Document:

Exhibit
10.7

 

SUBSIDIARY GUARANTY

 

This SUBSIDIARY GUARANTY is entered into as of
September 30, 2005 by the undersigned (each a “Guarantor”,
and together with any future Domestic Subsidiaries executing this Guaranty,
being collectively referred to herein as the “Guarantors”)
in favor of and for the benefit of CREDIT
SUISSE, Cayman Islands Branch, as agent for and representative of
the financial institutions party to the Credit Agreement referred to below (“Lenders”) and any Swap Counterparties (as
hereinafter defined) (in such capacity herein called “Guarantied Party”), and any other Beneficiaries (as
hereinafter defined).

 

RECITALS.

 

A.     Panolam Industries International, Inc., a Delaware corporation,
as successor by merger to PIH Acquisition Co. (“Company”), has entered into
that certain Credit Agreement dated as of September 30, 2005 by and among
Company, Panolam Holdings II Co., Lenders and Guarantied Party, as
Administrative Agent (said Credit Agreement, as it may hereafter be amended,
amended and restated, supplemented or otherwise modified from time to time,
being the “Credit Agreement”;
capitalized terms defined therein and not otherwise defined herein being used
herein as therein defined).

 

B.     Company may from time to time enter, or may from time to time
have entered, into one or more Hedge Agreements with one or more Persons that
are Lenders or Affiliates of Lenders at the time such Hedge Agreements are
entered into (in such capacity, collectively, “Swap
Counterparties”) (such Hedge Agreements, collectively, the “Lender Swap Agreements”) in accordance
with the terms of the Credit Agreement, and it is desired that the obligations
of Company under the Lender Swap Agreements, including without limitation the
obligation of Company to make payments thereunder in the event of early
termination thereof, together with all Obligations of Company under the Credit
Agreement, be guarantied hereunder.

 

C.     Guarantied Party, Lenders and each Swap Counterparty for which
Guarantied Party has received the notice required by Section 18 hereof are
sometimes referred to herein as “Beneficiaries”.

 

D.     A portion of the proceeds of the Loans may be advanced to the
Guarantors, and thus the Guarantied Obligations (as hereinafter defined) are
being incurred for and will inure to the benefit of Guarantors (which benefits
are hereby acknowledged).

 

E.      It is a condition precedent to the making of the initial Loans
under the Credit Agreement that Company’s Obligations be guarantied by
Guarantors.

 

F.      Guarantors are willing irrevocably and unconditionally to
guaranty such Obligations of Company.

 

NOW,
THEREFORE, based upon
the foregoing and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in order to induce Lenders
and Guarantied Party to enter into the Credit Agreement and to make Loans and
other extensions of credit thereunder and to induce Swap Counterparties to
enter into the Lender Swap Agreements, Guarantors hereby agree as follows:

 

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1.      Guaranty.  
  (a) Guarantors jointly and severally
irrevocably and unconditionally guaranty, as primary obligors and not merely as
sureties, the due and punctual payment in full of all Guarantied Obligations
(as hereinafter defined) when the same shall become due, whether at stated
maturity, by acceleration, demand or otherwise (including amounts that would
become due but for the operation of the automatic stay under Section 362(a) of
the Bankruptcy Code). The term “Guarantied Obligations” is used herein
in its most comprehensive sense and includes any and all Obligations of Company
and all obligations of Company under Lender Swap Agreements, now or hereafter
made, incurred or created, whether absolute or contingent, liquidated or
unliquidated, whether due or not due, and however arising under or in
connection with the Credit Agreement, the Lender Swap Agreements, and the other
Loan Documents.

 

Each Guarantor acknowledges
that a portion of the Loans may be advanced to it, that Letters of Credit may
be issued for the benefit of its business and that the Guarantied Obligations
are being incurred for and will inure to its benefit.

 

Any interest on any portion
of the Guarantied Obligations that accrues after the commencement of any
proceeding, voluntary or involuntary, involving the bankruptcy, insolvency,
receivership, reorganization, liquidation or arrangement of Company (or, if
interest on any portion of the Guarantied Obligations ceases to accrue by
operation of law by reason of the commencement of said proceeding, such
interest as would have accrued on such portion of the Guarantied Obligations if
said proceeding had not been commenced) shall be included in the Guarantied
Obligations because it is the intention of each Guarantor and Guarantied Party
that the Guarantied Obligations should be determined without regard to any rule
of law or order that may relieve Company of any portion of such Guarantied
Obligations.

 

Notwithstanding that all or
any portion of the Guarantied Obligations is paid by Company, the obligations
of each Guarantor hereunder shall continue and remain in full force and effect
or be reinstated, as the case may be, in the event that all or any part of such
payment(s) is rescinded or recovered directly or indirectly from Guarantied Party
or any other Beneficiary as a preference, fraudulent transfer or otherwise, and
any such payments that are so rescinded or recovered shall constitute
Guarantied Obligations.

 

Subject to the other
provisions of this Section 1, upon the failure of Company to pay any of the
Guarantied Obligations when and as the same shall become due, each Guarantor
will upon demand pay, or cause to be paid, in cash, to Guarantied Party for the
ratable benefit of Beneficiaries, an amount equal to the aggregate of the
unpaid Guarantied Obligations.

 

(b)    Anything contained in this Guaranty to the contrary
notwithstanding, (i) each of the parties hereto confirms that it is the
intention of all such Persons that this Guaranty and the Guarantied Obligations
not constitute a fraudulent transfer or conveyance for purposes of the
Fraudulent Transfer Laws (as hereinafter defined) and (ii) the obligations of
each Guarantor under this Guaranty and the other Loan Documents shall be
limited to a maximum aggregate amount equal to the largest amount that would
not render its obligations hereunder subject to avoidance as a fraudulent
transfer or conveyance under Section 548 of Title 11 of the United States Code
or any applicable provisions of comparable state law (collectively, the “Fraudulent Transfer Laws”), in each case
after giving effect to all other liabilities of such Guarantor.

 

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contingent or otherwise,
that are relevant under the Fraudulent Transfer Laws (specifically excluding,
however, any liabilities of such Guarantor (x) in respect of intercompany
indebtedness to Company or other affiliates of Company to the extent that such
indebtedness would be discharged in an amount equal to the amount paid by such
Guarantor hereunder and (y) under any guaranty of Subordinated Indebtedness
which guaranty contains a limitation as to maximum amount similar to that set
forth in this Section l(b), pursuant to which the liability of such Guarantor
hereunder is included in the liabilities taken into account in determining such
maximum amount) and after giving effect as assets to the value (as determined
under the applicable provisions of the Fraudulent Transfer Laws) of any rights
to subrogation, reimbursement, indemnification or contribution of such Guarantor
pursuant to applicable law or pursuant to the terms of any agreement.

 

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

 

2.      Guaranty Absolute; Continuing Guaranty. The obligations of each Guarantor hereunder
are irrevocable, absolute, independent and unconditional and shall not be
affected by any circumstance which constitutes a legal or equitable discharge
of a guarantor or surety other than payment in full of the Guarantied
Obligations. In furtherance of the foregoing and without limiting the
generality thereof, each Guarantor agrees that: (a) this Guaranty is a guaranty
of payment when due and not of collectibility; (b) Guarantied Party may enforce
this Guaranty upon the occurrence and during the continuance of an Event of
Default under the Credit Agreement or the occurrence of an early termination
date or similar event under any Lender Swap Agreement notwithstanding the
existence of any dispute between Company and any Beneficiary with respect to
the existence of such event; (c) the obligations of each Guarantor hereunder
are independent of the Guarantied Obligations and the obligations of any other
guarantor of the Guarantied Obligations and a separate action or actions may be
brought and prosecuted against each Guarantor whether or not any action is
brought against Company or any of such other guarantors and whether or not
Company is joined in any such action or actions; and (d) a payment of a
portion, but not all, of the Guarantied Obligations by one or more Guarantors shall
in no way limit, affect, modify or abridge the liability of such or any other
Guarantor for any portion of the Guarantied Obligations that has not been paid.
This Guaranty is a continuing guaranty and shall be binding upon each Guarantor
and its successors and assigns, and shall remain in full force and effect until
the latest of (a) the payment in full of the Guaranteed Obligations (other than
Unasserted Obligations and any obligations or liabilities of whatever nature
under any Lender Swap Agreement), (b) September 30, 2012 and (c) the latest
date of expiration or termination of, or the date that other provision for cash
collateral or other support therefor in a manner reasonably satisfactory to the
Issuing Lender has been provided with respect

 

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to, all Letters of Credit.
Each Guarantor irrevocably waives any right to revoke this Guaranty as to
future transactions giving rise to any Guarantied Obligations.

