exv10w1



 







Exhibit 10.1




 



$60,000,000




REVOLVING CREDIT AGREEMENT




dated as of July 18, 2006




among




THE PACIFIC LUMBER COMPANY




and




BRITT LUMBER CO., INC.,

as Borrowers




THE LENDERS PARTY HERETO,




MARATHON STRUCTURED FINANCE FUND L.P.,




as Administrative Agent




and




MARATHON STRUCTURED FINANCE FUND L.P.,

as Sole Bookrunner and Sole Lead Arranger



 






 









 








TABLE OF CONTENTS




	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	ARTICLE I. Defined Terms	 	 	1	 
	 
	 	 	 	 	 	 	 	 
	 

	 	SECTION 1.01
	 	Defined Terms
	 	 	1	 
	 

	 	SECTION 1.02
	 	Terms Generally
	 	 	27	 
	 

	 	SECTION 1.03
	 	Classification of Loans and Borrowings
	 	 	28	 
	 

	 	SECTION 1.04
	 	Pro Forma Calculations
	 	 	28	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE II. The Credits	 	 	28	 
	 
	 	 	 	 	 	 	 	 
	 

	 	SECTION 2.01
	 	Commitments
	 	 	28	 
	 

	 	SECTION 2.02
	 	Loans
	 	 	28	 
	 

	 	SECTION 2.03
	 	Borrowing Procedure
	 	 	30	 
	 

	 	SECTION 2.04
	 	Repayment of Loans; Evidence of Debt
	 	 	31	 
	 

	 	SECTION 2.05
	 	Fees
	 	 	31	 
	 

	 	SECTION 2.06
	 	Interest on Loans
	 	 	33	 
	 

	 	SECTION 2.07
	 	Default Interest
	 	 	33	 
	 

	 	SECTION 2.08
	 	Alternate Rate of Interest
	 	 	33	 
	 

	 	SECTION 2.09
	 	Termination and Reduction of Commitments
	 	 	34	 
	 

	 	SECTION 2.10
	 	Conversion and Continuation of Borrowings
	 	 	34	 
	 

	 	SECTION 2.11
	 	[Reserved]
	 	 	35	 
	 

	 	SECTION 2.12
	 	Prepayment
	 	 	35	 
	 

	 	SECTION 2.13
	 	Mandatory Prepayments
	 	 	36	 
	 

	 	SECTION 2.14
	 	Reserve Requirements; Change in Circumstances
	 	 	36	 
	 

	 	SECTION 2.15
	 	Change in Legality
	 	 	38	 
	 

	 	SECTION 2.16
	 	Indemnity
	 	 	38	 
	 

	 	SECTION 2.17
	 	Pro Rata Treatment
	 	 	39	 
	 

	 	SECTION 2.18
	 	Sharing of Setoffs
	 	 	39	 
	 

	 	SECTION 2.19
	 	Payments
	 	 	40	 
	 

	 	SECTION 2.20
	 	Taxes
	 	 	40	 
	 

	 	SECTION 2.21
	 	Assignment of Commitments Under Certain Circumstances; Duty to Mitigate
	 	 	42	 
	 

	 	SECTION 2.22
	 	Swingline Loans
	 	 	43	 
	 

	 	SECTION 2.23
	 	Letters of Credit
	 	 	44	 
	 

	 	SECTION 2.24
	 	Protective Advances
	 	 	48	 
	 

	 	SECTION 2.25
	 	Relationship Between the Borrowers
	 	 	48	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE III. Representations and Warranties	 	 	53	 
	 
	 	 	 	 	 	 	 	 
	 

	 	SECTION 3.01
	 	Organization; Powers
	 	 	53	 
	 

	 	SECTION 3.02
	 	Authorization; No Conflicts
	 	 	53	 
	 

	 	SECTION 3.03
	 	Enforceability
	 	 	54	 
	 

	 	SECTION 3.04
	 	Governmental Approvals
	 	 	54	 
	 

	 	SECTION 3.05
	 	Financial Statements
	 	 	54	 






i









 






	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	 

	 	SECTION 3.06
	 	No Material Adverse Change
	 	 	54	 
	 

	 	SECTION 3.07
	 	Title to Properties; Possession Under Leases
	 	 	54	 
	 

	 	SECTION 3.08
	 	Subsidiaries
	 	 	56	 
	 

	 	SECTION 3.09
	 	Litigation; Compliance with Laws
	 	 	56	 
	 

	 	SECTION 3.10
	 	Agreements
	 	 	57	 
	 

	 	SECTION 3.11
	 	Federal Reserve Regulations
	 	 	57	 
	 

	 	SECTION 3.12
	 	Investment Company Act; Public Utility Holding Company Act
	 	 	58	 
	 

	 	SECTION 3.13
	 	Use of Proceeds
	 	 	58	 
	 

	 	SECTION 3.14
	 	Tax Returns
	 	 	58	 
	 

	 	SECTION 3.15
	 	No Material Misstatements
	 	 	58	 
	 

	 	SECTION 3.16
	 	Employee Benefit Plans
	 	 	59	 
	 

	 	SECTION 3.17
	 	Environmental Matters
	 	 	59	 
	 

	 	SECTION 3.18
	 	Insurance
	 	 	60	 
	 

	 	SECTION 3.19
	 	Security Documents
	 	 	60	 
	 

	 	SECTION 3.20
	 	Location of Real Property
	 	 	61	 
	 

	 	SECTION 3.21
	 	Labor Matters
	 	 	61	 
	 

	 	SECTION 3.22
	 	Liens
	 	 	61	 
	 

	 	SECTION 3.23
	 	Intellectual Property
	 	 	61	 
	 

	 	SECTION 3.24
	 	Solvency
	 	 	61	 
	 

	 	SECTION 3.25
	 	Permits
	 	 	62	 
	 

	 	SECTION 3.26
	 	Deposit and Disbursement Accounts
	 	 	62	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE IV. Conditions of Lending	 	 	62	 
	 
	 	 	 	 	 	 	 	 
	 

	 	SECTION 4.01
	 	All Credit Events
	 	 	62	 
	 

	 	SECTION 4.02
	 	First Credit Event
	 	 	63	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE V. Affirmative Covenants	 	 	66	 
	 
	 	 	 	 	 	 	 	 
	 

	 	SECTION 5.01
	 	Existence; Businesses and Properties	 	 	67	 
	 

	 	SECTION 5.02
	 	Insurance
	 	 	67	 
	 

	 	SECTION 5.03
	 	Obligations and Taxes
	 	 	67	 
	 

	 	SECTION 5.04
	 	Financial Statements, Reports, etc.
	 	 	67	 
	 

	 	SECTION 5.05
	 	Litigation and Other Notices	 	 	71	 
	 

	 	SECTION 5.06
	 	Information Regarding Collateral
	 	 	71	 
	 

	 	SECTION 5.07
	 	Maintaining Records; Access to Properties and Inspections; Environmental Assessments
	 	 	72	 
	 

	 	SECTION 5.08
	 	Use of Proceeds
	 	 	73	 
	 

	 	SECTION 5.09
	 	Additional Collateral, etc.
	 	 	73	 
	 

	 	SECTION 5.10
	 	Further Assurances
	 	 	74	 
	 

	 	SECTION 5.11
	 	[Intentionally Omitted]	 	 	74	 
	 

	 	SECTION 5.12
	 	Cash Management Systems; Bank Accounts
	 	 	74	 
	 

	 	SECTION 5.13
	 	Landlords’ Agreements, Mortgagee Agreements, Bailee Letters and Real Estate Purchases
	 	 	75	 
	 

	 	SECTION 5.14
	 	Specified Asset Sales
	 	 	75	 






ii









 






	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	Page
	ARTICLE VI. Negative Covenants	 	 	75	 
	 
	 	 	 	 	 	 	 	 
	 

	 	SECTION 6.01
	 	Indebtedness
	 	 	76	 
	 

	 	SECTION 6.02
	 	Liens
	 	 	77	 
	 

	 	SECTION 6.03
	 	Sale and Lease-Back Transactions
	 	 	78	 
	 

	 	SECTION 6.04
	 	Investments, Loans and Advances
	 	 	78	 
	 

	 	SECTION 6.05
	 	Mergers, Consolidations, Sales of Assets and Acquisitions
	 	 	79	 
	 

	 	SECTION 6.06
	 	Restricted Payments; Restrictive Agreements
	 	 	79	 
	 

	 	SECTION 6.07
	 	Transactions with Affiliates
	 	 	80	 
	 

	 	SECTION 6.08
	 	Business of the Borrowers and Subsidiaries; Limitation on Hedging Agreements
	 	 	81	 
	 

	 	SECTION 6.09
	 	Other Indebtedness and Agreements
	 	 	81	 
	 

	 	SECTION 6.10
	 	Capital Expenditures
	 	 	81	 
	 

	 	SECTION 6.11
	 	Minimum Combined EBITDA
	 	 	82	 
	 

	 	SECTION 6.12
	 	Maximum Combined Total Leverage Ratio
	 	 	83	 
	 

	 	SECTION 6.13
	 	Minimum Combined Fixed Charge Coverage Ratio
	 	 	84	 
	 

	 	SECTION 6.14
	 	Fiscal Year
	 	 	84	 
	 

	 	SECTION 6.15
	 	The Salmon Creek Transaction
	 	 	85	 
	 

	 	SECTION 6.16
	 	Right to Cure
	 	 	85	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE VII. Events of Default	 	 	86	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE VIII. The Administrative Agent and the Arranger	 	 	88	 
	 
	 	 	 	 	 	 	 	 
	ARTICLE IX. Miscellaneous	 	 	91	 
	 
	 	 	 	 	 	 	 	 
	 

	 	SECTION 9.01
	 	Notices
	 	 	91	 
	 

	 	SECTION 9.02
	 	Survival of Agreement
	 	 	91	 
	 

	 	SECTION 9.03
	 	Binding Effect
	 	 	92	 
	 

	 	SECTION 9.04
	 	Successors and Assigns
	 	 	92	 
	 

	 	SECTION 9.05
	 	Expenses; Indemnity
	 	 	95	 
	 

	 	SECTION 9.06
	 	Right of Setoff
	 	 	97	 
	 

	 	SECTION 9.07
	 	Applicable Law
	 	 	97	 
	 

	 	SECTION 9.08
	 	Waivers; Amendment
	 	 	97	 
	 

	 	SECTION 9.09
	 	Interest Rate Limitation
	 	 	98	 
	 

	 	SECTION 9.10
	 	Entire Agreement
	 	 	98	 
	 

	 	SECTION 9.11
	 	WAIVER OF JURY TRIAL
	 	 	99	 
	 

	 	SECTION 9.12
	 	Severability
	 	 	99	 
	 

	 	SECTION 9.13
	 	Counterparts
	 	 	99	 
	 

	 	SECTION 9.14
	 	Headings
	 	 	99	 
	 

	 	SECTION 9.15
	 	Jurisdiction; Consent to Service of Process
	 	 	99	 
	 

	 	SECTION 9.16
	 	Confidentiality
	 	 	100	 
	 

	 	SECTION 9.17
	 	Delivery of Lender Addenda
	 	 	101	 
	 

	 	SECTION 9.18
	 	Disclosures
	 	 	101	 






iii









 






Exhibits and Schedules




	 	 	 
	Exhibit A

	 	Form of Administrative Questionnaire
	Exhibit B

	 	[Intentionally Omitted]
	Exhibit C

	 	Form of Assignment and Acceptance
	Exhibit D

	 	Form of Borrowing Request
	Exhibit E

	 	Form of Lender Addendum
	Exhibit F

	 	Form of Perfection Certificate
	Exhibit G

	 	Form of Exemption Certificate
	Exhibit H

	 	Form of Borrowing Base Certificate
	Exhibit I

	 	Closing Checklist
	Schedule 1.01(a)

	 	Mortgaged Properties
	Schedule 3.08

	 	Subsidiaries
	Schedule 3.09

	 	Litigation
	Schedule 3.10

	 	Agreements
	Schedule 3.17

	 	Environmental Matters
	Schedule 3.18

	 	Insurance
	Schedule 3.19(a)

	 	UCC Filing Offices
	Schedule 3.19(c)

	 	Mortgage Filing Offices
	Schedule 3.20

	 	Owned and Leased Real Property
	Schedule 3.26

	 	Deposit and Disbursement Accounts
	Schedule 5.14

	 	Specified Asset Sales
	Schedule 6.01

	 	Existing Indebtedness
	Schedule 6.02

	 	Existing Liens
	Schedule 6.04

	 	Existing Investments
	Schedule 6.05(b)

	 	Permitted Asset Sales
	Schedule 6.07

	 	Transactions with Affiliates






iv









 






          REVOLVING CREDIT AGREEMENT dated as of July 18, 2006 (this “Agreement”), among THE
PACIFIC LUMBER COMPANY (“PALCO”), a Delaware corporation and BRITT LUMBER CO., INC.
(“Britt”), a California corporation, the LENDERS from time to time party hereto, and
MARATHON STRUCTURED FINANCE FUND L.P., as administrative agent (in such capacity and together with
its successors, the “Administrative Agent”).




          The parties hereto agree as follows:




ARTICLE I.




DEFINED TERMS




     SECTION 1.01 Defined Terms. As used in this Agreement, the following terms shall have
the meanings specified below:



          “ABR”, when used in reference to any Loan or Borrowing, refers to whether such Loan,
or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to
the Alternate Base Rate.




          “Account Debtor” means each Person obligated in any way on or in connection with an
Account.




          “Accounts” means all now owned or hereafter acquired or arising accounts of either
Borrower, as defined in the UCC, including any rights to payment for the sale or lease of goods or
rendition of services, whether or not they have been earned by performance.




          “Adjusted LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any
Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%)
equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory
Reserves.




          “Administrative Agent” shall have the meaning assigned to such term in the preamble.




          “Administrative Agent Fees” shall have the meaning assigned to such term in Section
2.05(b).




          “Administrative Borrower” shall have the meaning assigned to such term in Section
2.25(a).




          “Administrative Questionnaire” shall mean an Administrative Questionnaire in the form
of Exhibit A, or such other form as may be supplied from time to time by the Administrative Agent.




 









 








          “Affiliate” shall mean, when used with respect to a specified person, another person
that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is
under common Control with the person specified; provided, however, that, for
purposes of Section 6.07, the term “Affiliate” shall also include any person that directly
or indirectly owns 5% or more of any class of Equity Interests of the person specified or that is
an officer or director of the person specified.




          “Aggregate Revolving Credit Exposure” shall mean the aggregate amount of the Lenders’
Revolving Credit Exposures.




          “Agreement” shall have the meaning assigned to such term in the preamble.




          “Alternate Base Rate” shall mean, for any day, a rate per annum (rounded upwards, if
necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day
and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the
Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be
effective as of the opening of business on the effective date of such change in the Prime Rate or
the Federal Funds Effective Rate, respectively.




          “Annexation” means (i) the annexation of the town of Scotia by the City of Rio Dell,
(ii) the approval of such annexation by the Local Area Formation Council and (iii) the approval of
the final subdivision map by the City of Rio Dell.




          “Applicable Margin” shall mean (a) with respect to the Loans comprising each ABR
Borrowing, including each Swingline Loan, 0.75% per annum and (b) with respect to the Loans
comprising each Eurodollar Borrowing, 2.75% per annum; provided that “Applicable
Margin” shall mean (a) with respect to the portion of the incremental Loans comprising each ABR
Borrowing made available to Borrowers during the Seasonal Overadvance Period utilizing the
increased advance rates set forth in the Borrowing Base for such Seasonal Overadvance Period,
including each Swingline Loan, 2.50% per annum and (b) with respect to the portion of the
incremental Loans comprising each Eurodollar Borrowing made available to Borrowers during the
Seasonal Overadvance Period utilizing the increased advance rates set forth in the Borrowing Base
for such Seasonal Overadvance Period, 4.50% per annum.




          “Appraisal” means an appraisal delivered by Administrative Borrower, at Borrowers’
expense, to Administrative Agent prior to the Closing Date and thereafter pursuant to Section
5.04(k) setting forth the Net Orderly Liquidation Value of the Inventory of each Borrower, in
form and substance and prepared by an independent appraiser reasonably acceptable to Administrative
Agent.




          “Arranger” means Marathon Structured Finance Fund, L.P., as arranger.




          “Asset Sale” shall mean the sale, lease, sale and leaseback, assignment, conveyance,
transfer, issuance or other disposition (by way of merger, casualty, condemnation or otherwise) by
PALCO or any of the Subsidiaries to any person other than PALCO or any Subsidiary Guarantor of (a)
any Equity Interests of any of the Subsidiaries (other than directors’ qualifying shares) or (b)
any other assets of PALCO or any of the Subsidiaries, including Equity Interests of any person that
is not a Subsidiary (other than inventory, obsolete or worn out assets,

2









 








scrap and Permitted Investments, in each case disposed of in the ordinary course of business);
provided that any asset sale or series of related asset sales described in clause (b) above
having a value not in excess of $25,000 shall be deemed not to be an “Asset Sale” for
purposes of this Agreement.




          “Assignment and Acceptance” shall mean an assignment and acceptance entered into by a
Lender and an assignee (with the consent of any person whose consent is required by Section 9.04),
and accepted by the Administrative Agent, in the form of Exhibit C or such other form as shall be
approved by the Administrative Agent.




          “Benefit Plan” shall mean any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Tax Code
or Section 307 of ERISA, and in respect of which the Borrowers or any ERISA Affiliate is (or, if
such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as
defined in Section 3(5) of ERISA.




          “Board” shall mean the Board of Governors of the Federal Reserve System of the United
States of America.




          “Borrowers” shall mean PALCO and Britt.




          “Borrowing” shall mean (a) Loans of the same Type made, converted or continued on the
same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect,
or (b) a Swingline Loan.




          “Borrowing Availability” means as of any time of determination the lesser of (i) the
Total Revolving Credit Commitment at such time and (ii) the Borrowing Base at such time, in each
case, less the sum of (a) the Loans then outstanding (including, without duplication, the
outstanding balance of the Swingline Loan then outstanding), (b) aggregate L/C Exposure at such
time and (c) Reserves established by the Administrative Agent in its reasonable credit judgment.




          “Borrowing Base” means, at any time, an amount equal to the sum of:





     (a) (i) at all times other than during the Seasonal Overadvance Period
eighty-five percent (85%) of the Net Amount of Eligible Accounts or (ii) during the
Seasonal Overadvance Period ninety-five percent (95%) of the Net Amount of Eligible
Accounts; plus




     (b) (i) at all times other than during the Seasonal Overadvance Period the
lesser of (x) eighty percent (80%) of the value (being the lower of cost (on a
first-in first-out basis) or market) of Eligible Inventory or (y) eighty-five
percent (85%) of the Net Orderly Liquidation Value at such time of the value (being
the lower of cost (on a first-in first-out basis) or market) of Eligible Inventory
or (ii) during the Seasonal Overadvance Period the lesser of (x) ninety percent
(90%) of the value (being the lower of cost (on a first-in first-out basis) or
market) of Eligible Inventory or (y) ninety-five percent (95%) of the Net Orderly
Liquidation



3









 







Value at such time of the value (being the lower of cost (on a first-in
first-out basis) or market) of Eligible Inventory ; less




     (c) Reserves from time to time established by the Administrative Agent in its
reasonable credit judgment.



          “Borrowing Base Certificate” means a certificate by a Responsible Officer of PALCO,
substantially in the form of Exhibit H (or another form acceptable to the Administrative Agent)
setting forth the calculation of the Borrowing Base, including a calculation of each component
thereof, all in such detail as shall be reasonably satisfactory to the Administrative Agent. All
calculations of the Borrowing Base in connection with the preparation of any Borrowing Base
Certificate shall originally be made by PALCO and certified to the Administrative Agent; provided,
that the Administrative Agent shall have the right to review and adjust, in the exercise of its
reasonable credit judgment, any such calculation (1) to reflect its reasonable estimate of declines
in value of any of the Collateral described therein, and (2) to the extent that such calculation is
not in accordance with this Agreement.




          “Borrowing Request” shall mean a request by the Administrative Borrower in accordance
with the terms of Section 2.03 and substantially in the form of Exhibit D, or such other form as
shall be approved by the Administrative Agent.




          “Breakage Event” shall have the meaning assigned to such term in Section 2.16.




          “Business Day” shall mean any day other than a Saturday, Sunday or day on which
commercial banks in New York City are authorized or required by law to close; provided,
however, that when used in connection with a Eurodollar Loan (including with respect to all
notices and determinations in connection therewith and any payments of principal, interest or other
amounts thereon), the term “Business Day” shall also exclude any day on which banks are not
open for dealings in dollar deposits in the London interbank market.




          “Capital Expenditures” shall mean, for any period, with respect to any person, (a) the
additions to property, plant and equipment and other capital expenditures of such person and its
subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of such
person for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred
by such person and its subsidiaries during such period. For financial covenant purposes, Capital
Expenditures shall exclude expenditures associated with the preparation and sale of non-core
assets, not to exceed $5,000,000 in the aggregate.




          “Capital Lease Obligations” of any person shall mean the obligations of such person to
pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real
or personal property, or a combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of
such obligations at any time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.




          “Change in Control” shall be deemed to have occurred if (a) Maxxam shall fail to own
directly or indirectly, beneficially and of record, Equity Interests representing at least 51% of
the aggregate ordinary voting power and aggregate equity value represented by the issued and




4









 







outstanding Equity Interests in PALCO; (b) Maxxam, through direct representation or through
persons nominated by it, ceases to control a majority of the Board of Directors of PALCO necessary
to effectuate any actions of the Board of Directors of PALCO; (c) Holdings shall at any time fail
to own directly, beneficially and of record, 100% of each class of issued and outstanding Equity
Interests in Palco, free and clear of all Liens (other than Liens created by the Guarantee and
Collateral Agreement); (d) PALCO shall at any time fail to own directly or indirectly, beneficially
and of record, 100% of each class of issued and outstanding Equity Interests in Britt, free and
clear of all Liens (other than Liens created by the Guarantee and Collateral Agreement); (e) PALCO
shall fail to own directly or indirectly, beneficially and of record, Equity Interests representing
at least 100% of the aggregate ordinary voting power and aggregate equity value represented by the
issued and outstanding Equity Interests in Scotia Pacific or (f) PALCO, through direct
representation or through persons nominated by it, ceases to control a majority of the Board of
Managers of Scotia Pacific necessary to effectuate any actions of the Board of Managers of Scotia
Pacific.




          “Change in Law” shall mean (a) the adoption of any law, rule or regulation after the
date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or
application thereof by any Governmental Authority after the date of this Agreement or (c)
compliance by any Lender (or, for purposes of Section 2.14, by any lending office of such Lender or
by such Lender’s holding company, if any) with any request, guideline or directive (whether or not
having the force of law) of any Governmental Authority made or issued after the date of this
Agreement.




          “Charges” shall have the meaning assigned to such term in Section 9.09.




          “Closing Date” shall mean July 18, 2006.




          “Collateral” shall mean all property and assets of the Loan Parties, now owned or
hereafter acquired, upon which a Lien is purported to be created by any Security Document, and
shall include the Mortgaged Properties.




          “Combined Cash Interest Expense” means, for any period, Combined Interest Expense for
such period less the sum of, in each case to the extent included in the definition of Combined
Interest Expense, (a) the amortized amount of debt discount and debt issuance costs, (b) interest
payable in evidences of Indebtedness or by addition to the principal of the related Indebtedness
and (c) other non-cash interest.




          “Combined EBITDA” shall mean, for any period, Combined Net Income for such period plus
(a) without duplication and to the extent deducted in determining such Combined Net Income, the sum
of (i) Combined Interest Expense for such period, (ii) combined income tax expense for such period,
(iii) all amounts attributable to depreciation and amortization for such period and (iv) depletion
for such period (provided that to the extent that all or any portion of the income of any person is
excluded from Combined Net Income pursuant to the definition thereof for all or any portion of such
period any amounts set forth in the preceding clauses (i) through (iv) that are attributable to
such person shall not be included for purposes of this definition for such period or portion
thereof), and minus (b) without duplication and to the extent included in determining such Combined
Net Income, any extraordinary gains and all non-cash items of




5









 







income for such period, all determined on a combined basis in accordance with GAAP (except
that Inventory is presented on a FIFO basis).




          “Combined Fixed Charge Coverage Ratio” means, for any period, the ratio of (a)
Combined EBITDA for such period minus Capital Expenditures of Borrowers and their Subsidiaries on a
combined basis for such period minus the total liability for United States federal income taxes and
other taxes measured by net income actually payable by Borrowers and their Subsidiaries on a
combined basis in respect of such period to (b) the Combined Fixed Charges for such period.




          “Combined Fixed Charges” means, with respect to Borrowers and their Subsidiaries on a
combined basis for any period, the sum, determined on a combined basis, of (a) the Combined Cash
Interest Expense for such period, (b) the principal amount of Combined Total Debt having a
scheduled due date during such period, (c) all cash dividends payable by Borrowers and their
Subsidiaries on Equity Interests in respect of such period to persons other than Borrowers and
their Subsidiaries and (d) all commitment fees and other costs, fees and expenses payable by
Borrowers and their Subsidiaries on a combined basis during such period in order to effect, or
because of, the incurrence of any Indebtedness.




          “Combined Interest Expense” shall mean, for any period, the sum of (a) the interest
expense (including imputed interest expense in respect of Capital Lease Obligations) of the
Borrowers on a combined basis for such period (including all commissions, discounts and other fees
and charges owed by the Borrowers on a combined basis with respect to letters of credit and
bankers’ acceptance financing), net of interest income, in each case determined on a combined basis
in accordance with GAAP, plus (b) any interest accrued during such period in respect of
Indebtedness of the Borrowers on a combined basis that is required to be capitalized rather than
included in interest expense for such period in accordance with GAAP. For purposes of the
foregoing, interest expense shall be determined after giving effect to any net payments made or
received by the Borrowers on a combined basis with respect to interest rate Hedging Agreements.




          “Combined Net Income” shall mean, for any period, the net income or loss of the
Borrowers on a combined basis for such period determined on a combined basis in accordance with
GAAP; provided that there shall be excluded (a) the income of any Subsidiary (other than
Britt), (b) the income or loss of any person accrued prior to the date it is merged into or
consolidated with a Borrower or the date that such person’s assets are acquired by a Borrower, (c)
the income of any person other than a Borrower, except to the extent of the amount of dividends or
other distributions actually paid to a Borrower by such person during such period, and (d) any
gains attributable to sales of assets out of the ordinary course of business.




          “Combined Total Debt” means all Indebtedness (excluding any Indebtedness evidenced by
the Subordinated Intercompany Note) of a type described in clause (a), (b), (f), (g), (h), (i) or
(j) of the definition thereof of the Borrowers and their Subsidiaries on a combined basis.




6









 








          “Combined Total Leverage Ratio” means the ratio of (a) Combined Total Debt outstanding
as of the applicable date to (b) Combined EBITDA for the last period of four consecutive Fiscal
Quarters ending on or before such date.




          “Commitment” shall mean, with respect to any Lender, such Lender’s Revolving Credit
Commitment and Swingline Commitment.




          “Commitment Fee” shall have the meaning assigned to such term in Section 2.05(a).




          “Commitment Fee Rate” shall mean a rate per annum equal to 1/2 of 1%.




          “Control” shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of a person, whether through the ownership of
voting securities, by contract or otherwise, and the terms “Controlling” and
“Controlled” shall have meanings correlative thereto.




          “Control Agreement” means tri-party deposit account, securities account or commodities
account control agreements by and among the applicable Loan Party, the Administrative Agent,
certain other parties and the depository, securities intermediary or commodities intermediary, and
each in form and substance satisfactory in all respects to the Administrative Agent and in any
event proving to the Administrative Agent “control” of such deposit account, securities or
commodities account within the meaning of Articles 8 and 9 of the UCC.




          “Credit Event” shall have the meaning assigned to such term in Section 4.01.




          “Default” shall mean any event or condition which constitutes an Event of Default or
which upon notice, lapse of time or both would constitute an Event of Default.




          “dollars” or “$” shall mean lawful money of the United States of America.




          “Eligible Accounts” shall mean the Accounts which the Administrative Agent in the
exercise of its reasonable commercial discretion determines to be Eligible Accounts. Without
limiting the discretion of the Administrative Agent to establish other criteria of ineligibility,
Eligible Accounts shall not, unless the Administrative Agent in its sole discretion elects, include
any Account:




          (a) with respect to which more than 60 days have elapsed since the date of the original
invoice therefor or which is more than 30 days past due, provided, that during the period
from November 1 through March 31 in any year any Account that is subject to an Extended Terms
Invoice and with respect to which no more than 120 days have elapsed since the date of the original
invoice therefor or which is no more than 30 days past due shall be eligible, provided,
that when such Account is aggregated with the gross amount of all other such Accounts then
outstanding, such aggregated amount shall not exceed $2,500,000;




          (b) with respect to which any of the representations, warranties, covenants, and agreements
contained in the Security Documents are incorrect or have been breached;




7









 








          (c) with respect to which Account (or any other Account due from such Account Debtor), in
whole or in part, a check, promissory note, draft, trade acceptance or other instrument for the
payment of money has been received, presented for payment and returned uncollected for any reason;




          (d) which represents a progress billing (as hereinafter defined) or as to which the applicable
Borrower has extended the time for payment without the consent of the Administrative Agent; for the
purposes hereof, “progress billing” means any invoice for goods sold or leased or services rendered
under a contract or agreement pursuant to which the Account Debtor’s obligation to pay such invoice
is conditioned upon the applicable Borrower’s completion of any further performance under the
contract or agreement;




          (e) with respect to which any one or more of the following events has occurred to the Account
Debtor on such Account: death or judicial declaration of incompetency of an Account Debtor who is
an individual; the filing by or against the Account Debtor of a request or petition for
liquidation, reorganization, arrangement, adjustment of debts, adjudication as a bankrupt,
winding-up, or other relief under the bankruptcy, insolvency, or similar laws of the United States,
any state or territory thereof, or any foreign jurisdiction, now or hereafter in effect; the making
of any general assignment by the Account Debtor for the benefit of creditors; the appointment of a
receiver or trustee for the Account Debtor or for any of the assets of the Account Debtor,
including, without limitation, the appointment of or taking possession by a “custodian,” as defined
in the Federal Bankruptcy Code; the institution by or against the Account Debtor of any other type
of insolvency proceeding (under the bankruptcy laws of the United States or otherwise) or of any
formal or informal proceeding for the dissolution or liquidation of, settlement of claims against,
or winding up of affairs of, the Account Debtor; the sale, assignment, or transfer of all or any
material part of the assets of the Account Debtor; the nonpayment generally by the Account Debtor
of its debts as they become due; or the cessation of the business of the Account Debtor as a going
concern;




          (f) if fifty percent (50%) or more of the aggregate Dollar amount of outstanding Accounts owed
at such time by the Account Debtor thereon is classified as ineligible under clause (a) above;




          (g) owed by an Account Debtor which: (i) does not maintain its chief executive office in the
United States of America or Canada (other than the Province of Newfoundland); or (ii) is not
organized under the laws of the United States of America or Canada or any state or province
thereof; or (iii) is the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any department, agency,
public corporation, or other instrumentality thereof; except to the extent that such Account is
secured or payable by a letter of credit satisfactory to the Administrative Agent in its
discretion;




          (h) owed by an Account Debtor which is an Affiliate or employee of the applicable Borrower;




          (i) except as provided in clause (k) below, with respect to which either the perfection,
enforceability, or validity of the Administrative Agent’s Liens in such Account, or the




8









 







Administrative Agent’s right or ability to obtain direct payment to the Administrative Agent
of the proceeds of such Account, is governed by any federal, state, or local statutory requirements
other than those of the UCC;




          (j) owed by an Account Debtor to which the applicable Borrower or any of its Subsidiaries, is
indebted in any way, or which is subject to any right of setoff or recoupment by the Account
Debtor, unless the Account Debtor has entered into an agreement acceptable to the Administrative
Agent to waive setoff rights; or if the Account Debtor thereon has disputed liability or made any
claim with respect to any other Account due from such Account Debtor; but in each such case only to
the extent of such indebtedness, setoff, recoupment, dispute, or claim;




          (k) owed by the government of the United States of America, or any department, agency, public
corporation, or other instrumentality thereof, unless the Federal Assignment of Claims Act of 1940,
as amended (31 U.S.C. ss. 3727 et seq.), and any other steps necessary to perfect the
Administrative Agent’s Liens therein, have been complied with to the Administrative Agent’s
satisfaction with respect to such Account;




          (l) owed by any state, municipality, or other political subdivision of the United States of
America, or any department, agency, public corporation, or other instrumentality thereof and as to
which the Administrative Agent determines that its Lien therein is not or cannot be perfected;




          (m) which represents a sale on a bill-and-hold, guaranteed sale, sale and return, sale on
approval, consignment, or other repurchase or return basis;




          (n) which is evidenced by a promissory note or other instrument or by chattel paper;




          (o) if the Administrative Agent believes, in the exercise of its reasonable judgment, that the
prospect of collection of such Account is impaired or that the Account may not be paid by reason of
the Account Debtor’s financial inability to pay;




          (p) with respect to which the Account Debtor is located in any state requiring the filing of a
Notice of Business Activities Report or similar report in order to permit the applicable Borrower
to seek judicial enforcement in such State of payment of such Account, unless such Borrower has
qualified to do business in such state or has filed a Notice of Business Activities Report or
equivalent report for the then current year;




          (q) which arises out of a sale not made in the ordinary course of the applicable Borrower’s
business;




          (r) with respect to which the goods giving rise to such Account have not been shipped and
delivered to and accepted by the Account Debtor or the services giving rise to such Account have
not been performed by the applicable Borrower, and, if applicable, accepted by the Account Debtor,
or the Account Debtor revokes its acceptance of such goods or services;




          (s) owed by an Account Debtor or a group of affiliated Account Debtors which is obligated to
the applicable Borrower respecting Accounts the aggregate unpaid balance




9









 







of which exceeds fifteen percent (15%) of the aggregate unpaid balance of all Accounts owed to
such Borrower at such time by all of the Borrower’s Account Debtors, but only to the extent of such
excess;




          (t) which is not subject to a first priority and perfected security interest in favor of the
Administrative Agent for the benefit of the Secured Parties;




          (u) as to which any Borrower is not able to bring suit or otherwise enforce its remedies
against the Account Debtor through judicial process;




          (v) that is not a true and correct statement of bona fide indebtedness incurred in the amount
of the Account for merchandise sold to or services rendered and accepted by the applicable Account
Debtor;




          (w) with respect to which an invoice, reasonably acceptable to the Administrative Agent in
form and substance, has not been sent to the applicable Account Debtor;




          (x) that (i) is not owned by any Borrower or (ii) is subject to any Lien of any other person,
other than Liens in favor of the Administrative Agent, on behalf of itself and the Lenders;




          (y) to the extent such Account exceeds any credit limit established by the Administrative
Agent, in its reasonable credit judgment, following prior notice of such limit by the
Administrative Agent to the Administrative Borrower; and




          (z) that is payable in any currency other than dollars.




