranty equal to such Lender’s Pro Rata Percentage of the
aggregate amount available to be drawn under such Letter of Credit, effective
upon the issuance of such Letter of Credit. In consideration and in furtherance
of the foregoing, each Lender hereby absolutely and unconditionally agrees to
pay to Administrative Agent such Lender’s Pro Rata Percentage of each L/C
Disbursement made by Administrative Agent and not reimbursed by the Borrowers
(or, if applicable, another party pursuant to its obligations under any other
Loan Document) forthwith on the date due as provided in Section 2.02(f). Each
Lender acknowledges and agrees that its obligation to acquire participations
pursuant to this paragraph is absolute and unconditional and shall not be
affected by any circumstance whatsoever, including the occurrence and
continuance of a Default or an Event of Default, and that each such payment
shall be made without any offset, abatement, withholding or reduction
whatsoever.

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          (e) Reimbursement. Upon any L/C Disbursement in respect of a Letter of
Credit, the Borrowers shall pay to Administrative Agent an amount equal to such
L/C Disbursement not later than two hours after any Borrower shall have received
notice that payment of such draft will be made, or, if any Borrower shall have
received such notice later than 10:00 a.m., New York City time, on any Business
Day, not later than 10:00 a.m., New York City time, on the immediately following
Business Day.
          (f) Obligations Absolute. The Borrowers’ obligations provided in
paragraph (e) above shall be absolute, unconditional and irrevocable, and shall
be performed strictly in accordance with the terms of this Agreement, under any
and all circumstances whatsoever, and irrespective of:
               (i) any lack of validity or enforceability of any Letter of
Credit or any Loan Document, or any term or provision therein;
               (ii) any amendment or waiver of, or any consent to departure
from, all or any of the provisions of any Letter of Credit or any Loan Document;
               (iii) the existence of any claim, setoff, defense or other right
that the Borrowers, any other party guaranteeing, or otherwise obligated with,
the Borrowers, any subsidiary or other Affiliate thereof or any other person may
at any time have against the beneficiary under any Letter of Credit, the Issuing
Bank, Administrative Agent or any Lender or any other person, whether in
connection with this Agreement, any other Loan Document or any other related or
unrelated agreement or transaction;
               (iv) any draft or other document presented under a Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any respect
or any statement therein being untrue or inaccurate in any respect;
               (v) payment by the Issuing Bank under a Letter of Credit against
presentation of a draft or other document that does not comply with the terms of
such Letter of Credit; and
               (vi) any other act or omission to act or delay of any kind of the
Issuing Bank, any Lender, Administrative Agent or any other person or any other
event or circumstance whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section, constitute a
legal or equitable discharge of the Borrowers’ obligations hereunder.
          Without limiting the generality of the foregoing, it is expressly
understood and agreed that the absolute and unconditional obligation of the
Borrowers hereunder to reimburse L/C Disbursements will not be excused by the
gross negligence or willful misconduct of the Issuing Bank or Administrative
Agent. However, the foregoing shall not be construed to excuse the Issuing Bank
or Administrative Agent from liability to the Borrowers to the extent of any
direct damages (as opposed to consequential damages, claims in respect of which
are hereby waived by the Borrowers to the extent permitted by applicable law)
suffered by the Borrowers that are caused by the Issuing Bank’s or
Administrative Agent’s gross negligence or willful misconduct in determining
whether drafts and other documents presented under a Letter of

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Credit comply with the terms thereof; it is understood that the Issuing Bank may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary and, in making any payment under any Letter of
Credit (i) the Issuing Bank’s exclusive reliance on the documents presented to
it under such Letter of Credit as to any and all matters set forth therein,
including reliance on the amount of any draft presented under such Letter of
Credit, whether or not the amount due to the beneficiary thereunder equals the
amount of such draft and whether or not any document presented pursuant to such
Letter of Credit proves to be insufficient in any respect, if such document on
its face appears to be in order, and whether or not any other statement or any
other document presented pursuant to such Letter of Credit proves to be forged
or invalid or any statement therein proves to be inaccurate or untrue in any
respect whatsoever and (ii) any noncompliance in any immaterial respect of the
documents presented under such Letter of Credit with the terms thereof shall, in
each case, be deemed not to constitute willful misconduct or gross negligence of
the Issuing Bank.
          (g) Intentionally Omitted.
          (h) Interim Interest. If Administrative Agent shall make any payment
under a Letter of Credit Guaranty in respect of a Letter of Credit, then, unless
the Borrowers shall reimburse such payment in full on such date, the unpaid
amount thereof shall bear interest for the account of Administrative Agent, for
each day from and including the date of such payment to but excluding the
earlier of the date of payment by the Borrowers or the date on which interest
shall commence to accrue thereon as provided in Section 2.02(f), at the rate per
annum that would apply to such amount if such amount were an ABR Loan.
          (i) Intentionally Omitted.
          (j) Cash Collateralization. If any Event of Default shall occur and be
continuing, the Borrowers shall, on the Business Day it receives notice from
Administrative Agent or the Required Lenders (or, if the maturity of the Loans
has been accelerated, Lenders representing greater than 50% of the total L/C
Exposure) thereof and of the amount to be deposited, deposit in an account with
Administrative Agent, for the ratable benefit of the Lenders, an amount in cash
equal to 105% of the L/C Exposure as of such date. Such deposit shall be held by
Administrative Agent as collateral for the payment and performance of the
obligations of the Borrowers under this Agreement. Administrative Agent shall
have exclusive dominion and control, including the exclusive right of
withdrawal, over such account. Other than any interest earned on the investment
of such deposits in Permitted Investments, which investments shall be made at
the option and sole discretion of Administrative Agent, such deposits shall not
bear interest. Interest or profits, if any, on such investments shall accumulate
in such account. Moneys in such account shall (i) automatically be applied by
Administrative Agent to reimburse payment made in respect of a Letter of Credit
Guaranty for L/C Disbursements which have not been reimbursed, (ii) be held for
the satisfaction of the reimbursement obligations of the Borrowers for the L/C
Exposure at such time and (iii) if the maturity of the Loans has been
accelerated (but subject to the consent of Lenders representing greater than 50%
of the total L/C Exposure), be applied to satisfy the Obligations. If the
Borrowers are required to provide an amount of cash collateral hereunder as a
result of the occurrence of an Event of Default, such amount (to the extent not
applied as aforesaid) shall be

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returned to the Borrowers within three Business Days after all Events of Default
have been cured or waived.
     SECTION 2.24 Protective Advances.
          (a) Subject to the limitations set forth below, the Administrative
Agent is authorized by the Borrowers and the Lenders, from time to time in the
Administrative Agent’s sole discretion (but shall have absolutely no obligation
to), to make Loans, on behalf of all Lenders, at the request of Administrative
Borrower or otherwise in its Permitted Discretion, which the Administrative
Agent, in its Permitted Discretion, deems necessary or desirable (i) to preserve
or protect the Collateral, or any portion thereof, (ii) to enhance the
likelihood of, or maximize the amount of, repayment of the Loans and other
Obligations, or (iii) to pay any other amount chargeable to or required to be
paid by the Borrowers pursuant to the terms of this Agreement, including
payments of principal, interest, L/C Disbursements, fees, premiums, reimbursable
expenses (including costs, fees, and expenses as described in Section 9.05) and
other sums payable under the Loan Documents (any of such Loans are herein
referred to as “Protective Advances”); provided that, the aggregate amount of
Protective Advances outstanding at any time, which were made pursuant to clauses
(i), (ii) and (iii) above, shall not cause the Aggregate Revolving Credit
Exposure to exceed the aggregate Commitment of all Lenders and shall not at any
time exceed $5,000,000 in the aggregate. Protective Advances may be made even if
the conditions precedent set forth in Section 4.01 have not been satisfied. The
Protective Advances shall be secured by the Liens in favor of the Administrative
Agent in and to the Collateral and shall constitute Obligations hereunder. All
Protective Advances shall be ABR Borrowings. Any such revocation must be in
writing and shall become effective prospectively upon the Administrative Agent’s
receipt thereof. At any time that there is sufficient Availability and the
conditions precedent set forth in Section 4.01 have been satisfied, the
Administrative Agent may request the Revolving Lenders to make a Revolving Loan
to repay a Protective Advance. At any other time the Administrative Agent may
require the Lenders to fund their risk participations described in
Section 2.24(b).
          (b) Upon the making of a Protective Advance by the Administrative
Agent (whether before or after the occurrence of a Default or Event of Default),
each Lender shall be deemed, without further action by any party hereto, to have
unconditionally and irrevocably purchased from the Administrative Agent without
recourse or warranty, an undivided interest and participation in such Protective
Advance in proportion to its Pro Rata Percentage of the Aggregate Revolving
Credit Exposure. From and after the date, if any, on which any Lender is
required to fund its participation in any Protective Advance purchased
hereunder, the Administrative Agent shall promptly distribute to such Lender
such Lender’s Pro Rata Percentage of all payments of principal and interest and
all proceeds of Collateral received by the Administrative Agent in respect of
such Protective Advance.
     SECTION 2.25 Relationship Between the Borrowers.
          (a) Administrative Borrower. Britt hereby appoints PALCO, and PALCO
(in such capacity, the “Administrative Borrower”) shall act under this
Agreement, as the agent, attorney-in-fact and legal representative of Britt for
all purposes, including requesting Loans and receiving account statements and
other notices and communications to the Borrowers (or any of

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them) from the Administrative Agent or any Lender. The Administrative Agent and
the Lenders may rely, and shall be fully protected in relying, on any Borrowing
request, request for a Letter of Credit, disbursement instruction, report,
information or any notice or communication made or given by the Administrative
Borrower, whether in its own name, as Borrowers’ agent, on behalf of Britt or on
behalf of the Borrowers, and neither the Administrative Agent nor any Lender
shall have any obligation to make any inquiry or request any confirmation from
or on behalf of any other Borrower as to the binding effect on it of any such
notice, request, instruction, report, information, other notice or
communications, nor shall the joint and several character of the Borrowers’
obligations hereunder be affected, provided that the provisions of this
Section 2.25 shall not be construed so as to preclude either Borrower from
taking actions permitted to be taken by a “Borrower” hereunder.
          (b) Joint and Several Obligations. The obligations of the Borrowers
pursuant to the Loan Documents shall be joint and several. Each Borrower hereby
irrevocably and unconditionally guaranties, as primary obligor and not merely as
surety, the due and punctual payment in full of all Obligations of the other
Borrower 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. ss. 362(a)).
          (c) Obligations Absolute. The obligations of each Borrower under this
Section 2.25 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
Obligations. In furtherance of the foregoing and without limiting the generality
thereof, each Borrower agrees that: (i) its obligation under this Section 2.25
with respect to the obligations of the other Borrower is a guaranty of payment
when due and not of collectibility; (ii) the Administrative Agent and any Lender
may enforce this obligation upon the occurrence of an Event of Default hereunder
notwithstanding the existence of any dispute between the other Borrower and the
Administrative Agent or any Lender with respect to the existence of such Event
of Default; (iii) the obligations of each Borrower hereunder are independent of
each of the obligations of the other Borrower under the Loan Documents and the
obligations of any other Person and a separate action or actions may be brought
and prosecuted against each Borrower whether or not any action is brought
against the other Borrower or any other Person and whether or not the other
Borrower or any other Person is joined in any such action or actions; and (iv) a
payment of a portion, but not all, of the Obligations by any Borrower shall in
no way limit, affect, modify or abridge the liability of such or any other
Borrower for any portion of the Obligations that has not been paid. Each
Borrower agrees that its obligation under this Section 2.25 with respect to the
obligations of the other Borrower is a continuing guaranty and shall be binding
upon each Borrower and its successors and assigns, and each Borrower irrevocably
waives any right to revoke its obligations under this Section 2.25 as to future
transactions giving rise to any Obligations.
          (d) Actions by the Administrative Agent and the Lenders. The
Administrative Agent and any Lender may from time to time, without notice or
demand and without affecting the validity or enforceability of this Section 2.25
or giving rise to any limitation, impairment or discharge of any Borrower’s
liability hereunder, but subject to the provisions of Section 2.25 (i) renew,
extend, accelerate or otherwise change the time, place, manner or terms of

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payment of the Obligations of the other Borrower with the consent of such other
Borrower, (ii) settle, compromise, release or discharge, or accept or refuse any
offer of performance with respect to, or substitutions for, the Obligations of
the other Borrower 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 Obligations of the other Borrower and take and
hold security for the payment of such Obligations, (iv) release, exchange,
compromise, subordinate or modify, with or without consideration, any security
for payment of the Obligations of the other Borrower, any other guaranties of
such Obligations, or any other obligation of any Person with respect to such
Obligations, (v) enforce and apply any security now or hereafter held from the
other Borrower by or for the benefit of the Administrative Agent or any Lender
in respect of the Obligations of the other Borrower and direct the order or
manner of sale thereof, or exercise any other right or remedy that the
Administrative Agent or the Lenders, or any of them, may have against any such
security, in each case as the Administrative Agent or the Lenders in their
discretion may determine consistent with this 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 (vi) exercise any other rights available to
the Administrative Agent or the Lenders, or any of them, under the Loan
Documents.
          (e) No Discharge. The obligations of each Borrower under this
Section 2.25 shall be valid and enforceable and shall not be subject to any
limitation, impairment or discharge for any reason (other than payment in full
of the Obligations), including the occurrence of any of the following, whether
or not any Borrower shall have had notice or knowledge of any of them: (i) any
failure to assert or enforce or agreement 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
with respect to the Obligations of the other Borrower or any agreement relating
thereto, or with respect to any other guaranty of or security for the payment of
such Obligations, (ii) any waiver or modification of, or any consent to
departure from, any of the terms or provisions of this Agreement or any of the
other Loan Documents or any agreement or instrument executed pursuant thereto,
or of any other guaranty or security for the Obligations of the other Borrower,
(iii) the Obligations of the other Borrower, 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 to the payment of
indebtedness other than the Obligations of the other Borrower, even though the
Administrative Agent or the Lenders, or any of them, might have elected to apply
such payment to any part or all of the Obligations of the other Borrower,
(v) any failure to perfect or continue perfection of a security interest in any
collateral which secures any of the Obligations of the other Borrower, (vi) any
defenses, set-offs or counterclaims which the other Borrower or any other Person
may assert against the Administrative Agent or any Lender in respect of the
Obligations, including but not limited to failure of consideration, breach of
warranty, payment, statute of frauds, statute of limitations, accord and
satisfaction and usury and (vii) any other act or thing or omission, or delay to
do any other act or thing, which may or might in any manner or to any extent
vary the risk of any Borrower as an obligor in respect of the Obligations.
          (f) Waivers. Each Borrower waives, for the benefit of the
Administrative Agent and each Lender: (i) any right to require the
Administrative Agent or any Lender, as a condition of payment or performance by
such Borrower, to (A) proceed against the other

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Borrower or any other Person, (B) proceed against or exhaust any security held
from the other Borrower or any other Person, (C) proceed against or have resort
to any balance of any deposit account or credit on the books of the
Administrative Agent or any Lender in favor of the other Borrower or any other
Person, or (D) pursue any other remedy in the power of the Administrative Agent
or any Lender; (ii) any defense arising by reason of the incapacity, lack of
authority or any disability or other defense of the other Borrower including any
defense based on or arising out of the lack of validity or the unenforceability
of the Obligations or any agreement or instrument relating thereto or by reason
of the cessation of the liability of the other Borrower from any cause other
than payment in full of the Obligations; (iii) 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; (iv) any defense based upon the Administrative Agent’s or any
Lender’s errors or omissions in the administration of the Obligations, except
behavior that amounts to gross negligence or willful misconduct; (v) (A) any
principles or provisions of law, statutory or otherwise, that are or might be in
conflict with the terms of this Section 2.25 and any legal or equitable
discharge of such Borrower’s obligations hereunder, (B) the benefit of any
statute of limitations affecting such Borrower’s liability hereunder or the
enforcement hereof, (C) any rights to set-offs, recoupments and counterclaims
and (D) promptness, diligence and any requirement that the Administrative Agent
or any Lender protect, secure, perfect or insure any Lien or any property
subject thereto; (vi) notices, demands, presentments, protests, notices of
protest, notices of dishonor and notices of any action or inaction, including
acceptance of this Section 2.25, notices of default under this Agreement or any
agreement or instrument related thereto, notices of any renewal, extension or
modification of the Obligations or any agreement related thereto, notices of any
extension of credit to the other Borrower and notices of any of the matters
referred to in Sections 2.24(d) and (e) and any right to consent to any thereof;
and (vii) to the fullest extent permitted by law, any defenses 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
Section 2.25.
          As used in this paragraph, any reference to “the principal” includes
each Borrower and any reference to “the creditor” includes the Administrative
Agent and each of the Lenders. In accordance with Section 2856 of the California
Civil Code each Borrower waives any and all rights and defenses available to it
by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California
Civil Code, including any and all rights or defenses such Borrower may have
because the Obligations are secured by real property or by reason of protection
afforded to the principal with respect to any of the Obligations, or to any
other guarantor of any of the Obligations with respect to any of such
guarantor’s obligations under its guaranty, in either case pursuant to the
antideficiency or other laws of the State of California limiting or discharging
the principal’s indebtedness or such guarantor’s obligations, including
Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure.
Consequently, among other things: (1) the creditor may collect from such
Borrower without first foreclosing on any real or personal property collateral
pledged by the principal; and (2) if the creditor forecloses on any real
property collateral pledged by the principal: (x) the amount of the Obligations
may be reduced only by the price for which the collateral is sold at the
foreclosure sale, even if the collateral is worth more than the sale price and
(y) the creditor may collect from such Borrower even if the creditor, by
foreclosing on the real property collateral, has destroyed any right such
Borrower may have to collect from the principal. This is an unconditional and
irrevocable waiver of any rights and defenses such Borrower may have because the
Obligations are secured by real

