Document:

Exhibit 10.1

 

Execution Draft

 

 

CREDIT AGREEMENT

 

Dated as of June 30, 2004

 

by and between

 

P&F INDUSTRIES, INC.,

FLORIDA PNEUMATIC MANUFACTURING CORPORATION,

EMBASSY INDUSTRIES, INC.,

GREEN MANUFACTURING, INC.,

COUNTRYWIDE HARDWARE, INC.,

NATIONWIDE INDUSTRIES, INC., and

WOODMARK INTERNATIONAL, L.P.

as Co-Borrowers

 

- and -

 

CITIBANK, N.A.,

as Administrative Agent

 

- and -

 

THE LENDERS PARTY HERETO

 

 

TABLE OF CONTENTS

 

 

	
  ARTICLE I DEFINITIONS AND ACCOUNTING TERMS

  	
   

  
	
  SECTION
  1.01. Definitions

  	
   

  
	
  SECTION
  1.02. Accounting Terms

  	
   

  
	
  SECTION
  1.03. Terms Generally

  	
   

  
	
   

  	
   

  
	
  ARTICLE II LOANS

  	
   

  
	
  SECTION
  2.01. Revolving Credit Loans

  	
   

  
	
  SECTION
  2.02. Revolving Credit Notes

  	
   

  
	
  SECTION
  2.03. Equipment Loans

  	
   

  
	
  SECTION
  2.04. Term Loan

  	
   

  
	
  SECTION
  2.05. Term Loan Notes

  	
   

  
	
  SECTION
  2.06. Letters of Credit and Banker’s Acceptances.

  	
   

  
	
   

  	
   

  
	
  ARTICLE III INTEREST RATE; FEES AND
  PAYMENTS; USE OF PROCEEDS

  	
   

  
	
  SECTION
  3.01. Interest Rate

  	
   

  
	
  SECTION
  3.02. Use of Proceeds

  	
   

  
	
  SECTION
  3.03. Prepayments

  	
   

  
	
  SECTION
  3.04. Fees

  	
   

  
	
  SECTION
  3.05.  Inability to Determine Interest
  Rate.

  	
   

  
	
  SECTION
  3.06. Illegality.

  	
   

  
	
  SECTION
  3.07. Other Events

  	
   

  
	
  SECTION
  3.08. Indemnity.

  	
   

  
	
  SECTION
  3.09. Funds; Manner of Payment

  	
   

  
	
  SECTION
  3.10. Pro Rata Treatment and Payments

  	
   

  
	
  SECTION
  3.11. Funding and Disbursement of Loans

  	
   

  
	
   

  	
   

  
	
  ARTICLE IV REPRESENTATIONS AND WARRANTIES

  	
   

  

 

1

 

	
  SECTION
  4.01. Organization, Corporate Powers, etc

  	
   

  
	
  SECTION
  4.02. Authorization of Borrowing, Enforceable Obligations

  	
   

  
	
  SECTION
  4.03. Financial Condition

  	
   

  
	
  SECTION
  4.04. Taxes

  	
   

  
	
  SECTION
  4.05. Title to Properties

  	
   

  
	
  SECTION
  4.06. Litigation

  	
   

  
	
  SECTION
  4.07. Agreements

  	
   

  
	
  SECTION
  4.08. Compliance with ERISA

  	
   

  
	
  SECTION
  4.09. Federal Reserve Regulations; Use of Proceeds

  	
   

  
	
  SECTION
  4.10. Approval

  	
   

  
	
  SECTION
  4.11. Subsidiaries.

  	
   

  
	
  SECTION
  4.12. Hazardous Materials

  	
   

  
	
  SECTION
  4.13. Investment Company Act

  	
   

  
	
  SECTION
  4.14. Security Agreement

  	
   

  
	
  SECTION
  4.15. No Default

  	
   

  
	
  SECTION
  4.16. Permits and Licenses.

  	
   

  
	
  SECTION
  4.17. Compliance with Law.

  	
   

  
	
  SECTION
  4.18. Disclosure.

  	
   

  
	
  SECTION
  4.19. Pledge Agreement.

  	
   

  
	
  SECTION
  4.20. Representations in Purchase Agreement.

  	
   

  
	
   

  	
   

  
	
  ARTICLE V CONDITIONS OF LENDING

  	
   

  
	
  SECTION
  5.01. Conditions to the Initial Extensions of Credit

  	
   

  
	
  SECTION
  5.02. Conditions to all Loans

  	
   

  
	
  SECTION
  5.03. Additional Conditions with respect to each Equipment Loan

  	
   

  
	
   

  	
   

  
	
  ARTICLE VI AFFIRMATIVE COVENANTS

  	
   

  
	
  SECTION
  6.01. Corporate Existence, Properties, etc

  	
   

  
	
  SECTION
  6.02. Payment of Indebtedness, Taxes, etc

  	
   

  
	
  SECTION
  6.03. Financial Statements, Reports, etc

  	
   

  
	
  SECTION
  6.04. Access to Premises and Records

  	
   

  
	
  SECTION
  6.05. Notice of Adverse Change

  	
   

  

 

2

 

	
  SECTION
  6.06. Notice of Default

  	
   

  
	
  SECTION
  6.07. Notice of Litigation

  	
   

  
	
  SECTION
  6.08. ERISA

  	
   

  
	
  SECTION
  6.09. Compliance with Applicable Laws

  	
   

  
	
  SECTION
  6.10. Subsidiaries

  	
   

  
	
  SECTION
  6.11. Default in Other Agreements

  	
   

  
	
  SECTION
  6.12. Environmental Laws

  	
   

  
	
  SECTION
  6.13. Further Assurances.

