Document:

Exhibit
10.1

 

EXECUTION COPY

 

FINANCING AGREEMENT

 

Dated as
of March 12, 2004

 

CELLU
TISSUE LLC

COASTAL
PAPER COMPANY

CELLU
TISSUE CORPORATION – NATURAL DAM

CELLU
TISSUE CORPORATION – NEENAH

MENOMINEE
ACQUISITION CORPORATION

INTERLAKE
ACQUISITION CORPORATION LIMITED

 

as
Borrowers

 

and

 

CELLU
TISSUE, HOLDINGS, INC.

VAN PAPER
COMPANY

VAN
TIMBER COMPANY

 

as
Initial Guarantors

 

CELLU
PAPER HOLDINGS, INC.

 

as
Parent

 

and

 

THE
LENDERS PARTY HERETO

 

and

 

THE CIT
GROUP/BUSINESS CREDIT, INC., 

as
Agent

 

 

TABLE
OF CONTENTS

 

	
  ARTICLE I

  	
  Definitions, Interpretation and Accounting
  Terms

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE II

  	
  Conditions Precedent

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE III

  	
  Revolving Loans

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IV

  	
  Prepayments and Commitment Reductions

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE V

  	
  Letters of Credit

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VI

  	
  Collateral Matters

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VII

  	
  Representations, Warranties and Covenants

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE VIII

  	
  Interest, Fees and Expenses

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE IX

  	
  Powers

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE X

  	
  Events of Default and Remedies

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XI

  	
  Termination

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XII

  	
  Miscellaneous

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XIII

  	
  Agreement between the Lenders

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XIV

  	
  Agency

  	
   

  
	
   

  	
   

  	
   

  
	
  ARTICLE XV

  	
  Guaranty

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  EXHIBITS

  	
   

  
	
   

  	
   

  
	
  Exhibit A – Form of USD
  Revolving Note

  	
   

  
	
  Exhibit B – Form of CDN
  Revolving Note

  	
   

  
	
  Exhibit C – Form of
  Borrowing Base Certificate

  	
   

  
	
  Exhibit D – Form of
  Assignment and Transfer Agreement

  	
   

  
	
  Exhibit E-1 – Form of
  Domestic Pledge and Security Agreement

  	
   

  
	
  Exhibit E-2 – Form of
  Canadian Pledge and Security Agreement

  	
   

  
	
  Exhibit F-1 – Form of Landlord
  Waiver

  	
   

  
	
  Exhibit F-2 – Form of
  Canadian Landlord Waiver

  	
   

  
	
  Exhibit G – Form of
  Notice of Borrowing

  	
   

  
	
  Exhibit H – Form of
  Notice of Continuation/Conversion

  	
   

  
	
  Exhibit I – Form of
  Request for Extension of Scheduled Termination Date

  	
   

  
	
  Exhibit J – Form of
  Intercompany Promissory Note

  	
   

  
	
   

  	
   

  
	
  SCHEDULES

  	
   

  
	
   

  	
   

  
	
  Schedule 1 –
  Commitments

  	
   

  
	
  Schedule 2 –
  Existing Liens

  	
   

  
	
  Schedule 3 –
  Existing Indebtedness

  	
   

  
	
  Schedule 4 – Real
  Estate

  	
   

  
	
  Schedule 5 –
  Investments

  	
   

  
	
  Schedule 6 –
  Restrictive Agreements

  	
   

  
	
  Schedule 7 –
  Subsidiaries

  	
   

  
	
  Schedule 8 –
  Litigation

  	
   

  

 

i

 

	
  Schedule 9 – Labor
  Matters

  	
   

  
	
  Schedule 10 –
  ERISA Matters

  	
   

  
	
  Schedule 11 –
  Environmental Matters

  	
   

  
	
  Schedule 12 –
  Intellectual Property

  	
   

  
	
  Schedule 13 –
  Rental Payments

  	
   

  
	
  Schedule 14 –
  Material Contracts

  	
   

  
	
  Schedule 15 –
  Existing Letters of Credit

  	
   

  
	
   

  	
   

  
	
  ANNEXES

  	
   

  
	
   

  	
   

  
	
  Annex A –
  Representations and Warranties

  	
   

  
	
  Annex B – Financial
  Covenants

  	
   

  

 

ii

 

 

FINANCING
AGREEMENT, dated
as of March 12, 2004, among CELLU TISSUE LLC,
a Delaware limited liability company (“CT LLC”), COASTAL PAPER COMPANY, a Virginia partnership (“Coastal Paper”), CELLU TISSUE CORPORATION –
NATURAL DAM, a Delaware corporation (“Natural Dam”),
CELLU TISSUE CORPORATION – NEENAH, a
Delaware corporation (“Neenah”), MENOMINEE ACQUISITION CORPORATION, a Delaware corporation (“Menominee” and together with CT LLC, Coastal Paper, Natural
Dam and Neenah, the foregoing collectively, the “US Borrowers”)
and INTERLAKE ACQUISITION CORPORATION LIMITED,
a corporation organized under the laws of Nova Scotia, Canada (the “Canadian Borrower” and together with the US Borrowers,
collectively, and as further defined below, the “Borrowers”),
CELLU TISSUE HOLDINGS, INC., a Delaware
corporation (“Cellu Tissue”), VAN PAPER COMPANY, a Mississippi corporation (“VPC”), and VAN TIMBER COMPANY,
a Mississippi corporation (“VTC” and
together with Cellu Tissue and VPC, the “Initial Guarantors”),
as Guarantors (as further defined below), CELLU PAPER HOLDINGS, INC.,
a Delaware corporation (“Parent”), THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation,
with offices located at 1211 Avenue of the Americas, 22nd Floor, New York, NY
10036 (“CIT”), CIT
FINANCIAL LIMITED, an Ontario (Canada) corporation, with offices
located at 207 Queens Quay West, Suite 700, Toronto, Ontario, Canada M5J 1A7 (“CIT Financial”) and any other party which now or hereafter
becomes a Lender hereunder pursuant to Article XIII
hereof (individually, each a “Lender” and
collectively the “Lenders”) and CIT, in its capacity as agent for the Lenders (as further
defined below, the “Agent”).

 

ARTICLE I

 

DEFINITIONS,
INTERPRETATION AND ACCOUNTING TERMS

 

Section 1.1                                   Defined
Terms

 

As used in this
Financing Agreement, the following terms have the following meanings (such
meanings to be applicable to both the singular and plural forms of the terms
defined):

 

Accounts shall mean all of each Loan Party’s now
existing and future:  (a) accounts
(as defined in the UCC or the PPSA, as applicable), and any and all other
receivables (whether or not specifically listed on schedules furnished to the
Agent), including, without limitation, all accounts created by, or arising
from, all of each of the Loan Parties’ sales, leases, rentals of goods or renditions
of services to their customers, including but not limited to, those accounts
arising under any of the Loan Parties’ trade names or styles, or through any of
the Loan Parties’ divisions; (b) any and all instruments, documents,
chattel paper (including electronic chattel paper) (all as defined in the UCC
or, if applicable, the PPSA to the extent so defined); (c) unpaid seller’s
or lessor’s rights (including rescission, replevin, reclamation, repossession
and stoppage in transit) relating to the foregoing or arising therefrom;
(d) rights to any goods represented by any of the foregoing, including
rights to returned, reclaimed or repossessed goods; (e) reserves and credit
balances arising in connection with or pursuant hereto; (f) guaranties, supporting
obligations, payment intangibles and letter-of-credit rights (all as defined in
the UCC or, if applicable, the PPSA to the extent so defined);
(g) insurance policies or rights relating to any of the foregoing;
(h) general intangibles (as defined in the UCC or the PPSA, as applicable)
pertaining to any and all of the foregoing (including all rights to payment,
including those arising in connection with bank and non-bank credit cards), and
including books and records and any electronic media and software thereto;
(i) notes, deposits or property of account debtors securing the
obligations of any such account debtors to the Loan Parties or any one of them;
and (j) cash and non-cash proceeds (as defined in the UCC or the PPSA, as
applicable) of any and all of the foregoing.

 

Administrative
Management Fee
shall mean the sum of $40,000 per year which shall be paid to the Agent in
accordance with Section 8.8 hereof to offset
the expenses and costs (excluding

 

 

Out-of-Pocket Expenses and auditor fees) of the Agent in connection
with administration, record keeping, analyzing and evaluating the Collateral.

 

Administrative Services Agreements shall mean, collectively,
each Cellu Tissue Management Agreement and each Purchasing Agreement.

 

Affiliate shall mean, with respect to any Person,
any other Person which, directly or indirectly, controls, is controlled by or
is under common control with such Person, each general partner or joint
venturer of such Person, and each Person who is the beneficial owner of 10% or
more of the voting Stock of such Person. 
For the purposes of this definition, “control” means the possession of
the power to direct or cause the direction of management and policies of such
Person, whether through the ownership of voting Stock, by contract or otherwise.

 

Affected
Lender shall
have the meaning specified in Section 8.22(b).

 

Agent shall have the meaning specified in the
preamble to this Financing Agreement; provided, however, that (a) in respect of
the provisions of Article III (Revolving Loans),
Article VIII (Interest, Fees and Expenses),
Article XII (Miscellaneous), Article XIII (Agreement between the
Lenders) and Article XIV (Agency),
“Agent” shall mean CIT Financial in so
far as such provisions relate to the Canadian Revolving Sub-Line of Credit and
(b) in respect of Article XIV (Agency) in so
far as such provisions relate to the Collateral and any other provisions in
this Financing Agreement or any other Loan Document that relate to Collateral,
the “Agent” shall mean CIT and/or any
Affiliate thereof approved by CIT (including without limitation, CIT
Financial).

 

Aggregate
Revolving Loan Amount shall mean the maximum amount which would not result in the aggregate
amount of the outstanding US Revolving Loans and the Dollar Equivalent of the
aggregate amount of the outstanding Canadian Revolving Loans, determined on a
daily basis, to exceed the Revolving Line of Credit.

 

Anniversary
Date  shall mean the Initial Anniversary Date
and the same date in every year thereafter.

 

Applicable
Margin shall
mean (a) during the period commencing on the Closing Date and ending on the
date that is 3 Business Days after the date upon which the Agent receives the
Borrowers’ annual consolidated financial statements for the twelve month period
ending February 28, 2005 required to be delivered pursuant to Section 7.8(c), (i) with respect to all outstanding USD
Revolving Loans maintained as (x) Chase Bank Rate Loans, a rate equal to one
half of one percent (0.50%) per annum and (y) LIBOR Loans, a rate equal to two
and three quarters percent (2.75%) per annum, and (ii) with respect to all
outstanding Canadian Revolving Loans maintained as (x) Canadian Prime Rate
Loans, a rate equal to one and two tenths percent (1.20%) per annum and
(y) BA Rate Loans, a rate equal to two and ninety-five one hundredths
percent (2.95%) per annum and (b) thereafter, as of any date of
determination, a rate per annum equal to the rate set forth below opposite the
applicable type of Loan and the then applicable Total Funded Debt Ratio set
forth below:

 

2

 

	
   

  	
   

  	
  USD Revolving Loans

  	
   

  	
  CDN Revolving Loans

  	
   

  
	
  Total
  Funded Debt Ratio

  	
   

  	
  Chase Bank

  Rate Loans

  	
   

  	
  LIBOR Loans

  	
   

  	
  Canadian Prime

  Rate Loans

  	
   

  	
  BA Rate

  Loans

  	
   

  
	
  Less
  than 3.75 to 1.0

  	
   

  	
  0.00

  	
   

  	
  2.25

  	
  %

  	
  0.70

  	
  %

  	
  2.45

  	
  %

  
	
  Less
  than 4.5 to 1.0 and equal to or greater than 3.75 to 1.0

  	
   

  	
  0.25

  	
  %

  	
  2.50

  	
  %

  	
  0.95

  	
  %

  	
  2.70

  	
  %

  
	
  Less
  than 5.25 and equal to or greater than 4.5 to 1.0

  	
   

  	
  0.50

  	
  %

  	
  2.75

  	
  %

  	
  1.20

  	
  %

  	
  2.95

  	
  %

  
	
  Less
  than 6.0 to 1 and equal to or greater than or equal to 5.25 to 1.0

  	
   

  	
  0.75

  	
  %

  	
  3.00

  	
  %

  	
  1.45

  	
  %

  	
  3.20

  	
  %

  
	
  Greater
  than or equal to 6.0 to 1.0

  	
   

  	
  1.00

  	
  %

  	
  3.25

  	
  %

  	
  1.70

  	
  %

  	
  3.45

  	
  %

  

 

Applicable
Taxes shall
have the meaning specified in Section 8.20(a).

 

Approved
Fund shall
mean any Fund that is advised or managed by (a) a Lender, (b) an
affiliate of a Lender or (c) an entity or affiliate of an entity that
administers or manages a Lender.

 

Assignment
and Transfer Agreement shall mean the Assignment and Transfer Agreement in
the form of Exhibit D hereto.

 

Availability shall mean, at any time of calculation,
the amount by which the lesser of (a) the Revolving Line of Credit and
(b) the Borrowing Base exceeds the outstanding aggregate amount of
all of the Borrowers’ Obligations as Borrowers, including without limitation,
all of such Borrowers’ Obligations with respect to Revolving Loans owing by the
Borrowers and Letters of Credit or Letter of Credit Guaranties issued for their
respective accounts.

 

Availability
Cure Date
shall mean the first Business Day following the expiration of an Availability
Event Cure Period.

 

Availability
Event shall
mean a period of at least 5 consecutive Business Days during which the
Availability under the Revolving Line of Credit shall be less than $15,000,000.

 

Availability
Event Cure Period shall mean a period of at least 30 consecutive days following the
occurrence of an Availability Event during which the Availability under the
Revolving Line of Credit shall equal or exceed $15,000,000 (as shall be
certified by the Borrowers to the Agent with calculations (in reasonable detail)
to support such certification).

 

Availability
Event Period
shall mean, with respect to any Availability Event, the period of days
commencing on the date on which the applicable Availability Event has occurred
and ending on the Availability Cure Date.

 

Availability
Reserve shall
mean, collectively (and without duplication), the sum of (i) Rent Reserve plus
(ii) any applicable Dilution Reserve plus (iii) any other reserve which
the Agent may reasonably require from time to time pursuant to this Financing
Agreement, including, without limitation, for Letters of Credit and/or Letter
of Credit Guaranties pursuant to Section 5.1
hereof.

 

3

 

BA
Equivalent Rate
shall mean the average bankers’ acceptance discount rate for the appropriate
Contract Period as quoted on Reuters Screen CDOR Page in respect of Chartered
Banks (or such other page as is a replacement page for such bankers’
acceptances) at 10:00 a.m. (Toronto, Ontario (Canada) time) plus 0.10%.  If such rate is not available at the time of
determination, then the discount rate in respect of a BA Rate Loan shall mean
the discount rate, calculated on an annual basis, quoted by CIBC at 10:00a.m.
(Toronto, Ontario (Canada) time) as the discount rate at which CIBC would
purchase, on the relevant borrowing date, its own bankers’ acceptances having
an aggregate face amount equal to and with a term to maturity the same as the
selected Interest Period on the applicable date.

 

BA Rate
Loans shall
mean any Revolving Loans made pursuant to this Financing Agreement which are
denominated in Canadian Dollars and are made or maintained at a rate of
interest, expressed as a discount, based upon the BA Equivalent Rate.

 

Bailee’s
Letter shall
mean a letter in form and substance reasonably acceptable to the Agent and
executed by any Person (other than any Borrower) that is in possession of any
Inventory on behalf of such Loan Party pursuant to which such Person
acknowledges, the Lien of the Agent or the Canadian Lender, as the case may be,
with respect thereto.

 

Bankruptcy
Code shall
mean title 11, United States Code.

 

Blocked
Account shall
mean each lockbox or other collection account or any other Deposit Account or
Securities Account, in each case that is subject to an effective Deposit
Account Control Agreement, a Securities Account Control Agreement, or is
otherwise subject to the instructions of the Agent, as specified in Section 3.5 of this Financing Agreement.  “Blocked Account”
includes all monies on deposit in such Blocked Account, all funds credited to
such Blocked Account and all certificates and instruments, if any, representing
or evidencing such Blocked Account.

 

Blocked
Account Institution shall have the meaning specified in Section 3.5(b)
of this Financing Agreement.

 

Borrowers shall have the meaning specified in the
preamble to this Financing Agreement and shall include each other Person that,
at any time after the Closing Date, becomes party to this Financing Agreement
as a Borrower.

 

Borrowing
Agent shall
mean CT LLC, in its capacity as agent for the US Borrowers and the other Loan
Parties under the Loan Documents, as more fully set forth in Section 3.9 hereof.

 

Borrowing
Base shall
mean the Dollar Equivalent of the sum of (a) eighty-five percent (85%) of
each Eligible Loan Party’s aggregate outstanding Eligible Accounts Receivable
plus (b) the lowest of (i) sixty-five percent (65%) of the aggregate
value of each Eligible Loan Party’s Eligible Inventory, valued at the lower of
cost or market, on a first in, first out basis, (ii) eighty-five percent
(85%) of the net orderly liquidation value of each Eligible Loan Party’s
Eligible Inventory (determined based on the most recent appraisal) and (iii)
the Inventory Loan Cap, in the aggregate at any time, and in each case, subject
to any applicable Availability Reserves as the Agent may reasonably establish.

 

Borrowing
Base Certificate
shall mean a certificate of the Borrowers, substantially in the form of Exhibit C.

 

Business
Day shall
mean any day other than a Saturday or Sunday on which the Agent and Chase are
open for business in New York City.

 

4

 

Canadian
Administrative Management Fee shall mean the sum of $10,000 per year which shall be
paid to the Agent in accordance with Section 8.8
hereof to offset the expenses and costs (excluding Out of Pocket Expenses and
auditor fees) of the Agent in connection with the administration of the
Canadian Dollar Revolving Loans, record keeping and analyzing and evaluating
the Collateral.

 

Canadian
Borrower
shall have the meaning specified in the preamble to this Financing Agreement.

 

Canadian Dollars  and the sign C$
shall mean the lawful money of Canada.

 

Canadian
Lender shall
mean CIT Financial and each other Lender that makes Revolving Loans, in Dollars
or Canadian Dollars (as the case may be), to the Canadian Borrower under this
Financing Agreement.

 

Canadian
Pledge and Security Agreement  shall
mean the general security agreement executed by the Canadian Borrower and
delivered to the Agent, substantially in the form of Exhibit E-2
and in form and substance satisfactory to the Agent.

 

Canadian Prime Rate shall mean, on any date of
determination, the annual rate of interest (rounded upwards, if necessary, to
the nearest 1/16 of 1%) equal to the greater of: (a) the annual rate of
interest announced from time to time by CIBC as its prime rate in effect at its
principal office in Toronto, Ontario (Canada) on such date and (b) the annual
rate of interest equal to the sum of (i) the CDOR Rate in effect on such date
and (ii) 1%.

 

Canadian Prime Rate Loans shall mean any Revolving
Loans made pursuant to this Financing Agreement which are denominated in
Canadian Dollars and are made or maintained at a rate of interest based upon
the Canadian Prime Rate.  The prime rate
is not intended to be the lowest rate of interest charged by CIBC to its
borrowers.

 

Canadian
Revolving Credit Commitment shall mean, with respect to each Canadian Lender, the
commitment of such Canadian Lender to make Canadian Revolving Loans in Dollars
or Canadian Dollars, as the case may be, under and in accordance with the terms
of this Financing Agreement, in the aggregate principal amount outstanding not
to exceed the amount set forth opposite such Lender’s name on Schedule 1 (Commitments)
under the caption “Canadian Revolving Credit Commitment” or set forth in the
applicable Assignment and Transfer Agreement executed by such Lender, in each
case as such amount may be reduced pursuant to this Financing Agreement provided, that in no event shall the aggregate principal
amount of Canadian Revolving Loans that are denominated (x) in Dollars exceed
$2,500,000 outstanding at any time or (y) in Canadian Dollars exceed the Dollar
Equivalent of $1,000,000.

 

Canadian
Revolving Sub-Line of Credit shall mean the aggregate commitment of the Canadian
Lenders to make loans and advances to the Canadian Borrower pursuant to Article III of this Financing Agreement, in an
aggregate amount not to exceed the Dollar Equivalent of $3,500,000; provided, that
the aggregate amount of Canadian Revolving Loans that shall be made available
to the Canadian Borrower (x) as USD Revolving Loans shall not exceed $2,500,000
and (y) as CDN Revolving Loans shall not exceed the Dollar Equivalent of
$1,000,000.

 

Canadian
Revolving Loans
shall mean the USD Revolving Loans and the CDN Revolving Loans made, from time
to time, by the Agent or the Canadian Lenders to the Canadian Borrower pursuant
to this Financing Agreement

 

5

 

Capital
Expenditures
shall mean, for any period, the aggregate expenditures of the Loan Parties
during such period on account of, property, plant, equipment or similar fixed
assets that, in conformity with GAAP, are required to be reflected in the
balance sheet of the Loan Parties.

 

Capital
Lease shall
mean any lease of property (whether real, personal or mixed) which, in
conformity with GAAP, is accounted for as a capital lease in the balance sheet
of the Loan Parties.

 

Capital
Lease Obligations shall mean, with respect to any Person, the capitalized amount of all
obligations of such Person under Capital Leases.

 

Cash
Equivalents
shall mean (a) securities issued or fully guarantied or insured by the
United States government or any agency thereof, (b) certificates of
deposit, eurodollar time deposits, overnight bank deposits and bankers’
acceptances of any Lender or any commercial bank organized under the laws of
the United States, any state thereof, the District of Columbia, any foreign
bank, or its branches or agencies (fully protected against currency
fluctuations) that, at the time of acquisition, are rated at least “A-1” by
Standard & Poor’s Rating Services (“S&P”) or
“P-1” by Moody’s Investors Services, Inc. (“Moody’s”),
(c) commercial paper of an issuer rated at least “A-1” by S&P or “P-1”
by Moody’s and (d) shares of any money market fund that (i) has at
least 95% of its assets invested continuously in the types of investments
referred to in clauses (a), (b) and (c) above,
(ii) has net assets of not less than $500,000,000 and (iii) is rated
at least “A-1” by S&P or “P-1” by Moody’s; provided, however, that the maturities of all obligations of the type
specified in clauses (a), (b) and (c) above shall
not exceed 270 days.

 

CDN
Revolving Loans
shall mean the Revolving Loans made, from time to time, by the Agent or the
Canadian Lenders to the Canadian Borrower denominated in Canadian Dollars
pursuant to this Financing Agreement.

 

CDOR Rate shall mean on any date, the annual rate
of interest which is the rate based on the average rate applicable to bankers’
acceptances for a term of 30 days appearing on the “Reuters Screen CDOR Page”
(as defined in the International Swaps and Derivatives Association, Inc.
definitions, as modified and amended from time to time) at approximately 10:00
a.m. (Toronto, Ontario (Canada) time), on such date, or if such date is not a
Working Day, then on the immediately preceding Working Day, provided that, if
such rate does not appear on the Reuter Screen CDOR Page as contemplated, then
the CDOR Rate on any date shall be calculated as the rate for the term referred
to above applicable to bankers’ acceptances quoted by CIBC as of 10:00 a.m.
(Toronto, Ontario (Canada) time) on such date or, if such date is not a Working
Day, then on the immediately preceding Working Day.

 

Cellu Tissue Management Agreements  shall mean,
collectively, each management services agreement, dated as of February 28,
2003 (as amended in accordance with this Financing Agreement) entered into by
Cellu Tissue with each Borrower pursuant to which Cellu Tissue will provide
certain services (including, without limitation, marketing, human resources and
payroll and other financial services) to each such Borrower in exchange for
certain fees and expenses as more fully set forth therein.

 

CEP shall mean Charterhouse Equity Partners
III, L.P. a Delaware limited partnership.

 

CGI shall mean Charterhouse Group, Inc., a
Delaware corporation.

 

Change of
Control shall
mean each occurrence of any of the following:

 

6

 

(a)                                  the
acquisition, directly or indirectly, by any person or group (within the meaning
of Section 13(d)(3) of the
Exchange Act), other than the Sponsor, of beneficial ownership of more than 33%
of the aggregate outstanding voting power of the Stock of the Parent; or

 

(b)                                 (i)
the Parent shall cease to have beneficial ownership (as defined in Rule 13d-3
under the Exchange Act) and control of 100% of the aggregate voting power of
the Stock of Cellu Tissue, or (ii) Cellu Tissue shall cease to have
beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) and
control of 100% of the aggregate voting power of the Stock of each other Loan
Party, in each case free and clear of all Liens (other than any Liens granted
hereunder and Permitted Encumbrances); or

 

(c)                                  Sponsor
shall cease to have beneficial ownership (as defined in Rule 13d-3 under the
Exchange Act) of at least 60% of the aggregate voting power of the Stock of
Parent; or

 

(d)                                 (i)
any Loan Party (A) consolidates with or merges into another Person that is not
a Borrower or Guarantor hereunder or (B) conveys, transfers or leases all or
substantially all of its property and assets to another Person that is not a
Borrower or Guarantor hereunder or (ii) any entity consolidates with or
merges into any Loan Party in a transaction pursuant to which the outstanding
voting Stock of such Loan Party is reclassified or changed into or exchanged
for cash, securities or other property, other than any such transaction described
in this clause (ii) in which (A) in the case of any such transaction
involving the Parent, no person or group (within the meaning of Section 13(d)(3) of the Exchange Act), other than the
Sponsor, has, directly or indirectly, acquired beneficial ownership of more
than 33% of the aggregate outstanding voting Stock of the Parent or (B) in
the case of any such transaction involving a Loan Party other than the Parent,
Cellu Tissue or another Borrower has beneficial ownership of 100% of the
aggregate voting power of all Stock of the resulting, surviving or transferee
entity; or

 

(e)                                  any
“Change of Control”, or like event, as defined in the Notes Indenture.

 

Chartered
Bank shall
mean a bank chartered under the Bank Act (Canada).

 

Chase shall mean JPMorgan Chase Bank.

 

Chase
Bank Rate
shall mean the rate of interest per annum announced by Chase from time to time
as its prime rate in effect at its principal office in New York City.  The prime rate is not intended to be the
lowest rate of interest charged by Chase to its borrowers.

 

Chase
Bank Rate Loans
shall mean any loans or advances pursuant to this Financing Agreement made or
maintained at a rate of interest based upon the Chase Bank Rate.

 

CIBC shall mean Canadian Imperial Bank of
Commerce.

 

CIT
Financial
shall have the meaning specified in the preamble to this Agreement.

 

Closing
Date shall
mean the date that this Financing Agreement has been duly executed by the
parties hereto and delivered to the Agent.

 

Code shall mean the U.S. Internal Revenue
Code of 1986, as amended from time to time and the rules and regulations
promulgated thereunder from time to time.

 

Collateral shall (i) with respect to each Loan
Party other than the Canadian Borrower, 
have the meaning specified in the Domestic Pledge and Security Agreement
and (ii) with respect to the Canadian Borrower, have the meaning specified
in the Canadian Pledge and Security Agreement.

 

7

 

Collateral
Documents
shall mean, collectively, each Pledge and Security Agreement, each Mortgage,
each Intellectual Property Security Agreement, each Deposit Account Control
Agreement, each Securities Account Control Agreement and each other document
executed and delivered by a Loan Party granting a security interest in or lien
or other encumbrance on any of its property to secure payment of the Secured
Obligations.

 

Compliance
Certificate
shall have the meaning specified in Section 7.8(d).

 

Consolidated
Balance Sheet  shall
mean a consolidated or compiled, as applicable, balance sheet for Cellu Tissue
and its consolidated subsidiaries, eliminating all inter-company transactions
and prepared in accordance with GAAP.

 

Consolidated
Net Income of
any Person for any period shall mean the consolidated net income (or loss) of
such Person and its Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP.

 

Consolidating
Financial Report  shall mean consolidating working capital
reports and profit and loss statements of the Parent, showing such working
capital reports and profit and loss statements for each business segment
(tissue and machine glaze), separately, all prepared in accordance with GAAP.

 

Constituent
Documents
shall mean, with respect to any Person, (a) the articles of incorporation,
certificate of incorporation or certificate of formation (or the equivalent
organizational documents) of such Person, (b) the by-laws, operating
agreement (or the equivalent governing documents) of such Person and
(c) any document setting forth the manner of election and duties of the
directors or managing members of such Person (if any) and the designation,
amount or relative rights, limitations and preferences of any class or series
of such Person’s Stock.

 

Contaminant shall mean any material, substance or
waste that is classified, regulated or otherwise characterized under any
Environmental Law as hazardous, toxic, a contaminant or a pollutant or by other
words of similar meaning or regulatory effect, including any petroleum or
petroleum-derived substance or waste, asbestos and polychlorinated biphenyls.

 

Contingent
Obligation
shall mean, with respect to any Person, any obligation of such Person
guaranteeing or intended to guaranty any Indebtedness, leases, dividends or
other obligations (“primary obligations”) of any other Person (the “primary
obligor”) in any manner, whether directly or indirectly, including, without
limitation, (i) the direct or indirect guaranty, endorsement (other than
for collection or deposit in the ordinary course of business), co-making, discounting
with recourse or sale with recourse by such Person of the obligation of a
primary obligor, (ii) the obligation to make take-or-pay or similar
payments, if required, regardless of nonperformance by any other party or
parties to an agreement (other than such obligations incurred in the ordinary
course of business), (iii) any obligation of such Person, whether or not
contingent, (A) to purchase any such primary obligation or any property
constituting direct or indirect security therefor, (B) to advance or
supply funds (1) for the purchase or payment of any such primary
obligation or (2) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency of the
primary obligor, (C) to purchase property, assets, securities or services
primarily for the purpose of assuring the owner of any such primary obligation
of the ability of the primary obligor to make payment of such primary
obligation or (D) otherwise to assure or to hold harmless the holder of such primary
obligation against loss in respect thereof; provided, however, that the term “Contingent Obligation” shall not include any product or
contractual warranties extended in the ordinary course of business.  The amount of any Contingent Obligation shall
be deemed to be an amount equal to the stated or to the determinable amount of
the

 

8

 

primary obligation with respect to which such Contingent Obligation is
made (or, if less, the maximum amount of such primary obligation for which such
Person may be liable pursuant to the terms of the instrument evidencing such
Contingent Obligation) or, if not stated or determinable, the maximum
reasonably anticipated liability with respect thereto (assuming such Person is
required to perform thereunder), as determined by such Person in good faith.

 

Contract
Maturity Date
shall mean, with respect to any BA Rate Loan, the expiry date of the applicable
Contract Period.

 

Contract
Period shall
mean:

 

(a)                                  with respect to any initial request by
the Canadian Borrower for a BA Rate Loan, the one month, two month, three month
or six month term of such BA Rate Loan selected by the Canadian Borrower
commencing on the last day of the immediately preceding Contract Period
applicable to such BA Rate Loan or on any date of conversion of or into a BA
Rate Loan, as applicable, (which date shall be a Working Day) and expiring on a
Working Day which shall be one, two, three or six months thereafter, as
applicable; and

 

(b)                                 thereafter, with respect to any
continuation of or to any conversion to, a BA Rate Loan, at the option of the
Canadian Borrower, any one month, two month, three month or six month period
commencing on the last day of the immediately preceding Contract Period
applicable to such BA Rate Loan and ending one, two, three or six months
thereafter, as applicable;

 

provided, however, that the foregoing provisions relating to Contract
Periods are subject to the following:

 

(i)                                     no Contract Period shall end subsequent
to a Scheduled Termination Date or to any applicable Early Termination Date;

 

(ii)                                  whenever the last day of any Contract
Period would otherwise occur on a day that is not a Working Day, the last day
of such Contract Period shall be extended to the next succeeding Working Day (unless
the result of such extension would extend such payment into another calendar
month in which event such Contract Period shall end on the immediately
preceding Working Day); and

 

(iii)                               any Contract Period that begins on the
last Working Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month, at the end of such
Contract Period) shall end on the last Working Day of a calendar month;

 

(iv)                              if bankers’ acceptances are unavailable
in accordance with Section 7.15(b)
of this Financing Agreement, the Canadian Borrower shall continue to pay
interest on the BA Rate Loans at the applicable per annum rate based upon the
Canadian Prime Rate until such Contract Period becomes available (as determined
by the Canadian Lenders in their sole discretion); and

 

(v)                                 there shall not be more than five (5) BA
Rate Loans, taken together with LIBOR Loans, outstanding at any time during the
term of this Financing Agreement, on a collective basis among the Borrowers
under this Financing Agreement, allocated between the Borrowers as they shall
determine.

 

Contractual
Obligation of
any Person shall mean any obligation, agreement, undertaking or similar
provision of any security issued by such Person or of any agreement, undertaking,
contract, lease, indenture, mortgage, deed of trust or other instrument
(excluding a Loan Document) to which such Person is a party or by which it or
any of its property is bound or to which any of its property is subject.

 

9

 

Control
Agreements
shall mean, collectively, the Deposit Account Control Agreements and the
Securities Account Control Agreements.

 

Control
Notice shall
have the meaning specified in the Deposit Account Control Agreements or the Securities
Account Control Agreements, as applicable.

 

Copyright
Licenses
shall have the meaning specified in the applicable Pledge and Security
Agreement.

 

Copyrights shall have the meaning specified in the
applicable Pledge and Security Agreement.

 

Current
Assets shall
mean those assets of the Loan Parties which, in accordance with GAAP, are
classified as current.

 

Current
Liabilities
shall mean those liabilities of the Loan Parties which, in accordance with
GAAP, are classified as “current,” provided however, that, notwithstanding
GAAP, the Revolving Loans and the current portion of Permitted Indebtedness
shall be considered “Current Liabilities.”

 

Default shall mean any event specified in Article X hereof, whether or not any requirement for
the giving of notice, the lapse of time, or both, or any other condition, event
or act, has been satisfied.

 

Default
Rate of Interest
shall mean a rate of interest on any Obligations hereunder that is two percent
(2%) per annum in excess of the rate of interest applicable to such Obligations
from time to time; provided, that in the case of BA Rate Loans, the “Default Rate of Interest” shall be two percent per annum in
excess of the rate of interest applicable to Canadian Prime Rate Loans
outstanding from time to time.

 

Defaulting
Lender shall
have the meaning specified in Section 13.6.

 

Deposit
Account Control Agreement shall mean (i) in respect of each Loan Party
other than the Canadian Borrower, a letter agreement, substantially in the form
of Annex 1 to the Domestic Pledge and
Security Agreement (with such changes as may be agreed to by the Agent), that
is executed by the applicable Loan Party, the Agent and the relevant financial
institution and (ii) in respect of the Canadian Borrower, a blocked
account agreement, in form and substance satisfactory to the Canadian Lenders
and the Agent, that is executed by the Canadian Borrower, the Agent and the
relevant financial institution.

 

Deposit
Accounts
shall have the meaning specified in Article 9
of the UCC (or, if applicable, the corresponding provision of the PPSA).

 

Depository
Account shall
mean (i) in the case of the First-Priority Collateral, the First Priority
Collateral Account or other Collateral Account (each as defined in the Pledge
and Security Agreement and (ii) in the case of the Second-Priority Collateral,
the Second Priority Collateral Account (as defined in the Pledge and Security
Agreement, in each case, to which funds may be transferred by the Blocked
Account Institutions in accordance with Section 3.5(b)
hereof.

 

Designated
Stock Repurchase
shall mean the redemption or repurchase by Parent of its capital stock, options
and warrants in a maximum aggregate amount not to exceed $101,000,000 and on
terms and conditions acceptable to the Agent.

 

10

 

Designated
Stock Repurchase Documents shall mean the documentation, in form and substance
satisfactory to the Agent, governing the Designated Stock Repurchase.

 

Dilution shall mean, as of any date of
determination, a percentage, based upon the experience of the immediately
preceding 365 days, that is the result of dividing (a) the Dollar amount
or Dollar Equivalent of the dollar amount of the Dilution Factors with respect
to the applicable Eligible Loan Party’s Trade Accounts Receivables during such
period by (b) the sum of (i) the Dollar amount or Dollar
Equivalent of the amount of each such Eligible Loan Party’s collections with
respect to such Trade Accounts Receivables during such period (excluding
extraordinary items) plus (ii) the dollar amount provided in the preceding
clause (a).

 

Dilution
Factors shall
mean, collectively, any and all bad debt write-downs, discounts, advertising
allowances, credits or other dilutive items with respect to any Trade Accounts
Receivable.

 

Dilution
Reserve shall
mean, as of any date of determination, an amount sufficient to reduce the
advance rate against Eligible Accounts Receivable by one percentage point for
each percentage point by which Dilution is in excess of five percent (5%).

 

Disposition shall mean any transaction, or series of
related transactions, pursuant to which any Person or any of its Subsidiaries
sells, conveys, transfers, assigns, leases or otherwise disposes of all or any
part of their respective business, property or assets, whether now owned or
hereafter acquired, or any direct interest therein (including the sale or
factoring at maturity or collection of any accounts) or agrees to do any of the
foregoing, to any Person, or otherwise permits such other Person to purchase or
acquire any interest in any of their respective assets, or, in the case of any
Subsidiary of any Loan Party, the issuance or sale of any shares of such
Subsidiary’s Stock, in each case whether or not the consideration therefor
consists of cash, securities or other assets owned by the acquiring
Person.  The term “Disposed” shall have a
correlative meaning.

 

Documentation
Fee shall
mean the Agent’s standard fees relating to any and all modifications, waivers,
releases, amendments or additional collateral with respect to this Financing
Agreement, the Collateral and/or the Obligations.

 

Documents
of Title
shall mean all of each Loan Party’s present and future documents (as defined in
the UCC, or, if applicable, the PPSA to the extent if so defined), and any and
all warehouse receipts, bills of lading, shipping documents, chattel paper,
instruments and similar documents, all whether negotiable or not and all goods
and Inventory relating thereto and all cash and non-cash proceeds of the
foregoing.

 

Dollar
Equivalent
shall mean at any time of determination thereof (a) with respect to any amount
expressed in Dollars, such amount in Dollars and (b) with respect to any amount
expressed in Canadian Dollars or any other currency, the amount of Dollars that
may be purchased with such amount of Canadian Dollars or other currency at the
Spot Exchange Rate on such date.

 

Dollars (without the word Canadian immediately
preceding it) and the sign $ (without
the letter “C” immediately preceding it) shall mean the lawful money of the
United States of America.

 

Domestic
Lender shall
mean each Lender, each Issuing Bank and each Agent that is a United States
person as defined in Section 7701(a)(30) of the Code.

 

Domestic
Lending Office
shall mean, with respect to any Lender, the office of such Lender specified as
its “Domestic Lending Office” opposite its
name on Schedule 1 (Commitments) or on

 

11

 

the Assignment and Transfer Agreement pursuant to which it became a
Lender or such other office of such Lender as such Lender may from time to time
specify to the Borrowers and the Agent.

 

Domestic
Pledge and Security Agreement  shall
mean the pledge and security agreement executed by the Loan Parties (other than
Parent and the Canadian Borrower) and delivered to the Agent, substantially in
the form of Exhibit E-1 and in form and substance
satisfactory to the Agent.

 

Early
Termination Date  shall
mean the effective date on which the applicable Loan Parties terminate this
Financing Agreement or the Revolving Line of Credit which is prior to an
Anniversary Date.  Notice of termination,
as aforesaid, by any one Loan Party shall be deemed to be notice by all of the
Loan Parties for purposes hereof.

 

Early
Termination Fee  shall:
(a)  mean the fee owing to the Agent on
behalf of the Lenders in the event the Borrowers or any one of them terminates
the Revolving Line of Credit or this Financing Agreement on a date prior to an
Anniversary Date; and (b) be determined by multiplying the Revolving Credit Commitment
by (x) one and three quarters of one percent (1.75%) if the Early Termination
Date occurs on or before the date that is one (1) year after the Closing Date,
(y) three quarters of one percent (0.75%) if the Early Termination Date occurs
on any date that is after the date that is one (1) year after the Closing Date
but on or before the date that is two (2) years after the Closing Date; and
(z) one half of one percent (0.50%) if the Early Termination Date occurs
at any time thereafter.

 

EBITDA shall mean, in any period, all
consolidated net income of the Loan Parties and their consolidated
Subsidiaries, plus (without duplication and, in each instance, only to
the extent deducted in determining net income) all (i) interest and tax
obligations, (ii) depreciation, (iii) amortization (inclusive of
amortization of deferred financing fees, amortization of transaction expenses,
covenants not to compete, other intangible assets and deferred charges),
(iv) non-cash compensation expenses relating to restricted stock and stock
options, (v) any other non-cash charge or expense deducted in determining
net income for such period to the extent such charges or expenses are
reasonably acceptable to the Agent, and (vi) the fees and expenses payable in
connection with (A) refinancing the Indebtedness incurred under the
Existing Credit Agreements, (B) closing the transactions contemplated by
this Financing Agreement, (C) closing the transactions contemplated by the
Notes Indenture and (D) closing the transactions contemplated by the
Designated Stock Purchase Documents, up to an aggregate amount for purposes of
this clause (vi) equal to $8,000,000
irrespective of actual fees or expenses paid in excess of such amount, but
excluding (without duplication) for purposes of the definition of “EBITDA” the effect of extraordinary and/or non-recurring
gains or losses for such period.  For
purposes of determining compliance with the financial covenants specified in Section 12 hereof, EBITDA shall be calculated on a
trailing twelve (12) month basis.

 

Eligible
Accounts Receivable shall mean, as to any Eligible Loan Party, the gross amount of such
Eligible Loan Party’s Trade Accounts Receivable that are subject to a valid,
exclusive (other than Permitted Encumbrances), first priority and fully
perfected security interest in favor of the Agent, on behalf of the Lenders,
which conform to the warranties contained herein and which, at all times,
continue to be acceptable to the Agent in the exercise of its reasonable
business judgment, less, without duplication, the sum of: (a) any
returns, discounts, claims, credits and allowances of any nature (whether
issued, owing, granted, claimed or outstanding), and (b) reserves for any
such Trade Accounts Receivable that arise from or are subject to or include:
(i) sales to the United States of America, 
any state or other governmental entity or to any agency, department or
division thereof, except for any such sales as to which such Eligible Loan
Party has complied with the Assignment of Claims Act of 1940 or any other
applicable statute, rules or regulation, to the Agent’s satisfaction in the
exercise of its reasonable business judgment or the federal government of
Canada or province of any division thereof unless the Agent is satisfied it has
a valid and perfected first priority security interest over such account;
(ii) foreign sales

 

12

 

(excluding Canada), other than sales which otherwise comply with all of
the other criteria for eligibility hereunder and are (x) secured by
letters of credit (in form and substance reasonably satisfactory to the Agent)
issued or confirmed by, and payable at, banks having a place of business in the
United States of America, or (y) to customers residing in Canada (or any
province, municipality or agency or department thereof) provided,
that (I) the Agent shall hold a valid and perfected first
priority security interest, (II) such steps have been taken as are
required by applicable Requirements of Law in connection therewith and (III) such
Accounts do not exceed $1,500,000 in the aggregate at any one time;
(iii) Accounts that remain unpaid more than ninety (90) days from invoice
date; (iv) contra accounts; (v) sales to Parent, any other Eligible Loan
Party, any Subsidiary, or to any company affiliated with the Eligible Loan
Parties or Parent in any way; (vi) bill and hold (deferred shipment),
accrued freight or consignment sales; (vii) sales to any customer which is:
(A) known by any Loan Party to be insolvent, (B) the debtor in any
bankruptcy, insolvency, arrangement, reorganization, receivership or similar
proceedings under any federal or state law, (C) known by the Loan Parties
to be negotiating, or to have called a meeting of its creditors for purposes of
negotiating, a compromise of its debts, or (D) financially unacceptable to
the Agent or has a credit rating unacceptable to the Agent, in each case, in
its reasonable judgment; (viii) all sales to any customer if fifty percent
(50%) or more of  the aggregate dollar amount of
all outstanding invoices to such customer are unpaid more than ninety (90) days
from invoice date; (ix) pre-billed receivables, cash in advance
receivables and receivables arising from progress billing; (x) an amount
representing, historically, returns, discounts, claims, credits, accrued
rebates, allowances and applicable terms; (xi) sales not payable in
Dollars or Canadian Dollars; and (xii) any other criteria deemed necessary
by the Agent in its reasonable judgment, and which are customary either in the
commercial finance industry or in the lending practices of the Agent and/or the
Lenders.

 

Eligible
Assignee
shall mean (a) a Lender or any affiliate of any Lender or Approved Fund of
such Lender, (b) a commercial bank having total assets in excess of
$5,000,000,000, (c) a finance company, insurance company or any other
financial institution or fund, in each case reasonably acceptable to the Agent
and regularly engaged in making, purchasing or investing in loans and having a
net worth, determined in accordance with GAAP, in excess of $250,000,000 or, to
the extent net worth is less than such amount, a finance company, insurance
company, other financial institution or fund, reasonably acceptable to the
Agent and the Borrowers or (d) a savings and loan association or savings
bank organized under the laws of the United States or any State thereof having
a net worth, determined in accordance with GAAP, in excess of $250,000,000.

 

Eligible
Inventory  shall
mean, as to any Eligible Loan Party, the gross amount of such Eligible Loan
Party’s Inventory that is subject to a valid, exclusive, first priority and
fully perfected security interest in favor of the Agent, on behalf of the
Lenders, (other than Permitted Encumbrances having priority over the Agent’s
security interest) and which conforms to the warranties contained herein and
which, at all times, continues to be acceptable to the Agent in the exercise of
its reasonable business judgment, less, without duplication, any (a)
work-in-process, (b) supplies (other than raw materials, but including
packaging, felt, fabric, wires, opened chemicals, dyes and wax),
(c) Inventory not present in the United States of America or Canada,
(d) Inventory returned or rejected by any of the Eligible Loan Party’s
customers (other than goods that are undamaged and resalable in the normal
course of business) and goods to be returned to an Eligible Loan Party’s
suppliers, (e) Inventory in transit to third parties (other than an
Eligible Loan Party’s agents or warehouses), or in the possession of a
warehouseman, bailee, third party processor, or other third party, unless such
warehouseman, bailee or third party has executed a Landlord Waiver, Bailee’s
Letter or other notice of security interest agreement (in form and substance
reasonably satisfactory to the Agent) and the Agent shall have a first priority
perfected security interest in such Inventory, and (f) Inventory acquired
by any Eligible Loan Party on a consignment basis; (g) any mark-up on
Inventory sold or to be sold to any other Eligible Loan Party; (h) excess
Inventory; (i) trial Inventory; and (j) less any reserves required by
the Agent in its reasonable discretion, including without limitation, reserves
for special order goods, discontinued, slow-moving and obsolete Inventory,

 

13

 

bill and hold (deferred shipment), consignment sales, shrinkage and any
applicable customs, freight, duties and Taxes.

 

Eligible
Loan Party
shall mean each US Borrower, the Canadian Borrower, and each other Person that,
at any time after the Closing Date, becomes party to this Financing Agreement
as a Borrower.

 

Energy Hedging Contracts shall mean any and all
forward contracts, commodity swaps, purchase or option agreements, other
commodity price hedging arrangements, and all other similar agreements or
arrangements designed to alter the risks of any Person arising from
fluctuations in the price of electricity.

 

Environmental
Actions  shall
mean any complaint, summons, citation, written notice, directive, order, claim,
litigation, investigation, judicial or administrative proceeding, judgment,
letter or other communication from any Person or Governmental Authority
involving violations of Environmental Laws or Releases of Contaminants
(i) from any assets, properties or businesses owned or operated by any
Loan Party or any of its Subsidiaries or any predecessor in interest;
(ii) from adjoining properties or businesses; or (iii) onto any
facilities which received Contaminants generated by any Loan Party or any of
its Subsidiaries or any predecessor in interest.

 

Environmental
Indemnified Matters shall have the meaning specified in Section 7.14(b).

 

Environmental
Laws shall
mean all applicable Requirements of Law now or hereafter in effect and as
amended or supplemented from time to time during the term of the Loan, relating
to pollution or the regulation and protection of human health, safety, the
environment or natural resources, including the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C.
§ 9601 et seq.); the Hazardous Material
Transportation Act, as amended (49 U.S.C. § 1801 et seq.);
the Federal Insecticide, Fungicide, and Rodenticide Act, as amended
(7 U.S.C. § 136 et seq.); the
Resource Conservation and Recovery Act, as amended (42 U.S.C. § 6901 et seq.); the Toxic Substance Control Act, as amended (42
U.S.C. § 7401 et seq.); the
Clean Air Act, as amended (42 U.S.C. § 740 et seq.);
the Federal Water Pollution Control Act, as amended (33 U.S.C. § 1251 et seq.); the Occupational Safety and Health Act, as
amended (29 U.S.C. § 651 et seq.); the
Safe Drinking Water Act, as amended (42 U.S.C. § 300f et seq.);
and each of their state and local counterparts or equivalents and any transfer
of ownership notification or approval statute, including the Industrial Site
Recovery Act (N.J. Stat. Ann. § 13:1K-6 et seq.).

 

Environmental
Liabilities and Costs shall mean, with respect to any Person, all liabilities, obligations,
responsibilities, Remedial Actions, losses, damages, punitive damages,
consequential damages, treble damages, costs and expenses (including all
reasonable fees, disbursements and expenses of counsel, experts and consultants
and costs of investigation and feasibility studies), fines, penalties,
sanctions and interest incurred as a result of any claim or demand by any other
Person, whether based in contract, tort, implied or express warranty, strict
liability, criminal or civil statute and whether arising under any
Environmental Law, Permit, order or written agreement with any Governmental
Authority or other Person, in each case relating to any environmental, health
or safety condition or to any Release or threatened Release and resulting from
the past, present or future operations of, or ownership of property by, such
Person or any of its Subsidiaries.

 

Environmental
Lien   shall mean any lien, security interest or
other encumbrance in favor of any Governmental Authority for Environmental
Liabilities and Costs.

 

14

 

Equipment shall mean all of each Loan Party’s
present and hereafter acquired equipment (as defined in the UCC or the PPSA, as
applicable) including, without limitation, all machinery, equipment,
furnishings and fixtures, and all additions, substitutions and replacements
thereof, wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto and all proceeds
thereof of whatever sort.

 

ERISA shall mean the Employee Retirement
Income Security Act of 1974, as amended from time to time, and the rules and
regulations promulgated thereunder from time to time.

 

ERISA
Affiliate
shall mean any trade or business (whether or not incorporated) under common
control or treated as a single employer with the Loan Parties or any of them
and any of their respective Subsidiaries within the meaning of Section 414(b), (c), (m) or (o) of
the Code.

 

ERISA
Event shall
mean (a) a reportable event described in Section 4043(b) or
4043(c)(1), (2), (3), (5), (6), (8) or (9) of ERISA (other than those events
with respect to which the thirty (30) day notice requirement has been waived
pursuant to the regulations under Section 4043 of ERISA) with respect to a
Title IV Plan or a Multiemployer Plan, (b) the withdrawal of any Loan
Party, any of its Subsidiaries or any ERISA Affiliate from a Title IV Plan
subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer, as defined in Section 4001(a)(2) of ERISA,
(c) the complete or partial withdrawal of a Loan Party, any of its
Subsidiaries or any ERISA Affiliate from any Multiemployer Plan,
(d) notice of reorganization or insolvency of a Multiemployer Plan,
(e) the filing of a notice of intent to terminate a Title IV Plan or
the treatment of a plan amendment as a termination under Section 4041 of
ERISA, (f) the institution of proceedings to terminate a Title IV
Plan or Multiemployer Plan by the PBGC, (g) the failure of any Loan Party,
any Subsidiary of any Loan Party or any ERISA Affiliate of any Loan Party to
make any required contribution to a Title IV Plan or Multiemployer Plan,
(h) the imposition of a lien under Section 412 of the Code or
Section 302 of ERISA on any Loan Party or any of its Subsidiaries or any
ERISA Affiliate or (i) any other event or condition that might reasonably
be expected to constitute grounds under Section 4042 of ERISA for the
termination of, or the appointment of a trustee to administer, any
Title IV Plan or Multiemployer Plan or the imposition of any liability
under Title IV of ERISA, except where the amount of such liability could
not reasonably be expected to have a Material Adverse Effect and other than for
PBGC premiums due but not delinquent under Section 4007 of ERISA.

 

Eurocurrency
Reserve Requirements for any day, as applied to a LIBOR Loan, shall mean the aggregate
(without duplication) of the maximum rates of reserve requirements (expressed
as a decimal fraction) in effect with respect to the Agent and/or any present
or future Lender or participant on such day (including, without limitation,
basic, supplemental, marginal and emergency reserves under Regulation D or
any other applicable regulations of the Board of Governors of the Federal
Reserve System or other Governmental Authority having jurisdiction with respect
thereto, as now and from time to time in effect, dealing with reserve
requirements prescribed for Eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of such Board)
maintained by the Agent and/or any such Lenders or participants (such rate to
be adjusted to the nearest one sixteenth of one percent (1/16 of 1%) or, if
there is not a nearest one sixteenth of one percent (1/16 of 1%), to the next
higher one sixteenth of one percent (1/16 of 1%)).

 

Event of
Default shall
have the meaning provided for in Article X
of this Financing Agreement.

 

Excess
Cash Flow
shall mean for any Fiscal Year (a) EBITDA, less (without duplication)
(b) the sum of (i) all interest obligations in respect of Permitted
Indebtedness paid during such Fiscal Year by the Loan Parties, (ii) scheduled
payments made by the Loan Parties in respect of

 

15

 

Capital Lease Obligations to the extent such Capital Lease Obligations
and payments are permitted by this Financing Agreement, (iii) all
scheduled cash principal payments in respect of the Secured Notes made during
such Fiscal Year, all optional cash principal payments made during such Fiscal
Year on the Loans (but only to the extent that the US Revolving Line of Credit
or the Canadian Revolving Sub-Line of Credit, as the case may be, is
permanently reduced by the amount of such payments), and all scheduled cash
principal payments on other Permitted Indebtedness actually made during such
Fiscal Year to the extent such payments are permitted to be made under this
Financing Agreement, (iv) the cash portion of funded Capital Expenditures
actually incurred to the extent permitted to be incurred under this Financing
Agreement, and (v) all federal, state, local and foreign tax obligations
of each of the Loan Parties.

 

Exchange
Act shall
mean the Securities Exchange Act of 1934, as amended.

 

Existing
Credit Agreements shall mean, collectively, the following:

 

(i) that certain
Financing Agreement, dated as of September 30, 2002 (as amended, restated,
supplemented or otherwise modified from time to time), among the US Borrowers,
as borrowers, the Initial Guarantors and Parent, as guarantors, CIT and the
other financial institutions party thereto as lenders, CIT, as agent for the
lenders thereunder, and Madison Capital Funding LLC, in its capacity as
documentation agent;

 

(ii) that certain
Financing Agreement, dated as of September 30, 2002, (as amended,
restated, supplemented or otherwise modified from time to time) among the Canadian
Borrower, as borrower, and CIT Financial, as lender;

 

(iii) that certain
Financing Agreement, dated as of September 30, 2002, (as amended,
restated, supplemented or otherwise modified from time to time), among the US
Borrowers, as borrowers, the Initial Guarantors and Parent, as guarantors, the
lenders party thereto, and Ableco Finance LLC, as administrative agent; and

 

(iv) that certain
Canadian Financing Agreement, dated as of September 30, 2002, (as amended,
restated, supplemented or otherwise modified from time to time), among the
Canadian Borrower and Ableco Finance LLC, as lender.

 

Extraordinary
Receipts
shall mean any cash received by any Loan Party not in the ordinary course of
business (excluding proceeds with respect to the sale of Obsolete Equipment or
of the Disposition of the Menominee Paper Machine), including, without
limitation, (i) foreign, United States, state or local tax refunds,
(ii) pension plan reversions, (iii) proceeds of insurance,
(iv) judgments, proceeds of settlements or other consideration of any kind
in connection with any cause of action, (v) condemnation awards (and
payments in lieu thereof), (vi) indemnity payments and (vii) any
purchase price adjustment received in connection with any purchase agreement.

 

Facility
Increase
shall have the meaning specified in Section 3.10(a)
of this Financing Agreement.

 

Facility
Increase Fee
shall mean the fee payable to the Agent in accordance with, and pursuant to,
the provisions of Section 3.10 of this
Financing Agreement.

 

Federal
Funds Rate
shall mean, for any period, a fluctuating interest rate per annum equal for
each day during such period to 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 for such day (or, if such day is not a
Business Day, for the next preceding Business Day) by the

 

16

 

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 such day
on such transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.

 

Financing
Agreement
shall mean this Financing Agreement.

 

First-Priority
Collateral
shall have the meaning specified in the Pledge and Security Agreements.

 

Fiscal
Quarter shall
mean, with respect to the Loan Parties, each three (3) month period ending on
or about May 31, August 31, November 30 and February 28 or
February 29 (as the case may be) of each Fiscal Year.

 

Fiscal
Year shall
mean each twelve (12) month period commencing on March 1 of each year and
ending on the following February 28 or February 29 (as the case may
be).

 

Fund shall mean any Person (other than a
natural Person) that is or will be engaged in making, purchasing, holding or
otherwise investing in commercial loans and similar extensions of credit in the
ordinary course of its business.

 

GAAP shall mean generally accepted accounting
principles in the United States of America (or, as may be applicable to the
Canadian Borrower, Canada) as in effect from time to time and for the period as
to which such accounting principles are to apply, provided that in the event
the Loan Parties modify their accounting principles and procedures as applied
as of the Closing Date, the Loan Parties shall provide to the Agent and the
Lenders such statements of reconciliation as shall be in form and substance
reasonably acceptable to the Agent.

 

General
Intangibles
shall mean all of each Loan Party’s present and hereafter acquired general
intangibles (as defined in the UCC or the PPSA, as the case may be), and shall
include, without limitation, all present and future right, title and interest
in and to: (a) all Trademarks, (b) Patents, together with any
improvements on said Patents, utility models, industrial models, and designs,
(c) Copyrights, (d) trade secrets, (e) licenses (including
Copyright Licenses, Patent Licenses and Trademark Licenses), permits and
franchises, (f) all applications with respect to the foregoing,
(g) all right, title and interest in and to any and all extensions and
renewals, (h) goodwill with respect to any of the foregoing, (i) any
other forms of similar intellectual property, (j) all customer lists,
distribution agreements, supply agreements, blue prints, indemnification rights
and tax refunds, together with all monies and claims for monies now or
hereafter due and payable in connection with any of the foregoing or otherwise,
and all cash and non-cash proceeds thereof, including, without limitation, the
proceeds or royalties of any licensing agreements between any Loan Party and
any licensee of any such Loan Party’s General Intangibles.

 

Governmental
Authority
shall mean any nation, sovereign or government, any state or other political
subdivision thereof and any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government,
including any central bank.

 

Guarantied
Obligations
shall mean (i) in the case of each Borrower, the Obligations of each other
Borrower and (ii) in the case of each Guarantor (other than the
Borrowers), the Obligations of all Borrowers.

 

Guarantors shall mean each Borrower (with respect
to its guaranty of the Obligations of each other Borrower), the Initial
Guarantors and the other Subsidiary Guarantors; provided,
that in the

 

17

 

event that Parent is required to guarantee the Obligations pursuant to Section 7.17 hereof, the term “Guarantors”
shall be deemed to include Parent.

 

Guaranty shall mean Article XV
of this Financing Agreement and any other guaranty of the Obligations on terms
and conditions acceptable to the Agent.

 

Hedging
Agreements  shall
mean all interest rate swap agreements, interest rate cap agreements, interest
rate collar agreements and interest rate insurance contracts, foreign exchange
contracts, currency swap or option agreements, forward contracts, commodity
swap, purchase or option agreements, other commodity price hedging arrangements
and all other similar agreements or arrangements designed to alter the risks of
any Person arising from fluctuations in interest rates, currency values or
commodity prices (including, for the avoidance of doubt, Pulp Hedging Contracts
and Energy Hedging Contracts).

 

Inactive
Subsidiary
shall mean any Subsidiary of the Parent or any other Loan Party that
(i) is not actively engaged in any trade or business, (ii) has
neither assets nor liabilities, calculated on a consolidated basis with such
Person’s subsidiaries, in excess of $50,000 and (iii) when taken together
with each other Inactive Subsidiary, all such Inactive Subsidiaries
collectively have neither assets nor liabilities, calculated on a consolidated
basis, in excess of $100,000.

 

Incremental
Revolving Loans
shall have the meaning specified in Section 3.10
of this Financing Agreement.

 

Incremental
Revolving Loan Lender shall have the meaning specified in Section 3.10
of this Financing Agreement.

 

Indebtedness shall mean, with respect to a Person,
without duplication, all liabilities, contingent or otherwise, which are any of
the following: (a) obligations of such Person in respect of borrowed money or
for the deferred purchase price of property, services or assets (other than Inventory)
excluding trade payables or other accounts payable incurred in the ordinary
course of such Person’s business and not outstanding for more than ninety (90)
days after the date such payable was created; (b) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments or
upon which interest payments are customarily made; (c) all reimbursement,
payment or other obligations and liabilities of such Person created or arising
under any conditional sales or other title retention agreement with respect to
property used and/or acquired by such Person, even though the rights and
remedies of the lessor, seller and/or Lender thereunder may be limited to
repossession or sale of such property; (d) all obligations and liabilities,
contingent or otherwise, of such Person, in respect of letters of credit, bills
of exchange (within the meaning of the Bills of Exchange Act (Canada)),
acceptances and similar facilities; (e) all obligations and liabilities,
calculated on a basis satisfactory to the Agent and in accordance with accepted
practice, of such Person under Hedging Agreements with counterparties, and in
form and substance, acceptable to the Agent; (f) all Contingent
Obligations; (g) lease obligations (including Capital Lease Obligations) which,
in accordance with GAAP, have been or should be capitalized; and (h) all
obligations referred to in clauses (a) through (g) of this definition of
another Person secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) a lien upon property
owned by such Person, even though such Person has not assumed or become liable
for the payment of such Indebtedness; provided, however,
that in the event that liability of such Person is non-recourse to such Person
and is recourse only to specified property owned by such Person, the amount of
Indebtedness attributed thereto shall not exceed the greater of the fair market
value of any such property or the net book value of such property.  The Indebtedness of any Person shall include
the Indebtedness of any partnership of or joint venture in which such Person is
a general partner or a joint venturer.

 

18

 

Indemnified
Matters shall
have the meaning specified in Section 7.14(a).

 

Indemnitees shall have the meaning specified in Section 7.14(a).

 

Initial
Anniversary Date
shall mean the date occurring three (3) years from the Closing Date.

 

Intellectual
Property
shall have the meaning specified in the applicable Pledge and Security
Agreement.

 

Intellectual
Property Security Agreements shall mean, collectively, each applicable
(i) short-form copyright security agreement, substantially in the form
attached to the Domestic Pledge and Security Agreement as Annex 5,
for filing in the United States Copyright Office, (ii) short-form patent
security agreement, substantially in the United States Patent and Trademark
Office, and (iii) short-form trademark security agreement, substantially
in the form attached to the Domestic Pledge and Security agreement as Annex 7, for filing in the United States Patent and
Trademark Office, executed and delivered by the applicable Loan Parties to the
Agent and in form and substance satisfactory to the Agent.

 

Intercompany
Promissory Note
shall mean a demand note, substantially in the form of Exhibit J
hereto and in any event in form and substance satisfactory to the Agent,
executed by a Loan Party, in its capacity as an intercompany borrower, in favor
of any Borrower, in its capacity as an intercompany lender, and collaterally
assigned to the Agent.

 

Intercreditor
Agreement
shall mean that certain intercreditor agreement (in form and substance
reasonably satisfactory to the Agent) among the Loan Parties, the Agent and the
Notes Collateral Agent, pursuant to which, inter alia, (x)
the liens, security interests and other encumbrances granted by such Loan
Parties to the Notes Collateral Agent in the First-Priority Collateral are
subordinate to the priority liens, security interests and other encumbrances
with respect to such First-Priority Collateral granted by the Loan Parties in
favor of the Agent for the benefit of the Secured Parties hereunder and (y) the
liens, security interests and other encumbrances granted by such Loan Parties to
the Agent in the Second-Priority Collateral are subordinate to the priority
liens, security interests and other encumbrances with respect to such
Second-Priority Collateral granted by the Loan Parties in favor of the Notes
Collateral Agent for the benefit of the Notes Secured Parties.

 

Interest
Period shall
mean (i) with respect to any BA Rate Loans, the applicable Contract Period
and (ii) with respect to any LIBOR Loans:

 

(a)                                  with
respect to any initial request by any of the Borrowers for a LIBOR Loan, a one
month, two month,  three month or six
month period commencing on the borrowing or conversion date with respect to a
LIBOR Loan and ending one, two, three or six months thereafter, as applicable;
and

 

(b)                                 thereafter
with respect to any continuation of, or conversion to, a LIBOR Loan, at the
option of any of the Borrowers, any one month, two month, three month or six
month period commencing on the last day of the immediately preceding Interest
Period applicable to such LIBOR Loan and ending one, two, three or six months
thereafter, as applicable;

 

provided, however,  that the foregoing provisions relating to Interest Periods
are subject to the following:

 

(i)  if any
Interest Period would otherwise end on a day which is not a Working Day, that
Interest Period shall be extended to the next succeeding Working Day, unless
the result of

 

19

 

such extension would extend such payment into another
calendar month in which event such Interest Period shall end on the immediately
preceding Working Day;

 

(ii)  any
Interest Period that begins on the last Working Day of a calendar month (or on
a day for which there is no numerically corresponding day in the calendar
month, at the end of such Interest Period) shall end on the last Working Day of
a calendar month; and

 

(iii)  for
purposes of determining the availability of Interest Periods, such Interest
Periods shall be deemed available if (x) Chase quotes an applicable rate or the
Agent determines LIBOR, as provided in the definition of LIBOR, (y) the
LIBOR determined by Chase or the Agent will adequately and fairly reflect the
cost of maintaining or funding its loans bearing interest at LIBOR, for such
Interest Period, and (z) such Interest Period will end on or before the earlier
of an Anniversary Date or the last day of the then current term of this
Financing Agreement.  If a requested
Interest Period shall be unavailable in accordance with the foregoing sentence,
the Borrowers shall continue to pay interest on the Obligations at the
applicable per annum rate based upon the Chase Bank Rate until such Interest
Period becomes available (as determined by the Agent).

