exv10w2



 








Exhibit 10.2




 





$85,000,000




TERM LOAN 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. DEFINITIONS
	 	 	1	 
	 
	 	 	 	 
	Section 1.01 Defined Terms
	 	 	1	 
	Section 1.02 Terms Generally
	 	 	19	 
	Section 1.03 [Intentionally Omitted]
	 	 	20	 
	Section 1.04 Pro Forma Calculations
	 	 	20	 
	 
	 	 	 	 
	ARTICLE II. THE CREDITS
	 	 	20	 
	 
	 	 	 	 
	Section 2.01 Loans
	 	 	20	 
	Section 2.02 Borrowings
	 	 	20	 
	Section 2.03 [Intentionally Omitted]
	 	 	20	 
	Section 2.04 Repayment of Loans; Evidence of Debt
	 	 	20	 
	Section 2.05 Fees
	 	 	21	 
	Section 2.06 Interest on Loans
	 	 	22	 
	Section 2.07 Default Interest
	 	 	22	 
	Section 2.08 [Intentionally Omitted]
	 	 	22	 
	Section 2.09 Termination of Commitments
	 	 	22	 
	Section 2.10 Conversion and Continuation of Borrowings
	 	 	22	 
	Section 2.11 Repayment of Borrowings
	 	 	23	 
	Section 2.12 Prepayment
	 	 	23	 
	Section 2.13 Mandatory Prepayments
	 	 	24	 
	Section 2.14 Reserve Requirements; Change in Circumstances
	 	 	25	 
	Section 2.15 [Intentionally Omitted]
	 	 	26	 
	Section 2.16 Indemnity
	 	 	26	 
	Section 2.17 Pro Rata Treatment
	 	 	26	 
	Section 2.18 Sharing of Setoffs
	 	 	27	 
	Section 2.19 Payments
	 	 	27	 
	Section 2.20 Taxes
	 	 	28	 
	Section 2.21 Assignment of Commitments Under Certain Circumstances; Duty to Mitigate
	 	 	29	 
	Section 2.22 [Intentionally Omitted]
	 	 	30	 
	Section 2.23 [Intentionally Omitted]
	 	 	30	 
	Section 2.24 Relationship Between the Borrowers
	 	 	30	 
	 
	 	 	 	 
	ARTICLE III. REPRESENTATIONS AND WARRANTIES
	 	 	35	 
	 
	 	 	 	 
	Section 3.01 Organization; Powers
	 	 	35	 
	Section 3.02 Authorization; No Conflicts
	 	 	35	 
	Section 3.03 Enforceability
	 	 	36	 
	Section 3.04 Governmental Approvals
	 	 	36	 
	Section 3.05 Financial Statements
	 	 	36	 
	Section 3.06 No Material Adverse Change
	 	 	36	 






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	 	 	Page
	Section 3.07 Title to Properties; Possession Under Leases
	 	 	36	 
	Section 3.08 Subsidiaries
	 	 	38	 
	Section 3.09 Litigation; Compliance with Laws
	 	 	38	 
	Section 3.10 Agreements
	 	 	39	 
	Section 3.11 Federal Reserve Regulations
	 	 	39	 
	Section 3.12 Investment Company Act; Public Utility Holding Company Act
	 	 	40	 
	Section 3.13 Use of Proceeds
	 	 	40	 
	Section 3.14 Tax Returns
	 	 	40	 
	Section 3.15 No Material Misstatements
	 	 	40	 
	Section 3.16 Employee Benefit Plans
	 	 	40	 
	Section 3.17 Environmental Matters
	 	 	40	 
	Section 3.18 Insurance
	 	 	42	 
	Section 3.19 Security Documents
	 	 	42	 
	Section 3.20 Location of Real Property
	 	 	43	 
	Section 3.21 Labor Matters
	 	 	43	 
	Section 3.22 Liens
	 	 	43	 
	Section 3.23 Intellectual Property
	 	 	43	 
	Section 3.24 Solvency
	 	 	43	 
	Section 3.25 Permits
	 	 	44	 
	Section 3.26 Deposit and Disbursement Accounts
	 	 	44	 
	 