          In addition, (i) to the extent that the amounts in respect of any Account in the general
ledger are lower than the amounts in respect of such Account in the monthly aging reports submitted
to the Administrative Agent, the difference between such amounts shall be excluded from the
calculation of Eligible Accounts and (ii) if PALCO does not own any Equity Interest in Britt, no
Account of Britt shall constitute an Eligible Account.




          If any Account at any time ceases to be an Eligible Account, then such Account shall promptly
be excluded from the calculation of Eligible Accounts.




          “Eligible Inventory” means Inventory which the Administrative Agent, in its reasonable
discretion, determines to be Eligible Inventory. Without limiting the discretion of the
Administrative Agent to establish other criteria of ineligibility, Eligible Inventory shall not,
unless the Administrative Agent in its sole discretion elects, include any Inventory:




          (a) that is not owned by the applicable Borrower;




          (b) that is not subject to the Administrative Agent’s Liens, which are perfected as to such
Inventory, or that are subject to any other Lien whatsoever (other than the Liens described in
clause (d) of Section 6.02 provided that such Permitted Liens (i) are junior in priority to the
Administrative Agent’s Liens or subject to Reserves and (ii) do not impair directly




10









 







or indirectly the ability of the Administrative Agent to realize on or obtain the full benefit
of the Collateral);




          (c) that does not consist of finished goods or raw materials;




          (d) that consists of chemicals, samples, prototypes, supplies, or packing and shipping
materials;




          (e) that is not in good condition, is unmerchantable, or does not meet all standards imposed
by any Governmental Authority, having regulatory authority over such goods, their use or sale;




          (f) that is not currently either usable or salable, at prices approximating at least cost, in
the normal course of the applicable Borrower’s business, or that is slow moving or stale;




          (g) that is obsolete or returned or repossessed or used goods taken in trade;




          (h) that is located outside the United States of America (or that is in-transit from vendors
or suppliers);




          (i) that is located in a public warehouse or in possession of a bailee or in a facility leased
by the applicable Borrower, if the warehouseman, or the bailee, or the lessor has not delivered to
the Administrative Agent, if requested by the Administrative Agent, a subordination agreement in
form and substance satisfactory to the Administrative Agent or if a Reserve for rents or storage
charges has not been established for Inventory at that location;




          (j) that contains or bears any proprietary rights licensed to the applicable Borrower by any
Person, if the Administrative Agent is not satisfied that it may sell or otherwise dispose of such
Inventory in accordance with the terms of the Security Documents and Section 6.05 without
infringing the rights of the licensor of such proprietary rights or violating any contract with
such licensor (and without payment of any royalties other than any royalties due with respect to
the sale or disposition of such Inventory pursuant to the existing license agreement), and, as to
which the applicable Borrower has not delivered to the Administrative Agent a consent or sublicense
agreement from such licensor in form and substance acceptable to the Administrative Agent if
requested;




          (k) that is Inventory placed on consignment;




          (l) that consists of the difference between any Borrower’s first-in, first-out log costs and
estimated market value log costs;




          (m) that consists of the difference between any Borrower’s first-in, first-out lumber costs
and reported market value lumber costs;




          (n) (i) is not located on premises owned, leased or rented by Borrowers and set forth in
Disclosure Schedule 3.20 or (ii) is located at an owned location subject to a mortgage




11









 







in favor of a lender other than the Administrative Agent, unless a reasonably satisfactory
mortgagee waiver has been delivered to the Administrative Agent;




          (o) that is covered by a negotiable document of title, unless such document has been delivered
to the Administrative Agent with all necessary endorsements, free and clear of all Liens except
those in favor of the Administrative Agent and Lenders;




          (p) that is not of a type held for sale in the ordinary course of the applicable Borrower’s
business;




          (q) that breaches any of the representations or warranties pertaining to Inventory set forth
in the Loan Documents;




          (r) that consists of any costs associated with “freight-in” charges;




          (s) that consists of Hazardous Materials or goods that can be transported or sold only with
licenses that are not readily available; or




          (t) that is not covered by casualty insurance reasonably acceptable to the Administrative
Agent.




          In addition, (i) to the extent that the amounts in respect of any Inventory in the general
ledger are lower than the amounts in respect of such Inventory in the monthly aging reports
submitted to the Administrative Agent, the difference between such amounts shall be excluded from
the calculation of Eligible Inventory and (ii) to the extent that PALCO does not own an Equity
Interest in Britt, no Inventory of Britt shall constitute Eligible Inventory.




          If any Inventory at any time ceases to be Eligible Inventory, such Inventory shall promptly be
excluded from the calculation of Eligible Inventory.




          “Environmental Laws” shall mean all former, current and future Federal, state, local
and foreign laws (including common law), treaties, regulations, rules, ordinances, codes, decrees,
judgments, directives, orders (including consent orders), and agreements in each case, relating to
protection of the environment, natural resources, human health and safety or the presence, Release
of, threatened Release, or exposure to, Hazardous Materials, or the generation, manufacture,
processing, distribution, use, treatment, storage, transport, recycling or handling of, or the
arrangement for such activities with respect to, Hazardous Materials.




          “Environmental Liability” shall mean all liabilities, obligations, damages, losses,
claims, actions, suits, judgments, orders, fines, penalties, fees, expenses and costs (including
administrative oversight costs, natural resource damages and remediation costs), whether contingent
or otherwise, arising out of or relating to (a) compliance or non-compliance with any Environmental
Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any
Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release or threatened
Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the foregoing.




12









 








          “Environmental Permit” shall mean any Permit under Environmental Law.




          “Equipment” means all now owned and hereafter acquired machinery, equipment,
furniture, furnishings, fixtures, of either Borrower and other tangible personal property (except
Inventory), including embedded software, motor vehicles with respect to which a certificate of
title has been issued, aircraft, dies, tools, jigs, molds and office equipment, as well as all of
such types of property leased by either Borrower and all of such Borrower’s rights and interests
with respect thereto under such leases (including, without limitation, options to purchase);
together with all present and future additions and accessions thereto, replacements therefor,
component and auxiliary parts and supplies used or to be used in connection therewith, and all
substitutes for any of the foregoing, and all manuals, drawings, instructions, warranties and
rights with respect thereto; wherever any of the foregoing is located.




          “Equity Interests” shall mean shares of capital stock, partnership interests,
membership interests in a limited liability company, beneficial interests in a trust or other
equity interests in any person, or any obligations convertible into or exchangeable for, or giving
any person a right, option or warrant to acquire, such equity interests or such convertible or
exchangeable obligations.




          “Equity Issuance” shall mean any issuance or sale by PALCO of any Equity Interests of
PALCO, or the receipt by PALCO of any capital contribution, as applicable, except in each case for
(a) any issuance of directors’ qualifying shares and (b) sales or issuances of common stock of
PALCO to management or employees of PALCO or any Subsidiary under any employee stock option or
stock purchase plan or employee benefit plan in existence from time to time in the ordinary course
of business.




          “ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended
from time to time.




          “ERISA Affiliate” shall mean any trade or business (whether or not incorporated) that,
together with the Borrowers, is treated as a single employer under Section 414(b) or (c) of the Tax
Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Tax Code, is treated as
a single employer under Section 414 of the Tax Code.




          “ERISA Event” shall mean (a) any “reportable event”, as defined in Section 4043 of
ERISA or the regulations issued thereunder, with respect to a Benefit Plan (other than an event for
which the 30-day notice period is waived); (b) the existence with respect to any Benefit Plan of an
“accumulated funding deficiency” (as defined in Section 412 of the Tax Code or Section 302 of
ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Tax Code or Section
303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any
Benefit Plan; (d) the incurrence by the Borrowers or any of its ERISA Affiliates of any liability
under Title IV of ERISA with respect to the termination of any Benefit Plan or the withdrawal or
partial withdrawal of the Borrowers or any of its ERISA Affiliates from any Benefit Plan or
Multiemployer Plan; (e) the receipt by the Borrowers or any of its ERISA Affiliates from the PBGC
or a plan administrator of any notice relating to the intention to terminate any Benefit Plan or
Plans or to appoint a trustee to administer any Benefit Plan; (f) the adoption of any amendment to
a Benefit Plan that would require the provision of




13









 







security pursuant to Section 401(a)(29) of the Tax Code or Section 307 of ERISA; (g) the
receipt by the Borrowers or any of their ERISA Affiliates of any notice, or the receipt by any
Multiemployer Plan from the Borrowers or any of their ERISA Affiliates of any notice, concerning
the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is
expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the
occurrence of a “prohibited transaction” with respect to which the Borrowers or any of the
Subsidiaries is a “disqualified person” (within the meaning of Section 4975 of the Tax Code) or
with respect to which the Borrowers or any such Subsidiary could otherwise be liable; or (i) any
other event or condition with respect to a Benefit Plan or Multiemployer Plan that could result in
liability of any Loan Party in an amount in excess of $2,500,000.




          “Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such
Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by
reference to the Adjusted LIBO Rate.




          “Event of Default” shall have the meaning assigned to such term in Article VII.




          “Excluded Taxes” shall mean, with respect to the Administrative Agent, any Lender, or
any other recipient of any payment to be made by or on account of any obligation of the Borrowers
hereunder, (a) taxes imposed on (or measured by) its net income as a result of a connection between
such recipient and the jurisdiction imposing such tax (or any political subdivision thereof), other
than any such connection arising solely from such recipient having executed, delivered or performed
its obligations or received a payment under, or enforced, this Agreement or any other Loan Document
and (b) in the case of a Foreign Lender (other than an assignee pursuant to a request by the
Administrative Borrower under Section 2.21(a)), any United States withholding tax that is imposed
on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this
Agreement (or designates a new lending office) or is attributable to such Foreign Lender’s failure
to comply with Section 2.20(d), except to the extent that such Foreign Lender (or its assignor, if
any) was entitled, at the time of designation of a new lending office (or assignment), to receive
additional amounts from PALCO with respect to such withholding tax pursuant to Section 2.20(a).




          “Existing Credit Facilities” shall mean (i) that certain Term Loan Agreement dated as
of April 19, 2005 among the Borrowers, the Lenders (as defined therein) and Credit Suisse First
Boston, as administrative agent and (ii) that certain Revolving Credit Agreement dated as of April
19, 2005 among the Borrowers, the Lenders (as defined therein) and The CIT Group/Business Credit,
Inc., as administrative agent.




          “Extended Terms Invoice” means any invoice issued by a Borrower that states that
payment in respect of such invoice is due more than 30 days past the date of such invoice.




          “Facility” shall mean the Commitments and the extensions of credit made thereunder.




          “Federal Funds Effective Rate” shall mean, for any day, the weighted average (rounded
upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal funds brokers, as




14









 







published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if
such rate is not so published for any day that is a Business Day, the average (rounded upwards, if
necessary, to the next 1/100 of 1%) of the quotations for the day for such transactions received by
the Administrative Agent from three Federal funds brokers of recognized standing selected by it.




          “Fee Letter” shall mean that certain Fee Letter dated as of the Closing Date between
PALCO and Marathon Structured Finance Fund L.P.




          “Fees” shall mean the Commitment Fees, the Administrative Agent Fees, the L/C Guaranty
Fees and the Issuing Bank Fees.




          “Financial Officer” of any person shall mean the chief financial officer, principal
accounting officer, treasurer or controller of such person and in addition to such persons, for
purposes of certifying compliance with financial covenants and the preparation of a Borrowing Base
Certificate, the “Financial Officer” shall include the financial reporting manager and general
accounting manager or any other person having substantially the same authority and responsibility.




          “Foreign Lender” shall mean any Lender that is organized under the laws of a
jurisdiction other than that in which the Borrower is located. For purposes of this definition, the
United States of America, each State thereof and the District of Columbia shall be deemed to
constitute a single jurisdiction.




          “GAAP” shall mean generally accepted accounting principles in the United States.




          “Governmental Authority” shall mean the government of the United States of America or
any other nation, any political subdivision thereof, whether state or local, and any agency,
authority, instrumentality, regulatory body, court, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.




          “Granting Lender” shall have the meaning assigned to such term in Section 9.04(i).




          “Guarantee” of or by any person (the “guarantor”) shall mean any obligation,
contingent or otherwise, of (a) the guarantor or (b) another person (including any bank under a
letter of credit) to induce the creation of which the guarantor has issued a reimbursement,
counterindemnity or similar obligation, in either case guaranteeing or having the economic effect
of guaranteeing any Indebtedness or other obligation of any other person (the “primary
obligor”) in any manner, whether directly or indirectly, and including any obligation,
contingent or otherwise, of the guarantor, direct or indirect, (i) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Indebtedness or other obligation or to
purchase (or to advance or supply funds for the purchase of) any security for the payment of such
Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for
the purpose of assuring the owner of such Indebtedness or other obligation of the payment of such
Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other
financial




15









 







statement condition or liquidity of the primary obligor so as to enable the primary obligor to
pay such Indebtedness or other obligation, (iv) as an account party in respect of any letter of
credit or letter of guaranty issued to support such Indebtedness or obligation or (v) to otherwise
assure or hold harmless the owner of such Indebtedness or other obligation against loss in respect
thereof; provided, however, that the term “Guarantee” shall not include
endorsements for collection or deposit in the ordinary course of business.




          “Guarantee and Collateral Agreement” shall mean each Guarantee and Collateral
Agreement executed and delivered by one or more Loan Parties, each in form and substance reasonably
satisfactory to the Administrative Agent.




          “Guarantors” shall mean the Subsidiary Guarantors.




          “Hazardous Materials” shall mean any petroleum (including crude oil or fraction
thereof) or petroleum products or byproducts, or any pollutant, contaminant, chemical, compound,
constituent, or hazardous, toxic or other substances, materials or wastes defined, or regulated as
such by, or pursuant to, any Environmental Law, or requires removal, remediation or reporting under
any Environmental Law, including asbestos, or asbestos containing material, radon or other
radioactive material, polychlorinated biphenyls and urea formaldehyde insulation.




          “Hedging Agreement” shall mean any agreement with respect to any swap, forward, future
or derivative transaction or option or similar agreement involving, or settled by reference to, one
or more rates, currencies, fuel or other commodities, equity or debt instruments or securities, or
economic, financial or pricing indices or measures of economic, financial or pricing risk or value
or any similar transaction or any combination of these transactions.




          “Holdings” shall mean MAXXAM Group Inc.




          “Indebtedness” of any person shall mean, without duplication, (a) all obligations of
such person for borrowed money or with respect to deposits or advances of any kind, (b) all
obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all
obligations of such person under conditional sale or other title retention agreements relating to
property or assets acquired by such person, (d) all obligations of such person in respect of the
deferred purchase price of property or services (other than current trade accounts payable incurred
in the ordinary course of business), (e) all obligations of such person, contingent or otherwise,
to purchase, redeem, retire or otherwise acquire for value any Equity Interests in such person, (f)
all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such
person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by
such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all
obligations, contingent or otherwise, of such person as an account party in respect of letters of
credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such person in
respect of bankers’ acceptances. The Indebtedness of any person shall include the Indebtedness of
any other person (including any partnership in which such person is a general partner) to the
extent such person is liable therefor as a result of such person’s ownership interest in, or other
relationship with, such other person, except to the extent the terms of such Indebtedness provide
that such person is not liable therefor.




16









 








          “Indemnified Taxes” shall mean Taxes other than Excluded Taxes and Other Taxes.




          “Indemnitee” shall have the meaning assigned to such term in Section 9.05(b).




          “Information” shall have the meaning assigned to such term in Section 9.16.




          “Intellectual Property Collateral” shall have the meaning assigned to such term in the
Guarantee and Collateral Agreement.




          “Intellectual Property Security Agreement” shall mean all Intellectual Property
Security Agreements to be executed and delivered by the Loan Parties, each substantially in the
applicable form required by the Guarantee and Collateral Agreement.




          “Intercreditor Agreement” shall mean that certain Intercreditor Agreement dated as of
the Closing Date by and among the Borrowers, the Guarantors, Holdings, the Administrative Agent and
the Administrative Agent (as defined in the Term Loan Agreement).




          “Interest Payment Date” shall mean (a) with respect to any ABR Loan (including a
Swingline Loan), the last Business Day of each calendar month, and (b) with respect to any
Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan
is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three
months’ duration, each day that would have been an Interest Payment Date had successive Interest
Periods of three months’ duration been applicable to such Borrowing.




          “Interest Period” shall mean, with respect to any Eurodollar Borrowing, the period
commencing on the date of such Borrowing and ending on the numerically corresponding day in the
calendar month that is 1, 2, 3 or 6 months thereafter (or 9 or 12 months thereafter if, at the time
of the relevant Borrowing, an interest period of such duration is available to all Lenders
participating therein), as the Borrowers may elect; provided, however, that (a) if
any Interest Period would end on a day other than a Business Day, such Interest Period shall be
extended to the next succeeding Business Day unless such next succeeding Business Day would fall in
the next calendar month, in which case such Interest Period shall end on the next preceding
Business Day and (b) any Interest Period that commences on the last Business Day of a calendar
month (or on a day for which there is no numerically corresponding day in the last calendar month
of such Interest Period) shall end on the last Business Day of the last calendar month of such
Interest Period. Interest shall accrue from and including the first day of an Interest Period to
but excluding the last day of such Interest Period. For purposes hereof, the date of a Borrowing
initially shall be the date on which such Borrowing is made and thereafter shall be the effective
date of the most recent conversion or continuation of such Borrowing.




          “Inventory” means all now owned and hereafter acquired inventory, goods and
merchandise of either Borrower, wherever located, to be furnished under any contract of service or
held for sale or lease, all returned goods, raw materials, work-in-process, finished goods
(including embedded software), other materials and supplies of any kind, nature or description
which are used or consumed in either Borrower’s business or used in connection with the packing,
shipping, advertising, selling or finishing of such goods, merchandise, and all documents of title
or other Documents representing them.




17









 








          “Investments” shall have the meaning assigned to such term in Section 6.04.




          “Issuing Bank” shall mean, as the context may require, or a bank selected by or
acceptable to Administrative Agent in its sole discretion, in such Person’s capacity as an issuer
of Letters of Credit.




          “Issuing Bank Fees” shall have the meaning assigned to such term in Section 2.05(c).




          “L/C Disbursement” shall mean a payment or disbursement made by the Administrative
Agent under a Letter of Credit Guaranty.




          “L/C Exposure” shall mean, at any time, the sum of (a) the aggregate undrawn amount of
all Letters of Credit at such time and (b) the aggregate amount of all L/C Disbursements that have
not been reimbursed at such time. The L/C Exposure of any Lender at any time shall equal its Pro
Rata Percentage of the aggregate L/C Exposure at such time.




          “L/C Fee Payment Date” shall have the meaning assigned to such term in Section
2.05(c).




          “L/C Guaranty Fee” shall have the meaning assigned to such term in Section 2.05(c).




          “Lender Addendum” shall mean, with respect to any initial Lender, a Lender Addendum in
the form of Exhibit E, or such other form as may be supplied by the Administrative Agent, to be
executed and delivered by such Lender on the Closing Date.




          “Lenders” shall mean (a) the persons that deliver a Lender Addendum (other than any
such person that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b)
any person that has become a party hereto pursuant to an Assignment and Acceptance. Unless the
context otherwise requires, the term “Lenders” shall include the Swingline Lender.




          “Letter of Credit” shall mean any letter of credit issued pursuant to Section 2.23.




          “Letter of Credit Guaranty” shall mean any guaranty or similar agreement delivered by
the Administrative Agent to an Issuing Bank of one or more Borrowers’ reimbursement obligation
under such Issuing Bank’s reimbursement agreement, application for letter of credit or other like
document.




          “LIBO Rate” shall mean, with respect to any Eurodollar Borrowing for any Interest
Period, the rate per annum determined by the Administrative Agent at approximately 11:00 a.m.,
London time, on the date that is two Business Days prior to the commencement of such Interest
Period by reference to the British Bankers’ Association Interest Settlement Rates for deposits in
dollars (as set forth by the Bloomberg Information Service or any successor thereto or any other
service selected by the Administrative Agent which has been nominated by the British Bankers’
Association as an authorized information vendor for the purpose of displaying such rates) for a
period equal to such Interest Period; provided that, to the extent that an interest rate is
not ascertainable pursuant to the foregoing provisions of this definition, the




18









 







“LIBO Rate” shall be the interest rate per annum determined by the Administrative Agent to be
the average of the rates per annum at which deposits in dollars are offered for such relevant
Interest Period to major banks in the London interbank market in London, England by the
Administrative Agent at approximately 11:00 a.m. (London time) on the date that is two Business
Days prior to the beginning of such Interest Period.




          “Lien” shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien
(statutory or otherwise), pledge, hypothecation, encumbrance, collateral assignment, charge or
security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement (or any financing lease
having substantially the same economic effect as any of the foregoing) relating to such asset and
(c) in the case of securities, any purchase option, call or similar right of a third party with
respect to such securities.




          “Loan Documents” shall mean this Agreement and the Security Documents.




          “Loan Parties” shall mean the Borrowers and each Subsidiary that is or becomes a party
to a Loan Document.




          “Loans” means Loans made by or on behalf of the Lenders to the Borrowers pursuant to
Sections 2.01, 2.22 and 2.24.




          “Margin Stock” shall have the meaning assigned to such term in Regulation U.




          “Material Adverse Effect” shall mean a material adverse condition or material adverse
change in or materially affecting (a) the business, assets, liabilities, operations or condition
(financial or otherwise) or prospects of PALCO and the Subsidiaries, taken as a whole, or (b) the
validity or enforceability of any of the Loan Documents or the rights and remedies of the Arranger,
the Administrative Agent, or the Secured Parties thereunder.




          “Material Indebtedness” shall mean Indebtedness (other than the Loans and Letters of
Credit), or obligations in respect of one or more Hedging Agreements, of any one or more of PALCO
and the Subsidiaries in an aggregate outstanding principal amount exceeding $1,000,000. For
purposes of determining Material Indebtedness, the “principal amount” of the obligations of PALCO
or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate
amount (giving effect to any netting agreements) that PALCO or such Subsidiary would be required to
pay if such Hedging Agreement were terminated at such time.




          “Maturity Date” shall mean July 18, 2011.




          “Maximum Rate” shall have the meaning assigned to such term in Section 9.09.




          “Maxxam” means MAXXAM Inc.




          “Moody’s” shall mean Moody’s Investors Service, Inc.




19









 








          “Mortgaged Properties” shall mean, initially, each parcel of real property and the
improvements thereto owned or leased by a Loan Party and specified on Schedule 1.01(a), and shall
include each other parcel of real property and improvements thereto with respect to which a
Mortgage is granted pursuant to Section 5.09 or 5.10.




          “Mortgages” shall mean the fee or leasehold mortgages or deeds of trust, assignments
of leases and rents and other security documents granting a Lien on any Mortgaged Property to
secure the Obligations, each in form and substance reasonably satisfactory to the Administrative
Agent, with such changes as shall be advisable under the law of the jurisdiction in which such
Mortgage is to be recorded and as are reasonably satisfactory to the Administrative Agent, as the
same may be amended, supplemented, replaced or otherwise modified from time to time in accordance
with this Agreement.




          “Multiemployer Plan” shall mean a multiemployer plan as defined in Section 4001(a)(3)
of ERISA.




          “Net Amount of Eligible Accounts” means, at any time, the gross amount of Eligible
Accounts less sales, excise or similar taxes, and less returns, discounts, claims, credits and
allowances, accrued rebates, and deductions of any nature at any time issued, owing, granted,
outstanding, available or claimed.




          “Net Cash Proceeds” shall mean (a) with respect to any Asset Sale or Recovery Event,
the proceeds thereof in the form of cash (including any such proceeds subsequently received (as and
when received) in respect of noncash consideration initially received), net of (i) selling expenses
(including reasonable and customary broker’s fees or commissions, legal fees, transfer and similar
taxes incurred by the Borrowers and the Subsidiaries in connection therewith and the Borrowers’
good faith estimate of income taxes paid or payable in connection with such sale, after taking into
account any available tax credits or deductions and any tax sharing arrangements), (ii) amounts
provided as a reserve, in accordance with GAAP and acceptable to the Administrative Agent, against
any liabilities under any indemnification obligations or purchase price adjustment associated with
such Asset Sale (provided that, to the extent and at the time any such amounts are released
from such reserve, such amounts shall constitute Net Cash Proceeds), (iii) the principal amount,
premium or penalty, if any, interest and other amounts on any Indebtedness for borrowed money which
is secured by the asset sold in such Asset Sale and which is required to be repaid with such
proceeds (other than Indebtedness hereunder or any such Indebtedness assumed by the purchaser of
such asset) and (iv) to the extent not otherwise included in clause (i) above, Capital Expenditures
associated with the preparation and sale of non-core assets, not to exceed $5,000,000 in the
aggregate; and (b) with respect to any issuance or disposition of Indebtedness or any Equity
Issuance, the cash proceeds thereof, net of all taxes and reasonable and customary fees,
commissions, costs and other expenses incurred by the Borrowers and the Subsidiaries in connection
therewith.




          “Net Orderly Liquidation Value” means at any time, with respect to Inventory, the
orderly liquidation value (expressed as a percentage of the book value and on a non-conversion
basis), if any, of such Inventory (less estimated liquidation expenses) at such time, as determined
by reference to the most recent Appraisal thereof delivered to Administrative Agent pursuant to
Section 5.04(k), which is reasonably satisfactory to Administrative Agent.




20









 








          “Obligations” shall mean all obligations defined as “Obligations” in the Guarantee and
Collateral Agreement and the other Security Documents.




          “Other Taxes” shall mean any and all present or future stamp or documentary taxes or
any other excise or property taxes, charges or similar levies (including interest, fines, penalties
and additions to tax) arising from any payment made under any Loan Document or from the execution,
delivery or enforcement of, or otherwise with respect to, any Loan Document.




          “PBGC” shall mean the Pension Benefit Guaranty Corporation referred to and defined in
ERISA and any successor entity performing similar functions.




          “Perfection Certificate” shall mean the Pre-Closing UCC Diligence Certificate
substantially in the form of Exhibit F or any other form approved by the Administrative Agent.




          “Permits” shall mean any and all franchises, licenses, leases, permits, approvals,
notifications, certifications, registrations, authorizations, exemptions, qualifications,
easements, rights of way, Liens and other rights, privileges and approvals required under any
Requirement of Law.




          “Permitted Discretion” means a determination made in good faith and in the exercise of
reasonable business judgment.




          “Permitted Investments” shall mean:




          (a) direct obligations of, or obligations the principal of and interest on which are
unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent
such obligations are backed by the full faith and credit of the United States of America), in each
case maturing within one year from the date of acquisition thereof;




          (b) investments in commercial paper maturing within 270 days from the date of acquisition
thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or
from Moody’s;




          (c) investments in certificates of deposit, banker’s acceptances and time deposits maturing
within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and
money market deposit accounts issued or offered by, the Administrative Agent or any domestic office
of any commercial bank organized under the laws of the United States of America or any State
thereof that has a combined capital and surplus and undivided profits of not less than
$500,000,000;




          (d) fully collateralized repurchase agreements with a term of not more than 30 days for
securities described in clause (a) above and entered into with a financial institution satisfying
the criteria of clause (c) above;




          (e) investments in “money market funds” within the meaning of Rule 2a-7 of the Investment
Company Act of 1940, as amended, substantially all of whose assets are invested in investments of
the type described in clauses (a) through (d) above;




21









 








          (f) taxable auction rate securities commonly known as “money market notes” that at the time of
purchase have been rated and the ratings for which (A) for direct issues, must not be less than
“P1” if rated by Moody’s Investors Services, Inc. and not less than “A1” if rated by Standard and
Poor’s Corporation, or (B) for collateralized issues which follow the asset coverage tests set
forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least
“AAA” if rated by Standard & Poor’s Corporation and “Aaa” if rated by Moody’s Investors Services,
Inc.; and




          (g) other short-term investments utilized by Subsidiaries in accordance with normal investment
practices for cash management in investments of a type analogous to the foregoing.




          “Permitted Refinancing Indebtedness” shall mean Indebtedness issued or incurred
(including by means of the extension or renewal of existing Indebtedness) to refinance, refund,
extend, renew or replace existing Indebtedness (“Refinanced Indebtedness”);
provided that (a) the principal amount of such refinancing, refunding, extending, renewing
or replacing Indebtedness is not greater than the principal amount of such Refinanced Indebtedness
plus the amount of any premiums or penalties and accrued and unpaid interest paid thereon and
reasonable fees and expenses, in each case associated with such refinancing, refunding, extension,
renewal or replacement, (b) such refinancing, refunding, extending, renewing or replacing
Indebtedness has a final maturity that is no sooner than, and a weighted average life to maturity
that is no shorter than, such Refinanced Indebtedness, (c) if such Refinanced Indebtedness or any
Guarantees thereof are subordinated to the Obligations, such refinancing, refunding, extending,
renewing or replacing Indebtedness and any Guarantees thereof remain so subordinated on terms no
less favorable to the Lenders, (d) the obligors in respect of such Refinanced Indebtedness
immediately prior to such refinancing, refunding, extending, renewing or replacing are the only
obligors on such refinancing, refunding extending, renewing or replacing Indebtedness and (e) such
refinancing, refunding, extending, renewing or replacing Indebtedness contains covenants and events
of default and is benefited by Guarantees, if any, which, taken as a whole, are determined in good
faith by a Financial Officer of PALCO to be no less favorable to the Borrowers or the applicable
Subsidiary and the Lenders in any material respect than the covenants and events of default or
Guarantees, if any, in respect of such Refinanced Indebtedness.




          “person” shall mean any natural person, corporation, trust, business trust, joint
venture, joint stock company, association, company, limited liability company, partnership,
Governmental Authority or other entity.




          “Pledged Collateral” shall have the meaning assigned to such term in the Guarantee and
Collateral Agreement.




          “Prime Rate” shall mean the rate of interest per annum announced from time to time by
JP Morgan Chase Bank, N.A as its prime rate in effect at its principal office in New York City;
each change in the Prime Rate shall be effective as of the opening of business on the date such
change is announced as being effective. The Prime Rate is a reference rate and does not
necessarily represent the lowest or best rate actually available.




22









 








          “Pro Rata Percentage” of any Lender, at any time, shall mean the percentage of the
total Commitments represented by such Lender’s Commitment. In the event the Commitments shall have
expired or been terminated, the Pro Rata Percentage of any Lender shall be determined on the basis
of the Commitments most recently in effect prior thereto.




          “Protective Advances” shall have the meaning assigned to such term in Section 2.24.




          “Real Property” shall mean all Mortgaged Property and all other real property owned or
leased from time to time by any Loan Party.




          “Recovery Event” shall mean any settlement of or payment in respect of any property or
casualty insurance claim or any taking under power of eminent domain or by condemnation or similar
proceeding of or relating to any property or asset of the Borrowers or any Subsidiary.




          “Register” shall have the meaning assigned to such term in Section 9.04(d).




          “Regulation T” shall mean Regulation T of the Board as from time to time in effect and
all official rulings and interpretations thereunder or thereof.