  	
   

  
	
  SECTION
  6.14. Mortgages

  	
   

  
	
   

  	
   

  
	
  ARTICLE VII NEGATIVE COVENANTS

  	
   

  
	
  SECTION
  7.01. Liens

  	
   

  
	
  SECTION
  7.02. Indebtedness

  	
   

  
	
  SECTION
  7.03. Guaranties

  	
   

  
	
  SECTION
  7.04. Sale of Assets

  	
   

  
	
  SECTION
  7.05. Sales of Notes

  	
   

  
	
  SECTION
  7.06. Loans and Investments

  	
   

  
	
  SECTION
  7.07. Nature of Business

  	
   

  
	
  SECTION
  7.08. Sale and Leaseback

  	
   

  
	
  SECTION
  7.09. Federal Reserve Regulations

  	
   

  
	
  SECTION
  7.10. Accounting Policies and Procedures

  	
   

  
	
  SECTION
  7.11. Hazardous Materials

  	
   

  
	
  SECTION
  7.12. Limitations on Fundamental Changes

  	
   

  
	
  SECTION
  7.13. Financial Condition Covenants.

  	
   

  
	
  SECTION
  7.14. Subordinated Debt

  	
   

  
	
  SECTION
  7.15. Transactions with Affiliates

  	
   

  
	
  SECTION
  7.16. Impairment of Security Interest

  	
   

  
	
   

  	
   

  
	
  ARTICLE VIII EVENTS OF DEFAULT

  	
   

  
	
  SECTION
  8.01. Events of Default

  	
   

  
	
   

  	
   

  
	
  THE ADMINISTRATIVE AGENT

  	
   

  
	
  SECTION
  9.01. Appointment, Powers and Immunities

  	
   

  

 

3

 

	
  SECTION
  9.02. Reliance by Administrative Agent

  	
   

  
	
  SECTION
  9.03. Events of Default

  	
   

  
	
  SECTION
  9.04. Rights as a Lender

  	
   

  
	
  SECTION
  9.05. Indemnification

  	
   

  
	
  SECTION
  9.06. Non-Reliance on Administrative Agent and Other Lenders

  	
   

  
	
  SECTION
  9.07. Failure to Act

  	
   

  
	
  SECTION
  9.08. Resignation of the Administrative Agent

  	
   

  
	
  SECTION
  9.09. Sharing of Collateral and Payments

  	
   

  
	
   

  	
   

  
	
  ARTICLE X MISCELLANEOUS

  	
   

  
	
  SECTION
  10.01. Notices

  	
   

  
	
  SECTION
  10.02. Effectiveness; Survival of Agreement

  	
   

  
	
  SECTION
  10.03. Expenses of the Bank

  	
   

  
	
  SECTION
  10.04. Amendments and Waivers.

  	
   

  
	
  SECTION
  10.05. Successors and Assigns; Participations

  	
   

  
	
  SECTION
  10.06. No Waiver; Cumulative Remedies

  	
   

  
	
  SECTION
  10.07. APPLICABLE LAW

  	
   

  
	
  SECTION
  10.08. SUBMISSION TO JURISDICTION

  	
   

  
	
  SECTION
  10.09. Severability

  	
   

  
	
  SECTION
  10.10. Reinstatement; Certain Payments

  	
   

  
	
  SECTION
  10.11. Right of Setoff

  	
   

  
	
  SECTION
  10.12. Joint and Several Obligations of the Co-Borrowers

  	
   

  
	
  SECTION
  10.13. Entire Agreement.

  	
   

  
	
  SECTION
  10.14. Counterparts

  	
   

  
	
  SECTION
  10.15. Headings

  	
   

  
	
  SECTION
  10.16. Construction

  	
   

  

 

4

 

SCHEDULES

 

	
  Schedule I

  	
   

  	
  –

  	
   

  	
  Subsidiaries and Affiliates

  
	
  Schedule II

  	
   

  	
  –

  	
   

  	
  Liens

  
	
  Schedule III

  	
   

  	
  –

  	
   

  	
  Existing Indebtedness

  
	
  Schedule IV

  	
   

  	
  –

  	
   

  	
  Existing Guarantees

  
	
  Schedule V

  	
   

  	
  –

  	
   

  	
  Intentionally Omitted

  
	
  Schedule VI

  	
   

  	
  –

  	
   

  	
  Permitted Investments

  
	
  Schedule VII

  	
   

  	
  –

  	
   

  	
  Litigation

  
	
  Schedule VIII

  	
   

  	
  –

  	
   

  	
  Environmental Matters

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  EXHIBITS

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Exhibit A

  	
   

  	
  –

  	
   

  	
  Form of Revolving Credit Note

  
	
  Exhibit B

  	
   

  	
  –

  	
   

  	
  Form of Equipment Loan Note

  
	
  Exhibit C

  	
   

  	
  –

  	
   

  	
  Form of Term Loan Note

  
	
  Exhibit D

  	
   

  	
  –

  	
   

  	
  Form of Guaranty

  
	
  Exhibit E

  	
   

  	
  –

  	
   

  	
  Form of Security Agreement

  
	
  Exhibit F

  	
   

  	
  –

  	
   

  	
  Form of Notice of Borrowing

  
	
  Exhibit G

  	
   

  	
  –

  	
   

  	
  Form of Opinion of Counsel

  
	
  Exhibit H

  	
   

  	
  –

  	
   

