Exhibit 10.37

 

JUNIOR SUBORDINATED

NOTE PURCHASE AGREEMENT

 

BETWEEN

 

CHURCHILL CAPITAL PARTNERS IV, L.P.

 

AND

 

PW EAGLE, INC.

 

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Dated as of October 25, 2004

 

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TABLE OF CONTENTS

 

          Page

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I. DEFINITIONS

   1

SECTION 1.1

  

DEFINED TERMS

   1

SECTION 1.2

  

RULES OF CONSTRUCTION

   13

II. SALE AND PURCHASE OF THE NOTES

   14

SECTION 2.1

  

ORIGINAL NOTES

   14

SECTION 2.2

  

INVESTMENT UNIT

   14

SECTION 2.3

  

CLOSING ON SALE OF NOTES

   14

SECTION 2.4

  

SECURITY FOR THE NOTES

   14

III. THE NOTES

   14

SECTION 3.1

  

PRINCIPAL AND INTEREST

   14

SECTION 3.2

  

PREPAYMENT

   15

SECTION 3.3

  

SUBORDINATION

   15

SECTION 3.4

  

METHOD AND PLACE OF PAYMENT OF PRINCIPAL AND INTEREST

   15

SECTION 3.5

  

EXCHANGE OF NOTES

   15

SECTION 3.6

  

REVIVAL OF OBLIGATIONS

   15

IV. REPRESENTATIONS AND WARRANTIES

   15

SECTION 4.1

  

ORGANIZATION AND AUTHORITY

   15

SECTION 4.2

  

ORGANIZATIONAL INFORMATION

   16

SECTION 4.3

  

TRANSACTIONS LEGAL AND AUTHORIZED

   16

SECTION 4.4

  

NO DEFAULTS, RESTRICTIONS; COMPLIANCE WITH LAWS

   17

SECTION 4.5

  

CONSENTS

   17

SECTION 4.6

  

BUSINESS

   17

SECTION 4.7

  

FINANCIAL STATEMENTS

   17

SECTION 4.8

  

FULL DISCLOSURE

   19

SECTION 4.9

  

NO EVENT HAVING A MATERIAL ADVERSE EFFECT

   19

SECTION 4.10

  

PENDING LITIGATION

   19

SECTION 4.11

  

TITLE TO PROPERTIES

   19

SECTION 4.12

  

LICENSES AND PERMITS

   19

SECTION 4.13

  

TAXES

   19

SECTION 4.14

  

USE OF PROCEEDS

   20

SECTION 4.15

  

MARGIN SECURITIES

   20

SECTION 4.16

  

NO INVESTMENT COMPANY

   20

SECTION 4.17

  

SECURITIES LAWS

   20

SECTION 4.18

  

ERISA COMPLIANCE

   20

SECTION 4.19

  

OSHA COMPLIANCE

   20

SECTION 4.20

  

ADA COMPLIANCE

   20

SECTION 4.21

  

EMPLOYEE RELATIONS

   20

SECTION 4.22

  

ENVIRONMENTAL PROTECTION

   20

SECTION 4.23

  

INSURANCE

   21

SECTION 4.24

  

SOLVENCY

   21

SECTION 4.25

  

INTELLECTUAL PROPERTY

   21

SECTION 4.26

  

EQUITY DOCUMENTS

   22

SECTION 4.27

  

NO PAYMENTS NOT IN THE ORDINARY COURS

   22

 

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V. CLOSING CONDITIONS

   23

SECTION 5.1

  

DOCUMENTS REQUIRED FOR THE CLOSING

   23

SECTION 5.2

  

REPRESENTATIONS AND WARRANTIES TRUE

   25

SECTION 5.3

  

COMPLIANCE WITH THIS AGREEMENT

   25

SECTION 5.4

  

PROCEEDINGS SATISFACTORY

   25

SECTION 5.5

  

PAYMENT OF CLOSING EXPENSES

   25

SECTION 5.6

  

FUNDING OF SENIOR DEBT; EXCESS AVAILABILITY UNDER REVOLVING LINE OF CREDIT;
OTHER INDEBTEDNESS

   25

SECTION 5.7

  

CLOSING EBITDA

   25

VI. AFFIRMATIVE COVENANTS

   26

SECTION 6.1

  

PAYMENT OF NOTES

   26

SECTION 6.2

  

FINANCIAL REPORTING

   26

SECTION 6.3

  

PAYMENT OF TAXES AND CLAIMS

   27

SECTION 6.4

  

MAINTENANCE OF EXISTENCE AND PROPERTIES

   27

SECTION 6.5

  

FINANCIAL COVENANTS

   29

SECTION 6.6

  

DELIVERY OF CERTIFICATES

   29

SECTION 6.7

  

NOTICE OF DEFAULT

   29

SECTION 6.8

  

BOARD OBSERVATION RIGHTS

   30

SECTION 6.9

  

INFORMATION MEETINGS

   30

SECTION 6.10

  

MONITORING OF CONTROL

   30

SECTION 6.11

  

FURTHER ASSURANCES

   30

VII. NEGATIVE COVENANTS

   32

SECTION 7.1

  

RESTRICTIONS ON SALE OF ASSETS, CONSOLIDATIONS AND MERGERS, INVESTMENTS, REAL
PROPERTY

   32

SECTION 7.2

  

INDEBTEDNESS

   33

SECTION 7.3

  

LIENS AND ENCUMBRANCES

   33

SECTION 7.4

  

CONTINGENT OBLIGATION

   34

SECTION 7.5

  

RESTRICTIONS ON DIVIDENDS AND DISTRIBUTIONS

   34

SECTION 7.6

  

ORGANIZATIONAL DOCUMENTS

   35

SECTION 7.7

  

CAPITAL EXPENDITURES

   35

December 31, 2004 and each $2,000,000

   35

December 31 thereafter

   35

SECTION 7.8

  

CHANGE IN BUSINESS

   35

SECTION 7.9

  

INTENTIONALLY OMITTED

   35

SECTION 7.10

  

TRANSACTIONS WITH AFFILIATES

   36

SECTION 7.11

  

TAX RETURNS

   36

SECTION 7.12

  

FISCAL YEAR; ACCOUNTING PRACTICES

   36

SECTION 7.13

  

INCONSISTENT AGREEMENTS

   36

SECTION 7.14

  

SECURITIES OF SUBSIDIARIES

   36

SECTION 7.15

  

[INTENTIONALLY OMITTED]

   36

SECTION 7.16

  

NEGATIVE PLEDGES

   37

SECTION 7.17

  

LEASES

   37

VIII. EVENTS OF DEFAULT

   37

SECTION 8.1

  

EVENTS OF DEFAULT

   37

SECTION 8.2

  

REMEDIES

   40

 

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IX. AMENDMENT AND WAIVER

   40

X. MISCELLANEOUS

   41

SECTION 10.1

  

FEES AND EXPENSES

   41

SECTION 10.2

  

INDEMNIFICATION

   41

SECTION 10.3

  

SURVIVAL OF AGREEMENTS, COVENANTS, REPRESENTATIONS AND WARRANTIES

   41

SECTION 10.4

  

NOTICES

   42

SECTION 10.5

  

ACCOUNTING AND TAX CONSEQUENCES

   42

SECTION 10.6

  

BINDING EFFECT

   43

SECTION 10.7

  

ENTIRE AGREEMENT

   43

SECTION 10.8

  

WAIVERS

   43

SECTION 10.9

  

ASSIGNMENT AND TRANSFER

   43

SECTION 10.10

  

REPRESENTATION AND WARRANTY OF NOTE PURCHASER

   43

SECTION 10.11

  

MAXIMUM INTEREST RATES

   43

SECTION 10.12

  

BROKERS

   44

SECTION 10.13

   GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE; SERVICE OF PROCESS;
ADMISSIBILITY OF PHOTOCOPIES; WAIVER OF JURY TRIAL    44

SECTION 10.14

  

PUBLICITY

   45

SECTION 10.15

  

TIME IS OF THE ESSENCE

   45

SECTION 10.16

  

SAVINGS CLAUSE; SEVERABILITY

   45

SECTION 10.17

  

SECTION HEADINGS

   45

SECTION 10.18

  

COUNTERPARTS

   46

SECTION 10.19

  

CREDIT INQUIRIES

   46

SECTION 10.20

  

CONFIDENTIALITY

   46

 

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SCHEDULES

 

1.1(a)

  

Environmental Audits

1.1(b)

  

Leases

1.1(c)

  

Owned Real Property

1.1(d)

  

Permitted Liens

4.2

  

Organizational Information

4.4

  

Defaults

4.5

  

Consents and Approvals

4.6

  

Business

4.7

  

Financial Statements; Opening Day Balance Sheet

4.21

  

Employee Relations

4.23

  

Insurance

6.5

  

Financial Covenant Ratios

6.6

  

Compliance Certificate

7.1(a)

  

Sales and Sale-Leasebacks

7.1(c)

  

Investments

7.2

  

Capitalized Lease Obligations

7.10

  

Consulting Agreements

 

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JUNIOR SUBORDINATED

NOTE PURCHASE AGREEMENT

 

THIS JUNIOR SUBORDINATED NOTE PURCHASE AGREEMENT, dated as of the 25th day of
October, 2004, by and between CHURCHILL CAPITAL PARTNERS IV, L.P., a Delaware
limited partnership (the “Note Purchaser”), and PW EAGLE, INC., a Minnesota
corporation (the “Company”).

 

WHEREAS, the Company will on the Closing Date sell its Junior Subordinated Notes
(the “Notes”) in the principal amount of Eight Million Dollars $8,000,000 to the
Note Purchaser, and the Note Purchaser will purchase such Notes from the Company
on the terms and conditions set forth herein.

 

WHEREAS, concurrently with the purchase and sale of the Notes pursuant to this
Agreement, the Company will sell its Senior Subordinated Notes in the principal
amount of Sixteen Million Dollars ($16,000,000) to the Senior Note Purchaser,
and the Senior Note Purchaser will purchase such Senior Subordinated Notes from
the Company on the terms and conditions set forth in the Senior Subordinated
Note Purchase Agreement.

 

WHEREAS, concurrently with the purchase and sale of the Notes pursuant to this
Agreement and the Senior Subordinated Notes pursuant to the Senior Subordinated
Note Purchase Agreement, the Note Purchaser, the Senior Note Purchaser and the
Company will enter into the Warrant Agreement (as defined below) pursuant to
which the Company will issue to the Note Purchaser and the Senior Note Purchaser
warrants to purchase 366,651 shares of Common Stock, par value $.01 per share,
of the Company (subject to adjustment as provided in the Warrant Agreement) for
an exercise price of $.01 per share (subject to adjustment as provided in the
Warrant Agreement).

 

NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained in this Agreement, the parties hereto agree
as follows:

 

I. DEFINITIONS

 

Section 1.1 Defined Terms. Each accounting term not defined herein and each
accounting term partly defined herein to the extent not defined shall have the
meaning given to it under GAAP. The following capitalized terms shall have the
following meanings, applicable both to the singular and plural forms of the
terms so defined, except as set forth herein:

 

“1999 Subordinated Notes” shall mean those certain subordinated promissory notes
dated on or about September 20, 1999 in the original aggregate principal amount
of $32,500,000 executed by the Company in favor of the purchasers thereof. The
1999 Subordinated Notes shall be repaid in full on the Closing Date.

 

“ADA” shall mean the Americans With Disabilities Act of 1990, as amended, and
the rules and regulations promulgated thereunder.

 

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“Affiliate” shall mean, as to any Person, any other Person which, directly or
indirectly, is in control of, is controlled by, or is under common control with,
such Person. A Person shall be deemed to control another Person if the
controlling Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of the other Person, whether
through the ownership of voting securities, by contract or otherwise. Without
limitation, any director, executive officer or beneficial owner of five percent
(5%) or more of the equity of a Person shall, for the purposes of this
Agreement, be deemed to control such Person. Notwithstanding the foregoing,
neither Note Purchaser nor any of its Affiliates shall be deemed an “Affiliate”
of the Company or of any Subsidiary.

 

“Agent” shall mean Fleet Capital Corporation, in its capacity as agent under the
Senior Credit Agreement, or any other financial institution performing such
function.

 

“Agreement” shall mean this Junior Subordinated Note Purchase Agreement, dated
as of October 25, 2004, between the Note Purchaser and the Company, as amended
from time to time, together with the Schedules attached hereto.

 

“Availability” shall mean Availability under and as defined in the Senior Credit
Agreement as in effect on the date hereof (together with all defined terms set
forth therein), without giving effect to any modification or amendment thereto
not consented to by the Note Purchaser (including any modification or amendment
to the definition of Borrowing Base or any other defined term set forth therein)
but without giving effect to the Availability Block (as defined under the Senior
Credit Agreement as in effect on the date hereof) and without giving effect to
any Overadvance under and as defined in the Senior Credit Agreement as in effect
on the date hereof in an aggregate amount not in excess of $1,000,000.

 

“Business Day” shall mean any day except a Saturday, Sunday or other day on
which commercial banks in the State of Minnesota are authorized or required by
law to close.

 

“Capital Expenditures” shall mean expenditures made or liabilities incurred for
the acquisition of any fixed assets or improvements, replacements, substitutions
or additions thereto which have a useful life of more than one year, including
the total principal portion of Capitalized Lease Obligations.

 

Capitalized Lease Obligation shall mean any Indebtedness represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP.

 

“Cash Equivalents” shall mean: (a) securities issued or fully guaranteed or
insured by the United States Government or any agency thereof having maturities
of not more than six (6) months from the date of acquisition; (b) certificates
of deposit, time deposits, repurchase agreements, reverse repurchase agreements,
or bankers’ acceptances, having in each case a tenor of not more than six (6)
months, issued by any Senior Creditor under the Senior Credit Agreement or by
any U.S. commercial bank or any branch or agency of a non-U.S. bank licensed to
conduct business in the U.S. having combined capital and surplus of not less
than $250,000,000, (c) commercial paper of an issuer rated at least A-1 by
Standard & Poor’s Corporation or P-1 by Moody’s Investors Service Inc. and in

 

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either case having a tenor of not more than three (3) months; and (d) money
market funds that invest exclusively in the foregoing instruments and
securities.

 

“Change of Control” means the occurrence of any of the following events: (i) all
or substantially all of the Company’s assets, on a consolidated basis, are sold
as an entirety to any Person or related group of Persons or there shall be
consummated any consolidation or merger of the Company (A) in which the Company
is not the continuing or surviving company (other than a consolidation or merger
with a wholly owned Subsidiary in which all shares of common stock of the
Company outstanding immediately prior to the effectiveness thereof are changed
into or exchanged for the same consideration) or (B) pursuant to which the
common stock of the Company would be converted into cash, securities or other
property, in any case, other than a sale of assets or consolidation or merger of
the Company in which the holders of the common stock of the Company immediately
prior to the sale of assets or consolidation or merger have, directly or
indirectly, at least a majority of the common stock of the transferee or
continuing or surviving company immediately after such sale of assets or
consolidation or merger, (ii) any “person” (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) other than the Spell Group, is or becomes
the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act
provided that such person shall be deemed to have “beneficial ownership” of all
shares that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the outstanding voting
securities of the Company; (iii) any member of the Spell Group sells, transfers,
or otherwise disposes to any Person who is not a member of the Spell Group
(including any sale, transfer or other disposition to the Company permitted
pursuant to Section 7.5 hereof) 10% or more of the securities of the Company
(including warrants, options or other instruments convertible into, or
exchangeable or exercisable for securities of the Company) now owned by him or
hereafter acquired by him as employment compensation; provided, however, that
any member of the Spell Group may sell securities of the Company to repay loans
incurred to purchase securities of the Company, or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the board of directors of the Company (together with any new directors whose
election by such members of the board of directors of the Company or whose
nomination for election by the shareholders of the Company, as the case may be,
was approved by a vote of at least a majority of the directors of the Company
then still in office) cease for any reason to constitute a majority of the board
of directors of the Company then in office.

 

“Closing” shall have the meaning specified in Section 2.3.

 

“Closing Date” shall mean October 25, 2004, or such other date as may be agreed
to by the parties hereto.

 

“Code” shall mean the Internal Revenue Code of 1986, as amended, and the rules
and regulations promulgated thereunder.

 

“Collateral” shall mean all property and interests in property and proceeds
thereof in or upon which a mortgage, lien or security interest now or hereafter
exists in favor of the holders of the Notes to directly or indirectly secure the
Obligations, whether under this Agreement or under any of the other Note
Documents.

 

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“Company” shall mean PW Eagle, Inc., a Minnesota corporation, and its permitted
successors and assigns.

 

“Compliance Certificate” shall mean the Compliance Certificate, in the form of
Schedule 6.6 hereto, whereby either the chief executive officer or the chief
financial officer of the Company certifies as to the matters required by Section
6.6 hereof.