          “Regulation U” shall mean Regulation U of the Board as from time to time in effect and
all official rulings and interpretations thereunder or thereof.




          “Regulation X” shall mean Regulation X of the Board as from time to time in effect and
all official rulings and interpretations thereunder or thereof.




          “Related Parties” shall mean, with respect to any specified person, such person’s
Affiliates and the respective directors, officers, employees, agents and advisors of such person
and such person’s Affiliates.




          “Release” shall mean any release, spill, seepage, emission, leaking, pumping,
injection, pouring, emptying, deposit, disposal, discharge, dispersal, dumping, escaping, leaching,
or migration into, onto or through the environment or within or upon any building, structure,
facility or fixture.




          “Required Lenders” shall mean, at any time, Lenders having Loans (excluding Swingline
Loans), L/C Exposure, Swingline Exposure and unused Commitments representing at least a majority of
the sum of all Loans (excluding Swingline Loans), outstanding L/C Exposure, Swingline Exposure and
unused Commitments at such time.




          “Requirement of Law” shall mean as to any person, the governing documents of such
person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or
other Governmental Authority, in each case applicable to or binding upon such person or any of its
Real Property or personal property or to which such person or any of its property of any nature is
subject.




23









 








          “Reserves” shall mean reserves that limit the availability of credit hereunder,
consisting of reserves against the Commitments, Eligible Accounts or Eligible Inventory,
established by the Administrative Agent from time to time in the Administrative Agent’s reasonable
credit judgment. Without limiting the generality of the foregoing, the following reserves shall be
deemed to be a reasonable exercise of the Administrative Agent’s credit judgment: (a) a reserve for
accrued, unpaid interest on the Obligations, (b) reserves for rent at leased locations subject to
statutory or contractual landlord liens, (c) reserves for any lumberman’s liens, logger’s liens or
other priming liens, (d) Inventory shrinkage, (e) environmental compliance reserves, (f) dilution,
and (g) warehousemen’s or bailees’ charges.




          “Responsible Officer” of any person shall mean any executive officer or Financial
Officer of such person and any other officer or similar official thereof responsible for the
administration of the obligations of such person in respect of this Agreement.




          “Restricted Payment” shall mean any dividend or other distribution (whether in cash,
securities or other property) with respect to any Equity Interests in PALCO or any Subsidiary, or
any payment (whether in cash, securities or other property), including any sinking fund or similar
deposit, on account of the purchase, redemption, defeasance, retirement, acquisition, cancellation
or termination of any Equity Interests in PALCO or any Subsidiary or any option, warrant or other
right to acquire any such Equity Interests in PALCO or any Subsidiary.




          “Revolving Credit Commitment” shall mean, with respect to each Lender, the commitment,
if any, of such Lender to make Loans (and to acquire participations in Letters of Credit, Swingline
Loans and Protective Advances) hereunder as set forth on the Lender Addendum delivered by such
Lender, or in the Assignment and Acceptance pursuant to which such Lender assumed its Commitment,
as applicable, as the same may be (i) reduced from time to time pursuant to Section 2.09 and (ii)
reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to
Section 9.04.




          “Revolving Credit Exposure” shall mean, with respect to any Lender, at any time, the
aggregate principal amount at such time of all outstanding Loans of such Lender, plus the aggregate
amount at such time of such Lender’s L/C Exposure, plus the aggregate amount at such time of such
Lender’s Swingline Exposure.




          “S&P” shall mean Standard & Poor’s Ratings Group, Inc.




          “Salmon Creek” shall mean Salmon Creek LLC, a Delaware limited liability company.




          “Salmon Creek CD” shall mean the certificate of deposit shown on Schedule 3.26
and Schedule 6.02 hereto which has been issued by Bank of America in the name of Salmon
Creek, account number 14892-83984, and which has been pledged by Salmon Creek to secure the
obligations of Salmon Creek, PALCO and Scotia Pacific under Items 1 and 2 of Schedule 6.07
hereto and under the related Habitat Conservation Plan and “incidental take” permits.




          “Salmon Creek Transaction” shall mean (i) a dividend distribution from Salmon Creek to
PALCO consisting of all of the assets of Salmon Creek (other than the Salmon Creek




24









 







CD), followed by (ii) a dividend distribution from PALCO to Holdings consisting of all of the
membership interests of Salmon Creek, so that immediately after the foregoing transactions PALCO
shall be the owner of all of the assets of Salmon Creek (other than the Salmon Creek CD), and
Salmon Creek shall be a direct subsidiary of Holdings. Such transfer of assets from Salmon Creek
to PALCO (other than the Salmon Creek CD) shall be subject to the Liens of the Administrative Agent
under the Security Documents, and all of the assets so transferred from Salmon Creek to PALCO
(other than the Salmon Creek CD) shall continue to be “Collateral” as defined herein, and the
Administrative Agent shall continue to have a first priority security interest in such Collateral,
subject only to Liens permitted by Section 6.02. For avoidance of doubt, the Salmon Creek
Transaction shall not affect any of the rights or obligations of Salmon Creek or PALCO under any
agreements listed on Schedule 6.07 hereto, and both Salmon Creek and PALCO shall retain
all of their rights and obligations under such agreements.




          “Scotia Inn” shall mean Scotia Inn Inc., a Delaware corporation.




          “Scotia Pacific” shall mean Scotia Pacific Company LLC, a Delaware limited liability
company.




          “Seasonal Overadvance Period” shall mean a period from and including October 15 of any
year until and including January 15 of the following year.




          “Secured Parties” shall have the meaning assigned to such term in the Guarantee and
Collateral Agreement.




          “Security Documents” shall mean the Guarantee and Collateral Agreement, the Mortgages,
the Intellectual Property Security Agreements, the Intercreditor Agreement and each of the other
security agreements, pledges, mortgages, consents and other instruments and documents executed and
delivered pursuant to any of the foregoing or pursuant to Section 5.09 or 5.10.




          “Settlement Property” shall mean the approximately 200 acres of real property to be
deeded from Scotia Pacific to PALCO, and then substantially concurrently deeded from PALCO to Ms.
Kristi Wrigley, pursuant to that certain Stipulation for Settlement CCP Section 664.6 in Kristi
Wrigley, et al. v Charles Hurwitz, et al., State of California, Humboldt County Superior Court,
Case No. DR 9700399.




          “Special Agent Advance” shall have the meaning assigned to such term in Section
9.05(e).




          “SPC” shall have the meaning assigned to such term in Section 9.04(i).




          “Specified Asset” means each asset set forth on Schedule 5.14.




          “Statutory Reserves” shall mean a fraction (expressed as a decimal), the numerator of
which is the number one and the denominator of which is the number one minus the aggregate of the
maximum reserve percentages (including any marginal, special, emergency or supplemental reserves)
expressed as a decimal established by the Board and any other banking authority, domestic or
foreign, to which the Administrative Agent or any Lender (including any




25









 







branch, Affiliate or other fronting office making or holding a Loan) is subject for
eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the
Board). Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to
such reserve requirements without benefit of or credit for proration, exemptions or offsets that
may be available from time to time to any Lender under such Regulation D or any comparable
regulation. Statutory Reserves shall be adjusted automatically on and as of the effective date of
any change in any reserve percentage.




          “Subordinated Intercompany Note” means that certain Subordinated Intercompany Note
dated as of the Closing Date by and among the Loan Parties.




          “subsidiary” shall mean, with respect to any person (herein referred to as the
“parent”), any corporation, partnership, limited liability company, association or other
entity (a) of which securities or other ownership interests representing more than 50% of the
equity or more than 50% of the ordinary voting power or more than 50% of the general partnership
interests are, at the time any determination is being made, owned, controlled or held, or (b) that
is, at the time any determination is made, otherwise Controlled, by the parent or one or more
subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.




          “Subsidiary” shall mean any subsidiary of PALCO, other than Scotia Pacific or a
subsidiary of Scotia Pacific.




          “Subsidiary Guarantor” shall mean each Subsidiary other than Britt.




          “Swingline Commitment” shall mean the commitment of the Swingline Lender to make loans
pursuant to Section 2.22, as the same may be reduced from time to time pursuant to Section 2.09 .




          “Swingline Exposure” shall mean, at any time, the aggregate principal amount at such
time of all outstanding Swingline Loans. The Swingline Exposure of any Lender at any time shall
equal its Pro Rata Percentage of the aggregate Swingline Exposure at such time.




          “Swingline Lender” shall mean Marathon Structured Finance Fund L.P., in its capacity
as lender of Swingline Loans hereunder.




          “Swingline Loan” shall mean any loan made by the Swingline Lender pursuant to Section
2.22.




          “Tax Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.




          “Taxes” shall mean any and all present or future taxes, levies, imposts, duties,
deductions, charges, liabilities or withholdings imposed by any Governmental Authority.




          “Term Loan Agreement” shall mean that certain Term Loan Agreement dated the date
hereof among PALCO, Britt, Marathon Structured Finance Fund L.P, as the administrative agent and a
lender, and the financial institutions from time to time party thereto as lenders, as amended,
restated, modified, supplemented or otherwise modified from time to time.




26









 








          “Title Insurance Company” shall have the meaning assigned to such term in Section
4.02(n).




          “Total Revolving Credit Commitment” shall mean, at any time, the aggregate amount of
the Revolving Credit Commitments, as in effect at such time. The Total Revolving Credit Commitment
as of the Closing Date is $60,000,000.




          “Transactions” shall mean, collectively, (a) the execution, delivery and performance
by the Loan Parties of the Loan Documents to which they are a party, (b) the borrowings hereunder,
the issuance of Letters of Credit and the use of proceeds of each of the foregoing, (c) the
granting of Liens pursuant to the Security Documents, (d) the repayment of all obligations under
the Existing Credit Facilities and (e) any other transactions related to or entered into in
connection with any of the foregoing.




          “Type”, when used in respect of any Loan or Borrowing, shall refer to the Rate by
reference to which interest on such Loan or on the Loans comprising such Borrowing is determined.
For purposes hereof, the term “Rate” shall include the Adjusted LIBO Rate and the Alternate
Base Rate.




          “UCC” shall mean the Uniform Commercial Code.




          “Uniform Customs” shall have the meaning assigned to such term in Section 9.07.




          “United States” or “U.S.” shall mean the United States of America.




          “wholly owned subsidiary” of any person shall mean a subsidiary of such person of
which securities (except for directors’ qualifying shares) or other ownership interests
representing 100% of the Equity Interests are, at the time any determination is being made, owned,
controlled or held by such person or one or more wholly owned subsidiaries of such person or by
such person and one or more wholly owned subsidiaries of such person; a “wholly owned
Subsidiary” shall mean any wholly owned Subsidiary of one or more of the Borrowers.




          “Withdrawal Liability” shall mean liability to a Multiemployer Plan as a result of a
complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of
Subtitle E of Title IV of ERISA.




     SECTION 1.02 Terms Generally. The definitions in Section 1.01 shall apply equally to
both the singular and plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”,
“includes” and “including”, and words of similar import, shall not be limiting and shall be deemed
to be followed by the phrase “without limitation”. The word “will” shall be construed to have the
same meaning and effect as the word “shall”. The words “asset” and “property” shall be construed
as having the same meaning and effect and to refer to any and all rights and interests in tangible
and intangible assets and properties of any kind whatsoever, whether real, personal or mixed,
including cash, securities, Equity Interests, accounts and contract rights. The words “herein”,
“hereof” and “hereunder”, and words of similar import, shall be construed to refer to this
Agreement in its entirety and not to any particular provision of this Agreement unless the context
shall otherwise require. All references herein to Articles,



27









 




Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and
Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as
otherwise expressly provided herein, (a) any definition of, or reference to, any Loan Document or
any other agreement, instrument or document in this Agreement shall mean such Loan Document or
other agreement, instrument or document as amended, restated, supplemented or otherwise modified
from time to time (subject to any restrictions on such amendments, restatements, supplements or
modifications set forth herein) and (b) all terms of an accounting or financial nature shall be
construed in accordance with GAAP, as in effect from time to time; provided,
however, that if the Administrative Borrower notifies the Administrative Agent that the
Borrowers wish to amend any covenant in Article VI or any related definition to eliminate the
effect of any change in GAAP occurring after the date of this Agreement on the operation of such
covenant (or if the Administrative Agent notifies the Administrative Borrower that the Required
Lenders wish to amend Article VI or any related definition for such purpose), then the Borrowers’
and their Subsidiaries’ compliance with such covenant shall be determined on the basis of GAAP in
effect immediately before the relevant change in GAAP became effective, until either such notice is
withdrawn or such covenant is amended in a manner satisfactory to the Borrowers and the Required
Lenders.




     SECTION 1.03 Classification of Loans and Borrowings. For purposes of this Agreement, Loans
may be classified and referred to by Type (e.g., a “Eurodollar Loan”). Borrowings also may be
classified and referred to by Type (e.g., a “Eurodollar Borrowing”).



     SECTION 1.04 Pro Forma Calculations. All pro forma calculations
permitted or required to be made by PALCO or any Subsidiary pursuant to this Agreement shall
include only those adjustments that would be permitted or required by Regulation S-X under the
Securities Act of 1933, as amended, together with those adjustments that (a) have been certified by
a Financial Officer of PALCO as having been prepared in good faith based upon reasonable
assumptions and (b) are based on reasonably detailed written assumptions reasonably acceptable to
the Administrative Agent.



ARTICLE II.




THE CREDITS




     SECTION 2.01 Commitments. Subject to the terms and conditions hereof and relying upon
the representations and warranties set forth herein, each Lender agrees, severally and not jointly,
to make Loans to the Borrowers, at any time and from time to time on or after the Closing Date and
until the earlier of the Maturity Date and the termination of the Commitment of such Lender in
accordance with the terms hereof, in an aggregate principal amount at any time outstanding that (i)
will not result in such Lender’s Revolving Credit Exposure exceeding such Lender’s Revolving Credit
Commitment and (ii) will not result in the Aggregate Revolving Credit Exposure exceeding the
Borrowing Base, subject to the Administrative Agent’s authority to make Protective Advances
pursuant to the terms of Section 2.24. Within the limits set forth in clause (ii) of the preceding
sentence and subject to the terms, conditions and limitations set forth herein, the Borrowers may
borrow, pay or prepay and reborrow Loans.



     SECTION 2.02 Loans.



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          (a) Each Loan (other than Swingline Loans) shall be made as part of a Borrowing consisting of
Loans of the same Type made by the Lenders ratably in accordance with their respective Commitments;
provided, however, that the failure of any Lender to make any Loan required to be
made by it shall not in itself relieve any other Lender of its obligation to lend hereunder (it
being understood, however, that no Lender shall be responsible for the failure of any other Lender
to make any Loan required to be made by such other Lender). Except for Loans deemed made pursuant
to Section 2.02(f) or Section 2.24, and subject to Section 2.22 relating to Swingline Loans, the
Loans comprising any Borrowing shall be in an aggregate principal amount that is (i) an integral
multiple of $250,000 and not less than $750,000 or (ii) equal to the remaining available balance of
the applicable Commitments.




          (b) Subject to Sections 2.08, 2.15 and 2.24, each Borrowing shall be comprised entirely of ABR
Loans or Eurodollar Loans as the Administrative Borrower may request pursuant to Section 2.03;
provided that all Borrowings made on the Closing Date and during the period ending seven
days thereafter must be made as ABR Borrowings (and may not be converted into Eurodollar Borrowings
until the end of such seven-day period), and no Borrowings may be converted into or continued as a
Eurodollar Borrowing having an Interest Period in excess of one month prior to the date which is 60
days after the Closing Date. Each Lender may at its option make any Eurodollar Loan by causing any
domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any
exercise of such option shall not affect the obligation of the Borrowers to repay such Loan in
accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding
at the same time; provided, however, that the Administrative Borrower shall not be
entitled to request any Borrowing that, if made, would result in more than five (5) Eurodollar
Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having
different Interest Periods, regardless of whether they commence on the same date, shall be
considered separate Borrowings.




          (c) Except with respect to Loans made pursuant to Section 2.02(f) or Section 2.24 and subject
to Section 2.22 relating to Swingline Loans, each Lender shall make each Loan to be made by it
hereunder on the proposed date thereof by wire transfer of immediately available funds to such
account in New York City as the Administrative Agent may designate not later than 2:00 p.m., New
York City time, and the Administrative Agent shall promptly credit the amounts so received to an
account in the name of the applicable Borrower, designated by the Administrative Borrower in the
applicable Borrowing Request or, if a Borrowing shall not occur on such date because any condition
precedent herein specified shall not have been met, return the amounts so received to the
respective Lenders.




          (d) Unless the Administrative Agent shall have received notice from a Lender prior to the date
of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s
portion of such Borrowing, the Administrative Agent may assume that such Lender has made such
portion available to the Administrative Agent on the date of such Borrowing in accordance with
paragraph (c) of this Section and the Administrative Agent may, in reliance upon such assumption,
make available to the Borrowers on such date a corresponding amount. If the Administrative Agent
shall have so made funds available then, to the extent that such Lender shall not have made such
portion available to the Administrative Agent, such Lender and the Borrowers severally agree to
repay to the Administrative Agent forthwith on




29









 







demand such corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrowers to but excluding the date such amount is repaid to
the Administrative Agent at (i) in the case of the Borrowers, the interest rate applicable at the
time to the Loans comprising such Borrowing or (ii) in the case of such Lender, a rate determined
by the Administrative Agent to represent its cost of overnight or short-term funds (which
determination shall be conclusive absent manifest error). If such Lender shall repay to the
Administrative Agent such corresponding amount, such amount shall constitute such Lender’s Loan as
part of such Borrowing for purposes of this Agreement.




          (e) Notwithstanding any other provision of this Agreement, the Administrative Borrower shall
not be entitled to request any Borrowing if the Interest Period requested with respect thereto
would end after the Maturity Date.




          (f) If the Administrative Agent shall not have received from the Borrowers the payment
required to be made by Section 2.23(e) with respect to a Letter of Credit within the time specified
in such Section, the Administrative Agent will promptly notify each Lender of such L/C Disbursement
and its Pro Rata Percentage thereof. Each Lender shall pay by wire transfer of immediately
available funds to the Administrative Agent not later than 2:00 p.m., New York City time, on such
date (or, if such Lenders shall have received such notice later than 12:00 (noon), New York City
time, on any day, not later than 10:00 a.m., New York City time, on the immediately following
Business Day), an amount equal to such Lender’s Pro Rata Percentage of such L/C Disbursement (it
being understood that such amount shall be deemed to constitute an ABR Loan of such Lender and such
payment shall be deemed to have reduced the L/C Exposure). If any Lenders shall not have made its
Pro Rata Percentage of such L/C Disbursement available to the Administrative Agent as provided
above, such Lender and the Borrowers severally agree to pay interest on such amount, for each day
from and including the date such amount is required to be paid in accordance with this paragraph to
but excluding the date such amount is paid, to the Administrative Agent at (i) in the case of the
Borrowers, a rate per annum equal to the interest rate applicable to Loans pursuant to Section
2.06(a), and (ii) in the case of such Lender, for the first such day, the Federal Funds Effective
Rate, and for each day thereafter, the Alternate Base Rate.




     SECTION 2.03 Borrowing Procedure. In order to request a Borrowing (other than a
Swingline Loan or a deemed Borrowing pursuant to Section 2.02(f) or Section 2.24, as to which this
Section 2.03 shall not apply), the Administrative Borrower shall hand deliver or fax to the
Administrative Agent a duly completed Borrowing Request (a) in the case of a Eurodollar Borrowing,
not later than 2:00 p.m., New York City time, three Business Days before a proposed Borrowing and
(b) in the case of an ABR Borrowing, not later than 2:00 p.m., New York City time, one Business Day
before a proposed Borrowing. Each Borrowing Request shall be irrevocable, shall be signed by or on
behalf of the Administrative Borrower and shall specify the following information: (i) whether the
Borrowing then being requested is to be a Eurodollar Borrowing or an ABR Borrowing; (ii) the date
of such Borrowing (which shall be a Business Day); (iii) the number and location of the account to
which funds are to be disbursed (which shall be an account that complies with the requirements of
Section 2.02(c)); (iv) the amount of such Borrowing; (v) if such Borrowing is to be a Eurodollar
Borrowing, the initial Interest Period with respect thereto and (vi) a Borrowing Base Certificate
as of such date; provided, however, that, notwithstanding any contrary
specification in any Borrowing Request, each requested



30









 




Borrowing shall comply with the requirements set forth in Section 2.02. If no election as to
the Type of Borrowing is specified in any such notice, then the requested Borrowing shall be an ABR
Borrowing. If no Interest Period with respect to any Eurodollar Borrowing is specified in any such
notice, then the Administrative Borrower shall be deemed to have selected an Interest Period of one
month’s duration. The Administrative Agent shall promptly advise the applicable Lenders of any
notice given in accordance with this Section 2.03 (and the contents thereof), and of each Lender’s
portion of the requested Borrowing.




     SECTION 2.04 Repayment of Loans; Evidence of Debt.



          (a) The Borrowers hereby unconditionally promise to pay to the Administrative Agent for the
account of each Lender the then unpaid principal amount of each Loan of such Lender made to the
Borrowers on the Maturity Date. The Borrowers hereby unconditionally promise to pay to the
Swingline Lender the then unpaid principal amount of each Swingline Loan made to the Borrowers on
the Maturity Date or the last day of each calendar month.




          (b) Each Lender shall maintain in accordance with its usual practice an account or accounts
evidencing the indebtedness of the Borrowers to such Lender resulting from each Loan made by such
Lender to the Borrowers from time to time, including the amounts of principal and interest payable
and paid to such Lender from time to time under this Agreement.




          (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of
each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the
amount of any principal or interest due and payable or to become due and payable from the Borrowers
to each Lender hereunder and (iii) the amount of the sum received by the Administrative Agent
hereunder from the Borrowers or any Guarantor and each Lender’s share thereof.




          (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) of this
Section shall be prima facie evidence of the existence and amounts of the obligations
therein recorded; provided, however, that the failure of any Lender or the
Administrative Agent to maintain such accounts or any error therein shall not in any manner affect
the obligations of the Borrowers to repay the Loans made to the Borrowers in accordance with the
terms of this Agreement.




          (e) Any Lender may request that Loans made by it hereunder be evidenced by a promissory note.
In such event, the Borrowers shall execute and deliver to such Lender a promissory note payable to
such Lender and its registered assigns and in a form and substance reasonably acceptable to the
Administrative Agent. Notwithstanding any other provision of this Agreement, in the event any
Lender shall request and receive such a promissory note, the interests represented by such note
shall at all times (including after any assignment of all or part of such interests pursuant to
Section 9.04) be represented by one or more promissory notes payable to the payee named therein or
its registered assigns.




     SECTION 2.05 Fees.



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          (a) The Borrowers agree to pay to each Lender, through the Administrative Agent, on the last
Business Day of each calendar month in each year and on each date on which any Commitment of such
Lender shall expire or be terminated as provided herein, a commitment fee (a “Commitment
Fee”) equal to the Commitment Fee Rate on the average daily unused amount of the Commitment of
such Lender (other than the Swingline Commitment) during the preceding month (or other period
commencing with the date hereof or ending with the Maturity Date or the date on which the
Commitments of such Lender shall expire or be terminated). All Commitment Fees shall be computed
on the basis of the actual number of days elapsed in a year of 360 days. The Commitment Fee due to
each Lender shall commence to accrue on the date hereof and shall cease to accrue on the date on
which the Commitment of such Lender shall expire or be terminated as provided herein. For purposes
of calculating Commitment Fees, no portion of the Commitments shall be deemed utilized under
Section 2.22 as a result of outstanding Swingline Loans.




          (b) The Borrowers agree to pay to the Administrative Agent and the Arranger, for its own
account, the fees in the amounts and at the times from time to time agreed to in writing by the
Borrowers (or any Affiliate) and the Administrative Agent, including pursuant to the Fee Letter
(the “Administrative Agent Fees”).




          (c) The Borrowers agree to pay (i) to each Lender, through the Administrative Agent, on the
last Business Day of each calendar month and on the date on which the Commitment of such Lender
shall be terminated as provided herein (each, an “L/C Fee Payment Date”) a fee (an “L/C
Guaranty Fee”) calculated on such Lender’s Pro Rata Percentage of the daily aggregate L/C
Exposure (excluding the portion thereof attributable to unreimbursed L/C Disbursements which are
earning interim interest pursuant to Section 2.23(h)) during the preceding quarter (or shorter
period commencing with the date hereof or ending with the Maturity Date or the date on which all
Letters of Credit have been canceled or have expired and the Commitments of all Lenders shall have
been terminated) at a rate per annum equal to the interest rate on Borrowings comprised of
Eurodollar Loans pursuant to Section 2.06, and (ii) to the Administrative Agent, any and all
charges, fees, commissions, costs and expenses charged to the Administrative Agent by an Issuing
Bank in connection with, or arising out of, Letters of Credit or out of transactions relating
thereto, when charged to or paid by the Administrative Agent, or as may be due upon any termination
of this Agreement (the amounts in this clause (ii), collectively, the “Issuing Bank Fees”)
(in the case of this clause (ii), as long as such amounts are consistent with amounts charged to
similarly situated borrowers). All L/C Guaranty Fees shall be computed on the basis of the actual
number of days elapsed in a year of 360 days.




          (d) If, on or prior to the second anniversary of the Closing Date, the Revolving Credit
Commitment of any Lender is reduced or terminated, the Borrowers agree to pay to the Administrative
Agent for the benefit of such Lender on the date of such reduction or termination a fee equal to
the Applicable Percentage (as defined below) multiplied by the amount of each reduction (or the
entire amount of such Revolving Credit Commitment in the event of a termination thereof). As used
herein, the term “Applicable Percentage” shall mean (w) 3%, in the case of a reduction or
termination of the Revolving Credit Commitment on or prior to the first anniversary of the Closing
Date, (x) 2%, in the case of a reduction or termination of the Revolving Credit Commitment after
the first anniversary of the Closing Date but on or prior to the second anniversary thereof, (y) 1%
in the case of a reduction or termination of the Revolving




32









 







Credit Commitment after the second anniversary of the Closing Date or on or prior to the third
anniversary of the Closing Date, and (z) 0%, in the case of a prepayment after the third
anniversary of the Closing Date.




          (e) All Fees shall be paid on the dates due, in immediately available funds, to the
Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the
Issuing Bank Fees shall be paid for the account of the Administrative Agent. Once paid, none of
the Fees shall be refundable under any circumstances.




     SECTION 2.06 Interest on Loans.



          (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing,
including each Swingline Loan, shall bear interest (computed on the basis of the actual number of
days elapsed over a year of 360 days) at a rate per annum equal to the Alternate Base Rate plus the
Applicable Margin in effect from time to time.




          (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing
shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360
days) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for
such Borrowing plus the Applicable Margin in effect from time to time.




          (c) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such
Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or
Adjusted LIBO Rate for each Interest Period or day within an Interest Period, as the case may be,
shall be determined by the Administrative Agent, and such determination shall be conclusive absent
manifest error.




     SECTION 2.07 Default Interest. If an Event of Default has occurred and is continuing
and the Administrative Agent or the Required Lenders so elect, the Borrowers shall on written
demand from time to time pay interest, to the extent permitted by law, on all Obligations, to but
excluding the date of actual payment (after as well as before judgment) at the rate otherwise
applicable to Loans pursuant to Section 2.06 plus 2.00% per annum.



     SECTION 2.08 Alternate Rate of Interest. In the event, and on each occasion, that
prior to the commencement of any Interest Period for a Eurodollar Borrowing (a) the Administrative
Agent shall have determined that adequate and reasonable means do not exist for determining the
Adjusted LIBO Rate for such Interest Period or (b) the Administrative Agent is advised by the
Required Lenders in respect of the Facility that the Adjusted LIBO Rate for such Interest Period
will not adequately and fairly reflect the cost to such Lenders of making or maintaining their
Loans included in such Borrowing for such Interest Period, the Administrative Agent shall, as soon
as practicable thereafter, give written or fax notice of such determination to the Borrowers and
the Lenders. In the event of any such determination, until the Administrative Agent shall have
advised the Borrowers and the Lenders that the circumstances giving rise to such notice no longer
exist, (i) any request by the Administrative Borrower for a Eurodollar Borrowing pursuant to
Section 2.03 or 2.10 shall be deemed to be a request for an ABR Borrowing and (ii) any Interest
Period election that requests the conversion of any



33









 




Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be
ineffective. Each determination by the Administrative Agent under this Section 2.08 shall be
conclusive absent manifest error.




     SECTION 2.09 Termination and Reduction of Commitments.



          (a) Unless previously terminated in accordance with the terms hereof, the Commitments shall
automatically terminate on the Maturity Date. Notwithstanding the foregoing, all the Commitments
shall automatically terminate at 5:00 p.m., New York City time, on July 18, 2006, if the initial
Credit Event shall not have occurred by such time.



Upon at least three Business Days’ prior irrevocable written or fax notice to the Administrative
Agent, the Borrowers may at any time in whole permanently terminate, or from time to time in part
permanently reduce, the Commitments; provided, however, that (i) each partial reduction of the
Commitments shall be in an integral multiple of $1,000,000 and in a minimum amount of $1,000,000
and (ii) the Commitments shall not be reduced to an amount that is less than the Aggregate
Revolving Credit Exposure then in effect.




          (b) Each reduction in the Commitments hereunder shall be made ratably among the applicable
Lenders in accordance with their Pro Rata Percentages. The Borrowers shall pay to the
Administrative Agent for the account of the applicable Lenders, on the date of each termination or
reduction, the Commitment Fees on the amount of the Commitments so terminated or reduced accrued to
but excluding the date of such termination or reduction.




     SECTION 2.10 Conversion and Continuation of Borrowings. The Administrative Borrower
shall have the right at any time upon prior irrevocable notice to the Administrative Agent (a) not
later than 12:00 p.m., New York City time, one Business Day prior to conversion, to convert any
Eurodollar Borrowing of the Borrowers into an ABR Borrowing, (b) not later than 2:00 p.m., New York
City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing of
the Borrowers into a Eurodollar Borrowing or to continue any Eurodollar Borrowing of the Borrowers
as a Eurodollar Borrowing for an additional Interest Period and (c) not later than 2:00 p.m., New
York City time, three Business Days prior to conversion, to convert the Interest Period with
respect to any Eurodollar Borrowing of the Borrowers to another permissible Interest Period,
subject in each case to the following:




               (i) each conversion or continuation shall be made pro rata among the Lenders in
accordance with the respective principal amounts of the Loans comprising the converted or
continued Borrowing;




               (ii) if less than all the outstanding principal amount of any Borrowing shall be
converted or continued, then each resulting Borrowing shall satisfy the limitations
specified in Sections 2.02(a) and 2.02(b) regarding the principal amount and maximum number
of Borrowings of the relevant Type;




               (iii) each conversion shall be effected by each Lender and the Administrative Agent by
recording for the account of such Lender the new Loan of such Lender resulting from such
conversion and reducing the Loan (or portion thereof) of such Lender being converted by an
equivalent principal amount; accrued interest on any



34









 








Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrowers at
the time of conversion;




               (iv) if any Eurodollar Borrowing is converted at a time other than the end of the
Interest Period applicable thereto, the Borrowers shall pay, upon demand, any amounts due to
the Lenders pursuant to Section 2.16;




               (v) any portion of a Borrowing maturing or required to be repaid in less than one month
may not be converted into or continued as a Eurodollar Borrowing;




               (vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued
as a Eurodollar Borrowing by reason of the immediately preceding clause shall be
automatically converted at the end of the Interest Period in effect for such Borrowing into
an ABR Borrowing;




               (vii) after the occurrence and during the continuance of a Default or Event of Default,
no outstanding Loan may be converted into, or continued as, a Eurodollar Loan.



          Each notice pursuant to this Section 2.10 shall be irrevocable and shall refer to this
Agreement and specify (i) the identity and amount of the Borrowing that the Administrative Borrower
request be converted or continued, (ii) whether such Borrowing is to be converted to or continued
as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the date
of such conversion (which shall be a Business Day) and (iv) if such Borrowing is to be converted to
or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest
Period is specified in any such notice with respect to any conversion to or continuation as a
Eurodollar Borrowing, the Administrative Borrower shall be deemed to have selected an Interest
Period of one month’s duration. The Administrative Agent shall advise the Lenders of any notice
given pursuant to this Section 2.10 and of each Lender’s portion of any converted or continued
Borrowing. If the Administrative Borrower shall not have given notice in accordance with this
Section 2.10 to continue any Borrowing into a subsequent Interest Period (and shall not otherwise
have given notice in accordance with this Section 2.10 to convert such Borrowing), such Borrowing
shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms
hereof), automatically be converted or continued into an ABR Borrowing.




     SECTION 2.11 [Reserved]



     SECTION 2.12 Prepayment.