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property. Each Borrower also waives all rights and defenses arising out of an
election of remedies by the creditor, even though that election of remedies,
such as a nonjudicial foreclosure with respect to security for an Obligation,
has destroyed such Borrower’s rights of subrogation and reimbursement against
the principal by the operation of Section 580d of the Code of Civil Procedure or
otherwise; and even though that election of remedies by the creditor, such as
nonjudicial foreclosure with respect to security for an obligation of any other
guarantor of any of the Obligations, has destroyed such Borrower’s rights of
contribution against such other Borrower or any other guarantor. No other
provision of this Section 2.25 shall be construed as limiting the generality of
any of the covenants and waivers set forth in this paragraph.
          (g) Borrowers’ Rights of Subrogation, Contribution, Etc.;
Subordination of Other Obligations. Each Borrower waives any claim, right or
remedy, direct or indirect, that such Borrower now has or may hereafter have
against the other Borrower or any of its assets in connection with this
Section 2.25 or the performance by such Borrower of its obligations hereunder,
in each case whether such claim, right or remedy arises in equity, under
contract, by statute (including under California Civil Code Section 2847, 2848
or 2849), under common law or otherwise and including (i) any right of
subrogation, reimbursement or indemnification that such Borrower now has or may
hereafter have against the other Borrower, (ii) any right to enforce, or to
participate in, any claim, right or remedy that the Administrative Agent or any
Lender now have or may hereafter have against the other Borrower and (iii) any
benefit of, and any right to participate in, any collateral or security now or
hereafter held by the Administrative Agent or any Lender. In addition, until the
Obligations shall have been paid in full, the Commitments shall have terminated
and all Letters of Credit shall have expired or been cancelled, each Borrower
shall withhold the exercise of any right of contribution such Borrower may have
against the other Borrower. Each Borrower further agrees that, to the extent the
waiver or agreement to withhold the exercise of its rights of subrogation,
reimbursement, indemnification and contribution as set forth herein is found by
a court of competent jurisdiction to be void or voidable for any reason, any
rights of subrogation, reimbursement or indemnification such Borrower may have
against the other Borrower or against any collateral or security, and any rights
of contribution such Borrower may have against such other Borrower, shall be
junior and subordinate to any rights the Administrative Agent or any Lender may
have against such Borrower to all right, title and interest the Administrative
Agent or any Lender may have in any such collateral or security, and to any
right the Administrative Agent or any Lender may have against such other
Borrower.
          Any indebtedness of any Borrower now or hereafter held by any Borrower
is subordinated in right of payment to the Obligations, and any such
indebtedness of the other Borrower to such Borrower collected or received by
such Borrower after an Event of Default has occurred and is continuing, and any
amount paid to a Borrower on account of any subrogation, reimbursement,
indemnification or contribution rights referred to in the preceding paragraph
when all Obligations have not been paid in full, shall be held in trust for the
Administrative Agent and the Lenders and shall forthwith be paid over to the
Administrative Agent for the benefit of the Lenders to be credited and applied
against the Obligations.
          (h) Fraudulent Transfer Laws. Anything contained in this Section 2.25
to the contrary notwithstanding, the obligations of each Borrower under this
Section 2.25 shall be limited to a maximum aggregate amount equal to the largest
amount that would not render its

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obligations hereunder subject to avoidance as a fraudulent transfer or
conveyance under Section 548 of Title 11 of the United States Code or any
applicable provisions of comparable state law (collectively, the “Fraudulent
Transfer Laws”), in each case after giving effect to all other liabilities of
such Borrower, contingent or otherwise, that are relevant under the Fraudulent
Transfer Laws and after giving effect as assets to the value (as determined
under the applicable provisions of the Fraudulent Transfer Laws) of any rights
to subrogation, reimbursement, indemnification or contribution of such Borrower
pursuant to applicable law or pursuant to the terms of any agreement.
          (i) Related Guaranties. Each Borrower under this Section 2.25 and any
other guaranties, if any, relating to the Agreement (the “Related Guaranties”)
that contain a contribution provision similar to that set forth in this
Section 2.25, together desire to allocate among themselves (collectively, the
“Contributing Guarantors”), in a fair and equitable manner, their obligations
arising under this Section 2.25 and the Related Guaranties. Accordingly, in the
event any payment or distribution is made on any date by any Borrower under this
Section 2.25 or a guarantor under a Related Guaranty, each such Borrower or such
guarantor shall be entitled to a contribution from each of the other
Contributing Guarantors in the maximum amount permitted by law so as to maximize
the aggregate amount of the Obligations paid to the Administrative Agent and the
Lenders.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
          Each of the Borrowers, jointly and severally, represents and warrants
to the Arranger, the Administrative Agent and each of the Lenders that:
     SECTION 3.01 Organization; Powers. Each of the Loan Parties (a) is duly
organized or formed, validly existing and in good standing under the laws of the
jurisdiction of its organization or formation, (b) has all requisite power and
authority, and the legal right, to own and operate its property and assets, to
lease the property it operates as lessee and to carry on its business as now
conducted and as proposed to be conducted, (c) is qualified to do business in,
and is in good standing in, every jurisdiction where such qualification is
required, except where the failure so to qualify, individually or in the
aggregate, would not reasonably be expected to result in a Material Adverse
Effect and (d) has the power and authority, and the legal right, to execute,
deliver and perform its obligations under this Agreement, each of the other Loan
Documents, and each other agreement or instrument contemplated thereby to which
it is or will be a party, including, in the case of the Borrowers, to borrow
hereunder, in the case of each Loan Party and Holdings, to grant the Liens
contemplated to be granted by it under the Security Documents and, in the case
of each Guarantor, to Guarantee the Obligations as contemplated by the Guarantee
and Collateral Agreement.
     SECTION 3.02 Authorization; No Conflicts. The Transactions (a) have been
duly authorized by all requisite corporate, partnership or limited liability
company and, if required, stockholder, partner or member action and (b) will not
(i) violate (A) any provision of law, statute, rule or regulation, or of the
certificate or articles of incorporation or other constitutive documents or
by-laws of Loan Party, (B) any order of any Governmental Authority or arbitrator

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or (C) any provision of any indenture, agreement or other instrument to which a
Loan Party is a party or by which any of them or any of their property is or may
be bound, (ii) be in conflict with, result in a breach of or constitute (alone
or with notice or lapse of time or both) a default under, or give rise to any
right to accelerate or to require the prepayment, repurchase or redemption of
any obligation under any such indenture, agreement or other instrument or (iii)
result in the creation or imposition of any Lien upon or with respect to any
property or assets now owned or hereafter acquired by any Loan Party (other than
Liens created under the Security Documents).
     SECTION 3.03 Enforceability. This Agreement has been duly executed and
delivered by each Loan Party and constitutes, and each other Loan Document when
executed and delivered by each Loan Party thereto will constitute, a legal,
valid and binding obligation of such Loan Party enforceable against such Loan
Party in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors’ rights
generally and subject to general principles of equity, regardless of whether
considered in a proceeding in equity or at law.
     SECTION 3.04 Governmental Approvals. No action, consent or approval of,
registration or filing with, Permit from, notice to, or any other action by, any
Governmental Authority is or will be required in connection with the
Transactions, except for (a) the filing of UCC financing statements and filings
with the United States Patent and Trademark Office and the United States
Copyright Office, (b) recordation of the Mortgages and (c) such as have been
made or obtained and are in full force and effect.
     SECTION 3.05 Financial Statements. PALCO has heretofore furnished to the
Lenders (i) balance sheets and statements of income, stockholder’s equity and
cash flows for the Borrowers on a combined basis as of and for the fiscal years
ended December 31, 2005 and December 31, 2004, in each case audited by and
accompanied by the opinion of Deloitte & Touche LLP, independent public
accountants and (ii) the unaudited balance sheet and related statement of income
and cash flows for the Borrowers on a combined basis as of the period from and
including January 1, 2003 through and including December 31, 2005. All of such
financial statements present fairly in all material respects the financial
condition and results of operations and cash flows of the applicable entities as
of such dates and for such periods. Such balance sheets and the notes thereto
disclose all material liabilities, direct or contingent, of the applicable
entities as of the dates thereof. Such financial statements were prepared in
accordance with GAAP (except for the exclusion of PALCO’s wholly owned
subsidiaries, Scotia Pacific and Salmon Creek, except as losses in excess of
investments in subsidiaries as a component of stockholder’s equity unless
otherwise indicated or the context indicates otherwise and consolidating the
financial statements thereof) applied on a consistent basis.
     SECTION 3.06 No Material Adverse Change. No event, change or condition has
occurred since December 31, 2005 that has caused, or would reasonably be
expected to cause, a Material Adverse Effect.
     SECTION 3.07 Title to Properties; Possession Under Leases.

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          (a) Each of the Loan Parties has good and marketable title to, or
valid leasehold interests in, all its material properties and assets (including
all Real Property), except for liens permitted under Section 6.02 and minor
defects in title that, in the aggregate, are not substantial in amount and do
not materially detract from the value of the property subject thereto or
interfere with its ability to conduct its business as currently conducted or to
utilize such properties and assets for their intended purposes. Each parcel of
Real Property is free from material structural defects and all building systems
contained therein are in good working order and condition, as necessary to
permit the Loan Party using the Real Property to conduct its business as
currently conducted or to utilize such Real Property for its intended purpose,
ordinary wear and tear dispositions, abandonments and breakdowns arising in the
ordinary course of business excepted, suitable for the purposes for which they
are currently being used. Each parcel of Real Property and the current use
thereof complies in all material respects with all applicable laws (including
building and zoning ordinances and codes) and with all insurance requirements.
          (b) Each of the Loan Parties is in compliance in all material respects
with all obligations under all material leases to which it is a party and all
such leases are legal, valid, binding and in full force and effect and are
enforceable in accordance with their terms. Each of the Loan Parties enjoys
peaceful and undisturbed possession under all such material leases. The Loan
Parties are not in default of their payment or other material obligations under
any material lease and no legal proceedings have been instituted against any
Loan Party by any landlord with respect to any claimed default under any such
leases. Except as set forth in Schedule 3.20, none of the Real Property is
subject to any lease, sublease, license or other agreement granting to any
person any right to the use, occupancy, possession or enjoyment of the Real
Property or any portion thereof, except for easements or similar rights which do
not materially detract from the value of the property subject thereto or
interfere with the ability of such Loan Party to conduct its business as
currently conducted or to utilize such properties and assets for their intended
purposes. PALCO has delivered to the Administrative Agent true, complete and
correct copies of all leases (whether as landlord or tenant) of Real Property.
          (c) None of the Loan Parties has received any notice of, nor has any
knowledge of, any pending or contemplated condemnation proceeding affecting the
Real Properties or any sale or disposition thereof in lieu of condemnation.
          (d) Except as set forth on Schedule 3.07 none of the Loan Parties is
obligated under any right of first refusal, option or other contractual right to
sell, assign or otherwise dispose of any Real Property or any interest therein.
          (e) There are no pending or, to the knowledge of PALCO, proposed
special or other assessments for public improvements or otherwise affecting any
material portion of the owned Real Property, nor are there any contemplated
improvements to such owned Real Property that may result in such special or
other assessments. No Loan Party has suffered, permitted or initiated the joint
assessment of any material portion of any owned Real Property with any other
real property constituting a separate tax lot. Each owned parcel of Real
Property is comprised of one or more parcels, each of which constitutes a
separate tax lot and none of which constitutes a portion of any other tax lot
not constituting Collateral.

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          (f) Such Loan Party has obtained all permits, licenses, variances and
certificates required by applicable law to be obtained and necessary to the use
and operation of each parcel of Real Property, except where the failure to have
such permit, license, certificate or variance would not prohibit the use of such
parcel of Real Property as it is currently being used. The use being made of
each parcel of Real Property conforms with the certificate of occupancy and/or
such other permits, licenses, variances and certificates for such Real Property
and any other restrictions, covenants or conditions affecting such Real
Property, except for any such nonconformity that would not reasonably be
expected to be enjoined or to result in material fines.
          (g) Each developed parcel of Real Property has adequate rights of
access to public ways or reasonable rights to permit the Real Property to be
used for its intended purpose, and is served by installed, operating and
adequate water, electric, gas, telephone, sewer, sanitary sewer and storm drain
facilities as necessary to permit the Loan Party using such Real Property to
conduct its business as currently conducted or to utilize such Real Property for
its intended purpose; (ii) all public utilities necessary to the continued use
and enjoyment of each parcel of Real Property as used and enjoyed on the Closing
Date are located in the public right-of-way abutting the premises or easements
permitting the location of such utilities, and all such utilities are connected
so as to serve such Real Property without passing over other Property except for
land of the utility company providing such utility service or, in the case of
leased Real Property, contiguous land owned by the lessor of such leased Real
Property; (iii) each developed parcel of Real Property, including each leased
parcel, has adequate available parking to meet legal and operating requirements;
(iv) all roads necessary for access to each developed parcel of Real Property to
permit its use for its current purpose have been completed and dedicated to
public use and accepted by all governmental authorities or are the subject of
access easements for the benefit of such Real Property; and (v) no building or
structure constituting Real Property or any appurtenance thereto or equipment
thereon, or the use, operation or maintenance thereof, violates any restrictive
covenant or encroaches on any easement or on any property owned by others, which
violation or encroachment interferes with the use or could materially adversely
affect the value of such building, structure or appurtenance or which
encroachment is necessary for the operation of the business at any Real
Property.
     SECTION 3.08 Subsidiaries. Schedule 3.08 sets forth as of the Closing Date
a list of all Subsidiaries, including each Subsidiary’s exact legal name (as
reflected in such Subsidiary’s certificate or articles of incorporation or other
constitutive documents) and jurisdiction of incorporation or formation and the
percentage ownership interest of PALCO (direct or indirect) therein, and
identifies each Subsidiary that is a Loan Party. The shares of capital stock or
other Equity Interests so indicated on Schedule 3.08 are fully paid and
non-assessable and are owned by PALCO, directly or indirectly, free and clear of
all Liens (other than Liens created under the Security Documents).
     SECTION 3.09 Litigation; Compliance with Laws.
          (a) Except as set forth in Schedule 3.09, there are no actions, suits
or proceedings at law or in equity or by or before any arbitrator or
Governmental Authority now pending or, to the knowledge of PALCO, threatened
against or affecting any Loan Party or any business, property or rights of any
such person (i) that involve any Loan Document or the

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Transactions or (ii) as to which there is a reasonable possibility of an adverse
determination and that, if adversely determined, would reasonably be expected,
individually or in the aggregate, to result in a Material Adverse Effect.
          (b) Since the date of this Agreement, there has been no change in the
status of the matters disclosed on Schedule 3.09 that, individually or in the
aggregate, has resulted in, or materially increased the likelihood of, a
Material Adverse Effect.
          (c) None of the Loan Parties or any of their respective material
properties or assets is in violation of, nor will the continued operation of
their material properties and assets as currently conducted violate, any law,
rule or regulation (including any zoning, building, Environmental Law,
ordinance, code or approval or any building permits) or any restrictions of
record or agreements affecting the Mortgaged Property, or is in default with
respect to any judgment, writ, injunction, decree or order of any Governmental
Authority, where such violation or default, individually or in the aggregate,
would reasonably be expected to result in a Material Adverse Effect.
          (d) Certificates of occupancy and permits are in effect for each
Mortgaged Property as currently constructed, and true and complete copies of
such certificates of occupancy have been delivered to the Administrative Agent
as mortgagee with respect to each Mortgaged Property.
     SECTION 3.10 Agreements.
          (a) Except as set forth in Schedule 3.10, none of the Loan Parties is
a party to any agreement or instrument, or subject to any corporate restriction,
that, individually or in the aggregate, has resulted or would reasonably be
expected to result in a Material Adverse Effect.
          (b) None of the Loan Parties is in default in any manner under any
provision of any indenture or other agreement or instrument evidencing
Indebtedness, or any other material agreement or instrument to which it is a
party or by which it or any of its properties or assets are or may be bound,
where such default, individually or in the aggregate, would reasonably be
expected to result in a Material Adverse Effect. No Default has occurred and is
continuing.
     SECTION 3.11 Federal Reserve Regulations.
          (a) None of the Loan Parties is engaged principally, or as one of its
important activities, in the business of extending credit for the purpose of
buying or carrying Margin Stock.
          (b) No part of the proceeds of any Loan or any Letter of Credit will
be used, whether directly or indirectly, and whether immediately, incidentally
or ultimately, for purchasing or carrying Margin Stock or for the purpose of
purchasing, carrying or trading in any securities under such circumstances as to
involve any Loan Party in a violation of Regulation X or to involve any broker
or dealer in a violation of Regulation T. No Indebtedness being reduced or
retired out of the proceeds of any Loans or Letters of Credit was or will be
incurred for the purpose of purchasing or carrying any Margin Stock. Following
the application of the proceeds of the Loans and the Letters of Credit, Margin
Stock will not constitute more than 25% of the value of the assets of the
aggregate assets of the Loan Parties. None of the transactions

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contemplated by this Agreement will violate or result in the violation of any of
the provisions of the Regulations of the Board, including Regulation T, U or X.
If requested by any Lender or the Administrative Agent, the Borrowers will
furnish to the Administrative Agent and each Lender a statement to the foregoing
effect in conformity with the requirements of FR Form G-3 or FR Form U-1
referred to in Regulation U.
     SECTION 3.12 Investment Company Act; Public Utility Holding Company Act.
None of the Loan Parties is (a) an “investment company” as defined in, or
subject to regulation under, the Investment Company Act of 1940, as amended, or
(b) a “holding company” as defined in, or subject to regulation under, the
Public Utility Holding Company Act of 1935, as amended.
     SECTION 3.13 Use of Proceeds. The Borrowers will use the proceeds of the
Loans solely for general corporate purposes, including the repayment of all
obligations under the Existing Credit Facilities. The Administrative Borrower
will request the issuance of Letters of Credit solely to support payment
obligations incurred in the ordinary course of business by the Borrowers and the
Subsidiary Guarantors.
     SECTION 3.14 Tax Returns. Each of the Loan Parties has timely filed or
timely caused to be filed all material Federal, state, local and foreign tax
returns or materials required to have been filed by it and all such tax returns
and related materials are correct and complete in all material respects. Each of
the Loan Parties has timely paid or timely caused to be paid all material Taxes
due and payable by it and all assessments received by it, except Taxes that are
being contested in good faith by appropriate proceedings and for which the
applicable Loan Party, shall have set aside on its books adequate reserves in
accordance with GAAP. Each of the Loan Parties has made adequate provision in
accordance with GAAP for all Taxes not yet due and payable. No Lien relating to
Taxes has been filed, and to the knowledge of any of the Loan Parties, no Lien
is being asserted or threatened, with respect to any Tax. None of the Loan
Parties (a) intends to treat the Loans or any of the transactions contemplated
by any Loan Document as being a “reportable transaction” (within the meaning of
Treasury Regulation Section 1.6011-4) or (b) is aware of any facts or events
that would result in such treatment.
     SECTION 3.15 No Material Misstatements. Each of the Loan Parties has
disclosed to the Arranger, the Administrative Agent and the Lenders all
agreements, instruments and corporate or other restrictions to which any Loan
Party is subject, and all other matters known to any of them, that, individually
or in the aggregate, would reasonably be expected to result in a Material
Adverse Effect. No other information, report, financial statement, exhibit or
schedule furnished by or on behalf of any Loan Party to the Arranger, the
Administrative Agent or any Lender for use in connection with the transactions
contemplated by the Loan Documents or in connection with the negotiation of any
Loan Document or included therein or delivered pursuant thereto contained,
contains or will contain any material misstatement of fact or omitted, omits or
will omit to state any material fact necessary to make the statements therein,
in the light of the circumstances under which they were, are or will be made,
not misleading; provided that to the extent any such information, report,
financial statement, exhibit or schedule was based upon or constitutes a
forecast or projection, the Borrowers represent only that they acted in good
faith and utilized reasonable assumptions and due care in the preparation of
such information, report, financial statement, exhibit or schedule.