 

Inventory shall mean all of each Loan Party’s
present and hereafter acquired inventory (as defined in the UCC or the PPSA, as
applicable) and including, without limitation, all merchandise, inventory and
goods, and all additions, substitutions and replacements thereof, wherever
located, together with all goods and materials used or usable in manufacturing,
processing, packaging or shipping same in all stages of production from raw
materials through work-in-process to finished goods, and all proceeds thereof
of whatever sort.

 

Inventory
Loan Cap
shall mean $15,000,000.

 

Investment
Property
shall mean all now owned and hereafter acquired investment property (as defined
in the UCC or the PPSA, as applicable) and all proceeds thereof.

 

IRS shall mean the Internal Revenue Service
of the United States or any successor thereto.

 

Issuing
Bank shall
mean the bank or other financial institution issuing Letters of Credit for the
Borrowers as provided in Article V
hereof.

 

Landlord
Waiver shall
mean a letter substantially in the form of Exhibit F-1 (as
to all Loan Parties other than the Canadian Borrower) or Exhibit F-2
(as to the Canadian Borrower)  and in any
event in form and substance reasonably acceptable to the Agent and executed by
a landlord or mortgagee in respect of Inventory of the Loan Parties located at
any leased premises of the Loan Parties pursuant to which such landlord or
mortgagee, as the case may be, among other things, waives any Lien such
landlord or mortgagee may have in respect of such Inventory.

 

Leases shall mean, with respect to any Person,
all of those leasehold estates in Real Estate of such Person, as lessee, as
such may be amended, supplemented or otherwise modified from time to time.

 

Lender shall have the meaning specified in the
preamble to this Financing Agreement.

 

20

 

Letter of
Credit Guaranty
shall mean the guaranty delivered by the Agent, on behalf of the Lenders, to
the Issuing Bank of any Borrower’s reimbursement obligations under the Issuing
Bank’s reimbursement agreement, application for Letter of Credit or other like
document.

 

Letter of
Credit Guaranty Fee shall mean the fee payable by the Borrowers under Section 8.3
of this Financing Agreement to the Agent on behalf of the Lenders for:
(a) issuing a Letter of Credit Guaranty, and/or (b) otherwise aiding
the Borrowers, or any one of them, in obtaining Letters of Credit, all pursuant
to Article V hereof.

 

Letter of
Credit Sub-Limit
shall mean the commitment of the Agent to assist the Borrowers in obtaining
Letters of Credit, pursuant to Article V
hereof, in an aggregate amount outstanding as of the date of determination not
to exceed $5,000,000.

 

Letters
of Credit
shall mean all documentary and standby letters of credit issued with the
assistance of the Agent in accordance with Article V hereof
by the Issuing Bank for or on behalf of a Borrower for the importation of
inventory and for other business purposes unrelated to the purchase of
inventory.

 

LIBOR shall mean, at any time of
determination, and subject to availability, for each applicable Interest
Period, a variable rate of interest equal to: (a) at the Agent’s election (i)
the applicable LIBOR quoted to the Agent by Chase (or any successor thereof),
or (ii) the rate of interest determined by the Agent at which deposits in
Dollars are offered for the relevant Interest Period based on information
presented on the Telerate System at Page 3750 as of 11:00 A.M. (London time) on
the day which is two (2) Business Days prior to the first day of such Interest
Period, provided  that, if at least two such offered rates appear
on the Telerate System at Page 3750 in respect of such Interest Period, the
arithmetic mean of all such rates (as determined by the Agent) will be the rate
used; divided by (b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of Eurocurrency
Reserve Requirements in effect on the day which is two (2) Business Days prior
to the beginning of such Interest Period.

 

LIBOR
Loan shall
mean any loans made pursuant to this Financing Agreement which are made or
maintained at a rate of interest based upon LIBOR, provided that (i) no
Event of Default has occurred and is continuing hereunder, which has not been
waived in writing by the Required Lenders, and (ii) no LIBOR Loan shall be
made with an Interest Period that ends subsequent to a Scheduled Termination
Date or any applicable Early Termination Date. 
For the avoidance of doubt, the Borrowers shall not have more than, on a
collective basis, under this Financing Agreement, respectively, five (5) LIBOR
Loans and BA Rate Loans, collectively, allocated among the US Borrowers and the
Canadian Borrower as they shall determine in accordance with the terms of this
Financing Agreement.

 

Lien shall mean any mortgage, deed of trust,
pledge, hypothecation, assignment, charge, deposit arrangement, encumbrance,
lien (statutory or other), security interest or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
intended to assure payment of any Indebtedness or the performance of any other
obligation, including any conditional sale or other title retention agreement,
the interest of a lessor under a Capital Lease and any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the UCC, the PPSA or comparable law of any
jurisdiction naming the owner of the asset to which such Lien relates as debtor
and that is signed, authenticated (as defined in the UCC or, if applicable, the
PPSA to the extent if so defined) or otherwise authorized by such debtor.

 

Line of
Credit Fee
shall: (a) mean the fee due the Agent for the ratable benefit of the
Lenders having US Revolving Credit Commitments at the end of each month for the
Revolving Line of

 

21

 

Credit, (b) be determined by multiplying the difference between
(i) the US Revolving Credit Commitment and (ii) the sum, for said
month, of (x) the average daily balance of Revolving Loans plus
(y) the average daily balance of Letters of Credit outstanding for said
month, by 0.375% per annum for the number of days in said month and (c) be
payable, whether or not Revolving Loans are then available.

 

Loan
Documents
shall mean, collectively, this Financing Agreement, the Promissory Notes, each Guaranty,
the Collateral Documents, the Letters of Credit, the Letter of Credit
Guaranties, the Mortgages, the other closing documents, any other ancillary
loan and security agreements and any other certificate, agreement or document
executed by a Loan Party and delivered to the Agent or the Lenders from time to
time in connection with this Financing Agreement, all as may be renewed,
amended, extended, increased or supplemented from time to time.

 

Loan
Facility Fee
shall mean the fee payable to the Agent in accordance with, and pursuant to,
the provisions of Section 8.7 of this
Financing Agreement.

 

Loan
Party shall
mean, collectively, the Borrowers, Parent and each Subsidiary of Parent that is
not, on the Closing Date or at any date of determination thereafter, a
Borrower.

 

Loans shall mean any loan made by any Lender
pursuant to this Financing Agreement.

 

Mandatory
Prepayment
shall mean the amounts by which the Borrowers must prepay the Loans in
accordance with Section 4.3.

 

Management
Agreement
shall mean that certain management agreement, dated as of September 30,
2002, among CGI and Cellu Tissue, which sets forth the terms of the Related
Party Fee Arrangement.

 

Material
Adverse Change
shall mean a material adverse change in any of (a) the condition (financial
or otherwise), Collateral, business, performance, prospects, operations,
industry or properties of the Loan Parties and their Subsidiaries taken as a
whole, (b) the legality, validity or enforceability of any Loan Document
or any Related Document, (c) the validity, perfection or priority of any
lien, security interest or other encumbrance granted pursuant to the Loan
Documents, or (d) the ability of the Loan Parties to repay the Obligations
or to perform their respective obligations under the Loan Documents or
(e) the rights and remedies of the Agent, the Lenders or the Issuing Bank
under the Loan Documents.

 

Material
Adverse Effect
shall mean an effect that results in or causes, or could reasonably be expected
to result in or cause, a Material Adverse Change.

 

Material
Contract
shall mean, with respect to any Person, (i) each Contractual Obligation of such
Person or any of its Subsidiaries involving aggregate consideration payable to
or by such Person or such Subsidiary of $500,000 or more in any Fiscal Year
(other than Contractual Obligations (including purchase orders) owed to vendors
and/or due from customers arising in the ordinary course of the business of
such Person or such Subsidiary and other than Contractual Obligations that by
their terms may be terminated by such Person or Subsidiary in the ordinary
course of its business upon less than 60 days’ notice without penalty or
premium) and (ii) all other Contractual Obligations material to the business,
operations, condition (financial or otherwise), performance, prospects or
properties of such Person or such Subsidiary.

 

Menominee
Paper Machine
shall mean the Number 1 Paper Machine located at Menominee’s facility located in
Menominee, Michigan.

 

22

 

Mortgages shall mean, collectively, the mortgages,
deeds of trust or other real estate security documents made or required herein
to be made by the Loan Parties.

 

Multiemployer
Plan shall
mean a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to
which any Loan Party, any of its Subsidiaries or any ERISA Affiliate has any
obligation or liability, contingent or otherwise.

 

Neenah shall have the meaning specified in the
preamble to this Financing Agreement.

 

Net Cash
Proceeds
shall mean, with respect to any Disposition of assets, the cash proceeds
resulting therefrom net of (a) reasonable cash expenses of sale
(including, without limitation, brokerage fees, if any, transfer taxes and
payment of principal, premium and interest of Indebtedness permitted under this
Financing Agreement (other than the Loans) required to be, and is, repaid as a
result of such Disposition of assets) and (b) all federal, state, local
and non-U.S. taxes to the extent payable as a direct consequence of any such
Disposition of assets.

 

Non-Domestic
Lender shall
mean each Lender, each Issuing Bank and each Agent that is not a United States
person as defined in Section 7701(a)(30) of the Code.

 

Notes
Collateral Agent
shall mean The Bank of New York, in its capacity as collateral agent for the
Notes Trustee and the holders of the Secured Notes.

 

Notes
Collateral Documents shall have the meaning ascribed to the term “Collateral Documents” in
the Notes Indenture.

 

Notes
Documents
shall mean the Notes Indenture, the Notes Collateral Documents, the
Registration Rights Agreement and any other documents entered into in
connection therewith.

 

Notes
Indenture
shall mean that certain Indenture, dated as of March 12, 2004, between
Cellu Tissue, as issuer, and The Bank of New York, as trustee, as amended,
supplemented or otherwise modified from time to time in accordance with this
Financing Agreement and the Intercreditor Agreement.

 

Notes
Security Agreement shall mean that certain Security Agreement, dated as of March 12,
2004, among Cellu Tissue and certain of its Subsidiaries, as grantors, and the
Notes Collateral Agent, as amended, supplemented or otherwise modified from
time to time in accordance with this Financing Agreement and the Intercreditor
Agreement.

 

Notes
Trustee shall
mean The Bank of New York, in its capacity as trustee for the holders of the
Secured Notes.

 

Notice of
Borrowing
shall mean a notice, substantially in the form of Exhibit G hereto,
to be delivered in accordance with Section 3.1.

 

Notice of
Conversion or Continuation shall mean a notice, substantially in the form of Exhibit H hereto, to be delivered in accordance with Section 8.13.

 

Obligations shall mean (i) with respect to all
Loan Parties, all Loans, advances and extensions of credit made or to be made
by the Agent and/or the Lenders to the Borrowers, or any one of them, or to
others for the Borrowers’ account (including, without limitation, all US
Revolving Loans, Canadian Revolving Loans, Letters of Credit, Letter of Credit
Guaranties) under the Loan Documents;

 

23

 

any and all Indebtedness and obligations which may at any time be owing
by the Loan Parties or any one of them to the Agent and/or the Lenders
howsoever arising under the Loan Documents, whether now in existence or
incurred by the Loan Parties or any one of them howsoever arising from time to
time hereafter; whether principal, interest (including, without limitation, all
interest that accrues after the commencement of any insolvency proceeding of
any Loan Party, whether or not such interest is unenforceable or is not
allowable due to the existence of such insolvency proceeding), fees, costs,
expenses or otherwise; whether secured by pledge, lien upon or security
interest in any of the Loan Parties’ Collateral, assets or property or the
assets or property of any other person, firm, entity or corporation; whether
such indebtedness is absolute or contingent, joint or several, matured or
unmatured, direct or indirect and whether the Loan Parties are liable to the
Agent and/or the Lenders for such indebtedness as principal, surety, endorser,
guarantor or otherwise.  Obligations
shall also include Indebtedness owing to the Agent and/or the Lenders by the
Loan Parties or any one of them under any Loan Document or under any other
agreement or arrangement now or hereafter entered into in connection with this
Financing Agreement between the Loan Parties and the Agent and/or the Lenders;
indebtedness or obligations incurred by, or imposed on, the Agent and/or the
Lenders as a result of environmental claims arising out of any of the Loan
Parties’ operations, premises or waste disposal practices or sites in
accordance with Section 7.7 and Section 7.13
hereof; the Loan Parties’ liability to the Agent and/or the Lenders as maker or
endorser of any promissory note or other instrument for the payment of money in
favor of the Agent and/or the Lenders; the Loan Parties’ liability to the Agent
and/or the Lenders under any instrument of guaranty or indemnity, or arising
under any guaranty, endorsement or undertaking which the Agent and/or the
Lenders may make or issue to others for the Borrowers’ account pursuant to this
Financing Agreement or the other Loan Documents, including any Letters of
Credit, Letter of Credit Guaranty or other accommodation extended by the Agent
or any Lender with respect to applications for Letters of Credit, the Agent
and/or the Lender’s acceptance of drafts or the Agent and/or the Lenders
endorsement of notes or other instruments for the Borrowers’ account and
benefit; and the obligation of any Loan Party to reimburse any amount in
respect of any of the foregoing that the Agent and/or any Lender (in their sole
discretion) may elect to pay or advance on behalf of such Person pursuant to
this Financing Agreement or the other Loan Documents; and (ii) with
respect to the Guarantors, the Guarantied Obligations.

 

Obsolete
Equipment
shall mean obsolete, outmoded, worn-out or surplus Equipment.

 

Operating
Leases shall
mean all leases of property (whether real, personal or mixed) other than
Capital Leases.

 

Other
Collateral
shall mean all lockboxes; all Blocked Accounts; the Depository Account and any
other Deposit Accounts maintained with any bank or financial institutions into
which the Proceeds of any Collateral are or may be deposited; all other Deposit
Accounts; all Investment Property; and all cash and other monies and property
of any Grantor that is in the possession or control of the Agent or any other
Secured Party.

 

Other
Taxes shall
have the meaning specified in Section 8.20(b).

 

Out-of-Pocket
Expenses
shall mean all of the Agent’s (and the Lenders upon the occurrence and during
the continuation of an Event of Default which is not waived by the Required
Lenders) present and future costs and expenses incurred relative to this
Financing Agreement or any other Loan Documents, whether incurred heretofore or
hereafter, which expenses shall include, without being limited to: the cost of
record searches, all costs and expenses incurred by the Agent in opening bank accounts,
depositing checks, receiving and transferring funds, and wire transfer charges,
any charges imposed on the Agent due to returned items and “insufficient funds”
of deposited checks and the Agent’s standard fees relating thereto, all
internal auditors’ and external auditors’ and appraisers’ costs and

 

24

 

expenses incurred by the Agent in connection with appraisals and audits
of the Collateral or valuations of the Loan Parties, any amounts paid by, incurred
by or charged to, the Agent and/or the Lenders by the Issuing Bank under a
Letter of Credit Guaranty or a Borrower’s Letter of Credit reimbursement
agreement, application for Letters of Credit or other like document which
pertain either directly or indirectly to such Letters of Credit, and the
Agent’s standard fees relating to the Letters of Credit and any drafts
thereunder, travel, lodging and similar expenses of the Agent’s personnel in
connection with inspecting and monitoring the Collateral from time to time
hereunder, any applicable reasonable counsel fees and disbursements, fees and
taxes relative to the filing of financing statements, all expenses, costs and
fees set forth in Section 10.3 of this
Financing Agreement,  and all title
insurance premiums, real estate survey costs, costs of preparing and recording
mortgages/deeds of trust against the Real Estate.

 

Overadvance
Rate shall
mean a rate equal to one-half of one percent (0.50%) per annum in excess of the
applicable contract rate of interest determined in accordance with Section 8.1(b) of this Financing Agreement.

 

Overadvances shall mean the amount by which
(x) the sum of all outstanding Revolving Loans, Letters of Credit and
advances made hereunder exceeds (y) the Borrowing Base applicable at
the time any such extension of credit is made. 
For the avoidance of doubt and notwithstanding anything herein to the
contrary, neither the Agent nor any Lender shall have any obligation whatsoever
under this Financing Agreement to make any Overadvances to any Borrower.

 

Parent shall have the meaning specified in the
preamble to this Financing Agreement.

 

Patent
Licenses
shall have the meaning specified in the applicable Pledge and Security
Agreement.

 

Patents shall have the meaning specified in the
applicable Pledge and Security Agreement, and for the avoidance of doubt, shall
include, and all General Intangible, Intellectual Property and Patent rights
with respect thereto and all income, royalties, cash and non-cash proceeds
thereof.

 

PBGC shall mean the Pension Benefit Guaranty
Corporation or any successor thereto.

 

Permit shall mean any permit, approval,
authorization, license, variance or permission required from a Governmental
Authority under an applicable Requirement of Law.

 

Permitted
Encumbrances
shall mean: (a) Liens existing on the date hereof to the extent such Liens are
not otherwise permitted under clauses (b), (j), (k) and
(l) of this definition of “Permitted Encumbrances”
and then only to the extent that such Liens are specifically described in Schedule 2 (Existing Liens) hereto and any extensions,
renewals or replacements thereof so long as the Lien is not extended to any
other assets or property; (b) Purchase Money Liens; (c) inchoate
Liens for Taxes, assessments or governmental charges or levies not yet due and
payable or Liens for Taxes, assessments or governmental charges or levies being
contested in good faith and by appropriate proceedings for which adequate
reserves or other appropriate provisions are being maintained to the extent required
by GAAP, in each case, which Liens are not (x) filed on any public
records, (y) other than with respect to Real Estate, senior to the Liens
of the Agent or (z) for Taxes due the United States of America or Canada
or any state or political subdivision of either thereof, having similar
priority statutes, as further set forth in Section 7.6
hereof;  (d) statutory Liens of landlords
and Liens of carriers, warehousemen, bailees, mechanics, materialmen and other
like Liens imposed by law, created in the ordinary course of business and for
amounts not yet due (or which are being contested in good faith, by appropriate
proceedings or other appropriate actions which are sufficient to prevent
imminent foreclosure of such Liens) and with respect to which adequate reserves
or other appropriate provisions are being maintained by each of the

 

25

 

Loan Parties, as applicable, in accordance with GAAP; (e) Liens in
respect of non-exclusive licenses of intellectual property of any Loan Party or
its Subsidiaries in the ordinary course of its business; (f) precautionary
financing statements in connection with Operating Leases with respect to a
lessor’s rights in and to personal property leased to such Person in the ordinary
course of such Person’s business to the extent such Operating Leases are
permitted under this Financing Agreement; (g) deposits made (and the Liens
thereon) in the ordinary course of business of any of the Loan Parties
(including, without limitation, security deposits for leases, indemnity bonds,
surety bonds and appeal bonds) in connection with workers’ compensation,
unemployment insurance and other types of social security benefits or to secure
the performance of tenders, bids, contracts (other than for the repayment or
guaranty of borrowed money or purchase money obligations), statutory
obligations and other similar obligations arising as a result of progress
payments under government contracts; (h) with respect to any Real Estate
that is not part of the Collateral, easements (including, without limitation,
reciprocal easement agreements and utility agreements), encroachments, minor
defects or irregularities in title, variation and other restrictions, charges
or encumbrances (whether or not recorded) affecting such Real Estate, if
applicable, and which in the aggregate (A) do not materially interfere
with the occupation, use or enjoyment by any of the Loan Parties of its
business or property so encumbered and (B) in the reasonable business
judgment of the Agent do not materially and adversely affect the value of such
Real Estate; (i) with respect to any Real Estate that is part of this
Collateral, Liens, easements and encroachments and any other exceptions to the
commitments for title insurance issued in connection with the Mortgages granted
to the Agent as accepted by the Agent; 
(j) Liens granted to the Agent, on behalf of the Secured Parties,
by the Loan Parties or any one of them; (k) Liens granted to the Notes
Collateral Agent by the Loan Parties pursuant to the Notes Collateral
Documents; and (l) Liens of judgment creditors provided such Liens do not
exceed, in the aggregate, at any time, $500,000 (other than Liens bonded or
insured to the reasonable satisfaction of the Agent).

 

Permitted
Indebtedness  shall
mean: (a) current Indebtedness maturing in less than one year and incurred
in the ordinary course of business for raw materials, supplies, equipment,
services, Taxes or labor; (b) Capital Lease Obligations and other Indebtedness
secured by Purchase Money Liens incurred by a Borrower or Guarantor to finance
the acquisition of Equipment; provided, however,
that the aggregate outstanding principal amount of such Capital Lease
Obligations and such other Indebtedness secured by Purchase Money Liens shall
not exceed $5,000,000 outstanding at any time; (c) Indebtedness arising
under this Financing Agreement; (d) subject to the terms and conditions of this
Financing Agreement and the Intercreditor Agreement, Indebtedness arising under
the Notes Indenture in an aggregate principal amount not to exceed an amount
equal to the sum of (i) $162,000,000 plus (ii) the amount of the
Additional Notes (provided that no more than $5,000,000 in aggregate principal
amount of Additional Notes shall constitute “Permitted
Indebtedness” under this Financing Agreement); (e) deferred
Taxes and other expenses incurred in the ordinary course of business;
(f) other Indebtedness existing on the Closing Date and listed in Schedule 3 (Existing Indebtedness) hereto and any
refinancings, extensions or renewals thereof so long as (I) such
extension, refinancing or renewal is pursuant to terms that are not less
favorable to the Loan Parties and the Agent and Lenders than the terms of the
Indebtedness being extended, refinanced or renewed and (II) after giving
effect to such extension, refinancing or renewal, the amount of such
Indebtedness is not greater than the amount of Indebtedness outstanding
immediately prior to such extension, refinancing or modification;
(g) Indebtedness under Pulp Hedging Contracts and Energy Hedging Contracts
permitted pursuant to Section 7.19
hereof or under other Hedging Agreements to purchase raw materials entered into
in the ordinary course of business and not for speculative purposes;
(h) Indebtedness in respect of loans or other advances made by
(I) any Borrower to (x) any other Borrower or (y) Parent, Cellu
Tissue, or any other Guarantor, in each case, to the extent permitted under Section 7.11(g)(ii) or (II) any
Loan Party to a Borrower; and (i) additional unsecured Indebtedness not to
exceed an aggregate principal amount of $500,000 outstanding at any time.

 

26

 

Person shall mean an individual, partnership,
corporation (including a business trust), joint stock company, estate, trust,
limited liability company, unincorporated association, joint venture or other
entity, or a Governmental Authority.

 

Pledge
and Security Agreement shall mean, collectively, the Domestic Pledge and
Security Agreement, the Canadian Pledge and Security Agreement and each other
pledge and security agreement executed and delivered by a Loan Party, each in
form and substance satisfactory to the Agent.

 

Pledged
Collateral  shall
have the meaning specified in the Pledge and Security Agreement.

 

Pledged
Instruments  shall
have the meaning specified in the Pledge and Security Agreement.

 

Pledged
Interests
shall have the meaning specified in the Pledge and Security Agreement.

 

PPSA shall mean the Personal Property Security Act (Ontario).

 

Proceeds shall have the meaning specified in Article 9 of the UCC (or, if applicable, the
corresponding provision of the PPSA).

 

Promissory
Notes shall
mean the promissory notes, in substantially the form of Exhibits A
or B attached hereto, delivered by any Borrower to the Agent to
evidence the US Revolving Loans and/or Canadian Revolving Loans made pursuant
to, and repayable in accordance with, the provisions of Article III
of this Financing Agreement.

 

Property
Loss Event
shall mean (a) any loss of or damage to any Inventory, Equipment, Real
Estate or other property or assets of any Loan Party that results in the
receipt by such Person of proceeds of insurance or (b) any taking of
property of any Loan Party that results in the receipt by such Person of a
compensation payment in respect thereof.

 

Pulp
Hedging Contracts shall mean any and all forward contracts, commodity swap, purchase or
option agreements, other commodity price hedging arrangements, and all other
similar agreements or arrangements designed to alter the risks of any Person
arising from fluctuations in the price of pulp.

 

Purchase
Money Liens
shall mean Liens (including the interest of a lessor under a Capital Lease) on
any item of Equipment acquired after the date of this Financing Agreement provided that (a) each such Lien shall attach only to
the property so acquired and shall be incurred solely for the purpose of
financing the acquisition of such Equipment, (b) a description of the
Equipment so acquired is furnished to the Agent, and (c) the debt incurred
in connection with such acquisitions and secured by such Purchase Money Lien is
Permitted Indebtedness.

 

Purchasing Agreements shall mean, collectively,
each purchasing services agreement, dated as of February 28, 2003 (as
amended in accordance with this Financing Agreement), entered into by Cellu
Tissue with each Borrower pursuant to which Cellu Tissue will engage in group
purchasing of pulp for each such Borrower in exchange for certain fees and
expenses as more fully set forth therein.

 

Ratable
Portion shall
mean, with respect to any Lender, the percentage obtained by dividing
(i) the Revolving Credit Commitment of such Lender by (ii) the
aggregate Revolving Credit

 

27

 

Commitments of all Lenders (or, at any time after the Revolving Credit
Termination Date, the percentage obtained by dividing the aggregate outstanding
principal balance of the outstanding Revolving Loans, Letters of Credit or
other extensions of credit made under the Revolving Line of Credit (collectively,
the “Revolving Extensions of Credit”) owing
to such Lender by the aggregate outstanding principal balance of the Revolving
Extensions of Credit owing to all Lenders).

 

Real
Estate shall
mean each real property in which any Loan Party has, or at any time during the
term of the Loan will have, a fee and/or leasehold interest, including any such
real property which has been, or will be, encumbered, mortgaged, pledged or
assigned to the Agent or its designee set forth on Schedule 4
(Real Estate) hereto, and, in each case, together with the right,
title and interest of such Loan Party, if any, in and to the streets, the land
lying in the bed of any streets, roads or avenues, opened or proposed, in front
of, the air space and development rights pertaining to the real property and
the right to use such air space and development rights, all rights of way,
privileges, liberties, tenements, hereditaments and appurtenances belonging or
in any way appertaining thereto, all fixtures, all easements now or hereafter
benefiting the real property and all royalties and rights appertaining to the
use and enjoyment of the real property, including all alley, vault, drainage,
mineral, water, oil and gas rights, together with all of the buildings and
other improvements now or hereafter erected on the real property and any
fixtures appurtenant thereto.

 

Registration
Rights Agreement
shall mean that certain Registration Rights Agreement, dated as of
March 12, 2004, among Cellu Tissue and certain of its Subsidiaries and J.P.
Morgan Securities Inc., on behalf of itself and the other initial purchasers of
the Secured Notes, as amended, supplemented or otherwise modified from time to
time in accordance with the Intercreditor Agreement.

 

Reinvestment
Deferred Amount
shall mean, with respect to any Reinvestment Event, the aggregate Net Cash
Proceeds received by any Loan Party in connection therewith that are not
initially applied to prepay the Loans pursuant to Section 4.3
as a result of the delivery of a Reinvestment Notice and which shall be
deposited by such Loan Party in the Depository Account until the Reinvestment
Prepayment Date.

 

Reinvestment
Event shall
mean any Disposition of Obsolete Equipment or any Property Loss Event (subject
to Section 7.5(d) hereof) in respect
of which the Borrowing Agent or the applicable Loan Party has delivered a
Reinvestment Notice.

 

Reinvestment
Notice shall
mean a written notice executed by a Responsible Officer of the applicable
Borrowers stating that no Event of Default has occurred and is continuing and
that the Borrowers (directly or indirectly through one of their respective
Subsidiaries) intend and expect to use all or a specified portion of the Net
Cash Proceeds of a Disposition of Obsolete Equipment or a Property Loss Event
to acquire replacement assets (including replacement of property subject to the
Property Loss Event) useful in its or one of its Subsidiaries’ businesses or,
in the case of a Property Loss Event, to effect repairs.

 

Reinvestment
Prepayment Amount shall mean, with respect to any Reinvestment Event, the Reinvestment
Deferred Amount relating thereto less any amount expended or required to be
expended pursuant to a Contractual Obligation entered into prior to the
relevant Reinvestment Prepayment Date to acquire replacement assets (including
replacement of property subject to the Property Loss Event) useful in the
Borrower’s business or, in the case of a Property Loss Event, to effect
repairs.

 

Reinvestment
Prepayment Date
shall mean, with respect to any Reinvestment Event, the earlier of (a) the
date occurring one hundred eighty (180) days after such Reinvestment Event (or
such longer period as required to be expended thereafter pursuant to a
Contractual Obligation entered into prior

 

28

 

to the relevant Reinvestment Date but in any event, not later than
three hundred sixty five (365) days after such Reinvestment Event unless
otherwise agreed to by the Agent) and (b) the date that is five (5)
Business Days after the date on which the Borrowers shall have notified the
Agent of the Borrowers’ determination not to acquire replacement assets
(including replacement of property subject to the Property Loss Event) useful
in the Borrowers’ or their Subsidiaries’ respective business (or, in the case
of a Property Loss Event, not to effect repairs) with all or any portion of the
relevant Reinvestment Deferred Amount.

 

Related Documents shall mean the Management
Agreement, the Administrative Services Agreements, the Stockholders Agreement, each
Notes Document and each Designated Stock Repurchase Document.

 

Related
Party Fee Arrangement shall mean each arrangement or agreement (which shall be consistent
with past practices, in accordance with the Management Agreement and otherwise
on payment terms acceptable to the Agent) between CGI (or such Person as may be
designated by CGI to the Loan Parties and the Agent in writing) and the Loan
Parties pursuant to which the Loan Parties are required to make any Related
Party Fee Payment to CGI (or to such Person as may be designated by CGI) or its
applicable affiliates to compensate CGI, such persons or such affiliates, as
the case may be, for the provision of management, consulting and related
services by such Person to the Loan Parties.

 

Related
Party Fee Payment shall have the meaning specified in Section 7.11(f).

 

Release shall mean, with respect to any Person,
any release, spill, emission, leaking, pumping, injection, deposit, disposal,
discharge, dispersal, leaching or migration, in each case, of any Contaminant
into the indoor or outdoor environment or into or out of any property owned by
such Person, including the movement of Contaminants through or in the air,
soil, surface water, ground water or property.

 

Remedial
Action shall
mean all actions required under or necessary to achieve compliance with
Environmental Laws relating to (a) the clean up, removal, treatment or in
any other way addressing any Contaminant in the indoor or outdoor environment,
(b) preventing the Release or threat of Release or minimizing the further
Release so that a Contaminant does not migrate or endanger or threaten to
endanger public health or welfare or the indoor or outdoor environment or
(c) performing pre-remedial studies and investigations and post-remedial
monitoring and care.

 

Rent
Reserve shall
mean, collectively (and without duplication) the sum of (i) three (3)
months rental payments or similar charges for any Eligible Loan Party’s leased
premises or other Collateral locations for which such Eligible Loan Party has
not delivered to the Agent a Landlord Waiver, plus (ii) three (3)
months estimated payments plus any other fees or charges owing by any Eligible
Loan Party to each applicable warehousemen or third party processor that has
not duly executed and delivered to the Agent a Bailee’s Letter or other
subordination of security interest, in form and substance reasonably
satisfactory to the Agent; provided, however,
that any of the foregoing amounts shall be adjusted from time to time hereafter
upon (x) delivery to the Agent of any such acceptable waiver or
subordination, (y) the opening or closing of a Collateral location and/or
(z) any change in the amount of rental, storage or processor payments or
similar charges.

 

Required
Lenders shall
mean the Lenders holding aggregate Revolving Credit Commitments under this
Financing Agreement in an amount of 662/3%.

 

Requirement
of Law shall
mean, with respect to any person or entity, the common law and all federal,
state, provincial, local and foreign laws, rules and regulations, statutes,
orders, judgments,

 

29

 

decrees and other determinations of any Governmental Authority or
arbitrator, applicable to or binding upon such person or any of its property or
to which such person or entity or any of its respective property is subject.

 

Responsible
Officer  shall mean an authorized accounting or
financial officer or other officer acceptable to the Agent.

 

Restricted
Payment shall
mean (i) any dividend or other distribution, direct or indirect, on
account of any Stock, options or warrants of any Loan Party or any of its
Subsidiaries, now or hereafter outstanding, (ii) any repurchase, redemption,
retirement, defeasance, sinking fund or similar payment, purchase or other
acquisition for value, direct or indirect, of any Stock, options or warrants of
any Loan Party or any direct or indirect parent of any Loan Party, now or
hereafter outstanding, (iii) any payment to retire, or to obtain the
surrender of, any outstanding warrants, options or other rights for the
purchase or acquisition of shares of any class of Stock of any Loan Party, now
or hereafter outstanding, (iv) any return of any Stock to any shareholders
or other equity holders of any Loan Party or any of its Subsidiaries, or make any
other distribution of property, assets, shares of Stock, warrants, rights,
options, obligations or securities thereto as such, or (v) any management fees
or any other fees or expenses (including the reimbursement thereof by any Loan
Party or any of its Subsidiaries) paid pursuant to any management, consulting
or other services agreement or otherwise (except standard employment or
indemnification arrangements consistent with past practice) to any of the
shareholders or other equity holders of any Loan Party or any of its
Subsidiaries or other affiliates, or to any other Subsidiaries or affiliates of
any Loan Party.

 

Revolving
Credit Commitment  shall
mean, as the context requires, with respect to any Lender, such Lender’s US
Revolving Credit Commitment, if any, and Canadian Revolving Credit Commitment,
if any, and “Revolving Credit Commitments”
shall mean the aggregate US Revolving Credit Commitments and Canadian Revolving
Credit Commitments of all Lenders.

 

Revolving
Credit Termination Date shall mean the date that is the earlier of
(i) the Scheduled Termination Date and (ii) the date upon which this
Financing Agreement is terminated in accordance with the terms hereof.

 

Revolving
Line of Credit
shall mean the aggregate commitment of the Lenders to (a) make Loans and
advances pursuant to Article III
of this Financing Agreement and (b) assist the US Borrowers in opening Letters
of Credit or issuing Letter of Credit Guaranties pursuant to Article V of this Financing Agreement, in an aggregate
amount not to exceed the lesser of (a) the Dollar Equivalent of
$30,000,000 and (b) the Borrowing Base; provided that nothing herein shall
be deemed to increase any Lender’s commitment hereunder, and which commitment
shall be set forth in the applicable schedules prepared by the Agent and
attached hereto in Schedule 1
(Commitments) or the Assignment and Transfer Agreements executed by
such Lender.

 

Revolving
Loan Accounts
shall mean each account on the Agent’s books, in the name of the Borrowing
Agent (on behalf of the US Borrowers) or the Canadian Borrower, as the case may
be, in which the Borrowers will be charged with all applicable Obligations
under this Financing Agreement.

 

Revolving
Loans shall
mean the loans, advances and other financial accommodations (including, without
limitation, the USD Revolving Loans and the CDN Revolving Loans) made, from
time to time, to or for the account of each of the Borrowers by the Agent on
behalf of the Lenders pursuant to Article III
of this Financing Agreement.

 

30

 

Scheduled
Termination Date
shall mean the Initial Anniversary Date, or, if the Agent and the Lenders agree
to extend the “Scheduled Termination Date” in
accordance with Article XI of this Financing
Agreement, such subsequent Anniversary Date as may be agreed to by the Agent
and the Lenders from and after the Initial Anniversary Date on which the
obligation of the Agent, on behalf of the Lenders, and/or the Lenders to make
Revolving Loans or advances or other financial accommodations contemplated by
this Financing Agreement to the Borrowers shall terminate.

 

Second-Priority
Collateral
shall have the meaning specified in the Pledge and Security Agreements.

 

Secured
Notes shall
mean the 9.75% senior secured notes due 2010 issued by Cellu Tissue, in an
aggregate principal amount not to exceed $162,000,000, pursuant to the Notes
Indenture.

 

Secured
Obligations
shall mean, in the case of each Loan Party, such Loan Party’s Obligations and
the other obligations of such Loan Party under the other Loan Documents to
which it is a party.

 

Secured
Party shall
mean, collectively, the Agent and the Lenders.

 

Securities
Account shall
have the meaning specified in Article 9
of the UCC (or, if applicable, the corresponding provision of the PPSA).

 

Securities
Account Control Agreement shall mean in respect of each Loan, a letter
agreement, substantially in the form of Annex 2 to the
applicable Pledge and Security Agreement (with such changes as may be agreed to
by the Agent), that is executed by the applicable Loan Party, the Agent and the
relevant securities intermediary.

 

Settlement
Date shall
mean the date, weekly, and more frequently, at the discretion of the Agent,
upon the occurrence of an Event of Default or a continuing decline or increase
of the Revolving Loans that the Agent and the Lenders shall settle amongst
themselves so that (x) the Agent shall not have, as the Agent, any money
at risk and (y) on such Settlement Date the Lenders shall have a pro rata
amount of all outstanding Revolving Loans and Letters of Credit, provided that
each Settlement Date for a Lender shall be a Business Day on which such Lender
and its bank are open for business.

 

Solvent shall mean, with respect to any Person,
that the value of the assets of such Person (both at fair value and present
fair saleable value is, on the date of determination, greater than the total
amount of liabilities (including contingent and unliquidated liabilities) of
such Person as of such date and that, as of such date, such Person is able to
pay all liabilities of such Person as such liabilities mature and does not have
unreasonably small capital.  In computing
the amount of contingent or unliquidated liabilities at any time, such
liabilities shall be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.

 

Sponsor shall mean CEP or an affiliate of CEP
acceptable to the Agent in its sole discretion.

 

Spot Exchange Rate shall mean, on any date of
determination, the spot rate at which Dollars are offered on such day by CIBC
in Toronto, Ontario (Canada) for C$ at approximately 11:00 a.m. (Toronto,
Ontario (Canada) time).

 

31

 

Stock shall mean shares of capital stock
(whether denominated as common stock or preferred stock), beneficial,
partnership or membership interests, participations or other equivalents
(regardless of how designated) of or in a corporation, partnership, limited
liability company or equivalent entity, whether voting or non-voting.

 

Stockholders
Agreement
shall mean the Stockholders Agreement, dated as of September 28, 2001,
among CEP, Chef Nominees Limited, Wahyam Capital, LLC, Parent and the other
parties listed therein, as amended by Amendment to Stockholders Agreement,
dated as of September 30, 2002, among Parent, CEP, Chef Nominees Limited
and Russell C. Taylor.

 

Subsidiary shall mean, with respect to any Person,
any corporation, partnership, limited liability company or other business
entity of which an aggregate of 50% or more of the outstanding voting stock is,
at the time, directly or indirectly, owned or controlled by such person or one
or more Subsidiaries of such person.

 

Subsidiary
Guarantors
shall mean each direct and indirect Subsidiary of Parent that is not, on the
Closing Date or at any date of determination thereafter, a Borrower, and shall
include, without limitation, any holding company owned directly or indirectly
by Parent or Sponsor and existing on the date of this Agreement or subsequently
formed or acquired to hold the equity interests of any Borrower.

 

Substitute
Institution
shall have the meaning specified in Section 8.22.

 

Substitution
Notice shall
have the meaning specified in Section 8.22.

 

Tax
Affiliate
shall mean, with respect to any Person, (a) any Subsidiary of such Person,
and (b) any affiliate of such Person with which such Person files or is
eligible to file consolidated, combined or unitary tax returns.

 

Taxes shall mean all federal, state, municipal
and other governmental taxes, levies, charges, claims and assessments which are
or may be due by the Loan Parties with respect to their business, operations,
Collateral or otherwise.

 

Title IV
Plan shall
mean a pension plan, other than a Multiemployer Plan, covered by Title IV
of ERISA and to which any Loan Party, any of its Subsidiaries or any ERISA
Affiliate has any obligation or liability (contingent or otherwise).

 

Total
Assets shall
mean total assets determined in accordance with GAAP, on a basis consistent
with the latest audited financial statements of the Loan Parties.

 

Total
Funded Debt
shall mean, in any period, all Indebtedness for borrowed money (including,
without limitation, all Capital Lease Obligations and substantially all other
short- and long-term Indebtedness for borrowed money) of the Loan Parties,
collectively, for such period.

 

Total
Funded Debt Ratio shall mean, for the relevant period, the ratio determined by dividing
Total Funded Debt by EBITDA.

 

Total
Liabilities
shall mean total liabilities determined in accordance with GAAP, on a basis
consistent with the latest audited financial statements of the Loan Parties.

 

32

 

Trade
Accounts Receivable shall mean that portion of each of the Loan Parties’ Accounts which
arises from the sale of Inventory or the rendition of services in the ordinary
course of the Loan Parties’ business.

 

Trademark
Licenses
shall have the meaning specified in the applicable Pledge and Security
Agreement.

 

Trademarks shall have the meaning specified in the
applicable Pledge and Security Agreement, and shall include all cash and
non-cash proceeds thereof.

 

Transferee shall have the meaning specified in Section 13.5(b).

 

UCC shall have the meaning specified in the
applicable Pledge and Security Agreement. 
For the avoidance of doubt, with respect to the Stock, assets and other
property of the Canadian Borrower, the term “UCC”
shall also include within its meaning the Personal Property Security Act
(Ontario).

 

US
Borrowers
shall have the meaning specified in the preamble to this Financing Agreement.

 

US Lender shall mean each Lender that makes
Revolving Loans to the US Borrowers under this Financing Agreement.

 

US
Revolving Credit Commitment  shall
mean, with respect to each US Lender, the commitment of such US Lender to make
US Revolving Loans and/or Letters of Credit and acquire interests in other
outstanding US Revolving Loans, Letters of Credit or Letter of Credit
Guaranties in the aggregate principal amount outstanding not to exceed the
amount set forth opposite such Lender’s name on Schedule 1
(Commitments) under the caption “US
Revolving Credit Commitment” or set forth in the applicable Assignment and
Transfer Agreement executed by such Lender, in each case as such amount may be
reduced pursuant to this Financing Agreement.

 

US
Revolving Line of Credit shall mean the aggregate commitment of the US Lenders
to (a) make Loans and advances to the US Borrowers (or to the Borrowing Agent on
behalf of the US Borrowers) pursuant to Article III
of this Financing Agreement and (b) assist the US Borrowers in opening Letters
of Credit or issuing Letter of Credit Guaranties pursuant to Article V of this Financing Agreement, in an aggregate
amount not to exceed the lesser of (a) the Dollar Equivalent of
$30,000,000 and (b) the Borrowing Base.

 

US
Revolving Loans
shall mean the Revolving Loans made, from time to time, by the Agent or the
Lenders to the Borrowing Agent (for the account of the applicable US Borrower),
denominated in Dollars, pursuant to this Financing Agreement.

 

USD
Revolving Loans
shall mean the Revolving Loans made from time to time pursuant to this
Financing Agreement by (i) the Agent or the Lenders to the Borrowing Agent (for
the account of the applicable US Borrower) or (ii) the Agent or the Canadian
Lenders to the Canadian Borrower (or the Borrowing Agent (for the account of
the Canadian Borrower), as the case may be, in each case, denominated in
Dollars.

 

Withdrawal
Liability shall
mean, with respect to any Loan Party or any of its Subsidiaries at any time,
the aggregate liability incurred (whether or not assessed) with respect to all
Multiemployer Plans pursuant to Section 4201 of ERISA or for increases in
contributions required to be made pursuant to Section 4243 of ERISA.

 

33

 

Working
Capital shall
mean Current Assets in excess of Current Liabilities.

 

Working
Day shall
mean any Business Day on which dealings in foreign currencies and exchanges
between banks may be transacted.

 

Section 1.2                                   Computation
of Time Periods

 

In this Financing
Agreement, in the computation of periods of time from a specified date to a
later specified date, the word “from” means
“from and including” and the words “to” and “until” each mean “to but excluding” and the word “through” means “to and including.”

 

Section 1.3                                   Accounting
Terms and Principles

 

(a)                                  Except
as set forth below, all accounting terms not specifically defined herein shall
be construed in conformity with GAAP and all accounting determinations required
to be made pursuant hereto (including for purpose of measuring compliance with Section 7.12) shall, unless expressly otherwise
provided herein, be made in conformity with GAAP.

 

(b)                                 If
any change in the accounting principles used in the preparation of the most
recent financial statements referred to in Section 7.8
is hereafter required or permitted by the rules, regulations, pronouncements
and opinions of the Financial Accounting Standards Board or the American
Institute of Certified Public Accountants (or any successors thereto) and such
change is adopted by the Loan Parties with the agreement of the Loan Parties’
accountants and results in a change in any of the calculations required by Article VII had such accounting change not occurred,
the parties hereto agree to enter into negotiations in order to amend such
provisions so as to equitably reflect such change with the desired result that
the criteria for evaluating compliance with such covenants by the Loan Parties
shall be consistent with GAAP as then in effect the same after such change as
if such change had not been made; provided, however, that no change in GAAP that would affect a
calculation that measures compliance with any covenant contained in Article VII shall be given effect until such provisions
are amended to reflect such changes in GAAP.

 

Section 1.4                                   Certain
Terms

 

(a)                                  The
terms “herein,” “hereof”
and “hereunder” and similar terms refer to
this Financing Agreement as a whole, and not to any particular Article,
Section, subsection or clause in, this Financing Agreement.

 

(b)                                 Unless
otherwise expressly indicated herein, (i) references in this Financing
Agreement to an Exhibit, Schedule, Article, Section, clause or sub-clause refer
to the appropriate Exhibit or Schedule to, or Article, Section, clause or
sub-clause in this Financing Agreement and (ii) the words “above”
and “below”, when following a reference to a
clause or a sub-clause of any Loan Document, refer to a clause or sub-clause
within, respectively, the same Section or clause.

 

(c)                                  The
Article and Section titles contained in this Financing Agreement are,
and shall be, without substantive meaning or content of any kind whatsoever and
are not part of the agreement of the parties hereto.

 

(d)                                 Each
agreement defined in this Article I
shall include all appendices, exhibits and schedules thereto.  Unless the prior written consent of the
Required Lenders is required hereunder for an amendment, restatement,
supplement or other modification to any such agreement and such consent is not

 

34

 

obtained, references in this Financing Agreement to
such agreement shall be to such agreement as so amended, restated, supplemented
or modified.

 

(e)                                  References
in this Financing Agreement to any statute shall be to such statute as amended
or modified from time to time and to any successor legislation thereto, in each
case as in effect at the time any such reference is operative.

 

(f)                                    References
in this Financing Agreement to any United States Requirements of Law shall be
deemed to include references to the corresponding Canadian Requirements of
Law.  References in this Financing
Agreement to “state” in respect of states of
the United States shall be deemed to include a reference to Canadian provinces.

 

(g)                                 The
term “including” when used in any Loan
Document means “including without limitation” except when used in the
computation of time periods.

 

(h)                                 The
terms “Lender,” “Issuing Bank”
and “Agent” include, without limitation,
their respective permitted successors and assigns.

 

Section 1.5                                   Fees

 

(a)                                  Each
of the fees payable under this Financing Agreement (including, without
limitation, the Line of Credit Fee, the Administrative Management Fee, the
Canadian Administrative Management Fee, the Loan Facility Fee and any other
fees payable pursuant to Article VIII
hereof) shall be fully earned and non-refundable when paid, and will not be
subject to counterclaim or setoff for, or otherwise be affected by, any claim
or dispute relating to any other matter.

 

Section 1.6                                   Currency
and Payments

 

(a)                                  Loans and advances under this Financing
Agreement shall be made in Dollars or Canadian Dollars, as the case may be, and
repayment shall be made in the same currency in which such advances were
made.  The specification of applicable
currencies in this Financing Agreement is of the essence.

 

(b)                                 For
purposes of measuring compliance with this Financing Agreement and the other
Loan Documents, all amounts to be calculated hereunder shall be calculated
using the Dollar Equivalent of such amounts.

 

(c)                                  The specification under this Financing
Agreement of Dollars is of the essence. 
Obligations hereunder to make payments in Dollars shall not be
discharged or satisfied by any tender or recovery pursuant to any judgment
expressed in or converted into any currency other than Dollars (the “Other Non-Dollar Currency”),
except to the extent that such tender or recovery results in the effective
receipt by the Agent or the Lenders of the full amount of Dollars expressed to
be payable to the Agent or the Lenders under this Financing Agreement.  If for the purposes of obtaining judgment in
any court it is necessary to convert a sum due hereunder in Dollars into
another currency (“Non-Dollar Judgment
Currency”), the parties hereto agree, to the fullest extent they may
effectively do so, that the rate of exchange used shall be that at which in
accordance with normal banking procedures the Lender could purchase Dollars
with such other currency at the spot rate of exchange quoted by Chase at 11:00
a.m. (New York time) on the Business Day preceding that on which final judgment
is given, for the purchase of Dollars, for delivery two Business Days
thereafter.  The obligation in respect of
any such sum due from a Loan Party to the Agent or the Lenders hereunder shall,
notwithstanding any judgment in such Non-Dollar Judgment Currency, be
discharged only to the extent that, on the Business Day immediately

 

35

 

following the date on which
the Agent or the Lenders receives any sum adjudged to be so due in any Other
Non-Dollar Currency, the Agent or the Lenders may, in accordance with normal
banking procedures, purchase Dollars with the Other Non-Dollar Currency.  If the Dollars so purchased are less than the
sum originally due to the Agent or the Lenders in Dollars, the Borrowers and
the other Loan Parties agree, as a separate obligation and notwithstanding any
such judgment, to indemnify the Agent or the Lenders against such loss, and if
the Dollars so purchased exceed the sum originally due to the Agent or the
Lenders in Dollars, the Agent and the Lenders agree to remit to Loan Parties
such excess.

 

(d)                                 The specification under this Financing
Agreement of Canadian Dollars is of the essence.  Obligations hereunder to make payments in
Canadian Dollars shall not be discharged or satisfied by any tender or recovery
pursuant to any judgment expressed in or converted into any currency other than
Canadian Dollars (the “Other Non-Canadian Currency”), except to the extent
that such tender or recovery results in the effective receipt by the Agent or
the Lenders of the full amount of Canadian Dollars expressed to be payable to
the Agent or the Lenders under this Financing Agreement.  If for the purposes of obtaining judgment in
any court it is necessary to convert a sum due hereunder in Canadian Dollars
into another currency (the “Non-Canadian Dollar
Judgment Currency”), the parties hereto agree, to the fullest extent
they may effectively do so, that the rate of exchange used shall be that at
which in accordance with normal banking procedures the Lender could purchase
Canadian Dollars with such other currency at the Spot Exchange Rate quoted by
CIBC at 11:00 a.m. (Toronto, Ontario (Canada) time) on the Business Day
preceding that on which final judgment is given, for the purchase of Canadian
Dollars, for delivery two Business Days thereafter.  The obligation in respect of any such sum due
from a Loan Party to the Agent or the Lenders hereunder shall, notwithstanding
any judgment in such Non-Canadian Dollar Judgment Currency, be discharged only
to the extent that, on the Business Day immediately following the date on which
the Agent or the Lenders receive any sum adjudged to be so due in any Other
Non-Canadian Dollar Currency, the Agent or the Lenders may, in accordance with
normal banking procedures, purchase Canadian Dollars with the Other
Non-Canadian Dollar Currency.  If the
Canadian Dollars so purchased are less than the sum originally due to the Agent
or the Lenders in Canadian Dollars, the Borrowers and the other Loan Parties
agree, as a separate obligation and notwithstanding any such judgment, to
indemnify the Agent or the Lenders against such loss, and if the Canadian
Dollars so purchased exceed the sum originally due to the lender in Canadian
Dollars, the Agent and the Lenders agree to remit to Borrower such excess.

 

(e)                                  Unless otherwise specified herein and without
effecting the timing or amount of any payment required to be made hereunder,
any payments (including, without limitation, Mandatory Prepayments, the payment
of Out-of-Pocket Fees and Expenses and other fees and expenses under Article VIII) required to be made by the Borrowers or
the Guarantors pursuant to this Financing Agreement may be made by (or
allocated between) the applicable Loan Parties as they shall determine.

 

ARTICLE II

 

CONDITIONS PRECEDENT

 

Section 2.1                                   Conditions
Precedent to Initial Loans

 

The obligation of
the Agent and the Lenders to make the initial Loans hereunder is subject to the
satisfaction of, extension of or waiver in writing of, on or prior to, the
Closing Date, the following conditions precedent:

 

(a)                                  Lien Searches - The Agent shall
have received tax, judgment and Uniform Commercial Code (or if applicable,
PPSA) searches of a recent date and satisfactory to the Agent for all locations
presently occupied or used, or that have been occupied or used within the last
five (5) years, by

 

36

 

each of the Loan Parties and each jurisdiction of
incorporation of each Loan Party.  Such
searches shall list all effective financing statements that name any Loan Party
as debtor in each such location, together with copies of such financing
statements, none of which shall cover the Collateral, except for those that
shall be terminated on the Closing Date or are otherwise expressly permitted
hereunder.

 

(b)                                 Casualty Insurance - Each of the
Loan Parties shall have delivered to the Agent evidence reasonably satisfactory
to the Agent that all casualty insurance policies list the Agent as additional
insured, loss payee or mortgagee, as the case may be, (y) are in full force and
effect, and (z) satisfy each other requirement of Section 7.5
of this Financing Agreement.

 

(c)                                  Financing Statements - (i) UCC Filings.  Any UCC
financing statements necessary or desirable to be filed in order to create, in
favor of the Agent, on behalf of the Lenders and the other Secured Parties,
subject only to the Permitted Encumbrances having priority over the Liens
granted to the Secured Parties pursuant to the Loan Documents, shall have been
properly filed in each office in each jurisdiction required in order to create
in favor of the Agent for the benefit of the Lenders a perfected Lien on the
Collateral.  The Agent shall have
received acknowledgment copies of all such filings (or, in lieu thereof, the
Agent shall have received other evidence satisfactory to the Agent that all
such filings have been made) and the Agent shall have received evidence that
all necessary filing fees and all taxes or other expenses related to such
filings have been paid in full.

 

(ii)                                  PPSA Filings.  Any
PPSA financing statements necessary or desirable to be filed in order to
create, in favor of the Agent, on behalf of the Lenders, a first priority,
perfected security interest in the Collateral, subject only to the Permitted
Encumbrances having priority over the Liens granted to the Secured Parties
pursuant to the Loan Documents, shall have been properly filed in each office
in each jurisdiction required in order to create, in favor of the Agent, for
the benefit of the Lenders, a perfected Lien on the Collateral.  The Agent shall have received acknowledgment
copies of all such filings (or, in lieu thereof, the Agent shall have received
other evidence satisfactory to the Agent that all such filings have been made)
and the Agent shall have received evidence that all necessary filing fees and
all taxes or other expenses related to such filings have been paid in full.

 

(d)                                 Board Resolution - The Agent shall
have received a copy of the resolutions of the Board of Directors (or similar
management body) of each of the Loan Parties authorizing the execution,
delivery and performance of (i) this Financing Agreement, (ii) each Pledge
and Security Agreement, (iii) the other Loan Documents, (iv) the
Intercreditor Agreement and (v) any related agreements, in each case, certified
by the Secretary or Assistant Secretary of each of the Loan Parties as of the
date hereof, together with a certificate of the Secretary or Assistant
Secretary of the Loan Parties as to the incumbency and signature of the
officers of each of the Loan Parties executing such Loan Documents and any
certificate or other documents to be delivered by them pursuant hereto,
together with evidence of the incumbency of such Secretary or Assistant
Secretary.

 

(e)                                  Corporate Organization - The Agent
shall have received (i) a copy of the articles or certificate of incorporation
(or equivalent Constituent Document) of each Loan Party, certified as of a
recent date by the Secretary of State (or equivalent governmental body) of the
jurisdiction of organization of such Loan Party and (ii) a copy of the by-laws
(or other equivalent Constituent Document) of each of the Loan Parties, certified
by the respective Secretary or Assistant Secretary thereof, all as amended
through the date hereof.

 

(f)                                    Officer’s Certificate - The Agent
shall have received an executed certificate of a Responsible Officer of each of
the Loan Parties, satisfactory in form and substance to the Agent, certifying
that (i) the representations and warranties contained herein are true and
correct in all material respects on and as of the Closing Date; (ii) each
of the Loan Parties are in compliance with all of the

 

37

 

terms and provisions set forth herein; and
(iii) no Default or Event of Default shall have occurred and be
continuing.

 

(g)                                 Opinions - Counsel for the Loan
Parties in (i) New York, (ii) each jurisdiction where a Loan Party is
organized (as to corporate, limited liability company or partnership, as
applicable, and Uniform Commercial Code and/or Personal Property Security Act
matters) and (iii) each other jurisdiction where a Loan Party owns Real
Estate, shall have delivered to the Agent on behalf of the Lenders opinions in
form and substance satisfactory to the Agent.

 

(h)                                 Absence of Default - No Default or
Event of Default shall have occurred and no Material Adverse Change shall have
occurred.

 

(i)                                     Legal Restraints/Litigation - As of
the Closing Date, there shall be no: (x) litigation, investigation or
proceeding (judicial or administrative) pending or threatened against the Loan
Parties or any one of them or their assets, by any agency, division or
department of any county, city, state or federal government arising out of the
Notes Indenture or this Financing Agreement; (y) injunction, writ or
restraining order restraining or prohibiting the consummation of the financing
arrangements contemplated under the Notes Indenture or this Financing
Agreement; or (z) suit, action, investigation or proceeding (judicial or
administrative) pending against the Loan Parties or any one of them or their
assets, which, in the opinion of the Agent, if adversely determined, could
reasonably be expected to have a Material Adverse Effect on the business,
prospects, operation, assets, financial condition or Collateral of the Loan
Parties or any one of them.

 

(j)                                     Financial Statements – The Agent
shall have received, reviewed and been satisfied with the Loan Parties’ interim
financial statements for the Fiscal Quarter ended November 28, 2003 and
for the months ended December 25, 2003 and January 29, 2004.  The Agent shall be satisfied, on the basis of
such financial statements, that EBITDA for the twelve month period ending
January 29, 2004 shall not be less than $30,000,000 on the Closing Date.

 

(k)                                  Financing Agreement – The Agent
shall have received this Financing Agreement, in form and substance
satisfactory to the Agent and in sufficient copies for each Lender, duly
executed and delivered by the Borrowers and the other Loan Parties and, for the
account of each Lender requesting the same, a Promissory Note or Notes from the
applicable Borrowers conforming to the requirements set forth herein.

 

(l)                                     Pledge and Security Agreement – (i)
Domestic Pledge and Security Agreement.  The  Loan Parties
(other than Parent and the Canadian Borrower) shall have delivered to the Agent
the Domestic Pledge and Security Agreement, duly executed by such Loan Parties
and together with each of the following: (i) evidence satisfactory to the
Agent that, upon the filing and recording of instruments delivered to the Agent
on the Closing Date, the Agent (for the benefit of the Secured Parties) shall
have a valid and perfected first priority security interest (subject only to
those Permitted Encumbrances having priority over the Liens of the Agent) in
the Collateral, including such documents duly executed by each such Loan Party
as the Agent may request with respect to the perfection of its security
interests in the Collateral (including Uniform Commercial Code financing
statements, patent, trademark and copyright security agreements suitable for
filing with the Patent and Trademark Office or the Copyright Office, as the
case may be, and other applicable documents under the laws of any jurisdiction
with respect to the perfection of Liens created by the Pledge and Security
Agreement); (ii) to the extent not delivered to the Notes Collateral
Agent, all share certificates representing all of the certificated Stock or
other equity interests being pledged pursuant to such Pledge and Security
Agreement and stock powers for such share certificates executed in blank;
(iii) with respect to the First Priority Collateral, all instruments
representing Indebtedness being pledged pursuant to such Pledge and Security
Agreement duly endorsed in favor of

 

38

 

the Agent or in blank and with respect to the
Second-Priority Collateral, to the extent not delivered to the Notes Collateral
Agent, all instruments representing Indebtedness being pledged pursuant to such
Pledge and Security Agreement duly endorsed in favor of the Agent or in blank;
and (iv) Deposit Account Control Agreements or Securities Account Control
Agreements, as the case may be, from all Blocked Account Institutions.

 

(ii)                                  Canadian Pledge and Security Agreement.  The  Canadian  Borrower shall
have delivered to the Agent the
Canadian Security Agreement, duly executed by the Canadian Borrower, together
with each of the following: (i) evidence of completion of the filing and the
recording of the Canadian Security Agreement such that the Agent will have a
valid and perfected first priority security interest (subject only to those Permitted
Encumbrances having priority over the Liens of the Agent) in the Collateral; (ii) to
the extent not delivered to the Notes Collateral Agent, all share certificates
representing all of the certificated Stock or other equity interests being
pledged pursuant to such Pledge and Security Agreement and stock powers for
such share certificates executed in blank; (iii) with respect to the First Priority Collateral, all
instruments representing Indebtedness being pledged pursuant to such Pledge and
Security Agreement duly endorsed in favor of the Agent or in blank and with
respect to the Second-Priority Collateral, to the extent not delivered to the
Notes Collateral Agent, all instruments representing Indebtedness being pledged
pursuant to such Pledge and Security Agreement duly endorsed in favor of the
Agent or in blank; and (iv) Deposit Account Control Agreements or
Securities Account Control Agreements, as the case may be, from all Blocked
Account Institutions.

 

(m)                               Intercreditor Agreement - The Notes
Collateral Agent, the Notes Trustee and each Loan Party shall have duly
executed and delivered to the Agent on behalf of the Secured Parties the
Intercreditor Agreement.

 

(n)                                 Disbursement Authorization - The
Loan Parties shall have delivered to the Agent all information necessary for
the Agent and the Lenders to issue wire transfer instructions on behalf of each
of the Loan Parties for the initial and subsequent loans and/or advances to be
made under this Financing Agreement including, but not limited to, disbursement
authorizations in form acceptable to the Agent.

 

(o)                                 Capital Structure – The ownership,
capital, corporate, tax, organizational and legal structure of Parent and its
subsidiaries shall be acceptable to the Agent.

 

(p)                                 Notes Documents – The terms and conditions
of the Notes Indenture and each of the other Notes Documents shall be in form
and substance satisfactory to the Agent. 
The Borrowers shall have delivered to the Agent evidence that Cellu
Tissue issued not more than $162,000,000 in aggregate principal amount of the
Secured Notes on terms and conditions acceptable to the Agent.  Each Note Document shall be in form and
substance satisfactory to the Agent.  The
Loan Parties shall have delivered to the Agent a certified copy of each Note
Document, certified as a true, complete and correct thereof by a Responsible
Officer of Cellu Tissue.

 

(q)                                 Designated Stock Repurchase –The
terms and conditions of the documentation relating to the Designated Stock
Repurchase shall be in form and substance satisfactory to the Agent.  The Borrowers shall have delivered to the
Agent evidence that Parent shall have commenced the Designated Stock Repurchase
on the Closing Date.

 

(r)                                    Solvency – The Agent shall be
satisfied, based on financial statements (actual and pro forma), projections,
certificates and other evidence provided by the Borrowers, or requested by the
Agent, that after incurring the Indebtedness contemplated by this Financing
Agreement, the Indebtedness in respect of the Secured Notes and consummating
the other transactions contemplated by

 

39

 

this Financing Agreement (including, without
limitation, the Designated Stock Repurchase), the Loan Parties will be, on a
consolidated basis, Solvent, able to satisfy their obligations as they mature
and adequately capitalized.  In addition,
the Agent shall have received a certificate from the chief financial officer of
Parent and the Borrowers certifying that before and immediately after giving
effect to the Loans and other extensions of credit under this Financing
Agreement and the issuance of the Secured Notes and the other transactions
contemplated by this Financing Agreement (including, without limitation, the
Designated Stock Repurchase), the Loan Parties shall be, on a consolidated
basis, Solvent, able to satisfy their obligations as they mature and adequately
capitalized.

 

(s)                                  Related Documents – Each Related
Document shall be in form and substance satisfactory to the Agent.  The Loan Parties shall have delivered to the
Agent a certified copy of each Related Document, certified as a true, complete
and correct copy thereof by a Responsible Officer of each Loan Party party
thereto.

 

(t)                                    Examination & Verification -
The Agent and each of the Lenders shall have completed, to their respective
satisfaction, an examination and verification of the Accounts, Inventory,
financial statements, books and records of each of the Loan Parties which
examination shall indicate that, after giving effect to all Revolving Loans,
Letters of Credit, Letter of Credit Guaranties, and any other advances and
extensions of credit to be made on the Closing Date and after giving effect to
the payment of or the creation of a reserve for all fees and expenses relating
to this Financing Agreement, the Secured Notes and the Designated Stock
Repurchase on the Closing Date, the Loan Parties shall have an opening
Availability of at least $15,000,000, as evidenced by the Borrowing Base
Certificate (in form and substance satisfactory to the Agent) delivered by the
Borrowers to the Agent as of the Closing Date. 
It is understood that such requirement contemplates that all debts and
obligations are current, and that all payables are being handled in the normal
course of the Loan Parties’ business and consistent with their past practice.