          (a) The Borrowers shall, subject to the requirements of Section 2.05(b), have the right at any
time and from time to time to prepay any Borrowing, in whole or in part, upon at least three
Business Days’ prior written or fax notice (or telephone notice promptly confirmed by written or
fax notice) in the case of Eurodollar Loans, or written or fax notice (or telephone notice promptly
confirmed by written or fax notice) at least one Business Day prior to the date of prepayment in
the case of ABR Loans, to the Administrative Agent before 2:00 p.m., New York City time;
provided, however, that each partial prepayment shall be in an amount that is an
integral multiple of $250,000 and not less than $750,000.




35









 








          (b) Each notice of prepayment shall specify the prepayment date and the principal amount of
each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the
Borrowers to prepay such Borrowing by the amount stated therein on the date stated therein. All
prepayments under this Section 2.12 shall be subject to Section 2.16, but otherwise without premium
or penalty. All prepayments under this Section 2.12 shall be accompanied by accrued and unpaid
interest on the principal amount to be prepaid to but excluding the date of payment.




     SECTION 2.13 Mandatory Prepayments.



          (a) In the event of any termination of all the Commitments, the Borrowers shall, on the date
of such termination, repay or prepay all its outstanding Borrowings and all its outstanding
Swingline Loans and replace all its outstanding Letters of Credit and/or deposit an amount equal to
the L/C Exposure in cash in a cash collateral account established with the Administrative Agent for
the benefit of the Secured Parties. If as a result of any partial reduction of the Commitments the
Aggregate Revolving Credit Exposure would exceed the Commitments after giving effect thereto, then
the Borrowers shall, on the date of such reduction, repay or prepay Borrowings or Swingline Loans
(or a combination thereof) and/or cash collateralize obligations in respect of Letter of Credit
Guaranties in an amount sufficient to eliminate such excess.




          (b) In the event and on each occasion that Aggregate Revolving Credit Exposure (other than
amounts constituting Protective Advances) exceeds the Borrowing Base, the Borrowers shall
immediately repay Loans and/or cash collateralize outstanding Letters of Credit to the extent
necessary to cause the Aggregate Revolving Credit Exposure not to exceed the Borrowing Base.




          (c) In connection with any Asset Sale which consists of (i) the sale of all of the Equity
Interests in Britt or (ii) the sale of Eligible Accounts and/or Eligible Inventory (or the sale of
certain of such assets and other assets of a Borrower), the Borrowers shall apply the Net Cash
Proceeds of such sale to repay outstanding Revolving Loans and/or provide cash collateral with
respect to L/C Exposure in an amount equal to the lesser of (i) the amount necessary to cause the
Borrowers to comply with Section 2.13(b) or (ii) the sum of (a) 85% of the Net Amount of the
Eligible Accounts sold in such Asset Sale plus (b) 75% of the value (being the lower of cost (on a
first-in first out basis) or market) of the Eligible Inventory sold in such Asset Sale.




     SECTION 2.14 Reserve Requirements; Change in Circumstances.



          (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall:





               (i) impose, modify or deem applicable any reserve, special deposit or similar
requirement against assets of, deposits with or for the account of, or credit extended by,
any Lender or the Administrative Agent (except any such reserve requirement which is
reflected in the Adjusted LIBO Rate) or



36









 






               (ii) impose on any Lender or the Administrative Agent or the London interbank market
any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any
Letter of Credit or participation therein,


and the result of any of the foregoing shall be to increase the cost to such Lender of making or
maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to
increase the cost to any Lender or the Administrative Agent of issuing or maintaining any Letter of
Credit or Letter of Credit Guaranty or purchasing or maintaining a participation therein or to
reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal,
interest or otherwise) by an amount deemed by such Lender or the Administrative Agent to be
material, then the Borrowers will pay to such Lender or the Administrative Agent, as the case may
be, upon demand such additional amount or amounts as will compensate such Lender or the Issuing
Bank, as the case may be, for such additional costs incurred or reduction suffered.




          (b) If any Lender or the Administrative Agent shall have determined that any Change in Law
regarding capital adequacy has or would have the effect of reducing the rate of return on such
Lender’s, the Administrative Agent’s capital or on the capital of such Lender’s, the Administrative
Agent’s holding company, if any, as a consequence of this Agreement or the Loans made by, or
participations in Letter of Credit Guaranties purchased by, such Lender or the Letter of Credit
Guaranties issued by the Administrative Agent to a level below that which such Lender, the
Administrative Agent or such Lender’s or the Administrative Agent’s holding company could have
achieved but for such Change in Law (taking into consideration such Lender’s or the Administrative
Agent’s policies and the policies of such Lender’s or the Administrative Agent’s holding company
with respect to capital adequacy) by an amount deemed by such Lender or the Administrative Agent to
be material, then from time to time the Borrowers shall pay to such Lender or the Administrative
Agent, as the case may be, such additional amount or amounts as will compensate such Lender or the
Administrative Agent or such Lender’s or the Administrative Agent’s holding company for any such
reduction suffered.




          (c) A certificate of a Lender or the Administrative Agent setting forth the amount or amounts
necessary to compensate such Lender or the Administrative Agent or its holding company, as
applicable, as specified in paragraph (a) or (b) of this Section 2.14 shall be delivered to the
Borrowers and shall be conclusive absent manifest error. The Borrowers shall pay such Lender or
the Administrative Agent, as the case may be, the amount or amounts shown as due on any such
certificate delivered by it within 10 days after its receipt of the same.




          (d) Failure or delay on the part of any Lender or the Administrative Agent to demand
compensation pursuant to this Section shall not constitute a waiver of such Lender’s or the
Administrative Agent’s right to demand such compensation; provided that the Borrowers shall
not be under any obligation to compensate any Lender or the Administrative Agent under paragraph
(a) or (b) above for increased costs or reductions with respect to any period prior to the date
that is 180 days prior to such request if such Lender or the Administrative Agent knew or could
reasonably have been expected to know of the circumstances giving rise to such increased costs or
reductions and of the fact that such circumstances would result in a claim for increased
compensation by reason of such increased costs or reductions; provided further that the
foregoing limitation shall not apply to any increased costs or reductions arising out of the




37









 







retroactive application of any Change in Law within such 180-day period. The protection of
this Section shall be available to each Lender and the Administrative Agent regardless of any
possible contention of the invalidity or inapplicability of the Change in Law that shall have
occurred or been imposed.




     SECTION 2.15 Change in Legality.



          (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall make it
unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its
obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to
the Administrative Borrower and to the Administrative Agent:





               (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration
of such unlawfulness) be made by such Lender hereunder (or be continued for additional
Interest Periods and ABR Loans will not thereafter (for such duration) be converted into
Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR
Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional
Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a
request to continue an ABR Loan as such for an additional Interest Period or to convert a
Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be
subsequently withdrawn; and




               (ii) such Lender may require that all outstanding Eurodollar Loans made by it be
converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically
converted to ABR Loans as of the effective date of such notice as provided in paragraph (b)
below.


In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and
prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that
would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead
be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion
of, such Eurodollar Loans. Any such conversion of a Eurodollar Loan under (i) above shall be
subject to Section 2.16.




          (b) For purposes of this Section 2.15, a notice to the Administrative Borrower by any Lender
shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of
the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall
be effective on the date of receipt by the Borrowers.




     SECTION 2.16 Indemnity. The Borrowers shall indemnify each Lender against any loss or
expense that such Lender may sustain or incur as a consequence of (a) any event, other than a
default by such Lender in the performance of its obligations hereunder, which results in (i) such
Lender receiving or being deemed to receive any amount on account of the principal of any
Eurodollar Loan prior to the end of the Interest Period in effect therefor, (ii) the conversion of
any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any
Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor
or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar



38









 







Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made
after notice of such Loan shall have been given by the Administrative Borrower hereunder (any of
the events referred to in this clause (a) being called a “Breakage Event”) or (b) any
default in the making of any payment or prepayment required to be made hereunder. In the case of
any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined
by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of
such Breakage Event for the period from the date of such Breakage Event to the last day of the
Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of
interest likely to be realized by such Lender in redeploying the funds released or not utilized by
reason of such Breakage Event for such period. A certificate of any Lender setting forth any
amount or amounts which such Lender is entitled to receive pursuant to this Section 2.16 shall be
delivered to the Borrowers and shall be conclusive absent manifest error.



     SECTION 2.17 Pro Rata Treatment. Except as provided below in this Section 2.17 with
respect to Swingline Loans and as required under Section 2.15, each Borrowing, each payment or
prepayment of principal of any Borrowing, each payment of interest on the Loans, each payment of
the Commitment Fees, each reduction of the Commitments and each conversion of any Borrowing to or
continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the
Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall
have expired or been terminated, in accordance with the respective principal amounts of their
outstanding Loans). For purposes of determining the available Revolving Credit Commitments of the
Lenders at any time, each outstanding Swingline Loan shall be deemed to have utilized the Revolving
Credit Commitments of the Lenders (including those Lenders which shall not have made Swingline
Loans) pro rata in accordance with such respective Revolving Credit Commitments. Each Lender
agrees that in computing such Lender’s portion of any Borrowing to be made hereunder, the
Administrative Agent may, in its discretion, round each Lender’s percentage of such Borrowing to
the next higher or lower whole dollar amount.



     SECTION 2.18 Sharing of Setoffs. Each Lender agrees that if it shall, through the
exercise of a right of banker’s lien, setoff or counterclaim against the Borrowers or any other
Loan Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code
or other security or interest arising from, or in lieu of, such secured claim, received by such
Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any
other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans or L/C
Disbursement as a result of which the unpaid principal portion of its Loans and participations in
the Letter of Credit Guaranty shall be proportionately less than the unpaid principal portion of
the Loans and participations in the Letter of Credit Guaranty of any other Lender, it shall be
deemed simultaneously to have purchased from such other Lender at face value, and shall promptly
pay to such other Lender the purchase price for, a participation in the Loans and L/C Exposure of
such other Lender, so that the aggregate unpaid principal amount of the Loans and L/C Exposure and
participations in Loans and L/C Exposure held by each Lender shall be in the same proportion to the
aggregate unpaid principal amount of all Loans and L/C Exposure then outstanding as the principal
amount of its Loans and L/C Exposure prior to such exercise of banker’s lien, setoff or
counterclaim or other event was to the principal amount of all Loans and L/C Exposure outstanding
prior to such exercise of banker’s lien, setoff or counterclaim or other event; provided,
however, that if any such purchase or purchases or adjustments shall be made



39









 







pursuant to this Section 2.18 and the payment giving rise thereto shall thereafter be
recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such
recovery and the purchase price or prices or adjustment restored without interest. The Borrowers
expressly consent to the foregoing arrangements and agrees that any Lender holding a participation
in a Loan or Letter of Credit Guaranty deemed to have been so purchased may exercise any and all
rights of banker’s lien, setoff or counterclaim with respect to any and all moneys owing by the
Borrowers to such Lender by reason thereof as fully as if such Lender had made a Loan directly to
the Borrowers in the amount of such participation.



     SECTION 2.19 Payments.



          (a) The Borrowers shall make each payment (including principal of or interest on any Borrowing
or any L/C Disbursement or any Fees or other amounts) hereunder and under any other Loan Document
not later than 12:00 (noon), New York City time, on the date when due in immediately available
dollars, without setoff, defense or counterclaim. Each such payment (other than principal of and
interest on Swingline Loans, which shall be paid directly to the Swingline Lender except as
otherwise provided in Section 2.21(e)) shall be made to the Administrative Agent at its offices at
461 Fifth Avenue, New York, New York 10017. All payments hereunder and under each other Loan
Document shall be made in dollars.




          (b) Except as otherwise expressly provided herein, whenever any payment (including principal
of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan
Document shall become due, or otherwise would occur, on a day that is not a Business Day, such
payment may be made on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of interest or Fees, if applicable.




     SECTION 2.20 Taxes.



          (a) Any and all payments by or on account of any obligation of the Borrowers or any other Loan
Party hereunder or under any other Loan Document shall be made free and clear of and without
deduction for any Indemnified Taxes or Other Taxes; provided that if any Indemnified Taxes
or Other Taxes are required to be withheld or deducted from such payments, then (i) the sum payable
by the Borrowers shall be increased as necessary so that after all required deductions or
withholding (including deductions or withholdings applicable to additional sums payable under this
Section 2.20) the Administrative Agent or such Lender (as the case may be) receives an amount equal
to the sum it would have received had no such deductions been made, (ii) the Borrowers or such
other Loan Party shall make (or cause to be made) such deductions and (iii) the Borrowers or such
other Loan Party shall pay (or cause to be paid) the full amount deducted to the relevant
Governmental Authority in accordance with applicable law. In addition, the Borrowers or any other
Loan Party hereunder shall pay (or cause to be paid) any Other Taxes to the relevant Governmental
Authority in accordance with applicable law.




          (b) The Borrowers shall indemnify the Administrative Agent and each Lender, within 10 days
after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by
the Administrative Agent or such Lender, as the case may be, or




40









 







any of their respective Affiliates, on or with respect to any payment by or on account of any
obligation of any Loan Party hereunder or under any other Loan Document (including Indemnified
Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section)
and any penalties, interest and expenses arising therefrom or with respect thereto, whether or not
such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. A certificate as to the amount of such payment or liability delivered to
the Borrowers by a Lender, or by the Administrative Agent on its behalf or on behalf of a Lender,
shall be conclusive absent manifest error.




          (c) As soon as practicable after any payment of Indemnified Taxes or Other Taxes pursuant to
Section 2.20(a), and in any event within 30 days of any such payment being due, the Borrowers shall
deliver (or cause to be delivered) to the Administrative Agent the original or a certified copy of
a receipt issued by such Governmental Authority evidencing such payment, a copy of the return
reporting such payment or other evidence of such payment reasonably satisfactory to the
Administrative Agent.




          (d) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax
under the law of the jurisdiction in which the Borrowers is located, or any treaty to which such
jurisdiction is a party, with respect to payments under this Agreement shall deliver to the
Administrative Borrower (with a copy to the Administrative Agent), at the reasonable written
request of the Administrative Borrower, such properly completed and executed documentation
prescribed by applicable law as will permit such payments to be made without withholding or at a
reduced rate; provided that such Lender is legally entitled to complete, execute and
deliver such documentation and in such Lender’s judgment such completion, execution or delivery
would not materially prejudice the legal position of such Lender. In addition, each Foreign Lender
shall (i) furnish on or before it becomes a party to the Agreement either (a) two accurate and
complete originally executed U.S. Internal Revenue Service Form W-8BEN (or successor form) or (b)
an accurate and complete U.S. Internal Revenue Service Form W-8ECI (or successor form), certifying,
in either case, to such Foreign Lender’s legal entitlement to an exemption or reduction from U.S.
Federal withholding tax with respect to all interest payments hereunder, and (ii) provide a new
Form W-8BEN (or successor form) or U.S. Internal Revenue Service Form W-8ECI (or successor form)
upon the expiration or obsolescence of any previously delivered form to reconfirm any complete
exemption from, or any entitlement to a reduction in, U.S. Federal withholding tax with respect to
any interest payment hereunder; provided that any Foreign Lender that is not a “bank”
within the meaning of Section 881(c)(3)(A) of the Tax Code and is relying on the so-called
“portfolio interest exemption” shall also furnish a “Non-Bank Certificate” in the form of Exhibit G
together with a U.S. Internal Revenue Service Form W-8BEN. Notwithstanding any other provision of
this paragraph, a Foreign Lender shall not be required to deliver any form pursuant to this
paragraph that such Foreign Lender is not legally able to deliver.




          (e) Any Lender that is a United States person, as defined in Section 7701(a)(30) of the Tax
Code, and is not an exempt recipient within the meaning of Treasury Regulations Section 1.6049-4(c)
shall deliver to the Borrowers (with a copy to the Administrative Agent) two accurate and complete
original signed copies of Internal Revenue Service Form W-9, or any successor form that such person
is entitled to provide at such time in order to comply with United States back-up withholding
requirements.




41









 








          (f) Without prejudice to the survival of any other agreement of the Borrowers hereunder, the
agreements and obligations of the Borrowers contained in this Section 2.20 shall survive the
payment in full of all amounts due hereunder.




     SECTION 2.21 Assignment of Commitments Under Certain Circumstances; Duty to Mitigate.



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




42









 








          (b) If (i) any Lender shall request compensation under Section 2.14, (ii) any Lender delivers
a notice described in Section 2.15 or (iii) the Borrowers are required to pay any additional amount
to any Lender or any Governmental Authority on account of any Lender, pursuant to Section 2.20,
then such Lender shall use reasonable efforts (which shall not require such Lender to incur an
unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with
its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden
deemed by it to be significant) (x) to file any certificate or document reasonably requested in
writing by the Administrative Borrower or (y) to assign its rights and delegate and transfer its
obligations hereunder to another of its offices, branches or affiliates, if such filing or
assignment would reduce its claims for compensation under Section 2.14 or enable it to withdraw its
notice pursuant to Section 2.15 or would reduce amounts payable pursuant to Section 2.20, as the
case may be, in the future. The Borrowers hereby agree to pay all reasonable costs and expenses
incurred by any Lender in connection with any such filing or assignment, delegation and transfer.




     SECTION 2.22 Swingline Loans.



          (a) Swingline Commitment. Subject to the terms and conditions hereof and relying upon
the representations and warranties set forth herein, the Swingline Lender agrees to make loans to
the Borrowers, at any time and from time to time after the Closing Date, and until the earlier of
the Maturity Date and the termination of the Commitments in accordance with the terms hereof, in an
aggregate principal amount at any time outstanding that will not result in (i) the aggregate
principal amount of all Swingline Loans exceeding $2,000,000 in the aggregate or (ii) the Aggregate
Revolving Credit Exposure, after giving effect to any Swingline Loan, exceeding the Commitment.
Each Swingline Loan shall be in a principal amount that is an integral multiple of $100,000. The
Swingline Commitment may be terminated or reduced from time to time as provided herein. Within the
foregoing limits, the Borrowers may borrow, pay or prepay and reborrow Swingline Loans hereunder,
subject to the terms, conditions and limitations set forth herein.




          (b) Swingline Loans. The Administrative Borrower shall notify the Administrative
Agent by fax, or by telephone (confirmed by fax), not later than 11:00 a.m., New York City time, on
the day of a proposed Swingline Loan to be made to it. Such notice shall be delivered on a
Business Day, shall be irrevocable and shall refer to this Agreement and shall specify the
requested date (which shall be a Business Day) and amount of such Swingline Loan. The
Administrative Agent will promptly advise the Swingline Lender of any notice received from the
Administrative Borrower pursuant to this paragraph (b). The Swingline Lender shall make each
Swingline Loan available to the Borrowers by means of a credit to the general deposit account of
the Borrowers with the Swingline Lender by 3:00 p.m. on the date such Swingline Loan is so
requested.




          (c) Prepayment. The Borrowers shall have the right at any time and from time to time
to prepay any Swingline Loan, in whole or in part, upon giving written or fax notice (or telephone
notice promptly confirmed by written or fax notice) to the Swingline Lender and to the
Administrative Agent before 12:00 (noon), New York City time, on the date of prepayment at the
Swingline Lender’s address for notices specified in the Lender Addendum delivered by the




43









 







Swingline Lender. All principal payments of Swingline Loans shall be accompanied by accrued
interest on the principal amount being repaid to the date of payment.




          (d) Interest. Each Swingline Loan shall be an ABR Loan and, subject to the provisions
of Section 2.07, shall bear interest as provided in Section 2.06(a).




          (e) Participations. The Swingline Lender may by written notice given to the
Administrative Agent not later than 10:00 a.m., New York City time, on any Business Day require the
Lenders to acquire participations on such Business Day in all or a portion of the Swingline Loans
outstanding. Such notice shall specify the aggregate amount of Swingline Loans in which Lenders
will participate. The Administrative Agent will, promptly upon receipt of such notice, give notice
to each Lender, specifying in such notice such Lender’s Pro Rata Percentage of such Swingline Loan
or Loans. In furtherance of the foregoing, each Lender hereby absolutely and unconditionally
agrees, upon receipt of notice as provided above, to pay to the Administrative Agent, for the
account of the Swingline Lender, such Lender’s Pro Rata Percentage of such Swingline Loan or Loans.
Each Lender acknowledges and agrees that its obligation to acquire participations in Swingline
Loans pursuant to this paragraph is absolute and unconditional and shall not be affected by any
circumstance whatsoever, including the occurrence and continuance of a Default or an Event of
Default, and that each such payment shall be made without any offset, abatement, withholding or
reduction whatsoever. Each Lender shall comply with its obligation under this paragraph by wire
transfer of immediately available funds, in the same manner as provided in Section 2.02(c) with
respect to Loans made by such Lender (and Section 2.02(c) shall apply, mutatis mutandis, to
the payment obligations of the Lenders under this Section) and the Administrative Agent shall
promptly pay to the Swingline Lender the amounts so received by it from the Lenders. The
Administrative Agent shall notify the Borrowers of any participations in any Swingline Loan
acquired pursuant to this paragraph and thereafter payments in respect of such Swingline Loan shall
be made to the Administrative Agent and not to the Swingline Lender. Any amounts received by the
Swingline Lender from the Borrowers (or other party on behalf of the Borrowers) in respect of a
Swingline Loan after receipt by the Swingline Lender of the proceeds of a sale of participations
therein shall be promptly remitted to the Administrative Agent; any such amounts received by the
Administrative Agent shall be promptly remitted by the Administrative Agent to the Lenders that
shall have made their payments pursuant to this paragraph and to the Swingline Lender, as their
interests may appear. The purchase of participations in a Swingline Loan pursuant to this paragraph
shall not relieve the Borrowers (or other party liable for obligations of the Borrowers) of any
default in the payment thereof.




     SECTION 2.23 Letters of Credit.



          (a) General. Subject to the terms and conditions hereof, the Administrative Borrower
may request the issuance of a Letter of Credit at any time and from time to time while the
Commitments remain in effect for its own account, in a form reasonably acceptable to Administrative
Agent and the Issuing Bank. In order to assist the Administrative Borrower in establishing or
opening Letters of Credit with an Issuing Bank, the Administrative Borrower has requested that the
Administrative Agent join in the applications for such Letters of Credit, and/or guarantee payment
or performance of such Letters of Credit and any drafts or acceptances thereunder through the
issuance of one or more Letter of Credit Guaranties, thereby lending the




44









 







Administrative Agent’s credit to the Borrowers, and Administrative Agent has agreed to do so.
This Section shall not be construed to impose an obligation to issue any Letter of Credit.




          (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. In order
to request the issuance of a Letter of Credit (or to amend, renew or extend an existing Letter of
Credit), the Administrative Borrower shall hand deliver or fax to Administrative Agent (no less
than three Business Days (or such shorter period of time acceptable to the Issuing Bank) in advance
of the requested date of issuance, amendment, renewal or extension) a notice requesting the
issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or
extended, the date of issuance, amendment, renewal or extension, the date on which such Letter of
Credit is to expire (which shall comply with paragraph (c) below), the amount of such Letter of
Credit, the name and address of the beneficiary thereof and such other information as shall be
necessary to prepare such Letter of Credit. A Letter of Credit shall be issued, amended, renewed or
extended only if, and upon issuance, amendment, renewal or extension of each Letter of Credit the
Borrowers shall be deemed to represent and warrant that, after giving effect to such issuance,
amendment, renewal or extension (i) the L/C Exposure shall not exceed $20,000,000 and (ii) the
Aggregate Revolving Credit Exposure shall not exceed the lesser of (a) total Commitments and (b)
the Borrowing Base, subject to the Administrative Agent’s authority to make Protective Advances
pursuant to the terms of Section 2.24.




          (c) Expiration Date. Each Letter of Credit shall expire at the close of business on
the earlier of (i) the date one year after the date of the issuance of such Letter of Credit and
(ii) the date that is five Business Days prior to the Maturity Date, unless such Letter of Credit
expires by its terms on an earlier date; provided, however, that a Letter of Credit
may, upon the request of the Administrative Borrower and subject to the Issuing Bank’s consent,
include a provision whereby such Letter of Credit shall be renewed automatically for additional
consecutive periods of 12 months or less (but not beyond the date that is five Business Days prior
to the Maturity Date) unless the Issuing Bank notifies the beneficiary thereof at least 30 days
prior to the then-applicable expiration date that such Letter of Credit will not be renewed.




          (d) Participations. Upon the issuance of a Letter of Credit and without any further
action on the part of the Issuing Bank or the Lenders, Administrative Agent hereby grants to each
Lender, and each such hereby acquires from Administrative Agent, a participation to the extent of
the applicable Letter of Credit Guaranty equal to such Lender’s Pro Rata Percentage of the
aggregate amount available to be drawn under such Letter of Credit, effective upon the issuance of
such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender hereby
absolutely and unconditionally agrees to pay to Administrative Agent such Lender’s Pro Rata
Percentage of each L/C Disbursement made by Administrative Agent and not reimbursed by the
Borrowers (or, if applicable, another party pursuant to its obligations under any other Loan
Document) forthwith on the date due as provided in Section 2.02(f). Each Lender acknowledges and
agrees that its obligation to acquire participations pursuant to this paragraph is absolute and
unconditional and shall not be affected by any circumstance whatsoever, including the occurrence
and continuance of a Default or an Event of Default, and that each such payment shall be made
without any offset, abatement, withholding or reduction whatsoever.




45









 








          (e) Reimbursement. Upon any L/C Disbursement in respect of a Letter of Credit, the
Borrowers shall pay to Administrative Agent an amount equal to such L/C Disbursement not later than
two hours after any Borrower shall have received notice that payment of such draft will be made,
or, if any Borrower shall have received such notice later than 10:00 a.m., New York City time, on
any Business Day, not later than 10:00 a.m., New York City time, on the immediately following
Business Day.




          (f) Obligations Absolute. The Borrowers’ obligations provided in paragraph (e) above
shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement, under any and all circumstances whatsoever, and irrespective of:





               (i) any lack of validity or enforceability of any Letter of Credit or any Loan
Document, or any term or provision therein;




               (ii) any amendment or waiver of, or any consent to departure from, all or any of the
provisions of any Letter of Credit or any Loan Document;




               (iii) the existence of any claim, setoff, defense or other right that the Borrowers,
any other party guaranteeing, or otherwise obligated with, the Borrowers, any subsidiary or
other Affiliate thereof or any other person may at any time have against the beneficiary
under any Letter of Credit, the Issuing Bank, Administrative Agent or any Lender or any
other person, whether in connection with this Agreement, any other Loan Document or any
other related or unrelated agreement or transaction;




               (iv) any draft or other document presented under a Letter of Credit proving to be
forged, fraudulent, invalid or insufficient in any respect or any statement therein being
untrue or inaccurate in any respect;




               (v) payment by the Issuing Bank under a Letter of Credit against presentation of a
draft or other document that does not comply with the terms of such Letter of Credit; and




               (vi) any other act or omission to act or delay of any kind of the Issuing Bank, any
Lender, Administrative Agent or any other person or any other event or circumstance
whatsoever, whether or not similar to any of the foregoing, that might, but for the
provisions of this Section, constitute a legal or equitable discharge of the Borrowers’
obligations hereunder.



          Without limiting the generality of the foregoing, it is expressly understood and agreed that
the absolute and unconditional obligation of the Borrowers hereunder to reimburse L/C Disbursements
will not be excused by the gross negligence or willful misconduct of the Issuing Bank or
Administrative Agent. However, the foregoing shall not be construed to excuse the Issuing Bank or
Administrative Agent from liability to the Borrowers to the extent of any direct damages (as
opposed to consequential damages, claims in respect of which are hereby waived by the Borrowers to
the extent permitted by applicable law) suffered by the Borrowers that are caused by the Issuing
Bank’s or Administrative Agent’s gross negligence or willful misconduct in determining whether
drafts and other documents presented under a Letter of




46









 







Credit comply with the terms thereof; it is understood that the Issuing Bank may accept
documents that appear on their face to be in order, without responsibility for further
investigation, regardless of any notice or information to the contrary and, in making any payment
under any Letter of Credit (i) the Issuing Bank’s exclusive reliance on the documents presented to
it under such Letter of Credit as to any and all matters set forth therein, including reliance on
the amount of any draft presented under such Letter of Credit, whether or not the amount due to the
beneficiary thereunder equals the amount of such draft and whether or not any document presented
pursuant to such Letter of Credit proves to be insufficient in any respect, if such document on its
face appears to be in order, and whether or not any other statement or any other document presented
pursuant to such Letter of Credit proves to be forged or invalid or any statement therein proves to
be inaccurate or untrue in any respect whatsoever and (ii) any noncompliance in any immaterial
respect of the documents presented under such Letter of Credit with the terms thereof shall, in
each case, be deemed not to constitute willful misconduct or gross negligence of the Issuing Bank.




          (g) Intentionally Omitted.




          (h) Interim Interest. If Administrative Agent shall make any payment under a Letter of
Credit Guaranty in respect of a Letter of Credit, then, unless the Borrowers shall reimburse such
payment in full on such date, the unpaid amount thereof shall bear interest for the account of
Administrative Agent, for each day from and including the date of such payment to but excluding the
earlier of the date of payment by the Borrowers or the date on which interest shall commence to
accrue thereon as provided in Section 2.02(f), at the rate per annum that would apply to such
amount if such amount were an ABR Loan.




          (i) Intentionally Omitted.




          (j) Cash Collateralization. If any Event of Default shall occur and be continuing, the
Borrowers shall, on the Business Day it receives notice from Administrative Agent or the Required
Lenders (or, if the maturity of the Loans has been accelerated, Lenders representing greater than
50% of the total L/C Exposure) thereof and of the amount to be deposited, deposit in an account
with Administrative Agent, for the ratable benefit of the Lenders, an amount in cash equal to 105%
of the L/C Exposure as of such date. Such deposit shall be held by Administrative Agent as
collateral for the payment and performance of the obligations of the Borrowers under this
Agreement. Administrative Agent shall have exclusive dominion and control, including the exclusive
right of withdrawal, over such account. Other than any interest earned on the investment of such
deposits in Permitted Investments, which investments shall be made at the option and sole
discretion of Administrative Agent, such deposits shall not bear interest. Interest or profits, if
any, on such investments shall accumulate in such account. Moneys in such account shall (i)
automatically be applied by Administrative Agent to reimburse payment made in respect of a Letter
of Credit Guaranty for L/C Disbursements which have not been reimbursed, (ii) be held for the
satisfaction of the reimbursement obligations of the Borrowers for the L/C Exposure at such time
and (iii) if the maturity of the Loans has been accelerated (but subject to the consent of Lenders
representing greater than 50% of the total L/C Exposure), be applied to satisfy the Obligations.
If the Borrowers are required to provide an amount of cash collateral hereunder as a result of the
occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be




47









 







returned to the Borrowers within three Business Days after all Events of Default have been
cured or waived.




     SECTION 2.24 Protective Advances.



          (a) Subject to the limitations set forth below, the Administrative Agent is authorized by the
Borrowers and the Lenders, from time to time in the Administrative Agent’s sole discretion (but
shall have absolutely no obligation to), to make Loans, on behalf of all Lenders, at the request of
Administrative Borrower or otherwise in its Permitted Discretion, which the Administrative Agent,
in its Permitted Discretion, deems necessary or desirable (i) to preserve or protect the
Collateral, or any portion thereof, (ii) to enhance the likelihood of, or maximize the amount of,
repayment of the Loans and other Obligations, or (iii) to pay any other amount chargeable to or
required to be paid by the Borrowers pursuant to the terms of this Agreement, including payments of
principal, interest, L/C Disbursements, fees, premiums, reimbursable expenses (including costs,
fees, and expenses as described in Section 9.05) and other sums payable under the Loan Documents
(any of such Loans are herein referred to as “Protective Advances”); provided that,
the aggregate amount of Protective Advances outstanding at any time, which were made pursuant to
clauses (i), (ii) and (iii) above, shall not cause the Aggregate Revolving Credit Exposure to
exceed the aggregate Commitment of all Lenders and shall not at any time exceed $5,000,000 in the
aggregate. Protective Advances may be made even if the conditions precedent set forth in Section
4.01 have not been satisfied. The Protective Advances shall be secured by the Liens in favor of
the Administrative Agent in and to the Collateral and shall constitute Obligations hereunder. All
Protective Advances shall be ABR Borrowings. Any such revocation must be in writing and shall
become effective prospectively upon the Administrative Agent’s receipt thereof. At any time that
there is sufficient Availability and the conditions precedent set forth in Section 4.01 have been
satisfied, the Administrative Agent may request the Revolving Lenders to make a Revolving Loan to
repay a Protective Advance. At any other time the Administrative Agent may require the Lenders to
fund their risk participations described in Section 2.24(b).




          (b) Upon the making of a Protective Advance by the Administrative Agent (whether before or
after the occurrence of a Default or Event of Default), each Lender shall be deemed, without
further action by any party hereto, to have unconditionally and irrevocably purchased from the
Administrative Agent without recourse or warranty, an undivided interest and participation in such
Protective Advance in proportion to its Pro Rata Percentage of the Aggregate Revolving Credit
Exposure. From and after the date, if any, on which any Lender is required to fund its
participation in any Protective Advance purchased hereunder, the Administrative Agent shall
promptly distribute to such Lender such Lender’s Pro Rata Percentage of all payments of principal
and interest and all proceeds of Collateral received by the Administrative Agent in respect of such
Protective Advance.