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     SECTION 3.16 Employee Benefit Plans. Each Loan Party and each of its ERISA
Affiliates is in compliance in all material respects with the applicable
provisions of ERISA and the Tax Code and the regulations and published
interpretations thereunder. No ERISA Event has occurred or is reasonably
expected to occur that, when taken together with all other such ERISA Events,
would reasonably be expected to result in material liability of the Borrowers or
any of their ERISA Affiliates.
     SECTION 3.17 Environmental Matters.
          (a) Except as set forth in Schedule 3.17 and except with respect to
any other matters that, individually or in the aggregate, would not reasonably
be expected to result in a Material Adverse Effect, none of the Loan Parties:
     (i) has failed to comply with any Environmental Law or to take, in a timely
manner, all actions necessary to obtain, maintain, renew and comply with any
Environmental Permit, and all such Environmental Permits are in full force and
effect and not subject to any administrative or judicial appeal;
     (ii) has become a party to any governmental, administrative or judicial
proceeding or possesses knowledge of any such proceeding that has been
threatened under Environmental Law;
     (iii) has received notice of, become subject to, or is aware of any facts
or circumstances that could form the basis for, any Environmental Liability
other than those which have been fully and finally resolved and for which no
obligations remain outstanding;
     (iv) possesses knowledge that any Mortgaged Property (A) is subject to any
Lien, restriction on ownership, occupancy, use or transferability imposed
pursuant to Environmental Law or (B) contains or previously contained Hazardous
Materials of a form or type or in a quantity or location that would reasonably
be expected to result in any Environmental Liability;
     (v) possess knowledge that there has been a Release or threat of Release of
Hazardous Materials at or from the Mortgaged Properties (or from any facilities
or other properties formerly owned, leased or operated by any Loan Party) in
violation of, or in amounts or in a manner that could give rise to liability
under, any Environmental Law;
     (vi) has generated, treated, stored, transported, or Released Hazardous
Materials from the Mortgaged Properties (or from any facilities or other
properties formerly owned, leased or operated by any Loan Party) in violation
of, or in a manner or to a location that could give rise to liability under, any
Environmental Law;
     (vii) is aware of any facts, circumstances, conditions or occurrences in
respect of any of the facilities and properties owned, leased or operated that
could (A) form the basis of any action, suit, claim or other judicial or
administrative proceeding relating to liability under or noncompliance with
Environmental Law on the part of any

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Loan Party or (B) interfere with or prevent continued compliance with
Environmental Laws by any Loan Party; or
     (viii) has pursuant to any order, decree, judgment or agreement by which it
is bound or has assumed the Environmental Liability for any Person.
          (b) Since the date of this Agreement, there has been no change in the
status of the matters disclosed on Schedule 3.17 that, individually or in the
aggregate, has resulted in, or materially increased the likelihood of, a
Material Adverse Effect.
     SECTION 3.18 Insurance. Schedule 3.18 sets forth a true, complete and
correct description of all insurance maintained by or on behalf of the Loan
Parties as of the Closing Date. As of the Closing Date, such insurance is in
full force and effect and all premiums have been duly paid. The Loan Parties are
insured by financially sound and reputable insurers and such insurance is in
such amounts and covering such risks and liabilities (and with such deductibles,
retentions and exclusions) as are in accordance with normal and prudent industry
practice. None of the Loan Parties (a) has received notice from any insurer (or
any agent thereof) that substantial capital improvements or other substantial
expenditures will have to be made in order to continue such insurance or (b) has
any reason to believe that it will not be able to renew its existing coverage as
and when such coverage expires or to obtain similar coverage from similar
insurers at a substantially similar cost.
     SECTION 3.19 Security Documents.
          (a) The Guarantee and Collateral Agreement is effective to create in
favor of the Administrative Agent, for the ratable benefit of the Secured
Parties, a legal, valid, binding and enforceable security interest in the
Collateral described therein and proceeds thereof and (i) in the case of the
Pledged Collateral, upon the earlier of (A) when such Pledged Collateral is
delivered to the Administrative Agent and (B) when financing statements in
appropriate form are filed in the offices specified on Schedule 3.19(a) and
(ii) in the case of all other Collateral described therein (other than
Intellectual Property Collateral), when financing statements in appropriate form
are filed in the offices specified on Schedule 3.19(a), the Guarantee and
Collateral Agreement shall constitute a fully perfected Lien on, and security
interest in, all right, title and interest of the Secured Parties in such
Collateral and proceeds thereof, as security for the Obligations, in each case
prior and superior to the rights of any other person (except, in the case of all
Collateral other than Pledged Collateral, with respect to Liens expressly
permitted by Section 6.02).
          (b) Each Intellectual Property Security Agreement is effective to
create in favor of the Administrative Agent, for the ratable benefit of the
Secured Parties, a legal, valid, binding and enforceable security interest in
the Intellectual Property Collateral described therein and proceeds thereof.
When each Intellectual Property Security Agreement is filed in the United States
Patent and Trademark Office and the United States Copyright Office,
respectively, together with financing statements in appropriate form filed in
the offices specified in Schedule 3.19(a), such Intellectual Property Security
Agreement shall constitute a fully perfected Lien on, and security interest in,
all right, title and interest of the grantors thereunder in the Intellectual
Property Collateral and proceeds thereof, as security for the Obligations, in
each case prior and

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superior in right to any other person (except with respect to Liens expressly
permitted by Section 6.02) (it being understood that subsequent recordings in
the United States Patent and Trademark Office and the United States Copyright
Office may be necessary to perfect a lien on registered trademarks, trademark
applications and copyrights acquired by the grantors after the date hereof).
          (c) Each of the Mortgages is effective to create in favor of the
Administrative Agent, for the ratable benefit of the Secured Parties, a legal,
valid, binding and enforceable Lien on, and security interest in, all of the
Loan Parties’ right, title and interest in and to the Mortgaged Property
thereunder and proceeds thereof, and when the Mortgages are filed in the offices
specified on Schedule 3.19(c), each such Mortgage shall constitute a fully
perfected Lien on, and security interest in, all right, title and interest of
the grantors thereof in such Mortgaged Property and proceeds thereof, as
security for the Obligations, in each case prior and superior in right to any
other person (except with respect to Liens expressly permitted by Section 6.02).
     SECTION 3.20 Location of Real Property. Schedule 3.20 lists completely and
correctly as of the Closing Date all Real Property and the addresses thereof,
indicating for each parcel whether it is owned or leased, including in the case
of leased Real Property, the landlord name, lease date and lease expiration
date. The Loan Parties own in fee or have valid leasehold interests in, as the
case may be, all the real property set forth on Schedule 3.20.
     SECTION 3.21 Labor Matters. As of the Closing Date, there are no strikes,
lockouts or slowdowns against any Loan Party pending or, to the knowledge of the
Borrowers, threatened. The hours worked by and payments made to employees of the
Loan Parties have not been in violation of the Fair Labor Standards Act or any
other applicable Federal, state, local or foreign law dealing with such matters.
All payments due from any of the Loan Parties, or for which any claim may be
made against any of the Loan Parties, on account of wages and employee health
and welfare insurance and other benefits, have been paid or accrued as a
liability on the books of the Loan Parties to the extent required by GAAP. The
consummation of the Transactions will not give rise to any right of termination
or right of renegotiation on the part of any union under any collective
bargaining agreement to which any of the Loan Parties is bound.
     SECTION 3.22 Liens. There are no Liens of any nature whatsoever on any of
the properties or assets of any of the Loan Parties (other than Liens expressly
permitted by Section 6.02).
     SECTION 3.23 Intellectual Property. Each of the Loan Parties owns, or is
licensed to use, all trademarks, tradenames, copyrights, patents and other
intellectual property material to its business, and the use thereof by the Loan
Parties does not infringe upon the rights of any other person, except for any
such infringements that, individually or in the aggregate, could not reasonably
be expected to result in a Material Adverse Effect.
     SECTION 3.24 Solvency. Immediately after the consummation of the
Transactions to occur on the Closing Date and immediately following the making
of each Loan (or other extension of credit hereunder) and after giving effect to
the application of the proceeds of each Loan (or other extension of credit
hereunder), (a) the fair value of the assets of each Loan

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Party, at a fair valuation, will exceed its debts and liabilities, subordinated,
contingent or otherwise; (b) the present fair saleable value of the property of
each Loan Party will be greater than the amount that will be required to pay the
probable liability of its debts and other liabilities, subordinated, contingent
or otherwise, as such debts and other liabilities become absolute and matured;
(c) each Loan Party will be able to pay its debts and liabilities, subordinated,
contingent or otherwise, as such debts and liabilities become absolute and
matured; and (d) no Loan Party will have unreasonably small capital with which
to conduct the business in which it is engaged as such business is now conducted
and is proposed to be conducted following the Closing Date.
     SECTION 3.25 Permits. Except where any such failure would not reasonably be
expected to have a Material Adverse Effect: (a) Each Loan Party has obtained and
holds all Permits required in respect of all Real Property and for any other
property otherwise operated by or on behalf of, or for the benefit of, such
person and for the operation of each of its businesses as presently conducted
and as proposed to be conducted, (b) all such Permits are in full force and
effect, and each Loan Party has performed and observed all requirements of such
Permits, (c) no event has occurred that allows or results in, or after notice or
lapse of time would allow or result in, revocation or termination by the issuer
thereof or in any other impairment of the rights of the holder of any such
Permit, (d) no such Permits contain any restrictions, either individually or in
the aggregate, that are materially burdensome to any Loan Party, or to the
operation of any of its businesses or any property owned, leased or otherwise
operated by such person, (e) each Loan Party reasonably believes that each of
its Permits will be timely renewed and complied with, without material expense,
and that any additional Permits that may be required of such Person will be
timely obtained and complied with, without material expense and (f) the
Borrowers have no knowledge or reason to believe that any Governmental Authority
is considering limiting, suspending, revoking or renewing on materially
burdensome terms any such Permit.
     SECTION 3.26 Deposit and Disbursement Accounts. Schedule 3.26 lists all
banks and other financial institutions at which any Loan Party maintains deposit
or other accounts as of the Closing Date and such Schedule correctly identifies
the name, address and telephone number of each depository, the name in which the
account is held, a description of the purpose of the account, and the complete
account number therefor.
ARTICLE IV.
CONDITIONS OF LENDING
          The obligations of the Lenders to make Loans, and the agreement of the
Administrative Agent to assist Administrative Borrower in obtaining Letters of
Credit in accordance with Section 2.23, are subject to the satisfaction of the
following conditions:
     SECTION 4.01 All Credit Events. On the date of each Borrowing, including
each Borrowing of a Swingline Loan, and on the date of each issuance, amendment,
extension or renewal of a Letter of Credit (each such event being called a
“Credit Event”):
     (a) The Administrative Agent shall have received a notice of such Borrowing
as required by Section 2.03 (or such notice shall have been deemed given in
accordance with Section 2.03) or, in the case of the issuance, amendment,
extension or renewal of a

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Letter of Credit, the Administrative Agent shall have received a notice
requesting the issuance, amendment, extension or renewal of such Letter of
Credit as required by Section 2.23(b) or, in the case of the Borrowing of a
Swingline Loan, the Swingline Lender and the Administrative Agent shall have
received a notice requesting such Swingline Loan as required by Section 2.22(b).
     (b) The representations and warranties set forth in each Loan Document
shall be true and correct in all material respects on and as of the date of such
Credit Event with the same effect as though made on and as of such date, except
to the extent such representations and warranties expressly relate to an earlier
date, in which case such representations and warranties shall be true and
correct in all material respects on and as of such earlier date.
     (c) The Borrowers and each other Loan Party shall be in compliance with all
the terms and provisions set forth in each Loan Document on its part to be
observed or performed, and, at the time of and immediately after such Credit
Event, no Event of Default or Default shall have occurred and be continuing.
          Each Credit Event shall be deemed to constitute a joint and several
representation and warranty by each of the Borrowers on the date of such Credit
Event as to the matters specified in paragraphs (b) and (c) of this
Section 4.01.
     SECTION 4.02 First Credit Event. On the Closing Date:
     (a) The Administrative Agent shall have received, on behalf of itself and
the Lenders, a favorable written opinion of (i) Andrews Kurth LLP, counsel for
the Loan Parties, and (ii) each special and local counsel to the Loan Parties as
the Administrative Agent may reasonably request, in each case (A) dated the
Closing Date, (B) addressed to the Administrative Agent, the Arranger and the
Lenders and (C) covering such matters relating to the Loan Documents and the
Transactions as the Administrative Agent shall reasonably request and which are
customary for transactions of the type contemplated herein, and the Loan Parties
hereby request such counsel to deliver such opinions.
     (b) The Administrative Agent shall have received (i) a copy of the
certificate or articles of incorporation or other formation documents, including
all amendments thereto, of each Loan Party, certified as of a recent date by the
Secretary of State of the state of its organization, and a certificate as to the
good standing of each Loan Party as of a recent date, from such Secretary of
State; (ii) a certificate of the Secretary or Assistant Secretary of each Loan
Party dated the Closing Date and certifying (A) that attached thereto is a true
and complete copy of the by-laws of such Loan Party as in effect on the Closing
Date and at all times since a date prior to the date of the resolutions
described in clause (B) below, (B) that attached thereto is a true and complete
copy of resolutions duly adopted by the Board of Directors of such Loan Party
authorizing the execution, delivery and performance of the Loan Documents to
which such person is a party, in the case of the Borrowers, the borrowings
hereunder, in the case of each Loan Party, the granting of the Liens
contemplated to be granted by it under the Security Documents and, in the case
of each Guarantor, the Guaranteeing of the Obligations as contemplated by the
Guarantee

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and Collateral Agreement, and that such resolutions have not been modified,
rescinded or amended and are in full force and effect, (C) that the certificate
or articles of incorporation or other formation documents of such Loan Party
have not been amended since the date of the last amendment thereto shown on the
certificate of good standing furnished pursuant to clause (i) above and (D) as
to the incumbency and specimen signature of each officer executing any Loan
Document or any other document delivered in connection herewith on behalf of
such Loan Party; (iii) a certificate of another officer as to the incumbency and
specimen signature of the Secretary or Assistant Secretary executing the
certificate pursuant to (ii) above; and (iv) such other documents as the
Administrative Agent, the Arranger or the Lenders may reasonably request.
     (c) The Administrative Agent shall have received a certificate, dated the
Closing Date and signed by a Financial Officer of the Borrowers, confirming
compliance with the conditions precedent set forth in paragraphs (a) and (b) of
Section 4.01.
     (d) The Administrative Agent shall have received (i) this Agreement,
executed and delivered by a duly authorized officer of each of the Borrowers,
(ii) the Guarantee and Collateral Agreement, executed and delivered by a duly
authorized officer of each of each Loan Party and Holdings, (iii) a Mortgage
covering each of the Mortgaged Properties, executed and delivered by a duly
authorized officer of each Loan Party thereto, (iv) the Intellectual Property
Security Agreements, executed and delivered by a duly authorized officer of each
Loan Party thereto, (v) if requested by any Lender pursuant to Section 2.04, a
promissory note or notes conforming to the requirements of Section 2.04 and
executed and delivered by a duly authorized officer of the Borrowers and (vi) a
Lender Addendum executed and delivered by each Lender and accepted by the
Borrowers.
     (e) The Administrative Agent, for the ratable benefit of the Secured
Parties, shall have been granted on the Closing Date perfected Liens on the
Collateral (subject, in the case of all Collateral other than Pledged
Collateral, only to Liens expressly permitted by Section 6.02) and shall have
received such other reports, documents and agreements as the Administrative
Agent shall reasonably request and which are customarily delivered in connection
with security interests in real property assets. The Pledged Collateral shall
have been duly and validly pledged under the Guarantee and Collateral Agreement
to the Administrative Agent, for the ratable benefit of the Secured Parties, and
certificates representing such Pledged Collateral, accompanied by instruments of
transfer and stock powers endorsed in blank, shall be in the possession of the
Administrative Agent.
     (f) The Administrative Agent shall have received a duly executed Perfection
Certificate dated on or prior to the Closing Date. The Administrative Agent
shall have received the results of a recent Lien and judgment search in each
relevant jurisdiction with respect to each of the Loan Parties that shall be
Subsidiary Guarantors or shall otherwise have assets that are included in the
Collateral, and such search shall reveal no Liens on any of the assets of each
of the Loan Parties except, in the case of Collateral other than Pledged
Collateral, for Liens expressly permitted by Section 6.02 and except for Liens
to be discharged on or prior to the Closing Date pursuant to documentation
reasonably satisfactory to the Administrative Agent.

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     (g) The Borrowers shall have received not less than $85,000,000 in gross
cash proceeds from borrowings under the Term Loan Agreement.
     (h) After giving effect to the Transactions and the other transactions
contemplated hereby, the Loan Parties shall have outstanding no Indebtedness or
preferred stock other than (i) the Loans and other extensions of credit
hereunder, (ii) borrowings under the Term Loan Agreement and (iii) the
Indebtedness set forth on Schedule 6.01. The Borrowers shall have repaid all
amounts outstanding under the Existing Credit Facilities. The Administrative
Agent shall have received satisfactory evidence that (i) the Existing Credit
Facilities shall have been terminated, all amounts then due and payable or to
become due and payable (other than indemnification obligations not yet having
been requested) thereunder shall have been paid in full and all commitments and
reimbursement obligations thereunder shall have been terminated and
(ii) satisfactory arrangements shall have been made for the termination of all
Liens granted in connection therewith, in each case on terms and conditions
satisfactory to the Administrative Agent.
     (i) The Administrative Agent shall have received (i) the financial
statements described in Section 3.05 and (ii) unaudited combined preliminary
special purpose balance sheets and related statements of income, stockholders’
equity and cash flows of PALCO and Britt prepared in accordance with GAAP
(except for the exclusion of PALCO’s wholly owned subsidiaries Scotia Pacific,
Salmon Creek and Scotia Inn except as losses in excess of investments in
subsidiaries as a component of stockholder’s equity and consolidating the
financial statements thereof, and inventory presented on a FIFO basis), for May,
2006 and year-to-date through May, 2006.
     (j) The Administrative Agent shall have received projections of the Loan
Parties in form and substance satisfactory to the Administrative Agent.
     (k) The Administrative Agent shall have received a certificate from the
chief financial officer of PALCO certifying that each of the Loan Parties, after
giving effect to the Transactions and the other transactions contemplated
hereby, are solvent.
     (l) All material governmental and third party consents and approvals with
respect to the Transactions and the other transactions contemplated hereby to
the extent required shall have been obtained, all applicable appeal periods
shall have expired and there shall be no litigation, governmental,
administrative or judicial action, actual or, to the knowledge of any Loan
Party, threatened, that could reasonably be expected to restrain, prevent or
impose materially burdensome conditions on the Transactions or the other
transactions contemplated hereby.
     (m) The Administrative Agent shall have received all documentation and
other information required by bank regulatory authorities under applicable “know
your customer” and anti-money laundering rules and regulations, including the
U.S.A. Patriot Act.