 

“Consolidated” means the consolidation in accordance with GAAP of the accounts
or other items as to which such term applies or as the context may require.

 

“Consolidated Net Income” means, with respect to the Company and its
Subsidiaries (other than PW Poly) for any fiscal period, the net income (or
loss) of the Company and its Subsidiaries for such period taken as a whole
(determined in accordance with GAAP on a Consolidated basis), but excluding in
any event: (a) any gains or losses on the sale or other disposition of
Investments or fixed or capital assets or from any transaction classified as
extraordinary under GAAP, any taxes on such excluded gains and any tax
deductions or credits on account of any such excluded losses; (b) the proceeds
of any life insurance policy; (c) net earnings and losses of any business
entity, substantially all the assets of which have been acquired in any manner
by the Company, realized by such business entity prior to the date of such
acquisition; (d) net earnings and losses of any business entity which shall have
merged into the Company earned or incurred prior to the date of such merger; (e)
net earnings of any business entity (other than a Consolidated Subsidiary) in
which the Company has an ownership interest unless such net earnings shall have
been received by the Company in the form of cash distributions; (f) earnings
resulting from a reappraisal, revaluation or write-up of assets; (g) any charge
to net earnings resulting from the amortization of the value of stock options
given to employees to the extent required by FASB 25; (h) any increase or
decrease of net income arising from a change in the Company’s accounting
methods; (i) any gains resulting from the forgiveness of Funded Debt or the
retirement of Funded Debt at a discount; (j) any gain arising from the
acquisition of any securities of the Company; (k) any reversal of any
contingency reserve, unless the provision for such contingency reserve shall
have been made from income arising during the fiscal period in question; and (l)
any charge to earnings resulting from the write-off of deferred loan costs
and/or debt discounts in connection with repayment of (A) the 1999 Subordinated
Notes, (B) the obligations under the Third Amended and Restated Loan and
Security Agreement dated as of September 30, 2002 among the Company, Agent and
certain lenders, and (C) the obligations under the Loan and Security Agreement
dated March 14, 2003 among Extrusion Technologies, Inc., Agent and certain
lenders.

 

“Contingent Obligation” shall mean, as to any Person, any direct or indirect
liability, contingent or otherwise, of that Person: (i) with respect to any
indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary
effect thereof, is to provide assurance to the obligee of such liability that
such liability will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such liability will be
protected (in whole or in part) against loss with respect thereto; (ii) with
respect to any letter of credit issued for the account of that person or as to
which that Person is otherwise liable for reimbursement of drawings; (iii) under
any swap agreements or other agreements or arrangements designed to provide
protection against fluctuations in interest or currency exchange

 

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rates; (iv) to make take-or-pay or similar payments if required regardless of
nonperformance by any other party or parties to an agreement; or (v) for the
obligations of another through any agreement to purchase, repurchase or
otherwise acquire such obligation or any property constituting security
therefor, to provide funds for the payment of discharge of such obligation or to
maintain the solvency, financial condition or any balance sheet item or level of
income of another Person. The amount of any Contingent Obligation shall be equal
to the amount of the obligation so guaranteed or otherwise supported or, if not
a fixed and determined amount, the maximum amount so guaranteed or supported.

 

“Default” shall mean any event or circumstance which, with the giving of notice
or the passage of time, or both, would constitute an Event of Default.

 

“Default Interest Rate” shall have the meaning specified in the Notes.

 

“Deferred Interest” shall mean all interest on the Notes accrued at the Deferred
Rate (as defined in the Notes), including any such interest which has been
compounded and added to principal.

 

“Derivative Obligation” shall mean every obligation of a Person under any
forward contract, futures contract, exchange contract, swap, option or other
financing agreement or arrangement (including, without limitation, caps, floors,
collars and similar agreement), the value of which is dependent upon interest
rates, currency exchange rates, commodities or other indices.

 

“EBITDA” shall mean with respect to any fiscal period, the sum of Consolidated
Net Income for such period plus amounts deducted in determining such
Consolidated Net Income in respect of: (a) any provision for (or less any
benefit from) income taxes whether current or deferred; (b) amortization and
depreciation expense; and (c) Interest Expense for such period. For purposes of
Schedule 6.5, EBITDA for fiscal periods ending on or prior to December 31, 2004,
shall not include restructuring charges of up to $1,000,000 which were incurred
in fiscal year 2003, but were expensed in fiscal year 2004 and up to $400,000 of
expenses which have been or will be incurred in the PW Poly Spinoff.

 

“Environmental Audits” shall mean the Phase I Environmental Site Assessments set
forth in Schedule 1.1(a) hereto.

 

“Environmental Laws” shall have the meaning specified in Section 4.22.

 

“Equity Documents” shall mean, collectively, the Warrant Agreement, the Warrants
and the Registration Rights Agreement, together with all exhibits, schedules and
amendments thereto.

 

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as the
same may from time to time be amended, and the rules and regulations promulgated
thereunder by any governmental agency or authority, as may from time to time be
in effect.

 

“ETI Subordinated Note” shall mean that certain unsecured promissory note in the
original principal amount of $243,439 dated as of March 11, 2003 and executed by
Extrusion Technologies, Inc. in favor of Uponor North America, Inc.

 

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“Event of Default” shall mean an Event of Default as defined in Section 8.1
hereof.

 

“Existing Subordinated Debt” shall mean the 14% Senior Subordinated Notes due
2007 of the Company and any other obligations of the Company under the
Securities Purchase Agreement dated as of September 20, 1999 among the Company
and the Investors, as defined therein.

 

“Financial Projections” shall have the meaning specified in Section 4.7(d).

 

“Financing Statements” shall mean all Uniform Commercial Code financing
statements (or comparable documents now or hereafter filed in accordance with
the Uniform Commercial Code or comparable law) given by any Related Party in
favor of any holder of a Note in connection with the transactions contemplated
hereby.

 

“Fixed Charges” means, for any period of determination, the sum of (a) scheduled
principal payments of Funded Debt (including the principal portion of scheduled
payments of Capital Lease Obligations) during such period, (b) Interest Expense
paid in cash included in the determination of Consolidated Net Income during
such period, (c) dividends paid on, or repurchases or redemptions of, the
Company’s capital stock during such period and (d) the amount of the reduction
in the Fixed Asset Maximum Amount (as such term is defined the Senior Credit
Agreement as in effect on the Closing Date) occurring within such period of
determination.

 

“Fixed Charge Coverage Ratio” shall mean, with respect to any period of
determination, the ratio of (i) EBITDA for such period minus income taxes paid
in cash and non-financed Capital Expenditures during such period to (ii) Fixed
Charges for such period.

 

“Funded Debt” means: (i) Indebtedness arising from the lending of money by any
Person to the Company or any of its Subsidiaries, including, without limitation,
the Obligations, the obligations of the Company under the Senior Subordinated
Note Purchase Agreement and the Senior Debt; (ii) Indebtedness, whether or not
in any such case arising from the lending by any Person of money to the Company
or any of its Subsidiaries (A) which is represented by notes payable or drafts
accepted that evidence extensions of credit, (B) which constitutes obligations
evidenced by bonds, debentures, notes or similar instruments, or (C) upon which
interest charges are customarily paid (other than accounts payable) or that was
issued or assumed as full or partial payment for property; (iii) Indebtedness
that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations
with respect to letters of credit or guaranties of letters of credit; and (v)
Indebtedness of the Company or any of its Subsidiaries under any guaranty of
obligations that would constitute Funded Debt under clauses (i) through (iv)
hereof if owed directly by the Company or any of its Subsidiaries. In computing
the amount of Funded Debt, the Notes and the notes issued pursuant to the Senior
Subordinated Note Purchase Agreement will be valued at full face value (less any
payments thereon) without giving effect to any original issue discount.

 

“GAAP” shall mean generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.

 

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“Indebtedness” as applied to a Person means, without duplication:

 

(i) all items which in accordance with GAAP would be included in determining
total liabilities as shown on the liability side of a balance sheet of such
Person as at the date as of which Indebtedness is to be determined, including,
without limitation, Capitalized Lease Obligations;

 

(ii) all obligations of other Persons which such Person has guaranteed;

 

(iii) all reimbursement obligations in connection with letters of credit or
letter of credit guaranties issued for the account of such Person;

 

(iv) Derivative Obligations; and

 

(v) in the case of the Company (without duplication), the Obligations, the
obligations under the Senior Subordinated Note Purchase Agreement and the Senior
Debt.

 

“Interest Coverage Ratio” shall mean, with respect to any period of
determination, the ratio of (i) EBITDA for such period to (ii) Interest Expense
paid in cash during such period all as determined in accordance with GAAP.

 

“Interest Expense” means, with respect to any fiscal period, the interest
expense incurred for such period excluding interest income as determined in
accordance with GAAP.

 

“Investments” shall have the meaning specified in Section 7.1(c) hereof.

 

“Junior Subordination Agreement” shall mean that certain Junior Subordination
Agreement between the Note Purchaser and the Senior Note Purchaser and
acknowledged by the Related Parties.

 

“knowledge,” with respect to any Person, shall mean the knowledge of such Person
after reasonable inquiry and investigation concerning the subject matter of the
representation and warranty. Any statements, representations or warranties that
are based upon the knowledge of any Person shall be deemed to have been made
after due inquiry by such Person with respect to the matter in question.

 

“Leases” shall mean the leases for real property set forth on Schedule 1.1(b).

 

“Lessor’s Agreement” shall mean the Landlord’s Waivers and Consents with respect
to the Leases.

 

“Lien” means any interest in property securing an obligation owed to, or a claim
by, a Person other than the owner of the property, whether such interest is
based on common law, statute or contract. The term “Lien” shall also include
rights of sellers under conditional sales contracts or title retention
agreements, reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting property. For the purpose of this Agreement, the Company
shall be deemed to be the owner of any property which it has acquired or holds
subject to a conditional sale agreement or other arrangement pursuant to which
title to the property has been retained by or vested in some other Person for
security purposes.

 

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“Management Fee Subordination Agreement” shall mean that certain Management Fee
Subordination Agreement among the Agent, the Note Purchaser, the Senior Note
Purchaser, the Company and Spell Capital Partners LLC pursuant to which certain
consulting and other fees payable to Spell Capital Partners LLC are subordinated
to the obligations of the Company under the Senior Credit Agreement, the Notes
and the obligations of the Company under the Senior Subordinated Note Purchase
Agreement.

 

“Material Adverse Effect” shall mean (a) a material adverse change in, or a
material adverse effect upon, the operations, business, prospects, properties or
condition (financial or otherwise) of (i) the Company or (ii) the Related
Parties taken as a whole; (b) an impairment of the ability of any Related Party
to perform in any material respect its obligations under this Agreement or the
Notes or any other Note Document or any Equity Documents; or (c) an impairment
of (i) the legality, validity, binding effect or enforceability of any Note
Document or any Equity Documents, or (ii) the perfection or priority of any lien
granted to the Note Purchaser under any of the Security Documents in respect of
Collateral having an aggregate fair market value of more than $500,000.

 

“Mortgages” shall mean the Mortgages whereby the Company grants to the Note
Purchaser a third mortgage lien, subject to the first lien of the Agent on
behalf of the Senior Creditors and the second lien of the Senior Note Purchaser,
against its Owned Real Property and shall include the Mortgages granted on the
date hereof and any future Mortgages granted pursuant to Section 6.11 or 6.12 of
this Agreement.

 

“Multiemployer Plan” has the meaning set forth in Section 4001(a)(3) of ERISA.

 

“Note Documents” shall mean this Agreement, the Notes, the Security Documents
and all documents delivered to any holder of a Note in connection herewith or
therewith, but shall not include the Equity Documents.

 

“Note Purchaser” shall mean Churchill Capital Partners IV, L.P., a Delaware
limited partnership, and its permitted successors and assigns, including without
limitation, as the context may require, subsequent holder(s) of the Notes.

 

“Notes” shall mean, as of a particular time, all of the Notes delivered under
this Agreement, and each Note delivered in substitution or exchange for any such
Note.

 

“Obligations” shall mean the obligation of the Company:

 

(a) to pay the principal of and interest on the Notes in accordance with the
terms thereof and to satisfy all of its other liabilities and obligations to the
Note Purchaser and holders of the Notes, whether hereunder, under the Notes or
any other Note Document or otherwise, whether now existing or hereafter
incurred, matured or unmatured, direct or contingent, or joint or several,
including any extensions, modifications, renewals and substitutions thereof;

 

(b) to repay to the Note Purchaser and any holder of a Note all amounts advanced
by the Note Purchaser or holder of a Note hereunder or otherwise on behalf of
the Company, including, but without limitation, advances for principal or
interest payments to prior secured parties, mortgagees,

 

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or lienors, or for taxes, levies, insurance, rent, or repairs to, or maintenance
or storage of, any of the Owned Real Property or other Collateral; and

 

(c) to reimburse the Note Purchaser or any holder of a Note for its fees and
expenses as provided in Section 10.1 hereof; and

 

(d) to perform the indemnification as required by Section 10.2 hereof.

 

“Opening Day Balance Sheet” shall mean that certain Opening Day Balance Sheet
dated as of October 25, 2004.

 

“Original Principal Balance” shall have the meaning specified in Section 2.1.

 

“OSHA” shall mean the Occupational Safety and Health Act of 1970, as amended,
and the rules and regulations promulgated thereunder.

 

“Owned Real Property” shall mean the Company’s real property identified on
Schedule 1.1(c) and any additional real property acquired by the Company or any
of its Subsidiaries after the date hereof.

 

“PBGC” shall mean the Pension Benefit Guaranty Corporation or any successor
board, authority, agency, officer or official of the United States administering
the principal functions assigned on the date hereof to the Pension Benefit
Guaranty Corporation under ERISA.

 

“Permitted Liens” shall mean:

 

(i) Liens now or hereafter securing the Senior Debt and any refinancings or
renewals thereof permitted hereunder;

 

(ii) Liens incurred or deposits made in the ordinary course of business (A) in
connection with workers’ compensation, social security, unemployment insurance
and other like laws, or (B) in connection with sales contracts, leases,
statutory obligations, work in progress advances and other similar obligations
not incurred in connection with the borrowing of money or the payment of the
deferred purchase price of property;

 

(iii) attachment, judgment and other similar Liens that do not constitute Events
of Default hereunder;

 

(iv) title exceptions or encumbrances granted in the ordinary course of
business, affecting real property owned by the Company or any of its
Subsidiaries, provided that such exceptions do not in the aggregate materially
detract from the value of such property or materially interfere with its use in
the ordinary conduct of the Company’s or such Subsidiary’s business;

 

(v) Purchase Money Liens securing Permitted Purchase Money Indebtedness;

 

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(vi) other Liens set forth on Schedule 1.1(d) hereof and any refinancings or
renewals thereof;

 

(vii) Liens securing Indebtedness of one of the Company’s Subsidiaries to the
Company or another such Subsidiary;

 

(viii) Liens securing the Obligations; and

 

(ix) Liens securing the obligations of the Company under the Senior Subordinated
Note Purchase Agreement.

 

“Permitted Purchase Money Indebtedness” means Purchase Money Indebtedness of the
Company incurred after the date hereof which is secured by a Purchase Money Lien
and the principal amount of which, when aggregated with the principal amount of
all other such Indebtedness and Capitalized Lease Obligations of the Company and
its Subsidiaries at the time outstanding, does not exceed $1,250,000. For the
purposes of this definition, the principal amount of any Purchase Money
Indebtedness consisting of capitalized leases (as opposed to operating leases)
shall be computed as a Capitalized Lease Obligation.

 

“Person” shall mean any individual, corporation, partnership, limited liability
company, association, joint-stock company, trust, estate, unincorporated
organization, joint venture, court, or governmental or political subdivision or
agency thereof.

 

“Plan” shall mean each employee benefit plan, or other class of benefits covered
by Title IV of ERISA, now or hereafter established or maintained for employees
of the Company or its Subsidiaries.

 

“Purchase Money Indebtedness” means (i) Indebtedness (other than the Senior
Debt) for the payment of all or any part of the purchase price of any fixed
assets, (ii) any Indebtedness (other than the Senior Debt) incurred at the time
of or within 10 days prior to or after the acquisition of any fixed assets for
the purpose of financing all or any part of the purchase price thereof, and
(iii) any renewals, extensions or refinancings thereof, but not any increases in
the principal amounts thereof outstanding at the time.

 

“Purchase Money Lien” means a Lien upon fixed assets which secures Purchase
Money Indebtedness, but only if such Lien shall at all times be confined solely
to the fixed assets the purchase price of which was financed through the
incurrence of the Purchase Money Indebtedness secured by such Lien.

 

“PW Poly” means USPoly Company (formerly known as PW Poly Corp.), a Minnesota
corporation.