	 	 	 	 
	ARTICLE IV. CONDITIONS OF LENDING
	 	 	44	 
	 
	 	 	 	 
	Section 4.01 All Credit Events
	 	 	44	 
	Section 4.02 First Credit Event
	 	 	45	 
	 
	 	 	 	 
	ARTICLE V. AFFIRMATIVE COVENANTS
	 	 	48	 
	 
	 	 	 	 
	Section 5.01 Existence; Businesses and Properties
	 	 	48	 
	Section 5.02 Insurance
	 	 	48	 
	Section 5.03 Obligations and Taxes
	 	 	48	 
	Section 5.04 Financial Statements, Reports, etc
	 	 	49	 
	Section 5.05 Litigation and Other Notices
	 	 	52	 
	Section 5.06 Information Regarding Collateral
	 	 	52	 
	Section 5.07 Maintaining Records; Access to Properties and Inspections; Environmental Assessments
	 	 	53	 
	Section 5.08 Use of Proceeds
	 	 	54	 
	Section 5.09 Additional Collateral, etc
	 	 	54	 
	Section 5.10 Further Assurances
	 	 	55	 
	Section 5.11 [Intentionally Omitted]
	 	 	55	 
	Section 5.12 Cash Management Systems; Bank Accounts
	 	 	56	 
	Section 5.13 Landlords’ Agreements, Mortgagee Agreements, Bailee Letters and Real Estate Purchases
	 	 	56	 
	Section 5.14 Specified Asset Sales
	 	 	56	 
	 
	 	 	 	 
	ARTICLE VI. NEGATIVE COVENANTS
	 	 	56	 






 ii 




 









 





	 	 	 	 	 
	 	 	Page
	Section 6.01 Indebtedness
	 	 	57	 
	Section 6.02 Liens
	 	 	58	 
	Section 6.03 Sale and Lease-Back Transactions
	 	 	59	 
	Section 6.04 Investments, Loans and Advances
	 	 	59	 
	Section 6.05 Mergers, Consolidations, Sales of Assets and Acquisitions
	 	 	60	 
	Section 6.06 Restricted Payments; Restrictive Agreements
	 	 	60	 
	Section 6.07 Transactions with Affiliates
	 	 	61	 
	Section 6.08 Business of the Borrowers and Subsidiaries; Limitation on Hedging Agreements
	 	 	62	 
	Section 6.09 Other Indebtedness and Agreements
	 	 	62	 
	Section 6.10 Capital Expenditures
	 	 	62	 
	Section 6.11 Minimum Combined EBITDA
	 	 	63	 
	Section 6.12 Maximum Combined Total Leverage Ratio
	 	 	64	 
	Section 6.13 Minimum Combined Fixed Charge Coverage Ratio
	 	 	65	 
	Section 6.14 Fiscal Year
	 	 	65	 
	Section 6.15 The Salmon Creek Transaction
	 	 	66	 
	Section 6.16 Right to Cure
	 	 	66	 
	 
	 	 	 	 
	ARTICLE VII. EVENTS OF DEFAULT
	 	 	67	 
	 
	 	 	 	 
	ARTICLE VIII. THE ADMINISTRATIVE AGENT AND THE ARRANGER
	 	 	69	 
	 
	 	 	 	 
	ARTICLE IX. MISCELLANEOUS
	 	 	72	 
	 
	 	 	 	 
	Section 9.01 Notices
	 	 	72	 
	Section 9.02 Survival of Agreement
	 	 	73	 
	Section 9.03 Binding Effect
	 	 	73	 
	Section 9.04 Successors and Assigns
	 	 	73	 
	Section 9.05 Expenses; Indemnity
	 	 	77	 
	Section 9.06 Right of Setoff
	 	 	78	 
	Section 9.07 Applicable Law
	 	 	78	 
	Section 9.08 Waivers; Amendment
	 	 	78	 
	Section 9.09 Interest Rate Limitation
	 	 	79	 
	Section 9.10 Entire Agreement
	 	 	79	 
	Section 9.11 WAIVER OF JURY TRIAL
	 	 	79	 
	Section 9.12 Severability
	 	 	80	 
	Section 9.13 Counterparts
	 	 	80	 
	Section 9.14 Headings
	 	 	80	 
	Section 9.15 Jurisdiction; Consent to Service of Process
	 	 	80	 
	Section 9.16 Confidentiality
	 	 	81	 
	Section 9.17 Delivery of Lender Addenda
	 	 	81	 
	Section 9.18 Disclosures
	 	 	81	 






 iii 




 