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     (n) The Administrative Agent shall have received in respect of each
Mortgaged Property a mortgagee’s title insurance policy (or policies) or marked
up unconditional binder for such insurance. Each such policy shall be in a form
and in an amount satisfactory to the Administrative Agent and issued by title
companies satisfactory to the Administrative Agent (including any such title
companies acting as co-insurers or reinsurers, at the option of the
Administrative Agent) (in each such case, a “Title Insurance Company”). The
Administrative Agent shall have received evidence satisfactory to it that all
premiums in respect of each such policy, all charges for mortgage recording tax,
and all related expenses, if any, have been paid. The Administrative Agent shall
have received a copy of all recorded documents referred to, or listed as
exceptions to title in, the title policy or policies referred to above and a
copy of all other material documents affecting the Mortgaged Property.
     (o) If requested by the Administrative Agent, the Administrative Agent
shall have received (i) a policy of flood insurance that (A) covers any parcel
of improved Mortgaged Property that is located in a flood zone and (B) is
written in an amount not less than the outstanding principal amount of the
indebtedness secured by such Mortgage that is reasonably allocable to such
Mortgaged Property or the maximum limit of coverage made available with respect
to the particular type of property under the National Flood Insurance Act of
1968, whichever is less.
     (p) The Administrative Agent shall have received evidence satisfactory to
the Administrative Agent demonstrating that after giving effect to the
Transactions, Borrowing Availability shall be at least $20,000,000.
     (q) The Administrative Agent shall have received evidence satisfactory to
the Administrative Agent that Holdings has made a loan on the Closing Date to
Palco in an aggregate amount equal to $10,000,000 evidenced by the Subordinated
Intercompany Note.
     (r) Borrowers shall have delivered all documents listed on, and taken all
actions set forth on and satisfied all other conditions precedent listed in the
Closing Checklist attached hereto as Exhibit I, all in form and substance, or in
a manner, satisfactory to the Administrative Agent and Lenders.
ARTICLE V.
AFFIRMATIVE COVENANTS
          Each of the Borrowers covenants and agrees with each Lender that so
long as this Agreement shall remain in effect and until the Commitments have
been terminated and the principal of and interest on each Loan, all Fees and all
other expenses or amounts payable under any Loan Document shall have been paid
in full and all Letters of Credit have been canceled or have expired and all
amounts drawn thereunder have been reimbursed in full, each of the Borrowers
will, and will cause each of the Loan Parties to:

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     SECTION 5.01 Existence; Businesses and Properties.
          (a) Do or cause to be done all things necessary to preserve, renew and
keep in full force and effect its legal existence, except as otherwise expressly
permitted under Section 6.05.
          (b) Do or cause to be done all things necessary to obtain, preserve,
renew, extend and keep in full force and effect the rights, licenses, permits,
franchises, authorizations, patents, copyrights, trademarks and trade names
material to the conduct of its business; maintain and operate such business in
substantially the manner in which it is presently conducted and operated; comply
in all material respects with all applicable laws, rules, regulations and
decrees and orders of any Governmental Authority, whether now in effect or
hereafter enacted; and at all times maintain and preserve all property material
to the conduct of such business and keep such property in good repair, working
order and condition and from time to time make, or cause to be made, all needful
and proper repairs, renewals, additions, improvements and replacements thereto
necessary in order that the business carried on in connection therewith may be
properly conducted at all times.
     SECTION 5.02 Insurance. Maintain the insurance required by the Guarantee
and Collateral Agreement.
     SECTION 5.03 Obligations and Taxes. Pay and discharge promptly when due all
material taxes, assessments and governmental charges or levies imposed upon it
or upon its income or profits or in respect of its property, before the same
shall become delinquent or in default, as well as all lawful claims for labor,
materials and supplies or otherwise that, if unpaid, might give rise to a Lien
upon such properties or any part thereof; provided, however, that such payment
and discharge shall not be required with respect to any such tax, assessment,
charge, levy or claim so long as the validity or amount thereof shall be
contested in good faith by appropriate proceedings and the Borrowers or the
applicable Subsidiary shall have set aside on its books adequate reserves with
respect thereto in accordance with GAAP and such contest operates to suspend
collection of the contested obligation, tax, assessment or charge and
enforcement of a Lien and, in the case of a Mortgaged Property, there is no risk
of forfeiture of such property.
     SECTION 5.04 Financial Statements, Reports, etc. Furnish to the
Administrative Agent and each Lender:
     (a) within 90 days after the end of each fiscal year, the balance sheet and
related statements of income, stockholders’ equity and cash flows showing the
financial condition of the Borrowers on a combined basis as of the close of such
fiscal year and the results of its operations and the operations of the
Borrowers on a combined basis during such year, together with comparative
figures for the immediately preceding fiscal year, all audited by an independent
public accountant of recognized national standing and accompanied by an opinion
of such accountants (which shall not be qualified in any material respect except
for a going concern qualification and as indicated below) to the effect that
such financial statements fairly present the financial condition and results of
operations of the Borrowers in accordance with GAAP (except for the exclusion of
Scotia

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Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments
in subsidiaries as a component of stockholder’s equity unless otherwise
indicated or the context indicates otherwise) consistently applied;
     (b) within 45 days after the end of each of the first three fiscal quarters
of each fiscal year, the balance sheet and related statements of income,
stockholders’ equity and cash flows showing the financial condition of the
Borrowers on a combined basis as of the close of such fiscal quarter and the
results of its operations and the operations of the Borrowers during such fiscal
quarter and the then elapsed portion of the fiscal year, and commencing April,
2006, comparative figures for the same periods in the immediately preceding
fiscal year, all certified by one of PALCO’s Financial Officers as fairly
presenting the financial condition and results of operations of the Borrowers on
a combined basis in accordance with GAAP (except for the exclusion of Scotia
Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments
in subsidiaries as a component of stockholder’s equity and consolidating the
financial statements thereof, and inventory presented on a FIFO basis)
consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes;
     (c) within 30 days after the end of each fiscal month of each fiscal
quarter, (i) the combined balance sheet and related statements of income and
cash flows showing the financial condition of the Borrowers during such fiscal
month and the then elapsed portion of the fiscal year, all certified by one of
its Financial Officers as fairly presenting the financial condition and results
of operations of the Borrowers in accordance with GAAP (except for the exclusion
of Scotia Pacific, Salmon Creek and Scotia Inn except as losses in excess of
investments in subsidiaries as a component of stockholder’s equity and
consolidating the financial statements thereof, and inventory presented on a
FIFO basis) consistently applied, subject to normal year-end audit adjustments
and the absence of footnotes and (ii) the separate, internally prepared
entity-only balance sheet and related statements of income and cash flows
showing the financial condition of each Borrower, and the eliminations reflected
in the corresponding financial statements delivered pursuant to the preceding
clause (i), for such month and the then-elapsed portion of the fiscal year (and,
commencing with such financial statements for the month of April, 2006, for the
corresponding month and elapsed portion of the preceding fiscal year) all
certified by one of its Financial Officers as fairly presenting the financial
condition and results of operations of the Borrowers in accordance with GAAP
(except for the exclusion of PALCO’s wholly owned subsidiaries Scotia Pacific,
Salmon Creek and Scotia Inn except as losses in excess of investments in
subsidiaries as a component of stockholder’s equity and consolidating the
financial statements thereof, and inventory presented on a FIFO basis)
consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes;
     (d) concurrently with any delivery of financial statements under paragraph
(a), (b) or (c) above, (i) a certificate of the accounting firm (in the case of
paragraph (a)) or Financial Officer (in the case of paragraph (b)) opining on or
certifying such statements and certifying that no Event of Default or Default
has occurred or, if such an Event of Default or Default has occurred, specifying
the nature and extent thereof and any corrective action taken or proposed to be
taken with respect thereto (which certificate,

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when furnished by an accounting firm, may be limited to providing negative
assurances regarding financial covenants related to accounting matters and
disclaim responsibility for legal interpretations), (ii) a certificate executed
by any officer of PALCO setting forth computations in reasonable detail
satisfactory to the Administrative Agent demonstrating compliance with the
covenants contained in Sections 6.10, 6.11, 6.12 and 6.13, (iii) (x) a
management report, in reasonable detail, signed by the chief financial officer
of PALCO, describing the operations and financial condition of the Loan Parties
and their Subsidiaries for the month and the portion of the fiscal year then
ended (or for the fiscal year then ended in the case of annual financial
statements) and (y) a report setting forth in comparative form the corresponding
figures for the corresponding periods of the previous fiscal year and the
corresponding figures from the most recent budget for the applicable periods
delivered to the Administrative Agent (and discussing the reasons for any
significant variations from such budget), (iv) a report, in form reasonably
acceptable to the Administrative Agent, setting forth the Asset Sales which have
occurred during such period and since the Closing Date and a description of the
status of the sale process with respect to all other Assets Sales and (v) (v) a
report, in form reasonably acceptable to the Administrative Agent, in reasonable
detail, signed by the chief financial officer of PALCO, describing (A) the
occurrence of any matter that could reasonably be expected to result in
Environmental Liability to Holdings, the Borrower or its Subsidiaries in excess
of $5,000,000, (B) the status of Borrower’s and its Subsidiaries’ compliance
with the matters discussed in the “Water Quality” subsection of Schedule 3.17,
including without limitation (1) TMDL’s, (2) waste discharge reporting,
(3) operational requirements and (4) WWDR’s (including the results of the
required monitoring program and any modifications or amendments thereto), and
(C) the occurrence of any Environmental Liability pursuant to Senate Bill 810 or
related to a violation of the Borrower’s Habitat Conservation Plan or other
plans and/or Permits related to listed species and (v) a report, in form
reasonably acceptable to the Administrative Agent, with respect to the
Annexation process listing all applicable material objections, milestones,
changes in scheduling, new governmental requirements and all other issues
material to the Annexation process, and generally setting forth the status and
progress of the Annexation since the delivery of the prior financial statements;
     (e) at least 30 days prior to the end of each fiscal year of PALCO, a
detailed consolidated budget for the following fiscal year (including a
projected consolidated and consolidating balance sheet and related statements of
projected operations and cash flows as of the end of and for such following
fiscal year and setting forth the assumptions used for purposes of preparing
such budget) and, promptly when available, any significant revisions of such
budget;
     (f) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by PALCO
or any Subsidiary with the Securities and Exchange Commission, or any
Governmental Authority succeeding to any or all of the functions of said
Commission, or with any national securities exchange;
     (g) promptly after the receipt thereof by either PALCO or any of the
Subsidiaries, a copy of any final “management letter” received by any such
person from

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its certified public accountants and the management’s response thereto (it being
understood that the term “management letter” does not include communications
from such public accountants to an audit committee that by their terms expressly
state that they may not be provided to third parties);
     (h) promptly, upon the Administrative Agent’s request, and in any event no
less frequently than noon New York time on the third (3rd) Business Day after
the end of each week, each of the following reports, each of which shall be
prepared by Borrowers as of the last day of the immediately preceding week:
(A) a Borrowing Base Certificate with respect to each Borrower, accompanied by
such supporting detail and documentation as shall be requested by the
Administrative Agent in its reasonable discretion; (B) with respect to each
Borrower, a summary of Inventory by location and type with a supporting
perpetual Inventory report, in each case accompanied by such supporting detail
and documentation as shall be requested by the Administrative Agent in its
reasonable discretion; and (C) with respect to each Borrower, a trial balance
showing Accounts outstanding aged from invoice date as follows: 1 to 30 days, 31
to 60 days, 61 to 90 days, 91 days to 120 days and 120 days or more, accompanied
by such supporting detail and documentation as shall be requested by the
Administrative Agent in its reasonable discretion;
     (i) on a weekly basis or at such more frequent intervals as the
Administrative Agent may request from time to time (together with a copy of all
or any part of such delivery requested by any Lender in writing after the
Closing Date), collateral reports with respect to each Borrower, including all
additions and reductions (cash and non-cash) with respect to Accounts of each
Borrower, in each case accompanied by such supporting detail and documentation
as shall be requested by Agent in its reasonable discretion each of which shall
be prepared by the applicable Borrower as of the last day of the immediately
preceding week or the date 2 days prior to the date of any request;
     (j) at the time of delivery of each of the monthly financial statements
delivered pursuant to Section 5.04(c): (A) a reconciliation of the most recent
monthly Borrowing Base, general ledger and month-end Inventory reports of each
Borrower to each Borrower’s general ledger and monthly financial statements
delivered pursuant to Section 5.04(c), in each case accompanied by such
supporting detail and documentation as shall be requested by the Administrative
Agent in its reasonable discretion; (B) a reconciliation of the perpetual
inventory by location to each Borrower’s most recent monthly Borrowing Base
Certificate, general ledger and monthly financial statements delivered pursuant
to Section 5.04(c), in each case accompanied by such supporting detail and
documentation as shall be requested by the Administrative Agent in its
reasonable discretion; (C) an aging of accounts payable and a reconciliation of
that accounts payable aging to each Borrower’s general ledger and monthly
financial statements delivered pursuant to Section 5.04(c), in each case
accompanied by such supporting detail and documentation as shall be requested by
the Administrative Agent in its reasonable discretion; and (D) a reconciliation
of the outstanding Loans to each Borrower’s general ledger and monthly financial
statements delivered pursuant to Section 5.04(c), in each case accompanied by
such supporting detail and documentation as shall be requested by the
Administrative Agent in its reasonable discretion;

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     (k) from time to time, if Administrative Agent determines in its sole
discretion that obtaining appraisals is necessary or appropriate for any reason,
the Administrative Agent will, at Borrower’s expense, obtain appraisal reports
in form and substance and from appraisers satisfactory to the Administrative
Agent stating the then current market values of all or any portion of the Real
Property and personal property, including Appraisals of Borrowers’ Inventory,
owned by any of the Loan Parties;
     (l) Borrowers, at their own expense, shall deliver to the Administrative
Agent the results of each physical verification, if any, that any Loan Party may
in their discretion have made, or caused any other person to have made on their
behalf, of all or any portion of their Inventory (and, if a Default or an Event
of Default has occurred and is continuing, Borrowers shall, upon the request of
the Administrative Agent, conduct, and deliver the results of, such physical
verifications as the Administrative Agent may require); and
     (m) promptly, from time to time, such other information regarding the
operations, business affairs and financial condition of any Loan Party or Scotia
Pacific, or compliance with the terms of any Loan Document, as the
Administrative Agent or any Lender may reasonably request.
     SECTION 5.05 Litigation and Other Notices. Furnish to the Administrative
Agent and each Lender prompt written notice of the following:
     (a) any Event of Default or Default, specifying the nature and extent
thereof and the corrective action (if any) taken or proposed to be taken with
respect thereto;
     (b) the filing or commencement of, or any threat or notice of intention of
any person to file or commence, any action, suit or proceeding, whether at law
or in equity or by or before any arbitrator or Governmental Authority, against
any Loan Party or Scotia Pacific that would reasonably be expected to result in
a Material Adverse Effect;
     (c) the occurrence of any ERISA Event described in clause (b) of the
definition thereof or any other ERISA Event that, alone or together with any
other ERISA Events that have occurred, would reasonably be expected to result in
liability of any Loan Party or Scotia Pacific in an aggregate amount exceeding
$1,000,000; and
     (d) any development that has resulted in, or would reasonably be expected
to result in, a Material Adverse Effect.
     SECTION 5.06 Information Regarding Collateral.
          (a) Furnish to the Administrative Agent prompt written notice of any
change (i) in any Loan Party’s corporate name or in any trade name used to
identify it in the conduct of its business or in the ownership of its
properties, (ii) in the location of any Loan Party’s chief executive office, its
principal place of business, any office in which it maintains books or records
relating to Collateral owned by it or any office or facility at which Collateral
owned by it is located (including the establishment of any such new office or
facility), (iii) in any Loan Party’s identity or corporate structure or (iv) in
any Loan Party’s Federal Taxpayer Identification

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Number. Each of the Borrowers agrees not to effect or permit any change of its
corporate or identity or state of organization unless all filings have been made
under the UCC or otherwise and all other actions have been taken that are
required in order for the Administrative Agent to continue at all times
following such change to have a valid, legal and perfected security interest in
all the Collateral. The Administrative Borrower also agrees promptly to notify
the Administrative Agent if any material portion of the Collateral is damaged or
destroyed.
          (b) Deliver to the Administrative Agent, each year, at the time of
delivery of the annual financial statements with respect to the preceding fiscal
year pursuant to Section 5.04(a), a certificate of a Financial Officer setting
forth the information required pursuant to Section I of the Perfection
Certificate or confirming that there has been no change in such information
since the date of the Perfection Certificate delivered on the Closing Date or
the date of the most recent certificate delivered pursuant to this Section.
     SECTION 5.07 Maintaining Records; Access to Properties and Inspections;
Environmental Assessments.
          (a) Keep proper books of record and account in which full, true and
correct entries in conformity with GAAP and all requirements of law are made of
all dealings and transactions in relation to its business and activities. Each
of the Borrowers will, and will cause each of the Subsidiaries to, permit any
representatives designated by the Administrative Agent or any Lender to visit
and inspect the financial records and the properties of the Loan Party, and
conduct field examinations relating to the Collateral, at reasonable times and
as often as reasonably requested and to make extracts from and copies of such
financial records, and permit any representatives designated by the
Administrative Agent or any Lender to discuss the affairs, finances and
condition of the Loan Parties with the officers thereof and independent
accountants therefor.
          (b) In the event that the Administrative Agent or any Lender shall
have reason to believe that Hazardous Materials have been Released or are
threatened to be Released on or from any Mortgaged Property or other facility of
any Loan Party or that any such property or facility is not being operated in
compliance with applicable Environmental Law, the Administrative Agent may, at
its election and after reasonable notice to the Administrative Borrower, retain
an independent engineer or other qualified environmental consultant to evaluate
whether Hazardous Materials are present in the soil, groundwater, or surface
water at such Mortgaged Property or facility or whether the facilities or
properties are being operated and maintained in compliance with applicable
Environmental Laws. Such environmental assessments may include detailed visual
inspections of the Mortgaged Property or facility, including any and all storage
areas, storage tanks, drains, dry wells and leaching areas, and the taking of
soil samples, surface water samples and groundwater samples as well as such
other reasonable investigations or analyses as are necessary. The scope of any
such environmental assessments under this paragraph shall be determined in the
sole discretion of the Administrative Agent. Each of the Borrowers shall, and
shall cause each of the Subsidiaries to, cooperate in the performance of any
such environmental assessment and permit any such engineer or consultant
designated by the Administrative Agent to have full access to each property or
facility at reasonable times and after reasonable notice to the Administrative
Borrower of the plans to