 

3.      Actions by Beneficiaries. Any Beneficiary may from time to time,
without notice or demand and without affecting the validity or enforceability
of this Guaranty or giving rise to any limitation, impairment or discharge of
any Guarantor’s liability hereunder, (a) renew, extend, accelerate or otherwise
change the time, place, manner or terms of payment of the Guarantied
Obligations, (b) settle, compromise, release or discharge, or accept or refuse
any offer of performance with respect to, or substitutions for, the Guarantied
Obligations or any agreement relating thereto and/or subordinate the payment of
the same to the payment of any other obligations, (c) request and accept other
guaranties of the Guarantied Obligations and take and hold security for the
payment of the Guarantied Obligations, (d) release, exchange, compromise,
subordinate or modify, with or without consideration, any security for payment
of the Guarantied Obligations, any other guaranties of the Guarantied
Obligations, or any other obligation of any Person with respect to the
Guarantied Obligations, (e) enforce and apply any security now or hereafter
held by or for the benefit of any Beneficiary in respect of this Guaranty or
the Guarantied Obligations and direct the order or manner of sale thereof, or
exercise any other right or remedy that Guarantied Party or the other
Beneficiaries, or any of them, may have against any such security, as
Guarantied Party in its discretion may determine consistent with the Credit
Agreement, the Lender Swap Agreements and any applicable security agreement,
including foreclosure on any such security pursuant to one or more judicial or
nonjudicial sales, whether or not every aspect of any such sale is commercially
reasonable, and (f) exercise any other rights available to Guarantied Party or
the other Beneficiaries, or any of them, under the Loan Documents or the Lender
Swap Agreements.

 

4.      No Discharge. This Guaranty and the obligations of
Guarantors hereunder shall be valid and enforceable and shall not be subject to
any limitation, impairment or discharge for any reason (other than payment in
full of the Guarantied Obligations), including without limitation the
occurrence of any of the following, whether or not any Guarantor shall have had
notice or knowledge of any of them: (a) any failure to assert or enforce or
agreement not to assert or enforce, or the stay or enjoining, by order of
court, by operation of law or otherwise, of the exercise or enforcement of, any
claim or demand or any right, power or remedy with respect to the Guarantied
Obligations or any agreement relating thereto, or with respect to any other
guaranty of or security for the payment of the Guarantied Obligations, (b) any
waiver or modification of, or any consent to departure from, any of the terms
or provisions of the Credit Agreement, any of the other Loan Documents, the
Lender Swap Agreements or any agreement or instrument executed pursuant
thereto, or of any other guaranty or security for the Guarantied Obligations,
(c) the Guarantied Obligations, of any agreement relating thereto, at any time
being found to be illegal, invalid or unenforceable in any respect, (d) the
application of payments received from any source to the payment of indebtedness
other than the Guarantied Obligations, even though Guarantied Party or the
other Beneficiaries, or any of them, might have elected to apply such payment
to any part or all of the Guarantied Obligations, (e) any failure to perfect or
continue perfection of a security interest in any collateral which secures any
of the Guarantied Obligations, (f) any defenses, set-offs or counterclaims
which Company may assert against Guarantied Party or any Beneficiary in respect
of the Guarantied Obligations, including but not limited to failure of
consideration, breach of warranty, payment, statute of frauds, statute of
limitations, accord and satisfaction and usury, and (g) any other act or thing
or omission, or delay

 

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to do any other act or
thing, which may or might in any manner or to any extent vary the risk of a
Guarantor as an obligor in respect of the Guarantied Obligations.

 

5.      Waivers. Each Guarantor waives, for the benefit of
Beneficiaries: (a) any right to require Guarantied Party or the other
Beneficiaries, as a condition of payment or performance by such Guarantor, to
(i) proceed against Company, any other guarantor of the Guarantied Obligations
or any other Person, (ii) proceed against or exhaust any security held from
Company, any other guarantor of the Guarantied Obligations or any other Person,
(iii) proceed against or have resort to any balance of any deposit account or
credit on the books of any Beneficiary in favor of Company or any other Person,
or (iv) pursue any other remedy in the power of any Beneficiary; (b) any
defense arising by reason of the incapacity, lack of authority or any
disability or other defense of Company including, without limitation, any
defense based on or arising out of the lack of validity or the unenforceability
of the Guarantied Obligations or any agreement or instrument relating thereto
or by reason of the cessation of the liability of Company from any cause other
than payment in full of the Guarantied Obligations; (c) any defense based upon
Guarantied Party’s or any other Beneficiary’s errors or omissions in the administration
of the Guarantied Obligations, except behavior that amounts to bad faith or
willful misconduct; (d) promptness, diligence and any requirement that any
Beneficiary protect, secure, perfect or insure any Lien or any property subject
thereto; (e) notices, demands, presentments, protests, notices of protest,
notices of dishonor and notices of any action or inaction, including acceptance
of this Guaranty, notices of default under the Credit Agreement, notices of
default or early termination under any Lender Swap Agreement or any agreement
or instrument related thereto, notices of any renewal, extension or
modification of the Guarantied Obligations or any agreement related thereto,
notices of any extension of credit to Company and notices of any of the matters
referred to in Sections 3 and 4 and any right to consent to any thereof; and
(f) to the fullest extent permitted by law, any defenses or benefits that may
be derived from or afforded by law which limit the liability of or exonerate
guarantors or sureties, or which may conflict with the terms of this Guaranty.

 

6.      Guarantors’ Rights of Subrogation,
Contribution, Etc.; Subordination of Other Obligations. Until the Guarantied Obligations (other than
Unasserted Obligations) shall have been paid in full and the Commitments shall
have terminated and all Letters of Credit shall have expired, been cancelled or
other provisions for cash collateral or other support therefor in a manner
reasonably satisfactory to the Issuing Lender has been provided, each Guarantor
shall withhold exercise of (a) any claim, right or remedy, direct or indirect,
that such Guarantor now has or may hereafter have against Company or any of its
assets in connection with this Guaranty or the performance by such Guarantor of
its obligations hereunder, in each case whether such claim, right or remedy
arises in equity, under contract, by statute, under common law or otherwise and
including without limitation (i) any right of subrogation, reimbursement or
indemnification that such Guarantor now has or may hereafter have against
Company, (ii) any right to enforce, or to participate in, any claim, right or
remedy that any Beneficiary now has or may hereafter have against Company, and
(iii) any benefit of, and any right to participate in, any collateral or
security now or hereafter held by any Beneficiary and (b) any right of
contribution such Guarantor now has or may hereafter have against any other
guarantor of any of the Guarantied Obligations. Each Guarantor further agrees
that, to the extent the agreement to withhold the exercise of its rights of
subrogation, reimbursement, indemnification and contribution as set forth
herein is found by a court of competent jurisdiction

 

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to be void or voidable for
any reason, any rights of subrogation, reimbursement or indemnification such Guarantor
may have against Company or against any collateral or security, and any rights
of contribution such Guarantor may have against any such other guarantor, shall
be junior and subordinate to any rights Guarantied Party or the other
Beneficiaries may have against Company, to all right, title and interest
Guarantied Party or the other Beneficiaries may have in any such collateral or
security, and to any right Guarantied Party or the other Beneficiaries may have
against such other guarantor.

 

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

 

7.      Expenses. Guarantors jointly and severally agree to
pay, or cause to be paid, on demand, and to save Guarantied Party and the other
Beneficiaries harmless against liability for, (i) any and all costs and
expenses (including fees, costs of settlement, and disbursements of counsel and
allocated costs of internal counsel) incurred or expended by Guarantied Party
or any other Beneficiary in connection with the enforcement of or preservation
of any rights under this Guaranty and (ii) any and all costs and expenses
(including those arising from rights of indemnification) required to be paid by
Guarantors under the provisions of any other Loan Document.