 





Exhibits and Schedules




	 	 	 
	Exhibit A

	 	Form of Administrative Questionnaire
	Exhibit B

	 	[Intentionally Omitted]
	Exhibit C

	 	Form of Assignment and Acceptance
	Exhibit D

	 	[Intentionally Omitted]
	Exhibit E

	 	Form of Lender Addendum
	Exhibit F

	 	Form of Perfection Certificate
	Exhibit G

	 	Form of Exemption Certificate
	Exhibit H

	 	[Intentionally Omitted]
	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 




 









 





          TERM LOAN 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.




DEFINITIONS




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



     “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 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 Borrower” shall have the meaning assigned to such term in Section
2.24(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.



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



     “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 8.75% per annum.



     “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, 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 Loans made, converted or continued on the same date and as to
which a single Interest Period is in effect.



     “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)



2









 







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
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



3









 







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 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.



4









 





     “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.



     “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 each Lender, the commitment, if any, of such
Lender to make Loans 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 (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or
increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04.
The initial aggregate amount of the Commitments is $85,000,000.



     “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.



     “Current Assets” shall mean, at any time, the current assets (other than cash and
Permitted Investments) of the Borrowers on a combined basis.



     “Current Liabilities” shall mean, at any time, the current liabilities of the
Borrowers on a combined basis at such time, but excluding, without duplication, (a) the current
portion of any long-term Indebtedness and (b) outstanding Loans.



     “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.



     “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.



5









 





     “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.



     “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



6









 







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 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.



     “Excess Cash Flow” shall mean, for any fiscal period of the Borrowers, the excess of
(a) the sum, without duplication, of (i) Combined EBITDA for such fiscal period and (ii) the
decrease, if any, in Current Assets minus Current Liabilities from the beginning to the end of such
fiscal period minus (b) the sum, without duplication, of (i) the amount of any Taxes payable in
cash by the Borrowers on a combined basis with respect to such fiscal period, (ii) Combined
Interest Expense for such fiscal period payable in cash, (iii) Capital Expenditures made in cash in
accordance with Section 6.10 during such fiscal period, except to the extent financed with the
proceeds of Indebtedness, equity issuances, casualty proceeds, condemnation proceeds or other
proceeds that would not be included in Combined EBITDA, (iv) permanent repayments of Indebtedness
(other than mandatory prepayments of Loans under Section 2.13) made by the Borrowers on a combined
basis during such fiscal period, but only to the extent that such prepayments by their terms cannot
be reborrowed or redrawn and do not occur in connection with a refinancing of all or any portion of
such Indebtedness and (v) the increase, if any, in Current Assets minus Current Liabilities from
the beginning to the end of such fiscal period.



     “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



7









 







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 Facility” shall mean, collectively, (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.



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



     “Federal Funds Effective Rate” shall mean, for any day, the weighted average of the
rates on overnight Federal funds transactions with members of the Federal Reserve System arranged
by Federal funds brokers, as 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 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 have the meaning assigned to such term in Section 2.05(a).



     “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, 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.



8









 





     “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 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



9









 







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.



     “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 with respect to any 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



10









 







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.



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



     “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.



     “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 “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; provided, additionally, if an interest rate is still not available
pursuant to the foregoing provisions of this definition, “LIBO Rate” shall be the interest rate per
annum reasonably determined by the Administrative Agent as the rate which best approximates a rate
per annum equivalent to the rates described above.