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conduct such an environmental assessment. All environmental assessments
conducted pursuant to this paragraph shall be at the Borrowers’ sole cost and
expense.
     SECTION 5.08 Use of Proceeds. Use the proceeds of the Loans and request the
issuance of Letters of Credit only for the purposes set forth in Section 3.13.
     SECTION 5.09 Additional Collateral, etc.
          (a) With respect to any Collateral acquired after the Closing Date
(other than the Settlement Property) or, in the case of inventory or equipment,
any Collateral (having a value in excess of $25,000) moved after the Closing
Date by any other Loan Party (other than any Collateral described in paragraphs
(b) or (c) of this Section 5.09) as to which the Administrative Agent, for the
benefit of the Secured Parties, does not have a perfected security interest,
promptly (and, in any event, within 10 days following the date of such
acquisition) (i) execute and deliver to the Administrative Agent such amendments
to the Guarantee and Collateral Agreement or such other Security Documents as
the Administrative Agent deems necessary or advisable to grant to the
Administrative Agent, for the benefit of the Secured Parties, a security
interest in such Collateral and (ii) take all actions necessary or advisable to
grant to, or continue on behalf of, the Administrative Agent, for the benefit of
the Secured Parties, a perfected security interest in such Collateral, including
the filing of UCC financing statements in such jurisdictions as may be required
by the Guarantee and Collateral Agreement or by law or as may be requested by
the Administrative Agent.
          (b) With respect to any fee interest in any Collateral consisting of
Real Property (other than the Settlement Property) or any material lease of
Collateral consisting of Real Property acquired or leased after the Closing Date
by the Borrowers or any other Loan Party, promptly (and, in any event, within
10 days following the date of such acquisition) (i) execute and deliver a first
priority Mortgage in favor of the Administrative Agent (subject only to Liens
permitted by Section 6.02), for the benefit of the Secured Parties, covering
such real property and complying with the provisions herein and in the Security
Documents, (ii) provide the Secured Parties with title and extended coverage
insurance in an amount at least equal to the purchase price of such Real
Property (or such other amount as the Administrative Agent shall reasonably
specify), surveys, and if applicable, flood insurance, lease estoppel
certificates, memoranda or amendments, all in accordance with the standards for
deliveries contemplated on the Closing Date, (iii) if requested by the
Administrative Agent, deliver to the Administrative Agent legal opinions
relating to the matters described above, which opinions shall be in form and
substance, and from counsel, reasonably satisfactory to the Administrative Agent
and (iv) deliver to the Administrative Agent a notice identifying, and upon the
Administrative Agent’s request, provide a copy of, the consultant’s reports,
environmental site assessments or other documents relied upon by any Loan Party
to determine that any such real property included in such Collateral does not
contain Hazardous Materials of a form or type or in a quantity or location that
could reasonably be expected to result in a material Environmental Liability.
          (c) With respect to any Subsidiary created or acquired after the
Closing Date by any Loan Party, promptly (and, in any event, within 10 days
following such creation or the date of such acquisition) (i) execute and deliver
to the Administrative Agent such amendments to the Guarantee and Collateral
Agreement as the Administrative Agent deems necessary or

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advisable to grant to the Administrative Agent, for the benefit of the Secured
Parties, a valid, perfected first priority security interest in the Equity
Interests in such new Subsidiary that are owned by any Loan Party (subject only
to Liens permitted by Section 6.02), (ii) deliver to the Administrative Agent
the certificates, if any, representing such Equity Interests, together with
undated stock powers, in blank, executed and delivered by a duly authorized
officer of the Borrowers or such Subsidiary, as the case may be, (iii) cause
such new Subsidiary (A) to become a party to the Guarantee and Collateral
Agreement (and provide Guarantees of the Obligations) and the Intellectual
Property Security Agreements and (B) to take such actions necessary or advisable
to grant to the Administrative Agent, for the benefit of the Secured Parties, a
perfected first priority security interest in the Collateral described in the
Guarantee and Collateral Agreement and the Intellectual Property Security
Agreement with respect to such new Subsidiary, including the recording of
instruments in the United States Patent and Trademark Office and the United
States Copyright Office and the filing of UCC financing statements in such
jurisdictions as may be required by the Guarantee and Collateral Agreement, the
Intellectual Property Security Agreement or by law or as may be requested by the
Administrative Agent and (iv) if requested by the Administrative Agent, deliver
to the Administrative Agent legal opinions relating to the matters described
above, which opinions shall be in form and substance, and from counsel,
reasonably satisfactory to the Administrative Agent.
     SECTION 5.10 Further Assurances. From time to time duly authorize, execute
and deliver, or cause to be duly authorized, executed and delivered, such
additional instruments, certificates, financing statements, agreements or
documents, and take all such actions (including filing UCC and other financing
statements), as the Administrative Agent may reasonably request, for the
purposes of implementing or effectuating the provisions of this Agreement and
the other Loan Documents, or of more fully perfecting or renewing the rights of
the Administrative Agent and the Secured Parties with respect to the Collateral
(or with respect to any additions thereto or replacements or proceeds or
products thereof or with respect to any other property or assets hereafter
acquired by or any of the Loan Parties which may be deemed to be part of the
Collateral) pursuant hereto or thereto. Upon the exercise by the Administrative
Agent or any Lender of any power, right, privilege or remedy pursuant to this
Agreement or the other Loan Documents which requires any consent, approval,
recording, qualification or authorization of any Governmental Authority, each of
the Borrowers will execute and deliver, or will cause the execution and delivery
of, all applications, certifications, instruments and other documents and papers
that the Administrative Agent or such Lender may be required to obtain from any
Loan Party for such governmental consent, approval, recording, qualification or
authorization.
     SECTION 5.11 [Intentionally Omitted]
     SECTION 5.12 Cash Management Systems; Bank Accounts. Borrowers shall, and
shall cause each other Loan Party to, enter into Control Agreements with respect
to each deposit account maintained by any Loan Party (other than any payroll
account so long as such payroll account is a zero balance account) as of or
after the Closing Date. Each such deposit account control agreement shall be in
form and substance satisfactory to the Administrative Agent. Borrowers shall,
and shall cause any Subsidiary to, provide prior written notice to the
Administrative Agent before directly or indirectly establishing any new bank
account and prior to the establishment thereof, the Administrative Agent,
Borrowers or such Subsidiary and the bank at which the account is to be opened
shall enter into a Control Agreement regarding such

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bank account pursuant to which such bank (i) acknowledges the security interest
of the Administrative Agent in such bank account, (ii) agrees to comply with
instructions originated by the Administrative Agent directing disposition of the
funds in the bank account without further consent from Borrowers, and
(iii) agrees to subordinate and limit any security interest the bank may have in
the bank account on terms satisfactory to the Administrative Agent.
     SECTION 5.13 Landlords’ Agreements, Mortgagee Agreements, Bailee Letters
and Real Estate Purchases. Upon the request of the Administrative Agent, each
Loan Party shall use reasonable efforts to obtain a landlord’s agreement,
mortgagee agreement or bailee letter, as applicable, from the lessor of each
leased property (other than the lessor of the leased property which the mill
owned by Britt on the Closing Date is on), mortgagee of owned property or bailee
with respect to any warehouse, processor or converter facility or other location
where Collateral is stored or located, which agreement or letter shall contain a
waiver or subordination of all Liens or claims that the landlord, mortgagee or
bailee may assert against the Collateral at that location, and shall otherwise
be reasonably satisfactory in form and substance to the Administrative Agent.
With respect to such locations or warehouse space leased, owned or where
Collateral is stored or located as of the Closing Date and thereafter, if the
Administrative Agent has not received a landlord or mortgagee agreement or
bailee letter as of the Closing Date (or, if later, as of the date such location
is acquired, leased or Collateral stored or located), the Eligible Inventory at
that location shall, in the Administrative Agent’s discretion, be subject to
such Reserves as may be established by the Administrative Agent in its
reasonable credit judgment. After the Closing Date, no real property or
warehouse space shall be leased by any Loan Party and no Inventory shall be
shipped to a processor or converter under arrangements established after the
Closing Date (excluding renewals of existing leases and arrangements) without
the prior written consent of the Administrative Agent (which consent, in the
Administrative Agent’s discretion, may be conditioned upon the establishment of
Reserves acceptable to the Administrative Agent) or, unless and until a
satisfactory landlord agreement or bailee letter, as appropriate, shall first
have been obtained with respect to such location. Each Loan Party shall and
shall cause its Subsidiaries to timely and fully pay and perform their
obligations under all leases and other agreements with respect to each leased
location or public warehouse where any Collateral is or may be located (other
than Collateral in an aggregate amount for all such locations not to exceed
$100,000 in the aggregate).
     SECTION 5.14 Specified Asset Sales. On or prior to the applicable dates set
forth on Schedule 5.14, the applicable Loan Party shall sell each applicable
Specified Asset for cash consideration in an amount not less than the amount
specified opposite such Specified Asset on Schedule 5.14. In addition, during
the first ninety (90) days after the Closing Date, each sale of a Specified
Asset shall be done in consultation with the Administrative Agent.
ARTICLE VI.
NEGATIVE COVENANTS
          Each of the Borrowers covenants and agrees with each Lender that, so
long as this Agreement shall remain in effect and until the Commitments have
been terminated and the principal of and interest on each Loan, all Fees and all
other expenses or amounts payable under any Loan Document have been paid in full
and all Letters of Credit have been cancelled or have

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expired and all amounts drawn thereunder have been reimbursed in full, neither
the Borrowers will, nor will they cause or permit Loan Party to:
     SECTION 6.01 Indebtedness. Incur, create, assume or permit to exist any
Indebtedness, except:
     (a) Indebtedness existing on the date hereof and set forth in Schedule 6.01
and any Permitted Refinancing Indebtedness in respect of any such Indebtedness;
     (b) Indebtedness created hereunder and under the other Loan Documents;
     (c) unsecured intercompany Indebtedness of the Borrowers to the extent
permitted by Section 6.04(f) so long as such Indebtedness is evidenced by a
subordinated note in form and substance satisfactory to the Administrative
Agent;
     (d) Indebtedness of any Loan Party incurred to finance the acquisition,
construction or improvement of any fixed or capital assets, and any Permitted
Refinancing Indebtedness in respect of any such Indebtedness; provided that
(i) such original Indebtedness is incurred prior to or within 90 days after such
acquisition or the completion of such construction or improvement and (ii) the
aggregate principal amount of Indebtedness permitted by this Section 6.01(d),
when combined with the aggregate principal amount of all Capital Lease
Obligations incurred pursuant to Section 6.01(e), shall not exceed $2,500,000 at
any time outstanding;
     (e) Capital Lease Obligations in an aggregate principal amount, when
combined with the aggregate principal amount of all Indebtedness incurred
pursuant to Section 6.01(d), not exceeding $2,500,000 at any time outstanding;
     (f) Indebtedness of the Borrowers under the Term Loan Agreement in an
aggregate principal amount not to exceed $85,000,000 and Indebtedness of the
Guarantors under any Guarantees in respect thereof and any Permitted Refinancing
Indebtedness in respect of any such Indebtedness;
     (g) Indebtedness under performance bonds or with respect to workers’
compensation claims, in each case incurred in the ordinary course of business;
     (h) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business; provided that such
Indebtedness is promptly covered by a Loan Party; and
     (i) (A) other unsecured Indebtedness of Palco to Holdings in an aggregate
amount not to exceed $36,000,000 outstanding on the Closing Date (plus such
other unsecured Indebtedness owed by Palco to Holdings incurred pursuant to
Section 6.16) and issued in accordance with the terms of the Subordinated
Intercompany Note; provided, however that such unsecured Indebtedness does not
mature, and no payments of any kind may be made on or with respect thereto,
until six (6) months after the

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Maturity Date and (B) other unsecured Indebtedness of the Borrowers and the
Subsidiaries in an aggregate amount not to exceed $500,000 at any time
outstanding.
     SECTION 6.02 Liens. Create, incur, assume or permit to exist any Lien on
any property or assets (including Equity Interests or other securities of any
person, including any Subsidiary) now owned or hereafter acquired by it or on
any income or revenues or rights in respect of any thereof, except:
     (a) Liens on property or assets of the Borrowers and the Subsidiaries
existing on the date hereof and set forth in Schedule 6.02; provided that such
Liens shall secure only those obligations which they secure on the date hereof
and refinancings, extensions, renewals and replacements thereof permitted
hereunder;
     (b) any Lien created under the Loan Documents;
     (c) Liens for Taxes not yet due or which are being contested in compliance
with Section 5.03;
     (d) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s,
lumberman’s or other like Liens arising in the ordinary course of business and
securing obligations that are not due and payable or which are being contested
in compliance with Section 5.03;
     (e) pledges and deposits made in the ordinary course of business in
compliance with workmen’s compensation, unemployment insurance and other social
security laws or regulations;
     (f) deposits in an amount not to exceed $500,000 in aggregate to secure the
performance of bids, trade contracts (other than for Indebtedness), leases
(other than Capital Lease Obligations), statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
     (g) zoning restrictions, easements, rights-of-way, restrictions on use of
real property and other similar encumbrances incurred in the ordinary course of
business which, in the aggregate, are not substantial in amount and do not
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the business of any Loan Party or the ability of
any Loan Party to utilize such property for its intended purpose;
     (h) purchase money security interests in real property, improvements
thereto or other fixed or capital assets hereafter acquired (or, in the case of
improvements, constructed) by the Borrowers or any Subsidiary; provided that
(i) such security interests secure Indebtedness permitted by Section 6.01,
(ii) such security interests are incurred, and the Indebtedness secured thereby
is created, within 90 days after such acquisition (or construction) and
(iii) such security interests do not apply to any other property or assets of
any Loan Party;

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     (i) judgment Liens securing judgments not constituting an Event of Default
under Article VII;
     (j) any interest or title of a lessor or sublessor under any lease entered
into by a Loan Party in the ordinary course of business and covering only the
assets so leased;
     (k) Liens securing the Indebtedness of the Borrowers under the Term Loan
Agreement and Indebtedness of the Subsidiary Guarantors under any Guarantees in
respect of the Term Loan Agreement as long as such Indebtedness is permitted
under Section 6.01(f);
     (l) Liens on cash deposits and other funds maintained with a depositary
institution, in each case arising in the ordinary course of business by virtue
of any statutory or common law provision relating to banker’s liens; provided
that (i) the applicable deposit account is not a dedicated cash collateral
account and is not subject to restrictions against access by any Loan Party in
excess of those set forth in regulations promulgated by the Board and (ii) the
applicable deposit account is not intended by any Loan Party to provide
collateral or security to the applicable depositary institution or any other
person;
          (m) Liens on cash or deposit accounts to secure letters of credit
incurred in connection with the Existing Credit Facility; and
     (n) Liens reflected on any mortgagee policy of title insurance issued on or
prior to the Closing Date in favor of Administrative Agent or the Lenders in
connection with the Mortgages.
     SECTION 6.03 Sale and Lease-Back Transactions. Enter into any arrangement,
directly or indirectly, with any person whereby it shall sell or transfer any
property, real or personal or mixed, used or useful in its business, whether now
owned or hereafter acquired, and thereafter rent or lease such property or other
property which it intends to use for substantially the same purpose or purposes
as the property being sold or transferred unless (a) the sale of such property
is permitted by Section 6.05 and (b) any Capital Lease Obligations or Liens
arising in connection therewith are permitted by Sections 6.01 and 6.02,
respectively.
     SECTION 6.04 Investments, Loans and Advances. Purchase, hold or acquire any
Equity Interests, evidences of indebtedness or other securities of, make or
permit to exist any loans or advances or capital contributions to, or make or
permit to exist any investment or any other interest in, any other person (all
of the foregoing, “Investments”), except:
     (a) Permitted Investments;
     (b) Investments received in connection with the bankruptcy or
reorganization of, or settlement of delinquent accounts and disputes with,
customers and suppliers, in each case in the ordinary course of business;
     (c) the Loan Parties may make loans and advances in the ordinary course of
business to their respective employees so long as the aggregate principal amount
thereof

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at any time outstanding (determined without regard to any write-downs or
write-offs of such loans and advances) shall not exceed $200,000;
     (d) Investments existing on the date hereof and set forth on Schedule 6.04;
     (e) extensions of trade credit in the ordinary course of business;
     (f) Investments by a Borrower in another Borrower pursuant to cash
management procedures consistent with those in existence on the Closing Date;
     (g) Investments after the Closing Date in Scotia Pacific in an aggregate
amount not to exceed $5,000,000; and
          (h) in addition to Investments permitted by paragraphs (a) through
(g) above, additional Investments by the Loan Parties so long as the aggregate
amount invested, loaned or advanced pursuant to this paragraph (f) (determined
without regard to any write-downs or write-offs of such investments, loans and
advances) does not exceed $500,000 in the aggregate.
     SECTION 6.05 Mergers, Consolidations, Sales of Assets and Acquisitions.
          (a) Merge into or consolidate with any other person, or permit any
other person to merge into or consolidate with it, or liquidate or dissolve, or
sell, transfer, lease, issue or otherwise dispose of (in one transaction or in a
series of transactions) all or substantially all the assets (whether now owned
or hereafter acquired) of any Loan Party or any of the Equity Interests of any
Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a
series of transactions) all or any substantial part of the assets of any other
person, except for (i) the purchase and sale by the Borrowers or any Subsidiary
of inventory in the ordinary course of business, (ii) the sale or discount by
the Borrowers or any Subsidiary in each case without recourse and in the
ordinary course of business of overdue accounts receivable arising in the
ordinary course of business, but only in connection with the compromise or
collection thereof consistent with customary industry practice (and not as part
of any bulk sale or financing transaction), and (iii) if at the time thereof and
immediately after giving effect thereto no Event of Default or Default shall
have occurred and be continuing, (x) the merger or consolidation of any wholly
owned Subsidiary into or with a Borrower in a transaction in which a Borrower is
the surviving corporation, (y) the merger or consolidation of any wholly owned
Subsidiary into or with any other wholly owned Subsidiary in a transaction in
which the surviving entity is a wholly owned Subsidiary and no person other than
a Borrower or a wholly owned Subsidiary receives any consideration.
          (b) Engage in any Asset Sale other than (i) the sale of Specified
Assets set forth on Schedule 5.14 and covered by Section 5.14 above and (ii) in
addition to Asset Sales permitted under clause (i) above, the sale of assets set
forth on Schedule 6.05(b) in aggregate amount for all such Asset Sales not to
exceed $6,000,000 so long as (x) the cash consideration for each such Asset Sale
is not less than 90% of the sale price of the asset being sold, (y) the total
consideration for each such Asset Sale is for consideration at least equal to
the fair market value of the asset being sold and (z) no Event of Default shall
exist at the time of such Asset Sale.
     SECTION 6.06 Restricted Payments; Restrictive Agreements.