 

8.      Financial Condition of Company. No Beneficiary shall have any obligation,
and each Guarantor waives any duty on the part of any Beneficiary, to disclose
or discuss with such Guarantor its assessment, or such Guarantor’s assessment,
of the financial condition of Company or any matter or fact relating to the
business, operations or condition of Company. Each Guarantor has adequate means
to obtain information from Company on a continuing basis concerning the
financial condition of Company and its ability to perform its obligations under
the Loan Documents and the Lender Swap Agreements, and each Guarantor assumes
the responsibility for being and keeping informed of the financial condition of
Company and of all circumstances bearing upon the risk of nonpayment of the
Guarantied Obligations.

 

9.      Representations and Warranties. Each Guarantor makes, for the benefit of
Beneficiaries, each of the representations and warranties made in the Credit
Agreement by Company as to such Guarantor, its assets, financial condition,
operations, organization, legal status, business and the Loan Documents to which
it is a party; provided that such Guarantor shall only be deemed to have made
such representations and warranties with respect to itself and its
Subsidiaries.

 

10.   Covenants. Each Guarantor agrees that, until the
Guarantied Obligations (other than Unasserted Obligations) shall have been paid
in full, all Letters of Credit shall have been cancelled or expired or other
provisions for cash collateral or other support therefor in a manner reasonably
satisfactory to the Issuing Lender have been provided and the termination of

 

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any outstanding Commitments,
such Guarantor will, unless Requisite Lenders shall otherwise consent in
writing, perform or observe, and cause each of its Subsidiaries to perform or
observe, all of the terms, covenants and agreements that the Loan Documents
state that such Guarantor is to perform or observe or that Company has agreed
to cause its Subsidiaries to perform or observe.

 

11.   Set Off. In addition to any other rights
any Beneficiary may have under law or in equity, upon the occurrence and during
the continuation of any Event of Default, each Beneficiary after obtaining
prior written consent of Guarantied Party is authorized at any time or from
time to time, without notice (any such notice being expressly waived), to set
off and to appropriate and to apply any and all deposits (general or special,
including but not limited to indebtedness evidenced by certificates of deposit,
whether matured or unmatured) and any other indebtedness of such Beneficiary
owing to a Guarantor and any other property of such Guarantor held by a
Beneficiary to or for the credit or the account of such Guarantor against and
on account of the Guarantied Obligations and liabilities of such Guarantor to
any Beneficiary under this Guaranty.

 

12.   Discharge of Guaranty Upon Sale of Guarantor.
If all of the stock of a Guarantor or any of its successors in interest under
this Guaranty shall be sold or otherwise disposed of (including by merger or
consolidation) in a sale or other disposition not prohibited by the Credit
Agreement or otherwise consented to by Requisite Lenders, such Guarantor or
such successor in interest, as the case may be, may request Guarantied Party
to, and Guarantied Party shall, execute and deliver documents or instruments
necessary to evidence the release and discharge of this Guaranty as provided in
subsection 10.14 of the Credit Agreement.

 

13.   Amendments and Waivers. No amendment,
modification, termination or waiver of any provision of this Guaranty, and no
consent to any departure by any Guarantor therefrom, shall in any event be
effective without the written concurrence of Guarantied Party and, in the case
of any such amendment or modification, Guarantors. Any such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which it was given.

 

14.   Miscellaneous. It is not necessary for
Beneficiaries to inquire into the capacity or powers of any Guarantor or
Company or the officers, directors or any agents acting or purporting to act on
behalf of any of them.

 

The rights, powers and
remedies given to Beneficiaries by this Guaranty are cumulative and shall be in
addition to and independent of all rights, powers and remedies given to
Beneficiaries by virtue of any statute or rule of law or in any of the Loan
Documents or the Lender Swap Agreements or any agreement between one or more
Guarantors and one or more Beneficiaries or between Company and one or more
Beneficiaries. Any forbearance or failure to exercise, and any delay by any
Beneficiary in exercising, any right, power or remedy hereunder shall not
impair any such right, power or remedy or be construed to be a waiver thereof,
nor shall it preclude the further exercise of any such right, power or remedy.

 

In case any provision in or
obligation under this Guaranty shall be invalid, illegal or unenforceable in
any jurisdiction, the validity, legality and enforceability of the remaining

 

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provisions or obligations,
or of such provision or obligation in any other jurisdiction, shall not in any
way be affected or impaired thereby.

 

THIS
GUARANTY AND THE RIGHTS AND OBLIGATIONS OF GUARANTORS, GUARANTIED PARTY AND THE
OTHER BENEFICIARIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK
(INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF
THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.

 

This Guaranty shall inure to
the benefit of Beneficiaries and their respective successors and permitted
assigns.

 

ALL JUDICIAL PROCEEDINGS
BROUGHT AGAINST ANY GUARANTOR, GUARANTIED PARTY AND/OR ANY OTHER BENEFICIARY
ARISING OUT OF OR RELATING TO THIS GUARANTY MAY BE BROUGHT IN ANY STATE OR
FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF NEW YORK, AND BY
EXECUTION AND DELIVERY OF THIS GUARANTY EACH GUARANTOR AND GUARANTIED PARTY
ACCEPTS FOR ITSELF AND THE OTHER BENEFICIARIES AND IN CONNECTION WITH ITS
PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS AND IRREVOCABLY
AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS
GUARANTY. Each of the parties hereto on behalf of itself and the other
Beneficiaries, as applicable, agrees that service of all process in any such
proceeding in any such court may be made by registered or certified mail,
return receipt requested, to it at its address set forth below its signature
hereto, such service being acknowledged by it to be sufficient for personal
jurisdiction in any action against it related to any proceeding in any such
court and to be otherwise effective and binding service in every respect. Nothing
herein shall affect the right to serve process in any other manner permitted by
law or shall limit the right to bring proceedings in the courts of any other
jurisdiction.

 

EACH
GUARANTOR AND, BY ITS ACCEPTANCE OF THE BENEFITS HEREOF, GUARANTIED PARTY EACH
AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. THE SCOPE OF THIS WAIVER IS
INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN
ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING
WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS. EACH GUARANTOR AND, BY ITS ACCEPTANCE OF
THE BENEFITS HEREOF, GUARANTIED PARTY EACH (I) ACKNOWLEDGES THAT THIS WAIVER IS
A MATERIAL INDUCEMENT FOR SUCH GUARANTOR AND GUARANTIED PARTY TO ENTER INTO A
BUSINESS RELATIONSHIP, THAT SUCH GUARANTOR AND GUARANTIED PARTY HAVE ALREADY
RELIED ON THIS WAIVER IN ENTERING INTO THIS GUARANTY OR

 

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ACCEPTING
THE BENEFITS THEREOF, AS THE CASE MAY BE, AND THAT EACH WILL CONTINUE TO RELY
ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS, AND (II) FURTHER WARRANTS AND
REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT
EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING
CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN
WAIVER SPECIFICALLY REFERRING TO THIS SECTION 14 AND EXECUTED BY EACH OF THE
PARTIES HERETO), AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS OF THIS GUARANTY. In the event of litigation, this Guaranty
may be filed as a written consent to a trial by the court.

 

15.   Additional Guarantors. The initial
Guarantor(s) hereunder shall be such of the Domestic Subsidiaries of Company as
are signatories hereto on the date hereof. From time to time subsequent to the
date hereof, Domestic Subsidiaries of Company may become parties hereto, as
additional Guarantors (each an “Additional
Guarantor”), by executing a counterpart of this Guaranty. A form of
such a counterpart is attached as Exhibit A. Upon delivery of any such
counterpart to Guarantied Party, notice of which is hereby waived by
Guarantors, each such Additional Guarantor shall be a Guarantor and shall be as
fully a party hereto as if such Additional Guarantor were an original signatory
hereof. Each Guarantor expressly agrees that its obligations arising hereunder
shall not be affected or diminished by the addition or release of any other
Guarantor hereunder, nor by any election of the Guarantied Party not to cause
any Subsidiary of Company to become an Additional Guarantor hereunder. This
Guaranty shall be fully effective as to any Guarantor that is or becomes a
party hereto regardless of whether any other Person becomes or fails to become
or ceases to be a Guarantor hereunder.