     “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



11









 







(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 the Lenders to the Borrowers pursuant to Sections 2.01.



     “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), 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.



     “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.



12









 





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



     “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.



     “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 Investments” shall mean:



     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



13









 







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;



     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;



     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;



     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;



     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;



     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



     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



14









 







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.



     “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.



     “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.




15










 







     “Required Lenders” shall mean, at any time, Lenders having Loans representing at
least a majority of the sum of all Loans at such time.



     “Required Prepayment Percentage” shall mean (a) in the case of any Asset Sale or
Recovery Event, 100%; (b) in the case of any Equity Issuance, 50%, (c) in the case of any issuance
or other incurrence of Indebtedness, 100%, and (d) in the case of any Excess Cash Flow, 75%.



     “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.



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



     “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 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



16









 




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.



     “Scotia Pacific Bankruptcy” means the happening of any of the following events:



     (a) 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 Scotia Pacific, or of a
substantial part of the property or assets of Scotia Pacific, 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 Scotia Pacific or for a substantial part of the
property or assets of Scotia Pacific or (iii) the winding-up or liquidation of Scotia Pacific, and
such proceeding or petition shall continue undismissed for 60 days; or



     (b) Scotia Pacific 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 (a) above, (iii) apply for or consent to the appointment of a
receiver, trustee, custodian, sequestrator, conservator or similar official for Scotia Pacific or
for a substantial part of the property or assets of Scotia Pacific, (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, and such event or circumstances shall continue
for 60 days; provided, however, that it shall not constitute a “Scotia Pacific
Bankruptcy” if, within 90 days of a voluntary proceeding described in clause (b)(i) above Scotia
Pacific files a proposed plan of reorganization with the applicable bankruptcy court and the
Administrative Agent has received evidence satisfactory to it in its reasonable discretion, that
such proposed plan of reorganization is supported by creditors of Scotia Pacific sufficient to
cause such proposed plan of reorganization to become effective.



     “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



17









 




Kristi Wrigley, et al. v. Charles Hurwitz, et al., State of California, Humboldt County
Superior Court, Case No. DR 9700399.




     “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 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.



     “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.



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



     “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
and the use of proceeds of each of the foregoing, (c) the granting of Liens pursuant to the



18









 




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.




     “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, 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,



19









 




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 [Intentionally Omitted].



     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 Loans. 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 a Loan to the Borrowers on the Closing Date in a principal equal to its Commitment. Amounts
paid or prepaid in respect of Loans may not be reborrowed.



     SECTION 2.02 Borrowings.



          (a) The Loans comprising any Borrowing shall be in an aggregate principal amount that is (i)
an integral multiple of $1,000,000 and not less than $1,000,000 or (ii) equal to the remaining
available balance of the Loans. 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. 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.




          (b) Each Lender shall make each Loan to be made by it hereunder on the Closing Date by wire
transfer of immediately available funds to such account designated by the Administrative Agent, and
the Administrative Agent shall promptly credit the amounts so received to an account in the name of
the applicable Borrowers.




          (c) Notwithstanding any other provision of this Agreement, the Administrative Borrower shall
not be entitled to request any Interest Period which would end after the Maturity Date.




     SECTION 2.03 [Intentionally Omitted].



     SECTION 2.04 Repayment of Loans; Evidence of Debt.



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          (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 as provided in Section 2.11.




          (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 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.



          (a) 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 and/or the Arranger, including pursuant
to the Fee Letter (the “Fees”).




          (b) If on or prior to the fourth anniversary of the Closing Date any Borrower pays after
acceleration or prepays all or any portion of the Loan, whether voluntarily or involuntarily and
whether before or after acceleration of the Obligations, Borrowers shall pay to the Administrative
Agent, for the benefit of Lenders as liquidated damages and compensation for the costs of being
prepared to make funds available hereunder an amount equal to the Applicable Percentage (as defined
below) multiplied by the principal amount of the Loan paid after acceleration or prepaid. As used
herein, the term “Applicable Percentage” shall mean (w) 3%, in the case of a prepayment on or prior
to the first anniversary of the Closing Date, (x) 2%, in the




21









 







case of a prepayment after the first
anniversary of the Closing Date but on or prior to the second anniversary thereof, (y) 1% in the
case of a prepayment 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. The Loan Parties agree that the Applicable Percentages are a
reasonable calculation of Lenders’ lost profits in view of the difficulties and impracticality of
determining actual damages from a prepayment of the Loans. Notwithstanding the foregoing, no
prepayment fee shall be payable by Borrowers upon a mandatory prepayment made pursuant to Section
2.13.