 

(u)                                 Deposit Accounts - Each of the Loan
Parties shall have established a system of lockbox and bank accounts at Chase
(or such other banks as may be agreed to by the Agent) with respect to the
collection of Accounts and the deposit of proceeds of Collateral as shall be
acceptable to the Agent in all material respects.

 

(v)                                 Existing Credit Agreements - In
connection with the refinancing of the Existing Credit Agreements as
contemplated herein, (i) the Existing Credit Agreement, and the “Loan Documents” (as defined in each Existing Credit
Agreement) shall be terminated; (ii) all loans and other obligations of
the Loan Parties thereunder shall have been paid or satisfied in full,
including through utilization of the proceeds of the initial Revolving Loans to
be made under this Financing Agreement; (iii) all Liens or security
interests in favor of the administrative agents under each Existing Credit
Agreement on the Collateral and otherwise in connection therewith shall have
been terminated and/or released upon such payment; and (iv) the Agent shall
have received a payoff letter duly executed and delivered by the Loan Parties
and the administrative agent and/or lenders under each Existing Credit
Agreement or other evidence of such termination of each Existing Credit
Agreement, in each case in form and substance satisfactory to the Agent.

 

40

 

(w)                               Additional Documents - Each of the
Loan Parties shall have executed and delivered to the Agent all Loan Documents
necessary to consummate the financing arrangement contemplated between the Loan
Parties, the Agent and the Lenders

 

(x)                                   Additional Matters Relating to Real Estate

 

(i)                                     Mortgages/Deeds of Trust - The Loan
Parties shall have executed and delivered to the Agent, such mortgages and/or
deeds of trust as the Agent on behalf of the Lenders may reasonably require to
obtain first Liens on the Real Estate subject to the Permitted Encumbrances and
in form and substance acceptable to the Agent.

 

(ii)                                  Title Insurance Policies - the
Agent shall have received, in respect of each mortgage or deed of trust, a
mortgagee’s title policy or marked-up unconditional binder for such
insurance.  Each such policy shall
(i) be in an amount to be agreed between the Agent and the Borrowers and
in any event satisfactory to the Agent; (ii) insure that the mortgage or
deed of trust insured thereby creates a valid first Lien on the property
covered by such mortgage or deed of trust, free and clear of all defects and
encumbrances except those acceptable to the Agent; (iii) name the Agent on
behalf of the Lenders as the insured thereunder; and (iv) contain such
endorsements and effective coverage as the Agent may reasonably request,
including, without limitation, the revolving line of credit endorsement.  The Agent shall also have received evidence
that all premiums in respect of such policies have been paid and that all
charges for mortgage recording taxes, if any, shall have been paid.

 

(iii)                               Surveys - the Agent and the title
insurance company issuing each policy referred to in the immediately preceding clause (ii) (each, a “Title Insurance Company”)
shall have received maps or plats of a perimeter or boundary of the site of
each of the properties covered by the mortgages or deeds of trust, dated a date
satisfactory to the Agent and the relevant Title Insurance Company prepared by
an independent professional licensed land surveyor satisfactory to the Agent
and the relevant Title Insurance Company, which maps or plats and the surveys
on which they are based shall be made in accordance with the Minimum Standard
Detail Requirements for Land Title Surveys jointly established and adopted by
the American Land Title Association and the American Congress on Surveying and
Mapping; and, without limiting the generality of the foregoing, there shall be
surveyed and shown on the maps or plats or surveys the following:  (i) the locations on such sites of all
the buildings, structures and other improvements and the established building
setback lines insofar as the foregoing affect the perimeter or boundary of such
property; (ii) the lines of streets abutting the sites and width thereof;
(iii) all access and other easements appurtenant to the sites or necessary
or desirable to use the sites; (iv) all roadways, paths, driveways,
easements, encroachments and overhanging projections and similar encumbrances
affecting the sites, whether recorded, apparent from a physical inspection of
the sites or otherwise known to the surveyor; (v) any encroachments on any
adjoining property by the building, structures and improvements on the sites;
and (vi) if the site is designated as being on a filed map, a legend
relating the survey to said map. 
Further, the survey shall x) be certified to the Agent and the Title
Insurance Company and y) contain a legend reciting as to whether or not
the site is located in a flood zone.

 

(y)                                 Environmental Reports – The Agent
shall have received copies of all material environmental audit and risk
assessment reports on all of each of the Loan Parties’ owned or leased Real
Estate that are in the possession, custody or control of any of the Loan
Parties.

 

(z)                                   Schedules – The Loan Parties shall
have delivered to the Agent each Schedule required to be delivered
pursuant to this Financing Agreement, each Collateral Document and each other
Loan Document and such other schedules and information concerning the
Collateral as the Agent may reasonably request, all of the foregoing in form
and substance satisfactory to the Agent.

 

41

 

(aa)                            Fees and Expenses – There shall
have been paid to the Agent, for the account of the Agent and the Lenders, as
applicable, all fees and expenses (including reasonable fees and expenses of
counsel) due and payable on or before the Closing Date.

 

Upon the execution of
this Financing Agreement and the initial disbursement of the Loans hereunder,
all of the above Conditions Precedent shall have been deemed satisfied, except
as otherwise set forth hereinabove or as the Loan Parties and the Agent shall
otherwise agree in writing.

 

Section 2.2                                   Conditions
to Each Extension of Credit

 

Subject to the
terms of this Financing Agreement, including, without limitation, the Agent’s
rights pursuant to Section 10.2
hereof, the agreement of the Agent on behalf of the Lenders to make any
extension of credit requested to be made by it to the Borrowing Agent or any of
the Borrowers on any date (including, without limitation, the initial extension
of credit) is subject to the satisfaction of the following conditions
precedent:

 

(a)                                  Request for Borrowing or Issuance of Letter of
Credit – With respect to any borrowing of a Revolving Loan, the
Agent shall have received from the Borrowing Agent or the applicable Borrower,
as the case may be, a duly executed Notice of Borrowing as provided in Article III, or with respect to any Letter of Credit,
the Agent and the Issuing Bank shall have received a duly executed request for
a Letter of Credit as provided in Article V.

 

(b)                                 Representations and Warranties -
Each of the representations and warranties made by each of the Loan Parties in
or pursuant to this Financing Agreement shall be true and correct in all
material respects on and as of such date as if made on and as of such date.

 

(c)                                  No Default - No Default or Event of
Default shall have occurred and be continuing on such date or after giving
effect to the extension of credit requested to be made on such date.

 

(d)                                 Borrowing Base - Except as may be
otherwise agreed to from time to time by the Agent and the Borrowers in
writing, after giving effect to the extension of credit requested to be made by
any of the Borrowing Agent or a Borrower, as the case may be, on such date, the
aggregate outstanding balance of the Revolving Loans and outstanding Letters of
Credit owing by the Borrowers will not exceed the lesser of (x) the
Aggregate Revolving Loan Amount and (y) the Borrowing Base.  The Borrowing Agent shall have delivered the
most recent Borrowing Base Certificate required to be delivered pursuant to Section 7.8(f).

 

(e)                                  Additional Matters – The Agent
shall have received such additional documents, information and materials as any
Lender, through the Agent, may reasonably request.

 

Each borrowing by a
Borrower hereunder shall constitute a representation and warranty by the
Borrowers as of the date of such loan or advance that each of the
representations, warranties and covenants contained in this Financing Agreement
has been satisfied and such representations and warranties are true and correct
in all material respects, except as the Borrowers and the Agent and/or the
Required Lenders shall otherwise agree herein or in a separate writing.

 

42

 

ARTICLE III

 

REVOLVING LOANS

 

Section 3.1                                   (a)                                  The
Agent and the US Lenders agree, subject to the terms and conditions of this
Financing Agreement, from time to time, severally to the extent of their
Revolving Credit Commitment to make US Revolving Loans in Dollars to each of US
Borrowers or to the Borrowing Agent, for the account of one or more of the US
Borrowers, to the extent of Availability under the Revolving Line of Credit; provided, however, that such US Revolving Loans shall be in
an aggregate principal amount outstanding at any time for all such US Revolving
Loans not to exceed the Dollar Equivalent of the lesser of (x) Availability
under the Revolving Line of Credit and (y) the Aggregate Revolving Loan
Amount (but subject to the Agent’s and the Lenders’ right to make
Overadvances); provided, further, however, that
the Agent and/or the Lenders shall not be required to make any US Revolving
Loan or other extension of credit to the Borrowing Agent for the account of the
US Borrowers if, after giving effect to such US Revolving Loan or extension of
credit, the Dollar Equivalent of (x) the aggregate outstanding balance of the
Revolving Loans or other extensions of credit owing by the Borrowers (or made
available to the Borrowing Agent for the account of the Borrowers) would exceed
the Borrowing Base on such date of determination or (y) the Dollar Equivalent
of the aggregate outstanding balance of all Revolving Loans or other extensions
of credit outstanding at such time exceeds $30,000,000.

 

(b)                                 The
Agent and the Canadian Lenders agree, subject to the terms and conditions of
this Financing Agreement, from time to time, severally to the extent of their
Canadian Revolving Credit Commitment to make Canadian Revolving Loans in
Dollars or Canadian Dollars, as the case may be, to the Canadian Borrower; provided, however, that such Canadian Revolving Loans shall
be in an aggregate principal amount outstanding at any time for all such
Revolving Loans not to exceed the Dollar Equivalent of the lowest of (x)
Availability, (y) the Aggregate Revolving Loan Amount and (z) $3,500,000
(but subject to the Agent’s and the Lenders’ right to make Overadvances); provided, further, however, that the Agent and/or the
Lenders shall not be required to make any Canadian Revolving Loan or other
extension of credit to the Canadian Borrower if, after giving effect to such
Canadian Revolving Loan or extension of credit, the Dollar Equivalent of (x)
the aggregate outstanding balance of the Revolving Loans or other extensions of
credit owing by the Borrowers (or made available to the Borrowing Agent for the
account of the Borrowers) would exceed the Borrowing Base on such date of
determination or (y) the Dollar Equivalent of the aggregate outstanding balance
of all Revolving Loans or other extensions of credit outstanding at such time
exceeds $30,000,000..

 

(c)                                  Notwithstanding
anything to the contrary in this Financing Agreement, (i) the Borrowing Agent
may advance Loans made to it for the account of any US Borrower to such US
Borrower and (ii) any Borrower may on-lend the proceeds of any Revolving Loan or
other extension of credit made to it hereunder to (A) any other Borrower,
irrespective of Availability under the Revolving Line of Credit or the
Borrowing Base applicable at the time of determination and (B) any other
Loan Party (other than the Borrowers) to the extent that (x) such Indebtedness
constitutes Permitted Indebtedness hereunder and (y) such loan is permitted to
be made pursuant to Section 7.11(f)
and Section 7.11(g).  Any such loan by a Borrower to any other Loan
Party (including any Eligible Loan Party) shall be evidenced by an Intercompany
Promissory Note, which shall be pledged to the Agent in accordance with the
applicable Pledge and Security Agreement.

 

(d)                                 Subject
to the limitations set forth in this Financing Agreement, the Borrowers may
borrow, repay and re-borrow Revolving Loans at any time prior to the Revolving
Credit Termination Date and from time to time on any Business Day during the
period from the Closing Date until the Revolving

 

43

 

Credit Termination Date.  All outstanding Revolving Loans and all other
Obligations outstanding on the Revolving Credit Termination Date shall be due
and payable on the Revolving Credit Termination Date.

 

(e)                                  For
the avoidance of doubt, (i) Canadian Revolving Loans made to or on behalf of
the Canadian Borrower shall be made by CIT Financial, in its capacity as Agent,
or the Canadian Lenders to the Canadian Borrower and (ii) such Canadian
Revolving Loans shall be repaid to such Agent or such Canadian Lenders, as the
case may be.

 

Section 3.2                                   (a)                                  All
requests for USD Revolving Loans must be received by an officer of the Agent no
later than (i) 2:30 p.m., New York time, on the Business Day on which
any such Chase Bank Rate Loans and advances are required or (ii) three (3)
Business Days prior to any requested LIBOR Loan.  Should the Agent for any reason honor
requests for Overadvances, any such Overadvances shall be made in the Agent’s
sole discretion and subject to any additional terms the Agent and/or the Required
Lenders deem necessary; provided, that
no Lender shall have any obligation to make any Overadvance unless such Lender
specifically consents to each such Overadvance.

 

(b)                                 All
requests for CDN Revolving Loans (irrespective of whether such Revolving Loans
are Canadian Prime Rate Loans or BA Rate Loans) must be received by an officer
of the Lender no later than 1:00 p.m., Toronto, Ontario (Canada) time, one (1)
Working Day prior to the Working Day on which any such Canadian Prime Rate
Loans or BA Rate Loan advances are required. 
Should the Agent for any reason honor requests for Overadvances, any
such Overadvances shall be made in the Agent’s sole discretion and shall be
subject to any additional terms the Agent and/or the Required Lenders deem
necessary; provided, that no Lender shall have any
obligation to make any Overadvance unless such Lender specifically consents to
each such Overadvance

 

(c)                                  (i)                                     Whenever
any Borrower desires the Agent, on behalf of the applicable Lenders, or any
Lender to make a Revolving Loan pursuant to Section 3.1,
the Borrowing Agent or such Borrower shall give the Agent a Notice of Borrowing
or irrevocable telephonic notice confirmed promptly in writing by delivery of a
Notice of Borrowing to the Agent, specifying (A) each applicable Borrower
on whose behalf such borrowing is requested, (B) the amount of the Borrowing
Base applicable at such time, (C) whether such requested borrowing is of USD
Revolving Loans or CDN Revolving Loans, (D) the amount of the requested
borrowing of each Borrower, (E) the requested borrowing date (which shall be a
Business Day, in the case of US Revolving Loans, or a Working Day, in the case
of Canadian Revolving Loans, and shall be prior to the Revolving Credit
Termination Date) and (F) specify whether the requested Revolving Loan
shall bear interest at the Chase Bank Rate, LIBOR, the Canadian Prime Rate or
the BA Equivalent Rate, as further set forth herein.

 

(ii)                                  If
the Borrowing Agent or the applicable Borrower, as the case may be, fails to
designate the proposed borrowing of a Revolving Loan as a Chase Bank Rate Loan
or a LIBOR Loan, in the case of USD Revolving Loans, or as a Canadian Prime
Rate Loan or a BA Rate Loan, in the case of CDN Revolving Loans, each in
accordance with this Section 3.1,
then the requested borrowing shall be a Chase Bank Rate Loan, in the case of
USD Revolving Loans, or a Canadian Prime Rate Loan, in the case of CDN
Revolving Loans.  If no Interest Period
is elected with respect to any requested borrowing of a LIBOR Loan or BA Rate
Loan, then the requested Loan shall be made as a Chase Bank Rate Loan or
Canadian Prime Rate Loan, as applicable.

 

(iii)                               The
procedure for Revolving Loans to be made on a requested borrowing date may be
such other procedure as is mutually satisfactory to the Borrowers, the Agent
and/or the Lenders.  The Agent shall make
loans and advances to the account of the applicable Borrower as specified in
the applicable Notice of Borrowing, or such other Deposit Account as the Agent
and the Borrowers may agree.

 

44

 

(iv)                              Subject
to Section 14.10 hereof, should the
Agent, on behalf of the Lenders agreeing to make an Overadvance, for any reason
honor requests for Overadvances, such Overadvance shall be made in the Agent’s
sole discretion, subject to any additional terms the Agent deems necessary.

 

(v)                                 Requests
for loans and advances shall be made solely by the Borrowing Agent or the
applicable Borrowers and shall be directed to the Agent.

 

(d)                                 The
Agent shall on any Settlement Date, and upon notice given by the Agent no later
than 1:00 P.M. New York time, request each Lender to make, and each
Lender hereby agrees to make, a Revolving Loan in an amount equal to such
Lender’s Revolving Credit Commitment percentage (calculated with respect to the
aggregate Revolving Credit Commitments then outstanding) of the aggregate
amount of the Revolving Loans made by the Agent from the preceding Settlement
Date to the date of such notice.  Each
Lender’s obligation to make the settlements pursuant to this
subsection (d) shall be absolute and unconditional and shall not be
affected by any circumstance, including without limitation (i) any
set-off, counterclaim, recoupment, defense or other right which any such Lender
or any of the Borrowers may have against the Agent, the (other) Borrowers, any
other Lender or any other person for any reason whatsoever; (ii) the
occurrence and continuance of a Default or an Event of Default; (iii) any
adverse change in the condition (financial or otherwise) of the Borrowers or
any one of them; (iv) any breach of this Financing Agreement or any other
Loan Document by any Loan Party party thereto or any other Lender; or
(v) any other circumstance, happening or event whatsoever, whether or not
similar to any of the foregoing.  Without
limiting the liability and obligation of each Lender to make such advances, the
Borrowers authorize the Agent to charge the applicable Revolving Loan Accounts
with the Agent to the extent amounts received from the Lenders are not
sufficient to repay in full the amount of any such deficiency.

 

(e)                                  The
Borrowers’ Revolving Loan Obligations hereunder shall be evidenced by one or
more Promissory Notes (i) in the case of USD Revolving Loans, in substantially
the form of Exhibit A attached hereto and (ii) in
the case of CDN Revolving Loans, in substantially the form of Exhibit B attached hereto. 
Each Borrower promises to repay the entire unpaid principal amount of
the Revolving Loans on the Scheduled Termination Date or earlier, if otherwise
required by the terms of this Financing Agreement.

 

Section 3.3                                   In
furtherance of the continuing assignment and security interest in each of the
Eligible Loan Parties’ Accounts and Inventory, each of the Eligible Loan
Parties will, upon the creation of Accounts and purchase or acquisition of
Inventory, execute and deliver to the Agent in such form and manner as the
Agent may reasonably require, solely for the Agent’s convenience in maintaining
records of Collateral, such confirmatory schedules
of Accounts and Inventory on each date on which a Borrowing Base Certificate is
delivered pursuant to Section 7.8(f)
for the fiscal period covered by the applicable Borrowing Base Certificate,
including without limitation, monthly schedules of Accounts and monthly
schedules of Inventory, all in form and substance satisfactory to the Agent,
and such other appropriate reports designating, identifying and describing the
Accounts and Inventory as the Agent may reasonably request, and provided
further that the Agent may reasonably request any such information more
frequently, from time to time in its sole discretion.  In addition, upon the Agent’s request, each
of the Eligible Loan Parties shall provide the Agent with copies of agreements
with, or purchase orders from, such Eligible Loan Party’s customers, and copies
of invoices to customers, proof of shipment or delivery, access to their
computers, electronic media and software programs associated therewith
(including any electronic records, contracts and signatures) and such other
documentation and information relating to said Accounts and other Collateral as
the Agent may reasonably require. 
Failure to provide the Agent with any of the foregoing shall in no way
affect, diminish, modify or otherwise limit the security interests granted
herein.  Each of the Eligible Loan
Parties hereby authorizes the Agent to regard the Eligible Loan

 

45

 

Parties’ (or an Eligible Loan Party’s) printed name or
rubber stamp signature on assignment schedules or invoices as the equivalent of
a manual signature by one of the Eligible Loan Parties’ authorized officers or
agents.

 

Section 3.4                                   (a)                                  Each
of the Eligible Loan Parties hereby represents and warrants that
(i) unless otherwise disclosed in writing to the Agent, each Trade Account
Receivable is based on an actual and bona fide sale and delivery of Inventory
or rendition of services to their respective customers, and any other Account
is bona fide, made by the Eligible Loan Parties in the ordinary course of their
business; (ii) the Inventory being sold, and the Trade Accounts Receivable
created, are the exclusive property of the Eligible Loan Parties and are not
and shall not be subject to any lien, consignment arrangement, encumbrance,
security interest or financing statement whatsoever, other than the Permitted
Encumbrances; (iii) the invoices evidencing such Trade Accounts Receivable are
in the name of the Eligible Loan Parties; and (iv) the Eligible Loan Parties’
customers have accepted the Inventory or services, owe and are obligated to pay
the full amounts stated in the invoices according to their terms, without
dispute, offset, defense, counterclaim or contra, except for disputes and other
matters arising in the ordinary course of business with respect to which the
Eligible Loan Parties have complied with the notification requirements of Section 3.5.

 

(b)                                 The
Eligible Loan Parties confirm to the Agent that any and all Taxes or fees
relating to their business, their sales, the Accounts or Inventory relating
thereto, are their sole responsibility and that same will be paid by the
Eligible Loan Parties when due, subject to Section 7.6 of
this Financing Agreement, and that none of said Taxes or fees represent a Lien
on or claim against the Accounts subject to Section 7.6
of this Financing Agreement.

 

(c)                                  The
Eligible Loan Parties hereby further represent and warrant that they shall not
co-mingle their Inventory with any of their customers or any other person,
including pursuant to any bill and hold sale or otherwise, and that their
Inventory is marketable to their customers in the ordinary course of business
of the Eligible Loan Parties, except as it may otherwise report in writing to
the Agent pursuant to Section 3.5
hereof from time to time.

 

(d)                                 Each
of the Eligible Loan Parties also represents and warrants that they are duly
and validly existing corporations, partnership or other legal entities and are
qualified to do business in all jurisdictions where the failure to so qualify
would have a Material Adverse Effect on their ability to enforce collection of
Accounts due from customers residing in that jurisdiction.

 

(e)                                  The
Eligible Loan Parties agree to maintain such books and records regarding
Accounts and Inventory consistent with GAAP as the Agent may reasonably require
and agree that the books and records of the Eligible Loan Parties will reflect
the Agent’s interest in the Accounts and Inventory.  All of the books and records of the Eligible
Loan Parties will be available to the Agent at normal business hours upon
reasonable prior notice to the Borrowing Agent, or upon shorter notice during
the occurrence and continuance of an Event of Default, including any records
handled or maintained for the Eligible Loan Parties or any one of them by any
other company or entity.

 

Section 3.5                                   (a)                                  Until
the Agent has advised the Eligible Loan Parties to the contrary after the
occurrence and continuance of an Event of Default or an Availability Event and
until, (x) in the case of an Event of Default, until such Event of Default is
waived in writing by the Required Lenders or cured to the satisfaction of the
Agent and/or the Required Lenders and (y) in the case of an Availability Event,
the occurrence of the applicable Availability Cure Date, the Eligible Loan
Parties, at their expense, will enforce, collect and receive all amounts owing
on their respective Accounts in the ordinary course of their business and any
proceeds they so receive shall be subject to the terms hereof, and held on
behalf of and in trust for the Agent (on behalf of the Lenders).  Any checks, cash, credit card sales and
receipts, notes or

 

46

 

other instruments or property received by an Eligible
Loan Party with respect to any Collateral, including Accounts, shall be held by
such Eligible Loan Party in trust for the Agent, on behalf of the Lenders,
separate from such Eligible Loan Party’s own or the Eligible Loan Parties’
property and funds, and promptly turned over to the Agent with proper
assignments or endorsements by deposit to the Depository Accounts.  Each of the Eligible Loan Parties shall:
(i) indicate on all of their invoices that funds should be delivered to
and deposited in a Blocked Account; (ii) direct all of their account
debtors to deposit any and all proceeds of Collateral into the Blocked
Accounts; (iii) irrevocably authorize and direct any banks which maintain
the Eligible Loan Parties’ initial receipt of cash, checks and other items to
promptly wire transfer all available funds to a Blocked Account or the
Depository Account; and (iv) advise all such banks of the Agent’s security
interest in such funds.  The Eligible
Loan Parties shall provide the Agent with prior written notice of any and all
Deposit Accounts opened or to be opened subsequent to the Closing Date.  All amounts (the “Collections”)
received by the Agent in payment of Accounts will be credited to the Revolving
Loan Account(s) when the Agent is advised by its bank of its receipt of
“collected funds” at the Agent’s bank account in New York, New York on the
Business Day of such advice if advised no later than 1:00 p.m. (New York
City time) or on the next succeeding Business Day if so advised after
1:00 p.m. (New York City time). 
However, the Revolving Loan Accounts will be charged monthly with the
cost of one (1) additional Business Day on all such Collections at the interest
rate (based upon the Chase Bank Rate) applicable to Revolving Loans at such
time for the account of the Agent.  No
checks, drafts or other instrument received by the Agent shall constitute final
payment to the Agent and/or the Lenders unless and until such instruments have
actually been collected.

 

(b)                                 The
Loan Parties shall establish and maintain, in their name and at their expense,
Blocked Accounts with Chase or such other banks as are acceptable to the Agent
into which each of the Loan Parties shall promptly cause to be deposited: (i)
all Proceeds of the First Priority Collateral received by any of the Loan
Parties, including all amounts payable to the Loan Parties from credit card
issuers and credit card processors, and (ii) all amounts on deposit in
deposit accounts used by the Loan Parties at each of their locations, all as
further provided in Section 3.4(a)
above.  The banks or securities
intermediaries, as the case may be, at which the Blocked Accounts in respect of
the Borrowers are established (each such bank, a “Blocked
Account Institution”) shall enter into a Deposit Account Control
Agreement or Securities Account Control Agreement, as the case may be,
providing that all cash, checks and items received or deposited in the Blocked
Accounts are the property of the Agent, that the Blocked Account Institution
has no Lien upon, or right of set off against, the Blocked Accounts and any cash,
checks, items, wires or other funds from time to time on deposit therein,
except as otherwise provided in the Control Agreements.  The Blocked Account Institution shall, in the
case of each Loan Party, following the delivery of a Control Notice, automatically,
on a daily basis, wire, or otherwise transfer, in immediately available funds
all funds received or deposited into the Blocked Accounts of such Loan Party to
the Depository Account or such other bank account as the Agent may from time to
time designate for such purpose. 
Following the delivery of a Control Notice and at all times during which
such Control Notice is effective and shall not have been withdrawn by the
Agent, the Agent shall apply, on a daily basis all collections of Accounts and
all other proceeds of First Priority Collateral and all other amounts
transferred to the Depository Account pursuant to this Financing Agreement
towards amounts owing by the applicable Loan Parties under the Revolving Line
of Credit, and the Agent agrees that, provided that no Default or Event of
Default shall have occurred and be continuing at such time, upon the written
request of the Borrowers, to cause any funds remaining on deposit therein after
all Obligations then due and payable have been satisfied to be paid.  The Loan Parties hereby confirm and agree
that all amounts deposited in such Blocked Accounts and any other funds
received and collected by the Agent, whether as proceeds of Inventory or other
Collateral or otherwise, shall be the property of the Agent subject to the
Intercreditor Agreement.

 

(c)                                  (i)  Prior to the occurrence of an Availability
Event, as long as an Event of Default shall not have occurred or be continuing,
the Agent and the Lenders will permit each Blocked

 

47

 

Account Institution to transfer funds in accordance
with instructions to be provided by the applicable Loan Party and the Borrowers
shall not be required (but may elect) to repay any of the outstanding Loans
with the funds credited to the Blocked Accounts.

 

(ii)                                  Notwithstanding
anything to the foregoing to the contrary, upon the occurrence of an
Availability Event, commencing upon the first Business Day after such
Availability Event has occurred, and at any time following the occurrence of a
Default or Event of Default under any Loan Document, the Agent shall be
permitted to deliver a Control Notice to the Blocked Account Institutions
pursuant to which the applicable Blocked Account Institution will be instructed
to comply only with the instructions of the Agent with respect to the
applicable Deposit Accounts.

 

(iii)                               If
a Control Notice is delivered by the Agent as a result of the occurrence of an
Availability Event, the Agent shall promptly terminate the effectiveness of the
applicable Control Notice upon the Agent’s satisfaction that the Availability
under the Revolving Line of Credit shall have equaled or exceeded $15,000,000
for at least 30 consecutive days and the Agent’s receipt from the Borrowers of
a certificate of a Responsible Officer of the Borrowers certifying that the
applicable Availability Event Cure Period shall have expired and the
Availability Cure Date shall have occurred (with calculations (in reasonable
detail) to support such certificate attached to such Responsible Officer’s
certificate); provided, that such termination
shall not in any way limit the Agent’s rights to deliver a subsequent Control
Notice upon the occurrence of another Availability Event or upon the occurrence
of any Default or Event of Default.

 

Section 3.6                                   The
Eligible Loan Parties agree to notify the Agent: (a) of any matters affecting
the value, enforceability or collectibility of any Account and of all material
customer disputes, offsets, defenses, counterclaims, returns, rejections and
all reclaimed or repossessed merchandise or goods, and of any material adverse
effect in the value of their Inventory, in their collateral reports required to
be delivered to the Agent pursuant to Section 3.3,
in such detail and format as the Agent may reasonably require from time to time
and (b) promptly of any such matters which are material, as a whole, to
the Accounts and/or the Inventory.  Each
Eligible Loan Party agrees to issue credit memoranda promptly (with duplicates
to the Agent upon request) upon accepting returns or granting allowances out of
the ordinary course or which are otherwise material to such Eligible Loan
Party, or in the aggregate, to the Accounts and/or the Inventory.  Upon the occurrence and during the
continuation of an Event of Default (which is not waived in writing by the
Required Lenders or cured to Agent’s and/or the Required Lenders’
satisfaction,) and on notice from the Agent, the Eligible Loan Parties agree
that all returned, reclaimed or repossessed merchandise or goods shall be set
aside by the Eligible Loan Parties, marked with the Agent’s name (as secured
party) and held by the Eligible Loan Parties for the Agent’s account.

 

Section 3.7                                   (a)                                  Each
Agent shall maintain a Revolving Loan Account on its books in which the US
Borrowers (collectively) or the Canadian Borrower, as the case may be, will be
charged with all loans and advances made by the Agent to the Borrowing Agent or
such Borrower to it or for its account, and with any other Obligations,
including any and all costs, expenses and reasonable attorney’s fees which the
Agent may incur in connection with the exercise by or for the Agent of any of
the rights or powers herein conferred upon the Agent, or in the prosecution or
defense of any action or proceeding to enforce or protect any rights of the
Agent in connection with this Financing Agreement, the other Loan Documents or
the Collateral assigned hereunder, or any Obligations owing by such
Borrower.  The Borrowers will be credited
with all amounts received by the Agent and/or the Lenders from the Borrowers or
from others for the Borrowers’ account, including, as above set forth, all
amounts received by the Agent in payment of Accounts, and such amounts will be
applied to payment of the Obligations as set forth herein.  In no event shall prior recourse to any
Accounts or other security granted to or by the Borrowers be a prerequisite to
the Agent’s right to demand payment of any Obligation.  Further, it is

 

48

 

understood that the Agent and/or the Lenders shall
have no obligation whatsoever to perform in any respect any of the Borrowers
contracts or obligations relating to the Accounts.

 

(b)                                 In
addition, each Agent agrees, acting as agent of the Borrowers solely for this
purpose and for tax purposes, to register by book entry in the Revolving Loan
Accounts, each Agent’s, each Lender’s and each Issuing Bank’s interest in each
Loan, each Overadvance, each Letter of Credit and each reimbursement obligation
relating to Letters of Credit of the Borrowers and in each other Obligations of
the Borrowers and in the right to receive any payments (including payments of
principal and interest) hereunder and any assignment of any such interest or
rights.  In addition, each Agent, acting
as agent of the Borrowers solely for this purpose and for tax purposes, will
establish and maintain accounts in the Revolving Loan Accounts, in accordance
with its usual practice in which it shall record (i) the names and addresses of
the Lenders and the Issuing Banks, (ii) the Revolving Credit Commitments of
each Lender from time to time, (iii) the amount of each Loan made, (iv) the
amount of each Overadvance, (v) the amount of any drawn Letters of Credit, (vi)
the amount of any principal or interest due and payable, and paid, by the
Borrowers to, or for the account of, each Lender hereunder, (vii) the amount
that is due and payable, and paid, by the Borrowers to, or for the account of,
each Issuing Bank, including the amount of any Obligations relating to the Letters
of Credit (specifying the amount of any reimbursement obligations with respect
to such Letters of Credit) due and payable to an Issuing Bank, (viii) the
amount due and payable, and paid by the Borrowers to Agent under any Letter of
Credit Guaranty, and (ix) the amount of any sum received by each Agent
hereunder from the Borrowers, where such sum constitutes principal or interest
(and the type of Loan to which it applies), fees, expenses or other amounts due
under the Loan Documents and each Lender’s, each Issuing Bank’s and each
Agent’s, as the case may be, share thereof, if applicable.

 

(c)                                  Notwithstanding
anything to the contrary contained in this Agreement, the Loans (including the
Promissory Notes evidencing such Loans) and the drawn Letters of Credit are
registered obligations and the right, title, and interest of the Lenders and
the Issuing Banks and their assignees in and to such Loans or drawn Letters of
Credit, as the case may be, shall be transferable only upon notation of such
transfer in the Revolving Loan Accounts. 
A Promissory Note shall only evidence the Lender’s or a registered
assignee’s right, title and interest in and to the related Loan, and in no
event is any such Promissory Note to be considered a bearer instrument or
obligation.  This Section 3.7 shall
be construed so that the Loans and drawn Letters of Credit are at all times
maintained in “registered form” within the meaning of Sections 163(f),
871(h)(2) and 881(c)(2) of the Code and any related regulations (or any
successor provisions of the Code or such regulations).

 

(d)                                 In
addition, the Loan Parties, each Agent, the Lenders and the Issuing Banks shall
treat each Person whose name is recorded in the Revolving Loan Accounts as a
Lender or as an Issuing Bank, as applicable, for all purposes of this
Agreement.

 

(e)                                  After
the end of each month, the Agent shall promptly send the Borrowers a statement
showing the accounting for the charges, loans, advances and other transactions
occurring between the Agent and each of the Borrowers during that month.  The monthly statements shall be deemed
correct and binding upon each of the Borrowers and shall constitute an account
stated between the Borrowers and the Agent unless the Agent receives a written
statement of the exceptions within thirty (30) days of the date of the monthly
statement.

 

Section 3.8                                   (a)                                  In
the event that the sum of (i) the Dollar Equivalent of the outstanding
balance of Revolving Loans and (ii) the Dollar Equivalent of the
outstanding balance of Letters of Credit exceeds either (x) the
Dollar Equivalent of the Borrowing Base or (y) the Dollar Equivalent of
the Aggregate Revolving Loan Amount, any such excess amount shall be due and
payable to the Agent on behalf of the Lenders.

 

49

 

(b)                                 In
the event that (i) the Dollar Equivalent of the outstanding balance of USD
Revolving Loans owing by the Canadian Borrower exceeds $2,500,000 at any time
or (ii) the Dollar Equivalent of the outstanding balance of CDN Revolving
Loans owing by the Canadian Borrower exceeds $1,000,000 at any time, then in
each case, any such excess amount shall be due and payable to the Agent on
behalf of the Lenders.

 

Section 3.9                                   (a)                                  Each
Borrower, jointly and severally, shall be obligated in respect of the aggregate
principal amount of all Loans, and the aggregate amount of credit available
hereunder to any of the Borrowers at any time shall be determined taking into
account all Loans outstanding (irrespective of whether such Loans are USD
Revolving Loans or CDN Revolving Loans) and all outstanding Letters of Credit,
regardless of which of the Borrowers may have received the proceeds of the
Loans or the benefit of any of the Letters of Credit.

 

(b)                                 (i)                                     Each
of the Loan Parties (other than the Canadian Borrower) hereby appoints the
Borrowing Agent (and confirms to the Agent, the Lenders, the Issuing Bank and
each other party to this Financing Agreement that the Borrowing Agent has been
duly appointed by each such Loan Party to) act as agent for such Loan Parties
for all purposes of the Loan Documents, including, as applicable,
(A) requesting Loans, (B) requesting the issuance of Letters of
Credit, (C) delivering Borrowing Base Certificates, (D) allocating (to the
extent permitted herein) the proceeds of Loans, and (E) taking any other action
or receiving any communication on behalf of such Loan Parties in connection
with the Loan Documents.

 

(ii)                                  The
Canadian Borrower hereby appoints the Borrowing Agent (and confirms to the
Agent, the Lenders, the Issuing Bank and each other party to this Financing
Agreement that the Borrowing Agent has been duly appointed by the Canadian
Borrower) to act as agent for the Canadian Borrower for all purposes of the
Loan Documents (other than for requesting Canadian Revolving Loans), including,
as applicable, (A) delivering Borrowing Base Certificates and (B) taking
any other action or receiving any communication on behalf of the Canadian
Borrower in connection with the Loan Documents.

 

(iii)                               Each
of the Lenders and the Agent shall be entitled to deal with any Borrower or any
other Loan Party through the Borrowing Agent as provided in this Section 3.9 and to rely on any instructions or other
communications from the Borrowing Agent on behalf of any Loan Party.  In furtherance of the foregoing, it is
expressly understood and agreed by each of the Loan Parties that the Agent is
authorized and directed to accept, honor and rely on instructions and requests
made by the Borrowing Agent, subject to the limitations of this Financing
Agreement.

 

(c)                                  None
of the Lenders or Agents shall have any responsibility to any Borrower or any
other Loan Party for dealing with the Borrowing Agent and the Loan Parties as
provided in this Section 3.9, and the
Obligations of each of the Borrowers and each of the other Loan Parties to the
Lenders and/or the Agent shall not be affected by any matter relating to acts
or omissions of the Borrowing Agent relating to the Loans, requests for Letters
of Credit or otherwise as agent for the Loan Parties hereunder.  Notwithstanding the appointment of the
Borrowing Agent as agent for the Loan Parties hereunder, the Agent and the
Lenders shall in their sole discretion be entitled to deal directly with any
Borrower or any other Loan Party for all purposes of the Loan Documents.

 

Section 3.10                            (a)                                  The
Borrowers shall have the right to request, once at any time prior to the date
that is 180 days prior to the Initial Anniversary Date, to increase the US
Revolving Line of Credit or establish a new tranche of US Revolving Loans (the
“Facility Increase”) by an amount that is
less than or equal to $5,000,000 (such additional Revolving Loans, the “Incremental Revolving Loans”) solely for general corporate
purposes (provided, that the Incremental Revolving Loans shall not be used for
the

 

50

 

purpose of defeasing, redeeming or otherwise
repurchasing outstanding Secured Notes); provided that (i) the Borrowing Agent
shall have given the Agent at least 60 days notice of its intention to effect
the Facility Increase and the desired amount of such Incremental Revolving
Loans, (ii) at the time of, and after giving effect to, the Facility Increase
and the initial funding of the Incremental Revolving Loans, the Borrowers shall
be in pro forma compliance with Section 7.12
of this Financing Agreement (whether or not such financial covenant is in
effect at such time) for the most recently ended Fiscal Quarter for which
Financial Statements have been delivered pursuant to Section 7.8(b)
or (c), (iii) the conditions precedent to a Borrowing set forth in Section 2.2 are satisfied as of the effective date of
the Facility Increase and the date of the initial funding of the Incremental
Revolving Loans, (iv) the Incremental Revolving Loan Lenders have committed to
provide such Incremental Revolving Loans to the US Borrowers, (v) there shall
be no Overadvances outstanding at such time, (vi) there shall be at least
$15,000,000 of Availability under the Revolving Line of Credit before and
immediately after giving effect to the Facility Increase (and calculated based
on the assumption that the Incremental Revolving Loans are fully borrowed at
such time), (vii) no Availability Event, Default or Event of Default shall have
occurred and be continuing on the effective date of the Facility Increase or
would result therefrom and (vii) an opinion of counsel to the Loan Parties, in
form and substance satisfactory to the Agent and addressing such matters as any
Lender through the Agent may reasonably request, shall be delivered to the
Agent.

 

(b)                                 The
Borrowers shall have the right to offer such increase to (i) the US Lenders,
and each US Lender will have the right, but no obligation, to commit to all or
a portion of the proposed Facility Increase or (ii) Eligible Assignees
reasonably acceptable to the Agent (collectively, such Persons, the “Incremental Revolving Loan Lenders”).  On the effective date of the Facility
Increase, the Revolving Loan Commitments and the US Revolving Loan Commitments
will be increased by the amount committed to by each Incremental Revolving Loan
Lender.  In the event there are
Incremental Revolving Loan Lenders that have committed to fund the Incremental
Revolving Loans in excess of the maximum amount requested (or permitted), then
the Agent shall have the right to allocate such commitments, first to then
existing US Lenders and then to Eligible Assignees, on whatever basis the Agent
determines is appropriate in consultation with the US Borrowers.

 

(c)                                  In
the event that the Incremental Revolving Loans shall have been made available
to the US Borrowers, such Incremental Revolving Loans shall (i) rank pari passu in right of payment and of security with the
other Loans, (ii) mature in a manner acceptable to the Agent, but in any event
have an average weighted life equal to or longer than the Revolving Loans made
on the Closing Date and mature on a date no earlier than the Scheduled
Termination Date and (iii) have such pricing as may be agreed to by the US
Borrowers and the Incremental Revolving Loan Lenders; provided, that the yield
(on a mark-to-market basis) with respect to the Incremental Revolving Loans
(taking into account upfront fees paid to the Incremental Revolving Loan
Lenders) shall be equal to the then-current yield (on a mark-to-market basis)
with respect to the US Revolving Loans made on the Closing Date

 

(d)                                 To
induce the Agent to provide the Facility Increase to the US Borrowers, the US
Borrowers shall pay to the Agent a Facility Increase Fee in the amount equal to
one percent (1.00%) of the amount of the Facility Increase payable on the
effective date of the Facility Increase. 
The Facility Increase Fee shall be fully earned and non-refundable when
paid.

 

ARTICLE IV

 

PREPAYMENTS AND
COMMITMENT REDUCTIONS

 

Section 4.1                                   In
the event this Financing Agreement or the Revolving Line of Credit is
terminated by the Agent (pursuant to Article X
or Article XI of this Financing
Agreement), the Required Lenders or the Borrowers or any one of them for any
reason whatsoever, the Revolving Loans shall

 

51

 

become due and payable on the effective date of such
termination, and the Revolving Credit Commitments shall immediately terminate,
notwithstanding any provision to the contrary in any Promissory Note or this
Financing Agreement.

 

Section 4.2                                   Optional
Prepayments and Commitment Reductions.

 

(a)                                  The
Borrowers may prepay the outstanding principal amount of the Revolving Loans in
whole or in part at any time; provided, that
if any prepayment of any LIBOR Loan or any BA Rate Loan is made by the
Borrowers other than on the last day of an Interest Period for such Loan, the
Borrowers shall also pay any amounts owing pursuant to Section 8.19.

 

(b)                                 The
Borrowers may, upon at least three Business Days’ prior notice to the Agent,
terminate in whole or reduce in part ratably the unused portions of the
respective Revolving Credit Commitments under the Revolving Line of Credit; provided, that the Canadian Revolving Sub-Line of Credit
shall also be permanently reduced on a ratable basis; provided, further, that each partial reduction of the Revolving Line
of Credit shall be in an aggregate amount of not less than $5,000,000 or an
integral multiple of $1,000,000 in excess thereof.  On the date of any such termination or
reduction of the Revolving Credit Commitments, the Borrowers shall pay (a)
accrued interest on the principal so prepaid to the date of such prepayment and
(b) solely in the case of a termination in whole of the Revolving Credit
Commitments, whether in a single transaction or a series of related
transactions, the Early Termination Fee.

 

Section 4.3                                   Mandatory
Prepayments and Commitment Reductions.

 

(a)                                  Upon
receipt by any Loan Party of, without duplication, (i) any Net Cash Proceeds
arising from any Disposition of First-Priority Collateral (other than (x)
the Disposition of Inventory in the ordinary course of business on ordinary
business terms or (y) the Disposition of Collateral by any Loan Party to any
Borrower), (ii) subject to Section 7.5 (d) and
clause (d) of this Section 4.3,
any proceeds from a Property Loss Event involving First-Priority Collateral or
(iii) Extraordinary Receipts relating to First-Priority Collateral, the
Borrowers shall immediately prepay the Loans (or provide cash collateral in
respect of Letters of Credit) in an amount equal to 105% of such proceeds.  Any such Mandatory Prepayment shall be
applied in accordance with clause (c) below.

 

(b)                                 To
the extent not required by the Notes Indenture to redeem or otherwise
repurchase the Secured Notes, subject to clause (d) of this Section 4.3,
upon receipt by any Loan Party of (i) any Net Cash Proceeds arising from
any Disposition of Second-Priority Collateral (other than (x) the Disposition
of the Menominee Paper Machine or (y) the Disposition of Collateral by any Loan
Party to any Borrower), (ii) subject to Section 7.5 (d)
and clause (d) of this Section 4.3,  any proceeds from a Property Loss Event involving
Second-Priority Collateral, or (iii) Extraordinary Receipts relating to
Second-Priority Collateral, the Borrowers shall immediately prepay the Loans
(or provide cash collateral in respect of Letters of Credit) in an amount equal
to 105% of such proceeds.  Any such
Mandatory Prepayment shall be applied in accordance with clause (c)
below.

 

(c)                                  Any
Mandatory Prepayments made by the Borrowers required to be applied in
accordance with this clause (c)
shall be applied (subject in the case of Mandatory Prepayments made with the
proceeds from a Reinvestment Event to Section 7.5
(if applicable)  and clause (d)
of this Section 4.3)
as follows: first, to repay the
outstanding principal balance of the Revolving Loans until the Revolving Line
of Credit shall have been paid in full and then to
provide cash collateral for any outstanding Letters of Credit or Letter of
Credit Guaranties in an amount equal to 105% of the face amount of the
applicable Letters of Credit until all such Letters of Credit have been fully
cash collateralized.  All repayments of
Revolving Loans required to be made pursuant to this clause (c)
shall result in a permanent reduction of

 

52

 

the Revolving Credit Commitments (and the Revolving
Credit Commitments of each Lender shall be reduced by its Ratable Portion of
such amount); provided, that, if such repayment
was made from the Net Cash Proceeds of a Reinvestment Event, the Revolving
Credit Commitments shall not be reduced by such prepayment to the extent of the
Reinvestment Deferred Amount of such Reinvestment Event until the Reinvestment
Prepayment Date corresponding thereto and, on such Reinvestment Prepayment
Date, the Revolving Credit Commitments shall be reduced only to the extent of
the Reinvestment Prepayment Amount applicable to such Reinvestment Event, if
any; and provided, further, that, upon the occurrence
of any Default or Event of Default on or before the Reinvestment Prepayment
Date corresponding to such Reinvestment Event, the Revolving Credit Commitments
shall be reduced by the entire Reinvestment Deferred Amount corresponding to
such Reinvestment Event; and provided, further, however, that
if any such repayment pursuant to this clause (c) was
made from the Net Cash Proceeds of a Disposition of the type described in clause (c)(ii)(A)(vi) of Section 7.11,
the Borrowers shall not be required to permanently reduce the Revolving Credit
Commitments to the extent such Disposition was permitted under such clause (c)(ii)(A)(vi) of Section 7.11.

 

(d)                                 Notwithstanding
anything in clauses (a), (b) or (c) of this Section 4.3 to the contrary, if (i) any repayment
under clause (c) of this Section 4.3
is required to be made in respect of a Reinvestment Event, (ii) such
Reinvestment Event constitutes a Property Loss Event and the insurance proceeds
received by the Loan Parties in connection therewith do not exceed $600,000
(individually or in the aggregate), or if such insurance proceeds exceed
$600,000 (individual or in the aggregate), the applicable Loan Party shall have
obtained the consent of the Agent in accordance with Section 7.5(d)
hereof, and (iii) the applicable Loan Party shall have delivered to the
Agent a Reinvestment Notice and, in the case of Property Loss Event, shall have
complied with the provisions of Section 7.5
of this Financing Agreement, then any such Mandatory Prepayment shall not be
required to the extent of the Reinvestment Deferred Amount of such Reinvestment
Event until the Reinvestment Prepayment Date corresponding thereto and, on such
Reinvestment Prepayment Date, the applicable Loan required to be prepaid shall
be so prepaid and reduced to the extent of the Reinvestment Prepayment Amount
applicable to such Reinvestment Event, if any; provided,
however, that, upon the occurrence of
any Event of Default on or before the Reinvestment Prepayment Date
corresponding to such Reinvestment Event, the Borrowers shall be required to
prepay the Loans in accordance with clause (c) of
this Section 4.3 by the entire
Reinvestment Deferred Amount corresponding to such Reinvestment Event.

 

Section 4.4                                   Each
of the Borrowers hereby authorizes the Agent to charge their Revolving Loan
Accounts with the amount of all Obligations owing under this Article IV as such amounts become due.  The Borrowers confirm that any charges which
the Agent may so make to their respective Revolving Loan Accounts as herein
provided will be made as an accommodation to the Borrowers and solely at the
Agent’s discretion.

 

ARTICLE V

 

LETTERS OF CREDIT

 

In order to assist
the US Borrowers in establishing or opening  Letters of
Credit with an Issuing Bank, the Borrowers have requested the Agent, on behalf
of the Lenders, to join in the applications for such Letters of Credit, and/or
guaranty payment or performance of such Letters of Credit and any drafts or
acceptances thereunder through the issuance of the Letters of Credit
Guaranties, thereby lending the Agent’s credit to the US Borrowers and the
Agent has agreed to do so.  These
arrangements shall be handled by the Agent subject to the terms and conditions
set forth below.

 

Section 5.1                                   Within
the Revolving Line of Credit and Availability, upon the request of the
Borrowing Agent or the US Borrowers (which request shall be given no later than
1:00 p.m., New York

 

53

 

time, three (3) Business Days prior the date of such
requested issuance), the Agent on behalf of the Lenders shall assist the US
Borrowers in obtaining Letters of Credit on any Business Day during the period
commencing on the Closing Date and ending on the earlier of the Revolving
Credit Termination Date and 30 days prior to the Scheduled Termination
Date.  Such Letters of Credit shall be in
an amount not to exceed the outstanding amount of the Letter of Credit
Sub-Limit.  The Agent’s assistance for
amounts in excess of the limitation set forth herein shall at all times and in
all respects be in the Agent’s sole discretion. 
It is understood that the term, form and purpose of each Letter of
Credit and all documentation in connection therewith, and any amendments,
modifications or extensions thereof, must be mutually acceptable to the Agent,
the Issuing Bank and the US Borrowers, provided that Letters of Credit shall
not be used for the purchase of domestic or Canadian Inventory or to secure
present or future debt of or to domestic or Canadian Inventory suppliers. Any
and all outstanding Letters of Credit issued hereunder for the account of any
of the US Borrowers shall be reserved dollar for dollar against Availability as
an Availability Reserve, provided, however, that such Availability Reserve shall be reduced in
an amount corresponding to the extent (i) that such Letter of Credit is
cash collateralized in an amount equal to 105% of the face amount of such
Letter of Credit or (ii) that the Agent charges the US Borrowers’
Revolving Loan Account in accordance with Section 5.2.  Letters of Credit issued under and as defined
in the Existing Credit Agreements (collectively, the “Existing
Letters of Credit”) prior to the Closing Date, which Existing
Letters of Credit are listed on Schedule 15 (Existing
Letters of Credit), shall, from and after the Closing Date,
constitute Letters of Credit hereunder.

 

Section 5.2                                   The
Agent shall have the right, with notice to the Borrowers, to charge the US
Borrowers’ Revolving Loan Account with the amount of any and all indebtedness,
liability or obligation of any kind incurred by the Agent and/or the Lenders
under the Letters of Credit Guaranty at the earlier of (a) payment by the
Agent under the Letters of Credit Guaranty; or (b) the occurrence of an
Event of Default which has not been waived in writing by the Required
Lenders.  Any amount charged to the US
Borrowers’ Revolving Loan Accounts shall be deemed a US Revolving Loan
hereunder and shall incur interest at the rate provided in Section 8.1
of this Financing Agreement applicable to Chase Bank Rate Loans.

 

Section 5.3                                   Each
of the Borrowers jointly and severally unconditionally indemnifies the Agent
and the Lenders and holds the Agent and the Lenders harmless from any and all
loss, claim or liability incurred by the Agent arising from any transactions or
occurrences relating to Letters of Credit established or opened for any
Borrower’s account, the collateral relating thereto and any drafts or
acceptances thereunder, and all Obligations thereunder, including any such loss
or claim due to any errors, omissions, negligence, misconduct or action taken
by any Issuing Bank, other than for any such loss, claim or liability arising
out of the gross negligence or willful misconduct by the Agent and/or the
Lenders under the Letters of Credit Guaranty. 
This indemnity shall survive termination of this Financing
Agreement.  The Borrowers agree that any
charges incurred by the Agent for the Borrowers’ account by the Issuing Bank
shall be conclusive on the Agent and may be charged to such Borrowers’
Revolving Loan Account absent manifest error.

 

Section 5.4                                   The
Agent and/or the Lenders shall not be responsible for: (a) the existence,
character, quality, quantity, condition, packing, value or delivery of the
goods purporting to be represented by any documents; (b) any difference or
variation in the character, quality, quantity, condition, packing, value or
delivery of the goods from that expressed in the documents; (c) the
validity, sufficiency or genuineness of any documents or of any endorsements
thereon, even if such documents should in fact prove to be in any or all
respects invalid, insufficient, fraudulent or forged; (d) the time, place,
manner or order in which shipment is made; (e) partial or incomplete
shipment, or failure or omission to ship any or all of the goods referred to in
the Letters of Credit or documents; (f) any deviation from instructions;
(g) delay, default, or fraud by the shipper and/or anyone else in
connection with the

 

54

 

goods or the shipping thereof; or (h) any breach
of contract between the shipper or vendors and the Eligible Loan Parties.

 

Section 5.5                                   The
Eligible Loan Parties agree that any action taken by the Agent and/or the
Lenders, if taken in good faith, or any action taken by any Issuing Bank, under
or in connection with the Letters of Credit, the Letter of Credit Guaranties,
the drafts or acceptances, or the Collateral, shall be binding on each of the
Eligible Loan Parties and shall not put the Agent and/or the Lenders in any
resulting liability to the Borrowers or the other Eligible Loan Parties.  In furtherance thereof, from and after the
occurrence and continuance of an Event of Default, the Agent shall have the
full right and authority to: 
(a) clear and resolve any questions of non-compliance of documents;
(b) give any instructions as to acceptance or rejection of any documents
or goods; (c) execute any and all steamship or airways guaranties (and
applications therefore), indemnities or delivery orders; (d) grant any extensions
of the maturity of, time of payment for, or time of presentation of, any
drafts, acceptances, or documents; and (e) agree to any amendments,
renewals, extensions, modifications, changes or cancellations of any of the
terms or conditions of any of the applications, Letters of Credit, drafts or
acceptances; all in the Agent’s sole name. 
The Issuing Bank shall be entitled to comply with and honor any and all
such documents or instruments executed by or received solely from the Agent; provided, however, that
unless an Event of Default has occurred and is continuing, the Agent agrees not
to execute or deliver any such document or instrument.  Notwithstanding any prior course of conduct
or dealing with respect to the foregoing including amendments and
non-compliance with documents and/or any of the Eligible Loan Parties’
instructions with respect thereto, the Agent may exercise its rights hereunder
in its sole and reasonable business judgment. 
In addition, without the Agent’s express consent and endorsement in
writing, the Eligible Loan Parties agree that after the occurrence and during
the continuation of an Event of Default which is not cured within any
applicable grace period, if any, or waived by the Agent, not to (i) clear and
resolve any questions of non-compliance of documents, or (ii) give any
instructions as to acceptances or rejection of any documents or goods.

 

Section 5.6                                   The
Eligible Loan Parties agree that: (a) any necessary import, export or
other licenses or certificates for the import or handling of the Collateral
will have been promptly procured; (b) all foreign and domestic
Requirements of Law in regard to the shipment and importation of the
Collateral, or the financing thereof shall have been promptly and fully
complied with except where the failure to so comply could not reasonably be
expected to adversely impact the value of the Collateral; and (c) any
certificates in that regard that the Agent may at any time request will be
promptly furnished.  In connection
herewith, the Eligible Loan Parties warrant and represent that all shipments
made under any such Letters of Credit are in accordance with the Requirements
of Law of the countries in which the shipments originate and terminate, and are
not prohibited by any such laws and regulations.  Each of the Eligible Loan Parties assumes all
risk, liability and responsibility for, and agrees to pay and discharge, all
present and future local, state, federal or foreign Taxes, duties, or
levies.  Any embargo, restriction, laws,
customs or regulations of any country, state, city, or other political
subdivision, where the Collateral is or may be located, or wherein payments are
to be made, or wherein drafts may be drawn, negotiated, accepted, or paid,
shall be solely the Eligible Loan Parties’ risk, liability and responsibility.

 

Section 5.7                                   Upon
any payments made to the Issuing Bank under the Letter of Credit Guaranty, the
Agent on behalf of the Lenders shall acquire by subrogation, any rights,
remedies, duties or obligations granted or undertaken by the Borrowers or any
one of them to the Issuing Bank in any application for Letters of Credit, any
standing agreement relating to Letters of Credit or otherwise, all of which
shall be deemed to have been granted to the Agent on behalf of the Lenders and
apply in all respects to the Agent and shall be in addition to any rights,
remedies, duties or obligations contained herein.

 

55

 

ARTICLE VI

 

COLLATERAL MATTERS

 

Section 6.1                                   This
Financing Agreement and the obligation of each of the Loan Parties to perform
all of their covenants and obligations hereunder are secured by a Lien on and
security interest in the Collateral, as more fully set forth in the Pledge and
Security Agreements, the Mortgages and the other Collateral Documents and
subject to the Intercreditor Agreement.

 

Section 6.2                                   Each
of the Loan Parties agrees to comply with all Requirements of Law in order to
grant to the Agent valid and perfected security interests in the Collateral,
subject only to the Permitted Encumbrances. 
The Agent is hereby authorized by the Loan Parties to file (including
pursuant to the applicable terms of the UCC) from time to time any financing
statements, continuations or amendments covering the Collateral.  The Loan Parties hereby consent to and ratify
any and all execution and/or filing of financing statements on or prior to the
Closing Date by the Agent.  The Loan
Parties agree to do whatever the Agent may reasonably request, from time to
time, by way of:  (a) filing notices
of Liens, financing statements, amendments, renewals and continuations thereof;
(b) cooperating with the Agent’s agents and employees; (c) keeping
Collateral records; (d) transferring proceeds of First-Priority Collateral
(and, if no Secured Notes are outstanding the Second-Priority Collateral) to
the Agent’s possession or such Deposit Account (including the Depository
Account and the Blocked Accounts) over which the Agent has control (as defined
in the UCC or, if applicable, the PPSA to the extent if so defined); and (e) performing
such further acts as the Agent and/or the Lenders may reasonably require in
order to effect the purposes of this Financing Agreement, including but not
limited to, obtaining control agreements with respect to deposit accounts
and/or Investment Property in each case, within 30 days of the Closing Date or
such later date as may be agreed to by the Agent.

 

Section 6.3                                   Each
of the Loan Parties agrees to safeguard, protect and hold all Inventory for the
Agent’s account and make no Disposition thereof except in the ordinary course
of the business of the Loan Parties, as herein provided.  The Loan Parties represent and warrant that
Inventory will be sold and shipped by the Loan Parties to their customers only
in the ordinary course of the Loan Parties’ business, and then only on open
account and on terms then currently being extended by the Loan Parties to their
respective customers, provided that, absent the prior written consent of the
Agent, the Loan Parties shall not sell Inventory on a consignment basis (other
than in the ordinary course and consistent with past practice) nor retain any
Lien or security interest in any sold Inventory.  Upon the sale, exchange, or other Disposition
of Inventory, as herein provided, the security interest in the Inventory
provided for herein shall, without break in continuity and without further
formality or act, continue in, and attach to, all proceeds, including any
instruments for the payment of money, Trade Accounts Receivable, documents of
title, shipping documents, chattel paper and all other cash and non-cash
proceeds of such sale, exchange or Disposition. 
As to any such sale, exchange or other Disposition, the Agent shall have
all of the rights of an unpaid seller, including stoppage in transit, replevin,
rescission and reclamation.  The Loan
Parties hereby agree to immediately forward any and all proceeds of Collateral
to the Depository Account or any Blocked Account (or such other Deposit Account
as may be designated in writing by the Agent to the Loan Parties), and to hold
any such proceeds (including any notes and instruments), in trust for the Agent
on behalf of the Secured Parties pending delivery to the Agent.  Irrespective of the Agent’s perfection status
in any and all of the General Intangibles, including, without limitations, any
Intellectual Property, each of the Loan Parties hereby irrevocably grants the
Agent a royalty free license to sell, or otherwise Dispose or transfer, in
accordance with the applicable Pledge and Security Agreements and Section 10.3 of this Financing Agreement, and the
applicable terms thereof and hereof, of any of the Inventory upon the
occurrence and during the continuation of an Event of Default which has not
been waived in writing by the Agent.

 

56

 

Section 6.4                                   Each
of the Loan Parties agrees at its own cost and expense to keep the Equipment in
as good and substantial repair and condition as the same is now or at the time
the lien and security interest granted herein shall attach thereto, ordinary
wear and tear excepted, making any and all repairs and replacements when and
where necessary in accordance with such Loan Party’s customary practice.  Each of the Loan Parties also agrees to
safeguard, protect and hold all Equipment in accordance with the terms hereof
and subject to the Agent’s security interest. 
Absent the Agent’s prior written consent, any sale, exchange or other
Disposition of any Equipment shall be made by the Loan Parties in the ordinary
course of their business and as set forth herein.  The Loan Parties may, in the ordinary course
of their business, sell, exchange or otherwise Dispose of Obsolete Equipment
(including, without limitation, the Menominee Paper Machine in accordance with Section 7.11(c)) and may retain and reinvest such
proceeds to purchase forthwith replacement Equipment with a collateral value at
least equal to the Equipment so Disposed of or sold, provided,
however, that any such reinvestment shall comply with the terms and
conditions of Section 4.3 hereof; and provided further, however that the aforesaid right shall
automatically cease upon the occurrence and during the continuation of an Event
of Default which is not waived in writing by the Required Lenders.  Upon the sale, exchange, or other Disposition
of the Equipment, as herein provided, the security interest provided for in the
Pledge and Security Agreement, without break in continuity and without further
formality or act, continue in, and attach to, all proceeds, including any
instruments for the payment of money, Accounts, documents of title, shipping
documents, chattel paper and all other cash and non-cash proceeds of such
sales, exchange or Disposition.  As to
any such sale, exchange or other Disposition, the Agent and the Lenders shall
have all of the rights of an unpaid seller, including stoppage in transit,
replevin, rescission and reclamation.

 

Section 6.5                                   Notwithstanding
the Agent’s security interest in the Collateral and to the extent that the
Obligations are now or hereafter secured by any assets or property other than
the Collateral or by the guaranty, endorsement, assets or property of any other
person, the Agent shall have the right in its sole discretion (and subject to
the Intercreditor Agreement) to determine which rights, Liens, security
interests or remedies the Agent shall at any time pursue, foreclose upon,
relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or any of the Agent’s
and/or the Lenders’ rights hereunder.

 

ARTICLE VII

 

REPRESENTATIONS,
WARRANTIES AND COVENANTS

 

Section 7.1                                   Certain
Representations and Warranties

 

(a)                                  Each
Loan Party represents, warrants and covenants to the Agent and each of the
Lenders as to the matters set forth on Annex A (Representations
and Warranties) hereto.

 

(b)                                 Each
Loan Party hereby further warrants, represents and covenants that on and as of
(i) the Closing Date and (ii) each other date as required by Section 2.2, the following statements are and will be
true, correct and complete in all material respects and, unless specifically
limited, shall remain so for so long as any of the Revolving Credit Commitments
hereunder shall be in effect and until indefeasible payment in full in cash of
the Obligations: (a) the fair value of their respective Total Assets
exceeds the book value of the Total Liabilities; (b) each Loan Party is
generally able to pay its debts as they become due and payable; and
(c) each Loan Party does not have unreasonably small capital to carry on
its business as it is currently conducted absent extraordinary and unforeseen
circumstances.

 

(c)                                  The
Loan Parties further warrant and represent that on and as of the Closing Date
and on and after each date as required by Section 2.2:
(i) except for the Permitted Encumbrances, after filing of financing
statements in the applicable filing clerks’ offices at the locations specified
in the

 

57

 

applicable Pledge and Security Agreements, each Pledge
and Security Agreements creates a valid, perfected and first priority security
interest in the Collateral; (ii) except for the Permitted Encumbrances,
the Loan Parties are, or will be, at the time additional Collateral is acquired
by them, the absolute owner of the Collateral with full right to pledge, sell,
consign, transfer and create a security interest therein, free and clear of any
and all Liens or other adverse claims in favor of others; (iii) the Loan
Parties will, at their expense, forever warrant and, at the Agent’s request,
defend the same from any and all claims and demands of any other Person other
than a holder of a Permitted Encumbrance; (iv) the Loan Parties, or any
one of them, will not grant, create or permit to exist, any Lien upon, or
security interest in, the Collateral, or any proceeds thereof, in favor of any
other Person other than the holders of the Permitted Encumbrances; (v) the
Equipment does not comprise a part of any Loan Party’s Inventory; and
(vi) the Equipment is and shall only be used by the Loan Parties in the
ordinary course of their respective businesses and will not be held for sale or
lease, or removed from their premises, or otherwise Disposed of by the Loan
Parties except as otherwise permitted pursuant to the terms of this Financing
Agreement or the other Loan Documents, as applicable.

 

Section 7.2                                   Books
and Records; Inspections; Etc.

 

(a)                                  Each
of the Loan Parties agrees to maintain books and records pertaining to the
Collateral in accordance with GAAP and in such additional detail, form and
scope as the Agent shall reasonably require.