 

16.   Counterparts; Effectiveness. This Guaranty
and each amendment, waiver and consent with respect hereto may be executed in
any number of counterparts and by the different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to
be an original for all purposes; but all such counterparts together shall
constitute but one and the same instrument. This Guaranty shall become
effective as to each Guarantor upon the execution of a counterpart hereof by
such Guarantor (whether or not a counterpart hereof shall have been executed by
any other Guarantor) and receipt by the Guaranteed Party of written or
telephonic notification of such execution and authorization of delivery
thereof.

 

17.   Guarantied Party as Agent.

 

(a)    Guarantied Party has been appointed to act as Guarantied Party
hereunder by Lenders. Guarantied Party shall be obligated, and shall have the
right hereunder, to make demands, to give notices, to exercise or refrain from
exercising any rights, and to take or refrain from taking any action, solely in
accordance with this Guaranty and the Credit Agreement; provided that
Guarantied Party shall exercise, or refrain from exercising, any remedies under
or with respect to this Guaranty in accordance with the instructions of
Requisite Lenders.

 

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(b)    Guarantied Party shall at all times be the same Person that is
Administrative Agent under the Credit Agreement. Written notice of resignation
by Administrative Agent pursuant to subsection 9.5 of the Credit Agreement
shall also constitute notice of resignation as Guarantied Party under this
Guaranty; and appointment of a successor Administrative Agent pursuant to
subsection 9.5 of the Credit Agreement shall also constitute appointment of a
successor Guarantied Party under this Guaranty. Upon the acceptance of any
appointment as Administrative Agent under subsection 9.5 of the Credit
Agreement by a successor Administrative Agent, that successor Administrative
Agent shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Guarantied Party under this Guaranty, and
the retiring Guarantied Party under this Guaranty shall promptly (i) transfer
to such successor Guarantied Party all sums held hereunder, together with all
records and other documents necessary or appropriate in connection with the
performance of the duties of the successor Guarantied Party under this
Guaranty, and (ii) take such other actions as may be necessary or appropriate
in connection with the assignment to such successor Guarantied Party of the
rights created hereunder, whereupon such retiring Guarantied Party shall be
discharged from its duties and obligations under this Guaranty. After any
retiring Guarantied Party’s resignation hereunder as Guarantied Party, the
provisions of this Guaranty shall inure to its benefits as to any actions taken
or omitted to be taken by it under this Guaranty while it was Guarantied Party
hereunder.

 

18.   Notice of Lender Swap Agreements.
Guarantied Party shall not be deemed to have any duty whatsoever with respect
to any Swap Counterparty until it shall have received written notice in form
and substance satisfactory to Guarantied Party from Company, a Guarantor or the
Swap Counterparty as to the existence and terms of the applicable Lender Swap
Agreement.

 

[Remainder
of page intentionally left blank.]

 

10

 

IN WITNESS
WHEREOF, each
Guarantor and Guarantied Party have caused this Guaranty to be duly executed
and delivered by their respective officers thereunto duly authorized as of the
date, first written above.

 

	
   

  	
  PANOLAM INDUSTRIES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert J. Muller Jr.

  	
   

  
	
   

  	
  Name: Robert J. Muller Jr.

  
	
   

  	
  Title: President and Chief-Executive Officer

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PIONEER PLASTICS CORPORATION

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert J. Muller Jr.

  	
   

  
	
   

  	
  Name: Robert J. Muller Jr.

  
	
   

  	
  Title: President and Chief-Executive Officer

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Attention:.

  	
   

  	
   

  
	
   

  	
   

  	
  Facsimile:.

  	
   

  	
   

  
									

 

 

	
   

  	
  CREDIT SUISSE, Cayman Islands Branch,

  as Administrative Agent and

  as Guarantied Party

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By: 

  	
  /s/ William O’ Daly

  	
   

  
	
   

  	
   

  	
  Name:

  	
  William O’ Daly

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Director

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Rianka Mohan

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Rianka Mohan

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Associate

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
  OMA-2

  
	
   

  	
   

  	
  Eleven Madison Avenue 

  
	
   

  	
   

  	
  New York, New York 10010 

  
	
   

  	
   

  	
  Attention: Agency Department Manager

  
	
   

  	
   

  	
  Facsimile: (212) 325-8304

  

 

 

EXHIBIT
A

 

[FORM
OF COUNTERPART FOR ADDITIONAL GUARANTORS]

 

This COUNTERPART (this “Counterpart”), dated       ,
20    , is delivered pursuant to Section 15 of the Guaranty
referred to below. The undersigned hereby agrees that this Counterpart may be
attached to the Guaranty, dated as of September 30, 2005 (as it may be from
time to time amended, amended and restated, modified or supplemented, the
“Guaranty”; capitalized terms used herein not otherwise defined herein shall
have the meanings ascribed therein), among the Guarantors named therein and     ,
as Guarantied Party. The undersigned, by executing and delivering this
Counterpart, hereby becomes an Additional Guarantor under the Guaranty in
accordance with Section 15 thereof and agrees to be bound by all of the terms
thereof.

 

IN WITNESS
WHEREOF, the
undersigned has caused this Counterpart to be duly executed and delivered by
its officer thereunto duly authorized as of           ,
20    .

 

	
   

  	
  [NAME OF ADDITIONAL GUARANTOR]

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
							

 

A-1Exhibit 10.8

 

PANOLAM HOLDINGS CO.

 

2005 EQUITY INCENTIVE PLAN

 

1.                                       Purpose. The Panolam Holdings
Co. 2005 Equity Incentive Plan (the “Plan”) is intended to
attract, retain and motivate officers and employees of, consultants to, and
non-employee directors providing services to Panolam Holdings Co. (the “Company”)
and its subsidiaries and affiliates by providing them with appropriate
incentives and rewards either through a proprietary interest in the long-term
success of the Company or compensation based on their performance in fulfilling
their personal responsibilities.

 

2.                                       Administration.

 

(a)                                  Committee. The
Plan will be administered by a committee (the “Committee”) appointed by
the Board of Directors of the Company (the “Board”) from among its
members and shall be comprised, unless otherwise determined by the Board, of
not less than two (2) members, each of whom shall be (i) a “Non-Employee
Director” within the meaning of Rule 16b-3(b)(3) (or any
successor rule) promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) and (ii) an “outside director” within
the meaning of Treasury Regulation Section 1.162-27(e)(3) under Section 162(m)
of the Internal Revenue Code of 1986, as amended (the “Code”).

 

(b)                                 Authority. The
Committee is authorized, subject to the provisions of the Plan, to establish
such rules as it deems necessary for the proper administration of the Plan
and to make such determinations and interpretations in its sole discretion and
to take such action in connection with the Plan and any awards granted
hereunder as it deems necessary or advisable, including the right to accelerate
the vesting or exerciseability of awards, establish the terms and conditions of
awards and cancel awards upon a Change of Control. The Committee may determine
the extent to which any Award under the Plan is required to comply, or not
comply, with Section 409A of the Code and to establish terms and
conditions of awards accordingly. All determinations and interpretations made
by the Committee shall be binding and conclusive on all participants and their
legal representatives.

 

(c)                                  Indemnification.
Except in circumstances involving bad faith or willful misconduct of the person
acting or failing to act, no member of the Committee and no employee of the Company
shall be liable for any act or failure to act hereunder or for any act or
failure to act hereunder by any other member or employee or by any agent to
whom duties in connection with the administration of this Plan have been
delegated. The Company shall indemnify members of the Committee and any agent
of the Committee who is an employee of the Company, a subsidiary or an
affiliate against any and all liabilities or expenses to which they may be
subjected by reason of any act or failure to act with respect to their duties
on behalf of the Plan, except in circumstances involving such person’s bad
faith or willful misconduct.