  	
  Form of Borrowing Base Certificate

  
	
  Exhibit I

  	
   

  	
  –

  	
   

  	
  Form of Pledge Agreement

  
	
  Exhibit J-1

  	
   

  	
  –

  	
   

  	
  Form of Woodmark Subordinated Note

  
	
  Exhibit J-2

  	
   

  	
  –

  	
   

  	
  Form of Sherstad  Subordinated Note

  
	
  Exhibit K

  	
   

  	
  –

  	
   

  	
  Form of Mortgage

  
	
  Exhibit L

  	
   

  	
  –

  	
   

  	
  Form of U.S. Tax Compliance Certificate

  

 

5

 

CREDIT AGREEMENT
dated as of June 30, 2004, by and among P&F
INDUSTRIES, INC., a Delaware corporation (“P&F”), FLORIDA PNEUMATIC MANUFACTURING CORPORATION,
a Florida corporation (“Florida Pneumatic”), EMBASSY
INDUSTRIES, INC., a New York corporation (“Embassy”), GREEN MANUFACTURING, INC., a Delaware
corporation, (“Green”), COUNTRYWIDE HARDWARE,
INC., a Delaware corporation (“Countrywide”), NATIONWIDE INDUSTRIES, INC., a Florida
corporation (“Nationwide”) and WOODMARK INTERNATIONAL, L.P., a Delaware
limited partnership (“Woodmark”; and collectively with P&F, Florida
Pneumatic, Embassy, Green, Countrywide and Nationwide, the “Co-Borrowers”), the
LENDERS which
from time to time are parties to this Agreement (individually a “Lender” and,
collectively, the “Lenders”) and CITIBANK, N.A., a national banking
association, as Administrative Agent for the Lenders (the “Administrative
Agent”).

 

RECITALS

 

The Co-Borrowers have requested the Lenders to extend credit from time
to time and the Lenders are willing to extend credit to the Co-Borrowers,
subject to the terms and conditions hereinafter set forth.

 

Accordingly, the Co-Borrowers and the Lenders agree as follows:

 

ARTICLE I DEFINITIONS AND ACCOUNTING TERMS

 

SECTION 1.01.    Definitions. 
As used herein, the following words and terms shall have the following
meanings:

 

“Affiliate” shall mean with respect to any Person, any corporation,
partnership, limited liability company, limited liability partnership, joint
venture, trust or unincorporated organization which, directly or indirectly,
controls or is controlled by or is under common control with such Person.  For the purpose of this definition,
“control” of a Person shall mean the power, direct or indirect, to direct or
cause the direction of the management or policies of such Person whether
through the ownership of voting securities, by contract or otherwise; provided
that, in any event, any Person who owns directly or indirectly 10% or more of
the securities having ordinary voting power for the election of directors or
other governing body of a corporation or 10% or more of the partnership or
other ownership interest of any Person (other than as a limited partner of such
other Person) will be deemed to control such corporation or other Person.

 

“Aggregate Banker’s Acceptances Outstanding” shall mean on the date of
determination thereof, the aggregate principal balance of outstanding Banker’s
Acceptances created by the Issuing Lender on behalf of or for the benefit of
the Co-Borrowers, or any of them, hereunder.

 

“Aggregate Letters of Credit Outstanding” shall mean on the date of
determination thereof, the sum of (a) the aggregate maximum amount which is
available or available in the future to be drawn under all outstanding Letters
of Credit under this Agreement plus (b) the

 

6

 

aggregate amount of any
payments made by the Issuing Lender under any Letter of Credit issued pursuant
to this Agreement that has not been reimbursed by the Co-Borrowers.

 

“Aggregate Outstandings” shall mean on the date of determination
thereof, the sum of (i) Aggregate RC Outstandings plus (ii) aggregate
outstanding principal amount of the Equipment Loans.

 

“Aggregate RC
Outstandings” shall mean on the date of determination thereof, the sum of (i)
the Aggregate Letters of Credit Outstanding, plus (ii) the Aggregate Banker’s
Acceptances Outstanding, plus (iii) the aggregate outstanding principal amount
of the Revolving Credit Loans.

 

“Agreement” shall mean this Credit Agreement dated as of June 30, 2004,
as it may hereafter be amended, restated, supplemented or otherwise modified
from time to time.

 

“Applicable Revolving Credit Loan Margin” shall mean with respect to
Revolving Credit Loans that are Prime Rate Loans or LIBOR Loans hereunder, the
percentage set forth below under the headings “Prime Rate Margin” and “LIBOR
Margin”, respectively, opposite the applicable ratio:

 

	
  Consolidated Senior Debt to

  Consolidated EBITDA

  	
   

  	
  Prime Rate

  Margin

  	
   

  	
  LIBOR
  Margin

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Greater than 3.50:1.00

  	
   

  	
  0.25

  	
  %

  	
  1.75

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equal to or less than 3.50:1.00 but greater
  than 2.25:1.00

  	
   

  	
  0

  	
  %

  	
  1.60

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equal to or less than 2.25:1.00

  	
   

  	
  0

  	
  %

  	
  1.45

  	
  %

  

 