 

(b)                                 Upon
prior written notice (or if a Default or Event of Default shall have occurred
and be continuing at such time, other notice) and at such times during normal
business hours as may be requested by the Agent, the Loan Parties agree that
the Agent or its agents, at the cost and expense of the Loan Parties, and any
of the Lenders who may wish to accompany the Agent at their own cost and
expense, may enter upon the Loan Parties’ premises and from time to time in its
reasonable business judgment, for the purposes of determining the Borrowing
Base or otherwise to inspect the Collateral and any and all records pertaining
thereto and making copies thereof and examining and making copies and abstracts
from such Loan Party’s books and records pertaining to Accounts and any other
Collateral and verifying materials, leases, notes, accounts receivable, Deposit
Accounts and such other assets of the Loan Parties, conducting audits, physical
counts, valuations, appraisals, Phase I Environmental Site Assessments (and, if
requested by the Agent based upon the results of any such Phase I
Environmental Site Assessment recommending that a Phase II Environmental Site
Assessment be conducted, a Phase II Environmental Site Assessment) or
examinations and discussing the affairs, finances and accounts of any such Loan
Party with any of its directors, officers, managerial employees, independent
accountants or any of its other representatives; provided,
however, that (i) with respect to access for environmental
inspection, Agent and any of the Lenders shall have the right to inspect once
every twelve (12) months or more frequently if the Agent has reason to believe
that a condition exists or an event has occurred which reasonably could be
expected to result in material Environmental Liabilities and Costs or would
otherwise adversely affect the value of the Collateral or if an Event of
Default shall have occurred and be continuing; (ii) with respect to such
audits, inspections, physical counts, valuations and appraisals, so long as the
Loan Parties shall comply with all the covenants set forth in Section 7.12, such audits, inspections, physical
counts, valuations and appraisals shall be conducted no more than once every
Fiscal Quarter (or four times in any Fiscal Year) and otherwise, as frequently
as the Agent shall request; and (iii) notwithstanding anything to the contrary
in the immediately preceding clause (ii),
for purposes of determining compliance with the applicable Borrowing Base, (x)
roll-forward of Accounts shall occur no less frequently than on a monthly basis
and shall be reported on each Borrowing Base Certificate delivered to the Agent
in accordance with Section 7.8(f)
as of the last Thursday of the immediately preceding week and (y) physical
counts of Inventory shall occur on a no less frequently than monthly basis and
shall be reported on each Borrowing Base Certificate delivered in accordance
with Section 7.8(f) as of the last
Business Day of the immediately preceding month.  In furtherance of the

 

58

 

foregoing, each Loan Party hereby authorizes its
independent accountants, and the independent accountants of each of its
Subsidiaries, to discuss the affairs, finances and accounts of such Person
(independently or together with representatives of such Person) with the agents
and representatives of the Agent.

 

Section 7.3                                   Intentionally
Deleted

 

Section 7.4                                   Intentionally
Deleted

 

Section 7.5                                   Insurance

 

(a)                                  Each
of the Loan Parties agrees to maintain insurance on its Real Estate, Equipment,
Inventory and other property under such policies of insurance, with such
insurance companies, in such reasonable amounts and covering such insurable
risks (including business interruption) as are at all times consistent with the
insurance coverage in effect on the Closing Date and reasonably satisfactory to
the Agent.  All policies covering the
Real Estate, Equipment and Inventory are, subject to the rights of any holders
of Permitted Encumbrances holding claims senior to the Agent, to be made
payable to the Agent on behalf of the Lenders, in case of loss, under a
standard non-contributory “mortgagee”, “lender” or “secured party” clause and
are to contain such other provisions as the Agent may require to fully protect
the Agent’s interest in the Real Estate, Inventory and Equipment and to any
payments to be made under such policies. 
The Loan Parties shall cause all such insurance policies to name the
Agent on behalf of the Secured Parties as additional insured or loss payee, as
appropriate, and to provide that no cancellation, material addition in amount
or material change in coverage shall be effective until after sixty (60) days’
written notice thereof to the Agent.  All
such insurance policies are in full force and effect.  The Loan Parties shall deliver all such
original policies or true copies thereof to the Agent, premium prepaid, with
the loss payable endorsement in the Agent’s favor.

 

(b)                                 As
soon as is practicable and in any event within ninety (90) days after the end
of each Fiscal Year, the Loan Parties shall furnish the Agent (in sufficient
copies for each of the Lenders) with (i) a report in form and substance
satisfactory to the Agent outlining all material insurance coverage maintained
as of the date of such report by the Loan Parties and their Subsidiaries and
the duration of such coverage and (ii) an insurance broker’s statement
that all premiums then due and payable with respect to such coverage have been
paid and confirming that the Agent has been named as loss payee or additional
insured, as applicable.

 

(c)                                  At
the Loan Parties’ request, or if the Loan Parties fail to maintain such
insurance, the Agent may arrange for such insurance, but at the Loan Parties’
expense and without any responsibility on the Agent’s part for:  (i) obtaining the insurance;
(ii) the solvency of the insurance companies; (iii) the adequacy of
the coverage; or (iv) the collection of claims.  Upon the occurrence and during the
continuation of an Event of Default which is not waived in writing by the
Required Lenders, the Agent shall, subject to the rights of any holders of
Permitted Encumbrances holding claims senior to the Agent, have the sole right
and at its option, in the name of the Agent or the Loan Parties or any of them,
to file claims under any insurance policies, to receive, receipt and give
acquittance for any payments that may be payable thereunder, and to execute any
and all endorsements, receipts, releases, assignments, reassignments or other
documents that may be necessary to effect the collection, compromise or
settlement of any claims under any such insurance policies.

 

(d)                                 Notwithstanding
anything in Section 4.3 to the contrary, absent
the occurrence and continuance of an Event of Default (which has not been
waived in writing by the Required Lenders), and provided that the Loan Parties
have sufficient insurance (subject to applicable policy deductibles consistent
with past practices) to replace any of the Loan Parties’ facilities, the
Borrowers may only

 

59

 

reinvest the insurance proceeds of a Property Loss
Event in accordance with Section 4.3(d)
after the Agent shall have received the applicable Reinvestment Notice.  The Agent shall (A) promptly upon the
Agent’s receipt of the applicable Reinvestment Notice, establish a reserve
against the Borrowing Base (irrespective of whether the applicable Loan Party
is a Borrower), in an amount equal to such Reinvestment Deferred Amount and
(B) on the Reinvestment Prepayment Date, release such reserve.  If the Loan Parties do not, or cannot, elect
to use the insurance proceeds as set forth in the applicable Reinvestment
Notice, the Agent shall, subject to the rights of any holders of Permitted
Encumbrances holding claims senior to the Agent, apply the insurance proceeds
to the payment of the Obligations in accordance with Section 4.3(c).  Notwithstanding anything in this Section 7.5(d) or Section 4.3 to
the contrary, the Loan Parties shall not be permitted to reinvest the insurance
proceeds of any Property Loss Event where the insurance proceeds in respect of
such Property Loss Event exceed $600,000 without the prior written consent of
the Agent.

 

(e)                                  In
the event the Loan Parties or any one of them fails to provide the Agent with
timely evidence, reasonably acceptable to the Agent, of its maintenance of
insurance coverage required pursuant to Section 7.5(a) and
(b) above, the Agent may purchase, at
the Loan Parties’ expense, insurance to protect the Agent’s interests in the
Collateral.  The insurance acquired by
the Agent may, but need not, protect the Loan Parties’ interest in the
Collateral, and therefore such insurance may not pay claims which the Loan
Parties may have with respect to the Collateral or pay any claim which may be
made against the Loan Parties in connection with the Collateral.  In the event the Agent purchases, obtains or
acquires insurance covering all or any portion of the Collateral, the Loan
Parties shall be responsible for all of the applicable costs of such insurance,
including premiums, interest (at the applicable Chase Bank Rate for Revolving
Loans at such time as provided herein), fees and any other charges with respect
thereto, until the effective date of the cancellation or the expiration of such
insurance.  The Agent may charge all of
such premiums, fees, costs, interest and other charges to the Loan Parties’
Revolving Loan Accounts.  Each of the
Loan Parties hereby acknowledges that the costs of the premiums of any
insurance acquired by the Agent may exceed the costs of insurance which the
Loan Parties may be able to purchase on their own.  In the event that the Agent purchases such
insurance, the Agent will notify the Loan Parties or the applicable Loan Party
of said purchase within thirty (30) days of the date of such purchase.  If, within thirty (30) days after the date of
such notice, the Loan Parties provides the Agent with proof that the Loan
Parties had the insurance coverage required pursuant to Section 7.5(a)
above (in form and substance satisfactory to the Agent) as of the date on which
the Agent purchased insurance and the Loan Parties continued at all times to
have such insurance, then the Agent agrees to cancel the insurance purchased by
the Agent and credit the applicable Loan Parties’ Revolving Loan Accounts with
the amount of all costs, interest and other charges associated with any
insurance purchased by the Agent, including with any amounts previously charged
to any Revolving Loan Accounts.

 

Section 7.6                                   Taxes

 

Each of the Loan Parties
agrees to pay, when due, all Taxes, including sales taxes, assessments, claims
and other charges lawfully levied or assessed upon the Loan Parties or the
Collateral unless such Taxes are being diligently contested in good faith by
the applicable Loan Parties by appropriate proceedings and adequate reserves
relating thereto are established on the books of such Loan Parties in
accordance with GAAP.  Notwithstanding
the foregoing, if any lien shall be filed or claimed thereunder:  (a) for Taxes due the United States of
America or Canada, or (b) which in the Agent’s opinion could reasonably be
expected to create a valid obligation having priority over the rights granted
to the Agent herein, such lien shall not be deemed to be a Permitted Encumbrance
hereunder and the Loan Parties shall immediately pay such Tax (including any
interest and penalties relating thereto) and remove the lien of record.  If the Loan Parties or any one of them fails
to do so promptly, then at the Agent’s election, the Agent may (i) create
an Availability Reserve in such amount as it may deem appropriate in its
business judgment, or (ii) upon the occurrence and during the continuation
of a Default or Event of

 

60

 

Default, imminent risk of seizure, filing of any priority lien,
forfeiture, or sale of the Collateral, pay Taxes on the Loan Parties’ behalf,
and the amount thereof shall be an Obligation secured hereby and due on demand.

 

Section 7.7                                   Compliance
with Laws

 

Each of the Loan
Parties:  (a) shall comply with all
Requirements of Law with respect to which the failure to comply would have a
material and adverse impact on the Collateral, or any material part thereof, or
on the business or operations of the Loan Parties, provided that the Loan
Parties may contest any acts, rules, regulations, orders and directions of such
bodies or officials in any reasonable manner which will not, in the Agent’s
reasonable opinion, materially and adversely effect the Agent’s and/or the
Lender’s rights or priority in the Collateral; (b) shall comply with all
Environmental Laws as presently existing or as adopted or amended in the future
during the terms of the Loans, applicable to the Collateral, the ownership
and/or use of their real property and operation of their business, with respect
to which the failure to comply would have a material and adverse impact on the
Collateral, or any material part thereof, or on the operation of the business
of the Loan Parties, individually or taken as a whole; and (c) shall not
be deemed to have breached any provision of this Section 7.7
if (i) the failure to comply with the requirements of this Section 7.7
resulted from good faith error or innocent omission, (ii) the Loan Parties
promptly commence and diligently pursue a cure of such breach, or
(iii) such failure is cured within thirty (30) days following the Loan
Parties’ receipt of notice of such failure, or if such cannot in good faith be
cured within thirty (30) days, then such breach is cured within a reasonable time
frame based upon the extent and nature of the breach and the necessary Remedial
Action, and in conformity in all material respects with any applicable consent
order, consensual agreement or other Requirement of Law.

 

Section 7.8                                   Reporting
Requirements

 

Until termination
of this Financing Agreement and payment and satisfaction of all Obligations due
hereunder in full in cash, the Loan Parties agree that each of the Loan Parties
will furnish to the Agent and each Lender:

 

(a)                                  Monthly Reports.  As
soon as available, and in any event within thirty (30) days after the end of
each fiscal month of Cellu Tissue and its Subsidiaries commencing with the
first fiscal month of the Loan Parties ending after the Closing Date,
internally prepared Consolidated Balance Sheets and Consolidating Financial
Reports, as at the end of such fiscal month, and consolidated statements of
operations and retained earnings and consolidated statements of cash flows for
the period commencing at the end of the immediately preceding fiscal month and
ending with the end of such fiscal month, and for the period commencing at end
of the immediately preceding Fiscal Year and ending with the end of such fiscal
month, (A) in each case setting forth (i) in comparative form the
corresponding figures for the corresponding month in the financial projections
provided pursuant Section 7.8(g)(B) and (ii)
commencing with the first fiscal month of the Loan Parties ending after the
Closing Date, in comparative form, the corresponding figures for the corresponding
fiscal month of the immediately preceding Fiscal Year and (B) all in
reasonable detail and certified by a Responsible Officer of Cellu Tissue as
fairly presenting, in all material respects, the financial position of the Loan
Parties as at the end of such fiscal month and the results of operations,
retained earnings and cash flows of Cellu Tissue and its Subsidiaries for such
fiscal month, in accordance with GAAP applied in a manner consistent with that
of the most recent audited financial statements furnished to the Agent and the
Lenders, subject to normal year-end adjustments and the absence of footnotes.

 

(b)                                 Quarterly Reports.  As
soon as available and in any event within forty five (45) days after the end of
the first three (3) Fiscal Quarters of the Loan Parties commencing with the
first fiscal

 

61

 

quarter of the Loan Parties ending after the Closing
Date, internally prepared Consolidated Balance Sheets and Consolidating
Financial Reports, consolidated statements of operations and retained earnings
and consolidated statements of cash flows of Cellu Tissue and its Subsidiaries
as at the end of such Fiscal Quarter, and for the period commencing at the end
of the immediately preceding Fiscal Year and ending with the end of such Fiscal
Quarter, setting forth in each case in comparative form the figures for the
corresponding date or period of the immediately preceding Fiscal Year, all in
reasonable detail and certified by an Responsible Officer of Cellu Tissue as
fairly presenting, in all material respects, the financial position of Cellu
Tissue and its Subsidiaries as of the end of such Fiscal Quarter and the
results of operations and cash flows of Cellu Tissue and its Subsidiaries for
such Fiscal Quarter, in accordance with GAAP applied in a manner consistent
with that of the most recent audited financial statements of Cellu Tissue and
its Subsidiaries furnished to the Agent and the Lenders, subject to normal
year-end adjustments.

 

(c)                                  Annual Reports.  As
soon as available, and in any event within ninety (90) days after the end
of each Fiscal Year of Cellu Tissue and its Subsidiaries (including the Fiscal
Year ending February 29, 2004), (i) Consolidated Balance Sheets,
consolidated statements of operations and retained earnings and consolidated
statements of cash flows of Cellu Tissue and its Subsidiaries as at the end of
such Fiscal Year, setting forth in each case in comparative form the
corresponding figures for the immediately preceding Fiscal Year, all in
reasonable detail and prepared in accordance with GAAP, and accompanied by a
report and an unqualified opinion, prepared in accordance with generally
accepted auditing standards, of independent certified public accountants of
recognized standing selected by Cellu Tissue and satisfactory to the Agent
(which opinion, for the avoidance of doubt, shall be without (A) a “going
concern” or like qualification or exception, (B) any qualification or exception
as to the scope of such audit, or (C) any qualification which relates to
the treatment or classification of any item and which, as a condition to the
removal of such qualification, would require an adjustment to such item, the
effect of which would be to cause any noncompliance with the provisions of Section 7.12 hereof, together with a written statement
of such accountants (1) to the effect that, in making the examination
necessary for their certification of such financial statements, they have not
obtained any knowledge of the existence of an Event of Default or a Default and
(2) if such accountants shall have obtained any knowledge of the existence
of an Event of Default or such Default, describing the nature thereof; and
(ii) internally prepared Consolidating Financial Reports as at the end of such
Fiscal Year, setting forth in each case in comparative form the corresponding
figures for the immediately preceding Fiscal Year.

 

(d)                                 Compliance Certificate. 
Simultaneously with the delivery of the financial statements of Cellu
Tissue and its Subsidiaries required by clauses (a), (b) and (c) of this Section 7.8, a certificate of a Responsible Officer of
the Loan Parties, in form and substance satisfactory to the Agent (such
certificate, the “Compliance Certificate”) (A)
stating that such Responsible Officer has reviewed the provisions of this
Financing Agreement and the other Loan Documents and has made or caused to be
made under his or her supervision a review of the condition and operations of
Cellu Tissue and its Subsidiaries during the period covered by such financial
statements with a view to determining whether Cellu Tissue and its Subsidiaries
were in compliance with all of the provisions of this Financing Agreement and
such Loan Documents at the times such compliance is required hereby and
thereby, and that such review has not disclosed, and such Responsible Officer
has no knowledge of, the existence during such period of an Availability Event,
an Event of Default or Default or, if an Availability Event, an Event of
Default or Default existed, describing the nature and period of existence
thereof and the action which the Loan Parties propose to take or have taken
with respect thereto, (B) if applicable, attaching a schedule showing the
calculations to determine compliance with Section 7.12
; and (C) the Loan Parties have not received any notice of cancellation
with respect to their property insurance policies; and (D) the Loan
Parties have not received any notice that could reasonably be expected to
result in a Material Adverse Effect on the value of the Collateral taken as a
whole.

 

62

 

(e)                                  Certain Collateral Reports. 
As soon as available and in any event within ten (10) days after
the end of each fiscal month of the Parent and its Subsidiaries commencing with
the first fiscal month of the Loan Parties ending after the Closing Date,
reports in form and detail satisfactory to the Agent and certified by a
Responsible Officer of the Loan Parties as being accurate and complete (A)
listing all Trade Accounts Receivable of the Loan Parties as of such day, which
shall include the amount and age of each such Trade Account Receivable, showing
separately those which are more than 30, 60, 90 and 120 days old and a
description of all liens, set-offs, defenses and counterclaims with respect
thereto, together with a reconciliation of such schedule with the
schedule delivered to the Agent pursuant to this clause (e)(A)
for the immediately preceding fiscal month, the name and mailing address of
each Account Debtor with respect to each such Trade Account Receivable and such
other information as the Agent may reasonably request, (B) listing all
accounts payable of the Loan Parties as of each such day which shall include
the amount and age of each such account payable, the name and mailing address
of each account creditor and such other information as the Agent may request,
and (C) listing all Inventory of the Loan Parties as of each such day, and
containing a breakdown of such Inventory by type and amount, the cost and the
current market value thereof (by location), the date of acquisition, the
warehouse and production facility location and such other information as the
Agent may reasonably request, all in detail and in form reasonably satisfactory
to the Agent.

 

(f)                                    Borrowing Base Certificate. 
As soon as available and in any event within three (3) Business Days
after the end of each fiscal month, a Borrowing Base Certificate of the
Eligible Loan Parties, on a consolidated basis, which shall be executed by a
Responsible Officer of the Eligible Loan Parties and shall be current as of the
close of business on the last Thursday in the immediately preceding fiscal
month, supported by schedules showing the derivation thereof and containing
such detail and other information as the Agent may request from time to time or
as otherwise provided in Section 7.9;
provided, however that during any
Availability Event Period, such Borrowing Base Certificates shall be delivered
to the Agent within three (3) Business Days after end of each two fiscal week
period occurring during such Availability Event Period and shall be current as
of the close of business on the last Thursday in the immediately preceding two
fiscal week period.  The Borrowing Base
set forth in the Borrowing Base Certificate shall be effective from and
including the date such Borrowing Base Certificate is duly received by the
Agent but not including the date on which a subsequent Borrowing Base
Certificate is received by the Agent, unless the Agent disputes the eligibility
of any property included in the calculation of the Borrowing Base or the
valuation thereof by notice of such dispute to the Borrowing Agent.  In the event of any dispute about the
eligibility of any property included in the calculation of the Borrowing Base
or the valuation thereof, the Agent’s good faith judgment shall control.  Each Eligible Loan Party shall update its
Eligible Inventory at the end of each month, to be current as of the last
Thursday of such month, which shall be reflected in the applicable Borrowing Base
Certificate to be delivered pursuant to this Section 7.8(f)
at any time during the following month.

 

(g)                                 Projections.  (A) on
or before January 31 of each year, preliminary annual financial
projections, supplementing and superseding the financial projections for such
period delivered to the Agent on the Closing Date, prepared on a monthly basis
and otherwise in form and substance reasonably satisfactory to the Agent, for
the immediately succeeding Fiscal Year for the Loan Parties and (B) on or
before (x) May 1 in the case of the Fiscal Year 2004 and (y) March 31 of
each Fiscal Year thereafter (or such later date as may be agreed to by the
Agent in its sole discretion), annual financial projections for such Fiscal
Year, which financial projections shall have been approved by the Board of
Directors (or equivalent management body) of each Loan Party and shall
supplement and supersede the preliminary annual financial projections for such
period delivered pursuant to the immediately preceding clause (A)
to the Agent, prepared on a monthly basis and otherwise in form and substance
reasonably satisfactory to the Agent, for such Fiscal Year for the Loan
Parties.

 

63

 

(h)                                 Corporate Chart and Other Updates.  (i) On or before each date on
or before which Financial Statements are required to be delivered pursuant to clause (b) or (c) above,
(A) a corporate organizational chart or other equivalent document, current
as of the date of receipt of such chart by the Agent and, if later, such date
for the delivery of the financial statements referred to in clauses (b) or (c), as the
case may be, in form and substance reasonably acceptable to the Agent and
certified as true, correct and complete in all material respects by a Responsible
Officer of the Loan Parties, setting forth, for each Person that is a Loan
Party that is party to, or required by this Financing Agreement to become party
to, this Financing Agreement and the Pledge and Security Agreement, or that is
a Subsidiary or Affiliate of any of them, (I) the full legal name of such
Person (and any trade name, fictitious name or other name such Person may have
had or operated under), (II) the jurisdiction of organization and
organizational number (if any) of such Person, (III) the location of such
Person’s chief executive office (or sole place of business) and (IV) the
number of shares of each class of such Person’s Stock authorized (if
applicable), the number outstanding as of the date of delivery, and the number
and percentage of the outstanding shares of each such class owned (directly or
indirectly) by any Loan Party and (B) a certificate of a Responsible
Officer of the Borrowers in form and substance satisfactory to the Agent that,
to the best of the knowledge of the Borrowers, all certificates, statements,
updates and other documents (including updated schedules) required to be
delivered pursuant to the Pledge and Security Agreement by any Loan Party in
the preceding Fiscal Quarter have been delivered thereunder.

 

(ii)                                  On
or before the 25th day of each fiscal month, the Loan Parties shall provide a
summary reasonably satisfactory to the Agent of the operating performance of
each business segment for the prior fiscal month (including, without
limitation, a comparison of such operating performance against that specified
for such fiscal month in the most recently delivered budget of the Loan Parties
delivered to the Agent).

 

(iii)                               The
reporting requirements set forth in this clause (h) are
in addition to, and are not intended to and shall not replace, relax or
otherwise modify, any obligation of any Loan Party under any Loan Document
(including other notice or reporting requirements).  Compliance with the reporting obligations in
this clause (h) shall not, by itself, operate
to update any Schedule hereto or any schedule to any other Loan
Document and shall not cure, or otherwise modify in any way, any failure to
comply with any covenant, or any breach of any representation or warranty,
contained in any Loan Document or any other Default or Event of Default.

 

(i)                                     Governmental Reports. 
Promptly after submission to any Governmental Authority, but subject to
the confidentiality provisions hereof, all documents and information furnished
to such Governmental Authority in connection with any investigation of any Loan
Party other than routine inquiries by such Governmental Authority.

 

(j)                                     Default Notices; Amendments to Constituent Documents.  Promptly, and in any event within five (5)
Business Days, after any Responsible Officer of a Loan Party has knowledge of
the existence of:  (a) any
Availability Event, Default or Event of Default; (b) any Material Adverse
Effect or Material Adverse Change; or (c) any material amendment of any
Constituent Document of any Loan Party or any of its Subsidiaries which could
reasonably be expected to materially adversely affect the interests, rights and
remedies of the Agent and Lenders under this Financing Agreement or the other
Loan Documents the applicable Loan Party shall give the Agent notice specifying
the nature of such Default or Event of Default or other event, including the
anticipated effect thereof, which notice, if given by telephone, shall be
promptly confirmed in writing on the next Business Day.

 

(k)                                  ERISA Matters.  (i)
Promptly and in any event within ten (10) days after any Loan Party or any of
its Subsidiaries or any ERISA Affiliate knows that any ERISA Event has
occurred, written notice describing such event; (ii) promptly and in any event
within ten (10) days after the Loan

 

64

 

Parties, any of their respective Subsidiaries or any
ERISA Affiliate knows that a request for a minimum funding waiver under
Section 412 of the Code has been filed with respect to any Title IV
Plan or Multiemployer Plan, a written statement of a Responsible Officer of the
Borrowers describing such ERISA Event or waiver request and the action, if any,
the Loan Parties, their respective Subsidiaries and ERISA Affiliates propose to
take with respect thereto and a copy of any notice filed with the PBGC or the
IRS pertaining thereto; and (iii) simultaneously with the date that the Loan
Parties, any of their respective Subsidiaries or any ERISA Affiliate files a
notice of intent to terminate any Title IV Plan, if such termination would
require material additional contributions in order to be considered a standard
termination within the meaning of Section 4041(b) of ERISA, a copy of each
notice.

 

(l)                                     Litigation.  Promptly
after the commencement thereof but in any event not later than three (3)
Business Days after service of process with respect thereto on, or the
obtaining of knowledge thereof, by any Responsible Officer of any Loan Party,
notice of each action, suit or proceeding before any court or other
Governmental Authority or other regulatory body or any arbitrator which, if
adversely determined, could be reasonably expected to have a Material Adverse
Effect.

 

(m)                               Material Contracts. 
(i) As soon as possible and in any event within three (3) Business
Days after execution, receipt or delivery thereof, copies of any material
notices that any Responsible Officer of any Loan Party executes or receives in
connection with any Material Contract; and (ii) promptly after becoming aware
of the same, the Loan Parties shall give the Agent written notice of any
cancellation, termination or loss of any material Contractual Obligation or
other customer arrangement.

 

(n)                                 Certain Dispositions. 
As soon as possible and in any event within five (5) days after
execution, receipt or delivery thereof, copies of any material notices that any
Responsible Officer of any Loan Party executes or receives in connection with
the sale or other Disposition of the Stock of, or all or substantially all of
the assets of, any Loan Party.

 

(o)                                 SEC Filings; Investor Reports.  Promptly after the sending or filing thereof,
copies of all statements, reports and other information any Loan Party sends to
any holders of its Indebtedness or its securities or files with the Securities
and Exchange Commission or any national (domestic or foreign) securities
exchange.

 

(p)                                 Management Letters. 
Promptly upon receipt thereof, copies of all financial reports
(including, without limitation, management letters), if any, submitted to any
Loan Party by its auditors in connection with any annual or interim audit of
the books thereof.

 

(q)                                 Other Information. 
Promptly upon request, such other information concerning the business
affairs condition or operations, financial or otherwise, of any Loan Party as
the Agent may from time to time may reasonably request.

 

Section 7.9                                   Borrowing
Base Matters

 

Until termination
of this Financing Agreement and payment and satisfaction of all Obligations due
hereunder in full in cash, the Eligible Loan Parties and the other Loan
Parties, as applicable, agree that, unless the Agent shall have otherwise
consented in writing:

 

(a)                                  Subject
to Section 7.2, each Eligible Loan Party shall conduct, or shall cause to
be conducted, at its expense and upon request of the Agent, and present to the
Agent for approval, such appraisals, investigations and reviews as the Agent
shall request for the purpose of determining the Borrowing Base applicable to
such Eligible Loan Party, all upon notice and at such times during normal

 

65

 

business hours and as often as may be reasonably requested.  The Eligible Loan Parties shall furnish to
the Agent any information that the Agent may reasonably request regarding the
determination and calculation of the Borrowing Base, including correct and
complete copies of any invoices, underlying agreements, instruments or other
documents and the identity of all account debtors in respect of Accounts
referred to therein.

 

(b)                                 The
Loan Parties shall promptly notify the Agent in writing in the event that at
any time any Loan Party receives or otherwise gains knowledge that the
outstanding Revolving Loans and/or Letters of Credit made to any Borrower
exceed the Borrowing Base as a result of a decrease therein, in which case such
notice shall also include the amount of such excess.

 

(c)                                  The
Agent may, in its sole discretion and at the Eligible Loan Parties’ sole cost
and expense, make weekly test verifications of the Accounts and payables (with
notice to the Eligible Loan Parties) and physical verifications of the
Inventory (at month end) in any manner and through any medium that the Agent
considers advisable, and the Eligible Loan Parties shall furnish all such
assistance and information as the Agent may reasonably require in connection
therewith.

 

Section 7.10                            Conduct
of Business

 

Each Loan Party
shall, and shall cause each of its Subsidiaries to, (a) conduct its
business in the ordinary course consistent with past practice and (b) use
its reasonable efforts, in the ordinary course and consistent with past
practice, to preserve its business and the goodwill and business of the
customers, advertisers, suppliers and others having business relations with the
Loan Parties, or any of them, or any of its Subsidiaries, except in each case
where the failure to comply with the covenants in each of clauses (a) and (b)
above would not, in the aggregate, have a Material Adverse Effect.

 

Section 7.11                            Certain
Negative Covenants

 

Until termination
of the Financing Agreement and payment and satisfaction of all Obligations
hereunder in full in cash, each of the Loan Parties agree that, except as
otherwise herein provided, each Loan Party shall comply with each covenant set
forth below in this Section 7.11.

 

(a)                                  Liens.  Except for the
Permitted Encumbrances, no Loan Party shall, and no Loan Party shall permit its
Subsidiaries to, mortgage, collaterally assign, transfer or otherwise permit
any Lien, charge, security interest, encumbrance or judgment, (whether as a
result of a purchase money or title retention transaction, or other security
interest, or otherwise) to exist on any of the Loan Parties’ Collateral or any
other assets, whether now owned or hereafter acquired;

 

(b)                                 Indebtedness and Contingent Obligations.  No Loan Party shall, and no Loan Party shall
permit its Subsidiaries to:

 

(i)                                     incur
or create any Indebtedness other than Permitted Indebtedness; and

 

(ii)                                  assume,
guaranty, endorse, or otherwise become liable upon the obligations of any
person, firm, entity or corporation, except (i) by the endorsement of
negotiable instruments for deposit or collection or similar transactions in the
ordinary course of business and consistent with past practice,
(ii) pursuant to the terms of this Financing Agreement, (iii) subject
to the Intercreditor Agreement, for guaranties issued pursuant to the terms of
the Notes Indenture or (iv) for guaranties by any Loan Party of any obligations
of any Borrower to any other Person (other than another Loan Party) but only to
the extent that (a) such guarantied obligations constitute Permitted
Indebtedness

 

66

 

hereunder (b) such guaranty constitutes Permitted
Indebtedness hereunder and (c) such guaranty shall not be secured by any
assets or property of such Loan Party.

 

(c)                                  Dispositions.

 

(i)                                     Certain Dispositions.   No
Loan Party shall, and no Loan Party shall permit its Subsidiaries to, make,
conduct or otherwise permit to occur any Disposition of either all or
substantially all of any Loan Party’s assets or property which do not
constitute Collateral; and

 

(ii)                                  Dispositions of Collateral.  No
Loan Party shall, and no Loan Party shall permit its Subsidiaries to, make,
conduct or otherwise permit to occur, any Disposition of any Collateral except
(A) for the following: (i) the sale or Disposition of Inventory in
the ordinary course of business on ordinary business terms, (ii) subject
to Section 6.4, the sale of Obsolete
Equipment, (iii) licenses of intellectual property of any Loan Party in
the ordinary course of business, (iv) any Disposition to a Borrower, (v)
so long as no Default or Event of Default shall have occurred and be continuing
or would result therefrom, the Disposition of the Menominee Paper Machine and
(vi) as long as no Default or Event of Default shall have occurred and be
continuing or would result therefrom, any other Disposition for cash in an
aggregate amount not less than the fair market value of such property or
assets, payable in cash upon such sale; provided, however,
that with respect to any Disposition pursuant to clause (vi),
the aggregate consideration received during any Fiscal Year for (I) any
such Disposition shall not exceed $100,000 and (II) all such Dispositions
shall not exceed $500,000; and provided, further, however
that all Net Cash Proceeds or other proceeds, as the case may be, of any such
Disposition permitted by the foregoing are applied as set forth in, and to the
extent required by, Section 4.3(c);
and (B) as otherwise specifically permitted by this Financing Agreement or
the other Loan Documents.

 

(d)                                 Restrictions on Fundamental Changes.  No Loan Party shall, and no Loan Party shall
permit its Subsidiaries to, alter or modify their respective corporate names,
principal places of business, structure, or existence, re-incorporate or
re-organize, or wind-up, liquidate or dissolve, or merge, consolidate or
amalgamate with any Person, purchase or otherwise acquire, whether in one
transaction or a series of related transactions, all or substantially all of
the assets of any Person (or any division thereof) (or agree to do any of the
foregoing), or permit any of its Subsidiaries to do any of the foregoing, except that the Loan Parties (or their respective
Subsidiaries) may (A) change their corporate name, address or
organizational structure or legal form; or (B) a Loan Party may merge with
and into any other Loan Party other than Parent, Cellu Tissue or a foreign
subsidiary (with a Loan Party being the survivor of such merger); provided, however, that:

 

(1)                                  in
any such instance under sub clauses (A) or (B) above the Loan Parties shall
give the Agent thirty (30) days prior written notice thereof (or such lesser
notice as may be agreed to by the Agent); the surviving Loan Party, if
any, is joined as a Loan Party hereunder and is a party to the Pledge and a
Security Agreement and the other Loan Documents (or in the case of a change in
organizational structure, the surviving Loan Party has assumed the obligations
of the original Loan Party under the Financing Agreement, the Pledge and
Security Agreement and each other Loan Document, by operation of law or by
express agreement in form and substance satisfactory to the Agent); and the
Stock of such Subsidiary or surviving Loan Party, as the case may be, shall be
pledged by the owner thereof pursuant to the Pledge and Security Agreement; and

 

(2)                                  in
connection with sub clauses (A) and (B) above, (x) the Loan Parties shall
comply with the terms of Section 7.17 hereof,
as applicable; (y) the Loan Parties shall execute and deliver, prior to or
simultaneously with any such action, any and all documents and agreements
requested by the Agent to confirm the continuation and preservation of all
security interests and liens granted to the Agent hereunder; and (z)
(I) no other provision of this Financing Agreement or

 

67

 

any other Loan Document would be violated thereby,
(II) no Default or Event of Default shall have occurred and be continuing
either before or after giving effect to such transaction and (III) the
Lenders’ rights in any Collateral, including, without limitation, the
existence, perfection and priority of any lien thereon, are not adversely
affected by such transaction.

 

(e)                                  Modifications of Debt Agreements; Modifications of Constituent
Documents; Amendments to Material Documents; Etc.

 

No Loan Party
shall, and no Loan Party shall permit its Subsidiaries to:

 

(i)                                     amend,
modify or otherwise change (or permit the amendment, modification or other
change in any manner of) any of the provisions of any of its or its
Subsidiaries’ Indebtedness (including the Secured Notes) or of any instrument
or agreement (including, without limitation, any purchase agreement, indenture,
loan agreement or security agreement) relating to any such Indebtedness if such
amendment, modification or change would shorten the final maturity or average
life to maturity of, or require any payment to be made earlier than the date
originally scheduled on, such Indebtedness, would increase the interest rate
applicable to such Indebtedness, would change the subordination provisions, if
any, of such Indebtedness, or would otherwise be adverse to the Lenders or the
issuer of such Indebtedness in any material respect;

 

(ii)                                  except
for the Obligations and with respect to the intercompany loans permitted in Section 3.1(a), make any voluntary or optional payment
or prepayment or redemption, defeasance, sinking fund payment or other
acquisition for value of any of its or its Subsidiaries’ Indebtedness
(including, without limitation, by way of depositing money or securities with
the trustee therefor before the date required for the purpose of paying any
portion of such Indebtedness when due), or refund, refinance, replace or
exchange any other Indebtedness for any such Indebtedness (except to the extent
such Indebtedness is otherwise expressly permitted by the definition of
Permitted Indebtedness), or make any payment, prepayment, redemption,
defeasance, sinking fund payment or repurchase of any outstanding Indebtedness
as a result of any asset sale, change of control, issuance and sale of debt or
equity securities or similar event, or give any notice with respect to any of
the foregoing; provided, that the Loan Parties
(other than Parent) may prepay, redeem or repurchase their outstanding
Indebtedness with Excess Cash Flow at any time so long as at the time of such
prepayment, redemption or repurchase, (x) there are no Loans outstanding under
this Financing Agreement and (y) no Default or Event of Default shall have
occurred and be continuing under the Loan Documents or would result therefrom;

 

(iii)                               except
as permitted under this Financing Agreement or any Pledge and Security
Agreement, amend, modify or otherwise change its name, jurisdiction of
organization, organizational identification number or federal taxpayer
identification number; or

 

(iv)                              amend,
modify or otherwise change its Constituent Documents, including, without
limitation, by the filing or modification of any certificate of designation, or
any agreement or arrangement entered into by it, with respect to any of its Stock
(including any shareholders’ agreement), or enter into any new agreement with
respect to any of its Stock, except any such amendments, modifications or
changes or any such new agreements or arrangements pursuant to this
clause (iv) that (x) do not materially affect the rights and privileges of
the Loan Parties or any of their Subsidiaries and do not materially adversely
affect the interests of the Agents or the Lenders or (y) are expressly
permitted pursuant to the terms of Section 7.11(d)(1).

 

(v)                                 materially
amend or otherwise materially change or waive any of its respective rights (or
agree to do any of the foregoing) under any Material Contract, Related Document
or any Related Party Fee Arrangement to which it is a party, in each case in
any respect that is adverse to the

 

68

 

interests of the Agent and the Lenders or could
reasonably be expected to result in a material decrease in the value of any
Collateral.

 

(f)                                    Restricted Payments. 
No Loan Party shall, or shall permit any of its Subsidiaries to,
directly or indirectly, declare, order, pay, make or set apart any sum for any
Restricted Payment except for the following:

 

(i)                                     any
Loan Party may directly or indirectly pay dividends to the Parent (A) in
amounts necessary to pay customary expenses of the Parent and/or Cellu Tissue
in the ordinary course of its business (including salaries and related
reasonable and customary expenses incurred by employees of the Parent) and
(B) in amounts necessary to pay Taxes when due and owing by the Parent, in
each case consistent with past practices and (C) in accordance with the
Management Agreement.

 

(ii)                                  any
Subsidiary of any Borrower may pay dividends to such Borrower;

 

(iii)                               the
Parent may pay dividends in the form of common Stock of the Parent;

 

(iv)                              any
Loan Party may pay (or may pay dividends to Parent in amounts necessary for
Parent to pay) management fees, consulting fees or similar fees and/or expenses
in an amount not to exceed $450,000 per Fiscal Year (the “Related
Party Fee Payment”) to CGI or such Persons designated by CGI in
accordance with the terms of the Related Party Fee Arrangement and consistent
with past practices; provided, however,
that the Related Party Fee Payment shall not accrue or be payable at any time
during which a Default or Event of Default shall have occurred and be
continuing;

 

(v)                                 (x)
Cellu Tissue may pay dividends to Parent within three (3) Business Days after
Closing Date in an amount necessary for parent to consummate the Designated Stock
Repurchase and (y) Parent may consummate the Designated Stock Repurchase within
three (3) Business Days after Closing Date; provided, that
Parent shall have completed all or substantially all of the Designated Stock
Repurchase on the Closing Date.

 

(vi)                              any
Loan Party may pay dividends to Parent in amounts necessary to repurchase Stock
of the Parent held by employees of any Loan Party or any of its respective
Subsidiaries upon the termination, retirement or death of any such employee; provided, however, that, as to any such repurchase, each of
the following conditions is satisfied: 
(a) as of the date of the payment for such repurchase and after
giving effect thereto, no Default or Event of Default shall exist or have
occurred and be continuing, (b) such repurchase shall be paid with funds
legally available therefor and (c) the aggregate amount of all payment for such
repurchases in any calendar year shall not exceed $1,500,000;

 

(vii)                           each Borrower may pay fees and expenses to
Cellu Tissue for certain management services (including, without limitation,
marketing, human resources and payroll and other financial services) provided
by Cellu Tissue to such Borrower in accordance with the terms of the applicable
Cellu Tissue Management Agreement;

 

(viii)                        each Borrower may pay fees and expenses to
Cellu Tissue for certain group purchasing services provided by Cellu Tissue in
accordance with the terms of the applicable Purchasing Agreement;

 

(ix)                                the Loan Parties may redeem or repurchase the
Stock of Parent with Excess Cash Flow at any time so long as at the time of
such redemption or repurchase, there are no Loans outstanding under this
Financing Agreement; and

 

69

 

(x)                                   commencing
with the fiscal year ending on or about February 28, 2007, and each fiscal
year thereafter, Cellu Tissue may make Restricted Payments up to an amount
equal to 50% of Consolidated Net Income for the period (treated as one
accounting period) from the Closing Date to the most recent Fiscal Quarter
ending prior to the date of such Restricted Payment for which financial
statements have been delivered to the Agent pursuant to Section 7.8(b)
or (c), as the case may be, subject
to the satisfaction of the following conditions: (A) the Agent shall have
received Cellu Tissue’s (I) audited annual financial statements required to be
delivered pursuant to Section 7.8(c)
for the then most recently ended Fiscal Year and (II) unaudited quarterly
financial statements required to be delivered pursuant to Section 7.8(b)
for each Fiscal Quarter ending after such Fiscal Year through the date such
Restricted Payment is proposed to be made, (B) immediately prior to and after
giving effect to such Restricted Payment, no Revolving Loans shall be
outstanding, (C) immediately prior to and after giving effect to such
Restricted Payment, (I) the Borrowers shall have Availability of at least
$25,000,000, (II) the Loan Parties shall be in compliance with Article VII of this Financing Agreement (including Annex A) and (III) no Default or Event of Default shall have
occurred or be continuing, (D) the Loan Parties shall not have had any trade
payables overdue for more than 45 days (other than such overdue trade payables
that (x) are being contested in good faith in an appropriate manner and (y) do
not exceed $50,000 owing to any Person (or group of related Persons)) in the 90
day period immediately prior to such Restricted Payment, and (E) the Agent
shall have received a certificate from the chief financial officer of Cellu Tissue
certifying compliance with the foregoing;

 

provided,
however, that the
Restricted Payments described in this Section 7.11(f)
shall not be permitted if a Default or an Event of Default shall have occurred
and be continuing at the date of declaration or payment thereof or would result
therefrom.

 

(g)                                 Investments.  No Loan
Party shall make or commit or agree to make any loan, advance, guaranty of
obligations, other extension of credit or capital contributions to, or hold or
invest in or commit or agree to hold or invest in, or purchase or otherwise
acquire or commit or agree to purchase or otherwise acquire any shares of the
Stock, bonds, notes, debentures or other securities of, or make or commit or
agree to make any other investment in, any other Person, or purchase or own any
futures contract or otherwise become liable for the purchase or sale of
currency or other commodities at a future date in the nature of a futures
contract, or purchase all or a significant part of the assets of a business
conducted by any other Person, or all or substantially all of the assets
constituting the business of a division, branch or other unit operation of any
other Person, or permit any of its Subsidiaries to do any of the foregoing,
except for the following:

 

(i)                                     investments
not otherwise permitted by clause (ii) below
and existing on the Closing Date and set forth on Schedule 5
(Investments) hereto, but not any increase in the amount thereof as
set forth in such Schedule or any other modification of the terms thereof;

 

(ii)                                  investments
in the ordinary course of business made after the Closing Date by
(w) Parent in Cellu Tissue, (x) Cellu Tissue in any Borrower or
Subsidiary Guarantor, (y) any Subsidiary in any Borrower or any Subsidiary
Guarantor or (z) any Borrower in any other Eligible Loan Party; provided that
any such investment is made by way of intercompany loan that is evidenced by an
Intercompany Promissory Note and pledged to the Agent pursuant to the Pledge
and Security Agreement;

 

(iii)                               purchase
of pulp or similar raw materials or electricity, as the case may be, in each
case, in the ordinary course of business; provided, that
the Loan Parties shall have complied with the terms and conditions of Section 7.19 relating to Pulp Hedging Contracts and
Energy Hedging Contracts, if any;

 

70

 

(iv)                              so
long as Availability shall equal or exceed $10,000,000 at any time when such
investments are outstanding, investments in cash or Cash Equivalents in an
aggregate amount not to exceed $5,000,000 outstanding at any time; provided,
that at any time when Availability shall equal or exceed $20,000,000, the Loan
Parties shall be permitted to make investments in cash or Cash Equivalents in
an aggregate amount not to exceed $10,000,000 outstanding at any time until
Availability shall be less than $20,000,000;

 

(v)                                 trade
payables and accruals in the ordinary course of business not yet due and
payable or with respect to which any Loan Party is contesting in good faith the
amount or validity thereof by appropriate proceedings and then only to the
extent that such Loan Party has established adequate reserves therefor under
GAAP;

 

(vi)                              investments
pursuant to Pulp Hedging Contracts and Energy Hedging Contracts permitted
pursuant to Section 7.19 hereof or under other
Hedging Agreements entered into in respect to the purchase of pulp and other
raw materials or electricity, as the case may be, in each case in the ordinary
course of business and which have not been entered into for speculative purposes
and, in the case of pulp and other raw materials, are consistent with past
practices;

 

(vii)                           investments
in accounts, payment intangibles and chattel paper (each as defined in the UCC
or, if applicable, the PPSA to the extent if so defined), notes receivable and
similar items arising or acquired in the ordinary course of business (including
in connection with the bankruptcy or reorganization of suppliers and customers
and in settlement of delinquent obligations of, and other disputes with,
customers and suppliers) and consistent with past practices;

 

(viii)                        deposits
made in the ordinary course of business and consistent with past practices to
secure the performance of leases or other Contractual Obligations, to the
extent the Lien created or incurred in connection therewith constitutes a
Permitted Encumbrance; and

 

(ix)                                loans
and advances made, in the ordinary course of business and consistent with past
practices, by the Loan Parties to their respective employees for
(a) moving and travel and other similar expenses or (b) in connection
with stock or stock option purchases of the Stock of the applicable Loan Party
pursuant to compensatory plans, arrangements or similar agreements, upon terms
reasonably acceptable to the Agent; provided, however
that the aggregate principal amount of all such loans and advances shall not
exceed $500,000 in any Fiscal Year.

 

Section 7.12                            Financial
Covenants

 

Until termination of this Financing Agreement and
payment and satisfaction in full in cash of all Obligations hereunder, the Loan
Parties, on a consolidated basis, shall maintain at the end of each fiscal
month a Total Funded Debt Ratio of not more 6.20 to 1.0 for such fiscal month; provided, that the Total Funded Debt Ratio shall not be
tested until the last day of the first fiscal month to end after the occurrence
of an Availability Event (the “Initial Testing Date”)
and provided, further,
that following the occurrence of an Availability Event, the Total Funded Debt
Ratio will be tested on the Initial Testing Date and on the last day of each
fiscal month ending thereafter during the applicable Availability Event Period.

 

Section 7.13                            Environmental
Matters

 

(a)                                  The
Borrowers shall not, and shall not permit any of their Subsidiaries to, allow a
Release of any Contaminants in violation of any Environmental Law or to
otherwise violate any Environmental Law; provided, however, that the Borrowers shall not be deemed in
violation of this Section 7.13 if all
Environmental Liabilities and Costs incurred or reasonably expected to be incurred
by

 

71

 

the Loan Parties as the consequence of all such
Releases shall not exceed in the aggregate an amount equal to $500,000.

 

(b)                                 Without
limiting the foregoing, each Loan Party, at its sole cost and expense, shall

 

(i)                                     keep
any property either owned or operated by it or any of its Subsidiaries free of
any Environmental Liens;

 

(ii)                                  comply,
and cause each of its Subsidiaries to comply, in all material respects with
Environmental Laws and provide to the Agent any documentation of such
compliance in its possession or under its control which the Agent may
reasonably request;

 

(iii)                               provide
the Agent written notice within five (5) days becoming aware of any Release of
a Contaminant in excess of any quantity required to be reported under
applicable Environmental Laws from or onto property at any time owned or
operated by it or any of its Subsidiaries and take any Remedial Actions
required to abate said Release; and

 

(iv)                              provide
the Agent with written notice promptly after and in any event within ten (10)
days of, the receipt of any of the following: 
(a) notice that an Environmental Lien has been filed against any
property of any Loan Party or any of its Subsidiaries; (b) any written
notices the Loan Parties receive from any local, state or federal Governmental
Authority advising the Loan Parties of any material environmental liability
(real or potential) stemming from any of the Loan Parties’ operations, their
premises, their waste disposal practices, or waste disposal sites used by any
of the Loan Parties and to provide the Agent with copies of all such notices if
so required; (c) the commencement of all actions, suits and proceedings
before any domestic or foreign Governmental Authority or arbitrator pertaining
to environmental conditions of any Property owned or operated by the Loan
Parties or alleging the Loan Parties’ violation of or non-compliance with any
Environmental Laws, affecting the Loan Parties or any of their Subsidiaries
that (I) seeks injunctive or similar relief or (II) in the reasonable
judgment of the Loan Parties or such Subsidiaries, exposes the Loan Parties or
such Subsidiaries to Environmental Liabilities and Costs in an aggregate amount
in excess of $250,000 or that, if adversely determined, would have a Material
Adverse Effect; and (d) all material documentation relating to
expenditures (including Environmental Liabilities and Costs), actual or
anticipated, in excess of $150,000 from the budgeted amount therefor in any
Fiscal Year for (I) Remedial Action, (II) environmental compliance or
(III) environmental testing and the impact of said expenses on each of the
Loan Parties’ Working Capital.

 

(c)                                  Notwithstanding
anything to the contrary in the foregoing clauses (a) and (b), the Environmental Liabilities and Costs set forth on Schedule 11 (Environmental Matters) shall not
constitute a breach of this Section 7.13.

 

Section 7.14                            Indemnification

 

(a)                                  In
addition to each Loan Party’s other Obligations under this Financing Agreement,
each Loan Party agrees to, jointly and severally, defend, protect, indemnify
and hold harmless the Agent and each Lender and all of their respective
officers, directors, employees, attorneys, consultants and agents (collectively
called the ”Indemnitees”) from and against
any and all losses, damages, liabilities, obligations, penalties, fees,
reasonable costs and expenses (including, without limitation, reasonable
attorneys’ fees, costs and expenses) incurred by such Indemnitees, whether
prior to or from and after the Closing Date, whether direct, indirect or
consequential, as a result of or arising from or relating to or in connection
with any of the following:  (i) the
negotiation, preparation, execution or performance or enforcement of this
Financing Agreement, any other Loan Document or of any other document executed

 

72

 

in connection with the transactions contemplated by
this Financing Agreement, (ii) the Agent’s or any Lender’s furnishing of
funds to the Borrowers or the Issuing Bank’s issuing of Letters of Credit for
the account of the Loan Parties under this Financing Agreement or the other
Loan Documents, including, without limitation, the management of any such Loans
or any Obligations in respect of such Letters of Credit, (iii) any matter
relating to the financing transactions contemplated by this Financing Agreement
or the other Loan Documents or by any document executed in connection with the
transactions contemplated by this Financing Agreement or the other Loan
Documents, (iv) any claim, litigation, investigation or proceeding
relating to any of the foregoing, whether or not any Indemnitee is a party
thereto, (v) the handling of the Revolving Loan Accounts and Collateral of
the Loan Parties as provided in this Financing Agreement (including Section 3.9 hereof), (vi) the Agent and/or the
Lenders relying on any instructions of the Borrowing Agent (and each Loan Party
hereby acknowledges and agrees that it shall be bound by any notice or other
statement made to the Agent or any Lender on its behalf by the Borrowing Agent,
whether such notice or other statement was authorized or not by such Loan
Party) or (vii) any other action taken by Agent or any Lender in
accordance with the Loan Documents (collectively, the ”Indemnified
Matters”); provided, however,
that the Loan Parties shall not have any obligation to any Indemnitee under
this subsection (a) for any Indemnified Matter caused by the gross
negligence or willful misconduct of such Indemnitee, as determined by a final
judgment of a court of competent jurisdiction.

 

(b)                                 Without
limiting Section 7.14(a), each Loan Party
agrees to, jointly and severally, defend, indemnify, and hold harmless the
Indemnitees against any and all Environmental Liabilities and Costs and all
other claims, demands, penalties, fines, liability (including strict
liability), losses, damages, costs and expenses (including without limitation,
reasonable legal fees and expenses, consultant fees and investigation and
laboratory fees), arising out of (i) any Releases or threatened Releases
at any property presently or formerly owned or operated by any Loan Party or
any Subsidiary of any Loan Party, or any predecessor in interest; (ii) any
Contaminants generated and disposed of by any Loan Party or any Subsidiary of
any Loan Party, or any predecessor in interest; (iii) any violations of
Environmental Laws; (iv) any Environmental Action relating to any Loan
Party or any Subsidiary of any Loan Party, or any predecessor in interest; (v) any
personal injury (including wrongful death) or property damage (real or
personal) arising out of exposure to Contaminants used, handled, generated,
transported or disposed of by any Loan Party or any Subsidiary of any Loan
Party, or any predecessor in interest; and (vi) any breach of any warranty
or representation regarding environmental matters or the breach of any covenant
made by the Loan Parties in Section 7.1 (including
Annex A) or Section 7.13
(the foregoing collectively, the “Environmental
Indemnified Matters”).  Notwithstanding the foregoing, the Loan
Parties shall not have any obligation to any Indemnitee under this Section 7.14(b) regarding any potential environmental
matter covered hereunder which is caused by the gross negligence or willful
misconduct of such Indemnitee, as determined by a final judgment of a court of
competent jurisdiction.

 

(c)                                  The
indemnification for all of the foregoing losses, damages, fees, costs and
expenses of the Indemnitees are chargeable against the Revolving Loan
Accounts.  To the extent that the
undertaking to indemnify, pay and hold harmless set forth in this Section 7.14 may be unenforceable because it is
violative of any law or public policy, each Loan Party shall, jointly and
severally, contribute the maximum portion which it is permitted to pay and
satisfy under applicable law, to the payment and satisfaction of all
Indemnified Matters (including the Environmental Indemnified Matters) incurred
by the Indemnitees.  The indemnities set
forth in this Section 7.14 shall survive
the repayment of the Obligations and discharge of any and all liens granted
under the Loan Documents.

 

Section 7.15                            Transactions
with Affiliates

 

The Loan Parties
agree that they will not, and they will not permit any of their respective
Subsidiaries to, enter into, renew, extend or be a party to any transaction,
including, without limitation, any purchase, sale, lease, loan or exchange of
property with (i) any Affiliate of any Borrower that is not a

 

73

 

Subsidiary of such Borrower, (ii) the Sponsor, (iii) Parent,
or (iv) any Subsidiary or Affiliate of the Parent or Sponsor (other than
the Borrowers and their respective Subsidiaries); provided,
however, that so long as no Default or
Event of Default shall have occurred and be continuing or would result
therefrom, (x) the Loan Parties or any one of them may enter into the
transactions contemplated by the Related Party Fee Arrangements (including the
making of any Related Party Fee Payment to the extent permitted under this
Financing Agreement) and the Administrative Services Agreements (including the
payment of fees and expenses thereunder to the extent permitted under this
Financing Agreement) and (y) except as otherwise set forth in this
Financing Agreement, the Loan Parties or any one of them may enter into sale
and service transactions in the ordinary course of their business and pursuant
to the reasonable requirements of any such Loan Party, and upon standard terms
and conditions and fair and reasonable terms, no less favorable to such Loan
Party than such Loan Party could obtain in a comparable arms length transaction
with an unrelated third party.

 

Section 7.16                            Intentionally
Deleted

 

Section 7.17                            Additional
Collateral and Guaranties

 

To the extent not
delivered to the Agent on or before the Closing Date, each Loan Party agrees to
do promptly each of the following:

 

(a)                                  execute
and deliver, and cause its Subsidiaries to execute and deliver, to the Agent
such supplements, amendments and joinders to the Collateral Documents and any
other Loan Document relating to the Collateral (or, in the case of any
Subsidiary of any Loan Party that is not a domestic subsidiary, foreign pledges
and security agreements) as the Agent deems necessary or advisable in order to
grant to the Agent, for the benefit of the Secured Parties, a perfected first
priority security interest in the Stock or other equity interests and other
debt Securities of any Loan Party or Subsidiary thereof that are owned by such
Loan Party or such Subsidiary and requested to be pledged by the Agent; provided, however, that
unless otherwise agreed by the Loan Parties and the Agent, in no event shall
such Loan Party or such Subsidiary be required to pledge in excess of 66% of
the outstanding voting stock of any direct Subsidiary of any Borrower or
Guarantor that is not a domestic Subsidiary (other than the Stock of the
Canadian Borrower or any other non-US Subsidiary that becomes a Guarantor, in
respect of which 100% of such Stock shall be pledged to the Agent) or, unless
such stock is otherwise held by a Borrower or any other Guarantor, any of the
stock of any Subsidiary of such direct Subsidiary; and provided,
further, that if a percentage greater
than 66% of the outstanding voting stock of any direct Subsidiary of any
Borrower or Guarantor that is not a domestic Subsidiary is pledged to secure
any other Indebtedness or other obligations of any Loan Party, such greater
percentage shall be required to be pledged to the Agent pursuant to the
Collateral Documents;

 

(b)                                 to
the extent not required to be delivered to the Notes Collateral Agent, deliver
to the Agent the certificates (if any) representing the Pledged Collateral,
together with (i) in the case of such certificated Pledged Interests,
undated stock powers endorsed in blank and (ii) in the case of such
certificated Pledged Instruments, endorsed in blank, in each case executed and
delivered by a Responsible Officer of such Loan Party or such Subsidiary
thereof, as the case may be;

 

(c)                                  in
the case of any wholly-owned Subsidiary of any Loan Party (other than any
Inactive Subsidiary), cause such wholly-owned Subsidiary (i) to execute a
supplement, amendment or joinder or otherwise become a party to this Financing
Agreement and the applicable Loan Documents, or if applicable, to execute a
guaranty agreement, in form and substance satisfactory to the Agent, pursuant
to which such Subsidiary guaranties the Obligations and (ii) to take such
actions necessary or advisable to grant to the Agent for the benefit of the
Secured Parties a perfected security interest in the Collateral described in
the applicable Loan Documents with respect to such wholly-owned Subsidiary,
including the

 

74

 

filing of UCC financing statements or PPSA financing
statements in such jurisdictions as may be required by the Loan Documents or by
law or as may be reasonably requested by the Agent;

 

(d)                                 if
requested by the Agent, deliver to the Agent legal opinions relating to the
matters described above, which opinions shall be in form and substance, and
from counsel, reasonably satisfactory to the Agent; and

 

(e)                                  in
the case of Parent, in the event that Parent guarantees any Indebtedness of any
other Loan Party, Parent shall (i) guaranty the payment of the Obligations on
the terms and conditions set forth in Article XV
of this Financing Agreement and (ii) execute and deliver to the Agent such
supplements, amendments and joinders to the Collateral Documents and any other
Loan Document relating to the Collateral as the Agent deems necessary or
advisable in order to grant to the Agent, for the benefit of the Secured
Parties, a perfected security interest in all or substantially all of the
assets and property of Parent in accordance with the Pledge and Security Agreement
and subject to the Intercreditor Agreement.

 

Section 7.18                            Maintenance
of Properties, Etc.

 

(a)                                  Each
of the Loan Parties (i) shall maintain and preserve, and cause each of its
Subsidiaries to maintain and preserve, (x) all of its properties which are
necessary or useful in the proper conduct of its business in good working order
and condition, ordinary wear and tear excepted and (y) all registered
Intellectual Property with respect to its business, in each case, except where
failure to so maintain and preserve the items set forth in clauses (x)
and (y) above would not, in the aggregate,
have a Material Adverse Effect and (ii) shall comply, and cause each of
its Subsidiaries to comply, at all times with the provisions of all leases to
which it is a party as lessee or under which it occupies property, so as to
prevent any material loss or forfeiture thereof or thereunder.

 

(b)                                 Each
of the Loan Parties shall, and shall cause each of its Subsidiaries to, obtain,
maintain and preserve and take all necessary action to timely renew, all
Permits, licenses, authorizations, approvals, entitlements and accreditations
which are in their reasonable business judgment necessary or useful in the
proper conduct of its business.

 

Section 7.19                            Hedging
Contracts

 

(a)                                  Each Borrower may enter into Pulp Hedging
Contracts (with counter-parties acceptable to the Agent and otherwise in form
and in substance satisfactory to the Agent), in the ordinary course of business
and not for speculative purposes, to reduce the risks of such Borrower arising
from fluctuations in the price of pulp.

 

(b)                                 Each Borrower may enter into Energy Hedging
Contracts (with counter-parties acceptable to the Agent and otherwise in form
and in substance satisfactory to the Agent), in the ordinary course of business
and not for speculative purposes, to reduce the risks of such Borrower arising
from fluctuations in the price of electricity.

 

Section 7.20                            Further
Assurances

 

Each Loan Party
shall take such action and execute, acknowledge and deliver, and cause each of
its Subsidiaries to take such action and execute, acknowledge and deliver, at
its sole cost and expense, such agreements, instruments or other documents as
the Agent may reasonably require from time to time in order (i) to carry
out more effectively the purposes of this Financing Agreement and the other
Loan Documents, (ii) to subject to valid and perfected first priority
liens (subject only to Permitted

 

75

 

Encumbrances) any of the Collateral or any other property of any Loan
Party and its Subsidiaries, (iii) to establish and maintain the validity
and effectiveness of any of the Loan Documents and the validity, perfection and
priority of the liens intended to be created thereby, and (iv) to better assure,
convey, grant, assign, transfer and confirm unto the Agent and each Lender the
rights now or hereafter intended to be granted to it under this Financing
Agreement or any other Loan Document.  In
furtherance of the foregoing, to the maximum extent permitted by applicable
law, each Loan Party (i) authorizes the Agent to execute any such
agreements, instruments or other documents in such Loan Party’s name and to
file such agreements, instruments or other documents in any appropriate filing
office, (ii) authorizes the Agent to file any financing statement required
hereunder or under any other Loan Document, and any continuation statement or
amendment with respect thereto, in any appropriate filing office without the
signature of such Loan Party, and (iii) ratifies the filing of any
financing statement, and any continuation statement or amendment with respect
thereto, filed without the signature of such Loan Party prior to the date
hereof.

 

Section 7.21                            Landlord
Waivers; Bailee’s Letters; Etc.

 

Each Loan Party
agrees that at any time any Collateral of such Loan Party or a Subsidiary of
such Loan Party with a book value in excess of $500,000 (when aggregated with
all other Collateral at the same location) is located on any real property of
such Person (whether such real property is now existing or acquired after the
Closing Date) which is not owned by such Person, such Loan Party shall, or
shall cause such Subsidiary to, use its commercially reasonable best efforts to
obtain written subordinations or waivers, substantially in the form of Exhibit F and in any event in form and substance reasonably
satisfactory to the Agent, of all present and future liens to which the owner
or lessor of such premises may be entitled to assert against the Collateral on
or before the Closing Date or, if such real property is acquired after the
Closing Date, within thirty (30) days of the acquisition thereof.  Notwithstanding anything to the contrary in
the foregoing, if any Borrower does not deliver such a subordination or waiver to
the Agent on or before the Closing Date, or, if applicable, within such thirty
(30) day period, or within such later period as may be agreed to by the Agent
in its sole discretion, the Agent shall establish an Availability Reserve with
respect to such Accounts or Inventory as provided herein.

 

Section 7.22                            Subordinated
Debt

 

Each Loan Party
shall, and shall cause its Subsidiaries to, cause all Indebtedness and other
obligations now or hereafter owed by such Person to any of its respective
Affiliates (other than (x) the Indebtedness in respect of the Secured Notes and
(y) Indebtedness which has been pledged to the Agent in accordance with the
terms of the Pledge and Security Agreement) to be subordinated in right of
payment and security to the Indebtedness and other Obligations owing by the
Loan Parties to the Agent and the Lenders in accordance with a subordination
agreement in form and substance satisfactory to the Agent.

 

Section 7.23                            Accounting
Changes; Fiscal Year

 

Neither Parent nor
the other Loan Parties shall, nor shall they permit any of their respective
Subsidiaries to, change its (a) accounting treatment and reporting
practices or tax reporting treatment, except as required by GAAP or any
Requirement of Law and disclosed to the Lenders and the Agent or
(b) Fiscal Year, unless Parent or such other Loan Parties shall have
provided the Agent with at least thirty (30) days prior written notice and the
Agent shall have consented thereto.

 

76

 

Section 7.24                            Change
in Nature of Business

 

(a)                                  The
Loan Parties shall not, and shall not permit any of their respective
Subsidiaries to, make any material change in the nature or conduct of its
business as carried on at the date hereof, whether in connection with an acquisition
permitted under this Financing Agreement or otherwise.

 

(b)                                 Parent
shall not engage in any business or activity other than (i) holding shares
in the Stock of Cellu Tissue, (ii) paying taxes, (iii) preparing
reports to Governmental Authorities and to its shareholders and
(iv) holding directors and shareholders meetings, preparing corporate
records and other corporate activities required to maintain its separate
corporate structure.