 

1

 

(d)                                 Delegation
and Advisers. The Committee may delegate to one or more of its members,
or to one or more agents, such administrative duties as it may deem
advisable. Any person to whom it has delegated duties as aforesaid may employ
one or more persons to render advice with respect to any responsibility the
Committee or such person may have under the Plan. The Committee may employ
such legal or other counsel, consultants and agents as it may deem
desirable for the administration of the Plan and may rely upon any opinion
or computation received from any such counsel, consultant or agent. Expenses
incurred by the Committee in the engagement of such counsel, consultant or
agent shall be paid by the Company, or the subsidiary or affiliate whose
employees have benefited from the Plan, as determined by the Committee.

 

3.                                       Participants. Participants will consist of such officers,
employees, consultants, and non-employee directors of the Company and its
subsidiaries and affiliates as the Committee in its sole discretion determines
and whom the Committee may designate from time to time to receive awards
under the Plan. Designation of a participant in any year shall not require the
Committee to designate such person to receive an award in any other year or,
once designated, to receive the same type or amount of award as granted to the
participant in any other year. The Committee shall consider such factors as it
deems pertinent in selecting participants and in determining the type and
amount of their respective awards.

 

4.                                       Type of Awards. Awards under the Plan may be granted in
any one or a combination of:  (a) stock
options, (b) stock appreciation rights, (c) restricted stock, (d) stock
units, and (e) cash. Restricted stock, stock units and cash awards may, as
determined by the Committee in its discretion, constitute performance-based
awards, as described in Section 11 hereof. Awards granted under the Plan
shall be evidenced by agreements (which need not be identical) that provide
additional terms and conditions associated with such awards, as determined by
the Committee in its sole discretion; provided, however, that in the event of any conflict between the
provisions of the Plan and any such agreement, the provisions of the Plan shall
prevail.

 

5.                                       Common Stock Available Under the Plan.

 

(a)                                  Maximum Shares.
The aggregate number of shares of common stock of the Company par value $.001 (“Shares”) that may be
issued under this Plan shall be 17,778 Shares, which may be authorized and
unissued or treasury Shares, subject to Section 5(c) hereof and Section 13
hereof (“Maximum Shares”). The maximum number of shares that may be
“incentive stock options”, within the meaning of Section 422 of the
Code, is 17,778 shares (the “ISO Maximum”).

 

(b)                                 Counting
Shares. Shares shall be charged against the Maximum Shares and, if
applicable, the ISO Maximum, upon the grant of each award (other than cash
awards, stock appreciation rights and stock units to be settled only in cash
and performance based awards which are not denominated in common stock) regardless of the vested status of the award, provided, however, that in the case of a stock appreciation
right granted in tandem with a stock option, only the number of Shares subject
to the stock option shall be counted.

 

2

 

(c)                                  Additional Shares.
Any Shares subject to an outstanding award granted under the Plan which are,
for any reason, forfeited, expired, canceled or settled in cash without
delivery to the award recipient of Shares, shall again be available for awards
under the Plan.

 

Any Shares
delivered to the Company as part or full payment for the exercise or
purchase price of an award granted under this Plan or, to the extent the
Committee determines that the availability of ISOs under the Plan will not be
compromised to satisfy the Company’s withholding obligation with respect to an
award granted under this Plan, shall again be available for awards under the
Plan.

 

6.                                       Stock Options.

 

(a)                                  Generally.
Stock options will consist of awards from the Company that will enable the
holder to purchase a number of Shares at set terms. Options shall be either
incentive stock options or nonqualified stock options. The Committee shall have
the authority to grant to any participant stock options (with or without stock
appreciation rights). A stock option granted as an incentive stock option shall,
to the extent it fails to qualify as an incentive stock option, be treated as a
nonqualified option. Each stock option shall be subject to such terms and
conditions, including vesting, consistent with the Plan as the Committee may impose
from time to time, subject to the following limitations.

 

(b)                                 Exercise Price.
Each stock option granted hereunder shall have a per-Share exercise price of
not less than the fair market value (as defined in Section 17 of the Plan)
of a Share on the date of grant;  provided, however, that
if an award is retroactively granted in tandem with or in substitution for
other awards made by the Company, the exercise price may be the price on
the date of grant of such other award; and provided, further, that
if a stock option is granted to a participant upon assumption of or in
substitution of an award granted by another entity in connection with a
corporate transaction between the Company and the granting entity, such as a
merger, consolidation or acquisition, the exercise price may be less than
fair market value of a Share on the date the substitute stock option is granted
if the aggregate fair market value of the Shares subject to the substitute
stock option over the aggregate exercise price of the substitute stock option
does not exceed the aggregate fair market value of the shares of the
predecessor entity subject to the award being assumed or substituted as of the
date immediately preceding the corporate transaction (as determined by the
Committee), over the aggregate grant price or exercise price of any such award.

 

(c)                                  Payment of
Exercise Price. The option exercise price may be paid in cash or, in
the discretion of the Committee, by the delivery of Shares. In the discretion
of the Committee, payment may also be made by delivering a properly
executed exercise notice to the Company together with a copy of irrevocable
instructions to a broker to deliver promptly to the Company the amount of sale
or loan proceeds to pay the exercise price. The Committee may prescribe
any other method of paying the exercise price that it determines to be
consistent with applicable law and the purpose of the Plan.

 

3

 

(d)                                 Exercise Period.
Stock options granted under the Plan shall be exercisable to the extent vested,
at such time or times and subject to such terms and conditions as shall be
determined by the Committee; provided, however,
that no stock option shall be exercisable later than ten (10) years after
the date it is granted except in the event of a participant’s death within six (6) months
prior to such expiration date, in which case, the exercise period of such
participant’s stock options may be extended beyond such period but no
later than one (1) year after the participant’s death. All stock options
shall terminate at such earlier times and upon such conditions or circumstances
as the Committee shall in its discretion set forth in such option agreement at
the date of grant.

 

(e)                                  Limitations on
Incentive Stock Options. Incentive stock options may be granted only
to participants who are employees of the Company or of a “parent corporation”
or “subsidiary corporation” (as defined in Sections 424(e) and (f) of
the Code, respectively) at the date of grant. The aggregate fair market value
(determined as of the time the stock option is granted) of the Shares with
respect to which incentive stock options are exercisable for the first time by
a participant during any calendar year (under all option plans of the Company
and of any parent corporation or subsidiary corporation) shall not exceed one
hundred thousand dollars ($100,000). For purposes of the preceding sentence,
incentive stock options will be taken into account in the order in which they
are granted. The per-Share exercise price of an incentive stock option shall
not be less than 100% of the fair market value of the common stock on the date
of grant, and no incentive stock option may be exercised later than 10
years after the date it is granted or, in the case of the death of a
participant, such longer period as permitted by Section 6(d).

 

(f)                                    Additional
Limitations on Incentive Stock Options for Ten Percent Shareholders. Incentive
stock options may not be granted to any participant who, at the time of
grant, owns stock possessing (after the application of the attribution rules of
Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any parent corporation
or subsidiary corporation, unless the exercise price of the option is fixed at
not less than 110% of the fair market value of the common stock on the date of
grant and the exercise of such option is prohibited by its terms after the
expiration of five years from the date of grant of such option or, in the case
of the death of a participant, such longer period as permitted by Section 6(d).

 

7.                                       Stock Appreciation Rights.

 

(a)                                  Generally. The
Committee may, in its discretion, grant stock appreciation rights, including a
concurrent grant of stock appreciation rights in tandem with any stock option
grant. A “stock appreciation right” means a right to receive a payment
in cash, Shares or a combination thereof, in an amount equal to the excess of (i) the
fair market value, or other specified valuation, of a specified number of
shares of common stock on the date the right is exercised over (ii) the “grant
price”. Each stock appreciation right shall be subject to such terms and
conditions, including vesting, as the Committee shall impose from time to time.

 

4

 

(b)                                 Grant Price. The
grant price per Share referenced in a stock appreciation right shall not be
less than the fair market value (as defined in Section 17 of the Plan) of
a Share on the date of grant; provided, however, that if an award is retroactively granted in tandem
with or in substitution for other awards made by the Company, the grant price may be
the price on the date of grant of such other award; and provided,
further, that if a stock appreciation right is granted to a
participant upon assumption of or in substitution of an award granted by
another entity in connection with a corporate transaction between the Company
and the granting entity, such as a merger, consolidation or acquisition, the
grant price may be less than fair market value of a Share on the date the
substitute stock appreciation right is granted if the aggregate fair market
value of the Shares subject to the substitute stock appreciation right over the
aggregate grant price of the substitute stock appreciation right does not
exceed the aggregate fair market value of the Shares of the predecessor entity
subject to the award being assumed or substituted as of the date immediately
preceding the corporate transaction (as determined by the Committee), over the
aggregate grant price or exercise price of any of such award.