          (c) 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. 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 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.




          (b) Interest on each Loan shall be increased by 2.00% per annum at all times that a Scotia
Pacific Bankruptcy exists.




          (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 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 [Intentionally Omitted].



     SECTION 2.09 Termination of Commitments.
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.



     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 (noon), New York City time, three Business Days prior to conversion or
continuation, to continue any Eurodollar Borrowing of the Borrowers as a Eurodollar Borrowing for
an additional Interest Period and (c) not later than 12:00 (noon), New York City time, three
Business Days prior to conversion, to convert the Interest Period with



22









 




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) regarding the principal amount and maximum number of
Borrowings;




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




               (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.



          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) if such notice requests a conversion, the
date of such conversion (which shall be a Business Day) and (iii) 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 a Eurodollar
Borrowing with an Interest Period of one month’s duration.




     SECTION 2.11 Repayment of Borrowings.



          (a) To the extent not previously paid, all Loans shall be due and payable on the Maturity
Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding
the date of payment.




          (b) All repayments pursuant to this Section 2.11 shall be subject to Section 2.16, but shall
otherwise be without premium or penalty.




     SECTION 2.12 Prepayment.



23









 





          (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), to the Administrative Agent before 12:00 (noon), 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.




          (b) Optional prepayments of Loans shall be applied pro rata to the remaining scheduled
installments thereof.




          (c) 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 Sections 2.05(b) and 2.16. 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) Not later than the third Business Day following the completion of any Asset Sale, sale of
a Specified Asset or the occurrence of any Recovery Event, the Borrowers shall apply the Required
Prepayment Percentage of the Net Cash Proceeds received with respect thereto to prepay outstanding
Loans in accordance with Section 2.13(e); provided, however, that with respect to any Net Cash
Proceeds received from property or casualty insurance relating to Collateral consisting of fixed
assets (other than Specified Assets), the Administrative Agent shall permit, within 180 days of
receipt of such Net Cash Proceeds, the applicable Borrower to use such Net Cash Proceeds, or any
part thereof, to replace, repair, restore or rebuild the relevant fixed assets in a diligent and
expeditious manner with materials and workmanship of substantially the same quality as existed
before the loss, damage or destruction so long as (1) no Default or Event of Default has occurred
and is continuing and (2) the applicable Borrower (i) provides the Administrative Agent and
Required Lenders with plans and specifications for any such repair or restoration which shall be
reasonably satisfactory to the Administrative Agent and the Required Lenders and (ii) demonstrates
to the reasonable satisfaction of the Administrative Agent and the Required Lenders that funds
available to it will be sufficient to complete such project in the manner provided therein.




          (b) In the event and on each occasion that an Equity Issuance occurs, the Borrowers shall,
substantially simultaneously with (and in any event not later than the third Business Day next
following) the occurrence of such Equity Issuance, apply the Required Prepayment Percentage of the
Net Cash Proceeds therefrom to prepay outstanding Loans in accordance with Section 2.13(e).




          (c) In the event that any Loan Party or any subsidiary of a Loan Party shall receive Net Cash
Proceeds from the issuance or other incurrence of Indebtedness of any Loan Party or any subsidiary
of a Loan Party (other than Indebtedness permitted pursuant to Section 6.01), the Borrowers shall,
substantially simultaneously with (and in any event not later than the third Business Day next
following) the receipt of such Net Cash Proceeds by such Loan




24









 







Party or such subsidiary, apply an
amount equal to the Required Prepayment Percentage of such Net Cash Proceeds to prepay outstanding
Loans in accordance with Section 2.13(e).