 

(c)                                  None
of Cellu Tissue, VPC, and VTC shall engage in any business or activity other
than (i) (A) in the case of Cellu Tissue, holding shares in the Stock
(directly or indirectly) of each other Loan Party (other than Parent) and (B)
in the case of VPC and VTC, holding interests in the Stock of Coastal Paper,
(ii) paying taxes, (iii) preparing reports to Governmental
Authorities and to its shareholder and (iv) holding directors and
shareholders meetings, preparing corporate records and other corporate
activities required to maintain its separate corporate structure.

 

(d)                                 No
Inactive Subsidiary shall engage in any business or activity other than
(i) paying taxes, (ii) preparing reports to Governmental Authorities
and to its shareholder and (iii) holding directors and shareholders
meetings, preparing corporate records and other corporate activities required
to maintain its separate corporate structure.

 

Section 7.25                            Limitations
on Restrictions on Subsidiary Distributions

 

No Loan Party
shall create or otherwise cause, incur, assume, suffer or permit to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of any Subsidiary of any Loan Party (i) to pay dividends or to
make any other distribution on any shares of Stock of such Subsidiary owned by
any Loan Party or any of its Subsidiaries, (ii) to pay or prepay or to
subordinate any Indebtedness owed to any Loan Party or any of its Subsidiaries,
(iii) to make loans or advances to any Loan Party or any of its
Subsidiaries or (iv) to transfer any of its property or assets to any Loan
Party or any of its Subsidiaries, or permit any of its Subsidiaries to do any
of the foregoing; provided, however, that nothing
in any of clauses (i) through (iv)
of this Section 7.25 shall prohibit or
restrict compliance with:

 

(a)                                  this
Financing Agreement and the other Loan Documents and the Notes Indenture and
the applicable Notes Documents;

 

(b)                                 any
agreements in effect on the date of this Financing Agreement and described on Schedule 6 (Restrictive Agreements) hereto;

 

(c)                                  any
applicable Requirements of Law (including, without limitation, applicable
currency control laws and applicable state corporate statutes restricting the
payment of dividends in certain circumstances);

 

(d)                                 in
the case of clause (iv) above, any agreement setting
forth customary restrictions on the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract of similar
property or assets; or

 

77

 

(e)                                  in
the case of clause (iv) above, any agreement,
instrument or other document evidencing a Permitted Encumbrance from
restricting on customary terms the transfer of any property or assets subject
thereto.

 

Section 7.26                            No New
Issuances

 

No Loan Party shall issue or sell or enter into any agreement or arrangement
for the issuance and sale of, or permit any of its Subsidiaries to issue or
sell or enter into any agreement or arrangement for the issuance and sale of,
any shares of its Stock, any securities convertible into or exchangeable for
its Stock or any warrants unless the Net Cash Proceeds thereof shall be used to
repay all Obligations in full in cash (including any applicable Early
Termination Fee) and to provide cash collateral for any outstanding Letters of
Credit in an amount equal to 105% of the outstanding face amount of such
Letters of Credit; provided, however,
that notwithstanding anything to the contrary in the foregoing, Parent may
issue or sell any of its Stock solely to the extent that such issuance or sale
shall not result in a Change of Control.

 

Section 7.27                            Investment
Company Act

 

No Loan Party
shall engage in any business, enter into any transaction, use any securities or
take any other action or permit any of its Subsidiaries to do any of the
foregoing, that would cause it or any of its Subsidiaries to become subject to
the registration requirements of the Investment Company Act of 1940, as
amended, by virtue of being an “investment company” or a company “controlled”
by an “investment company” not entitled to an exemption within the meaning of
such Act.

 

Section 7.28                            ERISA;
Pension Plans and Employee Obligations

 

(a)                                  The
Borrowers shall not cause or permit to occur, and shall not permit any of their
respective Subsidiaries or ERISA Affiliates to cause or permit to occur,
(a) an event that could reasonably be expected to result in the imposition
of a lien under Section 412 of the Code or Section 302 or 4068 of
ERISA or (b) ERISA Events, in each case, that would have a Material
Adverse Effect in the aggregate.

 

(b)                                 The
Canadian Borrower shall on a timely basis satisfy any obligations which it may
have to its employees, and with regard to the payment of salary, bonus, or
otherwise, to the employee, or to any taxing authority, so as, to ensure that
no prior claim, Lien or right, shall arise in favor of any such third party, in
seniority to the security over the Collateral granted by the Canadian Borrower
to the Agent.

 

Section 7.29                            Capital
Expenditures

 

The Loan Parties shall
not make or incur or commit or agree to make or incur, or permit any of their
Subsidiaries to make or incur or commit or agree to make or incur, any Capital
Expenditures that would cause the aggregate amount of all Capital Expenditures
made by the Loan Parties and their Subsidiaries to exceed $12,000,000 during
any Fiscal Year.

 

Section 7.30                            Inactive
Subsidiaries

 

The Loan Parties
shall not permit any Inactive Subsidiary to acquire any assets, incur any
Indebtedness of any kind, make any investments or advances, conduct any
business, perform any operations, receive any distributions from any Loan Party
or from any Subsidiary of a Loan Party or issue any Stock or other equity
interests; provided, however that any Inactive
Subsidiary may take any such action or do any of the foregoing that is required
(i) in connection with the liquidation or dissolution of

 

78

 

such Inactive Subsidiary, (ii) to enable such Inactive Subsidiary
to become a Subsidiary Guarantor hereunder or (iii) to enable such
Inactive Subsidiary to merge or consolidate with or into a Loan Party.

 

Section 7.31                            Real
Property

 

(a)                                  The
Loan Parties shall, and shall cause each of their respective Subsidiaries to,
(i) comply in all material respects with all of their respective
obligations under all of their respective Leases now or hereafter held
respectively by them, including the Leases set forth on Schedule 4
(Real Estate), (ii) not modify, amend, cancel, extend or
otherwise change in any materially adverse manner any term, covenant or
condition of any such Lease, (iii) not assign or sublet any other Lease if
such assignment or sublet would have a Material Adverse Effect,
(iv) provide the Agent with a copy of each notice of default under Lease
received by the Loan Parties or any Subsidiary of the Loan Parties immediately
upon receipt thereof and deliver to the Agent a copy of each notice of default
sent by the applicable Loan Party or any Subsidiary of any Loan Party under any
Lease simultaneously with its delivery of such notice under such Lease and
(v) comply with Section 7.31(d).

 

(b)                                 At
least 15 Business Days prior to (i) entering into any Lease (other than a
renewal of an existing Lease) for the principal place of business and chief
executive office of any Borrower or any other Loan Party or any other Lease
(including any renewal) in which the annual rental payments are anticipated to
equal or exceed $1,000,000 or (ii) acquiring any material owned Real
Estate, the Loan Parties shall, and shall cause their respective Subsidiaries
to,  provide the Agent written notice
thereof and, upon written request of the Agent, the Loan Parties shall, and
shall cause such Subsidiaries to provide Phase I Environmental Site
Assessments on such Real Estate or the Real Estate subject to such Lease, as
the case may be, showing no condition that could reasonably be expected to
result in material Environmental Liabilities and Costs.

 

(c)                                  To
the extent not previously delivered to the Agent, upon written request of the
Agent, the Loan Parties shall, and shall cause each of its Subsidiaries to,
execute and deliver to the Agent, for the benefit of the Secured Parties,
promptly and in any event not later than 45 days after receipt of such notice
(or, if such notice is given by the Agent prior to the acquisition of such Real
Estate, immediately upon such acquisition), a Mortgage on any Real Estate of
the Loan Parties or such Subsidiary, together with, each in form and substance
satisfactory to the Agent, (i) title insurance policies (or marked-up
unconditional binders for such insurance or other evidence acceptable to the
Agent proving ownership thereof), maps or plats of current as-built surveys and
a surveyor’s certificate therefor, zoning letters and certificates of
occupancy, in each case satisfactory in form and substance to the Agent, in its
sole discretion, (ii) evidence that the recording of counterparts of such
Mortgages in the recording offices specified in such Mortgages will create a
valid and enforceable first priority Lien on property described therein in
favor of the Agent for the benefit of the Secured Parties (or in favor of such
other trustee as may be required or desired under local law), to be subject
only to (A) Permitted Encumbrances and (B) such other Liens as the
Agent may reasonably approve, (iii) an opinion of counsel in each state in
which such Mortgage is to be recorded in form and substance and from counsel
satisfactory to the Agent and (iv) such other agreements, documents and
instruments as the Agent deems necessary or desirable; provided,
however, that with respect to any mortgaged property of any Loan
Party, if securing the applicable Mortgage in an amount in excess of the fair
market value of such mortgaged property would result in additional mortgage
recording taxes in excess of $75,000 (over the amount of the mortgage recording
taxes payable on an amount equal to the fair market value of such mortgaged
property), the Indebtedness secured by such Mortgage shall be equal to the fair
market value (as shall be agreed to by the Agent) of the applicable mortgaged
property.

 

(d)                                 The
Loan Parties shall deliver written notice to the Agent at least ten (10) days
prior to the acquisition of any Real Estate (or in the case of any Lease, at
least ten (10) days prior to the

 

79

 

date any applicable Loan Party or any Subsidiary of
any Loan Party takes possession of, or becomes liable under, any new leased
premises or Lease, whichever is earlier) that is not owned or leased by such
Loan Party as of the Closing Date and such Loan Party shall give to the Agent
from time to time such mortgage(s), deed(s) of trust or assignment(s) on the
Real Estate acquired after the date hereof as the Agent shall require to obtain
a valid first Lien thereon subject only to those exceptions of title as set forth
in future title insurance policies that are in form and substance satisfactory
to the Agent.

 

ARTICLE VIII

 

INTEREST, FEES AND
EXPENSES

 

Section 8.1                                   (a)                                  (i)
Interest on the USD Revolving Loans shall be payable monthly in arrears
(x) in the case of Chase Bank Rate Loans, (I) as of the end of each
month on the last Business Day of such month and (II) if not previously paid in
full, at maturity (whether by acceleration or otherwise) of such Chase Bank
Rate Loan and (y) in the case of LIBOR Loans, (I) on the last day of
each Interest Period applicable to such Loan and, if such Interest Period has a
duration of more than three (3) months, on each day during such Interest Period
occurring every three months from the first day of such Interest Period, (II) upon
the payment or prepayment thereof in full or in part and (III) if not
previously paid in full, at maturity (whether by acceleration or otherwise) of
such LIBOR Loan, and (ii) shall be in an amount equal to (x) if such
Revolving Loan is a Chase Bank Rate Loan, the Chase Bank Rate plus the
Applicable Margin and (y) if, at the Borrowers’ election, such Revolving Loan
is a LIBOR Loan, LIBOR plus the Applicable Margin, in each case on the average
of the net balances of such USD Revolving Loans owing by the Borrowers to the
Agent in its Revolving Loan Accounts at the close of each day during such
month.  In the event of any change in the
Chase Bank Rate, the rate hereunder for Chase Bank Rate Loans shall change, as
of the date of such change by the amount of such change.  The rate hereunder for all USD Revolving
Loans shall be calculated based on a 360-day year and actual days elapsed.

 

(ii)                                  Interest
on the Canadian Prime Rate Loans (i) shall be payable (x) as of the end of each
month on the last Working Day of such month and (y) if not previously paid in
full, at maturity (whether by acceleration or otherwise) of such Canadian Prime
Rate Loan and (ii) shall be in an amount equal to the Canadian Prime Rate plus
the Applicable Margin, on the average of the net balances of such Canadian
Prime Rate Loans owing by the Canadian Borrower to the Agent in the applicable
Revolving Loan Accounts at the close of each day during such month.  In the event of any change in the Canadian Prime
Rate, the rate hereunder for Canadian Prime Rate Loans shall change, as of the
date of such change by the amount of such change.  The rate hereunder for all Canadian Prime
Rate Loans shall be calculated based on a 365 day year and actual days elapsed.

 

(iii)                               Interest
on the BA Rate Loans shall be payable in a manner intended to directly
replicate the manner in which a discount is determined and payable as if a
bankers’ acceptance had been issued and accepted in accordance with usual
practice for Chartered Banks, and as such the BA Equivalent Rate shall be
determined, and the advance at the BA Equivalent Rate shall be provided, net of
the discount which is the BA Equivalent Rate plus the Applicable Margin for BA
Rate Loans for the applicable Contract Period. 
The Agent shall retain and advance to itself the amount of the discount
of the BA Equivalent Rate plus the Applicable Margin for BA Rate Loans, as
payment of the BA Equivalent Rate for the applicable Contract Period.  The BA Equivalent Rate will be determined on
the Working Day on which the BA Rate Loan is made available to the Canadian
Borrower.  The BA Equivalent Rate will be
calculated based upon the requested amount of the BA Rate Loan, being the full
requested amount including the amount which will be retained for payment of the
BA Equivalent Rate for the Contract Period. 
The BA Equivalent Rate shall be calculated based on a 365 day year and
actual days elapsed.

 

80

 

(b)                                 Notwithstanding
any provision to the contrary contained in this Article VIII,
in the event that (I) the sum of (i) the outstanding Revolving Loans
and (ii) the outstanding Letters of Credit and Letter of Credit Guaranties
made or issued, as the case may be, to any Borrower exceeds the maximum amount
of such Borrower’s Borrowing Base or (II) the sum of (i) the
outstanding Revolving Loans and (ii) the outstanding Letters of Credit and
Letter of Credit Guaranties exceeds, in the case of all Borrowers collectively,
the lesser of either (x) the maximum aggregate amount available under Articles III and V of this Financing Agreement or
(y) the Revolving Line of Credit; then (A) as a result of Revolving
Loans advanced by the Agent at the request of the Borrowing Agent, on behalf of
any Borrower, (herein “Requested Overadvances”), for any one (1) or more days
in any month, or (B) for any other reason whatsoever (herein “Other Overadvances”) and such Other Overadvances continue
for five (5) or more days in any month, the average net balance of all
Revolving Loans for such month shall bear interest at the Overadvance Rate; provided, however, that the Agent shall
have no obligation whatsoever under this Financing Agreement to make any
Overadvance or Other Overadvance to the Borrowers.

 

(c)                                  Upon
the occurrence and during the continuance of an Event of Default and, if
applicable, the giving of any required notice by the Agent in accordance with
the provisions of Section 10.2 hereof, all
Obligations shall bear interest at the Default Rate of Interest.

 

(d)                                 The
Agent shall be entitled to charge the Borrowers’ Revolving Loan Accounts at the
rate provided for herein when due until all Obligations have been paid in full
in cash.

 

Section 8.2                                   Intentionally
Deleted.

 

Section 8.3                                   In
consideration of the Letter of Credit Guaranty of the Agent, the Borrowers
shall pay the Agent, for the ratable benefit of the applicable Lenders, the
Letter of Credit Guaranty Fee which shall be an amount equal to the then
applicable Applicable Margin for LIBOR Loans multiplied by the daily average
face amount of each Letter of Credit and payable upon issuance thereof and
thereafter payable monthly, on the last Business Day of each month.

 

Section 8.4                                   Any
and all charges, fees, commissions, costs and expenses charged to the Agent for
the Borrowers’ account by any Issuing Bank in connection with, or arising out
of, Letters of Credit or out of transactions relating thereto will be charged
to the Revolving Loan Accounts in full when charged to, or paid by, the Agent,
or as may be due upon any termination of this Financing Agreement hereof, and
when made by any such Issuing Bank shall be conclusive on the Agent.

 

Section 8.5                                   The
Borrowers, or the other Loan Parties, as applicable, shall reimburse or pay, on
demand, the Agent, as the case may be, for: (a) all Out-of-Pocket Expenses
and (b) any applicable Documentation Fee. 
Without limiting the foregoing, Borrowers shall pay on demand, without
duplication of any Out-of-Pocket Expenses payable in accordance with the
foregoing clause (a), all other out-of-pocket
costs and expenses incurred by or on behalf of the Agent (and, in the case of clauses (b) through (l) below, each Lender), regardless of
whether the transactions contemplated hereby are consummated, including,
without limitation, reasonable fees, costs, client charges and expenses of
counsel for the Agent (and, in the case of clauses (b) through (l) below, each
Lender), accounting, due diligence, periodic field audits, physical counts,
valuations, investigations, searches and filings, monitoring of assets,
appraisals of Collateral, title searches and reviewing environmental
assessments, miscellaneous disbursements, examination, travel, lodging and
meals, arising from or relating to: 
(a) the negotiation, preparation, execution, delivery, performance
and administration of this Financing Agreement and the other Loan Documents
(including, without limitation, the preparation of any additional Loan
Documents or the review of any of the agreements, instruments and documents
required to be delivered on or after the Closing Date pursuant to the terms
hereof, (b) any requested amendments, waivers or consents to this
Financing Agreement or the other Loan Documents whether or not such documents
become effective or

 

81

 

are given, (c) the preservation and protection of
any of the Lenders’ rights under this Financing Agreement or the other Loan
Documents, (d) the defense of any claim or action asserted or brought
against the Agent or any Lender by any Person that arises from or relates to
this Financing Agreement, any other Loan Document, the Agent’s or the Lenders’
claims against any Loan Party, or any and all matters in connection therewith,
(e) the commencement or defense of, or intervention in, any court or other
legal proceeding arising from or related to this Financing Agreement or any
other Loan Document, (f) the filing of any petition, complaint, answer,
motion or other pleading by the Agent or any Lender, or the taking of any
action in respect of the Collateral or other security, in connection with this
Financing Agreement or any other Loan Document, (g) the protection,
collection, lease, sale, taking possession of or liquidation of, any Collateral
or other security in connection with this Financing Agreement or any other Loan
Document, (h) any attempt to enforce any Lien or security interest in any
Collateral or other security in connection with this Financing Agreement or any
other Loan Document, (i) any attempt to collect from any Loan Party,
(j) all liabilities and costs arising from or in connection with the past,
present or future operations of any Loan Party involving any damage to real or
personal property or natural resources or harm or injury alleged to have
resulted from any Release of Contaminants on, upon or into such property, (k) any
Environmental Liabilities and Costs incurred in connection with the
investigation, removal, cleanup and/or remediation of any Contaminants present
or arising out of the operations of any facility of any Loan Party, or
(l) the receipt by the Agent or any Lender of any advice from
professionals with respect to any of the foregoing; provided,
however, that the Loan Parties shall not be required to pay the
foregoing Out-of-Pocket Expenses relating to the Agent’s internal personnel
other than the Agent’s internal auditors and internal field examination
personnel.  Without limitation of the
foregoing or any other provision of any Loan Document:  (x) the Loan Parties agree to pay all
stamp, document, transfer, recording or filing taxes or fees and similar impositions
now or hereafter determined by the Agent or any Lender to be payable in
connection with this Financing Agreement or any other Loan Document, and the
Loan Parties agree to save the Agent and each Lender harmless from and against
any and all present or future claims, liabilities or losses with respect to or
resulting from any omission to pay or delay in paying any such taxes, fees or
impositions, (y) the Loan Parties agree to pay all broker fees that may
become due in connection with the transactions contemplated by this Financing
Agreement and the other Loan Documents, and (z) if the Loan Parties fail
to perform any covenant or agreement contained herein or in any other Loan
Document, the Agent may itself perform or cause performance of such covenant or
agreement, and the expenses of the Agent incurred in connection therewith shall
be reimbursed on demand by the applicable Loan Parties.

 

Section 8.6                                   Upon
the last Business Day of each month, commencing on the last Business Day of the
first complete calendar month following the Closing Date the Borrowers shall
pay to the Agent the Line of Credit Fee. 
The Borrowers shall pay to the Agent interest on advances made prior to
the Settlement Dates as provided in this Article VIII.

 

Section 8.7                                   To
induce the Agent to enter into this Financing Agreement and to extend to the
Borrowers the Revolving Loans, the Letters of Credit or applicable Letters of
Credit Guaranties, the Borrowers shall pay to the Agent a Loan Facility Fee in
the amount equal to one percent (1.00%) of the Revolving Line of Credit payable
upon execution of this Financing Agreement. 
The Loan Facility Fee shall be fully earned and non-refundable when
paid.

 

Section 8.8                                   On
the Closing Date and each one (1) year anniversary of the Closing Date thereafter
until the Scheduled Termination Date, the Borrowers shall pay to the Agent the
Administrative Management Fee and the Canadian Administrative Management
Fee.  Each of the Administrative
Management Fee and the Canadian Administrative Management Fee shall be deemed
fully earned and non-refundable when paid.

 

82

 

Section 8.9                                   The
Loan Parties shall pay the Agent’s standard charges and fees for the Agent’s
personnel used by the Agent for reviewing the books and records of the Loan
Parties and for verifying, testing, protecting, safeguarding, preserving or
disposing of all or any part of the Collateral (which fees shall be in addition
to the Administrative Management Fee, the Canadian Administrative Management
Fee and any Out-of-Pocket Expenses (except to the extent such charges for
reviewing the books and records of the Loan Parties and verifying the
Collateral are duplicative of such Out-of-Pocket Expenses that have already
been paid); provided, however, that the Loan Parties
shall not be required to pay the foregoing charges and fees relating to the
Agent’s internal personnel other than the Agent’s internal auditors and
internal field examination personnel.

 

Section 8.10                            The
Borrowers hereby authorize the Agent to charge the Revolving Loan Accounts with
the amount of all its Obligations due hereunder (including, without limitation,
its BA Rate Loans), as such payments become due.  Each Loan Party hereby confirms and agrees
that it shall promptly pay any Obligations (including, without limitation, its
BA Rate Loans) to the Agent upon the Agent’s request therefor.  Each Borrower confirms that (i) its
liability for any and all of the fee obligations (including without limitation,
those set forth in Section 8.6
through 8.9 above) and Out-of-Pocket Expenses,
set forth in this Financing Agreement and in any of the other Loan Documents is
joint and several, (ii) the Borrowers, as between themselves, shall
determine how to pro-rate any such payments due hereunder, and (iii) for
ease of administration, the Agent may charge any of their Revolving Loan
Accounts with the amount of any such fee payments and any such charges which
the Agent may so make to any of the Borrowers’ Revolving Loan Accounts as
herein provided will be made as an accommodation to the Borrowers and solely at
the Agent’s discretion.

 

Section 8.11                            In
the event that the Agent or any Lender hereunder (or any financial institution
which may from time to time become Lender hereunder) shall have determined in
the exercise of its reasonable business judgment that, subsequent to the
Closing Date, any change in applicable law, rule, regulation or guideline
regarding capital adequacy, or any change in the interpretation or
administration thereof, or compliance by the Agent or such Lender with any new
request or directive regarding capital adequacy (whether or not having the
force of law) of any such authority, central bank or comparable agency, has or
would have the effect of reducing the rate of return on the Agent’s or such
Lender’s capital as a consequence of its obligations hereunder to a level below
that which the Agent or such Lender could have achieved but for such adoption,
change or compliance (taking into consideration the Agent or such Lender’s
policies with respect to capital adequacy) by an amount reasonably deemed by
the Agent or such Lender to be material, then, from time to time, the Loan
Parties shall pay no later than five (5) days following demand to the Agent or
such Lender such additional amount or amounts as will compensate the Agent’s or
such Lender’s for such reduction.  In
determining such amount or amounts, the Agent or such Lender may use any
reasonable averaging or attribution methods. 
The protection of this Section 8.11 shall
be available to the Agent or such Lender regardless of any possible contention
of invalidity or inapplicability with respect to the applicable law, regulation
or condition.  A certificate of the Agent
or such Lender setting forth such amount or amounts as shall be necessary to
compensate the Agent or such Lender with respect to this Article VIII
and the calculation thereof when delivered to the Loan Parties shall be
conclusive on the Loan Parties absent manifest error.  Notwithstanding anything in this Section 8.11 to the contrary, in the event the Agent or
such Lender has exercised its rights pursuant to this Section 8.11,
and subsequent thereto determines that the additional amounts paid by the Loan
Parties in whole or in part exceed the amount which the Agent or such Lender
actually required to be made whole, the excess, if any, shall be returned to
the Loan Parties by the Agent or such Lender, as applicable.

 

Section 8.12                            In
the event that any applicable law, treaty or governmental regulation, or any
change therein or in the interpretation or application thereof, or compliance
by the Agent or any Lender with any request or directive (whether or not having
the force of law) from any central bank or other financial, monetary or other
authority, shall:

 

83

 

(a)                                  impose,
modify or hold applicable any reserve, special deposit, assessment or similar
requirement against assets held by, or deposits in or for the account of,
advances or loans by, or other credit extended by the Agent or such participant
by reason of or in respect to this Financing Agreement and the Loan Documents,
including (without limitation) pursuant to Regulation D of the Board of
Governors of the Federal Reserve System; or

 

(b)                                 impose
on the Agent or such Lender any other condition with respect to this Financing
Agreement or any other document, and the result of any of the foregoing is to
increase the cost to the Agent or such Lender of making, renewing or
maintaining its Loans hereunder by an amount that the Agent or such Lender
deems to be material in the exercise of its reasonable business judgment or to
reduce the amount of any payment (whether of principal, interest or otherwise)
in respect of any of the loans by an amount that the Agent or such Lender deems
to be material in the exercise of its reasonable business judgment, then, in
any case the Loan Parties shall pay the Agent or such Lender, within five (5)
days following its demand therefor such additional cost or such reduction, as
the case may be (including any additional tax or charge which may be imposed
upon the increased payment made pursuant to this Section 8.12
so that the Agent or such Lender receives the same amount it would have
received but for the imposition of such increased costs, tax or requirement).  All amounts payable under this Section 8.12 shall bear interest from the date that is
five (5) days after the date of demand by any Lender or the Agent until payment
in full to such Lender or the Agent at the Chase Bank Rate applicable to Revolving
Loans at such time.  The Agent or such
Lender shall certify the amount of such additional cost or reduced amount to
the Loan Parties and the calculation thereof and such certification shall be
conclusive upon the Loan Parties absent manifest error.  Notwithstanding anything in this Section 8.12 to the contrary, in the event the Agent or
such Lender has exercised its rights pursuant to this Section 8.12,
and subsequent thereto determine that the additional amounts paid by the Loan
Parties in whole or in part exceed the amount which the Agent or such Lender
actually required pursuant hereto, the excess, if any, shall be returned to the
Loan Parties by the Agent or such Lender.

 

Section 8.13                            The
Borrowers may request LIBOR Loans and BA Rate Loans on the following terms and
conditions:

 

(a)                                  The
Borrowing Agent or the applicable Borrowers, as the case may be, may from time
to time, (x) request that any Loan made hereunder be a LIBOR Loan,
(y) elect to convert Chase Bank Rate Loans to LIBOR Loans, and/or
(z) elect from time to time to convert LIBOR Loans to Chase Bank Rate
Loans, in each case by delivering an irrevocable Notice of Conversion or
Continuation to the Agent at least three (3) Business Days’ prior to date of
such conversion; provided that any such conversion
of LIBOR Loans to Chase Bank Rate Loans shall only be made, subject to the
second following sentence, on the last day of an Interest Period with respect
thereto.  Should the Borrowers elect to
convert Chase Bank Rate Loans to LIBOR Loans, the Borrowers shall deliver an
irrevocable Notice of Conversion or Continuation to the Agent at least three
(3) Business Days’ prior to the date of such conversion.  If the last day of an Interest Period with
respect to a Loan that is to be converted is not a Business Day or Working Day,
then such conversion shall be made on the next succeeding Business Day or
Working Day, as the case may be, and during the period from such last day of an
Interest Period to such succeeding Business Day, as the case may be, such Loan
shall bear interest as if it were an Chase Bank Rate Loan.  All or any part of the outstanding Chase Bank
Rate Loans then outstanding may be converted to LIBOR Loans as provided herein,
provided that partial conversions shall
be in multiples in an aggregate principal amount of $1,000,000 or more.  The Borrowers shall not have more than five
(5) LIBOR Loans and BA Rate Loans, collectively, outstanding at any time during
the term of this Financing Agreement.

 

(i)                                     The Canadian Borrower may, from time to time,
(w) request that any Canadian Dollar Revolving Loan made hereunder be a BA Rate
Loan, (x) elect to convert Canadian

 

84

 

Prime Rate Loans to BA Rate
Loans, (y) elect to convert Chase Bank Rate Loans to LIBOR Loans and/or (z)
elect from time to time to convert BA Rate Loans to Canadian Prime Rate Loans,
in each case by delivering an irrevocable Notice of Conversion or Continuation
to the Lender at least three (3) Business Days’ prior to date of such conversion;
provided that any such conversion of BA
Rate Loans to Canadian Prime Rate Loans and of Chase Bank Rate Loans to LIBOR
Loans shall only be made, subject to the second following sentence, on the last
day of an Interest Period with respect thereto. 
Should the Canadian Borrower elect to convert Canadian Prime Rate Loans
to BA Rate Loans or Chase Bank Rate Loans to LIBOR Loans, the borrowing Agent
or the Canadian Borrower shall deliver an irrevocable Notice of Conversion or
Continuation to the Lender at least three (3) Business Days’ prior to the date
of such conversion.  If the last day of
an Interest Period with respect to a loan that is to be converted is not a
Business Day or Working Day, then such conversion shall be made on the next
succeeding Business Day or Working Day, as the case may be, and during the
period from such last day of an Interest Period to such succeeding Business
Day, as the case may be, such loan shall bear interest as if it were a Canadian
Prime Rate Loan or Chase Bank Rate Loan, as the case may be.  All or any part of the outstanding Canadian
Prime Rate Loans or Chase Bank Rate Loans made to the Canadian Borrower then
outstanding may be converted to BA Rate Loans or LIBOR Loans, respectively, as
provided herein, provided that partial conversions
shall be in multiples in an aggregate principal amount of $100,000 or
more.  The Borrowers shall not have more
than five (5) LIBOR Loans and BA Rate Loans, collectively, outstanding at any
time during the term of this Financing Agreement.

 

(b)                                 (i)                                     Any
LIBOR Loans may be continued as such upon the expiration of an Interest Period;
provided that the Borrowing Agent or the
applicable Borrower, as the case may be, delivers to the Agent a Notice of
Conversion or Continuation at least three (3) Business Days’ prior to the
expiration of said Interest Period; and provided, further that
no LIBOR Loan may be continued as such upon the occurrence of any Default or
Event of Default under this Financing Agreement, but shall be automatically
converted to a Chase Bank Rate Loan on the last day of the Interest Period
during which such Default or Event of Default has occurred and is
continuing.  Absent the delivery of a
Notice of Conversion or Continuation, LIBOR Loans shall convert to Chase Bank
Rate Loans on the last day of the applicable Interest Period.  Each Notice of Conversion or Continuation
furnished by the Borrowers or the Borrowing Agent, as the case may be, pursuant
hereto shall specify whether such election, conversion or continuation is for a
one, two, three or six month period. 
Notwithstanding anything to the contrary contained herein, the Agent (or
any participant or Lender, if applicable) shall not be required to purchase
United States Dollar deposits in the London interbank market or from any other
applicable LIBOR rate market or source or otherwise “match fund” to fund LIBOR
Loans, but any and all provisions hereof relating to LIBOR Loans shall be
deemed to apply as if the Agent (and any participant or Lender, if applicable)
had purchased such deposits to fund any LIBOR Loans.

 

(ii)                                  Any BA Rate Loans may be continued as such
upon the expiration of an Interest Period; provided that
the Canadian Borrower delivers to the Lender a Notice of Conversion or
Continuation at least three (3) Business Days’ prior to the expiration of said
Interest Period; and provided, further that
no BA Rate Loan may be continued as such upon the occurrence of any Default or
Event of Default under this Financing Agreement, but it shall be automatically
converted to a Canadian Prime Rate Loan on the last day of the Interest Period
during which occurred such Default or Event of Default if it is
continuing.  Absent the delivery of a
Notice of Conversion or Continuation, BA Rate Loans shall convert to Canadian
Prime Rate Loans on the last day of the applicable Interest Period.  Each Notice of Conversion or Continuation
furnished by the Canadian Borrower pursuant hereto shall specify whether such
election, conversion or continuation is for a one, two, three or six month
period.  Notwithstanding anything to the
contrary contained herein, the Lender (or any participant or Lender, if
applicable) shall not be required to purchase bankers’ acceptance from any BA
Equivalent Rate source, but any and all provisions hereof relating to BA Rate
Loans shall be deemed to apply as if the Lender (and any participant or Lender,
if applicable) had purchased such bankers’ acceptance to fund any BA Rate
Loans.

 

85

 

(c)                                  (i)                                     The
Borrowing Agent or any Borrower may request a LIBOR Loan, convert any Chase
Bank Rate Loan or continue any LIBOR Loan provided that (i) there is then
no Default or Event of Default in effect, (ii) no Default or Event of
Default shall occur or exist after giving effect to such LIBOR Loan, conversion
or continuance, (iii) after giving effect to such conversion or
continuance, there shall be no more than five (5) LIBOR Loans and BA Rate
Loans, collectively, outstanding in the aggregate for all Borrowers and (iv)
the Borrowing Agent or the applicable Borrower shall have delivered a Notice of
Conversion or Continuation, substantially in the form of Exhibit H
to this Financing Agreement and in accordance with clauses (a)
and (b) of this Section 8.13),
specifying (a) the amount and type of Loans being converted or continued,
(b) in the case of a conversion to or a continuation of LIBOR Loans, the
applicable Interest Period and (c) in the case of a conversion, the date
of conversion.

 

(ii)                                  The
Canadian Borrower may request a BA Rate Loan, convert any Canadian Prime Rate
Loan into a BA Rate Loan, or continue any BA Rate Loan provided that (i) there
is then no Default or Event of Default in effect, (ii) no Default or Event of
Default shall occur or exist after giving effect to such BA Rate Loan,
conversion or continuance, (iii) after giving effect to such conversion or
continuance, there shall be no more than five (5) LIBOR Loans and BA Rate
Loans, collectively, outstanding in the aggregate for all Borrowers and (iv)
the Canadian Borrower shall have delivered a Notice of Conversion or
Continuation, substantially in the form of Exhibit G to
this Financing Agreement and in accordance with clauses (a) and (b) of this Section 8.13),
specifying (a) the amount and type of Loans being converted or continued, (b)
in the case of a conversion to or a continuation of BA Rate Loans, the
applicable Interest Period and (c) in the case of a conversion, the date of
conversion.

 

Section 8.14                            If
all or a portion of the outstanding principal amount of the Obligations shall
not be paid when due (whether at the stated maturity, by acceleration or
otherwise), such outstanding amount, to the extent it is a LIBOR Loan or a BA
Rate Loan, shall be converted to a Chase Bank Rate Loan or Canadian Prime Rate
Loan, respectively, at the end of the last Interest Period therefor.

 

Section 8.15                            The
Agent shall, at the request of the Loan Parties or the Borrowing Agent, deliver
to the Loan Parties a statement showing the quotations given by Chase or CIBC
(as applicable) and the computations used in determining any interest rate
pursuant to Section 8.1 hereof.

 

Section 8.16                            (a)                                  In
the event that the Agent or any Lender shall have determined in the exercise of
its reasonable business judgment (which determination shall be conclusive and
binding upon the Loan Parties) that by reason of circumstances affecting the
interbank LIBOR market, adequate and reasonable means do not exist for
ascertaining LIBOR applicable for any Interest Period with respect to: (a) a
proposed loan that the Loan Parties have requested be made as a LIBOR Loan; (b)
a LIBOR Loan that will result from the requested conversion of a Chase Bank
Rate Loan, into a LIBOR Loan; or (c) the continuation of LIBOR Loans beyond the
expiration of the then current Interest Period with respect thereto, the Agent
shall forthwith give written notice of such determination to the Loan Parties
at least one day prior to, as the case may be, the requested borrowing date for
such LIBOR Loan, the conversion date of such Chase Bank Rate Loan or the last
day of such Interest Period.  If such
notice is given (i) any requested LIBOR Loan shall be made as a Chase Bank Rate
Loan, (ii) any Chase Bank Rate Loan that was to have been converted to a LIBOR
Loan shall be continued as a Chase Bank Rate Loan, and (iii) any outstanding
LIBOR Loan shall be converted, on the last day of then current Interest Period
with respect thereto, to a Chase Bank Rate Loan.  Until such notice has been withdrawn by the
Agent, no further LIBOR Loan shall be made nor shall the Borrowers have the
right to convert a Chase Bank Rate Loan to a LIBOR Loan.  The Agent shall notify the Borrowers upon
becoming aware that such circumstances have ceased to exist.

 

In the event that
the Agent or any Lender shall have determined in the exercise of its reasonable
business judgment (which determination shall be conclusive and binding upon the
Loan

 

86

 

Parties) that by reason of circumstances affecting the market for
bankers’ acceptances, adequate and reasonable means do not exist for
ascertaining the BA Equivalent Rate applicable for any Interest Period with
respect to: (a) a proposed loan that the Canadian Borrower has requested be
made as a BA Rate Loan; (b) a BA Rate Loan that will result from the requested
conversion of a Canadian Prime Rate Loan; or (c) the continuation of BA Rate
Loans beyond the expiration of the then current Interest Period with respect
thereto, the Agent shall forthwith give written notice of such determination to
the Loan Parties at least one day prior to, as the case may be, the requested
borrowing date for such BA Rate Loan, the conversion date of such Canadian
Prime Rate Loan, or the last day of such Interest Period.  If such notice is given (i) any requested BA
Rate Loan shall be made as a Canadian Prime Rate Loan, (ii) any Canadian Prime
Rate Loan that was to have been converted to a BA Rate Loan shall be continued
as a Canadian Prime Rate Loan and (iii) any outstanding BA Rate Loan shall be
converted, on the last day of then current Interest Period with respect
thereto, to a Canadian Prime Rate Loan. 
Until such notice has been withdrawn by the Agent or the Lenders, no
further BA Rate Loan shall be made nor shall the Canadian Borrower have the
right to convert a Canadian Prime Rate Loan to a BA Rate Loan.  The Agent shall notify the Borrowers upon
becoming aware that such circumstances have ceased to exist.

 

Section 8.17                            (a)                                  If
any payment on a LIBOR Loan becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day or Working Day unless the result of such extension would be to
extend such payment into another calendar month in which event such payment
shall be made on the immediately preceding Business Day or Working Day.

 

(b)                                 If any payment on a BA Rate Loan becomes due
and payable on a day other than a Working Day, the maturity thereof shall be
extended to the next succeeding Working Day unless the result of such extension
would be to extend such payment into another calendar month in which event such
payment shall be made on the immediately preceding Working Day.

 

Section 8.18                            (a)                                  Notwithstanding
any other provisions herein, if any law, regulation, treaty or directive or any
change therein or in the interpretation or application thereof, shall make it
unlawful for the Agent to make or maintain LIBOR Loans as contemplated herein,
the then outstanding LIBOR Loans, if any, shall be converted automatically to
Chase Bank Rate Loans as of the end of such month or within such earlier period
as required by law.  The Loan Parties
hereby agree promptly to pay the Agent, upon demand, any additional amounts
necessary to compensate the Agent for any costs incurred by the Agent in making
any conversion in accordance with this Article VIII
including, but not limited to, any interest or fees payable by the Agent to
lenders of funds obtained by the Agent in order to make or maintain LIBOR Loans
hereunder.

 

(b)                                 In the event that bankers’ acceptances are
not, at any time, as a matter of usual money market practice, issued by
Chartered Banks, as a consequence of any change in any law, regulation, treaty,
directive, or as a consequence of the status of the Canadian financial markets,
then BA Rate Loans shall not be available, and any BA Rate Loans then
outstanding shall be converted automatically to Canadian Prime Rate Loans as at
the end of the applicable Interest Period.

 

Section 8.19                            (a)                                  The
Loan Parties agree to indemnify and to hold the Agent and each Lender harmless
from any loss or expense which the Agent or such Lender may sustain or incur as
a consequence of: (i) default by the Borrowers in payment of the principal
amount of or interest on any LIBOR Loans or BA Rate Loans as and when the same
shall be due and payable in accordance with the terms of this Financing
Agreement, including, but not limited to, any such loss or expense arising from
interest or fees payable by the Agent or such Lender to lenders of funds
obtained by either of them in order to maintain the LIBOR Loans or BA Rate
Loans hereunder; (ii) default by the Borrowers in making a borrowing or
conversion after the Borrowers have given a notice in accordance with Section 8.13

 

87

 

hereof; (iii) any prepayment of LIBOR Loans or BA
Rate Loans on a day which is not the last day of the Interest Period applicable
thereto, including, without limitation, prepayments arising as a result of the
application of the proceeds of Collateral to the Revolving Loans; and
(iv) default by the Borrowers in making any prepayment after the Borrowers
have given notice to the Agent thereof. 
The determination by the Agent of the amount of any such loss or
expense, when set forth in a written notice to the Loan Parties, containing the
Agent’s calculations thereof in reasonable detail, shall be conclusive on the
Loan Parties in the absence of manifest error.

 

(b)                                 Calculation
of all amounts payable under this Section 8.19
with regard to LIBOR Loans shall be made as though the Agent and each Lender
had actually funded the LIBOR Loans through the purchase of deposits in the
relevant market and currency, as the case may be, bearing interest at the rate
applicable to such LIBOR Loans in an amount equal to the amount of the LIBOR
Loans and having a maturity comparable to the relevant interest period; provided, however, that the Agent and each Lender may fund
each of the LIBOR Loans in any manner the Agent or such Lender sees fit and the
foregoing assumption shall be used only for calculation of amounts payable
under this Section 8.19.

 

(c)                                  Calculation of all amounts payable under this
Section 8.19 with regard to BA Rate
Loans shall be made as though the Agent or any Lender had actually created and
purchased, or purchased, as the case may be, bankers’ acceptances in Canadian
Dollars, bearing interest at the rate applicable to such BA Rate Loans and
having a maturity comparable to the relevant Interest Period and provided that the Agent or such Lender created and
purchased, each bankers’ acceptance in any manner the Agent or such Lender sees
fit and the foregoing assumption shall be used only for calculation of amounts
payable under this Section 8.19.

 

(d)                                 In
addition, notwithstanding anything to the contrary contained herein, the Agent
shall apply all proceeds of Collateral and all other amounts received by it
from or on behalf of the Loan Parties (i) initially to the Chase Bank Rate
Loans and Canadian Prime Rate Loans, on a ratable basis, and (ii) subsequently
to LIBOR Loans and BA Rate Loans; provided, however, (x) upon the occurrence of an Event of Default or
(y) in the event the aggregate amount of outstanding LIBOR Rate Loans and/or BA
Rate Loans exceeds the Availability under the Revolving Line of Credit or the
applicable maximum levels set forth therefor, the Agent may apply all such
amounts received by it to the payment of Obligations in such manner and in such
order as the Agent may elect in its reasonable business judgment.  In the event that any such amounts are
applied to Revolving Loans which are LIBOR Loans or BA Rate Loans, such
application shall be treated as a prepayment of such loans and the Agent shall
be entitled to indemnification hereunder. 
The terms and conditions of this Section 8.19
shall survive termination of this Financing Agreement and the payment of the
outstanding Obligations.

 

Section 8.20                            Taxes

 

(a)                                  Any
and all payments by any Loan Party under each Loan Document shall be made free
and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholdings, and all liabilities
(including, without limitation, all interest and penalties) with respect
thereto, excluding:  (i) in the case
of each Lender, each Issuing Bank and each Agent (A) taxes measured by its net
income, and franchise taxes imposed on it, by the jurisdiction (or any
political subdivision thereof) under the laws of which such Lender, such
Issuing Bank or such Agent (as the case may be) is organized and (B) any United
States withholding taxes payable with respect to payments under the Loan
Documents under laws (including any statute, treaty or regulation) in effect on
the Closing Date (or, in the case of any Person who becomes a Lender after the
Closing Date, the date of the applicable Assignment and Transfer Agreement or
in the case of any Person who becomes an Issuing Bank after the Closing Date,
the date such Person becomes an Issuing Bank, or in the case of any Person who
becomes an Agent after the Closing Date, the date such Person becomes an Agent,
as the case may

 

88

 

be) applicable to such Lender, such Issuing Bank or
such Agent, as the case may be, but not excluding any United States withholding
taxes payable as a result of any change in such laws occurring after the
Closing Date (or the date of such Assignment and Transfer Agreement or the date
such Person becomes an Issuing Bank or an Agent, as the case may be), and
(ii) in the case of each Lender, taxes measured by its net income, and
franchise taxes imposed on it as a result of a present or former connection
between such Lender and the jurisdiction of the Governmental Authority imposing
such tax or any taxing authority thereof or therein (all such non-excluded
taxes, the “Applicable Taxes”).  If any Applicable Taxes shall be required by
law to be deducted from or in respect of any sum payable under any Loan
Document to any Lender, any Issuing Bank or any Agent (w) the sum payable
shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 8.20 such Lender, such
Issuing Bank or such Agent (as the case may be) receives an amount equal to the
sum it would have received had no such deductions been made, (x) the
relevant Loan Party shall make such deductions, (y) the relevant Loan
Party shall pay the full amount deducted to the relevant taxing authority or
other authority in accordance with applicable law and (z) the relevant
Loan Party shall deliver to the Agent evidence of such payment.

 

(b)                                 In
addition, each Loan Party agrees to pay any present or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies of the United States or any political subdivision thereof or any
applicable foreign jurisdiction, and all liabilities with respect thereto, in
each case arising from any payment made under any Loan Document or from the
execution, delivery or registration of, or otherwise with respect to, any Loan
Document (collectively, “Other Taxes”).

 

(c)                                  Each
Loan Party shall indemnify each Lender, each Issuing Bank and each Agent for
the full amount of Applicable Taxes and Other Taxes (including any Applicable
Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this
Section 8.20) paid by such Lender,
such Issuing Bank or such Agent (as the case may be) and any liability
(including for penalties, interest and expenses) arising therefrom or with
respect thereto, whether or not such Applicable Taxes or Other Taxes were
correctly or legally asserted.  This
indemnification shall be made within 30 days from the date such Lender, such
Issuing Bank or such Agent (as the case may be) makes written demand therefor.

 

(d)                                 Within
30 days after the date of any payment of Applicable Taxes or Other Taxes by any
Loan Party, the Borrowers shall furnish to the Agent, the original or a
certified copy of a receipt evidencing payment thereof.

 

(e)                                  Without
prejudice to the survival of any other agreement of any Loan Party hereunder or
under any Guaranty, the agreements and obligations of such Loan Party contained
in this Section 8.20 shall survive the
payment in full of the Obligations.

 

(f)                                    (i)                                     Prior
to the Closing Date in the case of each Non-Domestic Lender that is a signatory
hereto, and on the date of the applicable Assignment and Transfer Agreement
pursuant to which it becomes a Lender or prior to the date a successor Issuing
Bank becomes an Issuing Bank, or prior to the date a successor Agent becomes an
Agent, as the case may be, in the case of each other Non-Domestic Lender, on or
before the date that any such form or certification expires or becomes
obsolete, after the occurrence of any event requiring a change in the most
recent form or certification previously delivered by it to the Borrowers and
the Agent, and from time to time thereafter if requested by the Borrowers or
the Agent, each Non-Domestic Lender that is entitled at such time to an
exemption from United States withholding tax, or that is subject to such tax at
a reduced rate under an applicable tax treaty, shall provide the Agent and the
Borrowers with two completed originals of each of the following, as applicable:
(A) Form W-8ECI (claiming exemption from U.S. withholding tax because the
income is effectively connected with a U.S. trade or business) or any successor
form, (B) Form W-8BEN (claiming

 

89

 

exemption from, or a reduction of, U.S. withholding
tax under an income tax treaty) or any successor form, (C) in the case of
a Non-Domestic Lender claiming exemption under Sections 871(h) or 881(c)
of the Code, a Form W-8BEN (claiming exemption from U.S. withholding tax under
the portfolio interest exemption) or any successor form or (D) any other
applicable form, certificate or document prescribed by the IRS certifying as to
such Non-Domestic Lender’s entitlement to such exemption from United States
withholding tax or reduced rate with respect to all payments to be made to such
Non-Domestic Lender under the Loan Documents. 
Unless the Borrowers and the Agent have received forms or other
documents satisfactory to them indicating that payments under any Loan Document
to or for a Non-Domestic Lender are not subject to United States withholding
tax or are subject to such tax at a rate reduced by an applicable tax treaty,
the Borrowers or the Agent shall withhold amounts required to be withheld by
applicable Requirements of Law from such payments at the applicable statutory
rate.

 

(ii)                                  Prior
to the Closing Date in the case of each Domestic Lender that is a signatory
hereto, and on the date of the applicable Assignment and Transfer Agreement
pursuant to which it becomes a Lender, or prior to the date a successor Issuing
Bank becomes an Issuing Bank, or on the date a successor Agent becomes an
Agent, as the case may be, in the case of each other Domestic Lender, on or
before the date that any such form or certification expires or becomes
obsolete, after the occurrence of any event requiring a change in the most
recent form or certification previously delivered by it to the Borrowers and
the Agent, and from time to time thereafter if requested by the Borrowers or
the Agent, each Domestic Lender shall provide the Agent and the Borrowers with
two completed originals of Form W-9 (certifying that such Domestic Lender is
entitled to an exemption from United States backup withholding tax) or any
successor form.  Solely for purposes of
this Section 8.19(f), a Domestic Lender shall not include a Lender, an
Issuing Bank or an Agent that may be treated as an exempt recipient based on
the indicators described in Treasury Regulation
section 1.6049-4(c)(1)(ii).

 

(g)                                 Any
Lender claiming any additional amounts payable pursuant to this Section 8.20 shall use its reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions) to
change the jurisdiction of its applicable lending office if the making of such
a change would avoid the need for, or reduce the amount of, any such additional
amounts that would be payable or may thereafter accrue and would not, in the
sole determination of such Lender, be otherwise disadvantageous to such Lender.

 

Section 8.21                            (a)                                  Notwithstanding
anything to the contrary in this Financing Agreement, in the event that, by
reason of any Regulatory Change (for purposes hereof “Regulatory
Change” shall mean, with respect to the Agent, any change after the
date of this Financing Agreement in United States federal, state or foreign law
or regulations (including, without limitation, Regulation D), Canadian
federal or province law or regulation, or the adoption or making after such
date of any interpretation, directive or request applying to a class of banks
including the Agent of or under any United States federal, Canadian federal,
state, province or foreign law or regulations (whether or not having the force
of law and whether or not failure to comply therewith would be unlawful), the
Agent either (a) incurs any material additional costs based on or measured
by the excess above a specified level of the amount of a category of deposits
or other liabilities of such bank which includes deposits by reference to which
the interest rate on LIBOR Loans is determined as provided in this Financing
Agreement or a category of extensions of credit or other assets of the Agent
which includes LIBOR Loans, or (b) becomes subject to any material
restrictions on the amount of such a category of liabilities or assets which it
may hold, then, if the Agent so elects by notice to the Loan Parties, the
obligation of the Agent to make or continue, or to convert Chase Bank Rate
Loans into LIBOR Loans hereunder shall be suspended until such Regulatory
Change ceases to be in effect.

 

(b)                                 Notwithstanding
anything to the contrary in this Financing Agreement, in the event that, by reason
of any Regulatory Change or the adoption or making after such date of any
interpretation,

 

90

 

directive or request applying to a class of banks
including the Agent of or under any United States federal, Canadian federal,
state, province or foreign law or regulations (whether or not having the force
of law and whether or not failure to comply therewith would be unlawful), the
Agent either (a) incurs any material additional costs based on or measured by the
excess above a specified level of the amount of a category of acceptances or
other liabilities of such bank which includes acceptances by reference to which
the interest rate on BA Rate Loans is determined as provided in this Financing
Agreement or a category of extensions of credit or other assets of the Agent
which includes BA Rate Loans, or (b) becomes subject to any material
restrictions on the amount of such a category of liabilities or assets which it
may hold, then, if the Agent so elects by notice to the Loan Parties, the
obligation of the Agent to make or continue, or to convert Canadian Prime Rate
Loans into BA Rate Loans hereunder shall be suspended until such Regulatory
Change ceases to be in effect.

 

Section 8.22                            Substitution
of Lenders

 

(a)                                  Agent
and each Lender agrees that, upon the occurrence of any event giving rise to
the operation of Sections 8.11, 8.12, 8.16, 8.20 or 8.21
with respect to the Agent or such Lender, if Agent or any such Lender claims
any additional amounts payable under Sections 8.11, 8.12, 8.16,
8.20 or 8.21, Agent or such Lender shall use its reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions) to
change the jurisdiction of its applicable lending office if the making of such
change would avoid the need for, or reduce the amount of, any such additional
amounts that would be payable or may thereafter accrue and would not, in the
sole determination of Agent or such Lender, be otherwise disadvantageous to
such Lender.  Nothing in this Section 8.22 shall affect or postpone any of the
obligations of the Loan Parties or the right of Agent or any Lender provided in
Sections 8.11, 8.12, 8.16, 8.20 or 8.21.

 

(b)                                 Notwithstanding
in anything in clause (a) of this Section 8.22 to the contrary, in the event that (i)(A)
any Lender makes a claim under Sections 8.11, 8.12, 8.16,
8.20 or 8.21 or (B) any Lender becomes a Defaulting Lender (any
such Lender described in the preceding clauses (A) or (B) being an “Affected Lender”)
or (ii) in the case of clause (i)(A) above
with respect to claims made by any Lender pursuant to Section 8.11
as a consequence of increased costs, the effective rate of interest payable to
such Lender under this Financing Agreement with respect to its Loans materially
exceeds the effective average annual rate of interest payable to the Required
Lenders under this Financing Agreement, the Borrowers may substitute any Lender
and, if reasonably acceptable to the Agent, any other Eligible Assignee (a “Substitute Institution”) for such Affected Lender hereunder,
after delivery of a written notice (a “Substitution Notice”)
within a reasonable time (in any case not to exceed 90 days) following the
occurrence of any of the events described in clause (i)
above by the Borrowers to the Agent and the Affected Lender that the
Borrowers intend to make such substitution; provided, however, that, if more than one Lender claims increased
costs, illegality or right to payment arising from the same act or condition
and such claims are received by the Borrowers within 30 days of each other,
then the Borrowers may substitute all, but not (except to the extent the
Borrowers have already substituted one of such Affected Lenders before the
Borrower’s receipt of the other Affected Lenders’ claim) less than all, Lenders
making such claims.

 

(c)                                  If
the Substitution Notice was properly issued under this Section 8.22,
the Affected Lender shall sell, and the Substitute Institution shall purchase,
all rights and claims of such Affected Lender under the Loan Documents and the
Substitute Institution shall assume, and the Affected Lender shall be relieved
of, the Affected Lender’s Revolving Credit Commitments and all other prior
unperformed obligations of the Affected Lender under the Loan Documents (other
than in respect of any damages (other than exemplary or punitive damages, to
the extent permitted by applicable law) in respect of any such unperformed
obligations).  Such purchase and sale
(and the corresponding assignment of all rights and claims hereunder) shall be
recorded in the Revolving Loan Accounts maintained by the Agent

 

91

 

and shall be effective on (and not earlier than) the
later of (i) the receipt by the Affected Lender of its ratable portion of
the outstanding Revolving Loans and Letters of Credit, together with any other
Obligations owing to it, (ii) the receipt by the Agent of an Assignment
and Transfer Agreement in form and substance satisfactory to it and the
Borrowers whereby the Substitute Institution shall agree to be bound by the
terms hereof and (iii) the payment in full to the Affected Lender in cash
of all fees, unreimbursed costs and expenses and indemnities accrued and unpaid
through such effective date.  Upon the
effectiveness of such sale, purchase and assumption, the Substitute Institution
shall become a “Lender” hereunder for all
purposes of this Financing Agreement having a Revolving Credit Commitment in
the amount of such Affected Lender’s Revolving Credit Commitment assumed by it
and such Revolving Credit Commitment of the Affected Lender shall be
terminated; provided, however,
that all indemnities under the Loan Documents shall continue in favor of such
Affected Lender.

 

(d)                                 Each
Lender agrees that, if it becomes an Affected Lender and its rights and claims
are assigned hereunder to a Substitute Institution pursuant to this Section 8.22, it shall execute and deliver to the Agent
an Assignment and Transfer Agreement to evidence such assignment, together with
any Promissory Note (if such Loans are evidenced by a Promissory Note)
evidencing the Loans subject to such Assignment and Transfer Agreement; provided, however, that
the failure of any Affected Lender to execute an Assignment and Transfer
Agreement shall not render such assignment invalid.

 

Section 8.23                            Subject
to the terms and conditions hereof, the Obligations of each of the Borrowers
under the provisions of this Section 8.23
constitute the absolute and unconditional, full recourse Obligations of each of
the Borrowers, enforceable against each such Borrower to the full extent of its
properties and assets, irrespective of the validity, regularity or
enforceability of this Financing Agreement, the other Loan Documents or any
other circumstances whatsoever.  Each of
the Borrowers hereby agrees that it will not enforce any of its rights of
contribution or subrogation against the other Borrowers with respect to any
liability incurred by it hereunder or under any of the other Loan Documents,
any payments made by it to the Agent with respect to any of the Obligations or
any Collateral, until such time as all of the Obligations have been paid in
full in cash.  Any claim which any
Borrower may have against any other Borrower with respect to any payments to the
Agent or any Lender hereunder or under any other Loan Documents are hereby
expressly made subordinate and junior in right of payment, without limitation
as to any increases in the Obligations arising hereunder or thereunder, to the
prior payment in full in cash of the Obligations.  The provisions of this Section 8.23
are made for the benefit of the Agent, the Lenders and their successors and
assigns, and may be enforced by them from time to time against any or all of
the Borrowers as often as occasion therefor may arise and without requirement
on the part of the Agent, the Lenders or such successors or assigns first to
marshal any of its or their claims or to exercise any of its or their rights
against any of the other Borrowers or to exhaust any remedies available to it
or them against any of the other Borrowers or to resort to any other source or
means of obtaining payment of any of the Obligations hereunder or to elect any
other remedy.  The provisions of this Section 8.23 shall remain in effect until all of the
Obligations shall have been paid in full or otherwise fully satisfied.

 

Section 8.24                            Canadian
Matters

 

(a) Interest Act
(Canada).  For purposes of the
Interest Act (Canada), where in this
Financing Agreement a rate of interest is to be calculated on the basis of a
year of 360 or 365 days, the yearly rate of interest to which the rate is
equivalent is the rate multiplied by the number of days in the year for which
the calculation is made and divided by 360 or 365, as applicable.

 

(b) Criminal
Interest  Rate.  Notwithstanding any other provision of this
Financing Agreement, in no event shall aggregate “interest”
(as that term is defined in Section 347 of the Criminal
Code (Canada)) payable by the Canadian Borrower exceeds the
effective annual rate of interest on the

 

92

 

“credit advanced”
(as defined therein) lawfully permitted under Section 347 of the Criminal Code (Canada). 
The effective annual rate of interest payable by the Canadian Borrower
shall be determined in accordance with generally accepted actuarial practices
and principles and, in the event of a dispute regarding compliance with
Section 347 of the Criminal Code (Canada),
a certificate of a Fellow of the Canadian Institute of Actuaries appointed by
Lender will be conclusive for the purposes of such determination.

 

ARTICLE IX

 

POWERS

 

Each Loan Party
hereby constitutes the Agent, or any person or agent the Agent may designate,
as its true and lawful attorney-in-fact, at the Loan Parties’ cost and expense,
to exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all Obligations to the Agent have been paid in full
in cash:

 

(a)                                  To
receive, take, endorse, sign, assign and deliver, all in the name of the Agent
or the Loan Parties or any one of them, any and all checks, notes, drafts, and
other documents or instruments relating to the Collateral;

 

(b)                                 To
receive, open and dispose of all mail addressed to the Loan Parties or any one
of them and to notify postal authorities to change the address for delivery
thereof to such address as the Agent may designate;

 

(c)                                  To
request from customers indebted or otherwise obligated on Accounts at any time,
in the name of the Agent information concerning the amounts owing on the
Accounts;

 

(d)                                 To
request from customers indebted on Accounts at any time, in the name of the
Loan Parties or any one of them, in the name of certified public accountant
designated by the Agent or in the name of the Agent’s designee, information
concerning the amounts owing on the Accounts;

 

(e)                                  To
transmit to customers indebted on Accounts notice of the Agent’s interest
therein and to notify customers indebted on Accounts to make payment directly
to the Agent for the Loan Parties’ account;

 

(f)                                    To
take or bring, in the name of the Agent or the Loan Parties or any one of them,
all steps, actions, suits or proceedings deemed by the Agent necessary or
desirable to enforce or effect collection of the Accounts and any of the
proceeds of any other Collateral or otherwise to enforce the rights of the
Agent and the other Secured Parties with respect to the Collateral; and

 

(g)                                 (i)
To execute assignments, licenses and other documents to enforce the rights of
the Agent and the other Secured Parties with respect to the Collateral and/or
(ii) to record and perfect the security interest of the Agent and the other
Secured Parties in the Collateral.

 

Notwithstanding
anything in the foregoing to the contrary, the powers set forth in (a), (b),
(c), (d), (e), (f) and (g)(i) above may only be exercised after the occurrence
and during the continuation of an Event of Default and until such time as such
Event of Default is waived in writing by the Agent.

 

93

 

ARTICLE X

 

EVENTS OF DEFAULT AND
REMEDIES

 

Section 10.1                            Notwithstanding
anything in this Financing Agreement to the contrary, the Agent may, or upon
the written direction of the Required Lenders the Agent shall, terminate this
Financing Agreement immediately upon the occurrence of any of the following events
(each such event being an “Event of Default”):

 

(a)                                  cessation
of the business of any Loan Party (other than an Inactive Subsidiary) or the
calling of a meeting of the creditors of any Loan Party (other than an Inactive
Subsidiary) for purposes of compromising the debts and obligations of such Loan
Party (other than an Inactive Subsidiary); or the Loan Parties or any of their
respective Subsidiaries (other than an Inactive Subsidiary) shall generally not
pay its debts as such debts become due, shall admit in writing its inability to
pay its debts generally or shall make a general assignment for the benefit of
creditors;

 

(b)                                 (i)
the commencement by any Loan Party (other than an Inactive Subsidiary) of any
bankruptcy, insolvency, arrangement, reorganization, receivership or similar
proceedings under any federal or state law; (ii) the commencement against any
Loan Party (other than an Inactive Subsidiary), of any bankruptcy, insolvency,
arrangement, reorganization, receivership or similar proceeding under any
federal or state law by creditors of such Loan Party, which proceeding shall
not have been controverted within ten (10) days or shall not have been
dismissed and vacated within sixty (60) days of commencement, or any of the
actions sought in any such proceeding shall occur or such Loan Party shall take
action to authorize or effect any of the actions in any such proceeding; or
(iii) the commencement (x) by Parent or any Loan Party’s subsidiaries (other
than an Inactive Subsidiary), or any one of them, of any bankruptcy,
insolvency, arrangement, reorganization, receivership or similar proceeding
under any applicable state law, or (y) against Parent or any Loan Party’s
subsidiaries (other than an Inactive Subsidiary), or any one of them, of any
involuntary bankruptcy, insolvency, arrangement, reorganization, receivership
or similar proceeding under applicable law, which proceeding shall not have
been controverted within ten (10) days and shall not have been dismissed or
vacated within sixty (60) days of commencement, or any of the actions sought in
any such proceeding shall occur or any Loan Party’s subsidiaries (other than an
Inactive Subsidiary), or any one of them, shall take action to authorize or
effect any of the actions in any such proceeding;

 

(c)                                  breach
by any Loan Party of any warranty, representation or covenant contained herein
(other than those referred to in Section 10.1(d)
below) or in any other Loan Document between such Loan Party or the Agent,
provided that such Default by such Loan Party of any of the warranties,
representations or covenants referred in this clause (c) shall not be deemed to
be an Event of Default unless and until such Default shall remain unremedied to
the Agent’s satisfaction for a period of fifteen (15) days (or with respect to
any breach of any warranty, representation or covenant contained in Sections 7.8 or 7.9, a period
of five (5) days) from the date of such breach.

 

(d)                                 breach
by any Loan Party of any warranty, representation or covenant contained in Sections 3.3 (other than the second sentence of Section 3.3) hereof; Sections 6.3
and 6.4 (other than the first sentence of Section 6.4) hereof; Article VII
(including Annex A) hereof
(other than Sections 7.5 (b), (c) and (e), 7.6, 7.8, 7.13
and 7.19).