     SECTION 2.25 Relationship Between the Borrowers.



          (a) Administrative Borrower. Britt hereby appoints PALCO, and PALCO (in such
capacity, the “Administrative Borrower”) shall act under this Agreement, as the agent,
attorney-in-fact and legal representative of Britt for all purposes, including requesting Loans and
receiving account statements and other notices and communications to the Borrowers (or any of




48









 







them) from the Administrative Agent or any Lender. The Administrative Agent and the Lenders
may rely, and shall be fully protected in relying, on any Borrowing request, request for a Letter
of Credit, disbursement instruction, report, information or any notice or communication made or
given by the Administrative Borrower, whether in its own name, as Borrowers’ agent, on behalf of
Britt or on behalf of the Borrowers, and neither the Administrative Agent nor any Lender shall have
any obligation to make any inquiry or request any confirmation from or on behalf of any other
Borrower as to the binding effect on it of any such notice, request, instruction, report,
information, other notice or communications, nor shall the joint and several character of the
Borrowers’ obligations hereunder be affected, provided that the provisions of this Section 2.25
shall not be construed so as to preclude either Borrower from taking actions permitted to be taken
by a “Borrower” hereunder.




          (b) Joint and Several Obligations. The obligations of the Borrowers pursuant to the
Loan Documents shall be joint and several. Each Borrower hereby irrevocably and unconditionally
guaranties, as primary obligor and not merely as surety, the due and punctual payment in full of
all Obligations of the other Borrower when the same shall become due, whether at stated maturity,
by required prepayment, declaration, acceleration, demand or otherwise (including amounts that
would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy
Code, 11 U.S.C. ss. 362(a)).




          (c) Obligations Absolute. The obligations of each Borrower under this Section 2.25
are irrevocable, absolute, independent and unconditional and shall not be affected by any
circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than
payment in full of the Obligations. In furtherance of the foregoing and without limiting the
generality thereof, each Borrower agrees that: (i) its obligation under this Section 2.25 with
respect to the obligations of the other Borrower is a guaranty of payment when due and not of
collectibility; (ii) the Administrative Agent and any Lender may enforce this obligation upon the
occurrence of an Event of Default hereunder notwithstanding the existence of any dispute between
the other Borrower and the Administrative Agent or any Lender with respect to the existence of such
Event of Default; (iii) the obligations of each Borrower hereunder are independent of each of the
obligations of the other Borrower under the Loan Documents and the obligations of any other Person
and a separate action or actions may be brought and prosecuted against each Borrower whether or not
any action is brought against the other Borrower or any other Person and whether or not the other
Borrower or any other Person is joined in any such action or actions; and (iv) a payment of a
portion, but not all, of the Obligations by any Borrower shall in no way limit, affect, modify or
abridge the liability of such or any other Borrower for any portion of the Obligations that has not
been paid. Each Borrower agrees that its obligation under this Section 2.25 with respect to the
obligations of the other Borrower is a continuing guaranty and shall be binding upon each Borrower
and its successors and assigns, and each Borrower irrevocably waives any right to revoke its
obligations under this Section 2.25 as to future transactions giving rise to any Obligations.




          (d) Actions by the Administrative Agent and the Lenders. The Administrative Agent and
any Lender may from time to time, without notice or demand and without affecting the validity or
enforceability of this Section 2.25 or giving rise to any limitation, impairment or discharge of
any Borrower’s liability hereunder, but subject to the provisions of Section 2.25 (i) renew,
extend, accelerate or otherwise change the time, place, manner or terms of




49









 







payment of the Obligations of the other Borrower with the consent of such other Borrower, (ii)
settle, compromise, release or discharge, or accept or refuse any offer of performance with respect
to, or substitutions for, the Obligations of the other Borrower or any agreement relating thereto
and/or subordinate the payment of the same to the payment of any other obligations, (iii) request
and accept other guaranties of the Obligations of the other Borrower and take and hold security for
the payment of such Obligations, (iv) release, exchange, compromise, subordinate or modify, with or
without consideration, any security for payment of the Obligations of the other Borrower, any other
guaranties of such Obligations, or any other obligation of any Person with respect to such
Obligations, (v) enforce and apply any security now or hereafter held from the other Borrower by or
for the benefit of the Administrative Agent or any Lender in respect of the Obligations of the
other Borrower and direct the order or manner of sale thereof, or exercise any other right or
remedy that the Administrative Agent or the Lenders, or any of them, may have against any such
security, in each case as the Administrative Agent or the Lenders in their discretion may determine
consistent with this Agreement and any applicable security agreement, including foreclosure on any
such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of
any such sale is commercially reasonable, and (vi) exercise any other rights available to the
Administrative Agent or the Lenders, or any of them, under the Loan Documents.




          (e) No Discharge. The obligations of each Borrower under this Section 2.25 shall be
valid and enforceable and shall not be subject to any limitation, impairment or discharge for any
reason (other than payment in full of the Obligations), including the occurrence of any of the
following, whether or not any Borrower shall have had notice or knowledge of any of them: (i) any
failure to assert or enforce or agreement not to assert or enforce, or the stay or enjoining, by
order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or
demand or any right, power or remedy with respect to the Obligations of the other Borrower or any
agreement relating thereto, or with respect to any other guaranty of or security for the payment of
such Obligations, (ii) any waiver or modification of, or any consent to departure from, any of the
terms or provisions of this Agreement or any of the other Loan Documents or any agreement or
instrument executed pursuant thereto, or of any other guaranty or security for the Obligations of
the other Borrower, (iii) the Obligations of the other Borrower, or any agreement relating thereto,
at any time being found to be illegal, invalid or unenforceable in any respect, (iv) the
application of payments received from any source to the payment of indebtedness other than the
Obligations of the other Borrower, even though the Administrative Agent or the Lenders, or any of
them, might have elected to apply such payment to any part or all of the Obligations of the other
Borrower, (v) any failure to perfect or continue perfection of a security interest in any
collateral which secures any of the Obligations of the other Borrower, (vi) any defenses, set-offs
or counterclaims which the other Borrower or any other Person may assert against the Administrative
Agent or any Lender in respect of the Obligations, including but not limited to failure of
consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and
satisfaction and usury and (vii) any other act or thing or omission, or delay to do any other act
or thing, which may or might in any manner or to any extent vary the risk of any Borrower as an
obligor in respect of the Obligations.




          (f) Waivers. Each Borrower waives, for the benefit of the Administrative Agent and
each Lender: (i) any right to require the Administrative Agent or any Lender, as a condition of
payment or performance by such Borrower, to (A) proceed against the other





50









 






Borrower or any other Person, (B) proceed against or exhaust any security held from the other
Borrower or any other Person, (C) proceed against or have resort to any balance of any deposit
account or credit on the books of the Administrative Agent or any Lender in favor of the other
Borrower or any other Person, or (D) pursue any other remedy in the power of the Administrative
Agent or any Lender; (ii) any defense arising by reason of the incapacity, lack of authority or any
disability or other defense of the other Borrower including any defense based on or arising out of
the lack of validity or the unenforceability of the Obligations or any agreement or instrument
relating thereto or by reason of the cessation of the liability of the other Borrower from any
cause other than payment in full of the Obligations; (iii) any defense based upon any statute or
rule of law which provides that the obligation of a surety must be neither larger in amount nor in
other respects more burdensome than that of the principal; (iv) any defense based upon the
Administrative Agent’s or any Lender’s errors or omissions in the administration of the
Obligations, except behavior that amounts to gross negligence or willful misconduct; (v) (A) any
principles or provisions of law, statutory or otherwise, that are or might be in conflict with the
terms of this Section 2.25 and any legal or equitable discharge of such Borrower’s obligations
hereunder, (B) the benefit of any statute of limitations affecting such Borrower’s liability
hereunder or the enforcement hereof, (C) any rights to set-offs, recoupments and counterclaims and
(D) promptness, diligence and any requirement that the Administrative Agent or any Lender protect,
secure, perfect or insure any Lien or any property subject thereto; (vi) notices, demands,
presentments, protests, notices of protest, notices of dishonor and notices of any action or
inaction, including acceptance of this Section 2.25, notices of default under this Agreement or any
agreement or instrument related thereto, notices of any renewal, extension or modification of the
Obligations or any agreement related thereto, notices of any extension of credit to the other
Borrower and notices of any of the matters referred to in Sections 2.24(d) and (e) and any right to
consent to any thereof; and (vii) to the fullest extent permitted by law, any defenses or benefits
that may be derived from or afforded by law which limit the liability of or exonerate guarantors or
sureties, or which may conflict with the terms of this Section 2.25.




          As used in this paragraph, any reference to “the principal” includes each Borrower and any
reference to “the creditor” includes the Administrative Agent and each of the Lenders. In
accordance with Section 2856 of the California Civil Code each Borrower waives any and all rights
and defenses available to it by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the
California Civil Code, including any and all rights or defenses such Borrower may have because the
Obligations are secured by real property or by reason of protection afforded to the principal with
respect to any of the Obligations, or to any other guarantor of any of the Obligations with respect
to any of such guarantor’s obligations under its guaranty, in either case pursuant to the
antideficiency or other laws of the State of California limiting or discharging the principal’s
indebtedness or such guarantor’s obligations, including Section 580a, 580b, 580d or 726 of the
California Code of Civil Procedure. Consequently, among other things: (1) the creditor may
collect from such Borrower without first foreclosing on any real or personal property collateral
pledged by the principal; and (2) if the creditor forecloses on any real property collateral
pledged by the principal: (x) the amount of the Obligations may be reduced only by the price for
which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the
sale price and (y) the creditor may collect from such Borrower even if the creditor, by foreclosing
on the real property collateral, has destroyed any right such Borrower may have to collect from the
principal. This is an unconditional and irrevocable waiver of any rights and defenses such
Borrower may have because the Obligations are secured by real




51









 







property. Each Borrower also waives all rights and defenses arising out of an election of
remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure
with respect to security for an Obligation, has destroyed such Borrower’s rights of subrogation and
reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure
or otherwise; and even though that election of remedies by the creditor, such as nonjudicial
foreclosure with respect to security for an obligation of any other guarantor of any of the
Obligations, has destroyed such Borrower’s rights of contribution against such other Borrower or
any other guarantor. No other provision of this Section 2.25 shall be construed as limiting the
generality of any of the covenants and waivers set forth in this paragraph.




          (g) Borrowers’ Rights of Subrogation, Contribution, Etc.; Subordination of Other
Obligations. Each Borrower waives any claim, right or remedy, direct or indirect, that such
Borrower now has or may hereafter have against the other Borrower or any of its assets in
connection with this Section 2.25 or the performance by such Borrower of its obligations hereunder,
in each case whether such claim, right or remedy arises in equity, under contract, by statute
(including under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise
and including (i) any right of subrogation, reimbursement or indemnification that such Borrower now
has or may hereafter have against the other Borrower, (ii) any right to enforce, or to participate
in, any claim, right or remedy that the Administrative Agent or any Lender now have or may
hereafter have against the other Borrower and (iii) any benefit of, and any right to participate
in, any collateral or security now or hereafter held by the Administrative Agent or any Lender. In
addition, until the Obligations shall have been paid in full, the Commitments shall have terminated
and all Letters of Credit shall have expired or been cancelled, each Borrower shall withhold the
exercise of any right of contribution such Borrower may have against the other Borrower. Each
Borrower further agrees that, to the extent the waiver or agreement to withhold the exercise of its
rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found
by a court of competent jurisdiction to be void or voidable for any reason, any rights of
subrogation, reimbursement or indemnification such Borrower may have against the other Borrower or
against any collateral or security, and any rights of contribution such Borrower may have against
such other Borrower, shall be junior and subordinate to any rights the Administrative Agent or any
Lender may have against such Borrower to all right, title and interest the Administrative Agent or
any Lender may have in any such collateral or security, and to any right the Administrative Agent
or any Lender may have against such other Borrower.




          Any indebtedness of any Borrower now or hereafter held by any Borrower is subordinated in
right of payment to the Obligations, and any such indebtedness of the other Borrower to such
Borrower collected or received by such Borrower after an Event of Default has occurred and is
continuing, and any amount paid to a Borrower on account of any subrogation, reimbursement,
indemnification or contribution rights referred to in the preceding paragraph when all Obligations
have not been paid in full, shall be held in trust for the Administrative Agent and the Lenders and
shall forthwith be paid over to the Administrative Agent for the benefit of the Lenders to be
credited and applied against the Obligations.




          (h) Fraudulent Transfer Laws. Anything contained in this Section 2.25 to the contrary
notwithstanding, the obligations of each Borrower under this Section 2.25 shall be limited to a
maximum aggregate amount equal to the largest amount that would not render its




52









 







obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under
Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state
law (collectively, the “Fraudulent Transfer Laws”), in each case after giving effect to all other
liabilities of such Borrower, contingent or otherwise, that are relevant under the Fraudulent
Transfer Laws and after giving effect as assets to the value (as determined under the applicable
provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement,
indemnification or contribution of such Borrower pursuant to applicable law or pursuant to the
terms of any agreement.




          (i) Related Guaranties. Each Borrower under this Section 2.25 and any other
guaranties, if any, relating to the Agreement (the “Related Guaranties”) that contain a
contribution provision similar to that set forth in this Section 2.25, together desire to allocate
among themselves (collectively, the “Contributing Guarantors”), in a fair and equitable
manner, their obligations arising under this Section 2.25 and the Related Guaranties. Accordingly,
in the event any payment or distribution is made on any date by any Borrower under this Section
2.25 or a guarantor under a Related Guaranty, each such Borrower or such guarantor shall be
entitled to a contribution from each of the other Contributing Guarantors in the maximum amount
permitted by law so as to maximize the aggregate amount of the Obligations paid to the
Administrative Agent and the Lenders.




ARTICLE III.




REPRESENTATIONS AND WARRANTIES




          Each of the Borrowers, jointly and severally, represents and warrants to the Arranger, the
Administrative Agent and each of the Lenders that:




     SECTION 3.01 Organization; Powers. Each of the Loan Parties (a) is duly organized or
formed, validly existing and in good standing under the laws of the jurisdiction of its
organization or formation, (b) has all requisite power and authority, and the legal right, to own
and operate its property and assets, to lease the property it operates as lessee and to carry on
its business as now conducted and as proposed to be conducted, (c) is qualified to do business in,
and is in good standing in, every jurisdiction where such qualification is required, except where
the failure so to qualify, individually or in the aggregate, would not reasonably be expected to
result in a Material Adverse Effect and (d) has the power and authority, and the legal right, to
execute, deliver and perform its obligations under this Agreement, each of the other Loan
Documents, and each other agreement or instrument contemplated thereby to which it is or will be a
party, including, in the case of the Borrowers, to borrow hereunder, in the case of each Loan Party
and Holdings, to grant the Liens contemplated to be granted by it under the Security Documents and,
in the case of each Guarantor, to Guarantee the Obligations as contemplated by the Guarantee and
Collateral Agreement.



     SECTION 3.02 Authorization; No Conflicts. The Transactions (a) have been duly
authorized by all requisite corporate, partnership or limited liability company and, if required,
stockholder, partner or member action and (b) will not (i) violate (A) any provision of law,
statute, rule or regulation, or of the certificate or articles of incorporation or other
constitutive documents or by-laws of Loan Party, (B) any order of any Governmental Authority or
arbitrator



53









 







or (C) any provision of any indenture, agreement or other instrument to which a Loan Party is
a party or by which any of them or any of their property is or may be bound, (ii) be in conflict
with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default
under, or give rise to any right to accelerate or to require the prepayment, repurchase or
redemption of any obligation under any such indenture, agreement or other instrument or (iii)
result in the creation or imposition of any Lien upon or with respect to any property or assets now
owned or hereafter acquired by any Loan Party (other than Liens created under the Security
Documents).



     SECTION 3.03 Enforceability. This Agreement has been duly executed and delivered by
each Loan Party and constitutes, and each other Loan Document when executed and delivered by each
Loan Party thereto will constitute, a legal, valid and binding obligation of such Loan Party
enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and
subject to general principles of equity, regardless of whether considered in a proceeding in equity
or at law.



     SECTION 3.04 Governmental Approvals. No action, consent or approval of, registration
or filing with, Permit from, notice to, or any other action by, any Governmental Authority is or
will be required in connection with the Transactions, except for (a) the filing of UCC financing
statements and filings with the United States Patent and Trademark Office and the United States
Copyright Office, (b) recordation of the Mortgages and (c) such as have been made or obtained and
are in full force and effect.



     SECTION 3.05 Financial Statements. PALCO has heretofore furnished to the Lenders (i)
balance sheets and statements of income, stockholder’s equity and cash flows for the Borrowers on a
combined basis as of and for the fiscal years ended December 31, 2005 and December 31, 2004, in
each case audited by and accompanied by the opinion of Deloitte & Touche LLP, independent public
accountants and (ii) the unaudited balance sheet and related statement of income and cash flows for
the Borrowers on a combined basis as of the period from and including January 1, 2003 through and
including December 31, 2005. All of such financial statements present fairly in all material
respects the financial condition and results of operations and cash flows of the applicable
entities as of such dates and for such periods. Such balance sheets and the notes thereto disclose
all material liabilities, direct or contingent, of the applicable entities as of the dates thereof.
Such financial statements were prepared in accordance with GAAP (except for the exclusion of
PALCO’s wholly owned subsidiaries, Scotia Pacific and Salmon Creek, except as losses in excess of
investments in subsidiaries as a component of stockholder’s equity unless otherwise indicated or
the context indicates otherwise and consolidating the financial statements thereof) applied on a
consistent basis.



     SECTION 3.06 No Material Adverse Change. No event, change or condition has occurred
since December 31, 2005 that has caused, or would reasonably be expected to cause, a Material
Adverse Effect.



     SECTION 3.07 Title to Properties; Possession Under Leases.



54









 





          (a) Each of the Loan Parties has good and marketable title to, or valid leasehold interests
in, all its material properties and assets (including all Real Property), except for liens
permitted under Section 6.02 and minor defects in title that, in the aggregate, are not substantial
in amount and do not materially detract from the value of the property subject thereto or interfere
with its ability to conduct its business as currently conducted or to utilize such properties and
assets for their intended purposes. Each parcel of Real Property is free from material structural
defects and all building systems contained therein are in good working order and condition, as
necessary to permit the Loan Party using the Real Property to conduct its business as currently
conducted or to utilize such Real Property for its intended purpose, ordinary wear and tear
dispositions, abandonments and breakdowns arising in the ordinary course of business excepted,
suitable for the purposes for which they are currently being used. Each parcel of Real Property
and the current use thereof complies in all material respects with all applicable laws (including
building and zoning ordinances and codes) and with all insurance requirements.




          (b) Each of the Loan Parties is in compliance in all material respects with all obligations
under all material leases to which it is a party and all such leases are legal, valid, binding and
in full force and effect and are enforceable in accordance with their terms. Each of the Loan
Parties enjoys peaceful and undisturbed possession under all such material leases. The Loan
Parties are not in default of their payment or other material obligations under any material lease
and no legal proceedings have been instituted against any Loan Party by any landlord with respect
to any claimed default under any such leases. Except as set forth in Schedule 3.20, none of the
Real Property is subject to any lease, sublease, license or other agreement granting to any person
any right to the use, occupancy, possession or enjoyment of the Real Property or any portion
thereof, except for easements or similar rights which do not materially detract from the value of
the property subject thereto or interfere with the ability of such Loan Party to conduct its
business as currently conducted or to utilize such properties and assets for their intended
purposes. PALCO has delivered to the Administrative Agent true, complete and correct copies of all
leases (whether as landlord or tenant) of Real Property.




          (c) None of the Loan Parties has received any notice of, nor has any knowledge of, any pending
or contemplated condemnation proceeding affecting the Real Properties or any sale or disposition
thereof in lieu of condemnation.




          (d) Except as set forth on Schedule 3.07 none of the Loan Parties is obligated under
any right of first refusal, option or other contractual right to sell, assign or otherwise dispose
of any Real Property or any interest therein.




          (e) There are no pending or, to the knowledge of PALCO, proposed special or other assessments
for public improvements or otherwise affecting any material portion of the owned Real Property, nor
are there any contemplated improvements to such owned Real Property that may result in such special
or other assessments. No Loan Party has suffered, permitted or initiated the joint assessment of
any material portion of any owned Real Property with any other real property constituting a
separate tax lot. Each owned parcel of Real Property is comprised of one or more parcels, each of
which constitutes a separate tax lot and none of which constitutes a portion of any other tax lot
not constituting Collateral.




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          (f) Such Loan Party has obtained all permits, licenses, variances and certificates required by
applicable law to be obtained and necessary to the use and operation of each parcel of Real
Property, except where the failure to have such permit, license, certificate or variance would not
prohibit the use of such parcel of Real Property as it is currently being used. The use being made
of each parcel of Real Property conforms with the certificate of occupancy and/or such other
permits, licenses, variances and certificates for such Real Property and any other restrictions,
covenants or conditions affecting such Real Property, except for any such nonconformity that would
not reasonably be expected to be enjoined or to result in material fines.




          (g) Each developed parcel of Real Property has adequate rights of access to public ways or
reasonable rights to permit the Real Property to be used for its intended purpose, and is served by
installed, operating and adequate water, electric, gas, telephone, sewer, sanitary sewer and storm
drain facilities as necessary to permit the Loan Party using such Real Property to conduct its
business as currently conducted or to utilize such Real Property for its intended purpose; (ii) all
public utilities necessary to the continued use and enjoyment of each parcel of Real Property as
used and enjoyed on the Closing Date are located in the public right-of-way abutting the premises
or easements permitting the location of such utilities, and all such utilities are connected so as
to serve such Real Property without passing over other Property except for land of the utility
company providing such utility service or, in the case of leased Real Property, contiguous land
owned by the lessor of such leased Real Property; (iii) each developed parcel of Real Property,
including each leased parcel, has adequate available parking to meet legal and operating
requirements; (iv) all roads necessary for access to each developed parcel of Real Property to
permit its use for its current purpose have been completed and dedicated to public use and accepted
by all governmental authorities or are the subject of access easements for the benefit of such Real
Property; and (v) no building or structure constituting Real Property or any appurtenance thereto
or equipment thereon, or the use, operation or maintenance thereof, violates any restrictive
covenant or encroaches on any easement or on any property owned by others, which violation or
encroachment interferes with the use or could materially adversely affect the value of such
building, structure or appurtenance or which encroachment is necessary for the operation of the
business at any Real Property.




     SECTION 3.08 Subsidiaries. Schedule 3.08 sets forth as of the Closing Date a list of
all Subsidiaries, including each Subsidiary’s exact legal name (as reflected in such Subsidiary’s
certificate or articles of incorporation or other constitutive documents) and jurisdiction of
incorporation or formation and the percentage ownership interest of PALCO (direct or indirect)
therein, and identifies each Subsidiary that is a Loan Party. The shares of capital stock or other
Equity Interests so indicated on Schedule 3.08 are fully paid and non-assessable and are owned by
PALCO, directly or indirectly, free and clear of all Liens (other than Liens created under the
Security Documents).



     SECTION 3.09 Litigation; Compliance with Laws.



          (a) Except as set forth in Schedule 3.09, there are no actions, suits or proceedings
at law or in equity or by or before any arbitrator or Governmental Authority now pending or, to the
knowledge of PALCO, threatened against or affecting any Loan Party or any business, property or
rights of any such person (i) that involve any Loan Document or the




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Transactions or (ii) as to which there is a reasonable possibility of an adverse
determination and that, if adversely determined, would reasonably be expected, individually or in
the aggregate, to result in a Material Adverse Effect.




          (b) Since the date of this Agreement, there has been no change in the status of the matters
disclosed on Schedule 3.09 that, individually or in the aggregate, has resulted in, or materially
increased the likelihood of, a Material Adverse Effect.




          (c) None of the Loan Parties or any of their respective material properties or assets is in
violation of, nor will the continued operation of their material properties and assets as currently
conducted violate, any law, rule or regulation (including any zoning, building, Environmental Law,
ordinance, code or approval or any building permits) or any restrictions of record or agreements
affecting the Mortgaged Property, or is in default with respect to any judgment, writ, injunction,
decree or order of any Governmental Authority, where such violation or default, individually or in
the aggregate, would reasonably be expected to result in a Material Adverse Effect.




          (d) Certificates of occupancy and permits are in effect for each Mortgaged Property as
currently constructed, and true and complete copies of such certificates of occupancy have been
delivered to the Administrative Agent as mortgagee with respect to each Mortgaged Property.




     SECTION 3.10 Agreements.



          (a) Except as set forth in Schedule 3.10, none of the Loan Parties is a party to any
agreement or instrument, or subject to any corporate restriction, that, individually or in the
aggregate, has resulted or would reasonably be expected to result in a Material Adverse Effect.




          (b) None of the Loan Parties is in default in any manner under any provision of any indenture
or other agreement or instrument evidencing Indebtedness, or any other material agreement or
instrument to which it is a party or by which it or any of its properties or assets are or may be
bound, where such default, individually or in the aggregate, would reasonably be expected to result
in a Material Adverse Effect. No Default has occurred and is continuing.




     SECTION 3.11 Federal Reserve Regulations.



          (a) None of the Loan Parties is engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of buying or carrying Margin Stock.




          (b) No part of the proceeds of any Loan or any Letter of Credit will be used, whether directly
or indirectly, and whether immediately, incidentally or ultimately, for purchasing or carrying
Margin Stock or for the purpose of purchasing, carrying or trading in any securities under such
circumstances as to involve any Loan Party in a violation of Regulation X or to involve any broker
or dealer in a violation of Regulation T. No Indebtedness being reduced or retired out of the
proceeds of any Loans or Letters of Credit was or will be incurred for the purpose of purchasing or
carrying any Margin Stock. Following the application of the proceeds of the Loans and the Letters
of Credit, Margin Stock will not constitute more than 25% of the value of the assets of the
aggregate assets of the Loan Parties. None of the transactions




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contemplated by this Agreement will violate or result in the violation of any of the
provisions of the Regulations of the Board, including Regulation T, U or X. If requested by any
Lender or the Administrative Agent, the Borrowers will furnish to the Administrative Agent and each
Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR
Form U-1 referred to in Regulation U.




     SECTION 3.12 Investment Company Act; Public Utility Holding Company Act. None of the
Loan Parties is (a) an “investment company” as defined in, or subject to regulation under, the
Investment Company Act of 1940, as amended, or (b) a “holding company” as defined in, or subject to
regulation under, the Public Utility Holding Company Act of 1935, as amended.



     SECTION 3.13 Use of Proceeds. The Borrowers will use the proceeds of the Loans solely
for general corporate purposes, including the repayment of all obligations under the Existing
Credit Facilities. The Administrative Borrower will request the issuance of Letters of Credit
solely to support payment obligations incurred in the ordinary course of business by the Borrowers
and the Subsidiary Guarantors.



     SECTION 3.14 Tax Returns. Each of the Loan Parties has timely filed or timely caused
to be filed all material Federal, state, local and foreign tax returns or materials required to
have been filed by it and all such tax returns and related materials are correct and complete in
all material respects. Each of the Loan Parties has timely paid or timely caused to be paid all
material Taxes due and payable by it and all assessments received by it, except Taxes that are
being contested in good faith by appropriate proceedings and for which the applicable Loan Party,
shall have set aside on its books adequate reserves in accordance with GAAP. Each of the Loan
Parties has made adequate provision in accordance with GAAP for all Taxes not yet due and payable.
No Lien relating to Taxes has been filed, and to the knowledge of any of the Loan Parties, no Lien
is being asserted or threatened, with respect to any Tax. None of the Loan Parties (a) intends to
treat the Loans or any of the transactions contemplated by any Loan Document as being a “reportable
transaction” (within the meaning of Treasury Regulation Section 1.6011-4) or (b) is aware of any
facts or events that would result in such treatment.



     SECTION 3.15 No Material Misstatements. Each of the Loan Parties has disclosed to the
Arranger, the Administrative Agent and the Lenders all agreements, instruments and corporate or
other restrictions to which any Loan Party is subject, and all other matters known to any of them,
that, individually or in the aggregate, would reasonably be expected to result in a Material
Adverse Effect. No other information, report, financial statement, exhibit or schedule furnished
by or on behalf of any Loan Party to the Arranger, the Administrative Agent or any Lender for use
in connection with the transactions contemplated by the Loan Documents or in connection with the
negotiation of any Loan Document or included therein or delivered pursuant thereto contained,
contains or will contain any material misstatement of fact or omitted, omits or will omit to state
any material fact necessary to make the statements therein, in the light of the circumstances under
which they were, are or will be made, not misleading; provided that to the extent any such
information, report, financial statement, exhibit or schedule was based upon or constitutes a
forecast or projection, the Borrowers represent only that they acted in good faith and utilized
reasonable assumptions and due care in the preparation of such information, report, financial
statement, exhibit or schedule.



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     SECTION 3.16 Employee Benefit Plans. Each Loan Party and each of its ERISA Affiliates
is in compliance in all material respects with the applicable provisions of ERISA and the Tax Code
and the regulations and published interpretations thereunder. No ERISA Event has occurred or is
reasonably expected to occur that, when taken together with all other such ERISA Events, would
reasonably be expected to result in material liability of the Borrowers or any of their ERISA
Affiliates.



     SECTION 3.17 Environmental Matters.



          (a) Except as set forth in Schedule 3.17 and except with respect to any other matters that,
individually or in the aggregate, would not reasonably be expected to result in a Material Adverse
Effect, none of the Loan Parties:





     (i) has failed to comply with any Environmental Law or to take, in a timely manner, all
actions necessary to obtain, maintain, renew and comply with any Environmental Permit, and
all such Environmental Permits are in full force and effect and not subject to any
administrative or judicial appeal;




     (ii) has become a party to any governmental, administrative or judicial proceeding or
possesses knowledge of any such proceeding that has been threatened under Environmental Law;




     (iii) has received notice of, become subject to, or is aware of any facts or
circumstances that could form the basis for, any Environmental Liability other than those
which have been fully and finally resolved and for which no obligations remain outstanding;




     (iv) possesses knowledge that any Mortgaged Property (A) is subject to any Lien,
restriction on ownership, occupancy, use or transferability imposed pursuant to
Environmental Law or (B) contains or previously contained Hazardous Materials of a form or
type or in a quantity or location that would reasonably be expected to result in any
Environmental Liability;




     (v) possess knowledge that there has been a Release or threat of Release of Hazardous
Materials at or from the Mortgaged Properties (or from any facilities or other properties
formerly owned, leased or operated by any Loan Party) in violation of, or in amounts or in a
manner that could give rise to liability under, any Environmental Law;




     (vi) has generated, treated, stored, transported, or Released Hazardous Materials from
the Mortgaged Properties (or from any facilities or other properties formerly owned, leased
or operated by any Loan Party) in violation of, or in a manner or to a location that could
give rise to liability under, any Environmental Law;




     (vii) is aware of any facts, circumstances, conditions or occurrences in respect of any
of the facilities and properties owned, leased or operated that could (A) form the basis of
any action, suit, claim or other judicial or administrative proceeding relating to liability
under or noncompliance with Environmental Law on the part of any



59









 






Loan Party or (B) interfere with or prevent continued compliance with Environmental
Laws by any Loan Party; or




     (viii) has pursuant to any order, decree, judgment or agreement by which it is bound or
has assumed the Environmental Liability for any Person.



          (b) Since the date of this Agreement, there has been no change in the status of the matters
disclosed on Schedule 3.17 that, individually or in the aggregate, has resulted in, or materially
increased the likelihood of, a Material Adverse Effect.




     SECTION 3.18 Insurance. Schedule 3.18 sets forth a true, complete and correct
description of all insurance maintained by or on behalf of the Loan Parties as of the Closing Date.
As of the Closing Date, such insurance is in full force and effect and all premiums have been duly
paid. The Loan Parties are insured by financially sound and reputable insurers and such insurance
is in such amounts and covering such risks and liabilities (and with such deductibles, retentions
and exclusions) as are in accordance with normal and prudent industry practice. None of the Loan
Parties (a) has received notice from any insurer (or any agent thereof) that substantial capital
improvements or other substantial expenditures will have to be made in order to continue such
insurance or (b) has any reason to believe that it will not be able to renew its existing coverage
as and when such coverage expires or to obtain similar coverage from similar insurers at a
substantially similar cost.



     SECTION 3.19 Security Documents.



          (a) The Guarantee and Collateral Agreement is effective to create in favor of the
Administrative Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and
enforceable security interest in the Collateral described therein and proceeds thereof and (i) in
the case of the Pledged Collateral, upon the earlier of (A) when such Pledged Collateral is
delivered to the Administrative Agent and (B) when financing statements in appropriate form are
filed in the offices specified on Schedule 3.19(a) and (ii) in the case of all other Collateral
described therein (other than Intellectual Property Collateral), when financing statements in
appropriate form are filed in the offices specified on Schedule 3.19(a), the Guarantee and
Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all
right, title and interest of the Secured Parties in such Collateral and proceeds thereof, as
security for the Obligations, in each case prior and superior to the rights of any other person
(except, in the case of all Collateral other than Pledged Collateral, with respect to Liens
expressly permitted by Section 6.02).