 

“PW Poly Spinoff” shall mean the transaction consisting of the sale of certain
of the shares of capital stock of PW Poly, and the distribution of all of the
remaining shares of capital stock of PW Poly, or the cash received from the sale
of such shares, to the shareholders and certain holders of warrants to purchase
shares of the Company.

 

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“Registration Rights Agreement” shall mean that certain Registration Rights
Agreement between the Note Purchaser, the Senior Note Purchaser and the Company
dated as of the Closing Date.

 

“Related Party” shall mean the Company and each Subsidiary of the Company.

 

“Reportable Event” means any of the events set forth in Section 4043(c) of
ERISA.

 

“Resin Supply Agreement” shall mean collectively the various agreements
separately disclosed to the Note Purchaser.

 

“Responsible Officer” shall mean the chief executive officer or the president of
the Company, or any other officer having substantially the same responsibility
(or having substantially the same knowledge of the contents of the certificate,
document or other item being delivered) and authority with respect to the matter
at hand; or, with respect to compliance with financial covenants or delivery of
financial information, the chief financial officer or the treasurer of the
Company, or any other officer having substantially the same responsibility (or
having substantially the same knowledge of the contents of the certificate,
document or other item being delivered) and authority with respect to the matter
at hand.

 

“Sale and Leaseback Documents” means the Sale and Leaseback Agreement together
with all exhibits, schedules and related documents.

 

“Sale and Leaseback Transaction” means the sale and leaseback by the Company of
its real property located in Perris, California, Eugene, Oregon, West Jordan,
Utah and Tacoma, Washington pursuant to that certain Lease Agreement (“Sale and
Leaseback Agreement”) dated as of February 28, 2002, by and between Company and
PWE (Multi) 14-85, Inc. (“Lessor”).

 

“Security Agreement” shall mean the Junior Subordinated Security Agreement dated
the Closing Date between the Company and the Note Purchaser whereby the Company
grants to the Note Purchaser a security interest in the personal property of the
Company.

 

“Security Agreement - Intellectual Property” shall mean collectively the Junior
Subordinated Patent and License Security Agreement and the Junior Subordinated
Trademark and License Security Agreement dated the Closing Date between the
Company and the Note Purchaser whereby the Company grants to the Note Purchaser
a security interest in its intellectual property.

 

“Security Documents” shall mean the Security Agreement, the Financing
Statements, the Security Agreement - Intellectual Property, the Mortgages, the
Lessor’s Agreements and all other security agreements, mortgages, pledges,
patent and trademark assignments, lease assignments, guarantees and other
similar agreements, and all amendments, restatements, modifications or
supplements thereof or thereto, by or between any one or more of the Related
Parties and any holder of a Note now or hereafter delivered to any holder of
Note pursuant to or in connection with the transactions contemplated hereby.

 

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“Senior Credit Agreement” shall mean that certain Fourth Amended and Restated
Loan and Security Agreement among the Agent, the Senior Creditors and the
Company dated as of October 25, 2004.

 

“Senior Creditors” shall mean, collectively, the lenders from time to time party
to the Senior Credit Agreement.

 

“Senior Debt” shall mean the obligations of the Company under the Senior Credit
Agreement, subject to the limitations set forth in the Senior Subordination
Agreement.

 

“Senior Note Purchaser” shall mean the note purchaser party to the Senior
Subordinated Note Purchase Agreement.

 

“Senior Subordinated Note Purchase Agreement” shall mean that certain Senior
Subordinated Note Purchase Agreement dated as of the date hereof between the
Senior Note Purchaser and the Company.

 

“Senior Subordination Agreement” shall mean the Subordination Agreement dated
the Closing Date among the Agent, the Senior Note Purchaser and the Note
Purchaser and acknowledged by the Related Parties.

 

“Spell Group” shall mean (x) William H. Spell and Harry W. Spell, and any of
their spouses or any family trust which is controlled by either of the
foregoing, (y) Dobson West and Bruce Richard, and (z) Jerry Dukes, Scott Long,
Jack Cobb and Mike Stickel so long as they are employed by the Company.

 

“Subsidiary” shall mean any corporation or other business entity as to which an
aggregate of more than 50% of the outstanding voting securities or more than 50%
of the equity is at any time directly or indirectly owned by the Company, or by
one or more of its Subsidiaries or by the Company and one or more of its
Subsidiaries.

 

“Title Policy” shall mean a mortgagee’s title insurance policy issued by a title
insurance company acceptable to the Note Purchaser in an amount satisfactory to
the Note Purchaser with respect to each parcel of Owned Real Property insuring
the Mortgage as a third lien on a good and marketable fee simple title to each
parcel of Owned Real Property subject only to “Permitted Encumbrances” (as that
term is defined in the Mortgages) and otherwise in form and substance
satisfactory to the Note Purchaser.

 

“Transfer” shall have the meaning specified in Section 3.6.

 

“Warrants” shall mean those certain warrants to purchase common stock of the
Company issued to the Note Purchaser and the Senior Note Purchaser pursuant to
the Warrant Agreement.

 

“Warrant Agreement” shall mean that certain Warrant Agreement dated as of the
Closing Date among the Note Purchaser, the Senior Note Purchaser and the
Company.

 

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Section 1.2 Rules of Construction. Where any provision in this Agreement refers
to action to be taken by a Person, or which such Person is prohibited from
taking, such provision shall be applicable whether such action is taken directly
or indirectly by such Person. Except as otherwise indicated, all agreements or
instruments herein defined shall mean agreements as the same may from time to
time be supplemented or amended or the terms thereof waived or modified to the
extent permitted, and in accordance with, the terms thereof. Each covenant
contained in this Agreement shall be construed (absent an express contrary
provision therein) as being independent of each other covenant contained herein
and compliance with any one covenant shall not (absent such an express contrary
provision) be deemed to excuse compliance with any or all covenants.

 

Whenever the terms “satisfactory to Note Purchaser,” “determined by Note
Purchaser,” “acceptable to Note Purchaser,” “consent of Note Purchaser,” “Note
Purchaser shall elect,” “Note Purchaser shall request” or similar terms are used
in this Agreement, the Notes or any other Note Document, except as otherwise
specifically provided therein, such terms shall mean satisfactory to, at the
election of, determined by, acceptable to or requested by, as applicable, Note
Purchaser in its sole and unlimited discretion. In addition, the Note Purchaser
shall be permitted to condition the giving of its consent upon the giving of
additional collateral security, the payment of a fee, or any other matter.

 

Whenever the Company is to deliver or make available a copy of any document,
agreement, statement, notice or other writing to the Note Purchaser, such copy
shall be a true, correct and complete copy thereof, including all exhibits,
schedules and attachments referenced therein.

 

Each warranty and representation contained in this Agreement shall be
conclusively presumed to have been relied on by Note Purchaser regardless of any
investigation made or information possessed by Note Purchaser. The warranties
and representations set forth herein shall be cumulative and in addition to any
and all other warranties and representations that the Company shall now or
hereafter give, or cause to be given, to Note Purchaser.

 

No provision of this Agreement, the Notes or any of the other Note Documents
shall be construed against or interpreted to the disadvantage of any party
hereto by any court or other governmental or judicial authority by reason of
such party having or being deemed to have structured or drafted such provision.

 

The terms “herein,” “hereof” and “hereunder” and other words of similar import
refer to this Agreement as a whole and not to any particular section, paragraph
or subdivision. Any pronoun used shall be deemed to cover all genders. The
section titles, table of contents and list of schedules appear as a matter of
convenience only and shall not affect the interpretation of the Agreement. All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations. The words “including,”
“includes” and “include” shall be deemed to be followed by the words “without
limitation.”

 

It is the intent of the parties that all defined terms and methodologies of
calculation set forth in Section 6.5 or Schedule 6.5 or 6.6 attached hereto
shall be identical to the defined terms and methodologies of calculation of the
corresponding terms and ratios as set forth in the Senior Credit Agreement. To
the extent of any inconsistency between the defined terms and methodologies of

 

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calculation as set forth in Section 6.5 or Schedule 6.5 or 6.6 attached hereto
and the defined terms and methodologies of calculation as set forth in the
Senior Credit Agreement, Section 6.5 and Schedule 6.5 and 6.6 shall be amended
to incorporate the corresponding defined terms and methodologies set forth in
the Senior Credit Agreement (together with all defined terms set forth herein),
as in effect on the date hereof and without giving effect to any modification or
amendment thereto not consented to by the Note Purchaser.

 

II. SALE AND PURCHASE OF THE NOTES

 

Section 2.1 Original Notes. The Company will authorize for issuance to the Note
Purchaser on the Closing Date Notes in an original principal amount of Eight
Million Dollars $8,000,000 (the “Original Principal Balance”). The Notes shall
accrue interest from and after the Closing Date and have such other
characteristics as set forth in the Notes. The Company agrees to sell the Notes
to the Note Purchaser on the Closing Date, and the Note Purchaser agrees to
purchase such Notes from the Company, on the terms and conditions set forth
herein.

 

Section 2.2 Investment Unit. The Note Purchaser and the Company hereby
acknowledge and agree that the Notes are part of an “investment unit” within the
meaning of Section 1273(c)(2) of the Code, which includes the Warrants.
Notwithstanding anything to the contrary contained herein or in the Warrant
Agreement, the Note Purchaser and the Company hereby further acknowledge and
agree that solely for United States federal income tax purposes the aggregate
“issue price” of the Notes and the Warrants allocated to the Notes pursuant to
Schedule 2.2 to the Warrant Agreement under Section 1273(b) of the Code (and for
purposes of comparable state and local income tax laws) shall equal
$7,465,170.34 and $534,829.66, respectively. The Note Purchaser and the Company
agree to use the foregoing issue prices for all income tax purposes with respect
to this transaction.

 

Section 2.3 Closing on Sale of Notes. The Closing of the purchase and sale of
the Notes pursuant to Section 2.1 hereof shall be held on October 25, 2004 at
the offices of counsel for Note Purchaser, or at such other date or location as
the parties hereto may agree (the “Closing”).

 

At the Closing, the Note Purchaser shall make payment to the Company of the
purchase price for such Notes by wire transfer of immediately available funds to
an account designated by the Company or by such alternative means of payment to
which the parties may agree. At the Closing, the Company shall deliver Notes,
registered in the name of the Note Purchaser and in such denominations, as the
Note Purchaser may reasonably request.

 

Section 2.4 Security for the Notes. Payment of all Obligations, including
indebtedness evidenced by the Notes, shall be secured by mortgages, liens and
security interests in the Collateral and other assets, property rights and
interests as described in the Security Documents.

 

III. THE NOTES

 

Section 3.1 Principal and Interest. Payment of principal and interest on the
Notes shall be made in accordance with the terms of each such Note as specified
therein.

 

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Section 3.2 Prepayment. Prepayment on the Notes shall be made in accordance with
the terms of each such Note as specified therein.

 

Section 3.3 Subordination. Payment of principal and accrued interest and all
other amounts due under the Notes shall be subordinated to the rights of (i) the
Senior Creditors to the extent provided in the Senior Subordination Agreement
and (ii) the Senior Note Purchaser to the extent provided in the Senior
Subordination Agreement and the Junior Subordination Agreement.

 

Section 3.4 Method and Place of Payment of Principal and Interest. The Company
will pay to the holder of a Note in immediately available funds to an account
designated by such holder all amounts payable to it when due in respect of the
principal of, or interest or premium on, any of the Notes then held by such
holder, without any presentation of such Notes.

 

Section 3.5 Exchange of Notes. The holder of any Notes may, at its option, in
person or by duly authorized attorney, surrender the same for exchange at the
principal office of the Company maintained pursuant to Section 6.4(b) and,
within a reasonable time thereafter and without expense for the issuance of the
replacement Notes, receive in exchange therefor one or more duly executed Notes,
dated as of the date to which interest has been paid on the Note or Notes so
surrendered, or if no interest has yet been so paid, then dated the date hereof,
and registered in such name or names, all as may be designated by such holder,
for the same aggregate principal amount as the then unpaid principal amount of
the Note or Notes so surrendered. The Company covenants and agrees to take and
cause to be taken all action necessary to effect such exchanges. Any such
issuance of new Notes shall not be deemed to be the sale of new securities and
shall in all respects be subject to compliance with applicable federal and state
securities laws.

 

Section 3.6 Revival of Obligations. If the incurring of any debt or the payments
of money or transfers of property made to Note Purchaser by or on behalf of the
Company contemplated by the Note, this Agreement, any of the other Note
Documents or any document delivered hereunder (collectively, a “Transfer”)
should for any reason subsequently be declared to be “voidable” or “avoidable”
within the meaning of any state or federal law relating to creditor’s rights,
including, without limitation, as fraudulent conveyances, fraudulent transfers,
preferences or otherwise voidable or recoverable payments of money or transfer
of property, in whole or in part, for any reason under the United States
Bankruptcy Code or any other federal or state law, and Note Purchaser is
required to repay or restore such Transfer, or the amount of any portion
thereof, then as to any such amount repaid or restored (including all reasonable
costs, expenses and attorneys’ fees of Note Purchaser related thereto), the
liability of the Company shall automatically be revived, reinstated, and
restored and shall exist as though such Transfer had never been made,
notwithstanding the surrender of any Note or cancellation of any instrument or
document relating to this Agreement.

 

IV. REPRESENTATIONS AND WARRANTIES

 

The Company represents and warrants to the Note Purchaser that after giving
effect to the transactions described in the Equity Documents, the Senior Credit
Agreement, the Senior Subordinated Note Purchase Agreement and herein:

 

Section 4.1 Organization and Authority. Each of the Related Parties is duly and
validly organized and an existing corporation in good standing under the laws of
its jurisdiction of incorporation and is duly licensed or qualified and in good
standing as a foreign corporation in all other jurisdictions where the ownership
or leasing of property or the nature of business transacted make such
qualification necessary and where the failure to be so qualified and in good
standing would, in the aggregate, have a Material Adverse Effect. Each of the
Related Parties is entitled and authorized to own its properties and assets and
to carry on its business as, and in the places where, such properties and assets
are now owned or operated or such business is now conducted and presently
proposed to be conducted.

 

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Section 4.2 Organizational Information. Schedule 4.2 to this Agreement correctly
sets forth (i) the state or other jurisdiction in which each of the Related
Parties is incorporated or organized, (ii) the state or states in which each of
the Related Parties conducts its businesses, (iii) a list of each class of stock
of each of the Related Parties showing in each case the number of shares of
stock of each class outstanding and the ownership of such shares (provided,
however, that in the case of the Company, ownership of shares by Persons other
than the Spell Group, officers and directors of the Company and owners of 5% or
more of the outstanding capital stock of the Company may be aggregated), and
(iv) a list of each outstanding option, warrant or other right to acquire any
class of stock of any of the Related Parties which has been granted by such
Related Party and each security convertible into any class of stock of any of
the Related Parties showing in each case the number of shares of stock of each
class issuable upon exercise or conversion of such option, warrant, right or
convertible security, the purchase or conversion price and other material terms
of such option, warrant, right or convertible security, and the ownership of
such option, warrant, right or convertible security (provided, however, that in
the case of the Company, ownership of options by employees of any of the Related
Parties who are not members of the Spell Group or officers or directors of the
Company may be aggregated). The shares of stock listed in Schedule 4.2 have been
duly issued and are fully paid and nonassessable. As of the Closing Date, the
Company does not own capital stock or other equity interests in any corporation
or other Person other than as set forth on Schedule 4.2. Schedule 4.2 shall be
deemed to be updated by each of the Company’s filings with the Securities and
Exchange Commission after the date hereof pursuant to the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, so long as
the Company has delivered a copy of such public filing to Note Purchaser.

 

Section 4.3 Transactions Legal and Authorized. The issuance and sale of the
Notes and compliance by the Related Parties with all the provisions of the Note
Documents are within the corporate powers of the Related Party executing the
same. This Agreement has been duly authorized, executed and delivered by and is
the legal, valid and binding obligation of the Company, enforceable in
accordance with its terms. The other Note Documents have been duly authorized by
each of the Related Parties executing the same and, when executed and delivered
by such Related Parties in accordance with this Agreement, will be legal, valid
and binding obligations of such Related Parties, enforceable in accordance with
their respective terms. The foregoing representations in this Section 4.3 are
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect generally relating to or affecting creditors’
rights.