 

(e)                                  failure
of the Loan Parties or any one of them to pay the principal of, interest or
fees on any Loan when due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise); provided, however, that
nothing contained herein shall prohibit the Agent from charging such amounts to
the Revolving Loan Accounts on the due date thereof;

 

94

 

(f)                                    failure
of the Loan Parties or any one of them to pay any Obligations (other than the
Obligations described in clause (e) of
this Section 10.1) when the same becomes
due and payable and in any event within (5) Business Days following notice
thereof by the Agent, provided, however,
that nothing contained herein shall prohibit the Agent from charging such
amounts to the Revolving Loan Accounts on the due date thereof;

 

(g)                                 an
ERISA Event shall occur and the amount of all liabilities and deficiencies
resulting therefrom, whether or not assessed, exceeds $500,000 in the
aggregate;

 

(h)                                 without
the prior written consent of the Agent and the Required Lenders and, except as
permitted by the terms of this Financing Agreement or the Intercreditor
Agreement, the Loan Parties or any one of them shall (x) amend or modify
the Notes Indenture or any other Note Document or (y) make any payment on
account of any obligations owing in respect of the Secured Notes or any other
obligations owing under the Notes Documents (other than regularly scheduled
payments of principal and interest);

 

(i)                                     the
occurrence of any default or event of default (after giving effect to any
applicable grace or cure periods) under any instrument or agreement evidencing
(x) the obligations owing to the Notes Trustee or the Notes Collateral
Agent pursuant to the Notes Indenture or any other Notes Document; or
(y) any other instrument or agreement evidencing Indebtedness of the Loan
Parties or any one of them having a principal amount in excess of $500,000;

 

(j)                                     any
provision of any Loan Document shall at any time for any reason (other than
pursuant to the express terms thereof) cease to be valid and binding on or
enforceable against any Loan Party intended to be a party thereto, or the
validity or enforceability thereof shall be contested by any party thereto, or
a proceeding shall be commenced by any Loan Party or any Governmental Authority
having jurisdiction over any of them, seeking to establish the invalidity or
unenforceability thereof, or any Loan Party shall deny in writing that it has
any liability or obligation purported to be created under any Loan Document;

 

(k)                                  any
Collateral Document, after delivery thereof pursuant hereto, shall for any
reason fail or cease to create a valid and perfected Lien on and security
interest in the Collateral and, except to the extent expressly permitted by the
terms hereof or thereof, (i) a first priority Lien in favor of the Agent for
the benefit of the Lenders on any First-Priority Collateral purported to be
covered thereby and (ii) a second priority Lien in favor of the Agent for the
benefit of the Lenders on any Second-Priority Collateral purported to be
covered thereby, in each case except to the extent permitted by the terms
hereof or under such Collateral Documents;

 

(l)                                     one
or more judgments or orders for the payment of money exceeding $500,000 in the
aggregate shall be rendered against any Loan Party and remain unsatisfied and
either (i) enforcement proceedings shall have been commenced by any creditor
upon any such judgment or order, or (ii) there shall be a period of
fifteen (15) consecutive days after entry thereof during which a stay of
enforcement of any such judgment or order, by reason of a pending appeal or
otherwise, shall not be in effect; provided, however, that any
such judgment or order shall not give rise to an Event of Default under this subsection (l) if and for so long as (A) the
amount of such judgment or order is covered by a valid and binding policy of
insurance (subject to applicable policy deductibles consistent with past
practices) between the defendant and the insurer covering full payment thereof
and (B) such insurer has been notified, and has not disputed the claim
(other than a standard reservation of rights) made for payment, of the amount
of such judgment or order;

 

95

 

(m)                               any
Loan Party (other than an Inactive Subsidiary) is enjoined, restrained or in
any way prevented by the order of any court or any Governmental Authority from
conducting all or any material part of its business for more than fifteen (15)
days;

 

(n)                                 any
material damage to, or loss, theft or destruction of, any Collateral, or any
strike, lockout, labor dispute, embargo, condemnation, act of God or public
enemy, or other casualty which causes, for more than fifteen (15) consecutive
days, the cessation or substantial curtailment of revenue producing activities
at any facility of any Loan Party (other than an Inactive Subsidiary), if any
such event or circumstance could reasonably be expected to have a Material
Adverse Effect after giving effect to all applicable insurance coverage with
respect to which such Loan Party has received insurance proceeds in connection
with such event;

 

(o)                                 the
loss, suspension or revocation of, or failure to renew, any license or Permit
now held or hereafter acquired by any Loan Party (other than an Inactive
Subsidiary), if such loss, suspension, revocation or failure to renew could
reasonably be expected to have a Material Adverse Effect;

 

(p)                                 the
indictment of any Loan Party under any criminal statute, or commencement of
criminal or civil proceedings against any Loan Party, pursuant to which statute
or proceedings the penalties or remedies sought or available include forfeiture
to any Governmental Authority of any material portion of the property of such
Person; or

 

(q)                                 a
Change of Control shall have occurred.

 

Section 10.2                            Upon
the occurrence and during the continuation of a Default and/or an Event of
Default, the Agent in its sole discretion may, or upon the written direction of
the Required Lenders the Agent shall, declare that, all Loans, advances and extensions
of credit provided for in Article III,
and V of this Financing Agreement shall be
thereafter in the Agent’s or the Required Lenders’ sole discretion, and the
obligation of the Agent and/or the Lenders to make Revolving Loans, open
Letters of Credit and provide Letters of Credit Guaranties, shall cease unless
such Default or Event of Default ceases to exist or is waived in writing by the
Required Lenders or cured to the Required Lenders’ satisfaction in the exercise
of the Required Lenders’ reasonable judgment. 
Upon the occurrence of an Event of Default, the Agent in its sole
discretion may, or upon the written direction of the Required Lenders the Agent
shall, declare that: (a) all Obligations shall become immediately due and
payable; (b) the Agent may charge the Loan Parties the Default Rate of
Interest on all then outstanding or thereafter incurred Obligations in lieu of
the interest provided for in Article VIII
of this Financing Agreement, provided that, with respect to this clause “(b)”
the Agent has given the Loan Parties written notice of the Event of Default,
provided further however, that no notice is required if the Event of Default is
the Event listed in Section 10.1(b)
hereof; and (c) the Agent may immediately terminate this Financing Agreement
upon notice to the Loan Parties, provided, however,
that upon the occurrence of an Event of Default listed in Section 10.1(b)
hereof, this Financing Agreement shall automatically terminate and
all Obligations shall become due and payable, without any action, declaration,
notice or demand by the Agent.  The
exercise of any option is not exclusive of any other option, which may be
exercised at any time by the Agent.

 

Section 10.3                            Immediately
upon the occurrence and during the continuation of any Event of Default, the
Agent may, to the extent permitted by law and subject, in the case of the
Second-Priority Collateral, to the Intercreditor Agreement:  (a) remove from any premises where same
may be located any and all books and records, computers, electronic media and
software programs associated with any Collateral (including any electronic
records, contracts and signatures pertaining thereto), documents, instruments,
files and records, and any receptacles or cabinets containing same, relating to
the Accounts, or the Agent may use, at the Loan Parties’ expense, such of the
Loan Parties’ personnel, supplies or space

 

96

 

at the Loan Parties’ places of business or otherwise,
as may be necessary to properly administer and control the Accounts or the
handling of collections and realizations thereon; (b) bring suit, in the
name of the Loan Parties or the Agent, and generally shall have all other
rights respecting said Accounts, including without limitation the right
to:  accelerate or extend the time of
payment, settle, compromise, release in whole or in part any amounts owing on
any Accounts and issue credits in the name of the Loan Parties or the Agent;
(c) subject to the terms of the Collateral Documents sell, assign and
deliver the Collateral and any returned, reclaimed or repossessed Inventory,
with or without advertisement, at public or private sale, for cash, on credit
or otherwise, at the Agent’s sole option and discretion, and the Agent may bid
or become a purchaser at any such sale, free from any right of redemption,
which right is hereby expressly waived by the Loan Parties; (d) subject to
the terms of the Collateral Documents, foreclose the security interests in the
Collateral created herein or by the Loan Documents by any available judicial
procedure, or to take possession of any or all of the Collateral, including any
Inventory, Equipment and/or Other Collateral without judicial process, and to
enter any premises where any Inventory and Equipment and/or Other Collateral
may be located for the purpose of taking possession of or removing the same;
and (e) exercise any other rights and remedies provided in law, in equity,
by contract or otherwise.  To the extent
permitted by applicable law, and subject to the terms of the Collateral
Documents and the Intercreditor Agreement, the Agent shall have the right,
without notice or advertisement, to sell, lease, or otherwise Dispose of all or
any part of the Collateral, whether in its then condition or after further preparation
or processing, in the name of the Loan Parties or the Agent, or in the name of
such other party as the Agent may designate, either at public or private sale
or at any broker’s board, in lots or in bulk, for cash or for credit, with or
without warranties or representations (including but not limited to warranties
of title, possession, quiet enjoyment and the like), and upon such other terms
and conditions as the Agent in its sole discretion may deem advisable, and the
Agent shall have the right to purchase at any such sale.  Subject to the terms of the Collateral
Documents, if any Inventory and Equipment shall require rebuilding, repairing,
maintenance or preparation, the Agent shall have the right, at its option, to
do such of the aforesaid as is necessary, for the purpose of putting the
Inventory and Equipment in such saleable form as the Agent shall deem
appropriate and any such costs shall be deemed an Obligation hereunder.  Any action taken by Agent pursuant to this Section 10.3 shall not affect the commercial
reasonableness of the sale.  The Loan
Parties agree, at the request of the Agent, to assemble the Inventory and
Equipment and to make it available to the Agent at premises of the Loan Parties
or elsewhere and to make available to the Agent the premises and facilities of
the Loan Parties for the purpose of the Agent’s taking possession of, removing
or putting the Inventory and Equipment in saleable form.  If notice of intended Disposition of any
Collateral is required by law, it is agreed that ten (10) days notice shall
constitute reasonable notification and full compliance with the law.  The net cash proceeds resulting from the
Agent’s exercise of any of the foregoing rights (after deducting all charges,
costs and expenses, including reasonable attorneys’ fees), shall be applied by
the Agent, subject to the terms of the Intercreditor Agreement, to the payment
of the Obligations, whether due or to become due, in such order as the Agent
may elect, and the Loan Parties shall remain liable to the Agent for any
deficiencies, and the Agent in turn agrees to remit to the Loan Parties or
their successors or assigns, any surplus resulting therefrom.  The enumeration of the foregoing rights is
not intended to be exhaustive and the exercise of any right shall not preclude
the exercise of any other rights, all of which shall be cumulative.  The Loan Parties hereby indemnify the Agent
and holds the Agent harmless from any and all costs, expenses, claims,
liabilities, Out-of-Pocket Expenses or otherwise, incurred or imposed on the
Agent by reason of the exercise of any of its rights, remedies and interests
hereunder, including, without limitation, from any sale or transfer of
Collateral following the occurrence and during the continuation of an Event of
Default, preserving, maintaining or securing the Collateral, defending its
interests in Collateral (including pursuant to any claims brought by the Loan
Parties, the Loan Parties as debtor-in-possession, any secured or unsecured
creditors of the Loan Parties, any trustee or receiver in bankruptcy, or
otherwise), and the Loan Parties hereby agree to so indemnify and hold the
Agent harmless, absent the Agent’s gross negligence or willful misconduct as
finally determined by a court of competent jurisdiction.  The foregoing indemnification shall survive
termination of this Financing Agreement until such time as all Obligations
(including the

 

97

 

foregoing) have been finally and indefeasibly paid in
full in cash.  In furtherance thereof the
Agent, may establish such reserves for Obligations hereunder (including any
contingent Obligations) as it may deem advisable in its reasonable business
judgment.  Any applicable mortgage(s), deed(s)
of trust or assignment(s) issued to the Agent on the Real Estate shall govern
the rights and remedies of the Agent thereto.

 

ARTICLE XI

 

TERMINATION

 

Section 11.1                            Except
as otherwise permitted herein, this Financing Agreement shall terminate on the
Initial Anniversary Date, or, if the Agent, the Lenders and the Loan Parties
agree to extend the Existing Scheduled Termination Date (as defined below) in
accordance with Section 11.3 below, on the
then effective Scheduled Termination Date.

 

Section 11.2                            Notwithstanding
anything to contrary contained in the foregoing Section 11.1:

 

(a)                                  the
Agent may terminate the Financing Agreement immediately upon the occurrence and
during the continuation of an Event of Default, provided,
however, that if the Event of Default is an event listed in Section 10.1(b) of this Financing Agreement, this
Financing Agreement shall terminate in accordance with Section 10.2
hereof; and

 

(b)                                 the
Loan Parties may terminate this Financing Agreement at any time upon thirty
(30) days’ prior written notice to the Agent (or such earlier notice as may be
agreed to by the Agent (in its sole discretion), provided that the Loan Parties
shall pay or cause to be paid to the Agent immediately on demand an Early
Termination Fee, if applicable.  Notice
of termination, as aforesaid, by the Borrowing Agent or any one Loan Party
shall be deemed to be notice by the Loan Parties for purposes hereof.

 

Section 11.3                            (a)                                  The
Borrowers may request, by irrevocable notice to the Agent and each of the
Lenders not less than one hundred twenty (120) days prior to the Initial
Anniversary Date, or if the Scheduled Termination Date has been extended in
accordance with this Section 11.3,
the Scheduled Termination Date then in effect (the Initial Anniversary Date or
the then effective Scheduled Termination Date being referred to as the “Existing Scheduled Termination Date”), to extend the
Existing Scheduled Termination Date for a period of one (1) year from the
Effective Date (as defined below); provided, however, that in no event shall the final Scheduled Termination
Date be later than the date which is thirty (30) years from the date
hereof.  Notice given pursuant to this Section 11.3 shall be substantially in the form of Exhibit I hereto (a “Request for Extension of
Scheduled Termination Date”) and shall specify, inter alia,
the new Scheduled Termination Date to be in effect following such extension
(the “Requested Scheduled Termination Date”).  Each Lender shall notify the Loan Parties and
the Agent of its acceptance or non-acceptance of the applicable request to
extend the Scheduled Termination Date by counter-signing the Request for
Extension of Scheduled Termination Date and returning the same to the Loan
Parties and the Agent at their respective addresses as set forth in Section 12.6 on or before the date that is ninety (90)
days prior to the Scheduled Termination Date then in effect.

 

(b)                                 The extension of the Existing Scheduled
Termination Date shall become effective on the
first date on which the following conditions, in the discretion of the
Agent, have been satisfied (the “Effective Date”):

 

(i)                                     the
Effective Date shall have occurred on or prior to the Existing Scheduled
Termination Date;

 

98

 

(ii)                                  the
Agent and each Lender shall have timely received a duly completed Request for
Extension of Scheduled Termination Date;

 

(iii)                               each
Lender shall have accepted the applicable Request for Extension of Scheduled
Termination Date and shall have timely returned a duly executed acknowledgement
and acceptance of such Request for Extension of Scheduled Termination Date to
the Agent and the Loan Parties;

 

(iv)                              each
of the terms and conditions set forth in Section 2.2 (b) and
(c) shall have been satisfied; and

 

(v)                                 the Borrowing Agent shall have delivered to each
Lender, for each existing Promissory Note issued by each Borrower to such
Lender, a new Promissory Note, maturing on the Requested Scheduled Termination
Date, in the aggregate principal amount of the Loans owed by such Borrowers to
such Lender as of the Existing Scheduled Termination Date; and

 

(c)                                  For
the avoidance of doubt, from and
after the Effective Date, the Revolving
Credit Commitments, if any, of the Lenders in effect on such date shall
continue until the Requested Scheduled Termination Date specified in the
Request for Extension of Scheduled Termination Date, and the term “Scheduled Termination Date”, as used in this Financing
Agreement shall, on and after the Effective Date but subject to any further
right of extension pursuant to Section 11.3(a),
mean and refer to such Requested Scheduled Termination Date.  Promptly upon each Lender’s receipt of the
new Promissory Notes described in Section 11.3(b)(v)
above, each Lender shall return each existing Promissory Note issued by each
Borrower to such Lender to each such Borrower marked cancelled.

 

Section 11.4                            All
Obligations shall become due and payable as of the effective date of any
termination under Article X or Article XI of this Financing Agreement, as the case may
be, and, pending a final accounting, the Agent may withhold any balances in the
Loan Parties’ Revolving Loan Accounts (unless supplied with an indemnity
satisfactory to the Agent in its sole discretion) to cover all of the
Obligations, whether absolute or contingent, including, but not limited to, cash
reserves for any contingent Obligations, including an amount of 105% of the
face amount of any outstanding Letters of Credit with an expiry date after the
effective date of termination of this Financing Agreement until such Letters of
Credit are replaced with new letters of credit. 
All of the Agent’s rights, liens and security interests shall continue
after any termination until all Obligations have been paid and satisfied in
full in cash.

 

Section 11.5                            CIT
Financial may appoint CIT to act as its agent, pursuant to such terms and
conditions as shall be desired or required by the Canadian Lenders.  In such event, the Canadian Borrower shall
enter into the agency agreement for the purpose of acknowledging and confirming
the appointment of CIT as agent, and the directions and authorizations
contained therein.

 

ARTICLE XII

 

MISCELLANEOUS

 

Section 12.1                            The
Loan Parties hereby waive diligence, notice of intent to accelerate, notice of
acceleration, demand, presentment and protest and any notices thereof as well
as notice of nonpayment.  No delay or
omission of the Agent or the Loan Parties to exercise any right or remedy
hereunder, whether before or after the happening of any Event of Default, shall
impair any such right or shall operate as a waiver thereof or as a waiver of
any such Event of Default.  No single or
partial exercise by the Agent of any right or remedy precludes any other or
further exercise thereof, or precludes any other right or

 

99

 

remedy.  The
rights and remedies of the Agent and the other Secured Parties hereunder and
under the other Loan Documents are cumulative and are in addition to, and are
not exclusive of, any rights and remedies provided by law.

 

Section 12.2                            This
Financing Agreement and the other Loan Documents executed and delivered in
connection therewith constitute the entire agreement between the Loan Parties
and the Agent; supersedes any prior agreements; and shall bind and benefit the
Loan Parties and the Agent and their respective successors and assigns.

 

Section 12.3                            In
no event shall the Loan Parties, upon demand by the Agent for payment of any
Indebtedness relating hereto, by acceleration of the maturity thereof, or
otherwise, be obligated to pay interest and fees in excess of the amount
permitted by law.  Regardless of any
provision herein or in any agreement made in connection herewith, the Agent
shall never be entitled to receive, charge or apply, as interest on any
Indebtedness relating hereto, any amount in excess of the maximum amount of
interest permissible under applicable law. 
If the Agent ever receives, collects or applies any such excess, it
shall be deemed a partial repayment of principal and treated as such; and if
principal is paid in full, any remaining excess shall be refunded to the Loan
Parties.  This Section 12.3
shall control every other provision hereof, the Loan Documents and of any other
agreement made in connection herewith.

 

Section 12.4                            If
any provision hereof or of any other agreement made in connection herewith is
held to be illegal or unenforceable, such provision shall be fully severable,
and the remaining provisions of the applicable agreement shall remain in full
force and effect and shall not be affected by such provision’s severance.  Furthermore, in lieu of any such provision,
there shall be added automatically as a part of the applicable agreement a
legal and enforceable provision as similar in terms to the severed provision as
may be possible.

 

Section 12.5                            EACH
OF THE LOAN PARTIES, THE LENDERS AND THE AGENT EACH HEREBY WAIVE ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS FINANCING
AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED
THEREUNDER.  EACH OF THE LOAN PARTIES
HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE
OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED.  IN NO EVENT WILL THE AGENT BE LIABLE FOR LOST
PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.  EACH OF THE LOAN PARTIES HEREBY IRREVOCABLY
AND UNCONDITIONALLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY
RIGHT IT MAY HAVE TO CLAIM OR RECOVER ANY SPECIAL, EXEMPLARY, PUNITIVE OR
CONSEQUENTIAL DAMAGES IN ANY LEGAL ACTION OR PROCEEDING IN RESPECT OF THIS
FINANCING AGREEMENT, THE GUARANTY OR ANY OTHER LOAN DOCUMENT.

 

Section 12.6                            Except
as otherwise herein provided, any notice or other communication required
hereunder shall be in writing (provided that, any electronic communications
from any of the Loan Parties with respect to any request, transmission,
document, electronic signature, electronic mail or facsimile transmission shall
be deemed binding on the Loan Parties for purposes of this Financing Agreement,
provided further that any such transmission shall not relieve the Loan Parties
from any other obligation hereunder to communicate further in writing), and
shall be deemed to have been validly served, given or delivered when hand
delivered or sent by facsimile, or three days after deposit in the United State
mails, with proper first class postage prepaid and addressed to the party to be
notified or to such other address as any party hereto may designate for itself
by like notice, as follows:

 

100

 

(A)                              if
to CIT, as Agent, at:

 

The CIT Group/Business
Credit, Inc.

1211 Avenue of the
Americas, 22nd Floor

New York, NY  10036

Attn:  Regional Credit Manager

Fax No.:  (212) 536-1295

 

(B)                                if
to CIT Financial, as Agent, at:

 

CIT Financial Limited

c/o The CIT
Group/Business Credit, Inc.

1211 Avenue of the
Americas, 22nd Floor

New York, NY  10036

Attn:  Regional Credit Manager

Fax No.:  (212) 536-1295

 

(C)                                if
to the Loan Parties at the following address, in care of the Borrowing Agent:

 

Cellu Tissue Corporation

3440 Francis Road

Alpharetta, Georgia 30004

Attn:  Chief Financial Officer

Fax No.:  (678) 393-2657

 

with a courtesy copy to
its counsel:

 

Proskauer Rose LLP

1585 Broadway

New York, NY  10036

Attn:  Allan R. Williams, Esq.

Fax No.:  (212) 969-2900

 

(C)  if to any other Lender hereunder, at its
Domestic Lending Office specified opposite its name on Schedule 1
(Commitments) or at the address set forth therefor in the applicable
Assignment and Assumption Agreement;

 

or as to each party, at
such other address as shall be designated by such party in a written notice to
the other parties complying as to delivery with the terms of this Section 12.6, provided, however,
that the failure of Agent or any Lender to provide the Loan Parties’ counsel
with a copy of such notice shall not invalidate any notice given to the Loan
Parties and shall not give the Loan Parties any rights, claims or defenses due
to the failure of Agent or any Lender to provide such additional notice.

 

Section 12.7                            THE
VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS FINANCING AGREEMENT AND THE
OTHER LOAN DOCUMENTS SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK,
EXCEPT TO THE EXTENT THAT ANY OTHER LOAN DOCUMENT INCLUDES AN EXPRESS ELECTION
TO BE GOVERNED BY THE LAWS OF ANOTHER JURISDICTION.

 

101

 

Section 12.8                            This
Financing Agreement may be executed in any number of counterparts and by
different parties in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. 
Signature pages may be detached from multiple separate counterparts and
attached to a single counterpart so that all signature pages are attached to
the same document.  Delivery of an
executed signature page of this Financing Agreement by facsimile transmission
shall be as effective as delivery of a manually executed counterpart
hereof.  A set of the copies of this
Financing Agreement signed by all parties shall be lodged with Cellu Tissue and
the Agent.

 

Section 12.9                            Notwithstanding
any contrary provision in any Loan Document, each Loan Document is subject to
the provisions of the Intercreditor Agreement. 
The Agent and each Lender acknowledge and agree to be bound by the
provisions of the Intercreditor Agreement.

 

Section 12.10                     This
Financing Agreement, together with all of the other Loan Documents and all
certificates and documents delivered hereunder or thereunder, embodies the
entire agreement of the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof.

 

Section 12.11                     Any legal
action, suit or proceeding with respect to this Financing Agreement or any
other Loan Document may be brought in the courts of the State of New York or
the United States of America for the Southern District of New York, and
appellate courts thereof, and, by execution and delivery of this Financing
Agreement, each Loan Party hereby accepts for itself and in respect of its
property, generally and unconditionally, the jurisdiction of the aforesaid
courts.  Each Loan Party hereby
irrevocably waives any objection, including, without limitation, any objection
to the laying of venue or based on the grounds of forum non conveniens, which
may now or hereafter have to the bringing of any such action, suit or
proceeding in such respective jurisdictions and consents to the granting of
such legal or equitable relief as is deemed appropriate by the court.

 

Section 12.12                     Each Loan
Party irrevocably consents to the service of process of any of the aforesaid courts
in any such action, suit or proceeding by the mailing of copies thereof by
registered or certified mail (or any substantially similar form of mail),
postage prepaid, to such Loan Party at its address provided herein, such
service to become effective when received or ten (10) days after such mailing,
whichever first occurs.  Nothing herein
shall affect the right of the Agent and the Lenders to serve process in any
other manner permitted by law or to commence legal proceedings or otherwise
proceed against any Loan Party in any other jurisdiction.

 

ARTICLE XIII

 

AGREEMENT BETWEEN THE
LENDERS

 

Section 13.1                            (a)                                  The
Agent, for the account of the Lenders, shall disburse all Loans and advances to
the Borrowing Agent or the applicable Borrowers and shall handle all
collections of Collateral and repayment of Obligations.  It is understood that for purposes of
advances of Revolving Loans to the Loan Parties and for purposes of this Article XIII the Agent is using the funds of the Agent.

 

(b)                                 Unless
the Agent shall have been notified in writing by any Lender prior to any
advance to the Loan Parties that such Lender will not make the amount which
would constitute its share of the borrowing on such date available to the
Agent, the Agent may assume that such Lender shall make such amount available
to the Agent on a Settlement Date, and the Agent may, in reliance upon such
assumption, make available to the Loan Parties a corresponding amount.  A certificate of the Agent submitted to any
Lender with respect to any amount owing under this subsection shall be
conclusive, absent manifest error.  If
such Lender’s share of such borrowing is not in fact made available to the
Agent

 

102

 

by such Lender on the Settlement Date, such Lender and
the Borrowers severally agree to repay to the Agent forthwith, on demand, such
corresponding amount together with interest thereon, for each day from the date
such amount is made available to the Borrowers until the date such amount is
repaid to the Agent, at (i) in the case of the US Borrowers, the rate per
annum applicable hereunder at the time of such borrowing to Chase Bank Rate
Loans, (ii) in the case of the Canadian Borrower, the rate per annum applicable
hereunder at the time of such borrowing to Canadian Prime Rate Loans and
(iii) in the case of such Lender, the Federal Funds Rate, in each case
without prejudice to any rights which the Agent or the Loan Parties, may have
against such Lender hereunder.  Nothing
contained in this subsection shall relieve any Lender which has failed to
make available its ratable portion of any borrowing hereunder from its
obligation to do so in accordance with the terms hereof.  Nothing contained herein shall be deemed to
obligate the Agent to make available to the Loan Parties the full amount of a
requested advance when the Agent has any notice (written or otherwise) that any
of the Lenders will not advance its Ratable Portion thereof.

 

Section 13.2                            On
the Settlement Date, the Agent and the Lenders shall each remit to the other,
in immediately available funds, all amounts necessary so as to ensure that, as
of the Settlement Date, the Lenders shall have their proportionate share of all
outstanding Obligations.

 

Section 13.3                            The
Agent shall forward to each Lender, at the end of each month, a copy of the
account statement rendered by the Agent to the Loan Parties.

 

Section 13.4                            The
Agent shall, after receipt of any principal and interest and fees earned under
this Financing Agreement, promptly remit to the Lenders:  (a) their Ratable Portion of all fees, provided, however, that the Lenders (other than CIT in its
role as the Agent) shall (i) not share in the Administrative Management
Fee, the Documentation Fee, the fees provided for in Section 8.9
hereof, the fees payable in connection with Loans not funded by such
Lender and interest payable on advances made by Agent prior to a Settlement
Date and (ii) receive their share of the Loan Facility Fee in accordance
with their respective agreements with the Agent; and (b) interest
(computed at the rate and as provided for in Article VIII
of this Financing Agreement) on all Revolving Loans made by the Lenders that
are either (i) outstanding at such time before such interest payment is
received by the Agent or (ii) advanced by the Lenders to the Agent on the
applicable Settlement Date, in each case prior to any adjustments as provided
in Article III hereof and in an amount
equal to their Ratable Portion thereof.

 

Section 13.5                            (a)                                  The
Loan Parties acknowledge that the Lenders with the prior written consent of the
Agent may sell participations in the loans and extensions of credit made and to
be made to the Loan Parties hereunder. 
The Loan Parties further acknowledge that in doing so, the Lenders may
grant to such participants certain rights which would require the participant’s
consent to certain waivers, amendments and other actions with respect to the
provisions of this Financing Agreement, provided that the consent of any such
participant shall not be required except for matters requiring the consent of
all Lenders hereunder as set forth in Section 14.10
hereof.  Each participant shall be
entitled to the benefits of Sections 8.11, 8.12,
8.16, 8.20 or 8.21 as if it were a Lender; provided,
however, that anything herein to the contrary notwithstanding, the
Borrowers shall not, at any time, be obligated to make under Sections 8.11, 8.12, 8.16, 8.20 or 8.21 to the
participants in the rights and obligations of any Lender (together with such
Lender) any payment in excess of the amount the Borrowers would have been
obligated to pay such Lender in respect of such interest had such participation
not been sold; provided  further
that such participant in the rights and obligations of such Lender shall have
no direct right to enforce any of the terms of this Agreement against the
Borrowers, the Agent or the other Lenders.

 

(b)                                 The
Loan Parties authorize each Lender to disclose to any participant or purchasing
Lender (each, a “Transferee”) and any prospective Transferee any and all
financial information in such Lender’s possession concerning the Loan Parties
and their affiliates which has been

 

103

 

delivered to such Lender by or on behalf of the Loan
Parties pursuant to this Financing Agreement or which has been delivered to
such Lender by or on behalf of the Loan Parties in connection with such
Lender’s credit evaluation of the Loan Parties and their affiliates prior to
entering into this Financing Agreement, provided that such Transferee agrees to
hold such information in confidence in the ordinary course of its business and Section 14.14 hereof.

 

Section 13.6                            The
Loan Parties hereby agree that each Lender is solely responsible for its
portion of the Revolving Line of Credit and that neither the Agent nor any
Lender shall be responsible for, nor assume any obligations for the failure of
any Lender to make available its portion of the Revolving Line of Credit.  The failure of any Lender (each such Lender,
a “Defaulting Lender”) to make the Loans or
any payment required by it on any Settlement Date, or any other date specified
herein, shall not relieve any other Lender of its obligations to make such Loan
or payment on such date.  Further, should
any Lender refuse to make available its portion of the Revolving Line of
Credit, then any other Lender or Lenders may, but without obligation to do so,
increase, unilaterally, its portion of the Revolving Line of Credit in which
event the Loan Parties are so obligated to such other Lender or Lenders.

 

Section 13.7                            In
the event that the Agent, the Lenders or any one of them is sued or threatened
with suit by the Loan Parties or any one of them, or by any receiver, trustee,
creditor or any committee of creditors on account of any preference, voidable
transfer or lender liability issue, alleged to have occurred or been received
as a result of, or during the transactions contemplated under this Financing
Agreement, then in such event any money paid in satisfaction or compromise of
such suit, action, claim or demand and any expenses, costs and attorneys’ fees
paid or incurred in connection therewith, whether by the Agent, the Lenders or
any one of them, shall be (i) in the case of any preference or voidable
transfer issue, shared proportionately by the Lenders and (ii) in the case of
any lender liability issue, (x) paid by the applicable Lender individually for
its own account or (y) if such lender liability lawsuit is brought or
threatened against the agent, shared proportionately by the Lenders; provided, that in the case of clause (y)
no Lender shall be liable for the payment of any portion of such expenses,
costs or fees resulting from the Agent’s gross negligence or willful
misconduct.  In addition, any costs,
expenses, fees or disbursements incurred by outside agencies or attorneys
retained by the Agent to effect collection or enforcement of any rights in the
Collateral, including enforcing, preserving or maintaining rights under this
Financing Agreement shall be shared proportionately between and among the Lenders
to the extent not reimbursed by the Loan Parties or from the proceeds of
Collateral.  The provisions of this Section 13.7 shall not apply to any suits, actions,
proceedings or claims that (i) predate the date of this Financing
Agreement or (ii) are based on transactions, actions or omissions that
predate the date of this Financing Agreement.

 

Section 13.8                            (a)                                  Each
of the Lenders agrees with each other Lender that any money or assets of the
Loan Parties held or received by such Lender, no matter how or when received,
shall be applied to the reduction of the Obligations (to the extent permitted
hereunder and in accordance with clause (b)
below) after (x) the occurrence of an Event of Default and (y) the
election by the Required Lenders to accelerate the Obligations.  In addition, the Loan Parties authorize, and
the Lenders shall have the right, without notice, upon any amount becoming due
and payable hereunder, to set-off and apply against any and all property held
by, or in the possession of, such Lender the Obligations due such Lenders.

 

(b)                                 Each
Loan Party hereby irrevocably waives the right to direct the application of any
and all payments in respect of the Obligations and any proceeds of Collateral
after the occurrence and during the continuance of an Event of Default and
agrees that, notwithstanding the provisions of Section 4.3(c)
above, the Agent, subject to the terms of the Intercreditor Agreement, may and
upon either (A) the written direction of the Required Lenders or
(B) the acceleration of the Obligations pursuant to

 

104

 

Section 10.2 hereof, shall,
apply all payments in respect of any Obligations and all funds on deposit in
the Depository Account or any Blocked Account (including all proceeds arising
from a Reinvestment Event that are held in the Depository Account or any such
Blocked Account pending application of such proceeds as specified in a
Reinvestment Notice) and all other proceeds of Collateral in the following
order:  first,
to pay interest on and then principal of any portion of the Revolving Loans
that the Agent may have advanced on behalf of any Lender prior to any
Settlement Date for which the Agent has not then been reimbursed by such Lender
or the Borrowers; second, to
pay Obligations in respect of any expense reimbursements or indemnities then
due to the Agent; third, to
pay Obligations in respect of any expense reimbursements or indemnities then
due to the Lenders; fourth, to
pay Obligations in respect of any fees then due to the Agent or the Lenders, fifth ̧ to pay interest then due and
payable in respect of the Loans and any reimbursement obligations in connection
with any Letter of Credit Guaranties issued pursuant to this Financing
Agreement; sixth, to pay or prepay
principal amounts on the Loans and Letters of Credit and to provide cash
collateral for the undrawn amounts of any outstanding Letters of Credit in an
amount equal to one hundred five percent (105%) of such undrawn amount, ratably
to the aggregate principal amount of such Loans and reimbursement amounts in
respect of such letters of credit; and seventh, to
the ratable payment of all other Obligations; provided, however, that if sufficient funds are not available to fund
all payments to be made in respect of any Obligation described in any of clauses first, second, third, fourth, fifth, sixth and seventh above, the available funds being applied with
respect to any such Obligation (unless otherwise specified in such clause)
shall be allocated to the payment of such Obligations ratably, based on the
proportion of the Agent’s and each Lender’s interest in the aggregate
outstanding Obligations described in such clauses.  The order of priority set forth in clauses first, second, third, fourth, fifth, sixth and seventh above may at any time and from time to time be
changed by the agreement of the Required Lenders without necessity of notice to
or consent of or approval by the Borrowers, any Secured Party that is not a
Lender or by any other Person that is not a Lender.  The order of priority set forth in clauses first, second, third and fourth
above may be changed only with the prior written consent of the Agent in
addition to that of the Required Lenders.

 

(c)                                  Upon
the occurrence and during the continuance of any Event of Default, the Agent or
any Lender may, and is hereby authorized to, at any time and from time to time,
without notice to any Loan Party (any such notice being expressly waived by the
Loan Parties) and to the fullest extent permitted by law, 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 the Agent or such
Lender to or for the credit or the account of any Loan Party against any and
all obligations of the Loan Parties either now or hereafter existing under any
Loan Document, irrespective of whether or not the Agent or such Lender shall
have made any demand hereunder or thereunder and although such obligations may
be contingent or unmatured.  Each Lender
agrees to notify the Borrowing Agent promptly after any such set-off and
application made by the Agent or such Lender provided that the failure to give
such notice shall not affect the validity of such set-off and application.  The rights of the Agent and the Lenders under
this Section 13.8 are in addition to the
other rights and remedies (including other rights of set-off) which the Agents
and the Lenders may have under this Financing Agreement or any other Loan
Documents of law or otherwise.

 

(d)                                 If
any claim is ever made upon the Agent, or any Lender for repayment or recovery
of any amount or amounts received by the Agent or such Lender in payment or on
account of any of the Obligations, the Agent or such Lender shall give prompt
notice of such claim to each other Lender and the Borrowing Agent, and if the
Agent or such Lender repays all or part of such amount by reason of
(i) any judgment, decree or order of any court or administrative body
having jurisdiction over the Agent or such Lender or any of its property, or
(ii) any good faith settlement or compromise of any such claim effected by
the Agent, or Lender with any such claimant, then and in such event each Loan
Party agrees that (A) any such judgment, decree, order, settlement or
compromise shall be binding upon it notwithstanding the cancellation of any
Indebtedness hereunder or under the other Loan Documents or the

 

105

 

termination of this Financing Agreement or the other
Loan Documents, and (B) it shall be and remain liable to the Agent and
such Lender hereunder for the amount so repaid or recovered to the same extent
as if such amount had never originally been received by the Agent or such
Lender.

 

Section 13.9                            Each
of the Lenders and the Agent shall have the right at any time to assign to one
or more commercial banks, commercial finance lenders or other financial
institutions, in each case constituting an Eligible Assignee, all or a portion
of its rights and obligations under this Financing Agreement (including,
without limitation, its obligations under the Revolving Line of Credit, the US
Revolving Loans, the Canadian Revolving Loans and its rights and obligations
with respect to Letters of Credit); provided, however, so long as no Event of Default has occurred and is
existing, such assignment other than an assignment to an Affiliate or another
Lender shall be subject to the consent of the Borrowers, which consent shall
not be unreasonably withheld or delayed. 
Upon execution of an Assignment and Transfer Agreement, and receipt of
such Assignment and Transfer Agreement by the Agent (which shall be duly
recorded in the Revolving Loan Accounts), (a) the assignee thereunder
shall be a party hereto and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such assignment, have the rights
and obligations of the Agent as the case may be hereunder, (b) the Agent
and/or Lenders, as the case may be, shall, to the extent that rights and
obligations hereunder have been assigned by such Person pursuant to such
assignment, relinquish its rights and be released from its obligations under
this Financing Agreement and (c) give prompt notice thereof to the
Borrowers.  Within five (5) Business Days
after its receipt of such notice, the Borrowers, at their own expense, shall,
if requested by such assignee, execute and deliver to the Agent new Promissory
Notes to the order of such assignee in an amount equal to the Revolving Credit
Commitments and Loans assumed by it pursuant to such Assignment and Transfer
Agreement and, if the assigning Lender has surrendered any Promissory Note for
exchange in connection with the assignment and has retained Revolving Credit
Commitments or Loans hereunder, new Promissory Notes to the order of the
assigning Lender in an amount equal to the Revolving Credit Commitments and
Loans retained by it hereunder.  Such new
Promissory Notes shall be dated the same date as the surrendered Promissory
Notes and be in substantially the form of Exhibits A and B hereto, as applicable. 
The Loan Parties shall, if necessary, execute any documents reasonably
required to effectuate the assignments. 
No Lender (other than CIT) may assign its interest in the Loans and
advances and extensions of credit hereunder without the prior written consent
of the Agent; provided, however, that the
Agent’s consent shall not be required with respect to an assignment by any
Lender to any Affiliate of such Lender only if such assignment is with full
recourse to such Lender.  In the event
that the Agent consents to any such assignment by any other Lenders
(i) the amount being assigned shall in no event be less than the lesser of
(x) $5,000,000, in the case of US Revolving Loans and $500,000, in the
case of Canadian Revolving Loans or (y) the entire interest of such Lender
hereunder, (ii) such assignment shall be of a pro-rata portion of all of
such assigning Lender’s Loans and Revolving Credit Commitments hereunder and
(iii) the parties to such assignment shall execute and deliver to the
Agent an Assignment and Transfer Agreement, and, at the Agent’s election, a
processing and recording fee of $1,000 payable by the Loan Parties to the Agent
for its own account.  The Agent shall
maintain a copy of each Assignment and Transfer Agreement delivered to it and
record in the Revolving Loan Accounts the names and addresses of the Lenders
and Issuing Banks and the principal amount of the Loans and reimbursement
obligations owing to each Lender and Issuing Bank from time to time and the
Revolving Credit commitments of each Lender. 
Any assignment pursuant to this Section 13.9
shall not be effective unless such assignment is recorded in the applicable
Revolving Loan Accounts maintained by the Agent.

 

ARTICLE XIV

 

AGENCY

 

Section 14.1                            (a)                                  Each
Lender hereby irrevocably designates and appoints CIT as the Agent under this
Financing Agreement and each other Loan Document and agrees that CIT’s
Affiliate,

 

106

 

CIT Financial, shall act as Agent with respect to the
Canadian Revolving Sub-Line of Credit and Collateral of the Canadian Borrower.

 

(b)                                 Each
Lender irrevocably authorizes CIT and/or CIT Financial, as the context
requires, as Agent to take such actions as agent on its behalf under the
provisions of this Financing Agreement, the Collateral Documents, the
Intercreditor Agreement, any other Loan Document and all ancillary documents
and to exercise such powers and perform such duties as are expressly delegated
to the Agent by the terms of this Financing Agreement, the Collateral
Documents, the Intercreditor Agreement, any other Loan Document and all
ancillary documents together with such other powers as are reasonably
incidental thereto.  Notwithstanding any
provision to the contrary elsewhere in this Financing Agreement or any other
Loan Document, the Agent shall not have any duties or responsibilities, except
those expressly set forth herein, or any fiduciary relationship with any Lender
and no implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Financing Agreement and the ancillary
documents or otherwise exist against the Agent.

 

(c)                                  Each
Lender and each Issuing Bank agrees that any action taken by the Agent or the
Required Lenders (or, where required by the express terms of this Financing
Agreement, a greater proportion of the Lenders) in accordance with the
provisions of this Financing Agreement or of the other Loan Documents, and the
exercise by the Agent or the Required Lenders (or, where so required, such
greater proportion) of the powers set forth herein or therein, together with
such other powers as are reasonably incidental thereto, shall be authorized and
binding upon all of the Lenders and other Secured Parties.  Without limiting the generality of the
foregoing, the Agent shall have the sole and exclusive right and authority to
(i) act as the disbursing and collecting agent for the applicable Lenders
and the Issuing Bank with respect to all payments and collections arising in
connection herewith and with the Collateral Documents, (ii) execute and
deliver each Collateral Document and accept delivery of each such agreement
delivered by any Loan Party or any of its respective Subsidiaries,
(iii) act as collateral agent for the Lenders and the other Secured Parties
for purposes of the perfection of all security interests and Liens created by
such agreements and all other purposes stated therein, provided,
however, that the Agent hereby appoints,
authorizes and directs each Lender and Issuing Bank to act as collateral sub-agent
for the Agent, the Lenders and the Issuing Bank for purposes of the perfection
of all security interests and Liens with respect to each Loan Party’s
respective Deposit Accounts maintained with, and cash and Cash Equivalents held
by, such Lender or such Issuing Bank, (iv) manage, supervise and otherwise
deal with the Collateral, (v) take such action as is necessary or
desirable to maintain the perfection and priority of the security interests and
Liens created or purported to be created by the Collateral Documents and
(vi) except as may be otherwise specifically restricted by the terms
hereof or of any other Loan Document, exercise all remedies given to the Agent,
the Lenders and the other Secured Parties with respect to the Collateral under
the Loan Documents relating thereto, applicable law or otherwise.

 

(d)                                 Each
of the Lenders and the Issuing Bank hereby directs the Agent to release (or, in
the case of clause (ii) below, release or
subordinate) any Lien held by the Agent for the benefit of the Lenders and the
other Secured Parties against any of the following:

 

(i)                                     all
of the Collateral, upon termination of the Revolving Credit Commitments and
payment and satisfaction in full in cash of all Loans, reimbursement
obligations in respect of Letters of Credit and all other Obligations that the
Agent has been notified in writing are then due and payable (and, in respect of
contingent Obligations in respect of Letters of Credit, with respect to which
cash collateral has been deposited or a back-up letter of credit has been
issued, in either case on terms satisfactory to the Agent and the applicable
Issuing Bank);

 

(ii)                                  any
assets that are subject to a Lien of the type described in clause (b) of
the definition of Permitted Encumbrances; and

 

107

 

(iii)                               any
part of the Collateral Disposed of by a Loan Party if such Disposition is
expressly permitted by this Financing Agreement (or permitted pursuant to a
waiver or consent of a transaction otherwise prohibited by this Financing
Agreement).

 

Each of the Lenders and
the Issuing Bank hereby directs the Agent to execute and deliver or file such
termination and partial release statements and do such other things as are
necessary to release Liens to be released pursuant to this Section 14.1
promptly upon the effectiveness of any such release.

 

Section 14.2                            The
Agent may execute any of its duties under this Financing Agreement and each
other Loan Document by or through agents or attorneys-in-fact and shall be
entitled to the advice of counsel concerning all matters pertaining to such
duties.

 

Section 14.3                            Neither
the Agent nor any of its officers, directors, employees, agents, or
attorneys-in-fact shall be (i) liable to any Lender for any action
lawfully taken or omitted to be taken by it or such person under or in
connection with this Financing Agreement, any other Loan Documents and all
ancillary documents (except for its or such person’s own gross negligence or
willful misconduct), or (ii) responsible in any manner to any of the
Lenders for any recitals, statements, representations or warranties made by the
Loan Parties or any officer thereof contained in this Financing Agreement or
any other Loan Document or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Financing Agreement, any other Loan Document or all
ancillary documents or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Financing Agreement, the other Loan
Documents and all ancillary documents or for any failure of the Loan Parties to
perform their obligations thereunder. 
The Agent shall not be under any obligation to any Lender to ascertain
or to inquire as to the observance or performance of any of the terms,
covenants or agreements contained in, or conditions of, this Financing
Agreement or the other Loan Documents or to inspect the properties, books or
records of the Loan Parties.  Without
limiting the generality of the foregoing, the Agent (i) may treat the
payee of the Loans as the owner thereof until the Agent receives a duly
executed Assignment and Transfer Agreement with respect to any assignment or
transfer thereof, pursuant to Section 13.9
hereof, signed by the assigning Lender and such transferee and in form
satisfactory to the Agent; (ii) may consult with legal counsel (including,
without limitation, counsel to the Agent), independent public accountants, and
other experts selected by any of them and shall not be liable for any action
taken or omitted to be taken in good faith by any of them in accordance with
the advice of such counsel or experts; (iii) shall not have any duty to
ascertain or to inquire as to the existence or possible existence of any
Default or Event of Default; (iv) shall not be deemed to have made any
representation or warranty regarding the existence, value or collectibility of
the Collateral, the existence, priority or perfection of the Agent’s Lien
thereon, or any certificate prepared by any Loan Party in connection therewith,
nor shall the Agent be responsible or liable to the Lenders for any failure to
monitor or maintain any portion of the Collateral; and (v) and shall not
be required to continue exercising any of the rights, authorities and powers
granted or available to the Agent in this Section 14.3
or in any other Loan Document.  The Agent
shall not be liable for any apportionment or distribution of payments made in
good faith pursuant to this Financing Agreement, and if any such apportionment
or distribution is subsequently determined to have been made in error the sole
recourse of any Lender to whom payment was due but not made, shall be to
recover from other Lenders any payment in excess of the amount which they are
determined to be entitled.  The Agent may
act in any manner it may deem appropriate, in its sole discretion, given the
Agent’s own interest in the Collateral as one of the Lenders and that the Agent
shall have no duty or liability whatsoever to any other Lender, except as
otherwise provided herein.

 

Section 14.4                            The
Agent shall be entitled to rely, and shall be fully protected in relying, upon
any note, writing, resolution, notice, consent, certificate, affidavit, letter,
cablegram, telegram, telecopy, telex or teletype message, statement, order or
other document or conversation believed by it to be genuine and correct and to
have been signed, sent or made by the proper person or persons and upon advice
and

 

108

 

statements of legal counsel (including, without
limitation, counsel to the Loan Parties), independent accountants and other
experts selected by the Agent.  The Agent
shall be fully justified in failing or refusing to take any action under this
Financing Agreement and all ancillary documents unless it shall first receive
such advice or concurrence of the Lenders, or the Required Lenders, as the case
may be, as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such
action.  The Agent shall in all cases be
fully protected in acting, or in refraining from acting, under this Financing
Agreement and all ancillary documents in accordance with a request of the
Lenders, or the Required Lenders, as the case may be, and such request and any
action taken or failure to act pursuant thereto shall be binding upon all the
Lenders.

 

Section 14.5                            The
Agent shall not be deemed to have knowledge or notice of the occurrence of any
Availability Event or any Default or Event of Default hereunder unless the
Agent has received written notice from a Lender or the Loan Parties describing
such Availability Event or Default or Event of Default.  In the event that the Agent receives such a
notice, the Agent shall promptly give notice thereof to the Lenders.  The Agent shall take such action with respect
to such Availability Event or Default or Event of Default as shall be
reasonably directed by the Lenders, or Required Lenders, as the case may be; provided
that unless and until the Agent shall have received such direction, the Agent
may in the interim (but shall not be obligated to) take such action, or refrain
from taking such action, with respect to such Availability Event or Default or
Event of Default as it shall deem advisable and in the best interests of the
Lenders.  In the event the Required
Lenders in their sole discretion continue to make Revolving Loans under this
Financing Agreement upon the occurrence of a Default or Event of Default, any
such Revolving Loans may be in such amounts (subject to Section 14.10
hereof) and on such additional terms and conditions as the Required Lenders may
deem appropriate.

 

Section 14.6                            Each
Lender expressly acknowledges that neither the Agent nor any of its officers,
directors, employees,  agents or
attorneys-in-fact has made any representations or warranties to it and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Loan Parties shall be deemed to constitute any representation or warranty by
the Agent to any Lender.  Each Lender
represents to the Agent that it has, independently and without reliance upon
the Agent or any other Lender and based on such documents and information as it
has deemed appropriate, made its own appraisal of and investigation into the
business, operations, property, financial and other condition and
creditworthiness of the Loan Parties and made its own decision to enter into
this Financing Agreement, and the Agent shall have no duty or responsibility,
either initially or on a continuing basis, to provide any Lender with any
credit or other information with respect thereto, whether coming into its
possession before the Closing Date or at any time or times thereafter.  Each Lender also represents that it will,
independently and without reliance upon the Agent 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 analysis, appraisals and decisions in taking or
not taking action under the Financing Agreement and to make such investigation
as it deems necessary to inform itself as to the business, operations,
property, financial and other condition or creditworthiness of the Loan Parties.  The Agent, however, shall provide the Lenders
with copies of all financial statements, projections and business plans which
come into the possession of the Agent or any of its officers, employees, agents
or attorneys-in-fact.  The Agent may act
in any manner it may deem appropriate, in its sole discretion, given the
Agent’s own interest in the Collateral as one of the Lenders and that the Agent
shall have no duty or liability whatsoever to any other Lender, except as
otherwise provided herein.

 

Section 14.7                            (a)                                  The
Lenders agree to indemnify the Agent in its capacity as such (to the extent not
reimbursed by the Loan Parties and without limiting the obligation of the Loan
Parties to do so), from and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements (including, without limitation, all Out-of-Pocket Expenses) of
any

 

109

 

kind whatsoever (including negligence on the part of
the Agent) which may at any time be imposed on, incurred by or asserted against
the Agent in any way relating to or arising out of this Financing Agreement or
any ancillary documents or any documents contemplated by or referred to herein
or the transactions contemplated hereby or any action taken or omitted by the
Agent under or in connection with any of the foregoing; provided that no
Lender shall be liable for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from the Agent’s gross negligence or
willful misconduct.  The agreements in
this Section 14.7 shall survive the
payment of the Obligations.

 

(b)                                 The
Agent will use its reasonable business judgment in handling the collection of
the Accounts, enforcement of its rights hereunder and realization upon the
Collateral but shall not be liable to the Lenders for any action taken or
omitted to be taken in good faith or on the written advice of counsel.  The Lenders expressly release the Agent from
any and all liability and responsibility (express or implied), for any loss,
depreciation of or delay in collecting or failing to realize on any Collateral,
the Obligations or any guaranties therefor and for any mistake, omission or
error in judgment in passing upon or accepting any Collateral or in making (or
in failing to make) examinations or audits or for granting indulgences or
extensions to the Loan Parties, any account debtor or any guarantor, other than
resulting from the Agent’s gross negligence or willful misconduct.

 

Section 14.8                            The
Agent may make loans to, and generally engage in any kind of business with the
Borrowers and the other Loan Parties as though the Agent were not the Agent
hereunder.  With respect to its Loans
made or renewed by it or Loan obligations hereunder as Lender, the Agent shall
have the same rights and powers, duties and liabilities under this Financing
Agreement as any Lender and may exercise the same as though it was not the
Agent and the terms “Lender” and “Lenders” shall include the Agent in its
individual capacity.

 

Section 14.9                            Any
Agent may resign as the Agent upon 30 days’ notice to the Lenders and such
resignation shall be effective upon the appointment of a successor Agent.  If the Agent shall resign as Agent, then the
Lenders shall appoint a successor Agent for the Lenders whereupon such
successor Agent shall succeed to the rights, powers and duties of the Agent and
the term “Agent” shall mean such successor agent effective upon its
appointment, and the former Agent’s rights, powers and duties as Agent shall be
terminated, without any other or further act or deed on the part of such former
Agent or any of the parties to this Financing Agreement; provided,
however, that so long as no Event of
Default has occurred and is continuing, no successor Agent shall be appointed
without the consent of the Borrowers which shall not be unreasonably withheld
or delayed.  After any retiring Agent’s
resignation hereunder as the Agent the provisions of this Article XIV
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was the Agent.

 

Section 14.10                     (a)  No
amendment or waiver of any provision of this Financing Agreement, the other
Loan Documents or the Intercreditor Agreement shall be effective unless the
same shall be in writing and signed by the Required Lenders (or, with the
consent of the Required Lenders, the Agent); provided, that no amendment
or waiver which results in any of the following shall be effective without the
prior written consent of all Lenders affected thereby: (i) amend the
Financing Agreement to (A) increase the Revolving Line of Credit (other
than the Facility Increase); (ii) reduce the interest rates or change the
form in which interest is paid; (iii) reduce or waive (A) any fees in
which the Lenders share hereunder, or (B) the repayment of any Obligations
due the Lenders; (iv) extend any scheduled principal or interest payment
date of the Obligations; (v) alter or amend (A) this Section 14.10 or (B) the definitions of Eligible
Accounts Receivable, Eligible Inventory, Collateral, First-Priority Collateral,
Second-Priority Collateral or Required Lenders; (vi) increase the advance
percentages against Eligible Accounts Receivable or Eligible Inventory or alter
or amend the Agent’s criteria for determining compliance with such definitions
of Eligible Accounts Receivable and/or Eligible Inventory if the effect thereof
is to

 

110

 

increase Availability; or (vii) except as
otherwise required in this Financing Agreement, release any guaranty or
Collateral in excess of $500,000 during any year.

 

(b)                                 Subject
to the provisions of this Section 14.10,
in all other respects the Agent is authorized by each of the Lenders to take
such actions or fail to take such actions under this Financing Agreement if the
Agent, in its reasonable discretion, deems such to be advisable and in the best
interest of the Lenders.  Notwithstanding
any provision to the contrary contained in this Financing Agreement (including
the provisions of this Section 14.10)
the Agent is authorized to take such actions or fail to take such actions in
connection with (i) the exercise of (A) any and all rights and
remedies under this Financing Agreement (including but not limited to the
exercise of rights and remedies under Section 10.2
of this Financing Agreement) and (B) its discretion in determining
compliance with the eligibility requirements of Eligible Accounts Receivable
and/or Eligible Inventory and establishing reserves against Availability in
connection therewith and/or (ii) the release of Collateral not to exceed
$500,000 in the aggregate during any Fiscal Year, and/or (iii) curing any
ambiguity, defect or inconsistency in the terms of this Financing
Agreement.  In the event the Agent
terminates this Financing Agreement pursuant to the written instructions of the
Required Lenders, the Agent will cease making any Loans or advances upon the
effective date of termination except for any Loans or advances which the Agent
deems, in its sole discretion, to be reasonably required to maintain, protect
or realize upon the Collateral.

 

(c)                                  If,
in connection with any proposed amendment, modification, discharge, waiver or
termination of this Financing Agreement (a “Proposed Change”)
requiring the consent of all affected Lenders, the consent of Required Lenders
is obtained but the consent of other Lenders whose consent is required is not
obtained (any such Lender whose consent is not obtained as described in this Section 14.10 being referred to as a “Non-Consenting Lender”), then, so long as the Lender acting
as the Agent is not a Non-Consenting Lender, at the Borrowers’ request, an
Eligible Assignee acceptable to the Agent (and if no Event of Default has
occurred and is continuing at such time, acceptable to the Borrowers) shall
have the right with the Agent’s consent and in the Agent’s sole discretion (but
shall have no obligation) to purchase from such Non-Consenting Lender, and such
Non-Consenting Lender agrees that it shall, upon the Agent’s request, sell and
assign to the Lender acting as the Agent or such Eligible Assignee, all of the
Revolving Credit Commitments, and outstanding Revolving Loans of such
Non-Consenting Lender for an amount equal to the principal balance of all Loans
held by the Non-Consenting Lender and all accrued interest and fees with
respect thereto through the date of sale; provided, however, that such purchase and sale shall not be effective
until (i) the Agent shall have received from such Eligible Assignee an
Assignment and Transfer Agreement in form and substance satisfactory to the
Agent and the Borrowers whereby such Eligible Assignee shall agree to be bound
by the terms hereof and (ii) such purchase is recorded in the applicable
Revolving Loan Account maintained by the Agent. 
Each Lender agrees that, if it becomes a Non-Consenting Lender, it shall
execute and deliver to the Agent an Assignment and Transfer Agreement to
evidence such sale and purchase and shall deliver to the Agent any Promissory
Note (if the assigning Lender’s Loans are evidenced by Promissory Notes)
subject to such Assignment and Transfer Agreement; provided,
however, that the failure of any
Non-Consenting Lender to execute an Assignment and Transfer Agreement shall not
render such sale and purchase (and the corresponding assignment) invalid.

 

Section 14.11                     Intentionally
deleted.

 

Section 14.12                     Intentionally
deleted.

 

Section 14.13                     If the
Agent is required at any time to return to the Loan Parties or to a trustee,
receiver, liquidator, custodian or other similar official any portion of the
payments made by the Loan Parties to the Agent as a result of a bankruptcy or
similar proceeding with respect to the Loan Parties, any guarantor or any other
person or entity or otherwise, then each Lender shall, on demand of the Agent,

 

111

 

forthwith return to the Agent its ratable share of any
such payments made to such Lender by the Agent, together with its ratable share
of interest and/or penalties, if any, payable by the Lenders; this provision
shall survive the termination of this Financing Agreement.

 

Section 14.14                     The Agent
and each Lender agrees to keep confidential any written or oral information
(a) provided to it by or on behalf of the Loan Parties or any of the their
respective Subsidiaries pursuant to or in connection with this Financing
Agreement or any other Loan Document or (b) obtained by the Agent or such
Lender based on a review of the books and records of the Loan Parties or any of
their respective Subsidiaries in accordance with its usual procedures for
protecting customer confidential information; provided that nothing herein
shall prevent any Lender from disclosing any such information (i) to the Agent,
the Issuing Bank or any other Lender, (ii) to any transferee, assignee or
participant which receives such information having been made aware of the
confidential nature thereof and having agreed to abide by the provisions of
this Section 14.14, (iii) to its employees,
directors, agents, attorneys, accountants and other professional advisors, and
to employees and officers of its affiliates who agree to be bound by the
provisions of this Section 14.14
and who have a need for such information in connection with this Financing
Agreement, (iv) upon the request or demand of any Governmental Authority,
rating agency or insurance regulator, (v) in response to any order of any
court or other Governmental Authority or as may otherwise be required pursuant
to any Requirement of Law or (vi) which has been publicly disclosed other
than in breach of this Financing Agreement.

 

Section 14.15                     Each
Lender hereby appoints the Agent and each other Lender as agent and bailee for
the purpose of perfecting the security interests in and liens upon the
Collateral in assets which, in accordance with Article 9 of the UCC (or,
if applicable, the corresponding provision of the PPSA), can be perfected only
by possession or control (or where the security interest of a secured party with
possession or control has priority over the security interest of another
secured party) and the Agent and each Lender hereby acknowledges that it holds
possession of or otherwise controls any such Collateral for the benefit of the
Agent and other Secured Parties.  Should
any Lender obtain possession or control of any such Collateral, such Lender
shall notify the Agent thereof, and, promptly upon the Agent’s request therefor
shall deliver such Collateral to the Agent or in accordance with the Agent’s
instructions.  Each Loan Party by its
execution and delivery of this Financing Agreement hereby consents to the
foregoing.

 

Section 14.16                     With
respect to its Ratable Portion of the Revolving Credit Commitment and the Loans
made by it, the Agent shall have and may exercise the same rights and powers
hereunder and is subject to the same obligations and liabilities as and to the
extent set forth herein for any other Lender or maker of the Loans.  The terms “Lenders” or “Required Lenders” or
any similar terms shall, unless the context clearly otherwise indicates,
include the Agent in its individual capacity as a Lender or one of the Required
Lenders.  The Agent and its Affiliates
may accept deposits from, lend money to, and generally engage in any kind of
banking, trust or other business with any Loan Party as if it were not acting
as the Agent pursuant hereto without any duty to account to the other Lenders.

 

ARTICLE XV

 

GUARANTY

 

Section 15.1                            (a)  Each
Guarantor unconditionally and irrevocably guaranties the full and punctual
payment when due, whether at stated maturity or earlier, by reason of
acceleration, Mandatory Prepayment or otherwise in accordance with the terms of
this Financing Agreement or any other Loan Document, and performance, of the
Guarantied Obligations of such Guarantor, whether or not from time to time
reduced or extinguished or hereafter increased or incurred, whether or not
recovery may be or hereafter may become barred by any statute of limitations,
whether or not enforceable against the applicable Borrower, whether now or
hereafter existing, or whether due or to become due, including

 

112

 

principal, interest (including interest at the
contract rate applicable upon default accrued or accruing after the commencement
of any proceeding under the Bankruptcy Code, whether or not such interest is an
allowed claim in such proceeding), fees and costs of collection.  The Guarantors further agree that the
Guarantied Obligations may be extended or renewed, in whole or in part, without
notice to or further assent from them, and they will remain bound upon this
guaranty notwithstanding any extension or renewal of any of the Guarantied
Obligations.  The Guarantors hereby
further jointly and severally agree that if the applicable Borrowers shall fail
to pay in full when due (whether at stated maturity, by acceleration or
otherwise) any of the Guarantied Obligations, the Guarantors shall promptly pay
the same, without any demand or notice whatsoever, and that in the case of any
extension of time of payment or renewal of any of the Guarantied Obligations,
the same shall be promptly paid in full when due (whether at extended maturity,
by acceleration or otherwise) in accordance with the terms of such extension or
renewal.  For the avoidance of doubt, the
Canadian Borrower shall not guaranty any of the Obligations of the Borrowers.

 

(b)                                 Each
Guarantor waives presentation to, demand for payment from and protest to the
Borrowers or the Guarantors, and also waives notice of protest for
nonpayment.  The Obligations of the
Guarantors hereunder shall not be affected by (i) the failure of the Agent
or any Lender to assert any claim or demand or to enforce any right or remedy
against the Borrowers or any other Guarantors of the Guarantied Obligations
under the provisions of this Financing Agreement or any other Loan Document or
otherwise; (ii) any extension or renewal of any provision hereof or
thereof; (iii) any rescission, waiver, compromise, acceleration, amendment
or modification of any of the terms or provisions of any of the Loan Documents;
(iv) the release, exchange, waiver or foreclosure of any security held by
the Agent for the Obligations or any of them; (v) the failure of the Agent
or any Lender to exercise any right or remedy against any other Guarantors of
the Obligations; or (vi) the release or substitution of any other
Guarantors of the Obligations.

 

(c)                                  Each
Guarantor further agrees that this guaranty constitutes a guaranty of
performance and of payment when due and not just of collection, and waives any
right to require that any resort be had by the Agent or any Lender to any
security held for payment of the Obligations or to any balance of any deposit,
account or credit on the books of the Agent or any Lender in favor of any
Borrower or the Guarantors, or to any other person.

 

(d)                                 The
Guarantors hereby waive any defense that they might have based on a failure to
remain informed of the financial condition of the Borrowers and of the
Guarantors and any circumstances affecting the ability of the Borrowers to
perform under this Financing Agreement.

 

(e)                                  The
Guarantors’ guaranty shall not be affected by the genuineness, validity,
regularity or enforceability of the Obligations or any other instrument
evidencing any Obligations, or by the existence, validity, enforceability,
perfection, or extent of any collateral therefor or by any other circumstance
relating to the Obligations which might otherwise constitute a defense to this
guaranty (other than the defense of final and indefeasible payment in full in
cash of all Obligations).  Neither of the
Agent, nor any of the Lenders makes any representation or warranty in respect
to any such circumstances or shall have any duty or responsibility whatsoever
to the Guarantors in respect of the management and maintenance of the
Obligations.

 

(f)                                    Subject
to the provisions of Section 10.1,
upon the Guarantied Obligations becoming due and payable (by acceleration or
otherwise), the Agent and the Lenders shall be entitled to immediate payment of
such Guarantied Obligations by the Guarantors upon written demand by the Agent

 

Section 15.2                            The
Obligations of the Guarantors hereunder shall not be subject to any reduction,
limitation, impairment or termination for any reason, including, without
limitation, any claim

 

113

 

of waiver, release, surrender, alteration or
compromise, and shall not be subject to any defense or set-off, counterclaim,
recoupment or termination whatsoever by reason of the invalidity, illegality or
unenforceability of the Guarantied Obligations. 
Without limiting the generality of the foregoing, the obligations of the
Guarantors hereunder shall not be discharged or impaired or otherwise affected
by the failure of the Agent or a Lender to assert any claim or demand or to
enforce any remedy under this Financing Agreement or any other agreement, by
any waiver or modification of any provision thereof, by any default, failure or
delay, willful or otherwise, in the performance of the Obligations, or by 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 the Guarantors or
would otherwise operate as a discharge of the Guarantors as a matter of law,
unless and until the Guarantied Obligations are paid in full in cash.