          (b) Each Intellectual Property Security Agreement is effective to create in favor of the
Administrative Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and
enforceable security interest in the Intellectual Property Collateral described therein and
proceeds thereof. When each Intellectual Property Security Agreement is filed in the United States
Patent and Trademark Office and the United States Copyright Office, respectively, together with
financing statements in appropriate form filed in the offices specified in Schedule 3.19(a), such
Intellectual Property Security Agreement shall constitute a fully perfected Lien on, and security
interest in, all right, title and interest of the grantors thereunder in the Intellectual Property
Collateral and proceeds thereof, as security for the Obligations, in each case prior and




60









 







superior in right to any other person (except with respect to Liens expressly permitted by
Section 6.02) (it being understood that subsequent recordings in the United States Patent and
Trademark Office and the United States Copyright Office may be necessary to perfect a lien on
registered trademarks, trademark applications and copyrights acquired by the grantors after the
date hereof).




          (c) Each of the Mortgages is effective to create in favor of the Administrative Agent, for the
ratable benefit of the Secured Parties, a legal, valid, binding and enforceable Lien on, and
security interest in, all of the Loan Parties’ right, title and interest in and to the Mortgaged
Property thereunder and proceeds thereof, and when the Mortgages are filed in the offices specified
on Schedule 3.19(c), each such Mortgage shall constitute a fully perfected Lien on, and security
interest in, all right, title and interest of the grantors thereof in such Mortgaged Property and
proceeds thereof, as security for the Obligations, in each case prior and superior in right to any
other person (except with respect to Liens expressly permitted by Section 6.02).




     SECTION 3.20 Location of Real Property. Schedule 3.20 lists completely and
correctly as of the Closing Date all Real Property and the addresses thereof, indicating for each
parcel whether it is owned or leased, including in the case of leased Real Property, the landlord
name, lease date and lease expiration date. The Loan Parties own in fee or have valid leasehold
interests in, as the case may be, all the real property set forth on Schedule 3.20.



     SECTION 3.21 Labor Matters. As of the Closing Date, there are no strikes, lockouts or
slowdowns against any Loan Party pending or, to the knowledge of the Borrowers, threatened. The
hours worked by and payments made to employees of the Loan Parties have not been in violation of
the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing
with such matters. All payments due from any of the Loan Parties, or for which any claim may be
made against any of the Loan Parties, on account of wages and employee health and welfare insurance
and other benefits, have been paid or accrued as a liability on the books of the Loan Parties to
the extent required by GAAP. The consummation of the Transactions will not give rise to any right
of termination or right of renegotiation on the part of any union under any collective bargaining
agreement to which any of the Loan Parties is bound.



     SECTION 3.22 Liens. There are no Liens of any nature whatsoever on any of the
properties or assets of any of the Loan Parties (other than Liens expressly permitted by Section
6.02).



     SECTION 3.23 Intellectual Property. Each of the Loan Parties owns, or is licensed to
use, all trademarks, tradenames, copyrights, patents and other intellectual property material to
its business, and the use thereof by the Loan Parties does not infringe upon the rights of any
other person, except for any such infringements that, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.



     SECTION 3.24 Solvency. Immediately after the consummation of the Transactions to
occur on the Closing Date and immediately following the making of each Loan (or other extension of
credit hereunder) and after giving effect to the application of the proceeds of each Loan (or other
extension of credit hereunder), (a) the fair value of the assets of each Loan



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Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or
otherwise; (b) the present fair saleable value of the property of each Loan Party will be greater
than the amount that will be required to pay the probable liability of its debts and other
liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become
absolute and matured; (c) each Loan Party will be able to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured;
and (d) no Loan Party will have unreasonably small capital with which to conduct the business in
which it is engaged as such business is now conducted and is proposed to be conducted following the
Closing Date.



     SECTION 3.25 Permits. Except where any such failure would not reasonably be expected
to have a Material Adverse Effect: (a) Each Loan Party has obtained and holds all Permits required
in respect of all Real Property and for any other property otherwise operated by or on behalf of,
or for the benefit of, such person and for the operation of each of its businesses as presently
conducted and as proposed to be conducted, (b) all such Permits are in full force and effect, and
each Loan Party has performed and observed all requirements of such Permits, (c) no event has
occurred that allows or results in, or after notice or lapse of time would allow or result in,
revocation or termination by the issuer thereof or in any other impairment of the rights of the
holder of any such Permit, (d) no such Permits contain any restrictions, either individually or in
the aggregate, that are materially burdensome to any Loan Party, or to the operation of any of its
businesses or any property owned, leased or otherwise operated by such person, (e) each Loan Party
reasonably believes that each of its Permits will be timely renewed and complied with, without
material expense, and that any additional Permits that may be required of such Person will be
timely obtained and complied with, without material expense and (f) the Borrowers have no knowledge
or reason to believe that any Governmental Authority is considering limiting, suspending, revoking
or renewing on materially burdensome terms any such Permit.



     SECTION 3.26 Deposit and Disbursement Accounts. Schedule 3.26 lists all banks
and other financial institutions at which any Loan Party maintains deposit or other accounts as of
the Closing Date and such Schedule correctly identifies the name, address and telephone number of
each depository, the name in which the account is held, a description of the purpose of the
account, and the complete account number therefor.



ARTICLE IV.




CONDITIONS OF LENDING




          The obligations of the Lenders to make Loans, and the agreement of the Administrative Agent to
assist Administrative Borrower in obtaining Letters of Credit in accordance with Section 2.23, are
subject to the satisfaction of the following conditions:




     SECTION 4.01 All Credit Events. On the date of each Borrowing, including each
Borrowing of a Swingline Loan, and on the date of each issuance, amendment, extension or renewal of
a Letter of Credit (each such event being called a “Credit Event”):




     (a) The Administrative Agent shall have received a notice of such Borrowing as required
by Section 2.03 (or such notice shall have been deemed given in accordance with Section
2.03) or, in the case of the issuance, amendment, extension or renewal of a



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Letter of Credit, the Administrative Agent shall have received a notice requesting the
issuance, amendment, extension or renewal of such Letter of Credit as required by Section
2.23(b) or, in the case of the Borrowing of a Swingline Loan, the Swingline Lender and the
Administrative Agent shall have received a notice requesting such Swingline Loan as required
by Section 2.22(b).




     (b) The representations and warranties set forth in each Loan Document shall be true
and correct in all material respects on and as of the date of such Credit Event with the
same effect as though made on and as of such date, except to the extent such representations
and warranties expressly relate to an earlier date, in which case such representations and
warranties shall be true and correct in all material respects on and as of such earlier
date.




     (c) The Borrowers and each other Loan Party shall be in compliance with all the terms
and provisions set forth in each Loan Document on its part to be observed or performed, and,
at the time of and immediately after such Credit Event, no Event of Default or Default shall
have occurred and be continuing.



          Each Credit Event shall be deemed to constitute a joint and several representation and
warranty by each of the Borrowers on the date of such Credit Event as to the matters specified in
paragraphs (b) and (c) of this Section 4.01.




     SECTION 4.02 First Credit Event. On the Closing Date:




     (a) The Administrative Agent shall have received, on behalf of itself and the Lenders,
a favorable written opinion of (i) Andrews Kurth LLP, counsel for the Loan Parties, and (ii)
each special and local counsel to the Loan Parties as the Administrative Agent may
reasonably request, in each case (A) dated the Closing Date, (B) addressed to the
Administrative Agent, the Arranger and the Lenders and (C) covering such matters relating to
the Loan Documents and the Transactions as the Administrative Agent shall reasonably request
and which are customary for transactions of the type contemplated herein, and the Loan
Parties hereby request such counsel to deliver such opinions.




     (b) The Administrative Agent shall have received (i) a copy of the certificate or
articles of incorporation or other formation documents, including all amendments thereto, of
each Loan Party, certified as of a recent date by the Secretary of State of the state of its
organization, and a certificate as to the good standing of each Loan Party as of a recent
date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant
Secretary of each Loan Party dated the Closing Date and certifying (A) that attached thereto
is a true and complete copy of the by-laws of such Loan Party as in effect on the Closing
Date and at all times since a date prior to the date of the resolutions described in clause
(B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted
by the Board of Directors of such Loan Party authorizing the execution, delivery and
performance of the Loan Documents to which such person is a party, in the case of the
Borrowers, the borrowings hereunder, in the case of each Loan Party, the granting of the
Liens contemplated to be granted by it under the Security Documents and, in the case of each
Guarantor, the Guaranteeing of the Obligations as contemplated by the Guarantee



63









 






and Collateral Agreement, and that such resolutions have not been modified, rescinded
or amended and are in full force and effect, (C) that the certificate or articles of
incorporation or other formation documents of such Loan Party have not been amended since
the date of the last amendment thereto shown on the certificate of good standing furnished
pursuant to clause (i) above and (D) as to the incumbency and specimen signature of each
officer executing any Loan Document or any other document delivered in connection herewith
on behalf of such Loan Party; (iii) a certificate of another officer as to the incumbency
and specimen signature of the Secretary or Assistant Secretary executing the certificate
pursuant to (ii) above; and (iv) such other documents as the Administrative Agent, the
Arranger or the Lenders may reasonably request.




     (c) The Administrative Agent shall have received a certificate, dated the Closing Date
and signed by a Financial Officer of the Borrowers, confirming compliance with the
conditions precedent set forth in paragraphs (a) and (b) of Section 4.01.




     (d) The Administrative Agent shall have received (i) this Agreement, executed and
delivered by a duly authorized officer of each of the Borrowers, (ii) the Guarantee and
Collateral Agreement, executed and delivered by a duly authorized officer of each of each
Loan Party and Holdings, (iii) a Mortgage covering each of the Mortgaged Properties,
executed and delivered by a duly authorized officer of each Loan Party thereto, (iv) the
Intellectual Property Security Agreements, executed and delivered by a duly authorized
officer of each Loan Party thereto, (v) if requested by any Lender pursuant to Section 2.04,
a promissory note or notes conforming to the requirements of Section 2.04 and executed and
delivered by a duly authorized officer of the Borrowers and (vi) a Lender Addendum executed
and delivered by each Lender and accepted by the Borrowers.




     (e) The Administrative Agent, for the ratable benefit of the Secured Parties, shall
have been granted on the Closing Date perfected Liens on the Collateral (subject, in the
case of all Collateral other than Pledged Collateral, only to Liens expressly permitted by
Section 6.02) and shall have received such other reports, documents and agreements as the
Administrative Agent shall reasonably request and which are customarily delivered in
connection with security interests in real property assets. The Pledged Collateral shall
have been duly and validly pledged under the Guarantee and Collateral Agreement to the
Administrative Agent, for the ratable benefit of the Secured Parties, and certificates
representing such Pledged Collateral, accompanied by instruments of transfer and stock
powers endorsed in blank, shall be in the possession of the Administrative Agent.




     (f) The Administrative Agent shall have received a duly executed Perfection Certificate
dated on or prior to the Closing Date. The Administrative Agent shall have received the
results of a recent Lien and judgment search in each relevant jurisdiction with respect to
each of the Loan Parties that shall be Subsidiary Guarantors or shall otherwise have assets
that are included in the Collateral, and such search shall reveal no Liens on any of the
assets of each of the Loan Parties except, in the case of Collateral other than Pledged
Collateral, for Liens expressly permitted by Section 6.02 and except for Liens to be
discharged on or prior to the Closing Date pursuant to documentation reasonably satisfactory
to the Administrative Agent.



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     (g) The Borrowers shall have received not less than $85,000,000 in gross cash proceeds
from borrowings under the Term Loan Agreement.




     (h) After giving effect to the Transactions and the other transactions contemplated
hereby, the Loan Parties shall have outstanding no Indebtedness or preferred stock other
than (i) the Loans and other extensions of credit hereunder, (ii) borrowings under the Term
Loan Agreement and (iii) the Indebtedness set forth on Schedule 6.01. The Borrowers
shall have repaid all amounts outstanding under the Existing Credit Facilities. The
Administrative Agent shall have received satisfactory evidence that (i) the Existing Credit
Facilities shall have been terminated, all amounts then due and payable or to become due and
payable (other than indemnification obligations not yet having been requested) thereunder
shall have been paid in full and all commitments and reimbursement obligations thereunder
shall have been terminated and (ii) satisfactory arrangements shall have been made for the
termination of all Liens granted in connection therewith, in each case on terms and
conditions satisfactory to the Administrative Agent.




     (i) The Administrative Agent shall have received (i) the financial statements described
in Section 3.05 and (ii) unaudited combined preliminary special purpose balance sheets and
related statements of income, stockholders’ equity and cash flows of PALCO and Britt
prepared in accordance with GAAP (except for the exclusion of PALCO’s wholly owned
subsidiaries Scotia Pacific, Salmon Creek and Scotia Inn except as losses in excess of
investments in subsidiaries as a component of stockholder’s equity and consolidating the
financial statements thereof, and inventory presented on a FIFO basis), for May, 2006 and
year-to-date through May, 2006.




     (j) The Administrative Agent shall have received projections of the Loan Parties in
form and substance satisfactory to the Administrative Agent.




     (k) The Administrative Agent shall have received a certificate from the chief financial
officer of PALCO certifying that each of the Loan Parties, after giving effect to the
Transactions and the other transactions contemplated hereby, are solvent.




     (l) All material governmental and third party consents and approvals with respect to
the Transactions and the other transactions contemplated hereby to the extent required shall
have been obtained, all applicable appeal periods shall have expired and there shall be no
litigation, governmental, administrative or judicial action, actual or, to the knowledge of
any Loan Party, threatened, that could reasonably be expected to restrain, prevent or impose
materially burdensome conditions on the Transactions or the other transactions contemplated
hereby.




     (m) The Administrative Agent shall have received all documentation and other
information required by bank regulatory authorities under applicable “know your customer”
and anti-money laundering rules and regulations, including the U.S.A. Patriot Act.



65









 






     (n) The Administrative Agent shall have received in respect of each Mortgaged Property
a mortgagee’s title insurance policy (or policies) or marked up unconditional binder for
such insurance. Each such policy shall be in a form and in an amount satisfactory to the
Administrative Agent and issued by title companies satisfactory to the Administrative Agent
(including any such title companies acting as co-insurers or reinsurers, at the option of
the Administrative Agent) (in each such case, a “Title Insurance Company”). The
Administrative Agent shall have received evidence satisfactory to it that all premiums in
respect of each such policy, all charges for mortgage recording tax, and all related
expenses, if any, have been paid. The Administrative Agent shall have received a copy of
all recorded documents referred to, or listed as exceptions to title in, the title policy or
policies referred to above and a copy of all other material documents affecting the
Mortgaged Property.




     (o) If requested by the Administrative Agent, the Administrative Agent shall have
received (i) a policy of flood insurance that (A) covers any parcel of improved Mortgaged
Property that is located in a flood zone and (B) is written in an amount not less than the
outstanding principal amount of the indebtedness secured by such Mortgage that is reasonably
allocable to such Mortgaged Property or the maximum limit of coverage made available with
respect to the particular type of property under the National Flood Insurance Act of 1968,
whichever is less.




     (p) The Administrative Agent shall have received evidence satisfactory to the
Administrative Agent demonstrating that after giving effect to the Transactions, Borrowing
Availability shall be at least $20,000,000.




     (q) The Administrative Agent shall have received evidence satisfactory to the
Administrative Agent that Holdings has made a loan on the Closing Date to Palco in an
aggregate amount equal to $10,000,000 evidenced by the Subordinated Intercompany Note.




     (r) Borrowers shall have delivered all documents listed on, and taken all actions set
forth on and satisfied all other conditions precedent listed in the Closing Checklist
attached hereto as Exhibit I, all in form and substance, or in a manner, satisfactory to the
Administrative Agent and Lenders.



ARTICLE V.




AFFIRMATIVE COVENANTS




          Each of the Borrowers covenants and agrees with each Lender that so long as this Agreement
shall remain in effect and until the Commitments have been terminated and the principal of and
interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document
shall have been paid in full and all Letters of Credit have been canceled or have expired and all
amounts drawn thereunder have been reimbursed in full, each of the Borrowers will, and will cause
each of the Loan Parties to:




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     SECTION 5.01 Existence; Businesses and Properties.



          (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and
effect its legal existence, except as otherwise expressly permitted under Section 6.05.




          (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in
full force and effect the rights, licenses, permits, franchises, authorizations, patents,
copyrights, trademarks and trade names material to the conduct of its business; maintain and
operate such business in substantially the manner in which it is presently conducted and operated;
comply in all material respects with all applicable laws, rules, regulations and decrees and orders
of any Governmental Authority, whether now in effect or hereafter enacted; and at all times
maintain and preserve all property material to the conduct of such business and keep such property
in good repair, working order and condition and from time to time make, or cause to be made, all
needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in
order that the business carried on in connection therewith may be properly conducted at all times.




     SECTION 5.02 Insurance. Maintain the insurance required by the Guarantee and
Collateral Agreement.



     SECTION 5.03 Obligations and Taxes. Pay and discharge promptly when due all material
taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits
or in respect of its property, before the same shall become delinquent or in default, as well as
all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise
to a Lien upon such properties or any part thereof; provided, however, that such
payment and discharge shall not be required with respect to any such tax, assessment, charge, levy
or claim so long as the validity or amount thereof shall be contested in good faith by appropriate
proceedings and the Borrowers or the applicable Subsidiary shall have set aside on its books
adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend
collection of the contested obligation, tax, assessment or charge and enforcement of a Lien and, in
the case of a Mortgaged Property, there is no risk of forfeiture of such property.



     SECTION 5.04 Financial Statements, Reports, etc. Furnish to the Administrative Agent
and each Lender:




     (a) within 90 days after the end of each fiscal year, the balance sheet and related
statements of income, stockholders’ equity and cash flows showing the financial condition of
the Borrowers on a combined basis as of the close of such fiscal year and the results of its
operations and the operations of the Borrowers on a combined basis during such year,
together with comparative figures for the immediately preceding fiscal year, all audited by
an independent public accountant of recognized national standing and accompanied by an
opinion of such accountants (which shall not be qualified in any material respect except for
a going concern qualification and as indicated below) to the effect that such financial
statements fairly present the financial condition and results of operations of the Borrowers
in accordance with GAAP (except for the exclusion of Scotia



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Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments in
subsidiaries as a component of stockholder’s equity unless otherwise indicated or the
context indicates otherwise) consistently applied;




     (b) within 45 days after the end of each of the first three fiscal quarters of each
fiscal year, the balance sheet and related statements of income, stockholders’ equity and
cash flows showing the financial condition of the Borrowers on a combined basis as of the
close of such fiscal quarter and the results of its operations and the operations of the
Borrowers during such fiscal quarter and the then elapsed portion of the fiscal year, and
commencing April, 2006, comparative figures for the same periods in the immediately
preceding fiscal year, all certified by one of PALCO’s Financial Officers as fairly
presenting the financial condition and results of operations of the Borrowers on a combined
basis in accordance with GAAP (except for the exclusion of Scotia Pacific, Salmon Creek and
Scotia Inn except as losses in excess of investments in subsidiaries as a component of
stockholder’s equity and consolidating the financial statements thereof, and inventory
presented on a FIFO basis) consistently applied, subject to normal year-end audit
adjustments and the absence of footnotes;




     (c) within 30 days after the end of each fiscal month of each fiscal quarter, (i) the
combined balance sheet and related statements of income and cash flows showing the financial
condition of the Borrowers during such fiscal month and the then elapsed portion of the
fiscal year, all certified by one of its Financial Officers as fairly presenting the
financial condition and results of operations of the Borrowers in accordance with GAAP
(except for the exclusion of Scotia Pacific, Salmon Creek and Scotia Inn except as losses in
excess of investments in subsidiaries as a component of stockholder’s equity and
consolidating the financial statements thereof, and inventory presented on a FIFO basis)
consistently applied, subject to normal year-end audit adjustments and the absence of
footnotes and (ii) the separate, internally prepared entity-only balance sheet and related
statements of income and cash flows showing the financial condition of each Borrower, and
the eliminations reflected in the corresponding financial statements delivered pursuant to
the preceding clause (i), for such month and the then-elapsed portion of the fiscal year
(and, commencing with such financial statements for the month of April, 2006, for the
corresponding month and elapsed portion of the preceding fiscal year) all certified by one
of its Financial Officers as fairly presenting the financial condition and results of
operations of the Borrowers in accordance with GAAP (except for the exclusion of PALCO’s
wholly owned subsidiaries Scotia Pacific, Salmon Creek and Scotia Inn except as losses in
excess of investments in subsidiaries as a component of stockholder’s equity and
consolidating the financial statements thereof, and inventory presented on a FIFO basis)
consistently applied, subject to normal year-end audit adjustments and the absence of
footnotes;




     (d) concurrently with any delivery of financial statements under paragraph (a), (b) or
(c) above, (i) a certificate of the accounting firm (in the case of paragraph (a)) or
Financial Officer (in the case of paragraph (b)) opining on or certifying such statements
and certifying that no Event of Default or Default has occurred or, if such an Event of
Default or Default has occurred, specifying the nature and extent thereof and any
corrective action taken or proposed to be taken with respect thereto (which certificate,



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when furnished by an accounting firm, may be limited to providing negative assurances
regarding financial covenants related to accounting matters and disclaim responsibility for
legal interpretations), (ii) a certificate executed by any officer of PALCO setting forth
computations in reasonable detail satisfactory to the Administrative Agent demonstrating
compliance with the covenants contained in Sections 6.10, 6.11, 6.12 and 6.13,
(iii) (x) a management report, in reasonable detail, signed by the chief financial officer
of PALCO, describing the operations and financial condition of the Loan Parties and their
Subsidiaries for the month and the portion of the fiscal year then ended (or for the fiscal
year then ended in the case of annual financial statements) and (y) a report setting forth
in comparative form the corresponding figures for the corresponding periods of the previous
fiscal year and the corresponding figures from the most recent budget for the applicable
periods delivered to the Administrative Agent (and discussing the reasons for any
significant variations from such budget), (iv) a report, in form reasonably acceptable to
the Administrative Agent, setting forth the Asset Sales which have occurred during such
period and since the Closing Date and a description of the status of the sale process with
respect to all other Assets Sales and (v) (v) a report, in form reasonably acceptable to
the Administrative Agent, in reasonable detail, signed by the chief financial officer of
PALCO, describing (A) the occurrence of any matter that could reasonably be expected to
result in Environmental Liability to Holdings, the Borrower or its Subsidiaries in excess
of $5,000,000, (B) the status of Borrower’s and its Subsidiaries’ compliance with the
matters discussed in the “Water Quality” subsection of Schedule 3.17, including without
limitation (1) TMDL’s, (2) waste discharge reporting, (3) operational requirements and (4)
WWDR’s (including the results of the required monitoring program and any modifications or
amendments thereto), and (C) the occurrence of any Environmental Liability pursuant to
Senate Bill 810 or related to a violation of the Borrower’s Habitat Conservation Plan or
other plans and/or Permits related to listed species and (v) a report, in form reasonably
acceptable to the Administrative Agent, with respect to the Annexation process listing all
applicable material objections, milestones, changes in scheduling, new governmental
requirements and all other issues material to the Annexation process, and generally setting
forth the status and progress of the Annexation since the delivery of the prior financial
statements;




     (e) at least 30 days prior to the end of each fiscal year of PALCO, a detailed
consolidated budget for the following fiscal year (including a projected consolidated and
consolidating balance sheet and related statements of projected operations and cash flows as
of the end of and for such following fiscal year and setting forth the assumptions used for
purposes of preparing such budget) and, promptly when available, any significant revisions
of such budget;




     (f) promptly after the same become publicly available, copies of all periodic and other
reports, proxy statements and other materials filed by PALCO or any Subsidiary with the
Securities and Exchange Commission, or any Governmental Authority succeeding to any or all
of the functions of said Commission, or with any national securities exchange;




     (g) promptly after the receipt thereof by either PALCO or any of the Subsidiaries, a
copy of any final “management letter” received by any such person from



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its certified public accountants and the management’s response thereto (it being
understood that the term “management letter” does not include communications from such
public accountants to an audit committee that by their terms expressly state that they may
not be provided to third parties);




     (h) promptly, upon the Administrative Agent’s request, and in any event no less
frequently than noon New York time on the third (3rd) Business Day after the end
of each week, each of the following reports, each of which shall be prepared by Borrowers as
of the last day of the immediately preceding week: (A) a Borrowing Base Certificate with
respect to each Borrower, accompanied by such supporting detail and documentation as shall
be requested by the Administrative Agent in its reasonable discretion; (B) with respect to
each Borrower, a summary of Inventory by location and type with a supporting perpetual
Inventory report, in each case accompanied by such supporting detail and documentation as
shall be requested by the Administrative Agent in its reasonable discretion; and (C) with
respect to each Borrower, a trial balance showing Accounts outstanding aged from invoice
date as follows: 1 to 30 days, 31 to 60 days, 61 to 90 days, 91 days to 120 days and 120
days or more, accompanied by such supporting detail and documentation as shall be requested
by the Administrative Agent in its reasonable discretion;




     (i) on a weekly basis or at such more frequent intervals as the Administrative Agent
may request from time to time (together with a copy of all or any part of such delivery
requested by any Lender in writing after the Closing Date), collateral reports with respect
to each Borrower, including all additions and reductions (cash and non-cash) with respect to
Accounts of each Borrower, in each case accompanied by such supporting detail and
documentation as shall be requested by Agent in its reasonable discretion each of which
shall be prepared by the applicable Borrower as of the last day of the immediately preceding
week or the date 2 days prior to the date of any request;




     (j) at the time of delivery of each of the monthly financial statements delivered
pursuant to Section 5.04(c): (A) a reconciliation of the most recent monthly Borrowing Base,
general ledger and month-end Inventory reports of each Borrower to each Borrower’s general
ledger and monthly financial statements delivered pursuant to Section 5.04(c), in each case
accompanied by such supporting detail and documentation as shall be requested by the
Administrative Agent in its reasonable discretion; (B) a reconciliation of the perpetual
inventory by location to each Borrower’s most recent monthly Borrowing Base Certificate,
general ledger and monthly financial statements delivered pursuant to Section 5.04(c), in
each case accompanied by such supporting detail and documentation as shall be requested by
the Administrative Agent in its reasonable discretion; (C) an aging of accounts payable and
a reconciliation of that accounts payable aging to each Borrower’s general ledger and
monthly financial statements delivered pursuant to Section 5.04(c), in each case accompanied
by such supporting detail and documentation as shall be requested by the Administrative
Agent in its reasonable discretion; and (D) a reconciliation of the outstanding Loans to
each Borrower’s general ledger and monthly financial statements delivered pursuant to
Section 5.04(c), in each case accompanied by such supporting detail and documentation as
shall be requested by the Administrative Agent in its reasonable discretion;



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     (k) from time to time, if Administrative Agent determines in its sole discretion that
obtaining appraisals is necessary or appropriate for any reason, the Administrative Agent
will, at Borrower’s expense, obtain appraisal reports in form and substance and from
appraisers satisfactory to the Administrative Agent stating the then current market values
of all or any portion of the Real Property and personal property, including Appraisals of
Borrowers’ Inventory, owned by any of the Loan Parties;




     (l) Borrowers, at their own expense, shall deliver to the Administrative Agent the
results of each physical verification, if any, that any Loan Party may in their discretion
have made, or caused any other person to have made on their behalf, of all or any portion of
their Inventory (and, if a Default or an Event of Default has occurred and is continuing,
Borrowers shall, upon the request of the Administrative Agent, conduct, and deliver the
results of, such physical verifications as the Administrative Agent may require); and




     (m) promptly, from time to time, such other information regarding the operations,
business affairs and financial condition of any Loan Party or Scotia Pacific, or compliance
with the terms of any Loan Document, as the Administrative Agent or any Lender may
reasonably request.



     SECTION 5.05 Litigation and Other Notices. Furnish to the Administrative Agent and
each Lender prompt written notice of the following:




     (a) any Event of Default or Default, specifying the nature and extent thereof and the
corrective action (if any) taken or proposed to be taken with respect thereto;




     (b) the filing or commencement of, or any threat or notice of intention of any person
to file or commence, any action, suit or proceeding, whether at law or in equity or by or
before any arbitrator or Governmental Authority, against any Loan Party or Scotia Pacific
that would reasonably be expected to result in a Material Adverse Effect;




     (c) the occurrence of any ERISA Event described in clause (b) of the definition thereof
or any other ERISA Event that, alone or together with any other ERISA Events that have
occurred, would reasonably be expected to result in liability of any Loan Party or Scotia
Pacific in an aggregate amount exceeding $1,000,000; and




     (d) any development that has resulted in, or would reasonably be expected to result in,
a Material Adverse Effect.



     SECTION 5.06 Information Regarding Collateral.



          (a) Furnish to the Administrative Agent prompt written notice of any change (i) in any Loan
Party’s corporate name or in any trade name used to identify it in the conduct of its business or
in the ownership of its properties, (ii) in the location of any Loan Party’s chief executive
office, its principal place of business, any office in which it maintains books or records relating
to Collateral owned by it or any office or facility at which Collateral owned by it is located
(including the establishment of any such new office or facility), (iii) in any Loan Party’s
identity or corporate structure or (iv) in any Loan Party’s Federal Taxpayer Identification




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Number. Each of the Borrowers agrees not to effect or permit any change of its corporate or
identity or state of organization unless all filings have been made under the UCC or otherwise and
all other actions have been taken that are required in order for the Administrative Agent to
continue at all times following such change to have a valid, legal and perfected security interest
in all the Collateral. The Administrative Borrower also agrees promptly to notify the
Administrative Agent if any material portion of the Collateral is damaged or destroyed.




          (b) Deliver to the Administrative Agent, each year, at the time of delivery of the annual
financial statements with respect to the preceding fiscal year pursuant to Section 5.04(a), a
certificate of a Financial Officer setting forth the information required pursuant to Section I of
the Perfection Certificate or confirming that there has been no change in such information since
the date of the Perfection Certificate delivered on the Closing Date or the date of the most recent
certificate delivered pursuant to this Section.




     SECTION 5.07 Maintaining Records; Access to Properties and Inspections; Environmental
Assessments.



          (a) Keep proper books of record and account in which full, true and correct entries in
conformity with GAAP and all requirements of law are made of all dealings and transactions in
relation to its business and activities. Each of the Borrowers will, and will cause each of the
Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender to
visit and inspect the financial records and the properties of the Loan Party, and conduct field
examinations relating to the Collateral, at reasonable times and as often as reasonably requested
and to make extracts from and copies of such financial records, and permit any representatives
designated by the Administrative Agent or any Lender to discuss the affairs, finances and condition
of the Loan Parties with the officers thereof and independent accountants therefor.




          (b) In the event that the Administrative Agent or any Lender shall have reason to believe that
Hazardous Materials have been Released or are threatened to be Released on or from any Mortgaged
Property or other facility of any Loan Party or that any such property or facility is not being
operated in compliance with applicable Environmental Law, the Administrative Agent may, at its
election and after reasonable notice to the Administrative Borrower, retain an independent engineer
or other qualified environmental consultant to evaluate whether Hazardous Materials are present in
the soil, groundwater, or surface water at such Mortgaged Property or facility or whether the
facilities or properties are being operated and maintained in compliance with applicable
Environmental Laws. Such environmental assessments may include detailed visual inspections of the
Mortgaged Property or facility, including any and all storage areas, storage tanks, drains, dry
wells and leaching areas, and the taking of soil samples, surface water samples and groundwater
samples as well as such other reasonable investigations or analyses as are necessary. The scope of
any such environmental assessments under this paragraph shall be determined in the sole discretion
of the Administrative Agent. Each of the Borrowers shall, and shall cause each of the Subsidiaries
to, cooperate in the performance of any such environmental assessment and permit any such engineer
or consultant designated by the Administrative Agent to have full access to each property or
facility at reasonable times and after reasonable notice to the Administrative Borrower of the
plans to




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conduct such an environmental assessment. All environmental assessments conducted pursuant to
this paragraph shall be at the Borrowers’ sole cost and expense.




     SECTION 5.08 Use of Proceeds. Use the proceeds of the Loans and request the issuance
of Letters of Credit only for the purposes set forth in Section 3.13.



     SECTION 5.09 Additional Collateral, etc.



          (a) With respect to any Collateral acquired after the Closing Date (other than the Settlement
Property) or, in the case of inventory or equipment, any Collateral (having a value in excess of
$25,000) moved after the Closing Date by any other Loan Party (other than any Collateral described
in paragraphs (b) or (c) of this Section 5.09) as to which the Administrative Agent, for the
benefit of the Secured Parties, does not have a perfected security interest, promptly (and, in any
event, within 10 days following the date of such acquisition) (i) execute and deliver to the
Administrative Agent such amendments to the Guarantee and Collateral Agreement or such other
Security Documents as the Administrative Agent deems necessary or advisable to grant to the
Administrative Agent, for the benefit of the Secured Parties, a security interest in such
Collateral and (ii) take all actions necessary or advisable to grant to, or continue on behalf of,
the Administrative Agent, for the benefit of the Secured Parties, a perfected security interest in
such Collateral, including the filing of UCC financing statements in such jurisdictions as may be
required by the Guarantee and Collateral Agreement or by law or as may be requested by the
Administrative Agent.