 

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Section 4.4 No Defaults, Restrictions; Compliance with Laws. None of the
execution and delivery of this Agreement or the other Note Documents, the
consummation of the transactions contemplated hereby or thereby, nor compliance
with their terms and conditions, will conflict or result in breach of, or
constitute a default under, any of the terms, obligations, covenants, conditions
or provisions of any corporate restriction or of any indenture, mortgage, deed
of trust, pledge, bank loan or credit agreement, articles, by-laws, operating
agreement or any other agreement or instrument to which any Related Party is a
party or by which its properties may be bound or affected, or any judgment,
order, writ, injunction, decree or demand of any court, arbitrator, grand jury,
or any governmental agency, or any law, rule, or regulation applicable to any
Related Party, or, with the exception of the note purchase transactions
contemplated hereby, result in the creation or imposition of any lien, charge or
encumbrance of any nature whatsoever upon any property or asset of any Related
Party. None of the Related Parties is a party to, nor is it bound by, any
contract or agreement or instrument, or subject to any charter or other
corporate restriction, which materially and adversely affects its business,
property, assets, operations or condition, financial or otherwise. Except as
disclosed on Schedule 4.4, none of the Related Parties is in material default in
the performance, observance or fulfillment of any of the terms, obligations,
covenants, conditions or provisions contained in any indenture or other
agreement creating, evidencing or securing material Indebtedness or pursuant to
which any such Indebtedness is issued, or other agreement or instrument to which
such Related Party is a party or by which its properties may be bound or
affected. Each Related Party has complied with all applicable statutes, rules,
regulations, orders and restrictions of any domestic or foreign government or
any instrumentality or agency thereof having jurisdiction over the conduct of
its business or the ownership of its properties, except where non-compliance
therewith would not have a Material Adverse Effect.

 

Section 4.5 Consents. Except as indicated on Schedule 4.5 hereto, no consents,
orders, permissions, approvals or authorizations by or from any governmental
entity or other Person are required to be obtained, and no registrations or
declarations are required to be filed, in connection with the execution and
delivery of any of the Note Documents.

 

Section 4.6 Business. Schedule 4.6 to this Agreement correctly sets forth a
brief description of the business (as conducted and presently proposed to be
conducted) of the Related Parties.

 

Section 4.7 Financial Statements.

 

(a) The audited financial statements of the Related Parties as of and for each
of the five fiscal years ended December 31, 2003, as certified by its
independent certified public accountants, which has been delivered to Note
Purchaser, and the unaudited financial statements of the Related Parties for the
eight-month interim period ended August 31, 2004, were prepared in accordance
with GAAP consistently applied throughout the fiscal years and interim period
involved; are correct, and completely and fairly present in all material
respects the financial position and results of operations of the Related Parties
as of said dates and for each of the periods indicated. The unaudited financial
statements accurately reflect (or have been restated to accurately reflect) the
financial condition and results of operation of the Company and its Subsidiaries
after giving effect to the PW Poly Spinoff.

 

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Copies of the financial statements described in this Section 4.7(a) are attached
hereto as part of Schedule 4.7.

 

(b) The Related Parties have no Indebtedness other than Indebtedness permitted
pursuant to Section 7.2 and have no Contingent Obligations other than Contingent
Obligations permitted pursuant to Section 7.4 hereof.

 

(c) The Opening Day Balance Sheet of the Related Parties delivered to the Note
Purchaser as part of Schedule 4.7 has been prepared by management of the Company
on a reasonable basis, taking into consideration the effect of the note purchase
transaction contemplated hereby, the transactions contemplated by the Senior
Credit Agreement, the transactions contemplated by the Senior Subordinated Note
Purchase Agreement and the transactions contemplated by the Equity Documents,
and neither the Company nor its management is aware of any fact which casts
doubt on the material accuracy or completeness thereof. To the Company’s
knowledge, after giving effect to such transactions, none of the Related Parties
will have any material liabilities, contingent or otherwise, which are not
referred to in the Opening Day Balance Sheet or in the notes thereto other than
liabilities not required to be disclosed in accordance with GAAP (and none of
such non-disclosed liabilities are material).

 

(d) The Financial Projections separately disclosed to the Note Purchaser (the
“Financial Projections”) have been prepared in good faith and are based on what
the Company believes on the date hereof to be a reasonable assessment of the
future performance of the Related Parties subject to general business conditions
and economic factors which may be beyond its control or other unanticipated
future events which could have an unforeseen impact on the performance or
condition of the Related Parties. All material assumptions used in the
preparation of the Financial Projections are set forth in the notes thereto or
in this Agreement or on a Schedule hereto.

 

Section 4.8 Full Disclosure. Neither this Agreement nor any of the other Note
Documents nor any Schedule hereto or thereto or closing certificate furnished by
any Related Party to the Note Purchaser nor the Confidential Private Placement
Memorandum relating to $15 million Convertible Preferred Stock delivered to Note
Purchaser (together will the filings made by the Company with the Securities and
Exchange Commission since the date thereof, the information made available to
the Note Purchaser on site at the Company’s office in February 2004, and the
financial statements, projections and other information provided as part of the
Schedules to this Agreement) contains any untrue statement of a material fact or
omits a material fact necessary to make the statements contained therein or
herein not misleading in light of the circumstances in which made. There is no
fact which the Company has not disclosed to the Note Purchaser in writing which
could reasonably be expected to have a Material Adverse Effect.

 

Section 4.9 No Event Having a Material Adverse Effect. Since December 31, 2003,
none of the business, operations, properties nor assets of the Related Parties
have been affected by an event or circumstance having a Material Adverse Effect.

 

Section 4.10 Pending Litigation. There are no actions, suits, investigations or
proceedings (whether or not purportedly on behalf of any Related Party) pending
or, to the knowledge of the

 

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Company, threatened against or affecting any Related Party, or the business,
operations, properties, prospects, profits or condition (financial or otherwise)
of any Related Party, before or by any governmental department, commission,
board, regulatory authority, bureau, agency, or instrumentality, domestic,
foreign, federal, state or municipal, or any court, arbitrator or grand jury,
which, if determined adversely to any Related Party, could reasonably be
expected to have a Material Adverse Effect or (without limiting the foregoing)
result in equitable relief or monetary judgments, individually or in the
aggregate, in excess of $250,000. No Related Party is in default with respect to
any judgment, order, writ, injunction, decree, demand, rule or regulation of any
court, arbitrator, grand jury or of any governmental agency, default under which
might have consequences which could result in a Material Adverse Effect. There
are no pending or, to the knowledge of the Company, threatened claims for
indemnification by or against any Related Party pursuant to any sale agreement.

 

Section 4.11 Title to Properties. Each Related Party has good and marketable
title to all of its property and other assets. No Related Party owns assets with
a fair market value in excess of Fifty Thousand Dollars ($50,000) in any state
except for those assets in transit from time to time and assets located at the
locations specified on Exhibit A to the Security Agreement. All property and
assets of any kind (real or personal, tangible or intangible) of the Related
Parties are free from any Lien except Permitted Liens. Except for financing
statements evidencing Permitted Liens and the Financing Statements filed
pursuant to this Agreement, no financing statement under the Uniform Commercial
Code which names any Related Party as debtor has been filed and not terminated,
and no Related Party has signed any security agreement authorizing any secured
party thereunder to file any such financing statement which has not been
terminated. Each Related Party enjoys peaceful and undisturbed possession under
all leases under which it is operating, including, without limitation, the
Leases, and none of such leases contain provisions that will materially impair
or adversely affect the operations of any Related Party. All of the leases under
which any Related Party is operating, including without limitation, the Leases,
are valid, subsisting and in full force and effect and none of such leases is in
default, and no event has occurred which with the passage of time or the giving
of notice, or both, would constitute a default under any provision thereof.

 

Section 4.12 Licenses and Permits. Each Related Party has all federal, state and
local licenses and permits required to be maintained in connection with and
material to the operation of its businesses, and all such licenses and permits
are valid and fully effective, except where the failure to have such valid or
effective license or permit could not reasonably be expected, individually or in
the aggregate, to have a Material Adverse Effect or result in material liability
to any Related Party.

 

Section 4.13 Taxes. Each Related Party has timely and accurately filed all
federal, state and municipal tax returns which are required to be filed and has
timely paid, or made provision for the payment of, all material taxes which have
become due pursuant to said returns or pursuant to any assessment received by
any Related Party, except such taxes, if any, as are being contested in good
faith and for which adequate reserves in accordance with GAAP have been
provided. Each Related Party has further made payment of all franchise and
similar taxes in its jurisdiction of incorporation, and in all of the respective
jurisdictions in which it is qualified as a foreign corporation, insofar as such
taxes are due and payable, except for any such taxes the validity of which are
being contested in good faith and for which reserves in accordance with GAAP
have been set aside on the books of the Related Parties.

 

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Section 4.14 Use of Proceeds. The Company will apply the proceeds from the sale
of the Notes solely for the purposes specified in the summary of sources and
uses provided pursuant to Section 5.1(p).

 

Section 4.15 Margin Securities. The Company is not engaged in the business of
extending credit for the purpose of buying or carrying margin securities, and no
part of the proceeds realized from the sale of the Notes will be used to buy or
carry any such margin securities or be used in a manner inconsistent with the
provisions of Regulation T, U or X of the Board of Governors of the Federal
Reserve System.

 

Section 4.16 No Investment Company. The Company is not an “investment company,”
or a company “controlled” by an “investment company,” as such terms are defined
in the Investment Company Act of 1940, as amended.

 

Section 4.17 Securities Laws. Neither the Company nor any agent on its behalf
has offered or will offer to sell all or any of the Notes, or solicited any
offers to acquire any of the Notes from, or otherwise approached or negotiated
or communicated in respect of any of the Notes with, any Person so as thereby to
bring the delivery of the Notes within the registration requirements of the
Securities Act of 1933, as amended.

 

Section 4.18 ERISA Compliance. The provisions of each Plan comply in all
material respects with all applicable requirements of ERISA, and no Related
Party has incurred any “accumulated funding deficiency” within the meaning of
ERISA which is material, or has incurred any material liability to PBGC, in
connection with any Plan. No Related Party participates in any multi-employer
pension plan.

 

Section 4.19 OSHA Compliance. Each Related Party has conducted its business so
as to comply in all material respects with the requirements of OSHA.

 

Section 4.20 ADA Compliance. Each Related Party is in compliance in all material
respects with the requirements of ADA.

 

Section 4.21 Employee Relations. Each Related Party has complied in all material
respects with all applicable federal, state and local laws, rules and
regulations relating to employment, and all applicable laws, rules and
regulations governing payment of minimum wages and overtime rates, and the
withholding and payment of taxes from compensation of employees and the payment
of premiums and/or benefits under applicable workers’ compensation laws. Except
as described in Schedule 4.21, no employees of any Related Party are parties to
a collective bargaining agreement, nor is any union organizing activity pending
or, to the best of its knowledge, threatened. No Related Party has experienced
any work stoppage or other material labor difficulty during the past five years.

 

Section 4.22 Environmental Protection. Each Related Party has obtained all
permits, licenses and other authorizations which are required under federal,
state and local laws relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, hazardous or toxic materials or wastes
into

 

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ambient air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants or hazardous or toxic
materials or wastes (“Environmental Laws”) except where the failure to obtain
such permits, licenses and authorizations could not reasonably be expected to
have a Material Adverse Effect. Each Related Party is in full compliance with
all terms and conditions of such required permits, licenses and authorizations
and is also in full compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in the Environmental Laws or contained in any plan, order,
decree, judgment or notice except where failure to be in compliance could not,
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect or material liability to any Related Party. The Company is
further not aware of, nor has any Related Party received notice of, any events,
conditions, circumstances, activities, practices, incidents, actions or plans
which may interfere with or prevent continued compliance or which may give rise
to any material liability under any Environmental Laws or the common law.

 

Section 4.23 Insurance. Each Related Party has been and is insured by
financially sound and reputable insurers with respect to its property and the
conduct of its business in such amounts and against such risks as is sufficient
for its business and compliance with law. All policies of insurance are
currently in full force and effect, and no notice of cancellation or termination
has been received by any Related Party with respect to any such policies. All
premiums due and payable on such policies have been paid. Schedule 4.23 to this
Agreement correctly sets forth a complete list and description of all policies
of insurance currently maintained by the Related Parties.

 

Section 4.24 Solvency.

 

(a) The fair saleable value of the assets of each Related Party will,
immediately following the sale of the Notes on the Closing Date and the other
transactions contemplated in connection therewith, exceed the amount of its
existing debts and other liabilities (including Contingent Obligations).

 

(b) None of the Related Parties has, or will have immediately following the sale
of the Notes and the other contemplated transactions on the Closing Date,
unreasonably small capital to carry out its business as conducted or as proposed
to be conducted.

 

(c) None of the Related Parties has incurred and none intends to incur debts
beyond its ability to pay as they mature.

 

Section 4.25 Intellectual Property. Each of the Related Parties possesses
adequate assets, licenses, permits, patents, patent applications, copyrights,
service marks, trademarks, trademark applications, trade styles and trade names,
governmental approvals or other authorizations or other rights that are
necessary for such Related Party to continue to conduct its business as
heretofore conducted by it and all such licenses, permits, patents, patent
applications, registered copyrights, service marks, trademarks, trademark
applications, trade styles and trade names, governmental approvals or other
authorizations or other rights are listed on Schedules A and B to the Security
Agreement - Intellectual Property, except for immaterial licenses, permits, and
governmental

 

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approvals and authorizations. There are no pending or, to the knowledge of the
Company, threatened suits, claims, proceedings or other actions challenging any
Related Party’s title to or right to use such intellectual property.

 

Section 4.26 Equity Documents. The representations and warranties made by the
Company in the Equity Documents are true and correct in all material respects,
may be relied upon by the Note Purchaser, and are in addition to and not in lieu
of any representations or warranties set forth herein.

 

Section 4.27 No Payments Not in the Ordinary Course Since December 31, 2003, the
Company has not made any payment to any Person other than in the ordinary course
of its business, except for payments in the aggregate not exceeding One Hundred
Thousand Dollars ($100,000).

 

Section 4.28 Trade Relations; Resin Supply Agreement.

 

(a) There exists no actual or threatened termination, cancellation or limitation
of, or any modification or change in, the business relationship between any of
the Related Parties and any customer or any group of customers whose purchases
individually or in the aggregate are material to such Related Party, or with any
material supplier, and there exists no present condition or state of facts or
circumstances which would materially affect adversely such Related Party or
prevent such Related Party from conducting such business after the consummation
of the transaction contemplated by this Agreement in substantially the same
manner in which it has heretofore been conducted.

 

(b) The Company has delivered to the Note Purchaser a true and correct copy of
the Resin Supply Agreement. The Resin Supply Agreement is a legal, valid and
binding agreement in full force and effect and is enforceable against the
parties thereto in accordance with its terms. The Company has not waived or
assigned to any other Person any of its rights thereunder. The Company and, to
the knowledge of the Company, the supplier under the Resin Supply Agreement have
substantially performed all obligations required to be performed by them to
date, and are not in default in any material respect, under the Resin Supply
Agreement.

 

Section 4.29 SEC Reports. The Company has filed all reports required to be filed
by it pursuant to Section 13 or Section 15(d) of the Exchange Act within the
last 12 months on a timely basis or has received a valid extension of time of
filing. The Company’s most recently filed Annual Report on Form 10-K and each
Quarterly Report on Form 10-Q and Current Report on Form 8-K filed thereafter
complied as to form in all material respects with the rules and regulations of
the Securities and Exchange Commission on the dates of filing and, as of such
dates, did not contain any untrue statement of a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.