 

(c)                                  Exercise Period.
Stock appreciation rights granted under the Plan shall be exercisable at such
time or times and subject to such terms and conditions, including vesting, as
shall be determined by the Committee; provided, however,
that no stock appreciation right shall be exercisable later than ten (10) years
after the date it is granted except in the event of a participant’s death
within six (6) months prior to such expiration date, in which case, the
exercise period of such participant’s stock appreciation rights may be
extended beyond such period but no later than one (1) year after the
participant’s death. All stock appreciation rights shall terminate at such
earlier times and upon such conditions or circumstances as the Committee shall
in its discretion set forth in such right at the date of grant.

 

8.                                       Restricted Stock Awards.

 

(a)                                  Generally. The
Committee may, in its discretion, grant restricted stock awards consisting of
common stock issued or transferred to participants with or without other
payments therefor, which are subject to transferability restrictions and/or a
substantial risk of forfeiture. Restricted stock awards shall be construed as
an offer by the Company to the participant to purchase the number of shares of
common stock subject to the restricted stock award at the purchase price, if
any, established therefor, and shall be subject to acceptance by a participant.

 

(b)                                 Payment of the
Purchase Price. If a restricted stock award requires payment therefor, the
purchase price of any shares of common stock subject to a restricted stock
award may be paid in any manner authorized by the Committee, which may include
any manner authorized under the Plan for the payment of the exercise price of a
stock option. Restricted stock awards may also be made in consideration of
services rendered to the Company or its subsidiaries or affiliates.

 

(c)                                  Additional Terms.
Restricted stock awards may be subject to such terms and conditions,
including vesting, as the Committee determines appropriate, including, without
limitation, restrictions on the sale or other disposition of such shares, the
right of

 

5

 

the Company to
reacquire such shares for no consideration upon termination of the participant’s
employment within specified periods, and may constitute performance-based
awards, as described in Section 11 hereof. The Committee may require
the participant to deliver a duly signed stock power, endorsed in blank,
relating to the common stock covered by such an award. The Committee may also
require that the stock certificates evidencing such shares be held in custody
or bear restrictive legends until the restrictions thereon shall have lapsed.

 

(d)                                 Rights as a
Shareholder. Holders of restricted stock awards have the right to receive
dividends and to vote the shares; provided, however,
unless the Committee or the award agreement provides otherwise, dividends on
restricted stock awards shall be held in escrow and shall be payable, at such
time as the restrictions on the shares lapse, in either cash, shares or if
applicable the kind of property distributed as a dividend or any combination
thereof.

 

9.                                       Stock Units. The Committee may, in its discretion, grant
stock units with each such stock unit representing one share of common stock of
the Company. Stock units will be credited to a notional account maintained by
the Company. Unless the award agreement provides otherwise, each stock unit
shall also entitle the holder to an amount equal to the value of dividends paid
in respect of one share of common stock of the Company during the period the
unit is outstanding, which amount shall also be credited to the notional
account. Stock units may be subject to such terms and conditions, including
vesting and the time and method of settlement, as the Committee determines
appropriate; provided, however, that unless
the Committee or the award agreement provides otherwise, stock units shall be
settled in shares of common stock. Stock units may constitute
performance-based awards, as described in Section 11 hereof.

 

10.                                 Cash Awards.
The Committee may grant awards to be settled in cash; provided, however, that non-employee directors shall not be
eligible for cash awards. Cash awards may be subject to such terms and
conditions, including vesting, as the Committee determines to be appropriate. Cash
awards may constitute performance-based awards, as described in Section 11
hereof. The Company may, in its discretion, permit participants to defer
settlement of cash awards, in accordance with the requirements of Section 409A.

 

11.                                 Performance-Based
Awards.

 

(a)                                  Generally. Any
awards granted under the Plan may be granted in a manner such that the
awards qualify for the performance-based compensation exemption of Section 162(m)
of the Code (“performance-based awards”). As determined by the Committee
in its sole discretion, either the granting or vesting of such
performance-based awards shall be based on achievement of hurdle rates, growth
rates, and/or reductions in one or more business criteria that apply to the
individual participant, one or more business units or the Company as a whole.

 

(b)                                 Business Criteria.
The business criteria shall be as follows, individually or in combination: (i) net
earnings; (ii) earnings per Share; (iii) net sales growth; (iv) market

 

6

 

share; (v) operating
profit; (vi) earnings before interest and taxes (EBIT); (vii) earnings
before interest, taxes, depreciation and amortization (EBITDA); (viii) gross
margin; (ix) expense targets; (x) working capital targets relating to
inventory and/or accounts receivable; (xi) operating margin; (xii) return on
equity; (xiii) return on assets; (xiv) planning accuracy (as measured by
comparing planned results to actual results); (xv) market price per Share;
(xvi) total return to stockholders; (xvii) net income; (xviii) pro forma net
income; (xix) return on capital; (xx) revenues; (xxi) expenses;
(xxii) operating cash flow; (xxiii) net profit margin; (xxiv) employee
headcount; (xxv) employee turnover; (xxvi) labor costs; and (xxvii)
customer service. In addition, performance-based awards may include
comparisons to the performance of other companies, such performance to be
measured by one or more of the foregoing business criteria.

 

(c)                                  Establishment of
Performance Goals. With respect to performance-based awards, the Committee
shall establish in writing (i) the performance goals applicable to a given
period, and such performance goals shall state, in terms of an objective
formula or standard, the method for computing the amount of compensation
payable to the participant if such performance goals are obtained and (ii) the
individual employees or class of employees to which such performance goals
apply no later than 90 days after the commencement of such period (but in no
event after 25% of such period has elapsed).

 

(d)                                 Certification of
Performance. No performance-based awards shall be payable to or vest with
respect to, as the case may be, any participant for a given period until
the Committee certifies in writing that the objective performance goals (and
any other material terms) applicable to such period have been satisfied.

 

(e)                                  Modification of
Performance-Based Awards. With respect to any awards intended to qualify as
performance-based awards, after establishment of a performance goal, the
Committee shall not revise such performance goal or increase the amount of
compensation payable thereunder (as determined in accordance with Section 162(m)
of the Code) upon the attainment of such performance goal. However, the
measurement of performance against goals shall exclude the impact of charges
for restructurings, discontinued operations, extraordinary items and other
unusual or non-recurring items, and the cumulative effects of accounting
changes, each as defined by generally accepted accounting principles as
identified in the financial statements, notes to the financial statements or
management’s discussion or analysis. In accordance with Section 162(m) of
the Code, the Committee may only exercise negative discretion with respect
to the amount of a performance-based award.

 

12.                                 Foreign Laws. The Committee may grant awards to
individual participants who are subject to the tax laws of nations other than
the United States, which awards may have terms and conditions as
determined by the Committee as necessary to comply with applicable foreign laws.
The Committee may take any action which it deems advisable to obtain
approval of such awards by the appropriate foreign governmental entity; provided, however, that no such awards may be granted
pursuant to this Section 12 and no action may be taken which would
result in a violation of the Exchange Act, the Code or any other applicable
law.

 

7

 

13.                                 Adjustment Provisions; Change of Control.

 

(a)                                  Adjustment
Generally. If there shall be any change in the common stock of the Company,
through merger, consolidation, reorganization, recapitalization, stock or
special one-time cash dividend, stock split, reverse stock split, split up,
spin-off, combination of shares, exchange of shares, dividend in kind or other
like change in capital structure or distribution (other than normal cash
dividends) to stockholders of the Company, an adjustment shall be made to each
outstanding award such that each such award shall thereafter be exercisable for
such securities, cash and/or other property as would have been received in
respect of the common stock subject to such award had such award been exercised
in full immediately prior to such change or distribution, and such an
adjustment shall be made successively each time any such change shall occur.