Notwithstanding the foregoing, during the period commencing on the
Closing Date and ending on the fifth Business Day following the date of
delivery of the financial statements to the Administrative Agent for the fiscal
quarter ending September 30, 2004, the Applicable Revolving Credit Loan Margin
shall be 0% per annum, with respect to Prime Rate Loans, and 1.60% per annum,
with respect to LIBOR Loans. The Applicable Revolving Credit Loan Margin will
be set or reset quarterly on the date which is five (5) Business Days following
the date of receipt by the Administrative Agent of the financial statements
referred to in 6.03(a) and Section 6.03(b), together with a certificate of the
Chief Financial Officer of the Co-Borrowers certifying the ratio of
Consolidated Senior Debt to Consolidated EBITDA and setting forth the
calculation thereof in detail; provided, however, that if any such financial
statement and certificate are not received by the Administrative Agent within
the time period required pursuant to Section 6.03(a) or Section 6.03(b), as the
case may be, the Applicable Revolving Credit Loan Margin will be established at
the highest rates provided above from the date such financial statement and
certificate were due until the date which is five (5) Business Days following
the receipt by the Administrative of such financial statements and certificate;
and provided, further, that the Lenders shall not in any way be deemed to have
waived any Event of Default, or any rights or remedies hereunder or under any
other Loan Document in connection with the foregoing proviso.

 

7

 

During the occurrence and continuance of a Default or an Event of
Default, no downward adjustment, and only upward adjustments, shall be made to
the Applicable Revolving Credit Loan Margin.

 

“Applicable Term Loan/Equipment Loan Margin” shall mean with respect to
Term Loans and Equipment Loans that are Prime Rate Loans or LIBOR Loans
hereunder, the percentage set forth below under the headings “Prime Rate
Margin” and “LIBOR Margin”, respectively, opposite the applicable ratio:

 

	
  Consolidated Senior Debt to

  Consolidated EBITDA

  	
   

  	
  Prime Rate

  Margin

  	
   

  	
  LIBOR
  Margin

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Greater than 3.50:1.00

  	
   

  	
  0.25

  	
  %

  	
  2.00

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equal to or less than 3.50:1.00 but greater
  2.25:1.00

  	
   

  	
  0

  	
  %

  	
  1.75

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equal to or less than 2.25:1.00

  	
   

  	
  0

  	
  %

  	
  1.50

  	
  %

  

 

Notwithstanding the foregoing, during the period commencing on the
Closing Date and ending on the fifth Business Day following the date of delivery
of the financial statements to the Administrative Agent for the fiscal quarter
ending September 30, 2004, the Applicable Term Loan/Equipment Loan Margin shall
be 0% per annum, with respect to Prime Rate Loans, and 1.75% per annum, with
respect to LIBOR Loans. The Applicable Term Loan/Equipment Loan Margin will be
set or reset quarterly on the date which is five (5) Business Days following
the date of receipt by the Administrative Agent of the financial statements
referred to in 6.03(a) and Section 6.03(b), together with a certificate of the
Chief Financial Officer of the Co-Borrowers certifying the ratio of
Consolidated Senior Debt to Consolidated EBITDA and setting forth the
calculation thereof in detail; provided, however, that if any such financial
statement and certificate are not received by the Administrative Agent within
the time period required pursuant to Section 6.03(a) or Section 6.03(b), as the
case may be, the Applicable Term Loan/Equipment Loan Margin will be established
at the highest rates provided above from the date such financial statement and
certificate were due until the date which is five (5) Business Days following
the receipt by the Administrative of such financial statements and certificate;
and provided, further, that the Lenders shall not in any way be deemed to have
waived any Event of Default, or any rights or remedies hereunder or under any
other Loan Document in connection with the foregoing proviso.  During the occurrence and continuance of a
Default or an Event of Default, no downward adjustment, and only upward
adjustments, shall be made to the Applicable Term Loan/Equipment Loan Margin.

 

“Available
Revolving Credit Commitment” shall mean at any time the lesser of (a) the
Borrowing Base less Aggregate RC Outstandings or (b) the Revolving
Credit Commitment less Aggregate Outstandings.

 

“Banker’s Acceptances” shall mean banker’s acceptances created by the
Issuing Lender accepting a draft drawn on the Issuing Credit and which satisfy
eligibility requirements

 

8

 

established by the Board of
Governors of the Federal Reserve System and the Issuing Lender’s internal
requirements as in effect from time-to-time.

 

“Bowling Green
Premises” shall mean the real property owned by Green at 1032 South Maple
Street, Bowling Green, Ohio 43402-0408.

 

“Borrowing Base” shall mean as of any Borrowing Date an amount equal to
the sum of (a) 80% of the value of the Obligor’s Eligible Accounts
Receivable, and (b) the lesser of (i) 50% of the aggregate value of the
Obligor’s Eligible Inventory, and (ii) $6,000,000; provided, however,
such percentages and the foregoing inventory limitation may be revised from
time to time solely by the Required Lenders in their Permitted Discretion (i)
upon 30 days’ prior written notice to the Co-Borrowers so long as no Default or
Event of Default has occurred and is then continuing or (ii) immediately upon
written notice if a Default or Event of Default has occurred and is then
continuing.  Without limiting the
foregoing, the Required Lenders may revise such percentages after review of
each field audit of the Obligor’s receivables and inventory.  The value of all Eligible Inventory shall be
determined at the lower of cost or market value on a first in first out basis
in accordance with Generally Accepted Accounting Principles applied on a
consistent basis.  The Borrowing Base
may be computed on the basis that the Woodmark Acquisition has been consummated
and the Initial Borrowing Base Certificate shall be as of May 31, 2004 (but
assuming the Woodmark Acquisition has been consummated).

 

“Borrowing Base Certificate” shall mean the Borrowing Base Certificate
in the form set forth as Exhibit H attached hereto.

 

“Borrowing Date” shall mean, with respect to any Loan, the date on
which such Loan is disbursed to a Co-Borrower.