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          (a) Declare or make, or agree to declare or make, directly or
indirectly, any Restricted Payment, or incur any obligation (contingent or
otherwise) to do so; provided, however, that (i) any Subsidiary may declare and
pay dividends or make other distributions ratably to its equity holders, (ii) so
long as no Event of Default or Default shall have occurred and be continuing or
would result therefrom, PALCO may, or may make distributions to Holdings so that
Holdings may, repurchase its Equity Interests owned by employees of Holdings,
PALCO or the Subsidiaries or make payments to employees of Holdings, PALCO or
the Subsidiaries upon termination of employment in connection with the exercise
of stock options, stock appreciation rights or similar equity incentives or
equity based incentives pursuant to management incentive plans or in connection
with the death or disability of such employees in an aggregate amount not to
exceed for all of this clause (ii) $250,000 in any fiscal year, (iii) the
Borrowers may make Restricted Payments to Holdings (x) in amount not to exceed
$25,000 in any fiscal year to the extent necessary to pay general corporate and
overhead expenses incurred by Holdings in the ordinary course of business and
(y) in an amount necessary to pay the Tax liabilities of Holdings directly
attributable to (or arising as a result of) the operations of the Borrowers and
the Subsidiaries; provided that (A) the amount of such dividends pursuant to
clause (iii)(y) shall not exceed the amount that the Borrowers and the
Subsidiaries would be required to pay in respect of Federal, State and local
Taxes were the Borrowers and the Subsidiaries to pay such Taxes as stand-alone
taxpayers and (B) all Restricted Payments made to Holdings pursuant to clause
(iii) shall be used by Holdings for the purpose specified herein within 20 days
of the receipt thereof and (iv) consummate transactions pursuant to the
agreements listed on Schedule 6.07 (other than the declaration of payment of a
dividend or similar payment) consistent with past practices.
          (b) Enter into, incur or permit to exist any agreement or other
arrangement that prohibits, restricts or imposes any condition upon (i) the
ability of Holdings or any Loan Party to create, incur or permit to exist any
Lien upon any of its property or assets intended to serve as Collateral, or
(ii) the ability of any Subsidiary to pay dividends or other distributions with
respect to any of its Equity Interests or to make or repay loans or advances to
any Loan Party or to Guarantee Indebtedness of any Loan Party; provided that
(A) the foregoing shall not apply to restrictions and conditions imposed by law
or by any Loan Document, (B) the foregoing shall not apply to customary
restrictions and conditions contained in agreements relating to the sale of a
Subsidiary pending such sale, provided such restrictions and conditions apply
only to the Subsidiary that is to be sold and such sale is permitted hereunder,
(C) the foregoing shall not apply to restrictions and conditions imposed on any
Subsidiary that is not a Loan Party (D) clause (i) of the foregoing shall not
apply to restrictions or conditions imposed by any agreement relating to secured
Indebtedness permitted by this Agreement if such restrictions or conditions
apply only to the property or assets securing such Indebtedness, (E) clause
(i) of the foregoing shall not apply to restrictions or conditions imposed by
the Term Loan Agreement and (F) clause (i) of the foregoing shall not apply to
customary provisions in leases and other contracts restricting the assignment
thereof.
     SECTION 6.07 Transactions with Affiliates. Sell or transfer any property or
assets to, or purchase or acquire any property or assets from, or otherwise
engage in any other transactions with, any of its Affiliates, except that
(a) any Loan Party may engage in any of the foregoing transactions in the
ordinary course of business at prices and on terms and conditions not less
favorable to the any Loan Party than could be obtained on an arm’s-length basis
from

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unrelated third parties, (b) Restricted Payments may be made to the extent
provided in Section 6.06 and (c) the transactions pursuant to the agreements
described on Schedule 6.07 may be consummated consistent with past practices.
     SECTION 6.08 Business of the Borrowers and Subsidiaries; Limitation on
Hedging Agreements.
          (a) With respect to the Loan Parties, engage at any time in any
business or business activity other than the business conducted by it as of the
date hereof and business activities reasonably incidental thereto.
          (b) Enter into any Hedging Agreement other than (a) any such agreement
or arrangement entered into in the ordinary course of business and consistent
with prudent business practice to hedge or mitigate risks to which the Borrowers
or any Subsidiary is exposed in the conduct of its business or the management of
its liabilities or (b) any such agreement entered into to hedge against
fluctuations in interest rates or currency incurred in the ordinary course of
business and consistent with prudent business practice; provided that in each
case such agreements or arrangements shall not have been entered into for
speculation purposes.
     SECTION 6.09 Other Indebtedness and Agreements.
          (a) Permit any waiver, supplement, modification or amendment,
termination or release of any indenture, instrument or agreement pursuant to
which any Material Indebtedness of any Loan Party (other than, to the extent
permitted under the terms of the Intercreditor Agreement, Material Indebtedness
pursuant to the Term Loan Agreement) is outstanding if the effect of such
waiver, supplement, modification or amendment, termination or release would
materially increase the obligations of the obligor or confer additional material
rights on the holder of such Indebtedness in a manner adverse to such Loan Party
or the Lenders.
          (b) (i) Make any distribution, whether in cash, property, securities
or a combination thereof, other than regular scheduled payments of principal and
interest as and when due (to the extent not prohibited by applicable
subordination provisions), in respect of, or pay, or offer or commit to pay, or
directly or indirectly redeem, repurchase, retire or otherwise acquire for
consideration, or set apart any sum for the aforesaid purposes, any
Indebtedness, except (A) the payment of the Indebtedness created hereunder or
under the Term Loan Agreement, (B) refinancings of Indebtedness permitted by
Section 6.01 and (C) the payment of secured Indebtedness that becomes due as a
result of the voluntary sale or transfer of the property or assets securing such
Indebtedness, or (ii) pay in cash any amount in respect of any Indebtedness or
preferred Equity Interests that may at the obligor’s option be paid in kind or
in other securities.
     SECTION 6.10 Capital Expenditures. Permit the aggregate amount of Capital
Expenditures made by the Borrowers and the Subsidiaries in any period set forth
below to exceed the amount set forth below for such period:

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          Period   Amount
Fiscal Year 2006
  $ 6,800,000  
 
       
Fiscal Year 2007
  $ 3,200,000  
 
       
Fiscal Year 2008
  $ 4,400,000  
 
       
Fiscal Year 2009
  $ 3,000,000  
 
       
Fiscal Year 2010
  $ 4,000,000  
 
       
Fiscal Year 2011
  $ 4,000,000               SECTION 6.11 Minimum Combined EBITDA. Permit the
Combined EBITDA for the three (3) month period then ended at the end of any
fiscal quarter set forth below to be less than the amount set forth opposite
such fiscal quarter set forth below:   Period Ending   Amount
September 30, 2006
  ($ 3,858,000 )
 
       
December 31, 2006
  ($ 363,000 )
 
       
March 31, 2007
  $ 342,000  
 
       
June 30, 2007
  $ 5,049,000  
 
       
September 30, 2007
  $ 3,104,000  
 
       
December 31, 2007
  $ 4,665,000  
 
       
March 31, 2008
  $ 1,755,000  
 
       
June 30, 2008
  $ 2,825,000  
 
       
September 30, 2008
  $ 3,411,000  
 
       
December 31, 2008
  $ 4,949,000  
 
       
March 31, 2009
  $ 1,942,000  
 
       
June 30, 2009
  $ 3,147,000  
 
       
September 30, 2009
  $ 3,912,000  
 
       
December 31, 2009
  $ 5,159,000  
 
       
March 31, 2010
  $ 1,942,000  

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          Period Ending   Amount
June 30, 2010
  $ 3,147,000  
 
       
September 30, 2010
  $ 3,912,000  
 
       
December 31, 2010
  $ 5,159,000  
 
       
March 31, 2011
  $ 1,942,000  
 
       
June 30, 2011 each fiscal quarter ending thereafter
  $ 3,147,000          SECTION 6.12 Maximum Combined Total Leverage Ratio.
Permit the Combined Total Leverage Ratio at the end of any fiscal quarter set
forth below to be greater than the amount set forth opposite such fiscal quarter
set forth below:   Period Ending   Combined Total Leverage Ratio
December 31, 2007
    7.34  
 
       
March 31, 2008
    5.51  
 
       
June 30, 2008
    6.02  
 
       
September 30, 2008
    6.47  
 
       
December 31, 2008
    4.76  
 
       
March 31, 2009
    3.28  
 
       
June 30, 2009
    2.76  
 
       
September 30, 2009
    2.82  
 
       
December 31, 2009
    2.44  
 
       
March 31, 2010
    3.04  
 
       
June 30, 2010
    2.62  
 
       
September 30, 2010
    2.78  
 
       
December 31, 2010
    2.44  
 
       
March 31, 2011
    3.04  
 
       
June 30, 2011 and each fiscal quarter ending thereafter
    2.62  

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     SECTION 6.13 Minimum Combined Fixed Charge Coverage Ratio. Permit the
Combined Fixed Charge Coverage Ratio for the twelve (12) month period (unless
otherwise indicated below) then ended at the end of any fiscal quarter set forth
below to be less than the amount set forth opposite such fiscal quarter set
forth below:

          Period Ending   Combined Fixed Charge Coverage Ratio
December 31, 2007
    0.79  
 
       
March 31, 2008
    0.76  
 
       
June 30, 2008
    0.63  
 
       
September 30, 2008
    0.70  
 
       
December 31, 2008
    0.84  
 
       
March 31, 2009
    1.22  
 
       
June 30, 2009
    1.34  
 
       
September 30, 2009
    1.77  
 
       
December 31, 2009
    2.33  
 
       
March 31, 2010
    2.28  
 
       
June 30, 2010
    2.23  
 
       
September 30, 2010
    2.17  
 
       
December 31, 2010
    2.12  
 
       
March 31, 2011
    2.12  
 
       
June 30, 2011 and each fiscal quarter ending thereafter
    2.12  

     SECTION 6.14 Fiscal Year. With respect to any Loan Party, change its fiscal
year-end to a date other than December 31.

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     SECTION 6.15 The Salmon Creek Transaction. It is expressly agreed that the
Salmon Creek Transaction is consented to and approved for all purposes by the
Administrative Agent and the Lenders, and shall not be deemed for any purpose to
violate any provisions hereof or of the Loan Documents; provided, however, that
the Borrowers shall notify the Administrative Agent at least five (but not more
than twenty) Business Days prior to the consummation of the Salmon Creek
Transaction (and at such time the Borrowers shall provide the Administrative
Agent copies of all relevant documentation relating thereto). Upon the
consummation of the Salmon Creek Transaction, Salmon Creek shall cease to be a
“Subsidiary” and a “Loan Party” as defined herein, and shall cease to be a
“Grantor” as defined in the Security Documents, provided that:
                       (a) the Administrative Agent shall have received evidence
that (i) all of the assets of Salmon Creek (other than the Salmon Creek CD) have
been transferred from Salmon Creek to PALCO and (ii) all of the membership
interests in Salmon Creek have been transferred from PALCO to Holdings; and
                       (b) immediately after the consummation of the Salmon
Creek Transaction, the Administrative Agent shall have a first priority Lien on
all of the assets that were held by Salmon Creek immediately prior to the Salmon
Creek Transaction (other than the Salmon Creek CD), subject only to Liens
permitted by Section 6.02.
              The parties hereto agree to execute and deliver any amendments or
other documents or agreements as may be necessary (or reasonably requested by
the Administrative Agent) to implement, effectuate or evidence any or all of the
foregoing.
     SECTION 6.16 Right to Cure. Notwithstanding anything to the contrary
contained in this Article 6, in the event that any Loan Party would otherwise be
in default of any financial covenant set forth in this Section 6, until ten
(10) days following delivery of the financial statements to Administrative Agent
in accordance with Section 5.04(a) or Section 5.04(b) with respect to any fiscal
period ending on or prior to March 31, 2007, Palco shall have the right to
borrow money from Holdings (which shall be evidenced by the Subordinated
Intercompany Note) so long as no mandatory payments thereon are required prior
to 180 days after the Maturity Date, in an aggregate amount no greater than what
is necessary to cure such default (collectively, the “Cure Right”), and upon the
receipt by Palco of such cash (the “Cure Amount”) pursuant to the exercise of
such Cure Right such financial covenants shall be recalculated giving effect to
the following adjustments:
          (i) Combined EBITDA shall be increased for the most recently ended
fiscal quarter for which such financial covenant is tested (but in no event
shall such increased amount be multiplied for purposes of annualizing Combined
EBITDA), solely for the purpose of measuring the financial covenants and not for
any other purpose under this Agreement, by an amount equal to the Cure Amount;
and
          (ii) if, after giving effect to the foregoing recalculation, the Loan
Parties shall then be in compliance with the requirements of all financial
covenants set forth in this Article 6 hereof, the Loan Parties shall be deemed
to have satisfied the requirements thereof as of the relevant date of
determination with the same effect as though there had been no failure to comply

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therewith at such date, and the applicable breach or default thereof which had
occurred shall be deemed cured for all purposes of the Agreement; and
          (iii) to the extent that the Cure Amount is used to repay
Indebtedness, such Indebtedness shall not be deemed to have been repaid for
purposes of calculating Combined Total Leverage Ratio for the period with
respect to the applicable measuring period.
          Notwithstanding anything to the contrary contained herein, the
aggregate amount of the Cure Amount for any fiscal period shall not exceed
$1,000,000.
ARTICLE VII.
EVENTS OF DEFAULT
          In case of the happening of any of the following events (“Events of
Default”):
          (a) any representation or warranty made or deemed made in or in
connection with any Loan Document or the Borrowings or issuances of Letters of
Credit hereunder, or any representation, warranty, statement or information
contained in any report, certificate, financial statement or other instrument
furnished in connection with or pursuant to any Loan Document, shall prove to
have been false or misleading in any material respect when so made, deemed made
or furnished;
          (b) default shall be made in the payment of any principal of any Loan
or the reimbursement with respect to any L/C Disbursement when and as the same
shall become due and payable, whether at the due date thereof or at a date fixed
for prepayment thereof or by acceleration thereof in accordance with the Loan
Documents;
          (c) default shall be made in the payment of any interest on any Loan
or L/C Disbursement or any Fee or any other amount (other than an amount
referred to in (b) above) due under any Loan Document, when and as the same
shall become due and payable, and such default shall continue unremedied for a
period of three Business Days;
          (d) default shall be made in the due observance or performance by any
Loan Party of any covenant, condition or agreement contained in Section 5.01(a),
5.02 (other than a default which arises as a result of the downgrade in the
rating of an insurance carrier), 5.05 or 5.08 or in Article VI;
          (e) default shall be made in the due observance or performance by any
Loan Party of any covenant, condition or agreement contained in Section 5.04(c),
5.04(h), 5.04(i) or 5.04(j) and such default shall continue unremedied for a
period of 5 days;
          (f) default shall be made in the due observance or performance by any
Loan Party or Holdings of any covenant, condition or agreement contained in any
Loan Document (other than those specified in clauses (b), (c) or (d) above) and
such default shall continue unremedied for a period of 30 days;

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          (g) any Loan Party shall (i) fail to pay any principal or interest,
regardless of amount, due in respect of any Material Indebtedness, when and as
the same shall become due and payable, or (ii) any other event or condition
occurs that results in any Material Indebtedness becoming due prior to its
scheduled maturity or that enables or permits (with or without the giving of
notice, the lapse of time or both) the holder or holders of any Material
Indebtedness or any trustee or agent on its or their behalf to cause any
Material Indebtedness to become due, or to require the prepayment, repurchase,
redemption or defeasance thereof, prior to its scheduled maturity; provided that
this clause (ii) shall not apply to secured Indebtedness that becomes due as a
result of the voluntary sale or transfer of the property or assets securing such
Indebtedness;
          (h) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed in a court of competent jurisdiction seeking (i) relief
in respect of any Loan Party (other than Salmon Creek), or of a substantial part
of the property or assets of any Loan Party (other than Salmon Creek), under
Title 11 of the United States Code, as now constituted or hereafter amended, or
any other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) the appointment of a receiver, trustee, custodian,
sequestrator, conservator or similar official for any Loan Party (other than
Salmon Creek)or for a substantial part of the property or assets of any Loan
Party (other than Salmon Creek)or (iii) the winding-up or liquidation of any
Loan Party (other than Salmon Creek); and such proceeding or petition shall
continue undismissed for 60 days or an order or decree approving or ordering any
of the foregoing shall be entered;
          (i) any Loan Party (other than Salmon Creek)shall (i) voluntarily
commence any proceeding or file any petition seeking relief under Title 11 of
the United States Code, as now constituted or hereafter amended, or any other
Federal, state or foreign bankruptcy, insolvency, receivership or similar law,
(ii) consent to the institution of, or fail to contest in a timely and
appropriate manner, any proceeding or the filing of any petition described in
(g) above, (iii) apply for or consent to the appointment of a receiver, trustee,
custodian, sequestrator, conservator or similar official for any Loan Party
(other than Salmon Creek)or for a substantial part of the property or assets of
any Loan Party (other than Salmon Creek), (iv) file an answer admitting the
material allegations of a petition filed against it in any such proceeding,
(v) make a general assignment for the benefit of creditors or (vi) become
unable, admit in writing its inability or fail generally to pay its debts as
they become due;
          (j) one or more judgments for the payment of money in an aggregate
amount in excess of $5,000,000 or other judgments that, individually or in the
aggregate, would reasonably be expected to result in a Material Adverse Effect
shall be rendered against any Loan Party or any combination thereof and the same
shall remain undischarged for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally taken
by a judgment creditor to levy upon assets or properties of any Loan Party to
enforce any such judgment;
          (k) an ERISA Event described in clause (b) of the definition thereof
shall have occurred or any other ERISA Event shall have occurred that, when
taken together with all other such ERISA Events, would reasonably be expected to
result in liability of any Loan Party and their ERISA Affiliates in an aggregate
amount exceeding $5,000,000;