          (b) With respect to any fee interest in any Collateral consisting of Real Property (other than
the Settlement Property) or any material lease of Collateral consisting of Real Property acquired
or leased after the Closing Date by the Borrowers or any other Loan Party, promptly (and, in any
event, within 10 days following the date of such acquisition) (i) execute and deliver a first
priority Mortgage in favor of the Administrative Agent (subject only to Liens permitted by Section
6.02), for the benefit of the Secured Parties, covering such real property and complying with the
provisions herein and in the Security Documents, (ii) provide the Secured Parties with title and
extended coverage insurance in an amount at least equal to the purchase price of such Real Property
(or such other amount as the Administrative Agent shall reasonably specify), surveys, and if
applicable, flood insurance, lease estoppel certificates, memoranda or amendments, all in
accordance with the standards for deliveries contemplated on the Closing Date, (iii) if requested
by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the
matters described above, which opinions shall be in form and substance, and from counsel,
reasonably satisfactory to the Administrative Agent and (iv) deliver to the Administrative Agent a
notice identifying, and upon the Administrative Agent’s request, provide a copy of, the
consultant’s reports, environmental site assessments or other documents relied upon by any Loan
Party to determine that any such real property included in such Collateral does not contain
Hazardous Materials of a form or type or in a quantity or location that could reasonably be
expected to result in a material Environmental Liability.




          (c) With respect to any Subsidiary created or acquired after the Closing Date by any Loan
Party, promptly (and, in any event, within 10 days following such creation or the date of such
acquisition) (i) execute and deliver to the Administrative Agent such amendments to the Guarantee
and Collateral Agreement as the Administrative Agent deems necessary or




73









 







advisable to grant to the Administrative Agent, for the benefit of the Secured Parties, a
valid, perfected first priority security interest in the Equity Interests in such new Subsidiary
that are owned by any Loan Party (subject only to Liens permitted by Section 6.02), (ii) deliver to
the Administrative Agent the certificates, if any, representing such Equity Interests, together
with undated stock powers, in blank, executed and delivered by a duly authorized officer of the
Borrowers or such Subsidiary, as the case may be, (iii) cause such new Subsidiary (A) to become a
party to the Guarantee and Collateral Agreement (and provide Guarantees of the Obligations) and the
Intellectual Property Security Agreements and (B) to take such actions necessary or advisable to
grant to the Administrative Agent, for the benefit of the Secured Parties, a perfected first
priority security interest in the Collateral described in the Guarantee and Collateral Agreement
and the Intellectual Property Security Agreement with respect to such new Subsidiary, including the
recording of instruments in the United States Patent and Trademark Office and the United States
Copyright Office and the filing of UCC financing statements in such jurisdictions as may be
required by the Guarantee and Collateral Agreement, the Intellectual Property Security Agreement or
by law or as may be requested by the Administrative Agent and (iv) if requested by the
Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters
described above, which opinions shall be in form and substance, and from counsel, reasonably
satisfactory to the Administrative Agent.




     SECTION 5.10 Further Assurances. From time to time duly authorize, execute and
deliver, or cause to be duly authorized, executed and delivered, such additional instruments,
certificates, financing statements, agreements or documents, and take all such actions (including
filing UCC and other financing statements), as the Administrative Agent may reasonably request, for
the purposes of implementing or effectuating the provisions of this Agreement and the other Loan
Documents, or of more fully perfecting or renewing the rights of the Administrative Agent and the
Secured Parties with respect to the Collateral (or with respect to any additions thereto or
replacements or proceeds or products thereof or with respect to any other property or assets
hereafter acquired by or any of the Loan Parties which may be deemed to be part of the Collateral)
pursuant hereto or thereto. Upon the exercise by the Administrative Agent or any Lender of any
power, right, privilege or remedy pursuant to this Agreement or the other Loan Documents which
requires any consent, approval, recording, qualification or authorization of any Governmental
Authority, each of the Borrowers will execute and deliver, or will cause the execution and delivery
of, all applications, certifications, instruments and other documents and papers that the
Administrative Agent or such Lender may be required to obtain from any Loan Party for such
governmental consent, approval, recording, qualification or authorization.



     SECTION 5.11 [Intentionally Omitted]



     SECTION 5.12 Cash Management Systems; Bank Accounts. Borrowers shall, and shall cause
each other Loan Party to, enter into Control Agreements with respect to each deposit account
maintained by any Loan Party (other than any payroll account so long as such payroll account is a
zero balance account) as of or after the Closing Date. Each such deposit account control agreement
shall be in form and substance satisfactory to the Administrative Agent. Borrowers shall, and
shall cause any Subsidiary to, provide prior written notice to the Administrative Agent before
directly or indirectly establishing any new bank account and prior to the establishment thereof,
the Administrative Agent, Borrowers or such Subsidiary and the bank at which the account is to be
opened shall enter into a Control Agreement regarding such



74









 







bank account pursuant to which such bank (i) acknowledges the security interest of the
Administrative Agent in such bank account, (ii) agrees to comply with instructions originated by
the Administrative Agent directing disposition of the funds in the bank account without further
consent from Borrowers, and (iii) agrees to subordinate and limit any security interest the bank
may have in the bank account on terms satisfactory to the Administrative Agent.



     SECTION 5.13 Landlords’ Agreements, Mortgagee Agreements, Bailee Letters and Real Estate
Purchases. Upon the request of the Administrative Agent, each Loan Party shall use reasonable
efforts to obtain a landlord’s agreement, mortgagee agreement or bailee letter, as applicable, from
the lessor of each leased property (other than the lessor of the leased property which the mill
owned by Britt on the Closing Date is on), mortgagee of owned property or bailee with respect to
any warehouse, processor or converter facility or other location where Collateral is stored or
located, which agreement or letter shall contain a waiver or subordination of all Liens or claims
that the landlord, mortgagee or bailee may assert against the Collateral at that location, and
shall otherwise be reasonably satisfactory in form and substance to the Administrative Agent. With
respect to such locations or warehouse space leased, owned or where Collateral is stored or located
as of the Closing Date and thereafter, if the Administrative Agent has not received a landlord or
mortgagee agreement or bailee letter as of the Closing Date (or, if later, as of the date such
location is acquired, leased or Collateral stored or located), the Eligible Inventory at that
location shall, in the Administrative Agent’s discretion, be subject to such Reserves as may be
established by the Administrative Agent in its reasonable credit judgment. After the Closing Date,
no real property or warehouse space shall be leased by any Loan Party and no Inventory shall be
shipped to a processor or converter under arrangements established after the Closing Date
(excluding renewals of existing leases and arrangements) without the prior written consent of the
Administrative Agent (which consent, in the Administrative Agent’s discretion, may be conditioned
upon the establishment of Reserves acceptable to the Administrative Agent) or, unless and until a
satisfactory landlord agreement or bailee letter, as appropriate, shall first have been obtained
with respect to such location. Each Loan Party shall and shall cause its Subsidiaries to timely
and fully pay and perform their obligations under all leases and other agreements with respect to
each leased location or public warehouse where any Collateral is or may be located (other than
Collateral in an aggregate amount for all such locations not to exceed $100,000 in the aggregate).



     SECTION 5.14 Specified Asset Sales. On or prior to the applicable dates set forth on
Schedule 5.14, the applicable Loan Party shall sell each applicable Specified Asset for
cash consideration in an amount not less than the amount specified opposite such Specified Asset on
Schedule 5.14. In addition, during the first ninety (90) days after the Closing Date, each
sale of a Specified Asset shall be done in consultation with the Administrative Agent.



ARTICLE VI.




NEGATIVE COVENANTS




          Each of the Borrowers covenants and agrees with each Lender that, so long as this Agreement
shall remain in effect and until the Commitments have been terminated and the principal of and
interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document
have been paid in full and all Letters of Credit have been cancelled or have




75









 







expired and all amounts drawn thereunder have been reimbursed in full, neither the Borrowers
will, nor will they cause or permit Loan Party to:




     SECTION 6.01 Indebtedness. Incur, create, assume or permit to exist any Indebtedness,
except:




     (a) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and any
Permitted Refinancing Indebtedness in respect of any such Indebtedness;




     (b) Indebtedness created hereunder and under the other Loan Documents;




     (c) unsecured intercompany Indebtedness of the Borrowers to the extent permitted by
Section 6.04(f) so long as such Indebtedness is evidenced by a subordinated note in form and
substance satisfactory to the Administrative Agent;




     (d) Indebtedness of any Loan Party incurred to finance the acquisition, construction or
improvement of any fixed or capital assets, and any Permitted Refinancing Indebtedness in
respect of any such Indebtedness; provided that (i) such original Indebtedness is
incurred prior to or within 90 days after such acquisition or the completion of such
construction or improvement and (ii) the aggregate principal amount of Indebtedness
permitted by this Section 6.01(d), when combined with the aggregate principal amount of all
Capital Lease Obligations incurred pursuant to Section 6.01(e), shall not exceed $2,500,000
at any time outstanding;




     (e) Capital Lease Obligations in an aggregate principal amount, when combined with the
aggregate principal amount of all Indebtedness incurred pursuant to Section 6.01(d), not
exceeding $2,500,000 at any time outstanding;




     (f) Indebtedness of the Borrowers under the Term Loan Agreement in an aggregate
principal amount not to exceed $85,000,000 and Indebtedness of the Guarantors under any
Guarantees in respect thereof and any Permitted Refinancing Indebtedness in respect of any
such Indebtedness;




     (g) Indebtedness under performance bonds or with respect to workers’ compensation
claims, in each case incurred in the ordinary course of business;




     (h) Indebtedness arising from the honoring by a bank or other financial institution of
a check, draft or similar instrument inadvertently drawn against insufficient funds in the
ordinary course of business; provided that such Indebtedness is promptly covered by
a Loan Party; and




     (i) (A) other unsecured Indebtedness of Palco to Holdings in an aggregate amount not to
exceed $36,000,000 outstanding on the Closing Date (plus such other unsecured Indebtedness
owed by Palco to Holdings incurred pursuant to Section 6.16) and issued in accordance with
the terms of the Subordinated Intercompany Note; provided, however that such unsecured
Indebtedness does not mature, and no payments of any kind may be made on or with respect
thereto, until six (6) months after the



76









 






Maturity Date and (B) other unsecured Indebtedness of the Borrowers and the
Subsidiaries in an aggregate amount not to exceed $500,000 at any time outstanding.



     SECTION 6.02 Liens. Create, incur, assume or permit to exist any Lien on any property
or assets (including Equity Interests or other securities of any person, including any Subsidiary)
now owned or hereafter acquired by it or on any income or revenues or rights in respect of any
thereof, except:




     (a) Liens on property or assets of the Borrowers and the Subsidiaries existing on the
date hereof and set forth in Schedule 6.02; provided that such Liens shall secure
only those obligations which they secure on the date hereof and refinancings, extensions,
renewals and replacements thereof permitted hereunder;




     (b) any Lien created under the Loan Documents;




     (c) Liens for Taxes not yet due or which are being contested in compliance with Section
5.03;




     (d) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, lumberman’s or
other like Liens arising in the ordinary course of business and securing obligations that
are not due and payable or which are being contested in compliance with Section 5.03;




     (e) pledges and deposits made in the ordinary course of business in compliance with
workmen’s compensation, unemployment insurance and other social security laws or
regulations;




     (f) deposits in an amount not to exceed $500,000 in aggregate to secure the performance
of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease
Obligations), statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business;




     (g) zoning restrictions, easements, rights-of-way, restrictions on use of real property
and other similar encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and do not materially detract from the value of the
property subject thereto or interfere with the ordinary conduct of the business of any Loan
Party or the ability of any Loan Party to utilize such property for its intended purpose;




     (h) purchase money security interests in real property, improvements thereto or other
fixed or capital assets hereafter acquired (or, in the case of improvements, constructed) by
the Borrowers or any Subsidiary; provided that (i) such security interests secure
Indebtedness permitted by Section 6.01, (ii) such security interests are incurred, and the
Indebtedness secured thereby is created, within 90 days after such acquisition (or
construction) and (iii) such security interests do not apply to any other property or assets
of any Loan Party;



77









 






     (i) judgment Liens securing judgments not constituting an Event of Default under
Article VII;




     (j) any interest or title of a lessor or sublessor under any lease entered into by a
Loan Party in the ordinary course of business and covering only the assets so leased;




     (k) Liens securing the Indebtedness of the Borrowers under the Term Loan Agreement and
Indebtedness of the Subsidiary Guarantors under any Guarantees in respect of the Term Loan
Agreement as long as such Indebtedness is permitted under Section 6.01(f);




     (l) Liens on cash deposits and other funds maintained with a depositary institution, in
each case arising in the ordinary course of business by virtue of any statutory or common
law provision relating to banker’s liens; provided that (i) the applicable deposit
account is not a dedicated cash collateral account and is not subject to restrictions
against access by any Loan Party in excess of those set forth in regulations promulgated by
the Board and (ii) the applicable deposit account is not intended by any Loan Party to
provide collateral or security to the applicable depositary institution or any other person;



          (m) Liens on cash or deposit accounts to secure letters of credit incurred in connection with
the Existing Credit Facility; and





     (n) Liens reflected on any mortgagee policy of title insurance issued on or prior to
the Closing Date in favor of Administrative Agent or the Lenders in connection with the
Mortgages.



     SECTION 6.03 Sale and Lease-Back Transactions. Enter into any arrangement, directly
or indirectly, with any person whereby it shall sell or transfer any property, real or personal or
mixed, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent
or lease such property or other property which it intends to use for substantially the same purpose
or purposes as the property being sold or transferred unless (a) the sale of such property is
permitted by Section 6.05 and (b) any Capital Lease Obligations or Liens arising in connection
therewith are permitted by Sections 6.01 and 6.02, respectively.



     SECTION 6.04 Investments, Loans and Advances. Purchase, hold or acquire any Equity
Interests, evidences of indebtedness or other securities of, make or permit to exist any loans or
advances or capital contributions to, or make or permit to exist any investment or any other
interest in, any other person (all of the foregoing, “Investments”), except:




     (a) Permitted Investments;




     (b) Investments received in connection with the bankruptcy or reorganization of, or
settlement of delinquent accounts and disputes with, customers and suppliers, in each case
in the ordinary course of business;




     (c) the Loan Parties may make loans and advances in the ordinary course of business to
their respective employees so long as the aggregate principal amount thereof



78









 






at any time outstanding (determined without regard to any write-downs or write-offs of
such loans and advances) shall not exceed $200,000;




     (d) Investments existing on the date hereof and set forth on Schedule 6.04;




     (e) extensions of trade credit in the ordinary course of business;




     (f) Investments by a Borrower in another Borrower pursuant to cash management
procedures consistent with those in existence on the Closing Date;




     (g) Investments after the Closing Date in Scotia Pacific in an aggregate amount not to
exceed $5,000,000; and



          (h) in addition to Investments permitted by paragraphs (a) through (g) above, additional
Investments by the Loan Parties so long as the aggregate amount invested, loaned or advanced
pursuant to this paragraph (f) (determined without regard to any write-downs or write-offs of such
investments, loans and advances) does not exceed $500,000 in the aggregate.




     SECTION 6.05 Mergers, Consolidations, Sales of Assets and Acquisitions.



          (a) Merge into or consolidate with any other person, or permit any other person to merge into
or consolidate with it, or liquidate or dissolve, or sell, transfer, lease, issue or otherwise
dispose of (in one transaction or in a series of transactions) all or substantially all the assets
(whether now owned or hereafter acquired) of any Loan Party or any of the Equity Interests of any
Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of
transactions) all or any substantial part of the assets of any other person, except for (i) the
purchase and sale by the Borrowers or any Subsidiary of inventory in the ordinary course of
business, (ii) the sale or discount by the Borrowers or any Subsidiary in each case without
recourse and in the ordinary course of business of overdue accounts receivable arising in the
ordinary course of business, but only in connection with the compromise or collection thereof
consistent with customary industry practice (and not as part of any bulk sale or financing
transaction), and (iii) if at the time thereof and immediately after giving effect thereto no Event
of Default or Default shall have occurred and be continuing, (x) the merger or consolidation of any
wholly owned Subsidiary into or with a Borrower in a transaction in which a Borrower is the
surviving corporation, (y) the merger or consolidation of any wholly owned Subsidiary into or with
any other wholly owned Subsidiary in a transaction in which the surviving entity is a wholly owned
Subsidiary and no person other than a Borrower or a wholly owned Subsidiary receives any
consideration.




          (b) Engage in any Asset Sale other than (i) the sale of Specified Assets set forth on Schedule
5.14 and covered by Section 5.14 above and (ii) in addition to Asset Sales permitted under clause
(i) above, the sale of assets set forth on Schedule 6.05(b) in aggregate amount for all such Asset
Sales not to exceed $6,000,000 so long as (x) the cash consideration for each such Asset Sale is
not less than 90% of the sale price of the asset being sold, (y) the total consideration for each
such Asset Sale is for consideration at least equal to the fair market value of the asset being
sold and (z) no Event of Default shall exist at the time of such Asset Sale.




     SECTION 6.06 Restricted Payments; Restrictive Agreements.



79









 





          (a) Declare or make, or agree to declare or make, directly or indirectly, any Restricted
Payment, or incur any obligation (contingent or otherwise) to do so; provided,
however, that (i) any Subsidiary may declare and pay dividends or make other distributions
ratably to its equity holders, (ii) so long as no Event of Default or Default shall have occurred
and be continuing or would result therefrom, PALCO may, or may make distributions to Holdings so
that Holdings may, repurchase its Equity Interests owned by employees of Holdings, PALCO or the
Subsidiaries or make payments to employees of Holdings, PALCO or the Subsidiaries upon termination
of employment in connection with the exercise of stock options, stock appreciation rights or
similar equity incentives or equity based incentives pursuant to management incentive plans or in
connection with the death or disability of such employees in an aggregate amount not to exceed for
all of this clause (ii) $250,000 in any fiscal year, (iii) the Borrowers may make Restricted
Payments to Holdings (x) in amount not to exceed $25,000 in any fiscal year to the extent necessary
to pay general corporate and overhead expenses incurred by Holdings in the ordinary course of
business and (y) in an amount necessary to pay the Tax liabilities of Holdings directly
attributable to (or arising as a result of) the operations of the Borrowers and the Subsidiaries;
provided that (A) the amount of such dividends pursuant to clause (iii)(y) shall not exceed
the amount that the Borrowers and the Subsidiaries would be required to pay in respect of Federal,
State and local Taxes were the Borrowers and the Subsidiaries to pay such Taxes as stand-alone
taxpayers and (B) all Restricted Payments made to Holdings pursuant to clause (iii) shall be used
by Holdings for the purpose specified herein within 20 days of the receipt thereof and (iv)
consummate transactions pursuant to the agreements listed on Schedule 6.07 (other than the
declaration of payment of a dividend or similar payment) consistent with past practices.




          (b) Enter into, incur or permit to exist any agreement or other arrangement that prohibits,
restricts or imposes any condition upon (i) the ability of Holdings or any Loan Party to create,
incur or permit to exist any Lien upon any of its property or assets intended to serve as
Collateral, or (ii) the ability of any Subsidiary to pay dividends or other distributions with
respect to any of its Equity Interests or to make or repay loans or advances to any Loan Party or
to Guarantee Indebtedness of any Loan Party; provided that (A) the foregoing shall not
apply to restrictions and conditions imposed by law or by any Loan Document, (B) the foregoing
shall not apply to customary restrictions and conditions contained in agreements relating to the
sale of a Subsidiary pending such sale, provided such restrictions and conditions apply
only to the Subsidiary that is to be sold and such sale is permitted hereunder, (C) the foregoing
shall not apply to restrictions and conditions imposed on any Subsidiary that is not a Loan Party
(D) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by any
agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or
conditions apply only to the property or assets securing such Indebtedness, (E) clause (i) of the
foregoing shall not apply to restrictions or conditions imposed by the Term Loan Agreement and (F)
clause (i) of the foregoing shall not apply to customary provisions in leases and other contracts
restricting the assignment thereof.




     SECTION 6.07 Transactions with Affiliates. Sell or transfer any property or assets
to, or purchase or acquire any property or assets from, or otherwise engage in any other
transactions with, any of its Affiliates, except that (a) any Loan Party may engage in any of the
foregoing transactions in the ordinary course of business at prices and on terms and conditions not
less favorable to the any Loan Party than could be obtained on an arm’s-length basis from



80









 







unrelated third parties, (b) Restricted Payments may be made to the extent provided in Section
6.06 and (c) the transactions pursuant to the agreements described on Schedule 6.07 may be
consummated consistent with past practices.



     SECTION 6.08 Business of the Borrowers and Subsidiaries; Limitation on Hedging
Agreements.



          (a) With respect to the Loan Parties, engage at any time in any business or business activity
other than the business conducted by it as of the date hereof and business activities reasonably
incidental thereto.




          (b) Enter into any Hedging Agreement other than (a) any such agreement or arrangement entered
into in the ordinary course of business and consistent with prudent business practice to hedge or
mitigate risks to which the Borrowers or any Subsidiary is exposed in the conduct of its business
or the management of its liabilities or (b) any such agreement entered into to hedge against
fluctuations in interest rates or currency incurred in the ordinary course of business and
consistent with prudent business practice; provided that in each case such agreements or
arrangements shall not have been entered into for speculation purposes.




     SECTION 6.09 Other Indebtedness and Agreements.



          (a) Permit any waiver, supplement, modification or amendment, termination or release of any
indenture, instrument or agreement pursuant to which any Material Indebtedness of any Loan Party
(other than, to the extent permitted under the terms of the Intercreditor Agreement, Material
Indebtedness pursuant to the Term Loan Agreement) is outstanding if the effect of such waiver,
supplement, modification or amendment, termination or release would materially increase the
obligations of the obligor or confer additional material rights on the holder of such Indebtedness
in a manner adverse to such Loan Party or the Lenders.




          (b) (i) Make any distribution, whether in cash, property, securities or a combination
thereof, other than regular scheduled payments of principal and interest as and when due (to the
extent not prohibited by applicable subordination provisions), in respect of, or pay, or offer or
commit to pay, or directly or indirectly redeem, repurchase, retire or otherwise acquire for
consideration, or set apart any sum for the aforesaid purposes, any Indebtedness, except (A) the
payment of the Indebtedness created hereunder or under the Term Loan Agreement, (B) refinancings of
Indebtedness permitted by Section 6.01 and (C) the payment of secured Indebtedness that becomes due
as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness,
or (ii) pay in cash any amount in respect of any Indebtedness or preferred Equity Interests that
may at the obligor’s option be paid in kind or in other securities.




     SECTION 6.10 Capital Expenditures. Permit the aggregate amount of Capital
Expenditures made by the Borrowers and the Subsidiaries in any period set forth below to exceed the
amount set forth below for such period:



81









 




	 	 	 	 	 
	Period	 	Amount
	Fiscal Year 2006
	 	$	6,800,000	 
	 
	 	 	 	 
	Fiscal Year 2007
	 	$	3,200,000	 
	 
	 	 	 	 
	Fiscal Year 2008
	 	$	4,400,000	 
	 
	 	 	 	 
	Fiscal Year 2009
	 	$	3,000,000	 
	 
	 	 	 	 
	Fiscal Year 2010
	 	$	4,000,000	 
	 
	 	 	 	 
	Fiscal Year 2011
	 	$	4,000,000	 
	 
	
          SECTION 6.11 Minimum Combined EBITDA. Permit the Combined EBITDA for the three (3)
month period then ended at the end of any fiscal quarter set forth below to be less than the amount
set forth opposite such fiscal quarter set forth below:

	 
	Period Ending	 	Amount
	September 30, 2006
	 	($	3,858,000	)
	 
	 	 	 	 
	December 31, 2006
	 	($	363,000	)
	 
	 	 	 	 
	March 31, 2007
	 	$	342,000	 
	 
	 	 	 	 
	June 30, 2007
	 	$	5,049,000	 
	 
	 	 	 	 
	September 30, 2007
	 	$	3,104,000	 
	 
	 	 	 	 
	December 31, 2007
	 	$	4,665,000	 
	 
	 	 	 	 
	March 31, 2008
	 	$	1,755,000	 
	 
	 	 	 	 
	June 30, 2008
	 	$	2,825,000	 
	 
	 	 	 	 
	September 30, 2008
	 	$	3,411,000	 
	 
	 	 	 	 
	December 31, 2008
	 	$	4,949,000	 
	 
	 	 	 	 
	March 31, 2009
	 	$	1,942,000	 
	 
	 	 	 	 
	June 30, 2009
	 	$	3,147,000	 
	 
	 	 	 	 
	September 30, 2009
	 	$	3,912,000	 
	 
	 	 	 	 
	December 31, 2009
	 	$	5,159,000	 
	 
	 	 	 	 
	March 31, 2010
	 	$	1,942,000	 






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	Period Ending	 	Amount
	June 30, 2010
	 	$	3,147,000	 
	 
	 	 	 	 
	September 30, 2010
	 	$	3,912,000	 
	 
	 	 	 	 
	December 31, 2010
	 	$	5,159,000	 
	 
	 	 	 	 
	March 31, 2011
	 	$	1,942,000	 
	 
	 	 	 	 
	June 30, 2011 each fiscal quarter ending thereafter
	 	$	3,147,000	 
	 
	     SECTION 6.12 Maximum Combined Total Leverage Ratio. Permit the Combined Total
Leverage Ratio at the end of any fiscal quarter set forth below to be greater than the amount set
forth opposite such fiscal quarter set forth below:

	 
	Period Ending	 	Combined Total Leverage Ratio
	December 31, 2007
	 	 	7.34	 
	 
	 	 	 	 
	March 31, 2008
	 	 	5.51	 
	 
	 	 	 	 
	June 30, 2008
	 	 	6.02	 
	 
	 	 	 	 
	September 30, 2008
	 	 	6.47	 
	 
	 	 	 	 
	December 31, 2008
	 	 	4.76	 
	 
	 	 	 	 
	March 31, 2009
	 	 	3.28	 
	 
	 	 	 	 
	June 30, 2009
	 	 	2.76	 
	 
	 	 	 	 
	September 30, 2009
	 	 	2.82	 
	 
	 	 	 	 
	December 31, 2009
	 	 	2.44	 
	 
	 	 	 	 
	March 31, 2010
	 	 	3.04	 
	 
	 	 	 	 
	June 30, 2010
	 	 	2.62	 
	 
	 	 	 	 
	September 30, 2010
	 	 	2.78	 
	 
	 	 	 	 
	December 31, 2010
	 	 	2.44	 
	 
	 	 	 	 
	March 31, 2011
	 	 	3.04	 
	 
	 	 	 	 
	June 30, 2011 and each fiscal quarter ending
thereafter
	 	 	2.62	 






83









 






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



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






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



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     SECTION 6.15 The Salmon Creek Transaction. It is expressly agreed that the Salmon
Creek Transaction is consented to and approved for all purposes by the Administrative Agent and the
Lenders, and shall not be deemed for any purpose to violate any provisions hereof or of the Loan
Documents; provided, however, that the Borrowers shall notify the Administrative Agent at least
five (but not more than twenty) Business Days prior to the consummation of the Salmon Creek
Transaction (and at such time the Borrowers shall provide the Administrative Agent copies of all
relevant documentation relating thereto). Upon the consummation of the Salmon Creek Transaction,
Salmon Creek shall cease to be a “Subsidiary” and a “Loan Party” as defined herein, and shall cease
to be a “Grantor” as defined in the Security Documents, provided that:



                       (a) the Administrative Agent shall have received evidence that (i) all of the assets of Salmon
Creek (other than the Salmon Creek CD) have been transferred from Salmon Creek to PALCO and (ii)
all of the membership interests in Salmon Creek have been transferred from PALCO to Holdings; and



                       (b) immediately after the consummation of the Salmon Creek Transaction, the Administrative
Agent shall have a first priority Lien on all of the assets that were held by Salmon Creek
immediately prior to the Salmon Creek Transaction (other than the Salmon Creek CD), subject only to
Liens permitted by Section 6.02.



              The parties hereto agree to execute and deliver any amendments or other documents or
agreements as may be necessary (or reasonably requested by the Administrative Agent) to implement,
effectuate or evidence any or all of the foregoing.




     SECTION 6.16 Right to Cure. Notwithstanding anything to the contrary contained in
this Article 6, in the event that any Loan Party would otherwise be in default of any
financial covenant set forth in this Section 6, until ten (10) days following delivery of the
financial statements to Administrative Agent in accordance with Section 5.04(a) or Section 5.04(b)
with respect to any fiscal period ending on or prior to March 31, 2007, Palco shall have the right
to borrow money from Holdings (which shall be evidenced by the Subordinated Intercompany Note) so
long as no mandatory payments thereon are required prior to 180 days after the Maturity Date, in an
aggregate amount no greater than what is necessary to cure such default (collectively, the
“Cure Right”), and upon the receipt by Palco of such cash (the “Cure Amount”)
pursuant to the exercise of such Cure Right such financial covenants shall be recalculated giving
effect to the following adjustments:



          (i) Combined EBITDA shall be increased for the most recently ended fiscal quarter for which
such financial covenant is tested (but in no event shall such increased amount be multiplied for
purposes of annualizing Combined EBITDA), solely for the purpose of measuring the financial
covenants and not for any other purpose under this Agreement, by an amount equal to the Cure
Amount; and




          (ii) if, after giving effect to the foregoing recalculation, the Loan Parties shall then be
in compliance with the requirements of all financial covenants set forth in this Article 6
hereof, the Loan Parties shall be deemed to have satisfied the requirements thereof as of the
relevant date of determination with the same effect as though there had been no failure to comply




85









 







therewith at such date, and the applicable breach or default thereof which had occurred shall
be deemed cured for all purposes of the Agreement; and




          (iii) to the extent that the Cure Amount is used to repay Indebtedness, such Indebtedness
shall not be deemed to have been repaid for purposes of calculating Combined Total Leverage Ratio
for the period with respect to the applicable measuring period.




          Notwithstanding anything to the contrary contained herein, the aggregate amount of the Cure
Amount for any fiscal period shall not exceed $1,000,000.




ARTICLE VII.