 

“Business Day” shall mean any day not a Saturday, Sunday or legal
holiday, on which banks in New York, New York are open for business; provided,
however, that when used in connection with an LIBOR Loan the term “Business
Day” shall exclude any day on which the Administrative Agent is not open for
dealings in Dollar deposits in the London interbank eurodollar market.

 

“Capital Expenditures” shall mean additions to property and equipment
of P&F and its Subsidiaries, which, in conformity with GAAP, are included
as “additions to property, plant or equipment” or similar items which would be
reflected in the consolidated statement of cash flow of P&F and its
Subsidiaries, including without limitation, property and equipment which are
the subject of a Capital Lease; provided that Capital Expenditures shall not
include Permitted Acquisitions or Capital Expenditures of the Person acquired
prior to the date of an acquisition.

 

“Capital Lease” shall mean (a) any lease of property, real or personal,
if the then present value of the minimum rental commitment thereunder should,
in accordance with GAAP, be capitalized on the balance sheet of the lessee, and
(b) any other such lease the obligations with respect to which are required to
be capitalized on the balance sheet of the lessee.

 

“Cash
Collateral” shall mean a deposit by the Co-Borrowers made in immediately
available funds to a cash collateral account at the Administrative Agent and
the taking of all

 

9

 

action required to provide the
Administrative Agent, for the ratable benefit of the Lenders, a first priority
perfected security interest in such deposit.

 

“Chief Financial Officer” shall mean, with respect to any entity, the
Chief Financial Officer of such entity or in the event no such position exists,
the Corporate Controller/Treasurer of such entity or the person performing
comparable duties.

 

“Closing Date” shall mean June 30, 2004.

 

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

 

“Commitment Proportion” shall mean, with respect to each Lender at the
time of determination, the ratio, expressed as a percentage, which such
Lender’s Commitments bear to the Total Commitment or, if the Commitments have
expired or have been terminated, the ratio, expressed as a percentage, which
(a) the sum of aggregate Loans advanced by such Lender, plus the Aggregate
Banker’s Acceptance Outstandings and the Aggregate Letters of Credit
Outstandings of such Lender to (b) the Aggregate Outstandings plus the
aggregate amount of Term Loans outstanding, at such time.

 

“Commitments” shall mean, collectively, the Revolving Credit Commitment
(including the Equipment Loan Commitment) and the Term Loan Commitment.

 

“Consolidated” shall mean, as applied to any financial or accounting
term, such term determined on a consolidated basis in accordance with GAAP for
P&F and its Subsidiaries.

 

“Consolidated Capital Base” shall mean on a Consolidated basis, the
shareholders’ equity of P&F and its Subsidiaries plus, Subordinated
Debt, less all intangible assets, including without limitation,
organization expenses, intellectual property, goodwill, loans or mortgages due
from shareholders and/or employees and/or Affiliates, treasury stock (unless
otherwise deducted in the computation of shareholders’ equity) or deferred
charges.

 

“Consolidated Current Maturities on Long Term Debt” shall mean the
portion of any Indebtedness which is classified as the current portion of long
term debt on the Consolidated financial statements of P&F and its
Subsidiaries, in accordance with GAAP.

 

“Consolidated
EBITDA” shall mean for P&F and its Subsidiaries for any period, the
Consolidated Net Income (or Consolidated net loss) of P&F and its
Subsidiaries for such period, plus the sum, without duplication, of (a) gross
interest expense, (b) depreciation and amortization expenses or charges, (c)
all income taxes to any government or governmental instrumentality, expensed on
P&F’s or its Subsidiaries’ books (whether paid or accrued) and (d) non-cash
extraordinary losses resulting from a write-off of goodwill in the context of
an acquisition, minus the sum of (a) all extraordinary gains, (b) all interest
income and (c) all non-cash income or gain, in each case determined on a
Consolidated basis for P&F and its Subsidiaries in accordance with
GAAP.  All of the foregoing categories
shall be calculated (without duplication) over the four fiscal quarters next
preceding the date of calculation thereof, provided that, notwithstanding
anything to the contrary, EBITDA of Woodmark included in shall be calculated on
an annualized basis for (i) the fiscal quarter ending September 30, 2004 by
multiplying actual EBITDA of

 

10

 

Woodmark for the fiscal quarter ending September 30, 2004 by a multiple
of four, (ii) the fiscal quarter ending December 31, 2004 by multiplying actual
EBITDA of Woodmark for the two fiscal quarters ending December 31, 2004 by a
multiple of two, and (iii) the fiscal quarter ending March 31, 2005 by
multiplying actual EBITDA of Woodmark for three fiscal quarters ending March
31, 2005 by a multiple of three.

 

“Consolidated Interest Expense” shall mean the Consolidated interest
expense of P&F and its Subsidiaries, determined in accordance with GAAP.

 

“Consolidated Net Income” shall mean, for any period, the net income of
P&F and its Subsidiaries on a Consolidated basis for such period determined
in accordance with GAAP.

 

“Consolidated
Net Loss” shall mean, for any period, a net loss of P&F and its
Subsidiaries on a Consolidated basis for such period determined in accordance
with GAAP.

 

“Consolidated Net Worth” shall mean (a) total Consolidated assets of
P&F and its Subsidiaries less (b) the total Consolidated liabilities
of P&F and its Subsidiaries, in each case determined in accordance with
GAAP.