 

(b)                                 Modification
of Awards. In the event of any change or distribution described in subsection (a) above,
in order to prevent dilution or enlargement of participants’ rights under the
Plan, the Committee will have authority to adjust, in an equitable manner, the
number and kind of shares that may be issued under the Plan, the number
and kind of shares subject to outstanding awards, the exercise price applicable
to outstanding awards, and the fair market value of the common stock and other
value determinations applicable to outstanding awards; provided,
however, that any such arithmetic adjustment to a performance-based
award shall not cause the amount of compensation payable thereunder to be
increased from what otherwise would have been due upon attainment of the
unadjusted award. Appropriate adjustments may also be made by the
Committee in the terms of any awards under the Plan to reflect such changes or
distributions and to modify any other terms of outstanding awards on an
equitable basis, including modifications of performance targets and changes in
the length of performance periods; provided, however,
that any such arithmetic adjustment to a performance-based award shall not
cause the amount of compensation payable thereunder to be increased from what
otherwise would have been due upon attainment of the unadjusted award. In
addition, other than with respect to stock options, stock appreciation rights,
and other awards intended to constitute performance-based awards, the Committee
is authorized to make adjustments to the terms and conditions of, and the
criteria included in, awards in recognition of unusual or nonrecurring events
affecting the Company or the financial statements of the Company, or in
response to changes in applicable laws, regulations, or accounting principles.

 

(c)                                  Effect of a Change
of Control. Notwithstanding any other provision of this Plan, if there is a
Change of Control (as defined in subsection (d) below) of the
Company, the Committee may provide at anytime prior to the Change of
Control that all then outstanding stock options, stock appreciation rights and
stock units and unvested cash awards shall immediately vest and become
exercisable and any restrictions on restricted stock awards or stock units
shall immediately lapse. In addition, the Committee may provide that all
awards held by participants who are at the time of the Change of Control in the
service of the Company a subsidiary or affiliate shall remain exercisable for
the remainder of their terms notwithstanding any subsequent termination of a
participant’s service. All awards shall be subject to the terms of any
agreement effecting the Change of Control, which agreement may provide,
without limitation, that

 

8

 

in lieu of
continuing the awards, each stock option and stock appreciation right
outstanding hereunder shall terminate within a specified number of days after
notice to the holder, and that such holder shall receive, with respect to each
share of common stock subject to such stock option or stock appreciation right,
an amount equal to the excess of the fair market value of such shares of common
stock immediately prior to the occurrence of such Change of Control over the
exercise price (or base price) per Share underlying such stock option or stock
appreciation right with such amount payable in cash, in one or more kinds of
property (including the property, if any, payable in the transaction) or in a
combination thereof, as the Committee, in its discretion, shall determine. A
provision like the one contained in the preceding sentence shall be
inapplicable to a stock option or stock appreciation right granted within 6
months before the occurrence of a Change of Control if the holder of such stock
option or stock appreciation right is subject to the reporting requirements of Section 16(a) of
the Exchange Act and no exception from liability under Section 16(b) of
the Exchange Act is otherwise available to such holder.

 

(d)                                 Definitions.
For purposes of this Section 13, a “Change of Control” of the
Company shall be deemed to have occurred upon any of the following events:

 

(i)                                     Any
person(s) acting together which would constitute a “group” for purposes
of Section 13(d) of the Exchange Act (other than any holder of the
Company’s stock as of the effective date of this Plan, the Company or any
subsidiary) shall “beneficially own” (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, at least 50% of the total
voting power of all classes of capital stock of the Company entitled to vote
generally in the election of the Board;

 

(ii)                                  Consummation
of (A) a plan of complete liquidation of the Company, or (B) a merger
or consolidation of the Company (x) in which the Company is not the continuing
or surviving corporation (other than a consolidation or merger with a
wholly-owned subsidiary of the Company in which all shares of common stock
outstanding immediately prior to the effectiveness thereof are changed into or
exchanged for common stock of the subsidiary) or (y) pursuant to which the
common stock is converted into cash, securities or other property, except in
either case, a consolidation or merger of the Company in which the holders of
the common stock immediately prior to the consolidation or merger have,
directly or indirectly, at least a majority of the common stock of the
continuing or surviving corporation immediately after such consolidation or
merger or in which the Board immediately prior the merger or consolidation
would, immediately after the merger or consolidation, constitute a majority of
the board of directors of the continuing or surviving corporation; or

 

(iii)                               The
consummation of a sale or other disposition (in one transaction or a series of
transactions) of all or substantially all of the assets of the Company.

 

9

 

14.                                 Termination
of Service.

 

(a)                                  Termination (other
than for Cause). Unless the Committee or the applicable award agreement
provides otherwise, if a participant’s service with the Company or any
subsidiary or affiliate terminates for any reason other than for “cause”
(which shall have the meaning defined in the applicable award agreement or, in
the absence of such definition shall be defined by the Committee).

 

(i)                                     Stock
Options/Stock Appreciation Rights. Except as provided in Section 13(c) hereof,
any outstanding stock options and stock appreciation rights shall expire on the
earlier of:

 

(A)                              the
expiration of their term,

 

(B)                                90
days following termination of the participant’s service other than termination
of service on account of death or Disability.

 

provided, however,
that a participant (or in the case of the participant’s death or Disability,
the participant’s representative) may exercise all or part of the
participant’s stock options and stock appreciation rights at any time before
the expiration of such stock options following termination of service only to
the extent that the stock options and stock appreciation rights are vested on
or before the date participant’s service terminates. The balance of the stock
options and stock appreciation rights (which are not vested on the date
participant’s service terminates) shall lapse when the participant’s service
terminates.

 

If by
virtue of this provision, an incentive stock option is not exercised within
three (3) months after a participant’s employment terminates, then unless
such participant’s employment termination is due to his or her death or
Disability (defined for this purpose only as described in Section 22(e)(3) of
the Code), the incentive stock option shall be treated as a nonqualified stock
option.

 

(ii)                                  Restricted
Stock Awards/Stock Units. All unvested restricted stock awards and stock
units shall expire upon termination of service.

 

(iii)                               Cash
Awards/Performance-Based Awards. All cash awards and performance-based
awards shall be forfeited upon termination of service.

 

(b)                                 Termination of
Service (for Cause). All of a participant’s awards (including any exercised
stock options for which shares or cash have not been delivered to the
participant) shall be cancelled and forfeited immediately on the date of the
participant’s termination of service with the Company or any subsidiary if such
termination is for cause or cause exists on such date, and the Company shall
return to the participant the price (if any) paid for any undelivered shares. Should
a participant die at a time when cause exists, all of the participant’s awards
(including any exercised stock options for which shares have not been delivered
to the participant) shall be cancelled and forfeited immediately as of the date
of the participant’s death.

 

(c)                                  Leave
of Absence. For purposes of this Section 14, service shall be deemed
to continue while the participant is on a bona fide leave of absence, if such
leave

 

10

 

was approved by
the Company in writing or if continued crediting of service for this purpose is
expressly required by the terms of such leave or by applicable law (as
determined by the Committee).

 

15.                                 Nontransferability.
Each award granted under the Plan to a participant shall not be
transferable except by will or the laws of descent and distribution or as
permitted by the Committee to a participant’s spouse, lineal descendants,
siblings, parents, heirs, executors, administrators, testamentary trustees,
legatees, beneficiaries or a trust for the exclusive benefit of any of the
foregoing persons, or to any charitable organizations described in Section 501(c)(3) of
the Code, which shall have discretion to permit transferability to third
parties under such terms and conditions as it shall determine. In the event of
the death of a participant (which for this purpose only shall include any
transferee), each stock option or stock appreciation right theretofore granted
to him or her shall be exercisable during such period after his or her death as
described in Section 14 hereof but unless the Committee or the award
agreement provides otherwise, such award shall only be exercisable by the
executor or administrator of the estate of the deceased participant or the
person or persons to whom the deceased participant’s rights under the stock
option or stock appreciation right shall pass by will or the laws of descent
and distribution.