EVENTS OF DEFAULT




          In case of the happening of any of the following events (“Events of Default”):




          (a) any representation or warranty made or deemed made in or in connection with any Loan
Document or the Borrowings or issuances of Letters of Credit hereunder, or any representation,
warranty, statement or information contained in any report, certificate, financial statement or
other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have
been false or misleading in any material respect when so made, deemed made or furnished;




          (b) default shall be made in the payment of any principal of any Loan or the reimbursement
with respect to any L/C Disbursement when and as the same shall become due and payable, whether at
the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof in
accordance with the Loan Documents;




          (c) default shall be made in the payment of any interest on any Loan or L/C Disbursement or
any Fee or any other amount (other than an amount referred to in (b) above) due under any Loan
Document, when and as the same shall become due and payable, and such default shall continue
unremedied for a period of three Business Days;




          (d) default shall be made in the due observance or performance by any Loan Party of any
covenant, condition or agreement contained in Section 5.01(a), 5.02 (other than a default which
arises as a result of the downgrade in the rating of an insurance carrier), 5.05 or 5.08 or in
Article VI;




          (e) default shall be made in the due observance or performance by any Loan Party of any
covenant, condition or agreement contained in Section 5.04(c), 5.04(h), 5.04(i) or 5.04(j) and such
default shall continue unremedied for a period of 5 days;




          (f) default shall be made in the due observance or performance by any Loan Party or Holdings
of any covenant, condition or agreement contained in any Loan Document (other than those specified
in clauses (b), (c) or (d) above) and such default shall continue unremedied for a period of 30
days;




86









 








          (g) any Loan Party shall (i) fail to pay any principal or interest, regardless of amount, due
in respect of any Material Indebtedness, when and as the same shall become due and payable, or (ii)
any other event or condition occurs that results in any Material Indebtedness becoming due prior to
its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse
of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its
or their behalf to cause any Material Indebtedness to become due, or to require the prepayment,
repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided
that this clause (ii) shall not apply to secured Indebtedness that becomes due as a result of the
voluntary sale or transfer of the property or assets securing such Indebtedness;




          (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in
a court of competent jurisdiction seeking (i) relief in respect of any Loan Party (other than
Salmon Creek), or of a substantial part of the property or assets of any Loan Party (other than
Salmon Creek), under Title 11 of the United States Code, as now constituted or hereafter amended,
or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii)
the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official
for any Loan Party (other than Salmon Creek)or for a substantial part of the property or assets of
any Loan Party (other than Salmon Creek)or (iii) the winding-up or liquidation of any Loan Party
(other than Salmon Creek); and such proceeding or petition shall continue undismissed for 60 days
or an order or decree approving or ordering any of the foregoing shall be entered;




          (i) any Loan Party (other than Salmon Creek)shall (i) voluntarily commence any proceeding or
file any petition seeking relief under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or
similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate
manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or
consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar
official for any Loan Party (other than Salmon Creek)or for a substantial part of the property or
assets of any Loan Party (other than Salmon Creek), (iv) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (v) make a general assignment
for the benefit of creditors or (vi) become unable, admit in writing its inability or fail
generally to pay its debts as they become due;




          (j) one or more judgments for the payment of money in an aggregate amount in excess of
$5,000,000 or other judgments that, individually or in the aggregate, would reasonably be expected
to result in a Material Adverse Effect shall be rendered against any Loan Party or any combination
thereof and the same shall remain undischarged for a period of 30 consecutive days during which
execution shall not be effectively stayed, or any action shall be legally taken by a judgment
creditor to levy upon assets or properties of any Loan Party to enforce any such judgment;




          (k) an ERISA Event described in clause (b) of the definition thereof shall have occurred or
any other ERISA Event shall have occurred that, when taken together with all other such ERISA
Events, would reasonably be expected to result in liability of any Loan Party and their ERISA
Affiliates in an aggregate amount exceeding $5,000,000;




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          (l) any Guarantee under the Guarantee and Collateral Agreement for any reason shall cease to
be in full force and effect (other than in accordance with its terms), or any Guarantor shall deny
that it has any further liability under its Guarantee (other than as a result of the discharge of
such Guarantor in accordance with the terms of the Loan Documents);




          (m) any Lien purported to be created under any Security Document shall cease to be, or shall
be asserted by any Loan Party or Holdings not to be, a valid, perfected and, with respect to the
Secured Parties, first priority (except as otherwise expressly provided in this Agreement or such
Security Document) Lien on any material Collateral covered thereby, except to the extent that any
such loss of perfection or priority results from the failure of the Administrative Agent to
maintain possession of certificates representing Equity Interests pledged under the Guarantee and
Collateral Agreement; or




          (n) there shall have occurred a Change in Control;



then, and in every such event (other than an event with respect to any Loan Party described in
paragraph (h) or (i) above), and at any time thereafter during the continuance of such event either
or both of the following actions may be taken: (i) the Administrative Agent may, and at the request
of the Required Lenders with respect to the Facility shall, by notice to the Administrative
Borrower, terminate forthwith the Revolving Credit Commitments and the Swingline Commitment and
(ii) the Administrative Agent may, and at the request of the Required Lenders shall, by notice to
the Administrative Borrower, declare the Loans then outstanding to be forthwith due and payable in
whole or in part, whereupon the principal of the Loans so declared to be due and payable, together
with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the
Borrowers accrued hereunder and under any other Loan Document, shall become forthwith due and
payable, without presentment, demand, protest or any other notice of any kind, all of which are
hereby expressly waived by the Borrowers, anything contained herein or in any other Loan Document
to the contrary notwithstanding, and the Administrative Agent shall have the right to take all or
any actions and exercise any remedies available to a secured party under the Security Documents or
applicable law or in equity; and in any event with respect to any Loan Party described in paragraph
(h) or (i) above, the Revolving Credit Commitments and the Swingline Commitment shall automatically
terminate and the principal of the Loans then outstanding, together with accrued interest thereon
and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder and under
any other Loan Document, shall automatically become due and payable, without presentment, demand,
protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers,
anything contained herein or in any other Loan Document to the contrary notwithstanding, and the
Administrative Agent shall have the right to take all or any actions and exercise any remedies
available to a secured party under the Security Documents or applicable law or in equity.




ARTICLE VIII.




THE ADMINISTRATIVE AGENT AND THE ARRANGER




          Each of the Lenders hereby irrevocably appoints the Administrative Agent its agent and
authorizes the Administrative Agent to take such actions on its behalf and to exercise




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such powers as are delegated to the Administrative Agent by the terms of the Loan Documents,
together with such actions and powers as are reasonably incidental thereto. Without limiting the
generality of the foregoing, the Administrative Agent is hereby expressly authorized by the Lenders
to execute any and all documents (including releases and the Security Documents) with respect to
the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and
in accordance with the provisions of this Agreement and the Security Documents.




          The Administrative Agent hereunder shall have the same rights and powers in its capacity as a
Lender as any other Lender and may exercise the same as though it were not the Administrative
Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally
engage in any kind of business with Holdings, the Borrowers or any Subsidiary or any of their
respective Affiliates as if it were not the Administrative Agent hereunder.




          The Administrative Agent shall not have any duties or obligations except those expressly set
forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the
Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of
whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any
duty to take any discretionary action or exercise any discretionary powers, except discretionary
rights and powers expressly contemplated hereby that the Administrative Agent is required to
exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as
shall be necessary under the circumstances as provided in Section 9.08), and (c) except as
expressly set forth in the Loan Documents, the Administrative Agent shall not have any duty to
disclose, nor shall it be liable for the failure to disclose, any information relating to Holdings,
the Borrowers or any of the Subsidiaries that is communicated to or obtained by the bank serving as
the Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall
not be liable for any action taken or not taken by it with the consent or at the request of the
Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the
circumstances as provided in Section 9.08) or in the absence of its own gross negligence or willful
misconduct. The Administrative Agent shall not be deemed to have knowledge of any Default unless
and until written notice thereof is given to the Administrative Agent by Holdings, the Borrowers or
a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain
or inquire into (i) any statement, warranty or representation made in or in connection with any
Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder
or in connection therewith, (iii) the performance or observance of any of the covenants, agreements
or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability,
effectiveness or genuineness of any Loan Document or any other agreement, instrument or document,
or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document,
other than to confirm receipt of items expressly required to be delivered to the Administrative
Agent.




          The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for
relying upon, any notice, request, certificate, consent, statement, instrument, document or other
writing believed by it to be genuine and to have been signed or sent by the proper person. The
Administrative Agent may also rely upon any statement made to it orally or by telephone and
believed by it to have been made by the proper person, and shall not incur any liability for
relying thereon. The Administrative Agent may consult with legal counsel (who




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may be counsel for Holdings or the Borrowers), independent accountants and other experts
selected by it, and shall not be liable for any action taken or not taken by it in accordance with
the advice of any such counsel, accountants or experts.




          The Administrative Agent may perform any and all its duties and exercise its rights and powers
by or through any one or more sub-agents appointed by it. The Administrative Agent and any such
sub-agent may perform any and all its duties and exercise its rights and powers by or through their
respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to
any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent,
and shall apply to their respective activities in connection with the syndication of the credit
facilities provided for herein as well as activities as the Administrative Agent.




          Subject to the appointment and acceptance of a successor Administrative Agent as provided
below, the Administrative Agent may resign at any time by notifying the Lenders and the Borrowers.
Upon any such resignation of the Administrative Agent, the Required Lenders shall have the right,
in consultation with the Borrowers, to appoint a successor. If no successor shall have been so
appointed by the Required Lenders and shall have accepted such appointment within 30 days after the
retiring Administrative Agent gives notice of its resignation, then the retiring Administrative
Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank
with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its
appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and
become vested with all the rights, powers, privileges and duties of the retiring Administrative
Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations
hereunder. The fees payable by the Borrowers to a successor Administrative Agent shall be the same
as those payable to its predecessor unless otherwise agreed between the Borrowers and such
successor. After an Administrative Agent’s resignation hereunder, the provisions of this Article
and Section 9.05 shall continue in effect for the benefit of such retiring Administrative Agent,
its sub-agents and their respective Related Parties in respect of any actions taken or omitted to
be taken by any of them while acting as the Administrative Agent.




          The Arranger, in its capacity as such, shall have no duties or responsibilities, and shall
incur no liability, under this Agreement or any other Loan Document.




          Each Lender acknowledges that it has, independently and without reliance upon the
Administrative Agent, the Arranger, or any Lender and based on such documents and information as it
has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.
Each Lender also acknowledges that it will, independently and without reliance upon the
Administrative Agent, the Arranger, or any Lender and based on such documents and information as it
shall from time to time deem appropriate, continue to make its own decisions in taking or not
taking action under or based upon this Agreement or any other Loan Document, any related agreement
or any document furnished hereunder or thereunder.




          To the extent required by any applicable law, the Administrative Agent may withhold from any
interest payment to any Lender an amount equivalent to any applicable withholding tax. If the
Internal Revenue Service or any other Governmental Authority asserts a




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claim that the Administrative Agent did not properly withhold tax from amounts paid to or for
the account of any Lender because the appropriate form was not delivered or was not properly
executed or because such Lender failed to notify the Administrative Agent of a change in
circumstance which rendered the exemption from, or reduction of, withholding tax ineffective or for
any other reason, such Lender shall indemnify the Administrative Agent fully for all amounts paid,
directly or indirectly, by the Administrative Agent as tax or otherwise, including any penalties or
interest and together with all expenses (including legal expenses, allocated internal costs and
out-of-pocket expenses) incurred.




ARTICLE IX.




MISCELLANEOUS




     SECTION 9.01 Notices. Notices and other communications provided for herein shall be
in writing and shall be delivered by hand or overnight courier service, mailed by certified or
registered mail or sent by fax, as follows:




	 	(a)	 	if to the Administrative Borrower, to
	 
	 	 	 	The Pacific Lumber Company

125 Main Street

P.O. Box 37

Scotia, CA 95565

Attention: Gary L. Clark

Fax No. (707) 764 4269
	 
	 	(b)	 	if to the Administrative Agent, to
	 
	 	 	 	Marathon Structured Finance Fund L.P.

461 Fifth Avenue

New York, New York 10017

Attention: Palco Account Officer

Telecopy No.: (212) 381-4499






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




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




     SECTION 9.02 Survival of Agreement. All covenants, agreements, representations and
warranties made herein and in the certificates or other instruments prepared



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or delivered in connection with or pursuant to this Agreement or any other Loan Document shall
be considered to have been relied upon by the Lenders and shall survive the making by the Lenders
of the Loans and the issuance of Letters of Credit by the Issuing Bank, regardless of any
investigation made by the Lenders or on their behalf, and shall continue in full force and effect
as long as the principal of or any accrued interest on any Loan or any Fee or any other amount
payable under this Agreement or any other Loan Document is outstanding and unpaid or any Letter of
Credit is outstanding and so long as the Commitments have not been terminated. The provisions of
Sections 2.14, 2.16, 2.20 and 9.05 shall remain operative and in full force and effect regardless
of the expiration of the term of this Agreement, the consummation of the transactions contemplated
hereby, the repayment of any of the Loans, the expiration of the Commitments, the expiration of any
Letter of Credit, the invalidity or unenforceability of any term or provision of this Agreement or
any other Loan Document or any investigation made by or on behalf of the Administrative Agent, the
Arranger, any Lender or the Issuing Bank.




     SECTION 9.03 Binding Effect. This Agreement shall become effective when it shall have
been executed by each of the parties hereto and when the Administrative Agent shall have received
counterparts hereof which, when taken together, bear the signatures of each of the other parties
hereto.



     SECTION 9.04 Successors and Assigns.



          (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall
be deemed to include the permitted successors and assigns of such party; and all covenants,
promises and agreements by or on behalf of the Borrowers, the Administrative Agent or the Lenders
that are contained in this Agreement shall bind and inure to the benefit of their respective
successors and assigns.




          (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights
and obligations under this Agreement (including all or a portion of its Commitment and the Loans at
the time owing to it); provided, however, that (i) the Administrative Agent must
give its prior written consent to such assignment (which consent shall not be unreasonably withheld
or delayed), (ii) in the case of any assignment of a Revolving Credit Commitment, each of the
Swingline Lender and the Borrower must give its prior written consent to such assignment (which
consent shall not be unreasonably withheld or delayed); provided that the consent of the
Borrowers shall not be required to any such assignment, (iii) the amount of the Commitment of the
assigning Lender subject to each such assignment (determined as of the date the Assignment and
Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be
less than $1,000,000 (or, if less, the entire remaining amount of such Lender’s Commitment) and
shall be in an amount that is an integral multiple of $1,000,000 (or the entire remaining amount of
such Lender’s Commitment), (iv) the parties to each such assignment shall execute and deliver to
the Administrative Agent an Assignment and Acceptance (such Assignment and Acceptance to be
manually executed and delivered together with a processing and recordation fee of $3,500 payable to
the Administrative Agent and (v) the assignee, if it shall not be a Lender immediately prior to the
assignment, shall deliver to the Administrative Agent an Administrative Questionnaire. Upon
acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the
effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a
party hereto and, to the




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extent of the interest assigned by such Assignment and Acceptance, have the rights and
obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the
extent of the interest assigned by such Assignment and Acceptance, be released from its obligations
under this Agreement (and, in the case of an Assignment and Acceptance covering all or the
remaining portion of an assigning Lender’s rights and obligations under this Agreement, such Lender
shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections
2.14, 2.16, 2.20 and 9.05, as well as to any Fees accrued for its account and not yet paid).




          (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder
and the assignee thereunder shall be deemed to confirm to and agree with each other and the other
parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial
owner of the interest being assigned thereby free and clear of any adverse claim and that its
Commitment, and the outstanding balances of its Loans, in each case without giving effect to
assignments thereof which have not become effective, are as set forth in such Assignment and
Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or
warranty and assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with this Agreement, or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any
other instrument or document furnished pursuant hereto, or the financial condition of Holdings, the
Borrowers or any Subsidiary or the performance or observance by Holdings, the Borrowers or any
Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other
instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that
it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms
that it has received a copy of this Agreement, together with copies of the most recent financial
statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other
documents and information as it has deemed appropriate to make its own credit analysis and decision
to enter into such Assignment and Acceptance; (v) such assignee will independently and without
reliance upon the Administrative Agent, the Arranger, such assigning Lender or any other Lender and
based on such documents and information as it shall deem appropriate at the time, continue to make
its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee
appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Administrative Agent by the
terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such
assignee agrees that it will perform in accordance with their terms all the obligations which by
the terms of this Agreement are required to be performed by it as a Lender.




          (d) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall
maintain at one of its offices a copy of each Assignment and Acceptance delivered to it and a
register for the recordation of the names and addresses of the Lenders, and the Commitment of, and
principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time
(the “Register”). The entries in the Register shall be conclusive and the Borrowers, the
Administrative Agent, and the Lenders may treat each person whose name is recorded in the Register
pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement,
notwithstanding notice to the contrary. The Register shall be




93









 







available for inspection by the Borrowers, and any Lender, at any reasonable time and from
time to time upon reasonable prior notice.




          (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning
Lender and an assignee, an Administrative Questionnaire completed in respect of the assignee
(unless the assignee shall already be a Lender hereunder) and the written consent of the Swingline
Lender and the Administrative Agent to such assignment, the Administrative Agent shall (i) accept
such Assignment and Acceptance, (ii) record the information contained therein in the Register and
(iii) give prompt notice thereof to the Lenders and the Swingline Lender. No assignment shall be
effective unless it has been recorded in the Register as provided in this paragraph (e).




          (f) Each Lender may without the consent of the Borrowers, the Swingline Lender, the Issuing
Bank or the Administrative Agent sell participations to one or more banks or other entities in all
or a portion of its rights and obligations under this Agreement (including all or a portion of its
Commitment and the Loans); provided, however, that (i) such Lender’s obligations
under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to
the other parties hereto for the performance of such obligations, (iii) the participating banks or
other entities shall be entitled to the benefit of the cost protection provisions contained in
Sections 2.14, 2.16 and 2.20 to the same extent as if they were Lenders (but, with respect to any
particular participant, to no greater extent than the Lender that sold the participation to such
participant) and (iv) the Borrowers, the Administrative Agent and the Lenders shall continue to
deal solely and directly with such Lender in connection with such Lender’s rights and obligations
under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the
Borrowers relating to the Loans or L/C Disbursements and to approve any amendment, modification or
waiver of any provision of this Agreement (other than amendments, modifications or waivers
decreasing any fees payable hereunder or the amount of principal of or the rate at which interest
is payable on the Loans, extending any scheduled principal payment date or date fixed for the
payment of interest on the Loans, increasing or extending the Commitments or releasing any
Guarantor or all or any substantial part of the Collateral).




          (g) Any Lender or participant may, in connection with any assignment or participation or
proposed assignment or participation pursuant to this Section 9.04, disclose to the assignee or
participant or proposed assignee or participant any information relating to the Borrowers furnished
to such Lender by or on behalf of the Borrowers; provided that, prior to any such
disclosure of information designated by the Borrowers as confidential, each such assignee or
participant or proposed assignee or participant shall execute an agreement whereby such assignee or
participant shall agree (subject to customary exceptions) to preserve the confidentiality of such
confidential information on terms no less restrictive than those applicable to the Lenders pursuant
to Section 9.16.




          (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to
secure extensions of credit to such Lender or in support of obligations owed by such Lender;
provided that no such assignment shall release a Lender from any of its obligations
hereunder or substitute any such assignee for such Lender as a party hereto.




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          (i) Notwithstanding anything to the contrary contained herein, any Lender (a “Granting
Lender”) may grant to a special purpose funding vehicle (an “SPC”), identified as such
in writing from time to time by the Granting Lender to the Administrative Agent and the Borrowers,
the option to provide to the Borrowers all or any part of any Loan that such Granting Lender would
otherwise be obligated to make to the Borrowers pursuant to this Agreement; provided that
(i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC
elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the
Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a
Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent,
and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no
SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all
liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each
party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that,
prior to the date that is one year and one day after the payment in full of all outstanding
commercial paper or other senior indebtedness of any SPC, it will not institute against, or join
any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement,
insolvency or liquidation proceedings under the laws of the United States or any State thereof. In
addition, notwithstanding anything to the contrary contained in this Section 9.04, any SPC may (i)
with notice to, but without the prior written consent of, the Borrowers and the Administrative
Agent and without paying any processing fee therefor, assign all or a portion of its interests in
any Loans to the Granting Lender or to any financial institutions (consented to by the Borrowers
and Administrative Agent) providing liquidity and/or credit support to or for the account of such
SPC to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any
non-public information relating to its Loans to any rating agency, commercial paper dealer or
provider of any surety, guarantee or credit or liquidity enhancement to such SPC.




          (j) The Borrowers shall not assign or delegate any of its rights or duties hereunder without
the prior written consent of the Administrative Agent and each Lender, and any attempted assignment
without such consent shall be null and void.




     SECTION 9.05 Expenses; Indemnity.



          (a) The Borrowers agree, to pay all out-of-pocket costs and expenses incurred by the
Administrative Agent, the Arranger and the Swingline Lender in connection with the syndication of
the Facility and the preparation and administration of this Agreement and the other Loan Documents
or in connection with any amendments, modifications or waivers of the provisions hereof or thereof
(whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred
by the Administrative Agent, the Arranger or any Lender in connection with the enforcement or
protection of its rights in connection with this Agreement and the other Loan Documents or in
connection with the Loans made or Letters of Credit issued hereunder, including in each case the
fees, disbursements and other charges of counsel, Latham & Watkins LLP and Winston & Strawn LLP,
for the Arranger and the Administrative Agent, and, in connection with any such enforcement or
protection, the reasonable fees, disbursements and other charges of any counsel for the
Administrative Agent, the Arranger or any Lender.




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          (b) The Borrowers agree to indemnify the Administrative Agent, the Arranger, each Lender and
each Related Party of any of the foregoing persons (each such person being called an
“Indemnitee”) against, and to hold each Indemnitee harmless from, any and all losses,
claims, damages, liabilities and related costs and expenses, including reasonable counsel fees,
disbursements and other charges, incurred by or asserted against any Indemnitee arising out of, in
any way connected with, or as a result of (i) the execution or delivery of this Agreement or any
other Loan Document or any agreement or instrument contemplated thereby, the performance by the
parties thereto of their respective obligations thereunder or the consummation of the Transactions
and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans or
issuances of Letters of Credit, (iii) any claim, litigation, investigation or proceeding relating
to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) any actual or
alleged presence or Release of Hazardous Materials on any property owned or operated by any Loan
Party, or any Environmental Liability related in any way to any Loan Party; provided that
such indemnity shall not, as to any Indemnitee, be available to the extent that such losses,
claims, damages, liabilities or related costs and expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from primarily the gross
negligence or willful misconduct of such Indemnitee (and, upon any such determination, any
indemnification payments with respect to such losses, claims, damages, liabilities or related costs
and expenses previously received by such Indemnitee shall be subject to reimbursement by such
Indemnitee).




          (c) To the extent that the Borrowers fail to pay any amount required to be paid by them to the
Administrative Agent, the Arranger, or the Swingline Lender under paragraph (a) or (b) of this
Section, each Lender severally agrees to pay to the Administrative Agent, the Arranger, or the
Swingline Lender, as the case may be, such Lender’s pro rata share (determined as of the time that
the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount;
provided that the unreimbursed expense or indemnified loss, claim, damage, liability or
related expense, as the case may be, was incurred by or asserted against the Administrative Agent,
the Arranger, or the Swingline Lender in its capacity as such.




          (d) To the extent permitted by applicable law, neither of the Borrowers shall assert, and each
hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect,
consequential or punitive damages (as opposed to direct or actual damages) arising out of, in
connection with, or as a result of, this Agreement or any agreement or instrument contemplated
hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.




          (e) The Administrative Agent may, at its option, from time to time, at any time on or after an
Event of Default and for so long as the same is continuing or upon any other failure of a condition
precedent to the Loans and Letter of Credit Accommodations hereunder, make such disbursements and
advances (“Special Agent Advances”) which Administrative Agent, in its sole discretion, (i) deems
necessary or desirable either to preserve or protect the Collateral or any portion thereof or (ii)
to enhance the likelihood or maximize the amount of repayment by any Loan Party of the Loans and
other Obligations or (iii) to pay any other amount chargeable to any Loan Party pursuant to the
terms of this Agreement or any of the other Loan Documents consisting of costs, fees and expenses
and payments to any issuer of Letters of Credit. Special Agent Advances shall be repayable on
demand and be secured by the Collateral.




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Special Agent Advances shall constitute Obligations hereunder. Each Lender agrees that it
shall make available to the Administrative Agent, upon the Administrative Agent’s demand, in
immediately available funds, the amount equal to such Lender’s Pro Rata Percentage of each such
Special Agent Advance. If such funds are not made available to the Administrative Agent by such
Lender, the Administrative Agent shall be entitled to recover such funds, on demand from such
Lender together with interest thereon for each day from the date such payment was due until the
date such amount is paid to the Administrative Agent at the Federal Funds Rate for each day during
such period (as published by the Federal Reserve Bank of New York or at the Administrative Agent’s
option based on the arithmetic mean determined by Agent of the rates for the last transaction in
overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of the
three leading brokers of Federal funds transactions in New York City selected by Agent) and if such
amounts are not paid within three (3) days of the Administrative Agent’s demand, at the Alternative
Base Rate plus the Applicable Margin.




          (f) The provisions of this Section 9.05 shall remain operative and in full force and effect
regardless of the expiration of the term of this Agreement, the consummation of the Transactions or
the other transactions contemplated hereby, the repayment of any of the Loans, the expiration of
the Commitments, the expiration of any Letter of Credit, the invalidity or unenforceability of any
term or provision of this Agreement or any other Loan Document, or any investigation made by or on
behalf of the Administrative Agent, the Arranger, any Lender or the Issuing Bank. All amounts due
under this Section 9.05 shall be payable on written demand therefor.




     SECTION 9.06 Right of Setoff. If an Event of Default shall have occurred and be
continuing, each Lender is hereby authorized at any time and from time to time, except to the
extent prohibited by law, to set off and apply any and all deposits (general or special, time or
demand, provisional or final) at any time held and other indebtedness at any time owing by such
Lender to or for the credit or the account of the Borrowers against any of and all the obligations
of the Borrowers now or hereafter existing under this Agreement and other Loan Documents held by
such Lender, irrespective of whether or not such Lender shall have made any demand under this
Agreement or such other Loan Document and although such obligations may be unmatured. The rights
of each Lender under this Section 9.06 are in addition to other rights and remedies (including
other rights of setoff) which such Lender may have.



     SECTION 9.07 Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN
AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED
BY THE LAWS OF THE STATE OF NEW YORK.



     SECTION 9.08 Waivers; Amendment.



          (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or
right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or discontinuance of
steps to enforce such a right or power, preclude any other or further exercise thereof or the
exercise of any other right or power. The rights and remedies of the Administrative Agent and the
Lenders hereunder and under the other Loan Documents are




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cumulative and are not exclusive of any rights or remedies that they would otherwise have. No
waiver of any provision of this Agreement or any other Loan Document or consent to any departure by
the Borrowers or any other Loan Party therefrom shall in any event be effective unless the same
shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only
in the specific instance and for the purpose for which given. No notice or demand on the Borrowers
in any case shall entitle the Borrowers to any other or further notice or demand in similar or
other circumstances.




          (b) Neither this Agreement, any other Loan Document, nor any provision hereof or thereof may
be waived, amended or modified except pursuant to an agreement or agreements in writing entered
into by the Borrowers and the Required Lenders; provided, however, that no such
agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled
principal payment date or date for the payment of any interest on any Loan or any date for
reimbursement of an L/C Disbursement, or waive or excuse any such payment or any part thereof, or
decrease the rate of interest on any Loan or L/C Disbursement, without the prior written consent of
each Lender affected thereby, (ii) increase or extend the Commitment or decrease or extend the date
for payment of any Fees of any Lender without the prior written consent of such Lender, (iii) amend
or modify the pro rata requirements of Section 2.17, the provisions of Section 9.04(j), the
provisions of this Section or the definition of the term “Required Lenders,” or release any
Guarantor, without the prior written consent of each Lender, (iv) release all or any substantial
part of the Collateral without the prior written consent of each Lender, or (v) modify the
protections afforded to an SPC pursuant to the provisions of Section 9.04(i) without the written
consent of such SPC; provided further that no such agreement shall amend, modify or
otherwise affect the rights or duties of the Administrative Agent, the Swingline Lender, or the
Arranger hereunder or under any other Loan Document without the prior written consent of the
Administrative Agent, the Swingline Lender, or Arranger, as applicable.




     SECTION 9.09 Interest Rate Limitation. Notwithstanding anything herein to the
contrary, if at any time the interest rate applicable to any Loan or participation in any Letter of
Credit Guaranty, together with all fees, charges and other amounts which are treated as interest on
such Loan or participation in such Letter of Credit Guaranty under applicable law (collectively the
“Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) which may be
contracted for, charged, taken, received or reserved by the Lender holding such Loan or
participation in accordance with applicable law, the rate of interest payable in respect of such
Loan or participation hereunder, together with all Charges payable in respect thereof, shall be
limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have
been payable in respect of such Loan or participation but were not payable as a result of the
operation of this Section 9.09 shall be cumulated and the interest and Charges payable to such
Lender in respect of other Loans or participations or periods shall be increased (but not above the
Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal
Funds Effective Rate to the date of repayment, shall have been received by such Lender.



     SECTION 9.10 Entire Agreement. This Agreement, the Fee Letter and the other Loan
Documents constitute the entire contract between the parties relative to the subject matter hereof.
Any other previous agreement among the parties with respect to the subject matter hereof is
superseded by this Agreement and the other Loan Documents. Nothing in this



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Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any
person (other than the parties hereto and thereto, their respective successors and assigns
permitted hereunder and, to the extent expressly contemplated hereby, the Related Parties of each
of the Administrative Agent, the Arranger and the Lenders ) any rights, remedies, obligations or
liabilities under or by reason of this Agreement or the other Loan Documents.




     SECTION 9.11 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY
OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD
NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT
AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS
SECTION 9.11.



     SECTION 9.12 Severability. In the event any one or more of the provisions contained
in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in
any respect, the validity, legality and enforceability of the remaining provisions contained herein
and therein shall not in any way be affected or impaired thereby (it being understood that the
invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect
the validity of such provision in any other jurisdiction). The parties shall endeavor in
good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid
provisions the economic effect of which comes as close as possible to that of the invalid, illegal
or unenforceable provisions.



     SECTION 9.13 Counterparts. This Agreement may be executed in counterparts (and by
different parties hereto on different counterparts), each of which shall constitute an original but
all of which when taken together shall constitute a single contract, and shall become effective as
provided in Section 9.03. Delivery of an executed signature page to this Agreement or of a Lender
Addendum by facsimile transmission shall be as effective as delivery of a manually signed
counterpart of this Agreement.



     SECTION 9.14 Headings. Article and Section headings and the Table of Contents used
herein are for convenience of reference only, are not part of this Agreement and are not to affect
the construction of, or to be taken into consideration in interpreting, this Agreement.



     SECTION 9.15 Jurisdiction; Consent to Service of Process.



          (a) Each of the Borrowers hereby irrevocably and unconditionally submits, for itself and its
property, to the nonexclusive jurisdiction of any New York State court or Federal court of the
United States of America sitting in New York City, and any appellate court from any thereof, in any
action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or
for recognition or enforcement of any judgment, and each of the




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parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in such New York State or, to the extent
permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by
suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall
affect any right that the Administrative Agent, the Arranger or any Lender may otherwise have to
bring any action or proceeding relating to this Agreement or the other Loan Documents against the
Borrowers or their properties in the courts of any jurisdiction.




          (b) Each of the Borrowers hereby irrevocably and unconditionally waives, to the fullest extent
it may legally and effectively do so, any objection which it may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or
the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby
irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to
the maintenance of such action or proceeding in any such court.




          (c) Each party to this Agreement irrevocably consents to service of process in the manner
provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party
to this Agreement to serve process in any other manner permitted by law.




     SECTION 9.16 Confidentiality. Each of the Administrative Agent and the Lenders agrees
to maintain the confidentiality of the Information, except that Information may be disclosed (a) to
its and its Affiliates’ officers, directors, employees and agents, including accountants, legal
counsel and other advisors (it being understood that the persons to whom such disclosure is made
will be informed of the confidential nature of such Information and instructed to keep such
Information confidential), (b) to the extent requested by any regulatory authority or
quasi-regulatory authority (such as the National Association of Insurance Commissioners), (c) to
the extent required by applicable laws or regulations or by any subpoena or similar legal process,
(d) in connection with the exercise of any remedies hereunder or under the other Loan Documents or
any suit, action or proceeding relating to the enforcement of its rights hereunder or thereunder,
(e) subject to an agreement containing provisions substantially the same as those of this Section
9.16, to (i) any actual or prospective assignee of or participant in any of its rights or
obligations under this Agreement and the other Loan Documents or (ii) any actual or prospective
counterparty (or its advisors) to any swap or derivative transaction relating to any Loan Party or
any of their respective obligations, (f) with the consent of the Borrowers or (g) to the extent
such Information becomes publicly available other than as a result of a breach of this Section
9.16. For the purposes of this Section, “Information” shall mean all information received
from the Borrowers and related to the Borrowers or their business, other than any such information
that was available to the Administrative Agent or any Lender on a nonconfidential basis prior to
its disclosure by Holdings or the Borrowers; provided that, in the case of Information
received from the Borrowers after the date hereof, such information is clearly identified at the
time of delivery as confidential. Any person required to maintain the confidentiality of
Information as provided in this Section 9.16 shall be considered to have complied with its
obligation to do so if such person has exercised the same degree of care to maintain the
confidentiality of such Information as such person would accord its own confidential information.
Notwithstanding any other express or implied agreement, arrangement or understanding to the
contrary, each of the parties hereto agrees that each other party hereto (and each of its
employees, representatives or agents)



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are permitted to disclose to any persons, without limitation, the tax treatment and tax
structure of the Loans and the other transactions contemplated by the Loan Documents and all
materials of any kind (including opinions and tax analyses) that are provided to the Loan Parties,
the Lenders, the Arranger or the Administrative Agent related to such tax treatment and tax
aspects. To the extent not inconsistent with the immediately preceding sentence, this
authorization does not extend to disclosure of any other information or any other term or detail
not related to the tax treatment or tax aspects of the Loans or the transactions contemplated by
the Loan Documents.



     SECTION 9.17 Delivery of Lender Addenda. Each initial Lender shall become a party to
this Agreement by delivering to the Administrative Agent a Lender Addendum duly executed by such
Lender, the Borrower and the Administrative Agent.



     SECTION 9.18 Disclosures. The parties acknowledge and agree that the disclosure of
any matter in the Schedules to the Loan Documents shall not be deemed to constitute an
acknowledgment that the matter is material or is not material for any purpose other than with
respect to the Loan Documents.



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]




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




	 	 	 	 	 
	 	THE PACIFIC LUMBER COMPANY

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



	 	 	 	 	 
	 	BRITT LUMBER CO., INC.

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



	 	 	 	 	 
	 	MARATHON STRUCTURED FINANCE FUND L.P. , as

Administrative Agent and Swingline Lender

 	 
	 	By:  	/s/ LOUIS T. HANOVER
 	 
	 	 	Name:  	LOUIS T. HANOVER 	 
	 	 	Title:  	Authorized Signatory 	 
	 



[Signature Page to PALCO Revolving Credit Agreement]