 

“Consolidated Senior Debt” shall mean all Indebtedness of P&F and
its Subsidiaries for borrowed money other than (i) Indebtedness described in
clause “(i)” of the definition of Indebtedness, but only to the extent such
banker’s acceptance does not constitute Banker’s Acceptances, (ii) Indebtedness
described in clause “(j)” of the definition of the term “Indebtedness,” (iii)
Subordinated Debt, and (iv) Indebtedness consisting of foreign currency
exchange agreements as described in clause “(h)” of the definition of
Indebtedness.

 

“Default” shall mean any event or condition which upon notice, lapse of
time or both, specified in Section 8.01 would constitute an Event of Default.

 

“Dollar” and
the symbol “$” shall mean lawful money of the United States of America.

 

“EBITDA” shall mean, for any Person for any
period, Net Income (or Net Loss) of such Person for such period, plus the sum,
without duplication, of (a) gross interest expense of such Person, (b)
depreciation and amortization expenses or charges of such Person, and (c) all
income taxes to any government or governmental instrumentality expensed on such
Person’s books (whether paid or accrued) minus the sum of (a) all extraordinary
gains of such Person, and (b) all interest income of such Person, determined in
accordance with GAAP applied on a consistent basis; provided that, if such
Person has Subsidiaries, all of the foregoing categories shall be determined
for such Person and its Subsidiaries on a consolidated basis in accordance with
GAAP, applied on a consistent basis.

 

“Eligible Accounts Receivable” shall mean and include such accounts
receivable of the Obligors’ arising out of sales, net of any credits, rebates
or offsets and net of any commissions payable to third parties, and which are
and at all times shall continue to be acceptable to the Required Lenders in all
respects.  Criteria for eligibility may
be fixed and revised from time to time solely by the Required Lenders in their
Permitted Discretion, Discretion (i) upon 30 days’ prior written notice to the
Co-Borrowers so long as no Default or Event of Default has occurred and is then
continuing or (ii) immediately upon written notice if a Default or Event of Default
has occurred

 

11

 

and is then continuing.  In general, such accounts receivable shall
in no event be deemed to be eligible unless: 
(a) delivery of the merchandise or the rendition of services has
been completed; (b) no return, rejection or repossession has occurred;
(c) such merchandise or the services have been finally accepted by the
account debtor without dispute, setoff, defense or counterclaim; (d) such
account receivable continues to be in full conformity with any representation
and warranty made herein by the respective Obligor to the Required Lenders with
respect thereto; (e) not more than ninety (90) days have elapsed from the
invoice date; (f) the account debtor with respect thereto is not an Affiliate
of such Obligor or a foreign entity or located outside the United States
(unless, with respect to a foreign account debtor, the account receivable is
insured by credit insurance in form and substance satisfactory to the Required
Lenders in all respects) and the account debtor is not the subject of any
bankruptcy or insolvency proceeding; (g) except with respect to accounts
receivable owing from Home Depot (or its Subsidiaries) or Sears (or its
Subsidiaries), not more than 50% of aggregate accounts of the customer in
question are more than 90 days from invoice date, (h) except with respect
to accounts receivable owing from Home Depot (or its Subsidiaries) or Sears (or
its Subsidiaries)if the aggregate accounts of the customer in question constitute
more than 10% of such Obligor’s otherwise aggregate accounts receivable, the
portion of such accounts in excess of such percentage shall not constitute
Eligible Accounts Receivable; (i) such account receivable does not
constitute an obligation of the United States unless all steps required by the
Required Lenders in connection therewith including notice to the United States
Government under the Federal Assignment of Claims Act have been duly taken;
(j) such account receivable is not evidenced by an instrument (as defined
in Article 9 of the Uniform Commercial Code) other than an instrument in
the possession of the Administrative Agent for the ratable benefit of the
Lenders, unless such receivable is in an amount less than $25,000;
(k) such account receivable is not a contra account receivable;
(l) such account receivable does not arise from a consignment sale;
(m) such account receivable is not encumbered by Liens, other than Liens
in favor of the Administrative Agent for the benefit of the Lenders;
(n) such account receivable has not been written off or deemed
uncollectible by such Obligor, as applicable; and (o) and the Required
Lenders are, and continue to be reasonably satisfied with the credit standing
of the account debtor in relation to amount of credit extended.  Notwithstanding anything to the contrary,
the Lenders agree that the SHI Receivable shall be deemed an Eligible
Receivable so long as the Escrow Agreement, dated as of the Closing Date,
between Woodmark and Woodmark International L.P., a Texas limited partnership,
shall remain in full force and effect.

 

“Eligible Inventory” shall mean all inventory (including raw materials)
of the Obligors’ located in the United States, which meet all of the following
specifications: (a) the inventory is lawfully owned by an Obligor, is not
subject to any lien, claim, security interest or prior assignment and is not
obsolete, (b) the inventory is stored on property that is either owned or
leased by such Obligor or owned or leased by a warehousemen that has contracted
with such Obligor to store inventory on such warehousemen’s property, provided
that, with respect to inventory stored on property leased by an Obligor, such
Obligor shall have delivered in favor of the Administrative Agent an
appropriate lien waiver (in form and substance reasonably satisfactory to the
Administrative Agent) executed by the Landlord, and with respect to inventory
stored on the property owned or leased by a warehousemen, such Obligor shall
have delivered to the Administrative Agent an appropriate lien waiver (in form
and substance reasonably satisfactory to the Administrative Agent) executed by
the warehousemen, provided further that,

 

12

 

in the event that the
Co-Borrowers shall not have delivered to the Administrative Agent a lien waiver
reasonably satisfactory to the Administrative Agent executed by such Landlord
or warehouseman, , the Administrative Agent may elect to reserve against such
inventory held at such location in an amount to be determined by the
Administrative Agent in its Permitted Discretion; (c) the Obligor has the
right of assignment thereof and the power to grant liens and security interests
therein; (d) the inventory arose or was acquired in the ordinary course of
such Obligor’s business, and no portion thereof represents defective or damaged
goods or perishable goods or unsalable goods; (e) no accounts receivable
or document to title has been created or issued with respect to such inventory;
(f) the inventory is readily marketable for sale or lease by the
applicable Obligor, (g) the inventory does not consist of any packaging
materials and supplies (other than inventoried packaging materials and
supplies), supplies (other than supplies held for sale), obsolete goods, goods in
transit to third parties, consigned inventory or inventory in transit.