 

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V. CLOSING CONDITIONS

 

The Note Purchaser’s obligation to purchase the Notes shall, unless waived by
the Note Purchaser, be subject to the satisfaction, prior to or concurrently
with the Note Purchaser’s purchase of the Notes, of the following conditions:

 

Section 5.1 Documents Required for the Closing. The Company shall have delivered
to the Note Purchaser the following:

 

(a) Notes having the characteristics described in Article III hereof, duly
executed by the Company;

 

(b) the Security Agreement and the Security Agreement - Intellectual Property,
each duly executed by the Company;

 

(c) the Financing Statements;

 

(d) the Senior Subordination Agreement, duly executed by the parties thereto;

 

(e) the Junior Subordination Agreement, duly executed by the parties thereto;

 

(f) the Management Fee Subordination Agreement, duly executed by the parties
thereto;

 

(g) a certificate dated the Closing Date, signed by a Responsible Officer of the
Company in form and substance satisfactory to the Note Purchaser and its
counsel, certifying that the conditions specified in Sections 5.2 and 5.3 have
been fulfilled and that no Default or Event of Default hereunder has occurred as
of such date;

 

(h) a certificate dated the Closing Date, signed by the secretary or an
assistant secretary of the Company in form and substance satisfactory to the
Note Purchaser and its counsel, (i) certifying resolutions duly adopted by the
Board of Directors of the Company authorizing the execution of this Agreement,
the Notes, the other Note Documents to which it is a party, the Equity Documents
and all of the other transactions to be consummated pursuant thereto, (ii)
certifying the names and incumbency of the officers of the Company who are
empowered to execute the foregoing documents for and on behalf of the Company,
(iii) certifying the authenticity of copies of the Articles or Certificate of
Incorporation and Bylaws of the Company, and (iv) certifying the continued good
standing of the Company, as evidenced by reasonably current Certificates of Good
Standing, in the State of Minnesota and all other jurisdictions in which it is
qualified to conduct business;

 

(i) a written opinion of the law firm of Fredrikson & Byron, P.A., legal counsel
for the Company, dated as of the Closing Date and addressed to the Note
Purchaser acceptable to the Note Purchaser and its legal counsel;

 

(j) a copy of the Senior Credit Agreement and all other documents evidencing or
securing the Senior Debt;

 

(k) copies of all other documentation evidencing material Indebtedness of any
Related Party including the Senior Subordinated Note Purchase Agreement;

 

(l) the Equity Documents, duly executed by the parties thereto;

 

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(m) a reasonably current lien and judgment search (at both state and county
levels in each jurisdiction where any of the Related Parties is qualified to
conduct business or owns material assets) confirming, except for Permitted
Liens, the absence of any judicial liens, security interests, tax liens or
similar such liens affecting any of the Collateral;

 

(n) documents, in form acceptable to the Note Purchaser, evidencing the
obtaining of all releases, consents or approvals to the transactions listed on
Schedule 4.5 hereto;

 

(o) a certificate executed by a Responsible Officer of the Company, certifying
that (i) the proceeds from the sale of the Notes have been applied in the manner
specified in Section 4.14; and (ii) the conditions set forth in Sections 5.6 and
5.7 have been satisfied;

 

(p) a complete and accurate summary of the sources and uses (including a
description in reasonable detail of the transaction fees and expenses to be paid
by the Company and other Related Parties) of all debt and equity funds provided
at the Closing;

 

(q) wire transfer instructions to Note Purchaser regarding the payment of the
purchase price of the Notes;

 

(r) a solvency certificate executed by a Responsible Officer of the Company in a
form acceptable to the Note Purchaser;

 

(s) true and correct copies of the Environmental Audits, together with a letter
authorizing the Note Purchaser to rely thereon;

 

(t) proof of adequate property and liability insurance coverage (consisting of
duly issued policies of insurance or binders) on all of the properties and
business operations of the Company which certificates shall be on ACORD Form 27
and shall name the Note Purchaser as a loss payee with respect to property
insurance and as an additional insured with respect to liability insurance;

 

(u) copies of any appraisals of fixed or other assets constituting Collateral
delivered to Agent or any of the Senior Creditors;

 

(v) pay-off letter or comparable documents from the holders of the Existing
Subordinated Debt in form and substance satisfactory to the Note Purchaser;

 

(w) acknowledgement from the Spell Group that it has read the definition of
“Change of Control” and understands that a Change of Control would constitute an
Event of Default under this Agreement;

 

(x) a copy of the Borrowing Base Certificate (as defined in the Senior Credit
Agreement) delivered to the Senior Creditors on the Closing Date;

 

(y) evidence of the dissolution of Mid-States Plastics, Inc. and the
distribution of its assets to the Company and evidence of the merger of
Extrusion Technologies, Inc. with and into the Company;

 

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(z) such additional financial information as the Note Purchaser may reasonably
require, including a current fiscal year operating budget and the most recent
auditor’s management letter; and

 

(aa) such other instruments, documents, certificates and opinions and other
evidence as the Note Purchaser may reasonably request, including personal and/or
professional references, in form and substance satisfactory to it and its
counsel, with respect to the transactions to be consummated pursuant hereto.

 

Section 5.2 Representations and Warranties True. The representations and
warranties contained in Article IV shall be true on and as of the Closing Date
with the same effect as though such representations and warranties had been made
on and as of the Closing Date.

 

Section 5.3 Compliance with this Agreement. The Company shall have performed all
of its agreements contained herein and there shall exist no Default or Event of
Default hereunder.

 

Section 5.4 Proceedings Satisfactory. All proceedings to be taken in connection
with the transactions contemplated by this Agreement and all documents incident
to such transactions shall be satisfactory in form and substance to the Note
Purchaser and its counsel.

 

Section 5.5 Payment of Closing Expenses. The Company shall pay at Closing Note
Purchaser’s due diligence and closing fees in the amount specified in the
proposal letter dated September 1, 2004, and reimburse Note Purchaser for its
out-of-pocket expenses in full satisfaction of all remaining liability the
Company may have for any closing, commitment and due diligence fees owed to Note
Purchaser, and shall have paid any then-outstanding legal fees and out-of-pocket
expenses of Note Purchaser’s legal counsel (both external legal counsel and
in-house counsel). Any outstanding closing, commitment and due diligence fees
shall be payable to Churchill Capital, Inc.

 

Section 5.6 Funding of Senior Debt; Excess Availability Under Revolving Line of
Credit; Other Indebtedness. The Senior Creditors shall have made available a
revolving credit facility in the amount of One Hundred Million Dollars
($100,000,000), with a 5-year term, all pursuant to the Senior Credit Agreement.
Following the application of funds drawn on the revolving line of credit
established by the Senior Credit Agreement and reserving an adequate amount for
the next scheduled payment under the Resin Supply Agreement, as of the Closing,
the amount of Availability shall be at least Twelve Million Dollars
($12,000,000) and the aggregate outstanding principal amount of the Indebtedness
outstanding under such revolving credit facility shall not exceed Eighty Million
Dollars ($80,000,000). The Company and its Subsidiaries shall have no other
Indebtedness outstanding at Closing except for the Indebtedness under the Senior
Subordinated Note Purchase Agreement and Capitalized Lease Obligations in an
aggregate amount not to exceed $18,000,000.

 

Section 5.7 Closing EBITDA. Evidence satisfactory to the Note Purchaser that
EBITDA of the Company and its consolidated Subsidiaries (excluding PW Poly) for
the seven month period ending July 31, 2004 was at least $13,000,000.

 

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VI. AFFIRMATIVE COVENANTS

 

The Company hereby covenants as follows:

 

Section 6.1 Payment of Notes. The Company will punctually pay or cause to be
paid the principal of and interest on the Notes at the times and places and in
the manner specified in the Notes.

 

Section 6.2 Financial Reporting. The Company will furnish to the Note Purchaser
and each holder of a Note copies of the following financial statements, reports
and information:

 

(a) not later than 90 days after the close of each fiscal year of the Company,
unqualified (except for a qualification for a change in accounting principles
with which the accountant concurs) audited financial statements of the Related
Parties as of the end of and for such year, on a Consolidated and consolidating
basis, certified by a firm of independent certified public accountants of
recognized standing selected by the Company but acceptable to the Note Purchaser
and, within a reasonable time thereafter a copy of any management letter issued
in connection therewith;

 

(b) not later than 30 days after the end of each month hereafter, including the
last month of the Company’s fiscal year, unaudited interim financial statements
of the Related Parties as of the end of such month and for the portion of the
fiscal year then elapsed, on a consolidating and Consolidated basis, certified
by the chief financial officer of the Company as prepared in accordance with
GAAP and fairly presenting in all material respects the financial position and
results of operations of the Related Parties as of the end of such month and for
such period subject only to changes from audit and year-end adjustments and
except that such statements need not contain notes;

 

(c) together with each delivery of financial statements pursuant to clause (a)
of this Section 6.2 and clause (b) of this Section 6.2 for the months of March,
June, September and December, a management report (1) 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 current fiscal year delivered pursuant to clause (e) of this Section 6.2
and (2) identifying the reasons for any significant variations. The information
above shall be presented in reasonable detail and shall be certified by the
chief financial officer of the Company to the effect that such information
fairly presents in all material respects the results of operation and financial
condition of the Company and its Subsidiaries as at the dates and for the
periods indicated;

 

(d) promptly after the sending or filing thereof, as the case may be, copies of
any proxy statements, financial statements or reports which the Company has made
available to its securities holders and copies of any regular, periodic and
special reports or registration statements which any of the Related Parties
files with the Securities and Exchange Commission or any governmental authority
which may be substituted therefor, or any national securities exchange or
national market system;

 

(e) as soon as available and in any event no later than thirty (30) days prior
to the last day of each fiscal year, annual and monthly budgets, forecasts and
pro forma cash flow projections developed by the Related Parties for their next
succeeding fiscal year;

 

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(f) promptly with the sending or filing thereof, copies of all reports and
documents that any Related Party sends or provides to any of its material
creditors, including, without limitation, all information provided to the Senior
Creditors pursuant to Sections 8.1.3 and 8.1.4 of the Senior Credit Agreement,
whether upon such creditors’ request or otherwise and, to the extent such are
within the possession or control of any Related Party, copies of all reports,
audits and work papers, prepared by or for its creditors, or their designees,
whether during the course of a periodic audit or otherwise, which examine the
loans, collateral, controls, policies or procedures of any Related Party;

 

(g) immediately upon the receipt thereof from any creditor, including, without
limitation, any Senior Creditor or the Agent, copies of any notices of default,
copies of any appraisals or audits of any property constituting Collateral or
other material correspondence or information pertaining to any material credit
facilities maintained by any Related Party;

 

(h) upon request from Note Purchaser, a true and correct copy of the Related
Parties’ consolidated federal and state income tax returns as filed and all
schedules thereto; and

 

(i) such other information with respect to the financial condition and
operations of the Related Parties as the Note Purchaser may request and, when
requested to do so, will make available for inspection by duly authorized
representatives of the Note Purchaser any of their respective books and records
and will furnish the Note Purchaser any information regarding their business
affairs and financial condition after written request therefor.

 

Section 6.3 Payment of Taxes and Claims.

 

The Company will, and will cause each of the Related Parties to, duly pay and
discharge, as the same become due and payable, all taxes, assessments and
governmental and other charges, levies or claims levied or imposed, which are,
or which if unpaid might become, a Lien or charge upon the properties, assets,
earnings or business of any Related Party; provided, however, that nothing
contained in this Section 6.3 shall require the Related Parties to pay and
discharge, or cause to be paid and discharged, any such tax, assessment, charge,
levy or claim so long as the Company or its Subsidiaries in good faith shall
contest the validity thereof and shall set aside on its books adequate reserves
in accordance with GAAP with respect thereto. In the event the Company fails to
satisfy its obligations under this Section 6.3, the Note Purchaser or any holder
of a Note may but is not obligated to satisfy such obligations in whole or in
part and any payments made and expenses incurred in doing so shall constitute
Obligations and shall be paid or reimbursed by the Company.

 

Section 6.4 Maintenance of Existence and Properties; Inspection.

 

(a) Existence and Rights. The Company will and will cause each other Related
Party at all times to do all things necessary to maintain, preserve and renew
its corporate charter and its rights, patents and franchises; provided, however,
that nothing contained in this Section 6.4(a) shall (i) require any Related
Party to maintain, preserve or renew any right, patent or franchise not
necessary or desirable in the conduct of the business of the Related Parties, or
(ii) prevent the termination of the corporate existence of any Subsidiary if in
the opinion of the Board of Directors of the Company such termination is not
disadvantageous to the holders of the Notes.

 

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(b) Maintenance of Corporate Offices. Except upon thirty (30) days prior written
notice to the Note Purchaser, the Company will at all times maintain its
corporate offices at the address specified in Section 10.4 hereof to which
notices, presentations and demands to or upon the Company in respect of a Note
may be given or made, and at which the Company shall maintain a register for the
Notes.

 

(c) Notices. The Company will as soon as practicable give written notice to the
Note Purchaser of:

 

(i) any litigation, arbitration or governmental investigation or proceeding,
which has been instituted or, to the knowledge of the Company, is threatened
against any Related Party, or its properties which:

 

(A) if determined adversely to such Related Party could reasonably be expected
to have a Material Adverse Effect; or

 

(B) relates to this Agreement or any document executed pursuant hereto; or

 

(ii) any event having or which would reasonably be expected to have a Material
Adverse Effect, including any materially adverse development which occurs in any
litigation, arbitration or governmental investigation or proceeding previously
disclosed by the Company to the Note Purchaser.

 

In addition, the Company will send to the Note Purchaser a copy of all notices
delivered to Agent or the Senior Creditors pursuant to Sections 8.1.2 or 8.1.3
of the Senior Credit Agreement, simultaneously with the delivery thereof under
such Senior Credit Agreement.

 

(d) Insurance. The Company will provide or cause to be provided for itself and
the other Related Parties insurance against loss or damage of the kinds
customarily insured against by corporations similarly situated, with reputable
insurers, in such amounts, with such deductibles and by such methods as shall be
adequate, and in any event in amounts not less than amounts generally maintained
by other companies engaged in similar businesses. The Company shall further
promptly provide to the Note Purchaser copies of all material notices received
from or sent to any of the insurers of any Related Party together with copies of
all material correspondence related to such insurance.

 

(e) Financial Records. The Company will and will cause each other Related Party
to keep true books of records and accounts in which full and correct entries
will be made of all its business transactions, and will reflect in its financial
statements adequate accruals and appropriations to reserves, all in accordance
with GAAP (subject to customary and reasonable year-end adjustments).

 

(f) Compliance with Law. The Company will and will cause each other Related
Party to comply with all applicable statutes, rules, regulations, orders and
restrictions of the United States of America, foreign countries, states and
municipalities and of any governmental department, commission, board, regulatory
authority, bureau, agency, and instrumentality of the foregoing, and of

 

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any court, arbitrator or grand jury, in respect of the conduct of their
respective businesses and the ownership of their properties, except such as are
being contested in good faith or where failure to comply could not reasonably be
expected to have a Material Adverse Effect.

 

(g) Inspection. The Company will and will cause each other Related Party to
permit representatives of the Note Purchaser, from time to time, as often as may
be reasonably requested, but only during normal business hours, to visit and
inspect the properties of each Related Party.

 

Section 6.5 Financial Covenants. The Company (on a consolidated basis) will
comply with the financial covenants set forth on Schedule 6.5 attached hereto.

 

Section 6.6 Delivery of Certificates.

 

(a) Compliance Certificate. The Company shall furnish to the Note Purchaser at
the time it delivers each set of financial statements required by Sections
6.2(a) and 6.2(b) hereof a Compliance Certificate in substantially the form of
Schedule 6.6 hereto, duly executed by a Responsible Officer of the Company,
which shall (i) in the case of Compliance Certificates delivered for March,
June, September and December of each year, set forth in reasonable detail the
computations necessary to determine whether the Company is in compliance with
the financial covenants contained in Section 6.5 hereof and Schedule 6.5 hereto;
(ii) certify that the representations and warranties set forth in Article IV
hereof remain true and correct in all material respects (except to the extent
such representations and warranties (x) expressly refer to an earlier date, in
which case they shall be true and correct in all material respects as of such
earlier date, or (y) are not true and correct due to events or conditions, the
occurrence or existence of which are not prohibited by this Agreement or any
other Note Document and which do not, in and of themselves, constitute a Default
or an Event of Default); (iii) certify that no Event of Default has occurred and
is continuing, or, if an Event of Default has occurred and is continuing,
describing the same in reasonable detail and describing the action the Company
has taken and proposes to take with respect thereto; and (iv) include a true and
correct copy of all minutes of meetings of the shareholders and the Board of
Directors of the Company, or written actions of the shareholders and the Board
of Directors, pertaining to meetings conducted or actions taken during the
reporting period.

 

(b) Accountants’ Certificate. The Company shall furnish to the Note Purchaser at
the time it delivers each set of financial statements required by Sections
6.2(a) a certificate of its certified public accountants certifying to the Note
Purchaser that, based upon their examination of the financial statements of the
Related Parties performed in connection with their examination of said financial
statements, they are not aware of any Default or Event of Default, or, if they
are aware of such Default or Event of Default, specifying the nature thereof.

 

Section 6.7 Notice of Default. In addition to any other reporting requirements
set forth in this Agreement, the Company shall have an immediate obligation to
report to the Note Purchaser the occurrence of any Default or Event of Default
of which it becomes aware and the action which the Company proposes to take with
respect thereto.

 

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Section 6.8 Board Observation Rights. The Company will permit one representative
of each holder of a Note (each, an “Observer”) to attend all meetings of the
board of directors of the Company and the board of directors of each Subsidiary
of the Company (whether in person, telephonic or other) in a non-voting,
observer capacity and shall provide to each Observer concurrently with the
members of such board, and in the same manner, notice of such meeting and a copy
of all materials provided to such board members. The Company agrees to pay all
out-of-pocket expenses reasonably incurred by each Observer associated with
attending such meetings.

 

Section 6.9 Information Meetings. Upon Note Purchaser’s request, the Company
will participate and will use its best efforts to cause key management personnel
and knowledgeable personnel of the Company and its Subsidiaries to participate
in a meeting with Note Purchaser, which meeting shall be held during normal
business hours and at such place as may be reasonably requested by Note
Purchaser, to discuss, among other things, operational performance, strategy,
business issues and any other matters requested by Note Purchaser. The Company
agrees to pay all out-of-pocket expenses reasonably incurred by the Note
Purchaser associated with attending such meetings.