          (d) No later than the earlier of (i) 45 days after the end of each fiscal quarter of the
Borrowers, commencing with the fiscal quarter ending on September 30, 2006, and (ii) the date on
which the financial statements with respect to such period are delivered pursuant to Section
5.04(a), the Borrowers shall prepay outstanding Loans in accordance with Section 2.13(e), in an
aggregate principal amount equal to the Required Prepayment Percentage of Excess Cash Flow for the
four fiscal quarter period then ended.




          (e) Mandatory prepayments of outstanding Loans under this Agreement shall be applied to then
outstanding principal balance of the Loans.




     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




               (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,


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
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 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 or the Administrative Agent’s capital or on the capital of such Lender’s or the
Administrative Agent’s holding company, if any, as a consequence of this Agreement or the Loans
made by such Lender to a level below that which such Lender or 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.




25









 








          (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
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 [Intentionally Omitted].



     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
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 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 required under Section 2.15, each
Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest



26









 




on the Loans, and each conversion of any Borrowing to or continuation of any Borrowing 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). 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 as a result of which the unpaid
principal portion of its Loans shall be proportionately less than the unpaid principal portion of
the Loans 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 of such other Lender, so that the aggregate unpaid principal amount of
the Loans and participations in Loans held by each Lender shall be in the same proportion to the
aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its
Loans prior to such exercise of banker’s lien, setoff or counterclaim or other event was to the
principal amount of all Loans 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 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 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 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 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.

27









 









     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 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




28









 








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.




          (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,
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


29









 








interest accrued to the date of such payment on the outstanding Loans 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.




          (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 [Intentionally Omitted].



     SECTION 2.23 [Intentionally Omitted].



     SECTION 2.24 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 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 disbursement instruction, report,

30









 








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 2.24 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 2.24
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 2.24 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 2.24 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 2.24 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 2.24 or giving rise to any limitation, impairment or discharge of
any Borrower’s liability hereunder, but subject to the provisions of Section 2.24 (i) renew,
extend, accelerate or otherwise change the time, place, manner or terms of 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

31









 








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 2.24 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 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

32









 








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 2.24 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 2.24, 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 2.24.




     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 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



33









 




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 2.24 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 2.24 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, 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 2.24 to the contrary
notwithstanding, the obligations of each Borrower under this Section 2.24 shall be limited to a
maximum aggregate amount equal to the largest amount that would not render its 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





34










 






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 2.24 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 2.24, together desire to allocate
among themselves (collectively, the “Contributing Guarantors”), in a fair and equitable
manner, their obligations arising under this Section 2.24 and the Related Guaranties. Accordingly,
in the event any payment or distribution is made on any date by any Borrower under this Section
2.24 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 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



35









 







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.



          (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



36









 







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.



          (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.



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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 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.



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          (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 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 was or
will be incurred for the purpose of purchasing or carrying any Margin Stock. Following the
application of the proceeds of the Loans, 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
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.



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     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.



     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.



     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.



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          (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 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.




41









 








     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 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



42









 







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 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.



43









 





     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 are subject to the satisfaction of the following
conditions:



     SECTION 4.01 All Credit Events. On the date of each Borrowing (each such event being
called a “Credit Event”):



          (a) 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.



          (b) 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 (a) and (b) of this Section 4.01.



44









 





     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 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



45









 







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.



          (g) Intentionally Omitted.



          (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 Revolving Credit 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.



46









 





          (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.



          (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 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 (as
defined in the Revolving Credit Agreement) 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.



47









 





          (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, each of the Borrowers will, and will cause each of the Loan Parties
to:



     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



48









 







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, who will deliver to 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 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



49









 







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, 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) 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;



50









 





          (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 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 provided to third parties); and



          (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



51









 







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;



          (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 (as defined in the Revolving Credit
Agreement) 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



52









 







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
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) [Intentionally Omitted]



          (c) 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



53









 







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 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 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, 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



54









 







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 advisable to grant to the
Administrative Agent (subject only to Liens permitted by Section 6.02), 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 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].