 

“Embassy
Premises” shall mean the real property owned by Embassy at 300 Smith Street,
Farmingdale, New York 11735.

 

“Environmental Law” shall mean any law, ordinance, rule, regulation or
policy having the force of law of any Governmental Authority relating to
pollution or protection of the environment or to the use, handling,
transportation, treatment, storage, disposal, release or discharge of Hazardous
Materials, including, without limitation, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. §§9601,
et. seq.), the Hazardous Materials Transportation Act, as amended (49 U.S.C.
§§1801, et. seq.), the Resource Conservation and Recovery Act, as amended (42
U.S.C. §§6901, et. seq.) and the rules and regulations promulgated pursuant
thereto.

 

“Equipment Loan” shall have the meaning given to such term in Section
2.03 hereof.

 

“Equipment Loan Commitment” shall mean, with respect to each Lender,
the obligation of such Lender to make the Equipment Loans to the Co-Borrowers
in an aggregate amount not to exceed the amount set forth opposite such
Lender’s name on the signature pages hereof under the caption “Equipment Loan
Commitment”.

 

“Equipment Loan Maturity Date” means, with respect to each Equipment
Loan, the date on which such Equipment Loan becomes due and payable in
accordance with its terms, which date shall be the date determined as set forth
in Section 2.03 but which shall not be more than five (5) years from the date
such Equipment Loan is made.

 

“Equipment Loan Notes” shall mean, collectively, the promissory notes
of the Co-Borrower issued to each Lender in accordance with Section 2.03
hereof, each in the form attached as Exhibit B hereto, as the same may be
amended, supplemented or otherwise modified from time to time.

 

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

 

13

 

“ERISA Affiliate” shall mean each person (as defined in Section 3(9) of
ERISA) which together with the Co-Borrowers or any of them would be deemed to
be a member of the same “controlled group” within the meaning of Section
414(b), (c), (m) and (o) of the Code.

 

“Eurocurrency Reserve Requirement” shall mean a fraction (expressed as
a decimal), the numerator of which is the number one and the denominator of
which is the number one minus the applicable statutory reserve requirements
(expressed as a decimal) for the Administrative Agent (without duplication, but
including, without limitation, basic, supplemental, marginal and emergency
reserves), from time to time in effect under Regulation D with respect to
eurocurrency funding currently referred to as “Eurocurrency liabilities” in
Regulation D.  It is agreed that for
purposes hereof each LIBOR Loan shall be deemed to constitute a “Eurocurrency
liability” as defined in Regulation D, and to be subject to the reserve
requirements of Regulation D without benefit of credit or proration, exemptions
or offsets which might otherwise be available to the Lenders from time to time
under Regulation D.

 

“Event of Default” shall have the meaning set forth in Article VIII.

 

“Executive Officer” shall mean with respect to any entity, the Chairman,
the President, the Chief Financial Officer or the Secretary of such entity, as
applicable, and their respective successors, if any, designated by the board of
directors.

 

“Existing Indebtedness” shall mean the aggregate Indebtedness of the
Co-Borrowers to Citibank, N.A. (successor-in-interest to European American
Bank) pursuant to that certain Credit Agreement, dated as of July 23, 1998, as
amended, among the Co-Borrowers (other than Woodmark) and Citibank, N.A.

 

“Existing
Letter of Credit” shall mean that certain Letter of Credit issued by Citibank,
N.A. for the benefit of Green pursuant to the Reimbursement Agreement, of which
$185,873.18 remains outstanding as of the Closing Date.

 

“Fixed Rate” shall mean a rate of interest per annum quoted to the
Co-Borrowers by the Administrative Agent, from time to time at the request of
the Co-Borrowers, as the “Fixed Rate”. 
Such quoted rate shall be the fixed rate which would be applicable to a
Fixed Rate Loan made by the Lenders on the requested date for a proposed Fixed
Rate Loan, in the specified amount and for the specified term thereof.  Notwithstanding any other provision of this
Agreement, the rate so quoted by the Administrative Agent shall be the rate, at
the time of election, on United States Treasury Notes (as determined by the
Administrative Agent) having maturities approximately equal to the maturity of
such Fixed Rate Loan plus 175 basis points.

 

“Fixed Rate Loan” shall mean a Loan at such time as it is made or being
maintained at the rate of interest based upon the Fixed Rate.

 

“GAAP” shall mean, with respect to the financial statements of any
Person generally accepted accounting principles and practices which are
recognized as such by the American Institute of Certified Public Accountants
acting through the financial Accounting Standards Board and which are
consistently applied for all periods so as to properly reflect the consolidated

 

14

 

financial condition and the
consolidated results of operations and cash flows of such Person and its
Subsidiaries.