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          (l) any Guarantee under the Guarantee and Collateral Agreement for any
reason shall cease to be in full force and effect (other than in accordance with
its terms), or any Guarantor shall deny that it has any further liability under
its Guarantee (other than as a result of the discharge of such Guarantor in
accordance with the terms of the Loan Documents);
          (m) any Lien purported to be created under any Security Document shall
cease to be, or shall be asserted by any Loan Party or Holdings not to be, a
valid, perfected and, with respect to the Secured Parties, first priority
(except as otherwise expressly provided in this Agreement or such Security
Document) Lien on any material Collateral covered thereby, except to the extent
that any such loss of perfection or priority results from the failure of the
Administrative Agent to maintain possession of certificates representing Equity
Interests pledged under the Guarantee and Collateral Agreement; or
          (n) there shall have occurred a Change in Control;
then, and in every such event (other than an event with respect to any Loan
Party described in paragraph (h) or (i) above), and at any time thereafter
during the continuance of such event either or both of the following actions may
be taken: (i) the Administrative Agent may, and at the request of the Required
Lenders with respect to the Facility shall, by notice to the Administrative
Borrower, terminate forthwith the Revolving Credit Commitments and the Swingline
Commitment and (ii) the Administrative Agent may, and at the request of the
Required Lenders shall, by notice to the Administrative Borrower, declare the
Loans then outstanding to be forthwith due and payable in whole or in part,
whereupon the principal of the Loans so declared to be due and payable, together
with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrowers accrued hereunder and under any other Loan
Document, shall become forthwith due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly
waived by the Borrowers, anything contained herein or in any other Loan Document
to the contrary notwithstanding, and the Administrative Agent shall have the
right to take all or any actions and exercise any remedies available to a
secured party under the Security Documents or applicable law or in equity; and
in any event with respect to any Loan Party described in paragraph (h) or
(i) above, the Revolving Credit Commitments and the Swingline Commitment shall
automatically terminate and the principal of the Loans then outstanding,
together with accrued interest thereon and any unpaid accrued Fees and all other
liabilities of the Borrowers accrued hereunder and under any other Loan
Document, shall automatically become due and payable, without presentment,
demand, protest or any other notice of any kind, all of which are hereby
expressly waived by the Borrowers, anything contained herein or in any other
Loan Document to the contrary notwithstanding, and the Administrative Agent
shall have the right to take all or any actions and exercise any remedies
available to a secured party under the Security Documents or applicable law or
in equity.
ARTICLE VIII.
THE ADMINISTRATIVE AGENT AND THE ARRANGER
          Each of the Lenders hereby irrevocably appoints the Administrative
Agent its agent and authorizes the Administrative Agent to take such actions on
its behalf and to exercise

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such powers as are delegated to the Administrative Agent by the terms of the
Loan Documents, together with such actions and powers as are reasonably
incidental thereto. Without limiting the generality of the foregoing, the
Administrative Agent is hereby expressly authorized by the Lenders to execute
any and all documents (including releases and the Security Documents) with
respect to the Collateral and the rights of the Secured Parties with respect
thereto, as contemplated by and in accordance with the provisions of this
Agreement and the Security Documents.
          The Administrative Agent hereunder shall have the same rights and
powers in its capacity as a Lender as any other Lender and may exercise the same
as though it were not the Administrative Agent, and such bank and its Affiliates
may accept deposits from, lend money to and generally engage in any kind of
business with Holdings, the Borrowers or any Subsidiary or any of their
respective Affiliates as if it were not the Administrative Agent hereunder.
          The Administrative Agent shall not have any duties or obligations
except those expressly set forth in the Loan Documents. Without limiting the
generality of the foregoing, (a) the Administrative Agent shall not be subject
to any fiduciary or other implied duties, regardless of whether a Default has
occurred and is continuing, (b) the Administrative Agent shall not have any duty
to take any discretionary action or exercise any discretionary powers, except
discretionary rights and powers expressly contemplated hereby that the
Administrative Agent is required to exercise in writing by the Required Lenders
(or such other number or percentage of the Lenders as shall be necessary under
the circumstances as provided in Section 9.08), and (c) except as expressly set
forth in the Loan Documents, the Administrative Agent shall not have any duty to
disclose, nor shall it be liable for the failure to disclose, any information
relating to Holdings, the Borrowers or any of the Subsidiaries that is
communicated to or obtained by the bank serving as the Administrative Agent or
any of its Affiliates in any capacity. The Administrative Agent shall not be
liable for any action taken or not taken by it with the consent or at the
request of the Required Lenders (or such other number or percentage of the
Lenders as shall be necessary under the circumstances as provided in
Section 9.08) or in the absence of its own gross negligence or willful
misconduct. The Administrative Agent shall not be deemed to have knowledge of
any Default unless and until written notice thereof is given to the
Administrative Agent by Holdings, the Borrowers or a Lender, and the
Administrative Agent shall not be responsible for or have any duty to ascertain
or inquire into (i) any statement, warranty or representation made in or in
connection with any Loan Document, (ii) the contents of any certificate, report
or other document delivered thereunder or in connection therewith, (iii) the
performance or observance of any of the covenants, agreements or other terms or
conditions set forth in any Loan Document, (iv) the validity, enforceability,
effectiveness or genuineness of any Loan Document or any other agreement,
instrument or document, or (v) the satisfaction of any condition set forth in
Article IV or elsewhere in any Loan Document, other than to confirm receipt of
items expressly required to be delivered to the Administrative Agent.
          The Administrative Agent shall be entitled to rely upon, and shall not
incur any liability for relying upon, any notice, request, certificate, consent,
statement, instrument, document or other writing believed by it to be genuine
and to have been signed or sent by the proper person. The Administrative Agent
may also rely upon any statement made to it orally or by telephone and believed
by it to have been made by the proper person, and shall not incur any liability
for relying thereon. The Administrative Agent may consult with legal counsel
(who

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may be counsel for Holdings or the Borrowers), independent accountants and other
experts selected by it, and shall not be liable for any action taken or not
taken by it in accordance with the advice of any such counsel, accountants or
experts.
          The Administrative Agent may perform any and all its duties and
exercise its rights and powers by or through any one or more sub-agents
appointed by it. The Administrative Agent and any such sub-agent may perform any
and all its duties and exercise its rights and powers by or through their
respective Related Parties. The exculpatory provisions of the preceding
paragraphs shall apply to any such sub-agent and to the Related Parties of the
Administrative Agent and any such sub-agent, and shall apply to their respective
activities in connection with the syndication of the credit facilities provided
for herein as well as activities as the Administrative Agent.
          Subject to the appointment and acceptance of a successor
Administrative Agent as provided below, the Administrative Agent may resign at
any time by notifying the Lenders and the Borrowers. Upon any such resignation
of the Administrative Agent, the Required Lenders shall have the right, in
consultation with the Borrowers, to appoint a successor. If no successor shall
have been so appointed by the Required Lenders and shall have accepted such
appointment within 30 days after the retiring Administrative Agent gives notice
of its resignation, then the retiring Administrative Agent may, on behalf of the
Lenders, appoint a successor Administrative Agent which shall be a bank with an
office in New York, New York, or an Affiliate of any such bank. Upon the
acceptance of its appointment as Administrative Agent hereunder by a successor,
such successor shall succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Administrative Agent, and the retiring
Administrative Agent shall be discharged from its duties and obligations
hereunder. The fees payable by the Borrowers to a successor Administrative Agent
shall be the same as those payable to its predecessor unless otherwise agreed
between the Borrowers and such successor. After an Administrative Agent’s
resignation hereunder, the provisions of this Article and Section 9.05 shall
continue in effect for the benefit of such retiring Administrative Agent, its
sub-agents and their respective Related Parties in respect of any actions taken
or omitted to be taken by any of them while acting as the Administrative Agent.
          The Arranger, in its capacity as such, shall have no duties or
responsibilities, and shall incur no liability, under this Agreement or any
other Loan Document.
          Each Lender acknowledges that it has, independently and without
reliance upon the Administrative Agent, the Arranger, or any Lender and based on
such documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon the
Administrative Agent, the Arranger, or any Lender and based on such documents
and information as it shall from time to time deem appropriate, continue to make
its own decisions in taking or not taking action under or based upon this
Agreement or any other Loan Document, any related agreement or any document
furnished hereunder or thereunder.
          To the extent required by any applicable law, the Administrative Agent
may withhold from any interest payment to any Lender an amount equivalent to any
applicable withholding tax. If the Internal Revenue Service or any other
Governmental Authority asserts a

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claim that the Administrative Agent did not properly withhold tax from amounts
paid to or for the account of any Lender because the appropriate form was not
delivered or was not properly executed or because such Lender failed to notify
the Administrative Agent of a change in circumstance which rendered the
exemption from, or reduction of, withholding tax ineffective or for any other
reason, such Lender shall indemnify the Administrative Agent fully for all
amounts paid, directly or indirectly, by the Administrative Agent as tax or
otherwise, including any penalties or interest and together with all expenses
(including legal expenses, allocated internal costs and out-of-pocket expenses)
incurred.
ARTICLE IX.
MISCELLANEOUS
     SECTION 9.01 Notices. Notices and other communications provided for herein
shall be in writing and shall be delivered by hand or overnight courier service,
mailed by certified or registered mail or sent by fax, as follows:

  (a)   if to the Administrative Borrower, to         The Pacific Lumber Company
125 Main Street
P.O. Box 37
Scotia, CA 95565
Attention: Gary L. Clark
Fax No. (707) 764 4269     (b)   if to the Administrative Agent, to        
Marathon Structured Finance Fund L.P.
461 Fifth Avenue
New York, New York 10017
Attention: Palco Account Officer
Telecopy No.: (212) 381-4499

      (c) if to a Lender, to it at its address (or fax number) set forth in the
Lender Addendum or the Assignment and Acceptance pursuant to which such Lender
shall have become a party hereto.

All notices and other communications given to any party hereto in accordance
with the provisions of this Agreement shall be deemed to have been given on the
date of receipt if delivered by hand or overnight courier service or sent by fax
or on the date five Business Days after dispatch by certified or registered mail
if mailed, in each case delivered, sent or mailed (properly addressed) to such
party as provided in this Section 9.01 or in accordance with the latest
unrevoked direction from such party given in accordance with this Section 9.01.
     SECTION 9.02 Survival of Agreement. All covenants, agreements,
representations and warranties made herein and in the certificates or other
instruments prepared

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or delivered in connection with or pursuant to this Agreement or any other Loan
Document shall be considered to have been relied upon by the Lenders and shall
survive the making by the Lenders of the Loans and the issuance of Letters of
Credit by the Issuing Bank, regardless of any investigation made by the Lenders
or on their behalf, and shall continue in full force and effect as long as the
principal of or any accrued interest on any Loan or any Fee or any other amount
payable under this Agreement or any other Loan Document is outstanding and
unpaid or any Letter of Credit is outstanding and so long as the Commitments
have not been terminated. The provisions of Sections 2.14, 2.16, 2.20 and 9.05
shall remain operative and in full force and effect regardless of the expiration
of the term of this Agreement, the consummation of the transactions contemplated
hereby, the repayment of any of the Loans, the expiration of the Commitments,
the expiration of any Letter of Credit, the invalidity or unenforceability of
any term or provision of this Agreement or any other Loan Document or any
investigation made by or on behalf of the Administrative Agent, the Arranger,
any Lender or the Issuing Bank.
     SECTION 9.03 Binding Effect. This Agreement shall become effective when it
shall have been executed by each of the parties hereto and when the
Administrative Agent shall have received counterparts hereof which, when taken
together, bear the signatures of each of the other parties hereto.
     SECTION 9.04 Successors and Assigns.
          (a) Whenever in this Agreement any of the parties hereto is referred
to, such reference shall be deemed to include the permitted successors and
assigns of such party; and all covenants, promises and agreements by or on
behalf of the Borrowers, the Administrative Agent or the Lenders that are
contained in this Agreement shall bind and inure to the benefit of their
respective successors and assigns.
          (b) Each Lender may assign to one or more assignees all or a portion
of its interests, rights and obligations under this Agreement (including all or
a portion of its Commitment and the Loans at the time owing to it); provided,
however, that (i) the Administrative Agent must give its prior written consent
to such assignment (which consent shall not be unreasonably withheld or
delayed), (ii) in the case of any assignment of a Revolving Credit Commitment,
each of the Swingline Lender and the Borrower must give its prior written
consent to such assignment (which consent shall not be unreasonably withheld or
delayed); provided that the consent of the Borrowers shall not be required to
any such assignment, (iii) the amount of the Commitment of the assigning Lender
subject to each such assignment (determined as of the date the Assignment and
Acceptance with respect to such assignment is delivered to the Administrative
Agent) shall not be less than $1,000,000 (or, if less, the entire remaining
amount of such Lender’s Commitment) and shall be in an amount that is an
integral multiple of $1,000,000 (or the entire remaining amount of such Lender’s
Commitment), (iv) the parties to each such assignment shall execute and deliver
to the Administrative Agent an Assignment and Acceptance (such Assignment and
Acceptance to be manually executed and delivered together with a processing and
recordation fee of $3,500 payable to the Administrative Agent and (v) the
assignee, if it shall not be a Lender immediately prior to the assignment, shall
deliver to the Administrative Agent an Administrative Questionnaire. Upon
acceptance and recording pursuant to paragraph (e) of this Section 9.04, from
and after the effective date specified in each Assignment and Acceptance,
(A) the assignee thereunder shall be a party hereto and, to the

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extent of the interest assigned by such Assignment and Acceptance, have the
rights and obligations of a Lender under this Agreement and (B) the assigning
Lender thereunder shall, to the extent of the interest assigned by such
Assignment and Acceptance, be released from its obligations under this Agreement
(and, in the case of an Assignment and Acceptance covering all or the remaining
portion of an assigning Lender’s rights and obligations under this Agreement,
such Lender shall cease to be a party hereto but shall continue to be entitled
to the benefits of Sections 2.14, 2.16, 2.20 and 9.05, as well as to any Fees
accrued for its account and not yet paid).
          (c) By executing and delivering an Assignment and Acceptance, the
assigning Lender thereunder and the assignee thereunder shall be deemed to
confirm to and agree with each other and the other parties hereto as follows:
(i) such assigning Lender warrants that it is the legal and beneficial owner of
the interest being assigned thereby free and clear of any adverse claim and that
its Commitment, and the outstanding balances of its Loans, in each case without
giving effect to assignments thereof which have not become effective, are as set
forth in such Assignment and Acceptance, (ii) except as set forth in (i) above,
such assigning Lender makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or representations
made in or in connection with this Agreement, or the execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement,
any other Loan Document or any other instrument or document furnished pursuant
hereto, or the financial condition of Holdings, the Borrowers or any Subsidiary
or the performance or observance by Holdings, the Borrowers or any Subsidiary of
any of its obligations under this Agreement, any other Loan Document or any
other instrument or document furnished pursuant hereto; (iii) such assignee
represents and warrants that it is legally authorized to enter into such
Assignment and Acceptance; (iv) such assignee confirms that it has received a
copy of this Agreement, together with copies of the most recent financial
statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04
and such other documents and information as it has deemed appropriate to make
its own credit analysis and decision to enter into such Assignment and
Acceptance; (v) such assignee will independently and without reliance upon the
Administrative Agent, the Arranger, such assigning Lender or any other Lender
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit decisions in taking or not taking action
under this Agreement; (vi) such assignee appoints and authorizes the
Administrative Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Administrative Agent by
the terms hereof, together with such powers as are reasonably incidental
thereto; and (vii) such assignee agrees that it will perform in accordance with
their terms all the obligations which by the terms of this Agreement are
required to be performed by it as a Lender.
          (d) The Administrative Agent, acting for this purpose as an agent of
the Borrowers, shall maintain at one of its offices a copy of each Assignment
and Acceptance delivered to it and a register for the recordation of the names
and addresses of the Lenders, and the Commitment of, and principal amount of the
Loans owing to, each Lender pursuant to the terms hereof from time to time (the
“Register”). The entries in the Register shall be conclusive and the Borrowers,
the Administrative Agent, and the Lenders may treat each person whose name is
recorded in the Register pursuant to the terms hereof as a Lender hereunder for
all purposes of this Agreement, notwithstanding notice to the contrary. The
Register shall be

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available for inspection by the Borrowers, and any Lender, at any reasonable
time and from time to time upon reasonable prior notice.
          (e) Upon its receipt of a duly completed Assignment and Acceptance
executed by an assigning Lender and an assignee, an Administrative Questionnaire
completed in respect of the assignee (unless the assignee shall already be a
Lender hereunder) and the written consent of the Swingline Lender and the
Administrative Agent to such assignment, the Administrative Agent shall
(i) accept such Assignment and Acceptance, (ii) record the information contained
therein in the Register and (iii) give prompt notice thereof to the Lenders and
the Swingline Lender. No assignment shall be effective unless it has been
recorded in the Register as provided in this paragraph (e).
          (f) Each Lender may without the consent of the Borrowers, the
Swingline Lender, the Issuing Bank or the Administrative Agent sell
participations to one or more banks or other entities in all or a portion of its
rights and obligations under this Agreement (including all or a portion of its
Commitment and the Loans); provided, however, that (i) such Lender’s obligations
under this Agreement shall remain unchanged, (ii) such Lender shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) the participating banks or other entities shall be entitled
to the benefit of the cost protection provisions contained in Sections 2.14,
2.16 and 2.20 to the same extent as if they were Lenders (but, with respect to
any particular participant, to no greater extent than the Lender that sold the
participation to such participant) and (iv) the Borrowers, the Administrative
Agent and the Lenders shall continue to deal solely and directly with such
Lender in connection with such Lender’s rights and obligations under this
Agreement, and such Lender shall retain the sole right to enforce the
obligations of the Borrowers relating to the Loans or L/C Disbursements and to
approve any amendment, modification or waiver of any provision of this Agreement
(other than amendments, modifications or waivers decreasing any fees payable
hereunder or the amount of principal of or the rate at which interest is payable
on the Loans, extending any scheduled principal payment date or date fixed for
the payment of interest on the Loans, increasing or extending the Commitments or
releasing any Guarantor or all or any substantial part of the Collateral).
          (g) Any Lender or participant may, in connection with any assignment
or participation or proposed assignment or participation pursuant to this
Section 9.04, disclose to the assignee or participant or proposed assignee or
participant any information relating to the Borrowers furnished to such Lender
by or on behalf of the Borrowers; provided that, prior to any such disclosure of
information designated by the Borrowers as confidential, each such assignee or
participant or proposed assignee or participant shall execute an agreement
whereby such assignee or participant shall agree (subject to customary
exceptions) to preserve the confidentiality of such confidential information on
terms no less restrictive than those applicable to the Lenders pursuant to
Section 9.16.
          (h) Any Lender may at any time assign all or any portion of its rights
under this Agreement to secure extensions of credit to such Lender or in support
of obligations owed by such Lender; provided that no such assignment shall
release a Lender from any of its obligations hereunder or substitute any such
assignee for such Lender as a party hereto.