 

Section 15.3                            Upon
payment by the Guarantors of any sums to the Agent or a Lender hereunder, all
rights of the Guarantors against any Borrower arising as a result thereof by
way of right of subrogation or otherwise, shall in all respects be subordinate
and junior in right of payment to the prior final and indefeasible payment in
full in cash of all the Obligations.  If
any amount shall be paid to the Guarantors for the account of any Borrower, such
amount shall be held in trust for the benefit of the Agent and the Lenders and
shall forthwith be paid to the Agent and the Lenders to be credited and applied
to the Obligations, whether matured or unmatured.

 

Section 15.4                            Notwithstanding
any provision herein contained to the contrary, each Guarantor’s liability
hereunder shall be limited to an amount not to exceed as of any date of
determination the greater of: (i) the amount of all Loans and other
extensions of credit (including Letters of Credit and Letter of Credit
Guaranties) advanced under this Financing Agreement and directly or indirectly
re-loaned or otherwise transferred to, or incurred for the benefit of, such
Guarantor, plus interest thereon at the applicable rate specified in this
Financing Agreement plus all fees and expenses arising hereunder with respect
thereto; or (ii) the amount which could be claimed by the Agent and the
Lenders from such Guarantor under this Article XV
without rendering such claim voidable or avoidable under Section 548 of
chapter 11 of the Bankruptcy Code or under any applicable state Uniform
Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute
or common law after taking into account, among other things, such Guarantor’s
right of contribution and indemnification from each other Guarantor under Section 15.5.

 

Section 15.5                            (a)  To
the extent that any Guarantor shall make a payment under this Article XV of all or any of the Guarantied Obligations
(a “Guarantor Payment”) which, taking into
account all other Guarantor Payments then previously or concurrently made by
the other Guarantors, exceeds the amount which such Guarantor would otherwise
have paid if each Guarantor had paid the aggregate Guarantied Obligations
satisfied by such Guarantor Payment in the same proportion that such
Guarantor’s “Allocable Amount” (as defined below) (in effect immediately prior
to such Guarantor Payment) bore to the aggregate Allocable Amounts of all of
Guarantors in effect immediately prior to the making of such Guarantor Payment,
then, following indefeasible payment in full in cash of the Obligations and
termination of the Revolving Credit Commitments, such Guarantor shall be
entitled to receive contribution and indemnification payments from, and be
reimbursed by, each of the other Guarantors for the amount of such excess, pro rata based upon their respective Allocable Amounts in
effect immediately prior to such Guarantor Payment.

 

(b)                                 As
of any date of determination, the “Allocable Amount”
of any Guarantor shall be equal to the maximum amount of the claim which could
then be recovered from such Guarantor under this Article XV
without rendering such claim voidable or avoidable under Section 548 of
chapter 11 of the Bankruptcy Code or under any applicable state Uniform
Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute
or common law.

 

114

 

(c)                                  This
Section 15.5 is intended only to
define the relative rights of Guarantors and nothing set forth in this Section 15.5 is intended to or shall impair the
obligations of Guarantors, jointly and severally, to pay any amounts as and
when the same shall become due and payable in accordance with the terms of this
Section 15.5.

 

(d)                                 The
rights of the parties under this Section 15.5
shall be exercisable upon the full and indefeasible payment of the Obligations
and the termination of this Financing Agreement and the other Loan Documents.

 

(e)                                  The
parties hereto acknowledge that the rights of contribution and indemnification
hereunder shall constitute assets of any Guarantor to which such contribution
and indemnification is owing.

 

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK]

 

115

 

IN
WITNESS WHEREOF,
the parties hereto have caused this Financing Agreement to be effective,
executed, accepted and delivered in New York, by their proper and duly
authorized officers as of the date set forth above.

 

	
   

  	
  US
  BORROWERS:

  
	
   

  	
   

  
	
   

  	
  CELLU
  TISSUE LLC, as Borrower and

  Borrowing Agent

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  COASTAL
  PAPER COMPANY, as Borrower

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Van
  Paper Company,

  
	
   

  	
   

  	
  its
  Managing Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CELLU
  TISSUE CORPORATION -

  NATURAL DAM, as Borrower

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CELLU
  TISSUE CORPORATION –

  NEENAH, as Borrower

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
						

 

116

 

	
   

  	
  MENOMINEE
  ACQUISITION

  CORPORATION, as Borrower

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CANADIAN
  BORROWER:

  
	
   

  	
   

  
	
   

  	
  INTERLAKE
  ACQUISITION

  CORPORATION LIMITED, as Borrower

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GUARANTORS:

  
	
   

  	
   

  
	
   

  	
  CELLU
  TISSUE HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  VAN
  PAPER COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
							

 

117

 

	
   

  	
  VAN
  TIMBER COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PARENT:

  
	
   

  	
   

  
	
   

  	
  CELLU
  PAPER HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ DIANNE SCHEU

  	
   

  
	
   

  	
  Name:

  	
  Dianne Scheu

  	
   

  
	
   

  	
  Title:

  	
  Senior Vice
  President, Finance and

  Chief Financial Officer

  
							

 

118

 

	
   

  	
  AGENTS
  AND LENDERS:

  
	
   

  	
   

  
	
   

  	
  THE CIT
  GROUP/BUSINESS CREDIT, INC., as

  Agent and as Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ RENEE SINGER

  	
   

  
	
   

  	
  Name:

  	
  Renee Singer

  
	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  CIT
  FINANCIAL LIMITED, as Agent as

  Lender

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ A. MURRAY
  EASTWOOD

  	
   

  
	
   

  	
  Name:

  	
  A. Murray
  Eastwood

  
	
   

  	
  Title:

  	
  Chief Credit
  Officer

  
						

 

119

 

Annex A

 

Representations
and Warranties

 

This Annex A
(Representations and Warranties) is attached and made a part of that
certain Financing Agreement, dated as of March 12, 2004 (as amended,
restated, supplemented or otherwise modified from time to time) and entered
into among the Loan Parties, the Lenders and the Agent.  Capitalized terms used in this Annex A (Representations and Warranties) and not otherwise
defined herein shall have the meanings ascribed to such terms in the Financing
Agreement.

 

Each Loan Party
represents, warrants and covenants to the Agent and each of the Lenders that on
and as of (i) the Closing Date and (ii) each other date as required
by Section 2.2, each of the following
statements are and will be true, correct and complete and, unless specifically
limited, shall remain so for so long as any of the Revolving Credit Commitments
under this Financing Agreement shall be in effect and until indefeasible
payment in full in cash of the Obligations:

 

(a)                                  Corporate Existence; Compliance with Laws

 

Each of the Loan
Parties and each of their respective Subsidiaries (a) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) is duly qualified to do business as a foreign
corporation and in good standing under the laws of each jurisdiction where such
qualification is necessary, except where the failure to be so qualified or in
good standing would not, in the aggregate, have a Material Adverse Effect,
(c) has all requisite corporate, partnership or other power and authority
and the legal right to own, pledge, mortgage and operate its properties, to
lease the property it operates under lease and to conduct its business as now
or currently proposed to be conducted, (d) is in compliance with its
Constituent Documents, (e) is in compliance with all applicable
Requirements of Law except where the failure to be in compliance would not, in
the aggregate, have a Material Adverse Effect and (f) has all necessary
licenses, permits, consents or approvals from or by, has made all necessary
filings with, and has given all necessary notices to, each Governmental
Authority having jurisdiction, to the extent required for such ownership,
operation and conduct, except for licenses, permits, consents, approvals or
filings that can be obtained or made by the taking of ministerial action to
secure the grant or transfer thereof or the failure to obtain or make would
not, in the aggregate, have a Material Adverse Effect.

 

(b)                                 Corporate Power; Authorization; Enforceable
Obligations

 

(i)                                     The
execution, delivery and performance by each Loan Party of the Loan Documents to
which it is a party and the consummation of the transactions contemplated
thereby:

 

(A)                              are
within such Loan Party’s corporate, limited liability company, partnership or
other powers;

 

(B)                                have
been or, at the time of delivery thereof pursuant to Article II
of the Financing Agreement, will have been duly authorized by all
necessary action, including the consent of shareholders, partners and members
where required;

 

(C)                                do
not and will not (i) contravene such Loan Party’s or any of its
Subsidiaries’ respective Constituent Documents, (ii) violate any other
Requirement of Law applicable to such Loan Party (including Regulations T, U
and X of the Federal Reserve Board), or any order or decree of any Governmental
Authority or arbitrator applicable to such Loan Party, (iii) conflict with
or result in

 

 

the breach of, or constitute a default under, or result in or permit
the termination or acceleration of, any material contractual obligation of such
Loan Party or any of its Subsidiaries (including any agreement, undertaking or
similar provision of any securities issued by such person, or of any agreement,
undertaking, contract, lease, indenture, mortgage, deed of trust or other
instrument (excluding a Loan Document) to which such person is a party or by
which it or any of its property is bound or to which any of its property is
subject) or (iv) result in the creation or imposition of any lien,
security interest or other encumbrance upon any property of such Loan Party or
any of its Subsidiaries, other than those in favor of the Secured Parties
pursuant to the Loan Documents; and

 

(D)                               do
not require the consent of, authorization by, approval of, notice to, or filing
or registration with, any Governmental Authority or any other Person, other
than those that have been or will be, prior to the Closing Date, obtained or
made, copies of which have been or will be delivered to the Agent and each of
which on the Closing Date will be in full force and effect and, with respect to
the Collateral, filings required to perfect the liens created by the Loan
Documents, except where the failure to obtain any such consent or authorization
would not, individually or in the aggregate, have a Material Adverse Effect.

 

(ii)                                  This
Financing Agreement has been, and each of the other Loan Documents will have
been upon delivery thereof pursuant to the terms of this Financing Agreement,
duly executed and delivered by each Loan Party party thereto.  This Financing Agreement is, and the other
Loan Documents will be, when delivered hereunder, the legal, valid and binding
obligation of each Loan Party party thereto, enforceable against such Loan
Party in accordance with its terms, subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
affecting creditors’ rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity).

 

(c)                                  Ownership of Borrower; Subsidiaries

 

(i)                                     The
authorized Stock of Cellu Tissue consists of 1,000 shares of common stock,
$0.01 par value per share, of which 100 shares are issued and outstanding.  All of the outstanding Stock of Cellu Tissue
has been validly issued, is fully paid and non-assessable and is owned
beneficially and of record by Parent, free and clear of all Liens.  Except as set forth on Schedule 7
(Subsidiaries), no Stock of Cellu Tissue is subject to any option,
warrant, right of conversion or purchase or any similar right.  There are no agreements or understandings to
which Cellu Tissue is a party with respect to the voting, sale or transfer of
any shares of Stock of or any agreement restricting the transfer or
hypothecation of any such shares. 

 

(ii)                                  Set
forth on Schedule 7 (Subsidiaries) to this
Financing Agreement is a complete and accurate list showing, as of the Closing
Date, all Subsidiaries of each Loan Party and, as to each such Subsidiary, the
jurisdiction of its organization, the number of shares of each class of stock
authorized (if applicable), the number outstanding on the Closing Date and the
number and percentage of the outstanding shares of each such class owned
(directly or indirectly) by such Loan Party. 
No stock of any Subsidiary of Parent is subject to any outstanding
option, warrant, right of conversion or purchase of any similar right.  All of the outstanding stock of each
Subsidiary of Parent owned (directly or indirectly) by Parent has been validly
issued, is fully paid and non-assessable (to the extent applicable) and is
owned by Parent or a Subsidiary of Parent, free and clear of all Liens (other
than (i) with respect to each Loan Party, the Lien in favor of the Agent,
on behalf of the Secured Parties, created by the applicable Pledge and Security
Agreement

 

2

 

and the Lien granted to
the Notes Collateral Agent pursuant to the Notes Documents), options, warrants,
rights of conversion or purchase or any similar rights.  Neither Parent nor any such Subsidiary is a
party to, or has knowledge of, any agreement restricting the transfer or
hypothecation of any stock of any such Subsidiary, other than the Loan
Documents and the Notes Documents.

 

(iii)                               Parent
does not own or hold, directly or indirectly, any stock of any Person other
than such Subsidiaries.

 

(d)                                 Financial Statements

 

(i)                                     The
Consolidated Balance Sheet as at February 28, 2003, and the related
consolidated statements of income, retained earnings and cash flows of Cellu
Tissue and its Subsidiaries for the Fiscal Year then ended, certified by Ernst
& Young and each of the Consolidated Balance Sheets of the Loan Parties as
at January 29, 2004 and the related consolidated statements of income,
retained earnings and cash flows of the Loan Parties for the 11 months then
ended, copies of which have been furnished to the Agent and each Lender, fairly
present, subject, in the case of said Consolidated Balance Sheets as at
January 29, 2004, and said statements of income, retained earnings and
cash flows for the 11 months then ended, to the absence of footnote disclosure
and normal recurring year-end audit adjustments, the consolidated financial
condition of the Borrowers and the other Loan Parties as at such dates and the
consolidated results of the operations of the Borrowers and the other Loan
Parties for the period ended on such dates, all in conformity with GAAP.

 

(ii)                                  Neither
the Borrowers nor any of the other Loan Parties has any material obligation,
contingent liability or liability for Taxes, long-term leases or unusual
forward or long-term commitment that is not reflected in the financial
statements referred to in clause (i) above  or in the notes thereto and not otherwise permitted by this
Financing Agreement.

 

(iii)                               The
budget projections have been prepared by the Loan Parties in light of the past
operations of its business, and reflect projections in the case of the one (1)
year period beginning on March 1, 2004, on a quarterly basis for the first
year and on a year by year basis thereafter. 
The cash budget projections are based upon estimates and assumptions
stated therein, all of which the Loan Parties believe to be reasonable and fair
in light of current conditions and current facts known to such Loan Parties
and, as of the Closing Date, reflect the Loan Parties’ good faith and
reasonable estimates of the future financial performance of the Loan Parties
and of the other information projected therein for the periods set forth
therein.

 

(iv)                              The
unaudited interim financial statements of the Loan Parties, a copy of which has
been delivered to the Agent and each Lender pursuant to Section 2.1,
has been prepared as of December 31, 2003 and, if applicable,
January 31, 2004, reflects as of such date, on a pro forma basis, the
consolidated financial condition of the Loan Parties, and the assumptions
expressed therein were reasonable based on the information available to the
Loan Parties at the time so furnished and on the Closing Date.

 

(e)                                  Material Adverse Change.

 

Since
February 28, 2003, there has been no Material Adverse Change and there
have been no events or developments that, in the aggregate, have had a Material
Adverse Effect.

 

3

 

(f)                                    Solvency

 

Both before and
after giving effect to (a) the Loans and Letters of Credit to be made or
extended on the Closing Date or such other date as Loans and Letters of Credit
requested hereunder are made or extended, (b) the disbursement of the
proceeds of such Loans pursuant to the instructions of the Borrowers,
(including application of any such proceeds to repay outstanding indebtedness
as directed by Borrowers), (c) the Designated Stock Repurchase and the
transactions contemplated thereby, (d) the issuance of the Secured Notes
and the consummation of the other financing transactions contemplated hereby
and (e) the payment and accrual of all transaction costs in connection
with the foregoing, the Loan Parties, on a consolidated basis, are Solvent.

 

(g)                                 Litigation

 

Except as set
forth on Schedule 8 (Litigation), there are
no pending or, to the knowledge of any Loan Party, threatened actions,
investigations or proceedings affecting any of the Loan Parties before any
court, Governmental Authority or arbitrator other than those that, in the
aggregate, would not have a Material Adverse Effect.  The performance of any action by any Loan
Party required or contemplated by any Loan Document or any Related Document is
not restrained or enjoined (either temporarily, preliminarily or permanently).

 

(h)                                 Full Disclosure

 

(i)                                     The
information prepared or furnished by or on behalf of the Borrowers or the other
Loan Parties in connection with this Financing Agreement or the Related
Documents or the consummation of the transactions contemplated hereunder and
thereunder taken as a whole does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
contained therein or herein not misleading.

 

(ii)                                  The
Budget Projections provided pursuant to Section 2.1
and all other financial projections that have been prepared by or on behalf of
the Loan Parties have been prepared in good faith based upon assumptions that
were reasonable at the time such Budget Projections and such other financial
projections were prepared.

 

(iii)                               Schedule 14 (Material Contracts) sets forth all of the
Material Contracts of the Loan Parties in effect as of the Closing Date.

 

(i)                                     Margin Regulations

 

The Borrowers are
not engaged in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of Regulation U of the Federal
Reserve Board), and no proceeds of any Loan will be used to purchase or carry
any such margin stock or to extend credit to others for the purpose of
purchasing or carrying any such margin stock in contravention of
Regulation T, U or X of the Federal Reserve Board.

 

(j)                                     No Burdensome Restrictions; No Defaults

 

(i)                                     None
of the Borrowers or the other Loan Parties (i) is a party to any
Contractual Obligation the compliance with one or more of which would have, in
the aggregate, a Material Adverse Effect or the performance of which by any
Loan Party, either unconditionally or upon the happening of an event, would
result in the creation of a Lien (other than a Permitted

 

4

 

Encumbrance) on the
assets of any Loan Party or (ii) is subject to one or more charter or
corporate (or equivalent) restrictions that would, in the aggregate, have a
Material Adverse Effect.

 

(ii)                                  None
of the Borrowers or the other Loan Parties is in default under or with respect
to any Contractual Obligation owed by it and, to the knowledge of any Loan
Party, no other party is in default under or with respect to any Contractual
Obligation owed to any Loan Party, other than, in either case, those defaults
that, in the aggregate, would not have a Material Adverse Effect.

 

(iii)                               No Default or Event of
Default has occurred and is continuing.

 

(iv)                              To
the best knowledge of the Loan Parties, there are no Requirements of Law
applicable to any Loan Party the compliance with which by such Loan Party
would, in the aggregate, have a Material Adverse Effect.

 

(k)                                  Investment Company Act; Public Utility Holding
Company Act

 

None of the
Borrowers or any of the other Loan Parties is (a) an “investment
company” or an “affiliated person”
of, or “promoter” or “principal
underwriter” for, an “investment company,”
as such terms are defined in the Investment Company Act of 1940, as amended or
(b) a “holding company,” or an “affiliate” or a “holding company”
or a “subsidiary company” of a “holding company,” as each such term is defined and used in
the Public Utility Holding Company Act of 1935, as amended.

 

(l)                                     Use of Proceeds

 

The proceeds of
the Loans and the Letters of Credit are being used by the Borrowers (i) on the
Closing Date, to (x) refinance in part the Indebtedness and other obligations
outstanding under the Existing Credit Agreements and (y) fund for the
payment of transaction costs, fees and expenses incurred in connection with
this Financing Agreement and the transactions contemplated hereby (including
the Designated Stock Repurchase), (ii) not later than three (3) Business Days
after the Closing Date, to fund in part the Designate and Stock Repurchase; and
(iii) from time to time, to provide for the Borrowers’ and the Guarantors’
working capital and general corporate purposes.

 

(m)                               Labor Matters

 

(i)                                     There
are no strikes, work stoppages, slowdowns or lockouts pending or, to the
knowledge of the Loan Parties, threatened against or involving the Loan
Parties, other than those that, in the aggregate, would not have a Material
Adverse Effect.

 

(ii)                                  There
are no unfair labor practices, grievances or complaints pending, or, to the
Loan Parties’ knowledge, threatened, against or involving the Loan Parties, nor
are there any arbitrations or grievances threatened involving the Loan Parties,
other than those that, in the aggregate, would not have a Material Adverse
Effect.

 

(iii)                               Except as set forth on Schedule 9 (Labor Matters), as of the Closing Date,
there is no collective bargaining agreement covering any employee of any Loan
Party.

 

(iv)                              Schedule 9 (Labor Matters) sets forth as of the date
hereof, all material consulting agreements, executive employment agreements,
executive compensation plans,

 

5

 

deferred compensation
agreements, employee stock purchase and stock option plans and severance plans
of the Loan Parties.

 

(n)                                 ERISA

 

(i)                                     Schedule 10 (ERISA Matters) separately identifies as of
the date hereof all Title IV Plans, all Multiemployer Plans and all of the
employee benefit plans within the meaning of Section 3(3) of ERISA to
which any Loan Party has any obligation or liability, contingent or otherwise.

 

(ii)                                  Each
employee benefit plan of the Loan Parties intended to qualify under
Section 401 of the Code has obtained a determination letter from the
Internal Revenue Service indicating that it has so qualified and nothing has
occurred with respect to the operation of such plans which could cause the loss
of such qualification, and any trust created thereunder is exempt from tax
under the provisions of Section 501 of the Code, except where such
failures, in the aggregate, would not have a Material Adverse Effect.

 

(iii)                               Each Title IV Plan
is in compliance in all material respects with applicable provisions of ERISA,
the Code and other Requirements of Law, except for non-compliances that, in the
aggregate, would not have a Material Adverse Effect.

 

(iv)                              There
has been no, nor is there reasonably expected to occur, any ERISA Event other
than those that, in the aggregate, would not have a Material Adverse Effect.

 

(v)                                 Except
to the extent set forth on Schedule 10 (ERISA
Matters), to the knowledge of the Loan Parties none of the Loan
Parties or any ERISA Affiliate would have any Withdrawal Liability as a result
of a complete withdrawal as of the date hereof from any Multiemployer Plan
which has not been fully satisfied.

 

(o)                                 Environmental Matters.

 

Except as
disclosed on Schedule 11 (Environmental Matters)

 

(i)                                     The
operations of the Borrowers and the other Loan Parties have been and are in
compliance with all Environmental Laws, including obtaining and complying with
all required environmental, health and safety Permits, other than
non-compliances that, in the aggregate, would not have a reasonable likelihood
of the Borrowers and the other Loan Parties incurring Environmental Liabilities
and Costs after the date hereof in excess of $500,000  in
the aggregate.

 

(ii)                                  None
of the Loan Parties or any real property currently or, to the knowledge of any
Loan Party, previously owned, operated or leased by or for the Loan Parties is
subject to any pending or, to the knowledge of any Loan Party, threatened,
claim, order, agreement, notice of violation, notice of potential liability or
is the subject of any pending or threatened proceeding or governmental
investigation under or pursuant to Environmental Laws other than those that, in
the aggregate, are not reasonably likely to result in the Loan Parties
incurring Environmental Liabilities and Costs in excess of $500,000  in the aggregate.

 

6

 

(iii)                               None of the Loan Parties
is a treatment, storage or disposal facility requiring a Permit under the
Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., the regulations thereunder or any state analog.

 

(iv)                              To
the knowledge of the Loan Parties, there are no facts, circumstances or
conditions arising out of or relating to the operations or ownership of the
Loan Parties or of the Real Estate owned, operated or leased by the Loan
Parties that are not specifically included in the financial information
furnished to the Agent and the Lenders other than those that would not have a
reasonable likelihood of the Loan Parties incurring Environmental Liabilities
and Costs in excess of $100,000 individually and $500,000 in the aggregate.

 

(v)                                 As
of the date hereof, no Environmental Lien has attached to any property of the
Loan Parties and, to the knowledge of the Loan Parties, no facts, circumstances
or conditions exist that could reasonably be expected to result in any such
lien attaching to any such property.

 

(vi)                              The
Borrowers and each of the other Loan Parties have provided the Agent and the Lenders
with copies of all material, written environmental, health or safety audits,
studies, assessments, inspections, investigations or other material, written
environmental health and safety reports relating to the operations of the Loan
Parries or any real property of any of them that are in the possession, custody
or control of any of the Loan Parties.

 

(p)                                 Intellectual Property

 

(i)                                     Set
forth on Schedule 12 (Intellectual Property)
is a complete and accurate list, as of the Closing Date, of all Material Intellectual
Property (as such term is defined in the Pledge and Security Agreement) of each
Loan Party, separately identifying that owned by each Loan Party and that
licensed to such Loan Party.

 

(ii)                                  Each
of the Borrowers and the other Loan Parties own or license or otherwise have
the right to use all licenses, permits, Patents, patent applications,
Trademarks, trademark applications, service marks, trade names, Copyrights,
copyright applications, franchises, authorizations and other intellectual
property rights that are necessary for the operations of their respective
businesses, without any known infringement upon or conflict with the rights of
any other Person with respect thereto, including all trade names associated
with any private label brands of any of the Loan Parties.  To the Loan Parties’ knowledge, no slogan or
other advertising device, product, process, method, substance, part or
component, or other material now employed, or now contemplated to be employed,
by any of the Loan Parties infringes upon or conflicts with any rights owned by
any other Person except to the extent any such infringement would not have a
Material Adverse Effect, and no claim or litigation regarding any of the
foregoing is pending or threatened.

 

(q)                                 Title; Real Property

 

(i)                                     Each
of the Loan Parties has good and marketable title to, or valid leasehold
interests in, all real property and good title to all personal property, in
each case that is purported to be owned or leased by it, including those
reflected on the most recent financial statements delivered by the Loan
Parties, and none of such properties and assets is subject to any Lien, except
for Permitted Encumbrances.  The Loan
Parties have received all deeds, assignments, waivers, consents,
non-disturbance and recognition or similar agreements, bills of

 

7

 

sale and other documents,
and have duly effected all recordings, filings and other actions necessary or
appropriate to establish, protect and perfect the Loan Parties’ right, title
and interest in and to all such property.

 

(ii)                                  Set
forth on Schedule 4 (Real Estate) is a
complete and accurate list of all Real Estate of each Loan Party and its
Subsidiaries and showing, as of the Closing Date, the current street address (including,
where applicable, county, state and other relevant jurisdictions) and record
owner thereof.

 

(iii)                               Set forth on Schedule 13 (Rental Payments) is a complete and
accurate list, as of the Closing Date, of the monthly rental payments for any
leased premises or any other premises where any Collateral may be stored or
processed.

 

(iv)                              No
Loan Party nor any of its Subsidiaries owns or holds, or is obligated under or
a party to, any lease, option, right of first refusal or other contractual
right to purchase, acquire, sell, assign, lease or Dispose of any Real Estate
of such Loan Party or any of its Subsidiaries.

 

(v)                                 All
components of all improvements included within the Real Estate of any Loan
Party or any of its Subsidiaries (collectively, “Improvements”),
including the roofs and structural elements thereof and the heating,
ventilation, air conditioning, plumbing, electrical, mechanical, sewer, waste
water, storm water, paving and parking equipment, systems and facilities
included therein, are in good working order and repair.  All water, gas, electrical, steam, compressed
air, telecommunication, sanitary and storm sewage lines and systems and other
similar systems serving the Real Estate of any Loan Party or any of its
Subsidiaries are installed and operating and are sufficient to enable the Real
Estate of such Loan Party or Subsidiary to continue to be used and operated in
the manner currently being used and operated, and no Loan Party nor any of its
Subsidiaries has any knowledge of any factor or condition that could result in
the termination or material impairment of the furnishing thereof.  No Improvement or portion thereof is
dependent for its access, operation or utility on any land, building or other
Improvement not included in the Real Estate of any Loan Party or any of its
Subsidiaries.

 

(vi)                              No
portion of any Real Estate of any Loan Party or any of its Subsidiaries has
suffered any material damage by fire or other casualty loss that has not
heretofore been completely repaired and restored to its original
condition.  Except as disclosed on Schedule 4 (Real Estate), no portion of any Real Estate
of any Loan Party or any of its Subsidiaries is located in a special flood
hazard area as designated by any federal (or in the case of Canada, such
equivalent) Governmental Authority.

 

(vii)                           All Permits required to have
been issued or appropriate to enable all Real Estate owned or leased by the
Loan Parties to be lawfully occupied and used for all of the purposes for which
they are currently occupied and used have been lawfully issued and are in full
force and effect, other than those that, in the aggregate, would not have a
Material Adverse Effect.

 

(viii)                        None of the Loan Parties has
received any notice, or has any knowledge, of any pending, threatened or contemplated
condemnation proceeding affecting any real property owned or leased by any of
the Loan Parties or any part thereof, except those that, in the aggregate,
would not have a Material Adverse Effect.

 

8

 

(r)                                    Related Documents

 

(i)                                     The
execution, delivery and performance by each Loan Party of the Related Documents
to which it is a party and the consummation of the transactions contemplated
thereby by such Loan Party:

 

(A)                              are
within such Loan Party’s respective corporate, limited liability company,
partnership or other powers;

 

(B)                                have
been duly authorized by all necessary corporate or other action on the part of
such Loan Party, including the consent of stockholders where required;

 

(C)                                do
not and will not (i) contravene or violate any Loan Party’s respective
Constituent Documents, (ii) violate any other Requirement of Law
applicable to any Loan Party, or any order or decree of any Governmental
Authority or arbitrator, (iii) conflict with or result in the breach of,
constitute a default under, or result in or permit the termination or
acceleration of, any Contractual Obligation of any Loan Party, except for those
that, in the aggregate, would not have a Material Adverse Effect or
(iv) result in the creation or imposition of any Lien upon any property of
any Loan Party other than Permitted Encumbrances; and

 

(D)                               do
not require the consent of, authorization by, approval of, notice to, or filing
or registration with, any Governmental Authority or any other person on the
part of such Loan Party, other than those that have been obtained and are in
full force and effect, except where the failure to obtain them will not have a
Material Adverse Effect.

 

(ii)                                  Each
of the Related Documents has been duly executed and delivered by each Loan
Party party thereto and are the legal, valid and binding obligation of each
Loan Party party thereto, enforceable against such Loan Party in accordance
with its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors’ rights and
remedies generally, and subject, as to enforceability, to general principles of
equity, including principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity).

 

(iii)                               None
of the Related Documents has been amended or modified in any respect and no
provision therein has been waived, except in each case to the extent permitted
by this Financing Agreement, and each of the representations and warranties of
the Loan Parties therein are true and correct in all material respects and no
default of the Loan Parties or event that, with the giving of notice or lapse
of time or both, would be a default of the Loan Parties has occurred
thereunder, except for such defaults that will not result in a Material Adverse
Effect.

 

(s)                                  Taxes

 

(i)                                     All
federal, state, local and foreign income and franchise and other material tax
returns, reports and statements (collectively, the “Tax Returns”)
required to be filed by the Borrowers or any of their Tax Affiliates have been
filed with the appropriate Governmental Authorities in all jurisdictions in
which such Tax Returns are required to be filed, all such Tax Returns are true
and correct in all material respects, and all taxes, charges and other
impositions reflected therein or otherwise due and payable have been paid prior
to the date on which any fine, penalty, interest, late charge or loss may be
added thereto for non-payment thereof except where contested in good faith and
by appropriate proceedings if adequate reserves

 

9

 

therefor have been
established on the books of the Borrowers or such Tax Affiliates in conformity
with GAAP.  Except as disclosed to the
Agent in writing prior to the date hereof, no Tax Return is under audit or
examination by any Governmental Authority and no notice of such an audit or
examination or any assertion of any claim for Taxes has been given or made by
any Governmental Authority.  Proper and
accurate amounts have been withheld by the Borrowers and each of their
respective Tax Affiliates from their respective employees for all periods in
material compliance with the tax, social security and unemployment withholding
provisions of applicable Requirements of Law and such withholdings have been
timely paid to the respective Governmental Authorities.

 

(ii)                                  None
of the Borrowers or any of their respective Tax Affiliates has
(i) executed or filed with the Internal Revenue Service of the United
States (or any successor thereto) or any other Governmental Authority any
agreement or other document extending, or having the effect of extending, the
period for the filing of any Tax Return or the assessment or collection of any
charges that have not been disclosed to the Agent in writing prior to the date
hereof, (ii) incurred any obligation under any tax sharing agreement or
arrangement other than those of which the Agent has received a copy prior to the
date hereof or (iii) been a member of an affiliated, combined or unitary
group other than the group of which the Parent (or its Tax Affiliate) is the
common parent.

 

10Exhibit 10.2

 

EXECUTION COPY

 

J.P. MORGAN SECURITIES INC.

 

$162,000,000

 

CELLU TISSUE HOLDINGS, INC.

 

9-3/4% Senior Secured Notes due 2010

 

Purchase Agreement

 

March 5, 2004

 

	
  J.P. Morgan Securities Inc.

  
	
  As Representative of the

  
	
  several Initial Purchasers listed

  
	
  in Schedule 1 hereto

  
	
  c/o J.P. Morgan Securities Inc.

  
	
  270 Park Avenue

  
	
  New York, New York  10017

  

 

Ladies and Gentlemen:

 

Cellu Tissue Holdings, Inc., a Delaware corporation (the “Company”),
proposes to issue and sell to the several Initial Purchasers listed in
Schedule 1 hereto (the “Initial Purchasers”), for whom you are acting as
representative (the “Representative”), $162,000,000 principal amount of its
9-3/4% Senior Secured Notes due 2010 (the “Securities”).  The Securities will be issued pursuant to an
Indenture to be dated as of March 12, 2004 (the “Indenture”) among the
Company, the guarantors listed in Schedule 2 hereto (the “Guarantors”) and
The Bank of New York, as trustee (the “Trustee”), and will be guaranteed on a
senior secured basis by each of the Guarantors (the “Guarantees”).

 

The Securities will be sold to the Initial Purchasers without being
registered under the Securities Act of 1933, as amended (the “Securities Act”),
in reliance upon an exemption therefrom. 
The Company has prepared a preliminary offering memorandum dated
February 24, 2004 (the “Preliminary Offering Memorandum”) and will prepare
an offering memorandum dated the date hereof (the “Offering Memorandum”)
setting forth information concerning the Company and the Securities.  Copies of the Preliminary Offering Memorandum
have been, and copies of the Offering Memorandum will be, delivered by the
Company to the Initial Purchasers pursuant to the terms of this Agreement.  The Company hereby confirms that it has
authorized the use of the Preliminary Offering Memorandum and the Offering
Memorandum in connection with the offering and resale of the Securities by the
Initial Purchasers in the manner contemplated by this Agreement.  Capitalized terms used but not defined herein
shall have the meanings given to such terms in the Offering Memorandum.

 

 

Holders of the Securities (including the Initial Purchasers and their
direct and indirect transferees) will be entitled to the benefits of a
Registration Rights Agreement, to be dated the Closing Date (as defined below)
and substantially in the form attached hereto as Exhibit A (the “Registration
Rights Agreement”), pursuant to which the Company and the Guarantors will agree
to file one or more registration statements with the Securities and Exchange
Commission (the “Commission”) providing for the registration under the
Securities Act of the Securities or the Exchange Securities referred to (and as
defined) in the Registration Rights Agreement.

 

The Securities and the Guarantees will be secured by (a) a first
priority lien, subject to permitted liens, on substantially all of the assets
(other than inventory, accounts receivable and proceeds therefrom and certain
excluded assets) of the Company and the Guarantors (the “First Priority Collateral”),
including, but not limited to, the real property, fixtures and equipment now
owned or hereafter acquired by the Company and the Guarantors, and (b) a second
priority lien, subject to permitted liens, in the inventory, accounts
receivable and proceeds therefrom of the Company and the Guarantors (the
“Second Priority Collateral” and, together with the First Priority Collateral,
the “Collateral”).  The Collateral shall
be described in the mortgages, deeds of trust or deeds to secure debt to be dated
the Closing Date (collectively, the “Mortgages”) with respect to each property
listed on Schedule 4 hereto and the Security Agreement to be dated the
Closing Date (the “Security Agreement” and, together with the Mortgages, the
“Collateral Documents”) with respect to the Collateral other than real
property, each to be delivered to the Trustee, granting a first priority
security interest, with respect to the First Priority Collateral, and a second
priority security interest, with respect to the Second Priority Collateral, in
each case, subject to permitted liens, for the benefit of the Trustee and each
holder of the Securities and the successors and assigns of the foregoing.  The rights of the holders of the Securities
with respect to the Collateral shall be further governed by the Intercreditor
Agreement to be dated the Closing Date (the “Intercreditor Agreement”) among
the Company, the Guarantors, the Trustee and the agent for the lenders under
the Credit Agreement (as defined in Section 5(o)).

 

The Company hereby confirms its agreement with the several Initial
Purchasers concerning the purchase and resale of the Securities, as follows:

 

1.                                       Purchase
and Resale of the Securities. 
(a)  The Company agrees to issue
and sell the Securities to the several Initial Purchasers as provided in this
Agreement, and each Initial Purchaser, on the basis of the representations,
warranties and agreements set forth herein and subject to the conditions set
forth herein, agrees, severally and not jointly, to purchase from the Company
the respective principal amount of Securities set forth opposite such Initial
Purchaser’s name in Schedule 1 hereto at a price equal to 95.889% of the
principal amount thereof plus accrued interest, if any, from March 12,
2004 to the Closing Date.  The Company
will not be obligated to deliver any of the Securities except upon payment for
all the Securities to be purchased as provided herein.

 

(b)                                 The
Company understands that the Initial Purchasers intend to offer the Securities
for resale on the terms and conditions set forth in this Agreement and in the
Offering Memorandum.  Each Initial
Purchaser, severally and not jointly, represents, warrants and agrees that:

 

2

 

(i)                                     it
is a qualified institutional buyer within the meaning of Rule 144A under the
Securities Act (a “QIB”) and an accredited investor within the meaning of Rule
501(a) under the Securities Act;

 

(ii)                                  it
has not solicited offers for, or offered or sold, and will not solicit offers
for, or offer or sell, the Securities by means of any form of general
solicitation or general advertising within the meaning of Rule 502(c) of
Regulation D under the Securities Act (“Regulation D”) or in any manner
involving a public offering within the meaning of Section 4(2) of the
Securities Act;

 

(iii)                               it
is not acquiring the Securities with a view to any distribution thereof that
would violate the Securities Act or the securities laws of any state of the
United States or of any other applicable jurisdiction; and

 

(iv)                              it
has not solicited offers for, or offered or sold, and will not solicit offers
for, or offer or sell, the Securities as part of their initial offering except:

 

(A)                              within
the United States to persons whom it reasonably believes to be QIBs in
transactions pursuant to Rule 144A under the Securities Act (“Rule 144A”) and
in connection with each such sale, it has taken or will take reasonable steps
to ensure that the purchaser of the Securities is aware that such sale is being
made in reliance on Rule 144A; or

 

(B)                                in
accordance with the restrictions set forth in Annex A hereto.

 

(c)                                  Each
Initial Purchaser acknowledges and agrees that the Company and, for purposes of
the opinions to be delivered to the Initial Purchasers pursuant to Sections
5(f) and 5(i), counsel for the Company and counsel for the Initial Purchasers,
respectively, may rely upon the accuracy of the representations and warranties
of the Initial Purchasers, and compliance by the Initial Purchasers with their
agreements, contained in paragraph (b) above (including Annex A hereto),
and each Initial Purchaser hereby consents to such reliance.

 

(d)                                 The
Company acknowledges and agrees that the Initial Purchasers may offer and sell
Securities to or through any affiliate of an Initial Purchaser and that any
such affiliate may offer and sell Securities purchased by it to or through any
Initial Purchaser.

 

2.                                       Payment
and Delivery.  (a)  Payment for and delivery of the Securities
will be made at the offices of Simpson Thacher & Bartlett LLP at 10:00
A.M., New York City time, on March 12, 2004, or at such other time or
place on the same or such other date, not later than the fifth business day
thereafter, as the Representative and the Company may agree upon in writing.  The time and date of such payment and
delivery is referred to herein as the “Closing Date”.

 

(b)                                 Payment
for the Securities shall be made by wire transfer in immediately available
funds to the account(s) specified by the Company to the Representative against
delivery to the nominee of The Depository Trust Company, for the account of the
Initial Purchasers, of one or more global notes representing the Securities
(collectively, the “Global Note”), with any transfer taxes payable in
connection with the sale of the Securities duly paid by the Company.  The

 

3

 

Global Note
will be made available for inspection by the Representative not later than 1:00
P.M., New York City time, on the business day prior to the Closing Date.

 

3.                                       Representations
and Warranties of the Company and the Guarantors.  The Company and the Guarantors jointly and
severally represent and warrant to each Initial Purchaser that:

 

(a)                                  Offering Memorandum. 
The Preliminary Offering Memorandum, as of its date, did not, and the
Offering Memorandum, in the form first used by the Initial Purchasers to
confirm sales of the Securities and as of the Closing Date, will not, contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that
the Company and the Guarantors make no representation or warranty with respect
to any statements or omissions made in reliance upon and in conformity with
information relating to any Initial Purchaser furnished to the Company in
writing by such Initial Purchaser through the Representative expressly for use
in the Preliminary Offering Memorandum and the Offering Memorandum.

 

(b)                                 Financial Statements. 
The financial statements and the related notes thereto included in the
Preliminary Offering Memorandum and the Offering Memorandum comply as to form
in all material respects with the accounting requirements of the Securities Act
and the related published rules and regulations applicable to a registration
statement on Form S-1 under the Securities Act; such financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis throughout the periods covered thereby and
present fairly the financial position of the Company and its subsidiaries as of
the dates indicated and the results of their operations and the changes in
their cash flows for the periods specified; the financial information contained
in the Preliminary Offering Memorandum and the Offering Memorandum under the
headings “Summary—Summary consolidated historical financial data”,
“Capitalization”, “Selected consolidated financial data” and “Management’s
discussion and analysis of financial condition and results of operations”
presents fairly the financial condition, results of operations and cash flows
of the entities purported to be covered thereby as of the dates and for the
respective periods indicated; the other financial information included in the
Preliminary Offering Memorandum and the Offering Memorandum has been derived
from the accounting records of the Company and its subsidiaries and presents
fairly the information shown thereby.

 

(c)                                  No Material Adverse Change. 
Since the date of the most recent financial statements of the Company
included in the Offering Memorandum, (i) other than amounts to be
distributed to Cellu Paper Holdings, Inc. (the “Parent”) to be paid to the
stockholders, warrant holders and option holders of the Parent to purchase
certain of their shares of common stock, warrants and options as expressly
described in the “Use of proceeds” section of the Preliminary Offering
Memorandum and the Offering Memorandum and other than as expressly set forth in
the Preliminary Offering Memorandum and the Offering Memorandum, there has not
been any change in the capital stock or the long-term or short-term
indebtedness of the Company or any of its subsidiaries (other than immaterial
borrowings by the Company or its subsidiaries under the revolving credit
facility consistent with past practices), or any dividend or distribution of
any kind declared, set aside for payment, paid or made by the Company on any
class of capital stock,

 

4

 

or any
material adverse change, or any development involving a prospective material
adverse change, in or affecting the business, properties, management, financial
position, results of operations or prospects of the Company and its
subsidiaries taken as a whole; (ii) neither the Company nor any of its
subsidiaries has entered into any transaction or agreement that is material to
the Company and its subsidiaries taken as a whole or incurred any liability or
obligation, direct or contingent, that is material to the Company and its
subsidiaries taken as a whole; and (iii) neither the Company nor any of
its subsidiaries has sustained any material loss or interference with its
business from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor disturbance or dispute or any action, order or
decree of any court or arbitrator or governmental or regulatory authority,
except in each case as otherwise disclosed in the Preliminary Offering
Memorandum and the Offering Memorandum.

 

(d)                                 Organization and Good Standing.  The Company and each of its subsidiaries have
been duly organized and are validly existing and in good standing under the
laws of their respective jurisdictions of organization, are duly qualified to
do business and are in good standing in each jurisdiction in which their
respective ownership or lease of property or the conduct of their respective
businesses requires such qualification, and have all power and authority
necessary to own or hold their respective properties and to conduct the
businesses in which they are engaged, except where the failure to be so
qualified or have such power or authority would not, individually or in the
aggregate, have a material adverse effect on the business, properties,
management, financial position, results of operations or prospects of the
Company and its subsidiaries taken as a whole or on the performance by the
Company and the Guarantors of their obligations under the Securities and the
Guarantees (a “Material Adverse Effect”). 
The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Schedule 3 to this Agreement.

 

(e)                                  Capitalization.  The
Company has an authorized capitalization as of the respective dates set forth
in the Preliminary Offering Memorandum and the Offering Memorandum under the
heading “Capitalization”; and all the outstanding shares of capital stock or
other equity interests of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned directly
or indirectly by the Company as set forth in Schedule 6 hereto, free and
clear of any lien, charge, encumbrance, security interest, restriction on
voting or transfer or any other claim of any third party, other than those
imposed by the Securities Act and the securities or Blue Sky laws of certain
domestic and foreign jurisdictions.

 

(f)                                    Due Authorization. 
The Company and each of the Guarantors have full right, power and authority
to execute and deliver this Agreement, the Securities, the Indenture (including
each Guarantee set forth therein), each of the Collateral Documents to the
extent a party thereto, the Intercreditor Agreement, the Exchange Securities
and the Registration Rights Agreement (collectively, the “Transaction
Documents”) and to perform their respective obligations hereunder and
thereunder; and all action required to be taken for the due and proper
authorization, execution and delivery of each of the Transaction Documents and
the consummation of the transactions contemplated thereby has been duly and
validly taken.

 

(g)                                 The Indenture.  The
Indenture has been duly authorized by the Company and each of the Guarantors
and, when duly executed and delivered in accordance with its terms by each of

 

5

 

the parties
thereto, will constitute a valid and legally binding agreement of the Company
and each of the Guarantors enforceable against the Company and each of the Guarantors
in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, receivership, moratorium,
fraudulent conveyance or similar laws relating to or affecting the right to
remedies of creditors generally or by equitable principles relating to
enforceability (collectively, the “Enforceability Exceptions”); and on the
Closing Date, the Indenture will conform in all material respects to the
requirements of the Trust Indenture Act of 1939, as amended (the “Trust
Indenture Act”), and the rules and regulations of the Commission applicable to
an indenture that is qualified thereunder.

 

(h)                                 The Securities and the Guarantees.  The Securities have been duly authorized by
the Company and, when duly executed, authenticated, issued and delivered as
provided in the Indenture and paid for as provided herein, will be duly and
validly issued and outstanding and will constitute valid and legally binding
obligations of the Company enforceable against the Company in accordance with
their terms, subject to the Enforceability Exceptions, and will be entitled to
the benefits of the Indenture; and the Guarantees have been duly authorized by
each of the Guarantors and, when the Securities have been duly executed,
authenticated, issued and delivered as provided in the Indenture and paid for
as provided herein, will be valid and legally binding obligations of each of
the Guarantors, enforceable against each of the Guarantors in accordance with
their terms, subject to the Enforceability Exceptions, and will be entitled to
the benefits of the Indenture.

 

(i)                                     The Exchange Securities. 
On the Closing Date, the Exchange Securities (including the related
guarantees) will have been duly authorized by the Company and each of the
Guarantors and, when duly executed, authenticated, issued and delivered as
contemplated by the Registration Rights Agreement, will be duly and validly
issued and outstanding and will constitute valid and legally binding
obligations of the Company, as issuer, and each of the Guarantors, as
guarantor, enforceable against the Company and each of the Guarantors in
accordance with their terms, subject to the Enforceability Exceptions, and will
be entitled to the benefits of the Indenture.

 

(j)                                     Purchase and Registration Rights Agreements.  This Agreement has been duly authorized,
executed and delivered by the Company and each of the Guarantors; and the
Registration Rights Agreement has been duly authorized by the Company and each
of the Guarantors and, when duly executed and delivered in accordance with its
terms by each of the parties thereto, will constitute a valid and legally
binding agreement of the Company and each of the Guarantors enforceable against
the Company and each of the Guarantors in accordance with its terms, subject to
the Enforceability Exceptions, and except that rights to indemnity and
contribution thereunder may be limited by applicable law and public policy.

 

(k)                                  Other Transaction Documents. 
Each of the Collateral Documents and the Intercreditor Agreement has
been duly authorized by the Company and each of the Guarantors, to the extent a
party thereto, and, when duly executed and delivered in accordance with its
terms by each of the parties thereto, will constitute valid and legally binding
agreements or obligations of the Company and each of the Guarantors, to the
extent a party thereto, enforceable against the Company and each of the
Guarantors, to the extent a party thereto, in accordance with its terms,
subject to the Enforceability Exceptions.

 

6

 

(l)                                     Descriptions of the Transaction Documents.  Each Transaction Document conforms in all
material respects to the description thereof contained in the Preliminary
Offering Memorandum and the Offering Memorandum.

 

(m)                               Collateral Documents, Financing Statements and Collateral.

 

(i)                                     The
Mortgages will be effective to grant a legal, valid and enforceable mortgage
lien on all of the mortgagor’s right, title and interest in the real property
listed on Schedule 4 hereto (each, a “Mortgaged Property” and,
collectively, the “Mortgaged Properties”). 
When the Mortgages are duly recorded in the proper recorders’ offices or
appropriate public records and the mortgage recording fees and taxes in respect
thereof are paid and compliance is otherwise had with the formal requirements
of state law or Canadian law, as the case may be, applicable to the recording
of real estate mortgages generally, each such Mortgage shall constitute a
validly perfected and enforceable first priority lien and security interest in
the related Mortgaged Property constituting First Priority Collateral for the
benefit of the Trustee and the holders of the Securities, subject only to the
encumbrances and exceptions to title expressly permitted in the Mortgages
(including those liens expressly permitted to be incurred or exist on the
Collateral pursuant to the Indenture) or expressly set forth as an exception to
the policies of title insurance obtained to insure the lien of each Mortgage
with respect to each of the Mortgaged Properties (such encumbrances and
exceptions, the “Permitted Exceptions”), and to the Enforceability Exceptions.

 

(ii)                                  The
Security Agreement will be effective to grant a legal, valid and enforceable
security interest on all of the grantor’s right, title and interest in the
Collateral (other than the Mortgaged Properties).

 

(iii)                               Upon
filing of financing statements or Mortgages, as applicable, with respect to the
Collateral described in the Security Agreement and the equipment and fixtures
described in the Mortgages (the “Personal Property Collateral”) and the due
execution and delivery of the Intercreditor Agreement, the security interests
granted thereby will constitute valid, perfected first priority liens and
security interests in the Personal Property Collateral constituting First
Priority Collateral and valid, perfected second priority liens and security
interests in the Personal Property Collateral constituting Second Priority
Collateral, for the benefit of the Trustee and the holders of the Securities,
enforceable in accordance with the terms contained therein against all
creditors of any grantor or mortgagor and subject only to liens expressly
permitted to be incurred or exist on the Personal Property Collateral under the
Indenture.

 

(iv)                              The
Company and its subsidiaries collectively own, have rights in or have the power
and authority to collaterally assign rights in the Collateral, free and clear
of any liens other than the Permitted Exceptions.

 

(n)                                 The Credit Agreement. 
The Credit Agreement has been, or as of the Closing Date will be, duly
authorized by the Company and each of its subsidiaries that is a party thereto,
and, when duly executed and delivered in accordance with its terms, will
constitute valid and legally

 

7

 

binding
agreements of the Company and each such subsidiary, enforceable against the
Company and each such subsidiary, in accordance with its terms, subject to the
Enforceability Exceptions.

 

(o)                                 No Violation or Default. 
Neither the Company nor any of its subsidiaries is (i) in violation
of its charter or by-laws or similar organizational documents; (ii) in
default, and no event has occurred that, with notice or lapse of time or both,
would constitute such a default, in the due performance or observance of any
term, covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which the Company or any of its
subsidiaries is bound or to which any of the property or assets of the Company
or any of its subsidiaries is subject; or (iii) in violation of any law or
statute or any judgment, order, rule or regulation of any court or arbitrator or
governmental or regulatory authority, except, in the case of clauses (ii) and
(iii) above, for any such default or violation that would not, individually or
in the aggregate, have a Material Adverse Effect.

 

(p)                                 No Conflicts.  The
execution, delivery and performance by the Company and each of the Guarantors
of each of the Transaction Documents to which each is a party (including, but
not limited to, the filing of any applicable financing statements pursuant to
the Mortgages or the Security Agreement), the issuance and sale of the
Securities (including the Guarantees), the grant and perfection of security
interests in the Collateral pursuant to the Mortgages and the Security
Agreement and compliance by the Company and each of the Guarantors with the
terms thereof and the consummation of the transactions contemplated by the
Transaction Documents will not (i) conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or any of its subsidiaries pursuant to,
any indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound or to which any of the
property or assets of the Company or any of its subsidiaries is subject (other
than any lien or encumbrance created or imposed pursuant to the Transaction
Documents), (ii) result in any violation of the provisions of the charter
or by-laws or similar organizational documents of the Company or any of its
subsidiaries or (iii) result in the violation of any law or statute or any
judgment, order, rule or regulation of any court or arbitrator or governmental
or regulatory authority, except, in the case of clauses (i) and (iii) above,
for any such conflict, breach or violation that would not, individually or in
the aggregate, have a Material Adverse Effect.

 

(q)                                 No Consents Required. 
No consent, approval, authorization, order, registration or
qualification of or with any court or arbitrator or governmental or regulatory
authority is required for the execution, delivery and performance by the Company
and each of the Guarantors of each of the Transaction Documents to which each
is a party (including, but not limited to, the filing of any applicable
financing statements pursuant to the Mortgages or the Security Agreement), the
issuance and sale of the Securities (including the Guarantees), the grant and
perfection of security interests in the Collateral pursuant to the Mortgages
and the Security Agreement and compliance by the Company and each of the
Guarantors with the terms thereof and the consummation of the transactions contemplated
by the Transaction Documents, except for such consents, approvals,
authorizations, orders and registrations or qualifications (A) as may be
required (i) under applicable state securities laws in connection with the
purchase and resale of

 

8

 

the Securities
by the Initial Purchasers, (ii) with respect to the Exchange Securities
(including the related guarantees) under the Securities Act and applicable
state securities laws as contemplated by the Registration Rights Agreement,
(iii) under the Trust Indenture Act with respect to the qualification of the
Indenture in connection with the registered exchange offer or shelf
registration of the Securities as contemplated by the Registration Rights Agreement,
(iv) to perfect the Trustee’s security interests granted pursuant to the
Mortgages, the Security Agreement and financing statements and (v) to release
existing liens or (B) as have been obtained on or prior to the date hereof.

 

(r)                                    Legal Proceedings.  Except
as described in the Preliminary Offering Memorandum and the Offering
Memorandum, there are no legal, governmental or regulatory investigations,
actions, suits or proceedings pending to which the Company or any of its
subsidiaries is or may be a party or to which any property of the Company or
any of its subsidiaries is or may be the subject that, individually or in the
aggregate, if determined adversely to the Company or any of its subsidiaries,
could reasonably be expected to have a Material Adverse Effect; and no such
investigations, actions, suits or proceedings are threatened or, to the best
knowledge of the Company and each of the Guarantors, contemplated by any
governmental or regulatory authority or threatened by others.

 

(s)                                  Independent Accountants. 
Ernst & Young LLP (“Ernst & Young”), who have
certified certain financial statements of the Company and its subsidiaries are
independent public accountants with respect to the Company and its subsidiaries
within the meaning of Rule 101 of the Code of Professional Conduct of the
American Institute of Certified Public Accountants and its interpretations and
rulings thereunder.

 

(t)                                    Title to Real and Personal Property.  The Company and its subsidiaries have good
and marketable title in fee simple to, or have valid rights to lease or
otherwise use, all items of real and personal property that are described or
referred to in the Mortgages and all other real or personal property that are
material to the respective businesses of the Company and its subsidiaries, in
each case free and clear of all liens, encumbrances, claims and defects and
imperfections of title except for Permitted Exceptions, in the case of the
Mortgaged Properties, and, in the case of all other real and personal property,
those that (i) do not materially interfere with the use made and proposed
to be made of such property by the Company and its subsidiaries or
(ii) could not reasonably be expected, individually or in the aggregate,
to have a Material Adverse Effect.  The
Company does not own or control, directly or indirectly, any other real
property, other than the real property listed in Schedule 5 to this
Agreement.

 

(u)                                 Title to Intellectual Property.  The Company and its subsidiaries own or
possess adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations, service mark
registrations, copyrights, licenses and know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential information,
systems or procedures) necessary for the conduct of their respective
businesses; and the conduct of their respective businesses will not conflict in
any material respect with any such rights of others, and the Company and its
subsidiaries have not received any notice of any claim of infringement of or
conflict with any such rights of others.

 

9

 

(v)                                 Investment Company Act. 
Neither the Company nor any of its subsidiaries is, and after giving
effect to the offering and sale of the Securities and the application of the
proceeds thereof as described in the Offering Memorandum none of them will be,
an “investment company” or an entity “controlled” by an “investment company”
within the meaning of the Investment Company Act of 1940, as amended, and the
rules and regulations of the Commission thereunder (collectively, “Investment
Company Act”).

 

(w)                               Public Utility Holding Company Act.  Neither the Company nor any of its
subsidiaries is a “holding company” or a “subsidiary company” of a holding
company or an “affiliate” thereof within the meaning of the Public Utility
Holding Company Act of 1935, as amended.

 

(x)                                   Taxes.  The Company
and its subsidiaries have paid all federal, state, local and foreign taxes and
filed all tax returns required to be paid or filed through the date hereof; and
except as otherwise disclosed in the Preliminary Offering Memorandum and the
Offering Memorandum, there is no tax deficiency that has been, or could
reasonably be expected to be, asserted against the Company or any of its
subsidiaries or any of their respective properties or assets.

 

(y)                                 Licenses and Permits. 
The Company and each of its subsidiaries possess all licenses,
certificates, permits and other authorizations issued by, and have made all
declarations and filings with, the appropriate federal, state, local or foreign
governmental or regulatory authorities that are necessary for the ownership or
lease of their respective properties or the conduct of their respective businesses
as described in the Preliminary Offering Memorandum and the Offering
Memorandum, except where the failure to possess or make the same would not,
individually or in the aggregate, have a Material Adverse Effect; and neither
the Company nor any of its subsidiaries has received notice of any revocation
or modification of any such license, certificate, permit or authorization or
has any reason to believe that any such license, certificate, permit or
authorization will not be renewed in the ordinary course, except where such
revocation or modification would not, individually or in the aggregate, have a
Material Adverse Effect.

 

(z)                                   No Labor Disputes.  No
labor disturbance by or dispute with employees of the Company or any of its
subsidiaries exists or, to the best knowledge of the Company and each of the
Guarantors, is contemplated or threatened. 
Neither the Company nor any of its subsidiaries has received any notice
of cancellation or termination with respect to any collective bargaining
agreement to which it is a party.

 

(aa)                            Compliance With Environmental Laws.  The Company and its subsidiaries (i) are
in compliance with all, and have not violated any, applicable federal, state,
local and foreign laws, rules, regulations, decisions, orders or other legally
enforceable requirements relating to the protection of human health and safety,
the environment or hazardous or toxic substances or wastes, pollutants or
contaminants (collectively, “Environmental Laws”); (ii) have received and
are in compliance with all, and have not violated any, permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses; and (iii) have not received notice of any
actual or potential liability (including, without limitation, such liability of
a third party which could reasonably be expected to adversely affect the
Company or any of its subsidiaries) for the investigation or remediation of any
disposal or

 

10

 

release of
hazardous or toxic substances or wastes, pollutants or contaminants, or any
actual or alleged violation of any Environmental Laws, and, to the best
knowledge of the Company and each of the Guarantors, there is no basis for any
such liability, except in any such case for any such failure to comply with, or
violation of, Environmental Laws, or failure to receive or comply with such
required permits, licenses or approvals, or liability, as would not,
individually or in the aggregate, have a Material Adverse Effect.

 

(bb)                          Compliance With ERISA. 
Each employee benefit plan, within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), that
is maintained, administered or contributed to by the Company or any of its affiliates
for employees or former employees of the Company and its affiliates has been
maintained in all material respects in compliance with its terms and the
requirements of any applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Internal Revenue Code of 1986, as
amended (the “Code”); no prohibited transaction, within the meaning of
Section 406 of ERISA or Section 4975 of the Code, has occurred with
respect to any such plan excluding transactions effected pursuant to a
statutory or administrative exemption; and for each such plan that is subject
to the funding rules of Section 412 of the Code or Section 302 of
ERISA, no “accumulated funding deficiency” as defined in Section 412 of
the Code has been incurred, whether or not waived, and the fair market value of
the assets of each such plan (excluding for these purposes accrued but unpaid
contributions) exceeds the present value of all benefits accrued under such
plan determined using reasonable actuarial assumptions.

 

(cc)                            Accounting Controls. 
The Company and its subsidiaries maintain systems of internal accounting
controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access
to assets is permitted only in accordance with management’s general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.  The
Company has advised Ernst & Young and the Company’s board of directors of
(x) all significant deficiencies, if any, in the design or operation of
internal accounting controls which could adversely affect the Company’s ability
to record, process, summarize and report financial data and (y) any fraud,
whether or not material, that involves management or other employees who have a
significant role in the Company’s internal accounting controls, in each case,
of which the Company is aware.  The
Company has identified for Ernst & Young any material weaknesses in
internal accounting controls of which they are aware.

 

(dd)                          Insurance.  The
Company and its subsidiaries have insurance covering their respective
properties, operations, personnel and businesses, including business
interruption insurance, which insurance is in amounts and insures against such
losses and risks as are adequate to protect the Company and its subsidiaries
and their respective businesses and are ordinary and customary for comparable
companies in the same or similar businesses; and neither the Company nor any of
its subsidiaries has (i) received notice from any insurer or agent of such
insurer that capital improvements or other expenditures are required or
necessary to be made in order to continue such insurance or (ii) any
reason to believe that it will not be able to renew its

 

11

 

existing
insurance coverage as and when such coverage expires or to obtain similar
coverage at reasonable cost from similar insurers as may be necessary to continue
its business.

 

(ee)                            No Unlawful Payments. 
Neither the Company nor any of its subsidiaries nor, to the best
knowledge of the Company and each of the Guarantors, any director, officer,
agent, employee or other person associated with or acting on behalf of the
Company or any of its subsidiaries has (i) used any corporate funds for
any unlawful contribution, gift, entertainment or other unlawful expense
relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from
corporate funds; (iii) violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977; or (iv) made any bribe, rebate,
payoff, influence payment, kickback or other unlawful payment.

 

(ff)                                Solvency.  On and
immediately after the Closing Date, the Company (after giving effect to the
issuance of the Securities, the application of proceeds therefrom and the other
transactions related thereto as described in the Offering Memorandum) will be
Solvent.  As used in this paragraph, the
term “Solvent” means, with respect to a particular date, that on such date
(i) the present fair market value (or present fair saleable value) of the
assets of the Company is not less than the total amount required to pay the
liabilities of the Company on its total existing debts and liabilities
(including contingent liabilities) as they become absolute and matured;
(ii) subject to the security interests granted pursuant to the Collateral
Documents, the Company is able to realize upon its assets and pay its debts and
other liabilities, contingent obligations and commitments as they mature and
become due in the normal course of business; (iii) assuming consummation
of the issuance of the Securities as contemplated by this Agreement and the
Offering Memorandum, the Company is not incurring debts or liabilities beyond
its ability to pay as such debts and liabilities mature; (iv) the Company
is not engaged in any business or transaction, and does not propose to engage
in any business or transaction, for which its property would constitute
unreasonably small capital after giving due consideration to the prevailing
practice in the industry in which the Company is engaged; and (v) the
Company is not a defendant in any civil action that would result in a judgment
that the Company is or would become unable to satisfy.

 

(gg)                          No Restrictions on Subsidiaries.  No subsidiary of the Company is currently
prohibited, directly or indirectly, under any agreement or other instrument to
which it is a party or is subject, from paying any dividends to the Company,
from making any other distribution on such subsidiary’s capital stock, from
repaying to the Company any loans or advances to such subsidiary from the
Company or from transferring any of such subsidiary’s properties or assets to
the Company or any other subsidiary of the Company.

 

(hh)                          No Broker’s Fees. 
Neither the Company nor any of its subsidiaries is a party to any
contract, agreement or understanding with any person (other than this
Agreement) that would give rise to a valid claim against any of them or any
Initial Purchaser for a brokerage commission, finder’s fee or like payment in
connection with the offering and sale of the Securities.

 

(ii)                                  Rule 144A Eligibility. 
On the Closing Date, the Securities will not be of the same class as
securities listed on a national securities exchange registered under
Section 6 of the

 

12

 

Exchange Act
or quoted in an automated inter-dealer quotation system; and each of the
Preliminary Offering Memorandum and the Offering Memorandum, as of its
respective date, contains or will contain all the information that, if
requested by a prospective purchaser of the Securities, would be required to be
provided to such prospective purchaser pursuant to Rule 144A(d)(4) under the
Securities Act.

 

(jj)                                  No Integration. 
Neither the Company nor any of its affiliates (as defined in Rule 501(b)
of Regulation D) has, directly or through any agent, sold, offered for sale,
solicited offers to buy or otherwise negotiated in respect of, any security (as
defined in the Securities Act), that is or will be integrated with the sale of
the Securities in a manner that would require registration of the Securities
under the Securities Act.

 

(kk)                            No General Solicitation or Directed Selling Efforts.  None of the Company or any of its affiliates
or any other person acting on its or their behalf (other than the Initial
Purchasers, as to which no representation is made) has (i) solicited
offers for, or offered or sold, the Securities by means of any form of general
solicitation or general advertising within the meaning of Rule 502(c) of
Regulation D or in any manner involving a public offering within the
meaning of Section 4(2) of the Securities Act or (ii) engaged in any
directed selling efforts within the meaning of Regulation S under the
Securities Act (“Regulation S”), and all such persons have complied with
the offering restrictions requirement of Regulation S.

 

(ll)                                  Securities Law Exemptions. 
Assuming the accuracy of the representations and warranties of the
Initial Purchasers contained in Section 1(b) (including Annex A hereto)
and their compliance with their agreements set forth therein, it is not
necessary, in connection with the issuance and sale of the Securities to the
Initial Purchasers and the offer, resale and delivery of the Securities by the
Initial Purchasers in the manner contemplated by this Agreement and the
Offering Memorandum, to register the Securities under the Securities Act or to
qualify the Indenture under the Trust Indenture Act.