 

Section 6.10 Monitoring of Control. The Company shall reimburse the Note
Purchaser for the expenses associated with engaging a service acceptable to the
Note Purchaser to monitor filings pursuant to Section 16 of the Exchange Act
with respect to the Company.

 

Section 6.11 Further Assurances.

 

(a) General. Promptly upon request by the Note Purchaser, the Company shall (and
shall cause any other Related Party to) take such additional actions as the Note
Purchaser may reasonably require from time to time in order (i) to carry out
more effectively the purposes of this Agreement and the other Note Documents,
(ii) to subject to the liens created by any of the Security Documents, any of
the properties, rights or interests covered by any of the Security Documents,
(iii) to perfect and maintain the validity, effectiveness and relative priority
of any of the Security Documents and the liens intended to be created thereby,
and (iv) to better assure, convey, grant, assign, transfer, preserve, protect
and confirm to the Note Purchaser the rights from time to time granted to the
Note Purchaser under this Agreement or any of the other Note Documents.

 

(b) Real Property. If the Company or any Subsidiary shall acquire at any time or
times hereafter any fee simple interest in other real property, the Company
shall or shall cause its Subsidiary to promptly execute and deliver to the Note
Purchaser, as additional security and Collateral for the Obligations, deeds of
trust, security deeds, mortgages or other collateral assignments reasonably
satisfactory in form and substance to the Note Purchaser and its counsel (herein
collectively referred to as “New Mortgages”) covering such real property. The
New Mortgages shall be duly recorded (at the Company’s expense) in each office
where such recording is required to constitute a valid Lien on the real property
covered thereby. In respect to any New Mortgage, the Company shall deliver to
the Note Purchaser, at the Company’s expense, mortgagee title insurance policies
issued by a title insurance company reasonably satisfactory to the Note
Purchaser, which policies shall be in form and substance reasonably satisfactory
to the Note Purchaser and shall insure a valid Lien in favor of the Note
Purchaser on the property covered thereby, subject only to Permitted Liens and
those other exceptions reasonably acceptable to the Note Purchaser and its
counsel. The Company shall also

 

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deliver to the Note Purchaser such other usual and customary documents,
including, without limitation, ALTA Surveys of the real property described in
the New Mortgage, as the Note Purchaser and its counsel may reasonably request
relating to the real property subject to the New Mortgages.

 

(c) Subsidiaries. The Company shall cause each of its Subsidiaries to guarantee
the Obligations and to grant to the Note Purchaser a Lien in all of such
Subsidiary’s property to secure such guaranty, subject only to Permitted Liens.
Furthermore and except as otherwise approved in writing by the Note Purchaser,
the Company shall pledge, or cause its Subsidiaries to pledge, the stock or
other equity interest of each of its Subsidiaries to the Note Purchaser to
secure the Obligations, subject only to Permitted Liens.

 

(d) Senior Liens. Without limiting the generality of the foregoing, the Company
shall cause each other Related Party to grant a Lien in favor of the Note
Purchaser in any property, real, personal or mixed, which secures the Senior
Debt.

 

Section 6.12 Post-Closing Matters

 

(a) Mortgages. No later than 10 days after the Closing Date, the Company shall
execute and deliver to the Note Purchaser Mortgages reasonably satisfactory in
form and substance to the Note Purchaser and its counsel covering the Owned Real
Property listed on Schedule 1.1(c). The Mortgages shall be duly recorded (at the
Company’s expense) in each office where such recording is required to constitute
a valid lien on the real property covered thereby. In respect of any Mortgage,
the Company shall deliver to the Note Purchaser, at the Company’s expense:

 

(A) the Title Policies;

 

(B) such other usual and customary documents, including, without limitation,
ALTA surveys of the real property described in the Mortgages, as the Note
Purchaser and its counsel may reasonably request relating to the real property
subject to the Mortgages; and

 

(C) written opinions of special California, West Virginia and Missouri counsel
to the Company, addressed to the Note Purchaser and acceptable to the Note
Purchaser and its legal counsel.

 

(b) Lessor’s Agreements. No later than 30 days after the Closing Date, the
Company shall deliver the Lessor’s Agreements, duly executed by the Lessors.

 

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VII. NEGATIVE COVENANTS

 

Unless the prior written consent of the Note Purchaser is received, the Company
hereby covenants to comply with the following:

 

Section 7.1 Restrictions on Sale of Assets, Consolidations and Mergers,
Investments, Real Property.

 

(a) Sale of Assets. Except as set forth in Schedule 7.1(a), the Company will not
and will not permit any of its Subsidiaries to sell, lease, transfer or
otherwise dispose of its assets other than current assets sold in the ordinary
course of business, except (w) sales of operating assets for fair value all or
substantially all the net proceeds of which are used by the Company (i) to
purchase similar operating assets, or (ii) to prepay the Senior Debt or the
Obligations hereunder, (x) dispositions of obsolete or unusable equipment, (y)
transfers of assets to the Company by a Subsidiary, or (z) dispositions of the
outstanding capital stock of PW Poly in the PW Poly Spinoff. Except as set forth
in Schedule 7.1(a), the Company will also not sell or transfer or permit any of
its Subsidiaries to sell or transfer any of its assets in order concurrently or
subsequently to lease as lessee the same assets. The Company will further not
sell, assign, discount or dispose of any accounts receivable, except in the
ordinary course of business.

 

(b) Consolidations and Mergers. The Company will not and will not permit any of
its Subsidiaries to consolidate with or merge into any other Person or permit
any other Person to consolidate with or merge into it; provided, however, that a
Subsidiary may consolidate with or merge into the Company or a wholly owned
Subsidiary.

 

(c) Investments. The Company will not and will not permit any of its
Subsidiaries to (i) purchase or acquire, or make any commitment therefor, any
capital stock, equity interest, or any obligations or other securities of, or
any interest in, any Person, including the establishment or creation of a
Subsidiary, or (ii) make or commit to make any acquisition of all or
substantially all of the assets of another Person, or of any business or
division of any Person, including without limitation, by way of merger,
consolidation or other combination, or (iii) make or commit to make any advance,
loan, extension of credit or capital contribution to or any other investment in,
any Person including any Affiliate of the Company (the items described in
clauses (i), (ii) and (iii) are referred to as “Investments”), except for:

 

(A) Investments in cash and Cash Equivalents;

 

(B) extensions of credit by the Company to any of its wholly owned Subsidiaries
provided the obligations of each obligor shall be evidenced by notes, which
notes shall be pledged to the Note Purchaser, and have such other terms as the
Note Purchaser may reasonably require; and

 

(C) Investments by the Company, to the extent existing on the Closing Date, in
the Subsidiaries and, prior to the PW Poly Spinoff, Investments by the Company
in PW Poly; and

 

(D) other Investments existing on the date hereof and listed on Schedule 7.1(c)
hereto.

 

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Section 7.2 Indebtedness.

 

(a) Permitted Indebtedness. The Company will not and will not permit any of its
Subsidiaries to create, incur, assume or suffer to exist any Indebtedness for
borrowed money after the date of this Agreement except for (i) the Obligations;
(ii) the Senior Debt; (iii) Indebtedness of the Company pursuant to the Senior
Subordinated Note Purchase Agreement; (iv) Indebtedness of any Subsidiary of the
Company to the Company; (v) accounts payable to trade creditors and current
operating expenses (other than for Funded Debt) which are not aged more than 30
days from the due date, in each case incurred in the ordinary course of business
and paid within such time period, unless the same are being actively contested
in good faith and by appropriate and lawful proceedings and the Company or such
Subsidiary shall have set aside such reserves, if any, with respect thereto as
are required by GAAP and deemed adequate by the Company or such Subsidiary and
its independent accountants; (vi) obligations to pay Rentals permitted by
Section 7.17; (vii) Permitted Purchase Money Indebtedness; (viii) contingent
liabilities arising out of endorsements of checks and other negotiable
instruments for deposit or collection in the ordinary course of business; (ix)
Indebtedness under Capitalized Leases listed on Schedule 7.2; (x) Indebtedness
incurred in connection with performance bonds, workmen’s compensation bonds or
the like; (xi) Indebtedness under the leases of the Company’s manufacturing
plants at 2220 Nugget Way, Eugene, Oregon and at 101 East Avenue M, Conroe,
Texas; (xii) Indebtedness under the leases of real property at 2150 Port of
Tacoma Road, Tacoma, Washington, 8875 Avenue 304 Visalia, California and 1820
Midvale Road, Sunnyside, Washington; (xiii) Indebtedness under the Sale and
Leaseback Documents; (xiv) Indebtedness incurred pursuant to the ETI
Subordinated Note; and (xv) Indebtedness not included in paragraphs (i) through
(xiv) above which does not exceed at any time, in the aggregate, the sum of
$1,000,000.

 

(b) Senior Debt. Without the consent of the Note Purchaser, the Company will not
modify the terms of the Senior Debt as to the amount of principal, rate of
interest, fees and prepayment penalties, if any, or change the maturity or
amortization thereof, except to the extent permitted under the Senior
Subordination Agreement. Without the consent of the Note Purchaser, the Company
will not modify the terms of the Indebtedness under the Senior Subordinated Note
Purchase Agreement, except to the extent permitted under the Junior
Subordination Agreement. Further, if any amendment to the Senior Credit
Agreement or the Senior Subordinated Note Purchase Agreement has the effect of
making any covenant or Event of Default therein more restrictive, the Company
and the Note Purchaser shall, at the Note Purchaser’s request, make a
substantially similar amendment to this Agreement (it being understood that any
such amendments to financial or numerical covenants contained in the Senior
Credit Agreement shall be made proportionately, as nearly as possible, to the
equivalent financial or numerical covenants contained in this Agreement). If, in
connection with an amendment to the Resin Supply Agreement, the Senior Credit
Agreement is amended to make the Minimum Interest Coverage Ratio or Minimum
EBITDA set forth in Schedule 8.3 to the Senior Credit Agreement less
restrictive, the Company and the Note Purchaser will make a proportionate
amendment to the financial covenants set forth in paragraphs (a) and (b) of
Schedule 6.5. Should the Senior Credit Agreement be extended beyond its original
term or should the Company at any time seek to refinance the Senior Credit
Agreement, the consent of the Note Purchaser shall in either event be obtained
prior to such extension or refinancing.

 

Section 7.3 Liens and Encumbrances. The Company will not cause or permit any of
its property (including but not limited to the capital stock of any Subsidiary)
or the property of any

 

33

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Subsidiary, in each case whether such property is now owned or hereafter
acquired, to be subject to any Lien, except Permitted Liens.

 

Section 7.4 Contingent Obligation. The Company will not and will not permit any
of its Subsidiaries to make or become or be liable in respect of any Contingent
Obligation except to the extent permitted hereby.

 

Section 7.5 Restrictions on Dividends and Distributions.

 

(a) The Company will not and will not permit any of its Subsidiaries to (i)
declare or make any dividend payment or other distribution of assets,
properties, cash, rights, obligations or securities on account of any shares of
any class of its capital stock, partnership interests, membership interests or
other equity securities, (ii) purchase, redeem or otherwise acquire for value
any shares of its capital stock, partnership interests, membership interests or
other equity securities or any warrants, rights or options to acquire such
shares, interests or securities now or hereafter outstanding or (iii) make any
payment or prepayment of principal of, premium, if any, interest, redemption,
exchange, purchase, retirement, defeasance, sinking fund or similar payment with
respect to any Indebtedness subordinated to the Notes except, as permitted by
the applicable subordination agreement.

 

(b) Notwithstanding the foregoing, (i) the Company may effect the PW Poly
Spinoff; (ii) the Company may make repurchases of its common stock from its
stockholders or may pay dividends on its common stock not in excess of an
aggregate amount of $500,000 during any fiscal year or $125,000 in any fiscal
quarter, in each case, provided (v) the Company shall have Availability over the
60 days prior to such repurchase or dividend, on average, and immediately after
giving effect to any such repurchase or dividend, of at least $10,000,000, (w)
the Fixed Charge Coverage Ratio for the most recently ended twelve month period
equals or exceeds 1.10 to 1; (x) EBITDA for the most recently ended twelve month
period equaled or exceeded $15,000,000, (y) the Company’s total Funded Debt as
of the last day of the most recently ended fiscal month equals or is less than
$100,000,000, and (z) no Default or Event of Default shall have occurred and be
continuing; (iii) the Company may make repurchases of its common stock from its
stockholders or may pay dividends on its common stock not in excess of an
aggregate amount of $1,000,000 during any fiscal year or $250,000 in any fiscal
quarter, in each case, provided (v) the Company shall have Availability over the
60 days prior to such repurchase or dividend, on average, and immediately after
giving effect to any such repurchase or dividend, of at least $13,000,000, (w)
the Fixed Charge Coverage Ratio for the most recently ended twelve month period
equals or exceeds 1.10 to 1; (x) EBITDA for the most recently ended twelve month
period equaled or exceeded $20,000,000, (y) the Company’s total Funded Debt as
of the last day of the most recently ended fiscal month equals or is less than
$80,000,000, and (z) no Default or Event of Default shall have occurred and be
continuing; (iv) the Company may make repurchases of its common stock from its
stockholders or may pay dividends on its common stock not in excess of an
aggregate amount of $2,000,000 during any fiscal year or $500,000 in any fiscal
quarter, in each case, provided (v) the Company shall have Availability over the
60 days prior to such repurchase or dividend, on average, and immediately after
giving effect to any such repurchase or dividend, of at least $17,000,000, (w)
the Fixed Charge Coverage Ratio for the most recently ended twelve month period
equals or exceeds 1.10 to 1; (x) EBITDA for the most recently ended twelve month
period equaled or exceeded $25,000,000, (y) the Company’s total

 

34

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Funded Debt as of the last day of the most recently ended fiscal month equals or
is less than $62,000,000, and (z) no Default or Event of Default shall have
occurred and be continuing; (v) the Company may make repurchases of its common
stock from its stockholders or may pay dividends on its common stock not in
excess of an aggregate amount of $4,000,000 during any fiscal year or $1,000,000
in any fiscal quarter, in each case, provided (v) the Company shall have
Availability over the 60 days prior to such repurchase or dividend, on average,
and immediately after giving effect to any such repurchase or dividend, of at
least $20,000,000, (w) the Fixed Charge Coverage Ratio for the most recently
ended twelve month period equals or exceeds 1.25 to 1; (x) EBITDA for the most
recently ended twelve month period equaled or exceeded $25,000,000, (y) the
Company’s total Funded Debt as of the last day of the most recently ended fiscal
month equals or is less than $50,000,000 and (z) no Default or Event of Default
shall have occurred and be continuing; and (vi) the Company may repurchase the
Warrants or the Warrant Shares (as defined in the Warrant Agreement).

 

Section 7.6 Organizational Documents. The Company will not agree to, or suffer
to occur, any amendment, supplement or addition to its or any of its
Subsidiaries’ charter, articles or certificate of incorporation, certificate of
formation, limited partnership agreement, bylaws, limited liability agreement,
operating agreement or other organizational documents (as the case may be), that
would reasonably be expected to have a Material Adverse Effect.

 

Section 7.7 Capital Expenditures. The Company will not make or permit any of its
Subsidiaries to make any Capital Expenditure (including, without limitation, by
way of capitalized leases) for any fiscal year that exceed in the aggregate the
amount set forth opposite such fiscal year in the following schedule:

 

Fiscal Year Ending

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

   Permitted
Capital Expenditure

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

December 31, 2004 and each December 31 thereafter

   $ 2,000,000

 

Notwithstanding the foregoing, if (x) the Company’s EBITDA for a fiscal year was
$17,000,000 or more, then for such fiscal year permitted Capital Expenditures
shall be increased to $4,000,000 and the Capital Expenditures Carryover (as
defined below) shall be increased to $1,500,000 and (y) if for any fiscal year
the Company incurs less than the maximum amount of Capital Expenditures
permitted hereunder (such difference is hereinafter referred to as the “Capital
Expenditure Carryover”), then Capital Expenditures incurred within the first six
months of the next fiscal year up to an amount equal to the lesser of $750,000
(or $1,500,000 as provided above) or the Capital Expenditure Carryover, shall be
treated, for purposes of this Section 7.7 as incurred in the prior fiscal year.

 

Section 7.8 Change in Business. The Company will not engage, directly or
indirectly, in any business other than its business as described in Schedule 4.6
hereto.

 

Section 7.9 Intentionally Omitted.