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          (i) Notwithstanding anything to the contrary contained herein, any
Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an
“SPC”), identified as such in writing from time to time by the Granting Lender
to the Administrative Agent and the Borrowers, the option to provide to the
Borrowers all or any part of any Loan that such Granting Lender would otherwise
be obligated to make to the Borrowers pursuant to this Agreement; provided that
(i) nothing herein shall constitute a commitment by any SPC to make any Loan and
(ii) if an SPC elects not to exercise such option or otherwise fails to provide
all or any part of such Loan, the Granting Lender shall be obligated to make
such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder
shall utilize the Commitment of the Granting Lender to the same extent, and as
if, such Loan were made by such Granting Lender. Each party hereto hereby agrees
that no SPC shall be liable for any indemnity or similar payment obligation
under this Agreement (all liability for which shall remain with the Granting
Lender). In furtherance of the foregoing, each party hereto hereby agrees (which
agreement shall survive the termination of this Agreement) that, prior to the
date that is one year and one day after the payment in full of all outstanding
commercial paper or other senior indebtedness of any SPC, it will not institute
against, or join any other person in instituting against, such SPC any
bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings
under the laws of the United States or any State thereof. In addition,
notwithstanding anything to the contrary contained in this Section 9.04, any SPC
may (i) with notice to, but without the prior written consent of, the Borrowers
and the Administrative Agent and without paying any processing fee therefor,
assign all or a portion of its interests in any Loans to the Granting Lender or
to any financial institutions (consented to by the Borrowers and Administrative
Agent) providing liquidity and/or credit support to or for the account of such
SPC to support the funding or maintenance of Loans and (ii) disclose on a
confidential basis any non-public information relating to its Loans to any
rating agency, commercial paper dealer or provider of any surety, guarantee or
credit or liquidity enhancement to such SPC.
          (j) The Borrowers shall not assign or delegate any of its rights or
duties hereunder without the prior written consent of the Administrative Agent
and each Lender, and any attempted assignment without such consent shall be null
and void.
     SECTION 9.05 Expenses; Indemnity.
          (a) The Borrowers agree, to pay all out-of-pocket costs and expenses
incurred by the Administrative Agent, the Arranger and the Swingline Lender in
connection with the syndication of the Facility and the preparation and
administration of this Agreement and the other Loan Documents or in connection
with any amendments, modifications or waivers of the provisions hereof or
thereof (whether or not the transactions hereby or thereby contemplated shall be
consummated) or incurred by the Administrative Agent, the Arranger or any Lender
in connection with the enforcement or protection of its rights in connection
with this Agreement and the other Loan Documents or in connection with the Loans
made or Letters of Credit issued hereunder, including in each case the fees,
disbursements and other charges of counsel, Latham & Watkins LLP and Winston &
Strawn LLP, for the Arranger and the Administrative Agent, and, in connection
with any such enforcement or protection, the reasonable fees, disbursements and
other charges of any counsel for the Administrative Agent, the Arranger or any
Lender.

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          (b) The Borrowers agree to indemnify the Administrative Agent, the
Arranger, each Lender and each Related Party of any of the foregoing persons
(each such person being called an “Indemnitee”) against, and to hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related costs and expenses, including reasonable counsel fees, disbursements and
other charges, incurred by or asserted against any Indemnitee arising out of, in
any way connected with, or as a result of (i) the execution or delivery of this
Agreement or any other Loan Document or any agreement or instrument contemplated
thereby, the performance by the parties thereto of their respective obligations
thereunder or the consummation of the Transactions and the other transactions
contemplated thereby, (ii) the use of the proceeds of the Loans or issuances of
Letters of Credit, (iii) any claim, litigation, investigation or proceeding
relating to any of the foregoing, whether or not any Indemnitee is a party
thereto, or (iv) any actual or alleged presence or Release of Hazardous
Materials on any property owned or operated by any Loan Party, or any
Environmental Liability related in any way to any Loan Party; provided that such
indemnity shall not, as to any Indemnitee, be available to the extent that such
losses, claims, damages, liabilities or related costs and expenses are
determined by a court of competent jurisdiction by final and nonappealable
judgment to have resulted from primarily the gross negligence or willful
misconduct of such Indemnitee (and, upon any such determination, any
indemnification payments with respect to such losses, claims, damages,
liabilities or related costs and expenses previously received by such Indemnitee
shall be subject to reimbursement by such Indemnitee).
          (c) To the extent that the Borrowers fail to pay any amount required
to be paid by them to the Administrative Agent, the Arranger, or the Swingline
Lender under paragraph (a) or (b) of this Section, each Lender severally agrees
to pay to the Administrative Agent, the Arranger, or the Swingline Lender, as
the case may be, such Lender’s pro rata share (determined as of the time that
the applicable unreimbursed expense or indemnity payment is sought) of such
unpaid amount; provided that the unreimbursed expense or indemnified loss,
claim, damage, liability or related expense, as the case may be, was incurred by
or asserted against the Administrative Agent, the Arranger, or the Swingline
Lender in its capacity as such.
          (d) To the extent permitted by applicable law, neither of the
Borrowers shall assert, and each hereby waives, any claim against any
Indemnitee, on any theory of liability, for special, indirect, consequential or
punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement or any agreement or
instrument contemplated hereby, the Transactions, any Loan or Letter of Credit
or the use of the proceeds thereof.
          (e) The Administrative Agent may, at its option, from time to time, at
any time on or after an Event of Default and for so long as the same is
continuing or upon any other failure of a condition precedent to the Loans and
Letter of Credit Accommodations hereunder, make such disbursements and advances
(“Special Agent Advances”) which Administrative Agent, in its sole discretion,
(i) deems necessary or desirable either to preserve or protect the Collateral or
any portion thereof or (ii) to enhance the likelihood or maximize the amount of
repayment by any Loan Party of the Loans and other Obligations or (iii) to pay
any other amount chargeable to any Loan Party pursuant to the terms of this
Agreement or any of the other Loan Documents consisting of costs, fees and
expenses and payments to any issuer of Letters of Credit. Special Agent Advances
shall be repayable on demand and be secured by the Collateral.

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Special Agent Advances shall constitute Obligations hereunder. Each Lender
agrees that it shall make available to the Administrative Agent, upon the
Administrative Agent’s demand, in immediately available funds, the amount equal
to such Lender’s Pro Rata Percentage of each such Special Agent Advance. If such
funds are not made available to the Administrative Agent by such Lender, the
Administrative Agent shall be entitled to recover such funds, on demand from
such Lender together with interest thereon for each day from the date such
payment was due until the date such amount is paid to the Administrative Agent
at the Federal Funds Rate for each day during such period (as published by the
Federal Reserve Bank of New York or at the Administrative Agent’s option based
on the arithmetic mean determined by Agent of the rates for the last transaction
in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on
that day by each of the three leading brokers of Federal funds transactions in
New York City selected by Agent) and if such amounts are not paid within three
(3) days of the Administrative Agent’s demand, at the Alternative Base Rate plus
the Applicable Margin.
          (f) The provisions of this Section 9.05 shall remain operative and in
full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the Transactions or the other transactions
contemplated hereby, the repayment of any of the Loans, the expiration of the
Commitments, the expiration of any Letter of Credit, the invalidity or
unenforceability of any term or provision of this Agreement or any other Loan
Document, or any investigation made by or on behalf of the Administrative Agent,
the Arranger, any Lender or the Issuing Bank. All amounts due under this
Section 9.05 shall be payable on written demand therefor.
     SECTION 9.06 Right of Setoff. If an Event of Default shall have occurred
and be continuing, each Lender is hereby authorized at any time and from time to
time, except to the extent prohibited by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by such Lender to or for the
credit or the account of the Borrowers against any of and all the obligations of
the Borrowers now or hereafter existing under this Agreement and other Loan
Documents held by such Lender, irrespective of whether or not such Lender shall
have made any demand under this Agreement or such other Loan Document and
although such obligations may be unmatured. The rights of each Lender under this
Section 9.06 are in addition to other rights and remedies (including other
rights of setoff) which such Lender may have.
     SECTION 9.07 Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(OTHER THAN AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
     SECTION 9.08 Waivers; Amendment.
          (a) No failure or delay of the Administrative Agent or any Lender in
exercising any power or right hereunder or under any other Loan Document shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right or power, or any abandonment or discontinuance of steps to enforce
such a right or power, preclude any other or further exercise thereof or the
exercise of any other right or power. The rights and remedies of the
Administrative Agent and the Lenders hereunder and under the other Loan
Documents are

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cumulative and are not exclusive of any rights or remedies that they would
otherwise have. No waiver of any provision of this Agreement or any other Loan
Document or consent to any departure by the Borrowers or any other Loan Party
therefrom shall in any event be effective unless the same shall be permitted by
paragraph (b) below, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice or demand
on the Borrowers in any case shall entitle the Borrowers to any other or further
notice or demand in similar or other circumstances.
          (b) Neither this Agreement, any other Loan Document, nor any provision
hereof or thereof may be waived, amended or modified except pursuant to an
agreement or agreements in writing entered into by the Borrowers and the
Required Lenders; provided, however, that no such agreement shall (i) decrease
the principal amount of, or extend the maturity of or any scheduled principal
payment date or date for the payment of any interest on any Loan or any date for
reimbursement of an L/C Disbursement, or waive or excuse any such payment or any
part thereof, or decrease the rate of interest on any Loan or L/C Disbursement,
without the prior written consent of each Lender affected thereby, (ii) increase
or extend the Commitment or decrease or extend the date for payment of any Fees
of any Lender without the prior written consent of such Lender, (iii) amend or
modify the pro rata requirements of Section 2.17, the provisions of
Section 9.04(j), the provisions of this Section or the definition of the term
“Required Lenders,” or release any Guarantor, without the prior written consent
of each Lender, (iv) release all or any substantial part of the Collateral
without the prior written consent of each Lender, or (v) modify the protections
afforded to an SPC pursuant to the provisions of Section 9.04(i) without the
written consent of such SPC; provided further that no such agreement shall
amend, modify or otherwise affect the rights or duties of the Administrative
Agent, the Swingline Lender, or the Arranger hereunder or under any other Loan
Document without the prior written consent of the Administrative Agent, the
Swingline Lender, or Arranger, as applicable.
     SECTION 9.09 Interest Rate Limitation. Notwithstanding anything herein to
the contrary, if at any time the interest rate applicable to any Loan or
participation in any Letter of Credit Guaranty, together with all fees, charges
and other amounts which are treated as interest on such Loan or participation in
such Letter of Credit Guaranty under applicable law (collectively the
“Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may
be contracted for, charged, taken, received or reserved by the Lender holding
such Loan or participation in accordance with applicable law, the rate of
interest payable in respect of such Loan or participation hereunder, together
with all Charges payable in respect thereof, shall be limited to the Maximum
Rate and, to the extent lawful, the interest and Charges that would have been
payable in respect of such Loan or participation but were not payable as a
result of the operation of this Section 9.09 shall be cumulated and the interest
and Charges payable to such Lender in respect of other Loans or participations
or periods shall be increased (but not above the Maximum Rate therefor) until
such cumulated amount, together with interest thereon at the Federal Funds
Effective Rate to the date of repayment, shall have been received by such
Lender.
     SECTION 9.10 Entire Agreement. This Agreement, the Fee Letter and the other
Loan Documents constitute the entire contract between the parties relative to
the subject matter hereof. Any other previous agreement among the parties with
respect to the subject matter hereof is superseded by this Agreement and the
other Loan Documents. Nothing in this

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Agreement or in the other Loan Documents, expressed or implied, is intended to
confer upon any person (other than the parties hereto and thereto, their
respective successors and assigns permitted hereunder and, to the extent
expressly contemplated hereby, the Related Parties of each of the Administrative
Agent, the Arranger and the Lenders ) any rights, remedies, obligations or
liabilities under or by reason of this Agreement or the other Loan Documents.
     SECTION 9.11 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY
JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH
PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY
OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND
(B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER
INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11.
     SECTION 9.12 Severability. In the event any one or more of the provisions
contained in this Agreement or in any other Loan Document should be held
invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein and therein shall
not in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision in a particular jurisdiction shall not in
and of itself affect the validity of such provision in any other jurisdiction).
The parties shall endeavor in good-faith negotiations to replace the invalid,
illegal or unenforceable provisions with valid provisions the economic effect of
which comes as close as possible to that of the invalid, illegal or
unenforceable provisions.
     SECTION 9.13 Counterparts. This Agreement may be executed in counterparts
(and by different parties hereto on different counterparts), each of which shall
constitute an original but all of which when taken together shall constitute a
single contract, and shall become effective as provided in Section 9.03.
Delivery of an executed signature page to this Agreement or of a Lender Addendum
by facsimile transmission shall be as effective as delivery of a manually signed
counterpart of this Agreement.
     SECTION 9.14 Headings. Article and Section headings and the Table of
Contents used herein are for convenience of reference only, are not part of this
Agreement and are not to affect the construction of, or to be taken into
consideration in interpreting, this Agreement.
     SECTION 9.15 Jurisdiction; Consent to Service of Process.
          (a) Each of the Borrowers hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of any
New York State court or Federal court of the United States of America sitting in
New York City, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Agreement or the other Loan
Documents, or for recognition or enforcement of any judgment, and each of the

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parties hereto hereby irrevocably and unconditionally agrees that all claims in
respect of any such action or proceeding may be heard and determined in such New
York State or, to the extent permitted by law, in such Federal court. Each of
the parties hereto agrees that a final judgment in any such action or proceeding
shall be conclusive and may be enforced in other jurisdictions by suit on the
judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that the Administrative Agent, the Arranger or any Lender may
otherwise have to bring any action or proceeding relating to this Agreement or
the other Loan Documents against the Borrowers or their properties in the courts
of any jurisdiction.
          (b) Each of the Borrowers hereby irrevocably and unconditionally
waives, to the fullest extent it may legally and effectively do so, any
objection which it may now or hereafter have to the laying of venue of any suit,
action or proceeding arising out of or relating to this Agreement or the other
Loan Documents in any New York State or Federal court. Each of the parties
hereto hereby irrevocably waives, to the fullest extent permitted by law, the
defense of an inconvenient forum to the maintenance of such action or proceeding
in any such court.
          (c) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
     SECTION 9.16 Confidentiality. Each of the Administrative Agent and the
Lenders agrees to maintain the confidentiality of the Information, except that
Information may be disclosed (a) to its and its Affiliates’ officers, directors,
employees and agents, including accountants, legal counsel and other advisors
(it being understood that the persons to whom such disclosure is made will be
informed of the confidential nature of such Information and instructed to keep
such Information confidential), (b) to the extent requested by any regulatory
authority or quasi-regulatory authority (such as the National Association of
Insurance Commissioners), (c) to the extent required by applicable laws or
regulations or by any subpoena or similar legal process, (d) in connection with
the exercise of any remedies hereunder or under the other Loan Documents or any
suit, action or proceeding relating to the enforcement of its rights hereunder
or thereunder, (e) subject to an agreement containing provisions substantially
the same as those of this Section 9.16, to (i) any actual or prospective
assignee of or participant in any of its rights or obligations under this
Agreement and the other Loan Documents or (ii) any actual or prospective
counterparty (or its advisors) to any swap or derivative transaction relating to
any Loan Party or any of their respective obligations, (f) with the consent of
the Borrowers or (g) to the extent such Information becomes publicly available
other than as a result of a breach of this Section 9.16. For the purposes of
this Section, “Information” shall mean all information received from the
Borrowers and related to the Borrowers or their business, other than any such
information that was available to the Administrative Agent or any Lender on a
nonconfidential basis prior to its disclosure by Holdings or the Borrowers;
provided that, in the case of Information received from the Borrowers after the
date hereof, such information is clearly identified at the time of delivery as
confidential. Any person required to maintain the confidentiality of Information
as provided in this Section 9.16 shall be considered to have complied with its
obligation to do so if such person has exercised the same degree of care to
maintain the confidentiality of such Information as such person would accord its
own confidential information. Notwithstanding any other express or implied
agreement, arrangement or understanding to the contrary, each of the parties
hereto agrees that each other party hereto (and each of its employees,
representatives or agents)

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are permitted to disclose to any persons, without limitation, the tax treatment
and tax structure of the Loans and the other transactions contemplated by the
Loan Documents and all materials of any kind (including opinions and tax
analyses) that are provided to the Loan Parties, the Lenders, the Arranger or
the Administrative Agent related to such tax treatment and tax aspects. To the
extent not inconsistent with the immediately preceding sentence, this
authorization does not extend to disclosure of any other information or any
other term or detail not related to the tax treatment or tax aspects of the
Loans or the transactions contemplated by the Loan Documents.
     SECTION 9.17 Delivery of Lender Addenda. Each initial Lender shall become a
party to this Agreement by delivering to the Administrative Agent a Lender
Addendum duly executed by such Lender, the Borrower and the Administrative
Agent.
     SECTION 9.18 Disclosures. The parties acknowledge and agree that the
disclosure of any matter in the Schedules to the Loan Documents shall not be
deemed to constitute an acknowledgment that the matter is material or is not
material for any purpose other than with respect to the Loan Documents.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.

            THE PACIFIC LUMBER COMPANY
      By:   /s/ GARY L. CLARK         Name:   GARY L. CLARK        Title:   VP
Finance & Administration and CFO   

            BRITT LUMBER CO., INC.
      By:   /s/ GARY L. CLARK         Name:   GARY L. CLARK        Title:   VP
Finance & Administration and CFO   

            MARATHON STRUCTURED FINANCE FUND L.P. , as
Administrative Agent and Swingline Lender
      By:   /s/ LOUIS T. HANOVER         Name:   LOUIS T. HANOVER       
Title:   Authorized Signatory     

[Signature Page to PALCO Revolving Credit Agreement]