55









 





     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 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.
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




56









 





     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, 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 Revolving Credit Agreement in an aggregate
principal amount not to exceed $60,000,000 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



57









 







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 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;



58









 





          (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 Revolving Credit Agreement and
Indebtedness of the Subsidiary Guarantors under any Guarantees in respect of the Revolving Credit
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 in 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 at any



59









 







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.



60









 





          (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 Revolving Credit 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



61









 







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 Revolving Credit 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:



62









 





	 	 	 	 	 
	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	 






63









 






	 	 	 	 	 
	Period Ending	 	Amount
	March 31, 2010
	 	$	1,942,000	 
	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 and 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	 






64









 






     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.



65









 





     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
therewith at



66









 







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 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 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 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;



          (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



67









 







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;



          (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



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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, 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 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



69









 







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 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.



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          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 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



71









 







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. (a) Except as provided in Section 9.01(b), 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:




	 	(i)	 	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




	 	(ii)	 	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




          (iii) 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.




          (b) Administrative Borrower hereby agrees, unless directed otherwise by the Administrative
Agent, that it will, or will cause its Subsidiaries to, provide to the Administrative Agent or
unless the electronic mail address referred to below has not been provided by the Administrative
Agent to the Administrative Borrower all information, documents and other materials that it is
obligated to furnish to the Administrative Agent pursuant to the Loan



72









 







Documents, including all notices, requests, financial statements, financial and other reports,
certificates and other information materials, but excluding any such communication that (i) is or
relates to Section 2.10, (ii) relates to the payment of any principal or other amount due under
this Agreement prior to the scheduled date therefor, (iii) provides notice of any Default or Event
of Default under this Agreement or any other Loan Document or (iv) is required to be delivered to
satisfy any condition precedent to the effectiveness of this Agreement and/or the Borrowing (all
such non-excluded communications being referred to herein collectively as
“Communications”), by transmitting the Communications in an electronic/soft medium that is
properly identified in a format acceptable to the Administrative Agent to an electronic mail
address designated by Administrative Agent from time to time. In addition, Administrative Borrower
agrees, and agrees to cause its Subsidiaries, to continue to provide the Communications to the
Administrative Agent or the Lenders, as the case may be, in the manner specified in the Loan
Documents but only to the extent requested by the Administrative Agent. Administrative Borrower
further agrees that the Administrative Agent may make the Communications available to the Lenders
by posting the Communications on Intralinks or a substantially similar electronic transmission
system.



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



     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



73









 







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) unless the Administrative Agent shall
otherwise agree, 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), (iii) 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 (iv) the
assignee, if it shall not be a Lender immediately prior to the assignment, shall deliver to the
Administrative Agent an Administrative Questionnaire and applicable tax forms. 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 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



74









 







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 absent manifest error
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 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 and applicable tax forms completed in
respect of the assignee (unless the assignee shall already be a Lender hereunder) and the written
consent of 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. 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 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 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



75









 







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.



          (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.



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     SECTION 9.05 Expenses; Indemnity.



          (a) The Borrowers agree, to pay all out-of-pocket costs and expenses incurred by the
Administrative Agent and the Arranger 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,
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.



          (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, (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, or the Arranger, under paragraph (a) or (b) of this Section, each Lender
severally agrees to pay to the Administrative Agent or the Arranger, 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 or the Arranger, 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)



77









 







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 the use of the proceeds thereof.



          (e) 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 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 or any Lender. 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 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



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maturity of or any scheduled principal payment date or date for the payment of any interest on
any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest
on any Loan, 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
or the Arranger hereunder or under any other Loan Document without the prior written consent of the
Administrative Agent 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, together with all fees, charges
and other amounts which are treated as interest on such Loan 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 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



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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 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.



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          (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) 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.



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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 a Lender
and Administrative Agent	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	/s/ LOUIS T. HANOVER	 	 
	 

	 	 	 	 	 	 
	 	 	Name: LOUIS T. HANOVER	 	 
	 	 	Title: Authorized Signatory