 

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Section 7.10 Transactions with Affiliates. The Company will not and will not
permit any of its Subsidiaries to enter into or continue in effect any
transaction with any Affiliate of the Company or any member of the Spell Group
nor with any officer or employee of the Company, its Subsidiaries or any
Affiliate of the Company except transactions upon fair and reasonable terms no
less favorable to the Company or such Subsidiary than would be obtainable in a
comparable arm’s length transaction with a Person not an Affiliate of the
Company; provided that the foregoing shall not prohibit transactions between or
among the Company and any wholly owned domestic Subsidiary that has guaranteed
the Notes. Further, the Company will not pay any management, consulting or
similar fees to any Affiliate of the Company, including, without limitation, any
member of the Spell Group, or to any officer, director or employee of the
Company or any of its Subsidiaries or any Affiliate of the Company except (a)
payment of reasonable compensation to officers and employees for actual services
rendered to the Company and its Subsidiaries in the ordinary course of business,
(b) payment of director fees in an aggregate amount not to exceed $90,000 per
year; (c) payment of consulting fees with respect to the consulting agreements
identified on Schedule 7.10 hereto and (d) payments of management fees to Spell
Capital Partners LLC in an amount not to exceed $624,000 per year payable no
less frequently than quarterly as permitted by the Management Fee Subordination
Agreement; provided that (x) no payment referred to in clause (b), (c) or (d)
above may be paid at any time there exists a Default or Event of Default
hereunder or a Default or Event of Default would result from such payment and
(y) the amount payable to any Person under any agreement identified on Schedule
7.10 hereto shall not be increased in excess of the amount payable to such
Person under such agreement as it exists on the Closing Date. The Company shall
not enter into any consulting agreements with any Affiliate of the Company after
the Closing Date. In the event that the Company or any of its Subsidiaries
provides goods or services to PW Poly, such party shall charge PW Poly
going-market rates for such goods and services and shall not permit amounts
owing from PW Poly for such goods and services to be outstanding for more than
30 days. In no event shall the Company or its Subsidiaries advance cash to PW
Poly, whether by inter-company loan or otherwise.

 

Section 7.11 Tax Returns. The Company will not file a consolidated tax return
with any Person other than its Subsidiaries and, with respect to periods prior
to the consummation of the PW Poly Spinoff, PW Poly.

 

Section 7.12 Fiscal Year; Accounting Practices. The Company will not change its
fiscal year or alter in any material respect the accounting practices of the
Company and its Subsidiaries for revenue recognition, inventory costing or other
fundamental accounting function of its business.

 

Section 7.13 Inconsistent Agreements. The Company will not and will not permit
any of its Subsidiaries to enter into any agreement containing any provision
which would be violated or breached by any borrowing by the Company hereunder or
by the performance by the Company of its Obligations hereunder or under any
document executed pursuant hereto.

 

Section 7.14 Securities of Subsidiaries. The Company will not permit any
securities of any of its Subsidiaries to be owned by any Person other than the
Company, except for director’s qualifying securities.

 

Section 7.15 [Intentionally Omitted.]

 

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Section 7.16 Negative Pledges. The Company will not enter into or permit any
Subsidiary to enter into any agreement limiting the ability of the Company or
any of its Subsidiaries to voluntarily create Liens upon any of its property.

 

Section 7.17 Leases. The Company will not become, or permit any of its
Subsidiaries to become, a lessee under any operating lease (other than a lease
under which the Company or any of its Subsidiaries is lessor) of property if the
aggregate Rentals payable during any current or future period of 12 consecutive
months under the lease in question and all other operating leases under which
the Company or any of its Subsidiaries is then lessee would exceed One Million
Five Hundred Thousand Dollars ($1,500,000). Lease payments made with respect to
the Sale and Leaseback Transaction are capital lease payments not operating
lease payments. The term “Rentals” means, as of the date of determination, all
payments which the lessee is required to make by the terms of any lease.

 

VIII. EVENTS OF DEFAULT

 

Section 8.1 Events of Default. An “Event of Default” shall exist if any of the
following occurs and is continuing:

 

(a) Default shall be made by the Company (i) in a payment of principal or
interest (including any required payment of Deferred Interest) on any Note when
and as the same shall become due and payable by acceleration or otherwise or
(ii) on any other payment obligation of any nature pursuant to this Agreement,
any Note or any of the Security Documents after the same shall become due and
payable; or

 

(b) Default shall be made in the performance or observance of any covenant,
condition, undertaking or agreement contained in this Agreement or any other
Note Document or any of the Equity Documents, and such default shall continue
for thirty (30) days without being cured after the earlier to occur of the
Company’s receipt of notice of such breach from the Note Purchaser or the date
an officer of the Company otherwise has knowledge of the occurrence thereof,
provided, however, that no grace period shall apply to a breach of the Company’s
obligations under any of Sections 6.2, 6.5, 6.6, 6.9, 6.11 or Article VII
(except with respect to the covenant set forth in paragraph (c) of Schedule
6.5); provided further, however, that the Company shall have a ten (10) day
grace period in which to cure a breach of the covenant set forth in paragraph
(c) of Schedule 6.5; or

 

(c) Any warranty, representation or other statement contained in this Agreement,
the Notes or any other Note Document or any of the Equity Documents, or in any
instrument furnished in compliance with or in reference hereto or thereto, shall
be false or misleading in any material respect at the time made or reaffirmed;
or

 

(d) The Company or any other Related Party shall: (i) file a petition seeking
relief for itself under the United States Bankruptcy Code, as now constituted or
hereafter amended, or file an answer consenting to, admitting the material
allegations of or otherwise not controverting, or fail timely to controvert, a
petition filed against it seeking relief under the United States Bankruptcy
Code, as now constituted or hereafter amended; or (ii) file such petition or
answer with respect to

 

37

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relief under the provisions of any other now existing or future applicable
bankruptcy, insolvency or other similar law of the United States of America or
any State thereof or of any other country having jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or an arrangement,
composition, extension or adjustment with creditors; or

 

(e) An order for relief shall be entered against the Company or any other
Related Party under the United States Bankruptcy Code, as now constituted or
hereafter amended, which order is not stayed; or upon the entry of an order,
judgment or decree by operation of law or by a court having jurisdiction in the
premises which is not stayed adjudging it bankrupt or insolvent under, or
ordering relief against it under, or approving a properly filed petition seeking
relief against it under the provisions of any other now existing or future
applicable bankruptcy, insolvency or other similar law of the United States or
any state thereof or of any other country or jurisdiction providing for the
reorganization, winding-up or liquidation of corporations or any arrangement,
composition, extension or adjustment with creditors, or appointing a receiver,
liquidator, assignee, sequestrator, trustee or custodian of the Company or any
other Related Party or of any substantial part of its property, or ordering the
reorganization, winding-up or liquidation of its affairs, or upon the expiration
of sixty (60) days after the filing of any involuntary petition against the
Company or any other Related Party seeking any of the relief specified in
Sections 8.1(d) or (e) hereof without the petition being dismissed prior to that
time; or

 

(f) The Company or any other Related Party shall: (i) make a general assignment
for the benefit of creditors, or (ii) consent to the appointment of or taking
possession by a receiver, liquidator, assignee, sequestrator, trustee or
custodian of the Company or any other Related Party of all or a substantial part
of its property, or (iii) admit its insolvency or inability to pay its debts
generally as such debts become due, or (iv) fail generally to pay its debts as
such debts become due, or (v) take any action (or if such action is taken by its
directors or majority shareholders) looking to the dissolution or liquidation of
the Company or (except as permitted by Section 7.1(b)) any Subsidiary of the
Company; or

 

(g) The Company or any other Related Party (i) fails to make any payment in
respect of any Indebtedness (other than the Obligations or Senior Debt) or
Contingent Obligation (excluding any Contingent Obligation constituting Senior
Debt) having an aggregate principal amount (including undrawn committed or
available amounts and including amounts owing to all creditors under any
combined or syndicated credit arrangement) of more than $750,000 when due
(whether by scheduled maturity, required prepayment, acceleration, demand, or
otherwise), and such failure continues after the applicable grace or notice
period, if any, specified in the document relating thereto on the date of such
failure; or (ii) fails to perform or observe any other condition or covenant, or
any other event shall occur or condition exist, under any agreement or
instrument relating to any such Indebtedness or Contingent Obligation, if the
effect of such failure, event or condition is to cause, or to permit the holder
or holders of such Indebtedness or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause such Indebtedness to be declared to be
due and payable prior to its stated maturity, or such Contingent Obligation to
become payable or cash collateral in respect thereof to be demanded; or

 

(h) Should payment of the Senior Debt or any part thereof be accelerated; or

 

38

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(i) Should the auditor’s report with respect to the Company’s audited annual
financial statements (to be delivered pursuant to Section 6.2(a) hereof) contain
a qualified opinion indicating a material adverse change in the financial
condition of the Company; or

 

(j) Final judgment (other than any judgment for which the Related Parties are
adequately insured) for the payment of money in excess of Two Hundred Fifty
Thousand Dollars ($250,000) shall be rendered against any Related Party for a
period of thirty (30) days during which time execution shall not be effectively
stayed; or

 

(k) There shall occur a cessation of a substantial part of the business of any
Related Party for a period which materially adversely affects such Related
Party’s capacity to continue its business on a profitable basis; or any Related
Party shall suffer the loss or revocation of any material license or permit now
held or hereafter acquired by such Related Party which is necessary to the
continued or lawful operation of its business; or any Related Party shall be
enjoined, restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of its business
affairs; or any material lease or agreement pursuant to which any Related Party
leases, uses or occupies any property shall be canceled or terminated prior to
the expiration of its stated term, except any such lease or agreement the
cancellation or termination of which could not reasonably be expected to have a
Material Adverse Effect; or any material portion of the Collateral shall be
taken through condemnation or the value of such property shall be impaired
through condemnation; or

 

(l) Any Related Party (other than the Company) shall revoke or attempt to revoke
any pledge agreement, guaranty or security agreement securing the Notes, or
shall repudiate or be in default on its respective obligations thereunder; or

 

(m) the occurrence of any Change of Control; or

 

(n) [Intentionally Omitted.]

 

(o) any material loss, theft, damage or destruction of any portion of the
Collateral having a fair market value of $200,000, in the aggregate, if not
fully covered (subject to such deductibles and self-insurance retentions as the
Note Purchaser shall have permitted) by insurance; or

 

(p) the Company or any Subsidiary of the Company shall be criminally indicted or
convicted under any law that could lead to a forfeiture of any property of the
Company or any Subsidiary of the Company; or

 

(q) a Reportable Event shall occur which, in Note Purchaser’s reasonable
determination, constitutes grounds for the termination by the PBGC of any Plan
or for the appointment by the appropriate United States district court of a
trustee for any Plan, or any Plan shall be terminated or any such trustee shall
be requested or appointed, or if the Company or any Subsidiary of the Company is
in “default” (as defined in Section 4219(c)(5) of ERISA) with respect to
payments to a Multiemployer Plan resulting from the Company’s or such
Subsidiary’s complete or partial

 

39

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withdrawal from such Plan and any such event could reasonably be expected to
have a Material Adverse Effect.

 

Section 8.2 Remedies.

 

(a) In case any one or more of the Events of Default specified in Section 8.1
(other than Section 8.1(d), (e) or (f)) shall have occurred and be continuing,
the Note Purchaser, or holders of at least 51% of the aggregate principal amount
of the Notes acting through a single agent, shall have the right to accelerate
payment of the entire principal of, and all interest accrued on, all outstanding
Notes, and, upon such acceleration, the Notes shall thereupon become forthwith
due and payable, without any presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived, and the Company shall forthwith
pay to the holders of the Notes the entire outstanding principal of, and
interest accrued on, such Notes. With respect to an Event of Default under
Section 8.1(d), (e) or (f), acceleration shall be automatic.

 

(b) The Note Purchaser, or holders of at least 51% of the aggregate principal
amount of the Notes acting through a single agent, may further proceed, either
alone or together with other holders of the Notes, to protect and enforce their
rights with respect to the Notes either by suit, in equity and/or by action at
law, or by other appropriate proceedings, whether for specific performance (to
the extent permitted by applicable law or equitable principles) of any covenant
or agreement contained in this Agreement or such Notes, or in aid of the
exercise of any power granted in this Agreement or the Notes, or may proceed to
enforce payment of the Notes or to enforce any other legal or equitable right of
the holders of the Notes.

 

(c) No course of dealing on the part of the holder of any Note or any delay or
failure on the part of such holder to exercise any right shall operate as a
waiver of such right or otherwise prejudice such holder’s rights, powers and
remedies.

 

IX. AMENDMENT AND WAIVER

 

Any term, covenant, agreement or condition of this Agreement may be amended, or
compliance therewith may be waived (without regard to whether any provision of
this Agreement shall otherwise require the consent of solely the Note
Purchaser), if the Company shall have obtained the agreement or consent in
writing of the holders of at least 51% in aggregate principal amount of all
outstanding Notes. Notwithstanding the foregoing, without the agreement or
consent in writing of the holders of all of the outstanding Notes, no such
amendment or waiver shall (i) change the amount or maturity of any principal of
the Notes or any installment thereof or change the rate of interest or extend
the time of payment of interest on the Notes or reduce the amount of principal
thereof or prepayment premium with respect thereto or modify any of the
provisions of the Notes with respect to the payment or prepayment thereof; (ii)
give to any Note any preference over any other Note; or (iii) reduce the
percentage of holders of Notes required to approve any such amendment or
effectuate any such waiver. Any such amendment or waiver shall apply equally to
all holders of the Notes and shall be binding upon them, upon each future holder
of any Note and upon the Company.

 

40

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X. MISCELLANEOUS

 

Section 10.1 Fees and Expenses. Whether or not (a) the transactions contemplated
by this Agreement shall be consummated or (b) an Event of Default has occurred
and is continuing, the Company will pay to the Note Purchaser (i) all reasonable
expenses of the Note Purchaser incident to the transactions contemplated by this
Agreement (including, solely with respect to the transaction contemplated to be
consummated on the Closing Date, Seven Thousand Dollars ($7,000) to cover Note
Purchaser’s administrative expenses) or in connection with any modification,
amendment, alteration or enforcement (whether requested by the Company, the Note
Purchaser or any other Person) of this Agreement, the Notes or the Security
Documents, and all waivers and releases requested or delivered in connection
therewith (whether or not the same become effective) including, but not limited
to, all filing fees, the fees and expenses of the Note Purchaser’s legal counsel
and the allocated cost of in-house legal services; (ii) all reasonable expenses
incurred by the Note Purchaser in monitoring the transactions contemplated by
this Agreement; and (iii) a reasonable fee to be determined by the Note
Purchaser in connection with any modification, amendment, waiver, extension or
release requested or delivered in connection with this Agreement, the Notes or
the Security Documents, such fee to be determined by the Note Purchaser after
taking into the account the nature of the request, the professional time
incurred in responding to the request, and the requested response date. Except
for fees and expenses payable at Closing pursuant to Section 5.5, fees and
expenses payable under this Section 10.1 shall be payable not later than fifteen
(15) Business Days after notice given in accordance with this Agreement. The
Obligations of the Company under this Section 10.1 shall survive payment of the
Notes.

 

Section 10.2 Indemnification. The Company hereby agrees to indemnify the Note
Purchaser and any other holders of the Notes for any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind and nature whatsoever, including but not
limited to the reasonable fees and expenses of the Note Purchaser’s legal
counsel and the allocated cost of in-house legal services which may be imposed
on, incurred by or asserted against the Note Purchaser or any Note holder in any
way relating to or arising out of this Agreement, the Notes or any other Note
Document or the enforcement of any of the terms hereof or thereof; provided,
however, that the Company shall not be liable for any of the foregoing to the
extent they arise from (i) the gross negligence or willful misconduct of the
Note Purchaser or any other holder of the Notes seeking indemnification, or (ii)
violations of securities laws by the Note Purchaser. The Obligations of the
Company under this Section 10.2 shall survive payment of the Notes.

 

Section 10.3 Survival of Agreements, Covenants, Representations and Warranties.
All agreements, covenants, representations and warranties contained herein, in
the Notes or in any other Note Document, or made in any document given or
supplied in connection herewith, shall survive the execution and delivery of
this Agreement, the issuance, sale and delivery of the Notes and payment
therefor, any disposition thereof by the holders thereof, and any investigation
at any time made by such holder on its behalf. All statements by the Company
contained in any report, memorandum, certificate or other instrument delivered
in connection with the transactions contemplated hereby or pursuant hereto shall
constitute representations and warranties as of the date of delivery of such
report, memorandum, certificate or other instrument.

 

41

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Section 10.4 Notices. Unless otherwise specifically provided herein or therein,
all communications under this Agreement, the Notes and the other Note Documents
shall be in writing and shall be deemed to have been duly given (i) on the date
of service if served personally on the party to whom notice is to be given, (ii)
on the day of transmission if sent by facsimile transmission to the telecopy
number given below, and telephonic confirmation of receipt is obtained promptly
after completion of transmission, (iii) on the day after delivery to Federal
Express or similar overnight courier, or (iv) on the fifth day after mailing, if
mailed to the party to whom notice is to be given, by first class mail,
registered or certified, postage prepaid, and properly addressed, return receipt
requested, to the party as follows:

 

If to the Note Purchaser:   

Churchill Capital Partners IV, L.P.