 

(mm)                      No Other Contracts or Documents.  There are no contracts or documents of a
character required by the Securities Act or the rules and regulations
thereunder to be described in a prospectus included in a Registration Statement
on Form S-1, which are not described in the Offering Memorandum.

 

(nn)                          No Stabilization. 
Neither the Company nor any of the Guarantors has taken, directly or
indirectly, any action designed to or that could reasonably be expected to
cause or result in any stabilization or manipulation of the price of the
Securities.

 

(oo)                          Margin Rules.  Neither
the issuance, sale and delivery of the Securities nor the application of the
proceeds thereof by the Company as described in the Offering Memorandum will
violate Regulation T, U or X of the Board of Governors of the Federal Reserve
System or any other regulation of such Board of Governors.

 

(pp)                          Forward-Looking Statements. 
No forward-looking statement (within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act) contained in the
Preliminary Offering Memorandum and the Offering Memorandum has been made or
reaffirmed without a reasonable basis or has been disclosed other than in good
faith.

 

13

 

(qq)                          Statistical and Market Data. 
Nothing has come to the attention of the Company that has caused the
Company to believe that the statistical and market-related data included in the
Preliminary Offering Memorandum and the Offering Memorandum is not based on or
derived from sources that are reliable and accurate in all material respects.

 

(rr)                                Surplus.  The amounts
paid to the stockholders, warrant holders and option holders of the Parent to
purchase certain of their shares of common stock, warrants and options as
expressly described in the “Use of proceeds” section of the Preliminary
Offering Memorandum and the Offering Memorandum is permitted by the Delaware
General Corporation Law and will be paid out of surplus as defined in
Section 154 of the Delaware General Corporation Law and following such
purchase the Company’s capital will not be impaired as a result of such
purchase and the Company will be able to pay its debts.

 

(ss)                            Warrant Agreement.  In
connection with the amounts paid to the stockholders, warrant holders and
option holders of the Parent to purchase certain of their shares of common
stock, warrants and options as expressly described in the “Use of proceeds”
section of the Preliminary Offering Memorandum and the Offering
Memorandum, no consents are required under the Warrant Agreement, dated as of
September 28, 2001, between Cellu Paper Holdings, Inc. and the
warrantholders parties thereto.

 

4.                                       Further
Agreements of the Company and the Guarantors.  The Company and each of the Guarantors
jointly and severally covenant and agree with each Initial Purchaser that:

 

(a)                                  Delivery of Copies. 
The Company will deliver to the Initial Purchasers as many copies of the
Preliminary Offering Memorandum and the Offering Memorandum (including all
amendments and supplements thereto) as the Representative may reasonably
request.

 

(b)                                 Amendments or Supplements. 
Before making or distributing any amendment or supplement to the
Preliminary Offering Memorandum or the Offering Memorandum, the Company will
furnish to the Representative and counsel for the Initial Purchasers a copy of
the proposed amendment or supplement for review, and will not distribute any
such proposed amendment or supplement to which the Representative reasonably
objects.

 

(c)                                  Notice to the Representative.  The Company will advise the Representative
promptly, and confirm such advice in writing if requested by the
Representative, (i) of the issuance by any governmental or regulatory
authority of any order preventing or suspending the use of the Preliminary
Offering Memorandum or the Offering Memorandum or the initiation or threatening
of any proceeding for that purpose; (ii) of the occurrence of any event at
any time prior to the completion of the initial offering of the Securities as a
result of which the Offering Memorandum as then amended or supplemented would
include any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances existing when the Offering Memorandum is delivered to a
purchaser, not misleading; and (iii) of the receipt by the Company of any
notice with respect to any suspension of the qualification of the Securities
for offer and sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and the Company will use its reasonable best
efforts to prevent the issuance of any such order preventing or suspending the
use of the Preliminary Offering Memorandum or the Offering Memorandum or
suspending any

 

14

 

such
qualification of the Securities and, if any such order is issued, will use its
reasonable best efforts to obtain as soon as possible the withdrawal thereof.

 

(d)                                 Ongoing Compliance of the Offering Memorandum.  If at any time prior to the completion of the
initial offering of the Securities (i) any event shall occur or condition
shall exist as a result of which the Offering Memorandum as then amended or
supplemented would include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances existing when the Offering Memorandum is
delivered to a purchaser, not misleading or (ii) it is necessary to amend
or supplement the Offering Memorandum to comply with law, the Company will
immediately notify the Initial Purchasers thereof and forthwith prepare and,
subject to paragraph (b) above, furnish to the Initial Purchasers such
amendments or supplements to the Offering Memorandum as may be necessary so
that the statements in the Offering Memorandum as so amended or supplemented
will not, in the light of the circumstances existing when the Offering
Memorandum is delivered to a purchaser, be misleading or so that the Offering
Memorandum will comply with law.

 

(e)                                  Blue Sky Compliance. 
The Company will qualify the Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions as the Representative shall
reasonably request and will continue such qualifications in effect so long as
required for the offering and resale of the Securities; provided that
neither the Company nor any of the Guarantors shall be required to
(i) qualify as a foreign corporation or other entity or as a dealer in
securities in any such jurisdiction where it would not otherwise be required to
so qualify, (ii) take any action that would subject it to any general
service of process in any jurisdiction where it was not so subject (other than
as a result of the sale of the Securities) or (iii) subject itself to
taxation in any such jurisdiction if it is not otherwise so subject.

 

(f)                                    Clear Market.  During
the period from the date hereof through and including the date that is 180 days
after the date hereof, the Company and each of the Guarantors will not, without
the prior written consent of the Representative, offer, sell, contract to sell
or otherwise dispose of any debt securities issued or guaranteed by the Company
or any of the Guarantors and having a tenor of more than one year.

 

(g)                                 Use of Proceeds.  The
Company will apply the net proceeds from the sale of the Securities as
described in the Offering Memorandum under the heading “Use of Proceeds”.

 

(h)                                 Supplying Information. 
While the Securities remain outstanding and are “restricted securities”
within the meaning of Rule 144(a)(3) under the Securities Act, the Company and
each of the Guarantors will, during any period in which the Company is not
subject to and in compliance with Section 13 or 15(d) of the Exchange Act,
furnish to holders of the Securities and prospective purchasers of the
Securities designated by such holders, upon the request of such holders or such
prospective purchasers, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.

 

(i)                                     PORTAL and DTC.   The
Company will assist the Initial Purchasers in arranging for the Securities to
be designated Private Offerings, Resales and Trading through Automated Linkages
(“PORTAL”) Market securities in accordance with the rules and regulations
adopted

 

15

 

by the
National Association of Securities Dealers, Inc. (“NASD”) relating to trading
in the PORTAL Market and for the Securities to be eligible for clearance and
settlement through The Depository Trust Company (“DTC”).

 

(j)                                     No Resales by the Company. 
Until the issuance of the Exchange Securities, the Company will not, and
will not permit any of its affiliates (as defined in Rule 144 under the Securities
Act) to, resell any of the Securities that have been acquired by any of them,
except for Securities purchased by the Company or any of its affiliates and
resold in a transaction registered under the Securities Act.

 

(k)                                  No Integration. 
Neither the Company nor any of its affiliates (as defined in Rule 501(b)
of Regulation D) will, directly or through any agent, sell, offer for sale,
solicit offers to buy or otherwise negotiate in respect of, any security (as
defined in the Securities Act), that is or will be integrated with the sale of
the Securities in a manner that would require registration of the Securities
under the Securities Act.

 

(l)                                     No General Solicitation or Directed Selling Efforts.  None of the Company or any of its affiliates
or any other person acting on its or their behalf (other than the Initial
Purchasers, as to which no covenant is given) will (i) solicit offers for,
or offer or sell, the Securities by means of any form of general solicitation
or general advertising within the meaning of Rule 502(c) of Regulation D or in
any manner involving a public offering within the meaning of Section 4(2)
of the Securities Act or (ii) engage in any directed selling efforts
within the meaning of Regulation S, and all such persons will comply with the
offering restrictions requirement of Regulation S.

 

(m)                               No Stabilization. 
Neither the Company nor any of the Guarantors will take, directly or
indirectly, any action designed to or that could reasonably be expected to
cause or result in any stabilization or manipulation of the price of the
Securities.

 

(n)                                 Perfection
of Security Interests. 
The Company and each Guarantor (i) shall use their reasonable best
efforts to complete on or prior to the Closing Date all filings and other
similar actions required in connection with the perfection of security
interests as and to the extent contemplated by the Mortgages and the Security
Agreement and (ii) shall take all actions necessary to maintain such security
interests and to perfect security interests in any collateral acquired after
the Closing Date, in each case as and to the extent contemplated by the
Mortgages and the Security Agreement.

 

5.                                       Conditions
of Initial Purchasers’ Obligations. 
The obligation of each Initial Purchaser to purchase Securities on the
Closing Date as provided herein is subject to the performance by the Company
and each of the Guarantors of their respective covenants and other obligations
hereunder and to the following additional conditions:

 

(a)                                  Representations and Warranties.  The representations and warranties of the
Company and the Guarantors contained herein shall be true and correct on the
date hereof and on and as of the Closing Date; and the statements of the
Company, the Guarantors and their respective officers made in any certificates
delivered pursuant to this Agreement shall be true and correct on and as of the
Closing Date.

 

16

 

(b)                                 No Downgrade. 
Subsequent to the execution and delivery of this Agreement, (i) no
downgrading shall have occurred in the rating accorded the Securities or any
other debt securities or preferred stock issued or guaranteed by the Company or
any of the Guarantors by any “nationally recognized statistical rating
organization”, as such term is defined by the Commission for purposes of Rule
436(g)(2) under the Securities Act; and (ii) no such organization shall have
publicly announced that it has under surveillance or review, or has changed its
outlook with respect to, its rating of the Securities or of any other debt
securities or preferred stock issued or guaranteed by the Company or any of the
Guarantors (other than an announcement with positive implications of a possible
upgrading).

 

(c)                                  No Material Adverse Change. 
Subsequent to the execution and delivery of this Agreement, no event or
condition of a type described in Section 3(c) hereof shall have occurred
or shall exist, which event or condition is not described in the Offering
Memorandum (excluding any amendment or supplement thereto) and the effect of
which in the judgment of the Representative makes it impracticable or
inadvisable to proceed with the offering, sale or delivery of the Securities on
the terms and in the manner contemplated by this Agreement and the Offering
Memorandum.

 

(d)                                 Officer’s Certificate. 
The Representative shall have received (x) on and as of the Closing Date
a certificate of an executive officer of the Company and of each Guarantor who
has specific knowledge of the Company’s or such Guarantor’s financial matters
and is satisfactory to the Representative (i) confirming that such officer
has carefully reviewed the Offering Memorandum and, to the best knowledge of
such officer, the representation set forth in Section 3(a) hereof is true
and correct, (ii) confirming that the other representations and warranties
of the Company and the Guarantors in this Agreement are true and correct and
that the Company and the Guarantors have complied with all agreements and
satisfied all conditions on their part to be performed or satisfied hereunder
at or prior to the Closing Date and (iii) to the effect set forth in
paragraphs (b) and (c) above and (y) on the date of this Agreement, a
certificate of an executive officer of the Company certifying, to the best
knowledge of such officer, calculation of the borrowing base calculation under
the Credit Agreement as of such date, in form and substance reasonably
satisfactory to the Representative.

 

(e)                                  Comfort Letters.  On
the date of this Agreement and on the Closing Date, Ernst & Young
shall have furnished to the Representative, at the request of the Company,
letters, dated the respective dates of delivery thereof and addressed to the
Initial Purchasers, in form and substance reasonably satisfactory to the
Representative, containing statements and information of the type customarily
included in accountants’ “comfort letters” to underwriters with respect to the
financial statements and certain financial information contained in the
Preliminary Offering Memorandum and the Offering Memorandum; provided that
the letter delivered on the Closing Date shall use a “cut-off” date no more
than three business days prior to the Closing Date.

 

(f)                                    Opinion of Counsel for the Company.  Proskauer Rose LLP, counsel for the Company,
shall have furnished to the Representative, at the request of the Company,
their written opinion, dated the Closing Date and addressed to the Initial
Purchasers, in form and substance reasonably satisfactory to the
Representative, to the effect set forth in Annex B hereto.

 

17

 

(g)                                 Opinions of Local Counsel to the Company.

 

(i)                                     Local
counsel to the Company in the States of Mississippi and Virginia shall have
furnished to the Representative, at the request of the Company, their written
opinion, dated the Closing Date and addressed to the Initial Purchasers, with
respect to the Personal Property Collateral in form and substance reasonably
satisfactory to the Representative, substantially to the effect set forth in
the drafts thereof delivered to counsel to the Representative prior to the date
hereof.

 

(ii)                                  Proskauer
Rose LLP, counsel for the Company in the State of New York, and local counsel
to the Company in the States of Connecticut, Michigan, Mississippi and
Wisconsin shall have furnished to the Representative, at the request of the
Company, their written opinions, dated the Closing Date and addressed to the
Initial Purchasers, with respect to the Mortgages in form and substance
reasonably satisfactory to the Representative, substantially to the effect set
forth in the drafts thereof delivered to counsel to the Representative prior to
the date hereof.

 

(h)                                 Opinion of Canadian Counsel to the Company.  Stewart McKelvey Stirling Scales, Nova Scotia
counsel to the Company, and Baker & McKenzie, Ontario counsel to the
Company, shall have furnished to the Representative, at the request of the
Company, their written opinions, dated the Closing Date and addressed to the
Initial Purchasers, with respect to the Personal Property Collateral and the
Mortgages, as applicable, in form and substance reasonably satisfactory to the
Representative, substantially to the effect set forth in the drafts thereof
delivered to counsel to the Representative prior to the date hereof.

 

(i)                                     Opinion of Counsel for the Initial Purchasers.  The Representative shall have received on and
as of the Closing Date an opinion of Simpson Thacher & Bartlett LLP,
counsel for the Initial Purchasers, with respect to such matters as the
Representative may reasonably request, and such counsel shall have received
such documents and information as they may reasonably request to enable them to
pass upon such matters.

 

(j)                                     No Legal Impediment to Issuance.  No action shall have been taken and no
statute, rule, regulation or order shall have been enacted, adopted or issued
by any federal, state or foreign governmental or regulatory authority that
would, as of the Closing Date, prevent the issuance or sale of the Securities
or the issuance of the Guarantees; and no injunction or order of any federal, state
or foreign court shall have been issued that would, as of the Closing Date,
prevent the issuance or sale of the Securities or the issuance of the
Guarantees.

 

(k)                                  Good Standing.  The
Representative shall have received on and as of the Closing Date satisfactory
evidence of the good standing of the Company and the Guarantors in their
respective jurisdictions of organization and their good standing in such other
jurisdictions as the Representative may reasonably request, in each case in
writing or any standard form of telecommunication, from the appropriate
governmental authorities of such jurisdictions.

 

(l)                                     Registration Rights Agreement.  The Initial Purchasers shall have received a
counterpart of the Registration Rights Agreement that shall have been executed
and delivered by a duly authorized officer of the Company and each of the
Guarantors.

 

18

 

(m)                               PORTAL and DTC.  The
Securities shall have been approved by the NASD for trading in the PORTAL
Market and shall be eligible for clearance and settlement through DTC.

 

(n)                                 Termination of the Existing Financing Agreements.
Concurrently with or prior to the issue and sale of the Securities by the
Company, the Company shall have prepaid in full all amounts outstanding under
any loans with respect to, received the release of any and all liens in
connection with, and obtained the termination of (i) the Financing Agreement,
dated as of September 30, 2002, by and among Cellu Tissue Corporation,
Coastal Paper Company, Cellu Tissue Corporation – Natural Dam, Cellu Tissue
Corporation – Neenah and Menominee Acquisition Corporation, as borrowers, Cellu
Tissue Holdings, Inc., Cellu Paper Holdings, Inc., Van Paper Company and Van
Timber Company, as initial guarantors, the lenders party thereto and The CIT
Group/Business Credit, Inc., as agent, and all related documents and agreements
and (ii) the Financing Agreement, dated as of September 30, 2002, by and
among Cellu Tissue Corporation, Coastal Paper Company, Cellu Tissue Corporation
– Natural Dam, Cellu Tissue Corporation – Neenah and Menominee Acquisition
Corporation, as borrowers, Cellu Tissue Holdings, Inc., Cellu Paper Holdings,
Inc., Van Paper Company and Van Timber Company, as initial guarantors, the
lenders party thereto and Ableco Finance LLC, as agent, and all related
documents and agreements (collectively, the “Existing Financing Agreements”);
the Representative shall have received all documents entered into and received
thereunder in connection with such termination in form and substance reasonably
satisfactory to the Representative.

 

(o)                                 The New Credit Agreement. 
Concurrently with or prior to the issue and sale of the Securities by
the Company, the Company shall have entered into that certain Revolving Credit
Agreement, to be dated as of the Closing Date (the “Credit Agreement”), in form
and substance satisfactory to the Representative; the Representative shall have
received conformed counterparts thereof and all other documents and agreements
entered into and received thereunder in connection with the closing of the
Credit Agreement, including, but not limited to, a security agreement, in form
and substance reasonably satisfactory to the Representative.

 

(p)                                 Lien Searches.  The
Representative shall have received the results of a recent lien search in each
of the jurisdictions where assets of the Company and the Guarantors are located
and any jurisdictions in which valid filings with respect to such assets of the
Company and the Guarantor may be in effect, and such search shall reveal no
liens on any of the assets of the Company and the Guarantors or their
respective subsidiaries except for Permitted Exceptions or liens that will be
released concurrently with or prior to the issuance and sale of the Securities
by the Company.

 

(q)                                 Security Agreement. 
The Initial Purchasers shall have received conformed counterparts of the
Security Agreement that shall have been executed and delivered by duly
authorized officers of each party thereto, substantially in the form attached
hereto as Exhibit B.

 

(r)                                    Intercreditor Agreement. 
The Initial Purchasers shall have received conformed counterparts of the
Intercreditor Agreement that shall have been executed and delivered by duly
authorized officers of each party thereto, substantially in the form attached
hereto as Exhibit C.

 

19

 

(s)                                  Filings, Registration and Recordings.  Except as otherwise contemplated by the
Mortgages and the Security Agreement, each document (including any Uniform Commercial
Code financing statement) required by the Mortgages and the Security Agreement,
or under law or reasonably requested by the Representative, in each case, to be
filed, registered or recorded, or delivered for filing on or prior to the
Closing Date, in order to create in favor of the Trustee, for the benefit of the holders of the Securities, a perfected
first priority lien and security interest in the Personal Property Collateral
constituting First Priority Collateral and a perfected second priority lien and
security interest in the Personal Property Collateral constituting
Second Priority Collateral, which can be perfected by the making of such
filings, registrations or recordations prior and superior to the right of any
other person (other than liens expressly permitted to be incurred or to exist
on the Personal Property Collateral under the Indenture), shall be in proper
form for filing, registration or recordation.

 

(t)                                    Mortgages, etc.

 

(i)                                     The
Representative shall have received, in form and substance reasonably
satisfactory to it, releases of the collateral pledged pursuant to the Existing
Financing Agreements;

 

(ii)                                  The
Representative shall have received a first priority Mortgage (or deed of trust
or deed to secure debt, as applicable), substantially in the form attached
hereto as Exhibit D, with respect to each of the Mortgaged Properties
constituting First Priority Collateral executed and delivered by a duly
authorized officer of the Company or Guarantor party thereto.

 

(iii)                               The
Representative shall have received, and the title company issuing the policy
referred to in clause (iv) below (the “Title Insurance Company”) shall have
received, maps or plats of an as-built survey of the sites of the Mortgaged
Properties which were delivered to the Representative by an independent
professional licensed land surveyor reasonably satisfactory to the
Representative and the Title Insurance Company or the Title Insurance Company
shall have issued a “same-as-survey” endorsement based on an affidavit from the
Company.

 

(iv)                              The
Representative shall have received in respect of each of the Mortgaged
Properties a mortgagee’s title insurance policy (or policies) or marked up
signed title commitment pursuant to a “New York” style real estate closing with
the Title Insurance Company; each such policy or commitment shall (A) be
in an amount equal to an amount mutually agreeable by the Company and the
Representative; (B) be issued at ordinary rates; (C) insure that the
Mortgage insured thereby creates a valid first priority lien and security
interest in each such Mortgaged Property constituting First Priority
Collateral, free and clear of all defects and encumbrances, except for those
defects and encumbrances expressly permitted as a Permitted Exception;
(D) name the Trustee for the benefit of the holders of the Securities as
the insured thereunder; (E) be in the form of ALTA Loan Policy - 1970
(Amended 10/17/70 and 10/17/84) (or equivalent policies); (F) contain such
endorsements and affirmative coverage as the Representative shall reasonably
request; and (G) be issued by title companies satisfactory to the
Representative (including any such title companies acting as co-insurers or
reinsurers, at

 

20

 

the option of the Representative); the Representative shall have
received evidence satisfactory to it that all premiums in respect of such
policy or commitment, all charges for mortgage recording tax and all related
expenses, if any, have been paid.

 

(v)                                 The
Representative shall have received a copy of all recorded documents referred
to, or listed as exceptions to title in, above and the title policies or
policies referred to in clause (iii) above and a copy of all other material
documents affecting the Mortgaged Properties.

 

(u)                                 Collateral Accounts. 
Prior to the Closing Date, the Initial Purchasers shall have received
satisfactory evidence that any and all collateral accounts have been
established pursuant to the terms of the Indenture and the Security Agreement.

 

(v)                                 Insurance Policies. 
On or prior to the Closing Date, the Initial Purchasers shall have
received satisfactory evidence that the Company and the Guarantors maintain
insurance with respect to the Collateral as specified by Section 5.2  of the Security Agreement.

 

(w)                               Stock Certificates. 
On the Closing Date, the Trustee, or the collateral agent, shall have
received the stock certificates and blank, undated stock powers for each of the
Guarantors, subject to Section 11.6 of the Indenture, as set forth in
Schedule 6 hereto.

 

(x)                                   Additional Documents. 
On or prior to the Closing Date, the Company and the Guarantors shall
have furnished to the Representative such further certificates and documents as
the Representative may reasonably request.

 

All opinions, letters, certificates and evidence mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Initial Purchasers.

 

6.                                       Indemnification
and Contribution.

 

(a)                                  Indemnification of the Initial Purchasers.  The Company and each of the Guarantors
jointly and severally agree to indemnify and hold harmless each Initial
Purchaser, its affiliates, directors and officers and each person, if any, who
controls such Initial Purchaser within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages and liabilities (including, without limitation,
legal fees and other expenses incurred in connection with any suit, action or
proceeding or any claim asserted, as such fees and expenses are incurred),
joint or several, that arise out of, or are based upon, any untrue statement or
alleged untrue statement of a material fact contained in the Preliminary
Offering Memorandum or the Offering Memorandum (or any amendment or supplement
thereto) or any omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except insofar as
such losses, claims, damages or liabilities arise out of, or are based upon,
any untrue statement or omission or alleged untrue statement or omission made
in reliance upon and in conformity with any information relating to any Initial
Purchaser furnished to the Company in writing by such Initial Purchaser through
the Representative expressly for use therein; provided, that with
respect to any such untrue statement in or omission from the Preliminary
Offering Memorandum, the indemnity agreement contained in this 

 

21

 

paragraph (a)
shall not inure to the benefit of any Initial Purchaser to the extent that the
sale to the person asserting any such loss, claim, damage or liability was an
initial resale by such Initial Purchaser and any such loss, claim, damage or
liability of or with respect to such Initial Purchaser results from the fact
that both (i) a copy of the Offering Memorandum was not sent or given to such
person at or prior to the written confirmation of the sale of such Securities
to such person and (ii) the untrue statement in or omission from such
Preliminary Offering Memorandum was corrected in the Offering Memorandum
unless, in either case, such failure to deliver the Offering Memorandum was a
result of non-compliance by the Company with the provisions of Section 4
hereof.

 

(b)                                 Indemnification of the Company.  Each Initial Purchaser agrees, severally and
not jointly, to indemnify and hold harmless the Company, each of the
Guarantors, each of their respective directors and officers and each person, if
any, who controls the Company or any of the Guarantors within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act to
the same extent as the indemnity set forth in paragraph (a) above, but only
with respect to any losses, claims, damages or liabilities that arise out of,
or are based upon, any untrue statement or omission or alleged untrue statement
or omission made in reliance upon and in conformity with any information
relating to such Initial Purchaser furnished to the Company in writing by such
Initial Purchaser through the Representative expressly for use in the
Preliminary Offering Memorandum and the Offering Memorandum (or any amendment
or supplement thereto), it being understood and agreed that the only such
information consists of the following: 
the statements concerning the Initial Purchasers contained in the third
paragraph, the fifth and sixth sentences of the eighth paragraph and the tenth
paragraph under the heading, “Plan of distribution” in the Preliminary Offering
Memorandum and Offering Memorandum.

 

(c)                                  Notice and Procedures. 
If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any person in respect of which indemnification may be sought pursuant to either
paragraph (a) or (b) above, such person (the “Indemnified Person”) shall
promptly notify the person against whom such indemnification may be sought (the
“Indemnifying Person”) in writing; provided that the failure to notify
the Indemnifying Person shall not relieve it from any liability that it may
have under this Section 6 except to the extent that it has been materially
prejudiced (through the forfeiture of substantive rights or defenses) by such
failure; and provided, further, that the failure to notify the
Indemnifying Person shall not relieve it from any liability that it may have to
an Indemnified Person otherwise than under this Section 6.  If any such proceeding shall be brought or
asserted against an Indemnified Person and it shall have notified the
Indemnifying Person thereof, the Indemnifying Person shall retain counsel
reasonably satisfactory to the Indemnified Person to represent the Indemnified
Person and any others entitled to indemnification pursuant to this
Section 6 that the Indemnifying Person may designate in such proceeding
and shall pay the fees and expenses of such counsel related to such proceeding,
as incurred.  In any such proceeding, any
Indemnified Person shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Person
unless (i) the Indemnifying Person and the Indemnified Person shall have
mutually agreed to the contrary; (ii) the Indemnifying Person has failed within
a reasonable time to retain counsel reasonably satisfactory to the Indemnified
Person; (iii) the Indemnified Person shall have reasonably concluded that there
may be legal defenses available to it that are different from or in addition to
those available to the Indemnifying Person; or (iv) the named parties in any
such proceeding 

 

22

 

(including any
impleaded parties) include both the Indemnifying Person and the Indemnified
Person and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them.  It is understood and agreed that the Indemnifying
Person shall not, in connection with any proceeding or related proceeding in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Indemnified Persons,
and that all such fees and expenses shall be reimbursed as they are
incurred.  Any such separate firm for any
Initial Purchaser, its affiliates, directors and officers and any control
persons of such Initial Purchaser shall be designated in writing by J.P. Morgan
Securities Inc. and any such separate firm for the Company, the Guarantors and
any control persons of the Company and the Guarantors shall be designated in
writing by the Company.  The Indemnifying
Person shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if there be a
final judgment for the plaintiff, the Indemnifying Person agrees to indemnify
each Indemnified Person from and against any loss or liability by reason of
such settlement or judgment. 
Notwithstanding the foregoing sentence, if at any time an Indemnified
Person shall have requested that an Indemnifying Person reimburse the
Indemnified Person for fees and expenses of counsel as contemplated by this
paragraph, the Indemnifying Person shall be liable for any settlement of any
proceeding effected without its written consent if (i) such settlement is
entered into more than 30 days after receipt by the Indemnifying Person of such
request and (ii) the Indemnifying Person shall not have reimbursed the
Indemnified Person in accordance with such request prior to the date of such
settlement.  No Indemnifying Person
shall, without the written consent of the Indemnified Person, effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Person is or could have been a party and indemnification could have
been sought hereunder by such Indemnified Person, unless such settlement (x)
includes an unconditional release of such Indemnified Person, in form and
substance reasonably satisfactory to such Indemnified Person, from all
liability on claims that are the subject matter of such proceeding and (y) does
not include any statement as to or any admission of fault, culpability or a
failure to act by or on behalf of any Indemnified Person.

 

(d)                                 Contribution.  If the
indemnification provided for in paragraphs (a) and (b) above is unavailable to
an Indemnified Person or insufficient in respect of any losses, claims, damages
or liabilities referred to therein, then each Indemnifying Person under such
paragraph, in lieu of indemnifying such Indemnified Person thereunder, shall
contribute to the amount paid or payable by such Indemnified Person as a result
of such losses, claims, damages or liabilities (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company and the
Guarantors on the one hand and the Initial Purchasers on the other from the
offering of the Securities or (ii) if the allocation provided by
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in
clause (i) but also the relative fault of the Company and the Guarantors
on the one hand and the Initial Purchasers on the other in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations.  The relative benefits received by the Company
and the Guarantors on the one hand and the Initial Purchasers on the other
shall be deemed to be in the same respective proportions as the net proceeds
(before deducting expenses) received by the Company from the sale of the
Securities and the total discounts and commissions received by the Initial
Purchasers in connection therewith, as provided in this Agreement, bear to the
aggregate offering price of the Securities. 
The relative fault of the Company and the Guarantors on the one hand and
the Initial Purchasers

 

23

 

on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or any
Guarantor or by the Initial Purchasers and the parties’ relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.

 

(e)                                  Limitation on Liability. 
The Company, the Guarantors and the Initial Purchasers agree that it
would not be just and equitable if contribution pursuant to this Section 6
were determined by pro rata allocation (even if the Initial
Purchasers were treated as one entity for such purpose) or by any other method
of allocation that does not take account of the equitable considerations
referred to in paragraph (d) above.  The
amount paid or payable by an Indemnified Person as a result of the losses,
claims, damages and liabilities referred to in paragraph (d) above shall be
deemed to include, subject to the limitations set forth above, any legal or
other expenses incurred by such Indemnified Person in connection with any such
action or claim.  Notwithstanding the
provisions of this Section 6, in no event shall an Initial Purchaser be
required to contribute any amount in excess of the amount by which the total
discounts and commissions received by such Initial Purchaser with respect to
the offering of the Securities exceeds the amount of any damages that such
Initial Purchaser has otherwise been required to pay by reason of such untrue
or alleged untrue statement or omission or alleged omission.  No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.  The
Initial Purchasers’ obligations to contribute pursuant to this Section 6
are several in proportion to their respective purchase obligations hereunder
and not joint.

 

(f)                                    Non-Exclusive Remedies. 
The remedies provided for in this Section 6 are not exclusive and
shall not limit any rights or remedies that may otherwise be available to any
Indemnified Person at law or in equity.

 

7.                                       Termination.  This Agreement may be terminated in the absolute
discretion of the Representative, by notice to the Company, if after the
execution and delivery of this Agreement and prior to the Closing Date
(i) trading generally shall have been suspended or materially limited on
the New York Stock Exchange or the over-the-counter market; (ii) trading
of any securities issued or guaranteed by the Company or any of the Guarantors
shall have been suspended on any exchange or in any over-the-counter market;
(iii) a general moratorium on commercial banking activities shall have
been declared by federal or New York State authorities; or (iv) there shall
have occurred any outbreak or escalation of hostilities or any change in
financial markets or any calamity or crisis, either within or outside the
United States, that, in the judgment of the Representative, is material and
adverse and makes it impracticable or inadvisable to proceed with the offering,
sale or delivery of the Securities on the terms and in the manner contemplated
by this Agreement and the Offering Memorandum.

 

8.                                       Defaulting
Initial Purchaser.  (a)  If, on the Closing Date, any Initial
Purchaser defaults on its obligation to purchase the Securities that it has
agreed to purchase hereunder, the non-defaulting Initial Purchasers may in
their discretion arrange for the purchase of such Securities by other persons
satisfactory to the Company on the terms contained in this Agreement.  If, within 36 hours after any such default by
any Initial Purchaser, the non-defaulting

 

24

 

Initial
Purchasers do not arrange for the purchase of such Securities, then the Company
shall be entitled to a further period of 36 hours within which to procure other
persons satisfactory to the non-defaulting Initial Purchasers to purchase such
Securities on such terms.  If other
persons become obligated or agree to purchase the Securities of a defaulting
Initial Purchaser, either the non-defaulting Initial Purchasers or the Company
may postpone the Closing Date for up to five full business days in order to
effect any changes that in the opinion of counsel for the Company or counsel
for the Initial Purchasers may be necessary in the Offering Memorandum or in
any other document or arrangement, and the Company agrees to promptly prepare
any amendment or supplement to the Offering Memorandum that effects any such
changes.  As used in this Agreement, the
term “Initial Purchaser” includes, for all purposes of this Agreement unless
the context otherwise requires, any person not listed in Schedule 1 hereto
that, pursuant to this Section 8, purchases Securities that a defaulting
Initial Purchaser agreed but failed to purchase.

 

(b)                                 If,
after giving effect to any arrangements for the purchase of the Securities of a
defaulting Initial Purchaser or Initial Purchasers by the non-defaulting
Initial Purchasers and the Company as provided in paragraph (a) above, the
aggregate principal amount of such Securities that remains unpurchased does not
exceed one-eleventh of the aggregate principal amount of all the Securities,
then the Company shall have the right to require each non-defaulting Initial
Purchaser to purchase the principal amount of Securities that such Initial
Purchaser agreed to purchase hereunder plus such Initial Purchaser’s pro rata
share (based on the principal amount of Securities that such Initial Purchaser
agreed to purchase hereunder) of the Securities of such defaulting Initial
Purchaser or Initial Purchasers for which such arrangements have not been made.

 

(c)                                  If,
after giving effect to any arrangements for the purchase of the Securities of a
defaulting Initial Purchaser or Initial Purchasers by the non-defaulting
Initial Purchasers and the Company as provided in paragraph (a) above, the
aggregate principal amount of such Securities that remains unpurchased exceeds
one-eleventh of the aggregate principal amount of all the Securities, or if the
Company shall not exercise the right described in paragraph (b) above, then
this Agreement shall terminate without liability on the part of the non-defaulting
Initial Purchasers.  Any termination of
this Agreement pursuant to this Section 8 shall be without liability on
the part of the Company or the Guarantors, except that the Company and each of
the Guarantors will continue to be liable for the payment of expenses as set
forth in Section 9 hereof and except that the provisions of Section 6
hereof shall not terminate and shall remain in effect.

 

(d)                                 Nothing
contained herein shall relieve a defaulting Initial Purchaser of any liability
it may have to the Company, the Guarantors or any non-defaulting Initial
Purchaser for damages caused by its default.

 

9.                                       Payment
of Expenses.  (a)  Whether or not the transactions contemplated
by this Agreement are consummated or this Agreement is terminated, the Company
and each of the Guarantors jointly and severally agree to pay or cause to be
paid all costs and expenses incident to the performance of their respective
obligations hereunder, including without limitation, (i) the costs
incident to the authorization, issuance, sale, preparation and delivery of the
Securities and any taxes payable in that connection; (ii) the costs
incident to the preparation and printing of the Preliminary Offering Memorandum
and the Offering Memorandum (including any amendment

 

25

 

or supplement
thereto) and the distribution thereof; (iii) the costs of reproducing and
distributing each of the Transaction Documents and perfecting the security
interest in the Collateral as contemplated by the Mortgages and the Security
Agreement; (iv) the fees and expenses of the Company’s and the Guarantors’
counsel (including local and special counsel) and independent accountants;
(v) the fees and expenses incurred in connection with the registration or
qualification and determination of eligibility for investment of the Securities
under the laws of such jurisdictions as the Representative may designate and
the preparation, printing and distribution of a Blue Sky Memorandum (including
the related reasonable fees and expenses of counsel for the Initial
Purchasers); (vi) any fees charged by rating agencies for rating the
Securities; (vii) the fees and expenses of the Trustee, any paying agent
and any collateral agent (including related fees and expenses of any counsel to
such parties); (viii) all expenses and application fees incurred in
connection with the application for the inclusion of the Securities on the
PORTAL Market and the approval of the Securities for book-entry transfer by
DTC; (ix) all expenses incurred by the Company in connection with any
“road show” presentation to potential investors; and (x) the fees and expenses
incurred with respect to creating and perfecting the security interest in the
Collateral as contemplated by the Collateral Documents (including the related
reasonable fees and expenses of counsel for the Initial Purchasers).

 

(b)                                 If
(i) this Agreement is terminated pursuant to Section 7, (ii) the
Company for any reason fails to tender the Securities for delivery to the
Initial Purchasers or (iii) the Initial Purchasers decline to purchase the
Securities for any reason permitted under this Agreement, the Company and each
of the Guarantors jointly and severally agrees to reimburse the Initial
Purchasers for all out-of-pocket costs and expenses (including the reasonable
fees and expenses of their counsel) reasonably incurred by the Initial
Purchasers in connection with this Agreement and the offering contemplated
hereby.

 

10.                                 Persons
Entitled to Benefit of Agreement. 
This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective successors and any controlling persons
referred to herein, and the affiliates, officers and directors of each Initial
Purchaser referred to in Section 6 hereof. 
Nothing in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement or any provision contained herein.  No purchaser of Securities from any Initial
Purchaser shall be deemed to be a successor merely by reason of such purchase.

 

11.                                 Survival.  The respective indemnities, rights of
contribution, representations, warranties and agreements of the Company, the
Guarantors and the Initial Purchasers contained in this Agreement or made by or
on behalf of the Company, the Guarantors or the Initial Purchasers pursuant to
this Agreement or any certificate delivered pursuant hereto shall survive the
delivery of and payment for the Securities and shall remain in full force and
effect, regardless of any termination of this Agreement or any investigation
made by or on behalf of the Company, the Guarantors or the Initial Purchasers.

 

12.                                 Certain
Defined Terms.  For purposes of this
Agreement, (a) except where otherwise expressly provided, the term “affiliate”
has the meaning set forth in Rule 405 under the Securities Act; (b) the term
“business day” means any day other than a day on which banks are permitted or
required to be closed in New York City; (c) the term “Exchange Act” means the

 

26

 

Securities
Exchange Act of 1934, as amended; and (d) the term “subsidiary” has the meaning
set forth in Rule 405 under the Securities Act.

 

13.                                 Miscellaneous.  (a)  Authority of the Representative.  Any action by the Initial Purchasers
hereunder may be taken by J.P. Morgan Securities Inc. on behalf of the Initial
Purchasers, and any such action taken by J.P. Morgan Securities Inc. shall be
binding upon the Initial Purchasers.

 

(b)                                 Notices.  All notices
and other communications hereunder shall be in writing and shall be deemed to
have been duly given if mailed or transmitted and confirmed by any standard
form of telecommunication.  Notices to
the Initial Purchasers shall be given to the Representative c/o J.P. Morgan
Securities Inc., 270 Park Avenue, New York, New York 10017 (fax: (212)
270-1063); Attention: Gerry Murray. 
Notices to the Company and the Guarantors shall be given to them at
Cellu Tissue Holdings, Inc., 3440 Francis Road, Suite C, Alpharetta, Georgia
30004, (fax: (678) 393-2657); Attention: Dianne M. Scheu; with a copy to
Proskauer Rose LLP, 1585 Broadway, New York, New York 10036, (fax: (212)
969-2900); Attention: Allan R. Williams.

 

(c)                                  Governing Law.  This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York.

 

(d)                                 Counterparts.  This
Agreement may be signed in counterparts (which may include counterparts
delivered by any standard form of telecommunication), each of which shall be an
original and all of which together shall constitute one and the same
instrument.

 

(e)                                  Amendments or Waivers. 
No amendment or waiver of any provision of this Agreement, nor any
consent or approval to any departure therefrom, shall in any event be effective
unless the same shall be in writing and signed by the parties hereto.

 

(f)                                    Headings.  The
headings herein are included for convenience of reference only and are not
intended to be part of, or to affect the meaning or interpretation of, this
Agreement.

 

27

 

If the foregoing is in accordance with your understanding, please
indicate your acceptance of this Agreement by signing in the space provided
below.

 

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
  CELLU TISSUE HOLDINGS, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dianne M. Scheu

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  CELLU TISSUE CORPORATION – NATURAL DAM

  
	
   

  	
  CELLU TISSUE CORPORATION – NEENAH

  
	
   

  	
  CELLU TISSUE LLC

  
	
   

  	
  INTERLAKE ACQUISITION CORPORATION LIMITED

  
	
   

  	
  MENOMINEE ACQUISITION CORPORATION

  
	
   

  	
  VAN PAPER COMPANY

  
	
   

  	
  VAN TIMBER COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dianne M. Scheu

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  COASTAL PAPER COMPANY

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Van Paper Company, a Mississippi

  corporation, individually and as its general

  partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dianne M. Scheu

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Van Timber Company, a Mississippi

  corporation, individually and as its general

  partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Dianne M. Scheu

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
							

 

 

Accepted:  March 5, 2004

 

J.P. MORGAN SECURITIES INC.

 

For itself and on behalf of the

several Initial Purchasers listed

in Schedule 1 hereto.

 

 

	
  By:

  	
  /s/ Gerard Murray

  	
   

  	
   

  
	
   

  	
  Authorized
  Signatory

  	
   

  	
   

  

 

 

Schedule 1

 

	
  Initial
  Purchaser

  	
   

  	
  Principal Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  J.P. Morgan Securities Inc.

  	
   

  	
  $

  	
  129,600,000

  	
   

  
	
  CIBC World Markets Corp.

  	
   

  	
  32,400,000

  	
   

  
	
  Total

  	
   

  	
  $

  	
  162,000,000

  	
   

  

 

 

Schedule 2

 

Guarantors

 

Cellu Tissue Corporation – Natural Dam

Cellu Tissue Corporation – Neenah

Cellu Tissue LLC

Coastal Paper Company

Interlake Acquisition Corporation Limited

Menominee Acquisition Corporation

Van Paper Company

Van Timber Company

 

 

Schedule 3

 

Subsidiaries

 

Cellu Tissue Corporation – Natural Dam

Cellu Tissue Corporation – Neenah

Cellu Tissue LLC

Coastal Paper Company

Interlake Acquisition Corporation Limited

Menominee Acquisition Corporation

Van Paper Company

Van Timber Company

 

 

Schedule 4

 

Mortgaged Properties

 

Cellu Tissue Corporation – Natural Dam

4921 Route 58 N

Gouverneur, New York

 

Cellu Tissue Corporation – Neenah 

249 North Lake Street

Neenah, Wisconsin

 

Cellu Tissue LLC

Two Forbes Street

East Hartford, Connecticut

 

Coastal Paper Company

1321 South Magnolia Drive

Wiggins, Mississippi

 

Interlake Acquisition Corporation Limited

45 Merritt Street

St. Catharines, Ontario, Canada

 

Menominee Acquisition Corporation

144 First Street

Menominee, Michigan

 

 

Schedule 5

 

Properties

 

Cellu Tissue Corporation – Natural Dam

4921 Route 58 N

Gouverneur, New York

 

Cellu Tissue Corporation – Neenah 

249 North Lake Street

Neenah, Wisconsin

 

Cellu Tissue Holdings, Inc.

333 East River Drive

East Hartford, Connecticut

 

Cellu Tissue Holdings, Inc.

3440 Francis Road

Alpharetta, Georgia

 

Cellu Tissue LLC

Two Forbes Street

East Hartford, Connecticut

 

Coastal Paper Company

1321 South Magnolia Drive

Wiggins, Mississippi

 

Interlake Acquisition Corporation Limited

45 Merritt Street

St. Catharines, Ontario, Canada

 

Menominee Acquisition Corporation

144 First Street

Menominee, Michigan

 

 

Schedule 6

 

Ownership of Subsidiaries

 

	
  Issuer

  	
   

  	
  Stock Certificate

  Number

  	
   

  	
  Percentage Owned

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cellu Tissue Corporation – Natural Dam

  	
   

  	
  1

  	
   

  	
  100% owned by Cellu Tissue Holdings, Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cellu Tissue Corporation – Neenah

  	
   

  	
  3

  	
   

  	
  100% owned by Cellu Tissue Holdings, Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cellu Tissue LLC

  	
   

  	
  N/A

  	
   

  	
  100% owned by Cellu Tissue Holdings, Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Coastal Paper Company

  	
   

  	
  N/A

  	
   

  	
  99% partnership interest owned by Van Paper Company; 1% partnership
  interest owned by Van Timber Company

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interlake Acquisition Corporation Limited

  	
   

  	
  3 and 5

  	
   

  	
  100% owned by Cellu Tissue Holdings, Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Menominee Acquisition Corporation

  	
   

  	
  1

  	
   

  	
  100% owned by Cellu Tissue Holdings, Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Van Paper Company

  	
   

  	
  9

  	
   

  	
  100% owned by Cellu Tissue Holdings, Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Van Timber Company

  	
   

  	
  2

  	
   

  	
  100% owned by Cellu Tissue Holdings, Inc.

  

 

 

ANNEX A

 

Restrictions on Offers and Sales Outside the United States

 

In connection with offers and sales of Securities outside the United
States:

 

(a)                                  Each
Initial Purchaser acknowledges that the Securities have not been registered
under the Securities Act and may not be offered or sold within the United
States or to, or for the account or benefit of, U.S. persons except pursuant to
an exemption from, or in transactions not subject to, the registration
requirements of the Securities Act.

 

(b)                                 Each
Initial Purchaser, severally and not jointly, represents, warrants and agrees
that:

 

(i)                                     Such
Initial Purchaser has offered and sold the Securities, and will offer and sell
the Securities, (A) as part of their distribution at any time and (B) otherwise
until 40 days after the later of the commencement of the offering of the
Securities and the Closing Date, only in accordance with Regulation S under the
Securities Act (“Regulation S”) or Rule 144A or any other available exemption
from registration under the Securities Act.

 

(ii)                                  None
of such Initial Purchaser or any of its affiliates or any other person acting
on its or their behalf has engaged or will engage in any directed selling
efforts with respect to the Securities, and all such persons have complied and
will comply with the offering restrictions requirement of Regulation S.

 

(iii)                               At
or prior to the confirmation of sale of any Securities sold in reliance on
Regulation S, such Initial Purchaser will have sent to each distributor, dealer
or other person receiving a selling concession, fee or other remuneration that
purchases Securities from it during the distribution compliance period, a
confirmation or notice to substantially the following effect:

 

“The Securities covered hereby have not been registered under the U.S.
Securities Act of 1933, as amended (the “Securities Act”), and may not be
offered or sold within the United States or to, or for the account or benefit
of, U.S. persons (i) as part of their distribution at any time or
(ii) otherwise until 40 days after the later of the commencement of the
offering of the Securities and the date of original issuance of the Securities,
except in accordance with Regulation S or Rule 144A or any other available
exemption from registration under the Securities Act.  Terms used above have the meanings given to
them by Regulation S.”

 

(iv)                              Such
Initial Purchaser has not and will not enter into any contractual arrangement
with any distributor with respect to the distribution of the Securities, except
with its affiliates or with the prior written consent of the Company.

 

Terms used in paragraph (a) and this paragraph (b) and not otherwise
defined in this Agreement have the meanings given to them by Regulation S.

 

1

 

(c)                                  Each
Initial Purchaser, severally and not jointly, represents, warrants and agrees
that:

 

(i)                                     it
has not offered or sold and, prior to the date six months after the Closing
Date, will not offer or sell any Securities to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes
of their businesses or otherwise in circumstances which have not resulted and
will not result in an offer to the public in the United Kingdom within the
meaning of the United Kingdom Public Offers of Securities Regulations 1995 (as
amended);

 

(ii)                                  it
has only communicated or caused to be communicated and will only communicate or
cause to be communicated any invitation or inducement to engage in investment
activity (within the meaning of Section 21 of the United Kingdom Financial
Services and Markets Act 2000 (the “FSMA”)) received by it in connection with
the issue or sale of any Securities in circumstances in which
Section 21(1) of the FSMA does not apply to the Company or the Guarantors;
and

 

(iii)                               it
has complied and will comply with all applicable provisions of the FSMA with
respect to anything done by it in relation to the Securities in, from or
otherwise involving the United Kingdom.

 

(d)                                 Each
Initial Purchaser acknowledges that no action has been or will be taken by the
Company that would permit a public offering of the Securities, or possession or
distribution of the Preliminary Offering Memorandum, the Offering Memorandum or
any other offering or publicity material relating to the Securities, in any
country or jurisdiction where action for that purpose is required.

 

2

 

Annex B

 

[Form of Opinion of Counsel for the Company]

 

[To be replaced by Proskauer opinion]

 

(a)                                  The
Company and each of the Guarantors have been duly organized and are validly
existing and in good standing under the laws of their respective jurisdictions
of organization, are duly qualified to do business and are in good standing in
each jurisdiction in which their respective ownership or lease of property or
the conduct of their respective businesses requires such qualification, and
have all power and authority necessary to own or hold their respective
properties and to conduct the businesses in which they are engaged, except
where the failure to be so qualified or have such power or authority would not,
individually or in the aggregate, have a Material Adverse Effect.

 

(b)                                 The
Company has an authorized capitalization as set forth in the Offering
Memorandum under the heading “Capitalization”; and all the outstanding shares
of capital stock or other equity interests of each subsidiary of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and are held of record by the Company or a subsidiary of the
Company.

 

(c)                                  The
Company and each of the Guarantors have full right, power and authority to
execute and deliver each of the Transaction Documents to which each is a party
and to perform their respective obligations thereunder; and all action required
to be taken for the due and proper authorization, execution and delivery of
each of the Transaction Documents and the consummation of the transactions
contemplated thereby has been duly and validly taken.

 

(d)                                 The
Indenture has been duly authorized, executed and delivered by the Company and
each of the Guarantors and, assuming due execution and delivery thereof by the
Trustee, constitutes a valid and legally binding agreement of the Company and
each of the Guarantors enforceable against the Company and each of the
Guarantors in accordance with its terms, subject to the Enforceability
Exceptions; and the Indenture conforms in all material respects with the
requirements of the Trust Indenture Act and the rules and regulations of the
Commission applicable to an indenture that is qualified thereunder.

 

(e)                                  The
Securities have been duly authorized, executed and delivered by the Company
and, when duly authenticated as provided in the Indenture and paid for as
provided in this Agreement, will be duly and validly issued and outstanding and
will constitute valid and legally binding obligations of the Company
enforceable against the Company in accordance with their terms, subject to the
Enforceability Exceptions, and will be entitled to the benefits of the
Indenture; and the Guarantees have been duly authorized by each of the Guarantors
and, when the Securities have been duly executed, authenticated, issued and
delivered as provided in the Indenture and paid for as provided in this
Agreement, will be valid and legally binding obligations of each of the
Guarantors, enforceable against each of the Guarantors in accordance with their
terms, subject to the Enforceability Exceptions, and will be entitled to the
benefits of the Indenture.

 

1

 

(f)                                    The
Exchange Securities (including the related guarantees) have been duly
authorized by the Company and each of the Guarantors and, when duly executed,
authenticated, issued and delivered as contemplated by the Registration Rights
Agreement, will be duly and validly issued and outstanding and will constitute
valid and legally binding obligations of the Company, as issuer, and each of
the Guarantors, as guarantor, enforceable against the Company and each of the
Guarantors in accordance with their terms, subject to the Enforceability
Exceptions, and will be entitled to the benefits of the Indenture.

 

(g)                                 This
Agreement has been duly authorized, executed and delivered by the Company and
the Guarantors; and the Registration Rights Agreement has been duly authorized,
executed and delivered by the Company and each of the Guarantors and, when duly
executed and delivered by the other parties thereto, will constitute a valid
and legally binding agreement of the Company and each of the Guarantors
enforceable against the Company and each of the Guarantors in accordance with
its terms, subject to the Enforceability Exceptions, and except that rights to
indemnity and contribution thereunder may be limited by applicable law and
public policy.

 

(h)                                 Each
of the Mortgages has been duly authorized, executed and delivered by the
Company and each of the Guarantors, and, when duly executed and delivered by
the other parties thereto, will constitute valid and legally binding agreements
of the Company and each of the Guarantors, enforceable against the Company and
each of the Guarantors in accordance with their respective terms, subject to
the Enforceability Exceptions.

 

(i)                                     The
Security Agreement has been duly authorized, executed and delivered by the
Company and each of the Guarantors, and, when duly executed and delivered by
the other parties thereto, will constitute a valid and legally binding
agreement of the Company and each of the Guarantors, enforceable against the
Company and each of the Guarantors in accordance with its terms, subject to the
Enforceability Exceptions.

 

(j)                                     The
Intercreditor Agreement has been duly authorized, executed and delivered by the
Company and each of the Guarantors, and, when duly executed and delivered by
the other parties thereto, will constitute a valid and legally binding
agreement of the Company and each of the Guarantors, enforceable against the
Company and each of the Guarantors in accordance with its terms, subject to the
Enforceability Exceptions.

 

(k)                                  Each
Transaction Document conforms in all material respects to the description thereof
contained in the Preliminary Offering Memorandum and the Offering Memorandum.

 

(l)                                     The
execution, delivery and performance by the Company and each of the Guarantors
of each of the Transaction Documents to which each is a party (including, but
not limited to, the filing of any applicable financing statements pursuant to
the Mortgages or the Security Agreement), the issuance and sale of the
Securities (including the Guarantees), the grant and perfection of security
interests in the Collateral pursuant to the Mortgages and the Security
Agreement and compliance by the Company and each of the Guarantors with the
terms thereof and the consummation of the transactions contemplated by the
Transaction Documents will not (i) conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or result in the creation or imposition of any lien, charge or

 

2

 

encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject (other than any lien or encumbrance created or imposed
pursuant to the Transaction Documents), (ii) result in any violation of
the provisions of the charter or by-laws or similar organizational documents of
the Company or any of its subsidiaries or (iii) result in the violation of
any law or statute or any judgment, order, rule or regulation of any court or
arbitrator or governmental or regulatory authority, except, in the case of
clauses (i) and (iii) above, for any such conflict, breach or violation that
would not, individually or in the aggregate, have a Material Adverse Effect.

 

(m)                               No
consent, approval, authorization, order, registration or qualification of or
with any court or arbitrator or governmental or regulatory authority is
required for the execution, delivery and performance by the Company and each of
the Guarantors of each of the Transaction Documents to which each is a party
(including, but not limited to, the filing of any applicable financing
statements pursuant to the Mortgages or the Security Agreement), the issuance
and sale of the Securities (including the Guarantees), the grant and perfection
of security interests in the Collateral pursuant to the Mortgages and the
Security Agreement and compliance by the Company and each of the Guarantors
with the terms thereof and the consummation of the transactions contemplated by
the Transaction Documents, except for such consents, approvals, authorizations,
orders and registrations or qualifications as may be required (i) under
applicable state securities laws in connection with the purchase and resale of
the Securities by the Initial Purchasers, (ii) with respect to the
Exchange Securities (including the related guarantees) under the Securities Act
and applicable state securities laws as contemplated by the Registration Rights
Agreement, (iii) to perfect the Trustee’s security interests granted
pursuant to the Mortgages, the Security Agreement or financing statements and
(iv) to release existing liens.

 

(n)                                 To
the best knowledge of such counsel, except as described in the Offering
Memorandum, there are no legal, governmental or regulatory investigations,
actions, suits or proceedings pending to which the Company or any of its
subsidiaries is or may be a party or to which any property of the Company or
any of its subsidiaries is or may be the subject that, individually or in the
aggregate, if determined adversely to the Company or any of its subsidiaries,
could reasonably be expected to have a Material Adverse Effect; and no such
investigations, actions, suits or proceedings are threatened or, to the best
knowledge of such counsel, contemplated by any governmental or regulatory
authority or threatened by others.

 

(o)                                 The
descriptions in the Offering Memorandum of statutes, legal, governmental and
regulatory proceedings and contracts and other documents are accurate in all
material respects; and the statements in the Offering Memorandum under the
heading “Certain federal income tax considerations”, to the extent that they
constitute summaries of matters of law or regulation or legal conclusions,
fairly summarize the matters described therein in all material respects.

 

(p)                                 Neither
the Company nor any of its subsidiaries is, and after giving effect to the
offering and sale of the Securities and the application of the proceeds thereof
as described in the

 

3

 

Offering Memorandum none of them will be, an “investment company” or an
entity “controlled” by an “investment company” within the meaning of the
Investment Company Act.

 

(q)                                 Neither
the issuance, sale and delivery of the Securities nor the application of the
proceeds thereof by the Company as described in the Offering Memorandum will
violate Regulation T, U or X of the Board of Governors of the Federal Reserve
System or any other regulation of such Board of Governors.

 

(r)                                    Assuming
the accuracy of the representations, warranties and agreements of the Company,
the Guarantors and the Initial Purchasers contained in this Agreement, it is
not necessary, in connection with the issuance and sale of the Securities to
the Initial Purchasers and the offer, resale and delivery of the Securities by
the Initial Purchasers in the manner contemplated by this Agreement and the
Offering Memorandum, to register the Securities under the Securities Act or
qualify the Indenture under the Trust Indenture Act.

 

(s)                                  To
the best knowledge of such counsel, there are no contracts or documents of a
character required by the Securities Act or the rules and regulations
thereunder to be described in a prospectus included in a Registration Statement
on Form S-1, which are not described in the Offering Memorandum.

 

(t)                                    The
Collateral Documents create under the Uniform Commercial Code as in effect in
the State of New York (the “New York UCC”) a security interest in favor of the
Trustee or a collateral agent employed by the Trustee (the Trustee in such
capacity or such collateral agent, the “Collateral Agent”) in such of the
Collateral of the obligors that are parties thereto that is of a type in which
a security interest can be created under Article 9 of the New York UCC
(such Collateral is hereinafter called “Article 9 Collateral”).

 

(u)                                 Under
the New York UCC (including the conflict of laws provisions thereof), the local
law of the State of Delaware governs the perfection, by the filing of financing
statements, of the Collateral Agent’s security interest in the Article 9
Collateral (other than fixtures) in which the subsidiaries of the Company that
are incorporated under the laws of the State of Delaware (the “Delaware
Entities”) have an interest (the “Delaware Entities Collateral”).  Under the Uniform Commercial Code as in effect
in the State of Delaware (the “Delaware UCC”), upon the proper filing, in the
Office of the Secretary of State of the State of Delaware, of financing
statements on Form UCC-1 in the form reviewed by such counsel and signed by the
Delaware Entities (the “Financing Statements”), the security interest of the
Collateral Agent for the ratable benefit of Trustee and the holders of the
Securities will be perfected in that part of the Delaware Entities Collateral
in which a security interest may be perfected by the filing of a financing
statement in the State of Delaware.  No
other filing or recording is necessary in the State of Delaware to perfect a
security interest in the Delaware Entities Collateral in which a security
interest may be perfected by filing a financing statement in the State of Delaware.

 

(v)                                 The
execution and delivery by the relevant Guarantor (the “Mortgagor”) of the
Mortgage and the fixture filing (collectively, the “Security Documents”), the
performance by Mortgagor of its obligations thereunder, and the creation and
perfection of any security interest upon or with respect to any of the
Mortgagor’s properties provided for therein do not and will not violate any
requirement of law of the State of New York, and except for the filing in the

 

4

 

relevant county clerk’s office (the “Mortgage Recording Office”) to
perfect the security interest created by the fixture filing, and the recording
in the Mortgage Recording Office to perfect the lien created by the Mortgage,
do not and will not require any consent or authorization of, approval by,
notice to, filing with or other act by or in respect of, any governmental
authority of the State of New York.

 

(w)                               The
fixture filing (a) is in proper form under the applicable laws of the State of
New York for filing, and (b) adequately identifies the collateral described
therein to provide sufficient notice to third parties of the security interest
referenced therein.  The Collateral
Agent, upon the filing of the fixture filing in the Mortgage Recording Office,
will have a perfected security interest in the collateral described therein.

 

(x)                                   The
Mortgage:

 

(i)                                     constitutes
a legal, valid and binding obligation of the Mortgagor, enforceable against the
Mortgagor in accordance with its terms;

 

(ii)                                  is
in proper form for recording as a mortgage and as a fixture filing;

 

(iii)                               complies
as to form with all existing requirements of law;

 

(iv)                              creates
in favor of the Collateral Agent for the ratable benefit of the holders of the
Securities a legal, valid and binding lien upon that portion of the Mortgaged
Property described therein constituting real property or fixtures under the
laws of the State of New York (the “Real Property”), enforceable as such
against the Mortgagor;

 

(v)                                 when
recorded in the Mortgage Recording Office, will constitute a perfected lien on
the Real Property;

 

(vi)                              creates
in favor of the Collateral Agent for the ratable benefit of the holders of the
Securities a valid security interest in that portion of the Mortgaged Property
constituting personal property and as to which a security interest therein may
be created under the provisions of Article 9 of the New York UCC.

 

(y)                                 The
recording of the Mortgage and the filing of the fixture filing with the offices
described above are the only actions, recordings or filings necessary to
publish notice and protect the validity of and to establish of record the
rights of the parties under the Mortgage and the Indenture, except that
continuation statements under the Uniform Commercial Code of the State of Delaware
are required to be filed within six months prior to the expiration of five
years from the date of filing of the Fixture Filing.

 

(z)                                   The
Indenture and the Mortgage contain the terms and provisions necessary to enable
the Collateral Agent, following a default thereunder, to exercise the remedies
which are customarily available to a holder under a mortgage in the State of
New York.

 

(aa)                            The
Indenture and the Mortgage do not violate any usury, consumer protection or
truth in lending laws, rules or regulations of the State of New York, or any
governmental or

 

5

 

quasigovernmental agencies thereof, so as to (i) subject the Collateral
Agent to any civil or criminal liability or penalty, (ii) prohibit, limit or
impede the Collateral Agent’s right to collect any interest, principal or other
sums payable under the Indenture or to exercise any of its rights or remedies
under the Indenture, or (iii) subject the Collateral Agent to any other claim,
loss or damage.

 

(bb)                          The
Collateral Agent is not required (i) to be qualified to do business, file any
designation for service of process or file any reports or pay any taxes in the
State of New York, or (ii) to comply with any statutory or regulatory
requirement applicable only to financial institutions chartered or qualified or
required to be chartered or qualified to do business in the State of New York,
in each case by reason of the execution and delivery of filing or recording, as
applicable, of any of the Indenture or the Mortgage, or by reason of the
participation in any of the transactions under or contemplated thereby, the
making and receipt of payments pursuant thereto and the exercise of any remedy
thereunder.  If it were determined that
such qualification and filing were required, the validity of the Indenture or
the Mortgage would not be affected thereby, but (x) if the Collateral Agent
were not qualified, it would be precluded from enforcing its rights as
Collateral Agent on behalf of the holders of the Securities in the courts of
the State of New York until such time as it is admitted to transact business in
the State of New York, or (y) assuming the holders of the Securities would
institute remedies without the Collateral Agent, they would be precluded from enforcing
their rights in the courts of the State of New York until such time as they
were admitted to transact business in the State of New York.  However, the lack of qualification would not
result in any waiver of rights or remedies pending such qualification.

 

(cc)                            The
Collateral Agent has the power, in any applicable legal proceeding, to exercise
remedies under the Security Documents for the realization of any of the
Mortgaged Property or the collateral described in the fixture filing in its own
name, as Collateral Agent.

 

(dd)                          The
transfer of all or any portion of the Mortgaged Property in connection with the
exercise of any remedy under the Mortgage, including, without limitation, by
way of judicial foreclosure, will not restrict, affect or impair the liability
of the Mortgagor with respect to the indebtedness secured thereby or the
mortgagee’s rights or remedies relating thereto, including the foreclosure or
enforcement of any other security interest liens securing such indebtedness,
and the laws of the State of New York do not require a lienholder to elect to
pursue its remedies either against mortgaged real property or personal property
where such lienholder holds security interests and liens on both real and
personal property of a debtor.

 

(ee)                            Under
existing laws of the State of New York, there are no statutory or regulatory
requirements applicable to the Collateral Agent relating to the granting of the
Mortgage or of the security interest in any Mortgaged Property that (i) require
any notification or certification to the State of New York or any applicable
political subdivision thereof of the Mortgage or security interest, or (ii) in
the event of a discharge of any hazardous materials, impose responsibility or
liability on the part of the Collateral Agent for the undertaking of remedial
measures to alleviate environmental contamination resulting from such
discharge, except to the extent that the Collateral Agent acquires ownership of
the Mortgaged Property.

 

6

 

Such counsel shall also state that they have participated in
conferences with representatives of the Company and with representatives of its
independent accountants and counsel at which conferences the contents of the
Preliminary Offering Memorandum and the Offering Memorandum and any amendment
and supplement thereto and related matters were discussed and, although such
counsel assume no responsibility for the accuracy, completeness or fairness of
the Preliminary Offering Memorandum and the Offering Memorandum and any
amendment or supplement thereto (except as expressly provided above), nothing
has come to the attention of such counsel to cause such counsel to believe that
the Preliminary Offering Memorandum, as of its date, contained any untrue statement
of a material fact or omitted to state a material fact or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or that the Offering Memorandum or any amendment or
supplement thereto, as of its date and the Closing Date, contained or contains
any untrue statement of a material fact or omits to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (other than, in each case, the
financial statements and other financial information contained therein, as to
which such counsel need express no belief).

 

In rendering such opinion, such counsel may rely as to matters of fact
on certificates of responsible officers of the Company and the Guarantors and
public officials that are furnished to the Initial Purchasers.

 

The opinion of Proskauer Rose LLP described above shall be rendered to
the Initial Purchasers at the request of the Company and shall so state therein.

 

7

 

Exhibit A

 

[Form of Registration Rights Agreement]

 

 

Exhibit B

 

[Form of Security Agreement]

 

 

Exhibit C

 

[Form of Intercreditor Agreement]

 

 

Exhibit D

 

[Form of Mortgage]

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