 

16.                                 Other
Provisions. The granting of or distribution under any award under
the Plan may also be subject to such other provisions (whether or not
applicable to the awards of any other participant) as the Committee determines
appropriate, including, without limitation, for the forfeiture of, or
restrictions on resale or other disposition of, common stock acquired under any
form of award, for the acceleration of exercisability or vesting of awards
in the event of a Change of Control, for the payment of the value of awards to
participants in the event of a Change of Control, or to comply with federal and
state securities laws, or understandings or conditions as to the participant’s
employment in addition to those specifically provided for under the Plan.

 

17.                                 Fair Market Value. For purposes of this Plan and any awards
awarded hereunder, fair market value per
Share as of a particular date shall mean (i) if shares are then listed on a
national stock exchange, the closing price per Share on the exchange for the
last preceding date on which there was a sale of shares on such exchange, as
determined by the Committee, (ii) if shares are not then listed on a
national stock exchange but are then traded on an over-the-counter market, the
average of the closing bid and asked prices for such shares in such
over-the-counter market for the last preceding date on which there was a sale
of such shares in such market, as determined by the Committee, or (iii) if
shares are not then listed on a national exchange or traded on an
over-the-counter market, such value as the Committee in its discretion may in
good faith determine; provided that, where such shares are so listed or traded,
the Committee may make discretionary determinations where the shares have
not been traded for 10 trading days.

 

18.                                 Withholding.
All payments or distributions of awards made pursuant to the Plan
shall be net of any amounts required to be withheld pursuant to applicable
federal, state and local tax withholding requirements at the minimum statutory

 

11

 

withholding rates.
If the Company proposes or is required to distribute common stock pursuant to
the Plan, it may require the recipient to remit to it or to the
corporation that employs such recipient an amount sufficient to satisfy such
tax withholding requirements prior to the delivery of any certificates for such
common stock. In lieu thereof, the Company or the employing corporation shall
have the right to withhold the amount of such taxes from any other sums due or
to become due from such corporation to the recipient as the Committee shall
prescribe. The Committee may, in its discretion and subject to such rules as
it may adopt (including any as may be required to satisfy applicable
tax and/or non-tax regulatory requirements), permit an optionee or award or
right holder to pay all or a portion of the federal, state and local
withholding taxes arising in connection with any award consisting of shares of
common stock by electing to have the Company withhold shares of common stock
having a fair market value equal to the amount of tax to be withheld, such tax
calculated at minimum statutory withholding rates.

 

19.                                 Tenure. A
participant’s right, if any, to continue to serve the Company or any of its
subsidiaries or affiliates as an officer, employee, or otherwise, shall not be
enlarged or otherwise affected by his or her designation as a participant under
the Plan.

 

20.                                 Unfunded
Plan. Participants shall have no right, title, or interest
whatsoever in or to any investments which the Company may make to aid it
in meeting its obligations under the Plan. Nothing contained in the Plan, and
no action taken pursuant to its provisions, shall create or be construed to
create a trust of any kind, or a fiduciary relationship between the Company and
any participant, beneficiary, legal representative or any other person. To the
extent that any person acquires a right to receive payments from the Company
under the Plan, such right shall be no greater than the right of an unsecured
general creditor of the Company. All payments to be made hereunder shall be
paid from the general funds of the Company and no special or separate fund
shall be established and no segregation of assets shall be made to assure
payment of such amounts except as expressly set forth in the Plan. The Plan is
not intended to be subject to the Employee Retirement Income Security Act of
1974, as amended.

 

21.                                 No Fractional Shares. No fractional shares of common stock
shall be issued or delivered pursuant to the Plan or any award. The Committee
shall determine whether cash, or awards, or other property shall be issued or
paid in lieu of fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.

 

22.                                 Duration,
Amendment and Termination. No award shall be granted more than 10
years after the Effective Date. The Committee may amend the Plan from time
to time or suspend or terminate the Plan at any time. No amendment of the Plan may be
made without approval of the stockholders of the Company if the amendment will:
(i)  increase the aggregate number of shares of common stock that may be
delivered through stock options under the Plan; (ii) increase the Maximum
Shares as set forth in Section 5 hereof; (iii) permit the re-pricing
of an award to a lower exercise price, base price or purchase price, as
applicable, (including, without limitation, the cancellation of an award
followed by a re-grant of that award six (6) months later); (iv) change
the types of business criteria on which performance-based awards are to be
based under the Plan;

 

12

 

(v) modify
the requirements as to eligibility for participation in the Plan; or (vi) change
the legal entity authorized to make awards under the Plan. Notwithstanding
anything contained in this Section 22 or the Plan, the terms of the Plan
and any awards granted hereunder may be amended (retrospectively or prospectively)
as may be required to comply with the requirements of Section 409A.

 

23.                                 Governing
Law. This Plan, awards granted hereunder and actions taken in
connection herewith shall be governed and construed in accordance with the laws
of the State of Delaware (regardless of the law that might otherwise govern
under applicable Delaware principles of conflict of laws).

 

24.                                 Effective
Date. The Plan shall be effective as of September 30, 2005, the
date on which the Plan was adopted by the Board (the “Effective Date”),
provided that the Plan is approved by the stockholders of the Company at an
annual meeting or any special meeting of stockholders of the Company within 12
months of the Effective Date, and such approval of stockholders shall be a
condition to the right of each participant to receive any awards hereunder. Any
awards granted under the Plan prior to such approval of stockholders shall be
effective as of the date of grant (unless, with respect to any award, the
Committee specifies otherwise at the time of grant), but no such award may be
exercised or settled and no restrictions relating to any award may lapse
prior to such stockholder approval, and if stockholders fail to approve the
Plan as specified hereunder, any such award shall be cancelled.

 

13

 

Section Where
Important Terms First Defined or Used

 

	
  Term

  	
   

  	
  Section

  
	
   

  	
   

  	
   

  
	
  Board

  	
   

  	
  2(a)

  
	
   

  	
   

  	
   

  
	
  Cash Award

  	
   

  	
  10

  
	
   

  	
   

  	
   

  
	
  Cause

  	
   

  	
  14(a)

  
	
   

  	
   

  	
   

  
	
  Change of
  Control

  	
   

  	
  13(d)

  
	
   

  	
   

  	
   

  
	
  Code

  	
   

  	
  2(a)

  
	
   

  	
   

  	
   

  
	
  Committee

  	
   

  	
  2(a)

  
	
   

  	
   

  	
   

  
	
  Common Stock

  	
   

  	
  5(a)

  
	
   

  	
   

  	
   

  
	
  Company

  	
   

  	
  1

  
	
   

  	
   

  	
   

  
	
  Effective Date

  	
   

  	
  24

  
	
   

  	
   

  	
   

  
	
  Exchange Act

  	
   

  	
  2(a)

  
	
   

  	
   

  	
   

  
	
  Fair Market
  Value

  	
   

  	
  17

  
	
   

  	
   

  	
   

  
	
  Grant Price

  	
   

  	
  7(a)

  
	
   

  	
   

  	
   

  
	
  Independent
  Director

  	
   

  	
  2(a)

  
	
   

  	
   

  	
   

  
	
  ISO Maximum

  	
   

  	
  5(a)

  
	
   

  	
   

  	
   

  
	
  Maximum Shares

  	
   

  	
  5(a)

  
	
   

  	
   

  	
   

  
	
  Non-Employee
  Director

  	
   

  	
  2(a)

  
	
   

  	
   

  	
   

  
	
  Parent Corporation

  	
   

  	
  6(e)

  
	
   

  	
   

  	
   

  
	
  Performance-Based
  Awards

  	
   

  	
  11(a)

  
	
   

  	
   

  	
   

  
	
  Plan

  	
   

  	
  1

  
	
   

  	
   

  	
   

  
	
  Restricted Stock
  Award

  	
   

  	
  8

  
	
   

  	
   

  	
   

  
	
  Share

  	
   

  	
  5(a)

  
	
   

  	
   

  	
   

  
	
  Stock
  Appreciation Rights

  	
   

  	
  7

  
	
   

  	
   

  	
   

  
	
  Stock Options

  	
   

  	
  6

  
	
   

  	
   

  	
   

  
	
  Stock Unit

  	
   

  	
  9

  
	
   

  	
   

  	
   

  
	
  Subsidiary
  Corporation

  	
   

  	
  6(e)

  

 

14

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