2400 Metropolitan Centre

333 South Seventh Street

Minneapolis, Minnesota 55402

Attn: Kevin C. Dooley, General Counsel, and

  Mark McDonald, Partner

Telecopy: (612) 673-6630 (Mark McDonald)

                 (612) 673-6615 (Kevin Dooley)

with a copy to:

(which shall not constitute notice)

  

Faegre & Benson LLP

2200 Wells Fargo Center

90 South Seventh Street

Minneapolis, Minnesota 55402

Attn: Susan L. Jacobson

Telecopy: (612) 766-1600

If to Company:   

PW Eagle, Inc.

1550 Valley River Drive

Eugene, Oregon 97401

Attention: Scott Long, CFO

Facsimile No.: (541) 686-9248

With a copy to:

(which shall not constitute notice)

  

Fredrikson & Byron, P.A.

200 South Sixth Street

Suite 4000

Minneapolis, Minnesota 55402

Attention: K. Lisa Holter

Facsimile No.: (612) 347-7077

 

Any party hereto, or holder of a Note, may change its address for purposes of
this Section 10.4 by giving the other party written notice of the new address in
the manner set forth above.

 

Section 10.5 Accounting and Tax Consequences. The Company acknowledges and
agrees that it has made an independent evaluation of the accounting and tax
consequences resulting from the

 

42

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terms and provisions of this Agreement, and that it has no recourse against the
Note Purchaser nor shall this Agreement be affected in any way by virtue of the
fact that the Company’s accounting and tax objectives hereunder may not be
realized in whole or in part.

 

Section 10.6 Binding Effect. All the terms of this Agreement shall be binding
upon, and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto, and in particular, shall inure to
the benefit of and be enforceable by the Note Purchaser or any holder of the
Notes.

 

Section 10.7 Entire Agreement. This Agreement (including the Schedules referred
to herein which form a part hereof), the Note and the other Note Documents
constitute the entire agreement between the parties hereto and supersedes all
prior agreements and understandings, oral and written, between the parties with
respect to the subject matter hereof.

 

Section 10.8 Waivers. Neither any failure nor any delay on the part of the Note
Purchaser or the holder of any Note in exercising any right, power or privilege
hereunder, or under the Notes or any of the other Note Documents, shall operate
as a waiver thereof, nor shall a single or partial exercise thereof preclude any
other or future exercise, or the exercise of any other right, power or
privilege.

 

Section 10.9 Assignment and Transfer. The Note Purchaser and any holder of a
Note may transfer Notes, in whole or in part, to another Person and may, in
connection with such transfer, assign its rights in whole or in part under this
Agreement and the other Note Documents, provided that such transfer complies
with applicable federal and state securities laws. The Company agrees to execute
and deliver such instruments, documents and certificates as the Note Purchaser,
a holder or any such transferee may reasonably request in order to document the
transfer in whole or in part of rights hereunder and under the other Note
Documents, which instruments, documents and certificates shall be in form and
substance reasonably satisfactory to counsel for the Note Purchaser, or holder
or such transferee. The Company may not assign its rights, or effect an
assumption of its Obligations, hereunder, in whole or in part without the prior
written consent of all of the holders of the Notes.

 

Section 10.10 Representation and Warranty of Note Purchaser. The Note Purchaser
hereby represents and warrants that it is acquiring the Notes for its own
account, for the purpose of investment and with no present intention of
distributing or selling such Notes, but subject nevertheless to the condition
that the disposition of its property shall at all times be and remain within its
control. The Note Purchaser further represents and warrants that it is an
“accredited investor” as such term is defined in Regulation D promulgated under
the Securities Act of 1933, as amended.

 

Section 10.11 Maximum Interest Rates. IN CONSIDERATION OF THE WILLINGNESS OF THE
NOTE PURCHASER TO PURCHASE THE NOTES AS PROVIDED HEREIN, THE COMPANY EXPRESSLY
AND IRREVOCABLY WAIVES ANY RIGHT, WHETHER ARISING NOW OR AT ANY TIME IN THE
FUTURE, TO CLAIM THE PROVISIONS OF THE USURY LAWS OF ANY STATE HAVE BEEN
VIOLATED OR THAT ANY SUCH LAW PROVIDES A DEFENSE TO THE PAYMENT OF PRINCIPAL,
INTEREST, DEFAULT INTEREST OR

 

43

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

PREPAYMENT PREMIUM, PURSUANT TO THE TERMS OF THIS AGREEMENT AND THE NOTES, OR TO
CHALLENGE THE VALIDITY AND ENFORCEABILITY OF THIS AGREEMENT, THE NOTES OR THE
SECURITY DOCUMENTS BASED ON THE USURY LAWS OF ANY STATE. IN THE EVENT THE
FOREGOING PROVISIONS OF THIS AGREEMENT ARE NOT GIVEN EFFECT, ALL AGREEMENTS
BETWEEN THE COMPANY AND THE NOTE PURCHASER, WHETHER NOW EXISTING OR HEREAFTER
ARISING AND WHETHER WRITTEN OR ORAL, ARE HEREBY EXPRESSLY LIMITED SO THAT IN NO
EVENT WHATSOEVER, WHETHER BY REASON OF ACCELERATION OF THE MATURITY OF THE NOTE,
OR OTHERWISE, SHALL THE AMOUNT PAID, OR AGREED TO BE PAID, TO THE NOTE PURCHASER
FOR THE USE, FORBEARANCE OR DETENTION OF THE MONEY TO BE LOANED HEREUNDER EXCEED
THE MAXIMUM AMOUNT PERMISSIBLE UNDER APPLICABLE LAW. IF FROM ANY CIRCUMSTANCE
WHATSOEVER FULFILLMENT OF ANY PROVISION HEREOF OR OF THE NOTES OR SECURITY
DOCUMENTS, AT THE TIME PERFORMANCE OF SUCH PROVISION SHALL BE DUE, SHALL INVOLVE
EXCEEDING THE LIMIT OF VALIDITY PRESCRIBED BY LAW, THEN THE OBLIGATION TO BE
FULFILLED SHALL BE AUTOMATICALLY REDUCED TO THE LIMIT OF SUCH VALIDITY. ANY
EXCESS INTEREST RECEIVED BY THE NOTE PURCHASER SHALL BE ALLOCATED TO REDUCE THE
OBLIGATIONS, AND ANY AMOUNT GREATER THAN THE OBLIGATIONS SHALL BE REFUNDED TO
THE COMPANY.

 

Section 10.12 Brokers. The Company agrees that it shall be solely responsible
for payment of any fees, compensation and expenses of any broker, finder or
financial advisor acting on its behalf in connection with the transactions
contemplated hereby.

 

Section 10.13 Governing Law; Consent to Jurisdiction and Venue; Service of
Process; Admissibility of Photocopies; Waiver of Jury Trial. This Agreement, the
Notes and the Security Documents shall be governed by, and construed and
enforced in accordance with, the laws of the State of Minnesota without giving
effect to conflict of laws principles thereof, except if and to the extent that
the validity or perfection of any mortgage, lien or security interest created
pursuant to the Security Documents, or remedies thereunder in respect of any
particular Collateral are required to be governed by the laws of a jurisdiction
other than the State of Minnesota. Regardless of any present or future domicile
of the Company, the Company hereby submits to the jurisdiction and venue of the
United States District Court for the District of Minnesota, and the Hennepin
County District Court, State of Minnesota, for the purposes of all legal
proceedings arising out of or relating to this Agreement or the transactions
contemplated hereby. The Company hereby irrevocably agrees that all claims in
respect of such action or proceeding may be heard and determined in any such
court and irrevocably waives any objection it may now or hereafter have as to
the jurisdiction or venue of any such suit, action or proceeding brought in such
a court or that such court is an inconvenient forum. Nothing herein shall limit
the right of the Note Purchaser to bring proceedings against the Company in any
other court of competent jurisdiction. Any legal proceeding by the Company
against Note Purchaser involving, directly or indirectly, any matter in any way
arising out of, related to, or connected with this Agreement or any document
executed and delivered in connection herewith shall be brought only in the
United States District Court for the District of Minnesota, or the Hennepin
County District Court, State of Minnesota. In the event the Company commences
any action in

 

44

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another jurisdiction or venue arising directly or indirectly from the
relationship created by this Agreement, the Note Purchaser shall be entitled to
have the case transferred to the jurisdiction and venue above-described, or if
such transfer cannot be accomplished under applicable law, to have such case
dismissed without prejudice. The Company hereby consents to service of process
by registered mail delivered in accordance with the provisions of Section 10.4
or service of process in any other legal manner at the option of the Note
Purchaser. This Agreement, the Note and the other Note Documents and all
documents relating thereto, including, without limitation, (a) consents, waivers
and modifications that may hereafter be executed, (b) documents received by the
Note Purchaser, and (c) financial statements, certificates and other information
previously or hereafter furnished to the Note Purchaser may be reproduced by the
Note Purchaser by any photographic, photostatic, microfilm, microcard, miniature
photographic or other similar process. The Company agrees and stipulates that,
to the extent permitted by applicable law, any such reproduction shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding (whether or not the original is in existence and whether or not such
reproduction was made in the regular course of business) and any enlargement,
facsimile or further reproduction of such reproduction shall likewise be
admissible in evidence.

 

THE COMPANY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT, THE NOTES, THE OTHER NOTE DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

 

Section 10.14 Publicity. The Company hereby consents to the use of its name and
trade style by the Note Purchaser in any announcements or advertisements by the
Note Purchaser of the completion of the transactions contemplated hereby and the
role played by the Note Purchaser in providing financing to the Company
hereunder in such media and in such manner as the Note Purchaser shall, in its
sole discretion, determine.

 

Section 10.15 Time is of the Essence. Time is of the essence as to the payment
and performance of the Obligations, covenants and agreements hereunder.

 

Section 10.16 Savings Clause; Severability. If the scope of any provision
contained in this Agreement is deemed unenforceable to its full extent, then
such provision shall be enforced to the maximum extent provided by law, and each
party hereto hereby consents that such provision may be reformed or modified
accordingly, and enforced as reformed or modified, in any proceeding brought to
enforce any provision of this Agreement. Subject to the foregoing, whenever
possible, each provision of this Agreement shall be interpreted in such a manner
as to be effective and valid under applicable law, but if any provision of this
Agreement is held to be prohibited by or invalid under applicable law, such
provision, to the extent of such prohibition or invalidity, shall be deemed not
to be a part of this Agreement, and shall not invalidate the remainder of such
provision or the remaining provisions of this Agreement.

 

Section 10.17 Section Headings. The titles of the Sections and Articles herein
appear as a matter of convenience only and shall not affect the construction
hereof.

 

45

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Section 10.18 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument.

 

Section 10.19 Credit Inquiries. The Company hereby authorizes and permits Note
Purchaser to respond to usual and customary credit inquiries from third parties
concerning the Related Parties.

 

Section 10.20 Confidentiality. Note Purchaser shall hold all nonpublic
information obtained pursuant to the requirements of this Agreement in
accordance with Note Purchaser’s customary procedures for handling confidential
information of this nature and in accordance with safe and sound business
practices and in any event may make disclosure reasonably required by a
prospective participant or assignee in connection with the contemplated
participation or assignment or as required or requested by any governmental
authority or representative thereof or pursuant to legal process or in
connection with the enforcement by the Note Purchaser of the rights and remedies
hereunder or under the other Note Documents or the Equity Documents and shall
require any such participant or assignee to agree to comply with this Section
10.20.

 

Section 10.21. PW Poly. Notwithstanding anything herein to the contrary, the
Company and the Note Purchaser hereby agree that:

 

(a) In no event shall any provision (including, without limitation, any
representation, warranty, covenant, default or event of default) of this
Agreement apply to PW Poly and its Subsidiaries;

 

(b) By way of example, and not in limitation of Section 10.21(a) above, any
reference to “Subsidiary,” “Subsidiaries” or “Consolidated” in this Agreement
shall expressly exclude PW Poly and its Subsidiaries;

 

(c) By way of example, and not in limitation of Section 10.21(a) above, and
notwithstanding anything to the contrary contained in GAAP, all computations of
financial covenants in this Agreement shall exclude the results of operations
and financial condition of PW Poly and its Subsidiaries;

 

(d) Notwithstanding anything to the contrary contained in this Section 10.21 or
otherwise (but subject to the proviso at the end of this clause (d)), each of PW
Poly and its Subsidiaries shall be expressly included as a Subsidiary of the
Company for the purposes of subsection 6.2 (Financial Reporting) of this
Agreement; provided, however, that with respect to the monthly financial
statements contemplated by subsection 6.2(b) of this Agreement, each of PW Poly
and its Subsidiaries shall be expressly excluded as a Subsidiary of the Company;

 

(e) Notwithstanding anything to the contrary contained in this Section 10.21 or
otherwise, each of PW Poly and its Subsidiaries shall be expressly included as
an Affiliate of the Company for the purposes of subsection 7.10 (Transactions
with Affiliates);

 

46

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(f) Notwithstanding anything to the contrary contained in this Section 10.21 or
otherwise, the Company may enter into a tax sharing agreement with PW Poly and
its Subsidiaries; provided that the tax obligations owing by the Company, on the
one hand, and PW Poly and its Subsidiaries, on the other hand, do not exceed the
tax obligations that either such party would have on a stand-alone basis; and

 

(g) Notwithstanding anything to the contrary contained in this Section 10.21 or
otherwise, the Company shall operate PW Poly and its Subsidiaries (including,
without limitation, with respect to ERISA law compliance, environmental law
compliance and tax law compliance) with the same care and diligence as the
Company is operated.

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

47

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IN WITNESS WHEREOF, the parties hereto have caused this Junior Subordinated Note
Purchase Agreement to be executed as of the day and year first above written.

 

CHURCHILL CAPITAL PARTNERS IV

     

PW EAGLE, INC.

L.P., a Delaware limited partnership

       

By Churchill Capital IV, L.L.C., its General Partner

       

By Churchill Capital, Inc. as Managing Agent

        By  

/s/ Mark McDonald

      By  

/s/ Dobson West

   

Its Partner

         

Its Secretary

 

48

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SCHEDULE 1.1(a)

 

ENVIRONMENTAL AUDITS

 

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

 

SCHEDULE 1.1(b)

 

LEASES

 

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

 

SCHEDULE 1.1(c)

 

OWNED REAL PROPERTY

 

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

 

SCHEDULE 1.1(d)

 

PERMITTED LIENS

 

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

 

SCHEDULE 4.2

 

ORGANIZATIONAL INFORMATION

 

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

 

SCHEDULE 4.5

 

CONSENTS AND APPROVALS

 

[*UCC filings]

 

[*Filings with PTO and Copyright Office]

 

[*Mortgage filings]

 

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

 

SCHEDULE 4.6

 

BUSINESS

 

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

 

SCHEDULE 4.7

 

FINANCIAL STATEMENTS; OPENING DAY

BALANCE SHEET

 

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

 

SCHEDULE 4.23

 

INSURANCE

 

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

 

SCHEDULE 6.5

 

FINANCIAL COVENANTS

 

The Company (inclusive of the Subsidiaries) will comply with the following
financial covenants (all of which will be calculated excluding PW Poly):

 

(a) The Company shall not permit its Interest Coverage Ratio for any period set
forth below to be less than the ratio set forth opposite such period below:

 

Period

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

   Minimum Interest
Coverage Ratio

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

Three months ended December 31, 2004

   0.12 to 1

Six months ended March 31, 2005

   0.49 to 1

Nine months ended June 30, 2005

   1.30 to 1

Twelve months ended September 30, 2005 and each December 31, March 31, June 30
and September 30 thereafter

   1.46 to 1

 

(b) The Company shall not permit its EBITDA to be less than $12,200,000 for the
twelve month period ending December 31, 2004 and each twelve month period ending
March 31, June 30, September 30 and December 31 thereafter.

 

(c) The Company shall not permit at any time during each period set forth below
its Availability to be less than the amount set forth opposite such period
below:

 

Period

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

   Minimum
Availability

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

Closing Date to December 30, 2004

   $ 1,600,000

December 31, 2004 to April 30, 2005

   $ 800,000

May 1, 2005 through the term of the Senior Credit Agreement

   $ 1,600,000

 

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

 

SCHEDULE 6.6

 

COMPLIANCE CERTIFICATE

(See Form Attached)

 

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

 

SCHEDULE 7.1(a)

 

SALES AND SALE-LEASEBACKS

 

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

 

SCHEDULE 7.1(c)

 

INVESTMENTS

 

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

 

SCHEDULE 7.2

 

CAPITALIZED LEASE OBLIGATIONS

 

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

 

SCHEDULE 7.10

 

CONSULTING AGREEMENTS