 

“Governmental Authority” shall mean any nation or government, any
state, province, city or municipal entity or other political subdivision
thereof, and any governmental, executive, legislative, judicial, administrative
or regulatory agency, department, authority, instrumentality, commission, board
or similar body, whether federal, state, provincial, territorial, local or
foreign.

 

“Guarantors” shall mean, collectively, each Person listed on Schedule
IV hereto and each Person who, from time to time, is required to execute a
Guaranty in accordance with Section 5.01(b) or Section 6.10; provided such
Person’s status as a Guarantor shall be effective as of the date of such
execution.

 

“Guaranty” means the Guaranty in the form attached hereto as Exhibit D
to be executed and delivered by the Guarantors and any Person who may be
required to execute the same pursuant to Section 6.10, as the same may
hereafter be amended, restated, supplemented or otherwise modified from time to
time.

 

“Hazardous Materials” shall mean any explosives, radioactive materials,
or other materials, wastes, chemicals or substances regulated as toxic,
hazardous, or as a pollutant, contaminant, or waste under any Environmental
Law.

 

“Indebtedness” shall mean, without duplication, as to any Person or
Persons (a) indebtedness for borrowed money; (b) indebtedness for the deferred
purchase price of property or services; (c) indebtedness evidenced by bonds,
debentures, term notes or other similar instruments; (d) obligations and
liabilities secured by a Lien upon property owned by such Person, whether or
not owing by such Person and even though such Person has not assumed or become
liable for the payment thereof; (e) Indebtedness of others directly or
indirectly guaranteed by such Person; (f) obligations or liabilities created or
arising under any conditional sales contract or other title retention agreement
with respect to property used and/or acquired by such Person; (g) obligations
of such Person as lessee under Capital Leases; (h) all obligations of such
Person under hedging agreements and foreign currency exchange agreements, as
calculated on a basis satisfactory to the Administrative Agent and in
accordance with accepted practice; (i) all obligations of such Person in
respect of bankers acceptances; and (j) all obligations, contingent or
otherwise of such Person as an account party in respect of letters of credit.

 

“Interest
Payment Date” means, (i) with respect to Prime Rate Loans or LIBOR Loans, the
first business day of each calendar month during the term of such Loan
commencing with the month following the month in which such Loan is made;  (ii)
with respect to Fixed Rate Loans the monthly or quarterly interest payment
dates established by the Administrative Agent at the time such Fixed Rate Loan
is made, and (ii) with respect to any Loan, the date such Loan is paid in full
or in part.

 

“Interest Period” shall mean with respect to any LIBOR Loan:

 

(a)           initially, the
period commencing on the date such LIBOR Loan is made and ending one, two,
three or six months thereafter, as selected by the Co-Borrowers in their Notice

 

15

 

of Borrowing, or in their
notice of conversion from a Prime Rate Loan as provided in Section 3.01(e); and

 

(b)           thereafter, each
period commencing on the last day of the next preceding Interest Period
applicable to such LIBOR Loan and ending one, two, three or six months
thereafter, as selected by the Co-Borrowers by irrevocable written notice to
the Administrative Agent not later than 11:00 a.m. New York, New York time
three Business Days prior to the last day of the then current Interest Period
with respect to such LIBOR Loan and the Administrative Agent shall promptly
notify each of the Lenders of such selection; provided, however, that all of
the foregoing provisions relating to Interest Periods are subject to the
following:

 

(i)            if
any Interest Period pertaining to a LIBOR Loan would otherwise end on a day
which is not a Business Day, the Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to carry
such Interest Period into another calendar month in which event such Interest
Period shall end on the immediately preceding Business Day;

 

(ii)           if
the Co-Borrowers shall fail to give notice as provided in clause (b) above, the
Co-Borrowers shall be deemed to have requested conversion of the affected LIBOR
Loan to a Prime Rate Loan on the last day of the then current Interest Period
with respect thereto;

 

(iii) any Interest Period that begins on the
last Business 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 Business Day of a calendar month;

 

(iv) no Interest Period may be selected with
respect to (a) a Revolving Credit Loan which ends later than the Revolving
Credit Commitment Termination Date, (b) the Term Loan which ends later than the
Term Loan Maturity Date or (c) an Equipment Loan which ends later than the
Equipment Loan Maturity Date; and

 

(v)           no
more than twelve (12) Interest Periods may exist at any one time.

 

“Issuing
Lender” shall mean the entity which is the Administrative Agent, in its capacity
as the issue of the Letters of Credit and the creator of the Banker’s
Acceptances hereunder.

 

“Jupiter
Premises” shall mean the real property owned by Florida Pneumatic at 851
Jupiter Park Lane, Jupiter, Florida 33458.

 

“Letter of Credit” shall mean any Sight Letter of Credit or Standby
Letter of Credit issued by the Issuing Lender for the account of the
Co-Borrowers, or any of them, pursuant to the terms of this Agreement.

 

16

 

“LIBOR Loan” shall mean any Loan at such time as it is made and/or
being maintained at a rate of interest based upon Reserve Adjusted Libor.

 

“Liens” shall mean any lien (statutory or otherwise) security interest,
mortgage, deed of trust, pledge, charge, conditional sale, title retention
agreement, Capital Lease or other encumbrance or similar right of others, or
any agreement to give any of the foregoing.

 

“Loans” shall mean, collectively, the Revolving Credit Loans, the Term
Loans and the Equipment Loans and shall refer to a Prime Rate Loan, a LIBOR
Loan or a Fixed Rate Loan, each of which shall be a “Type” of Loan.

 

“Loan Documents” shall mean, collectively, this Agreement, the Notes,
the Security Documents, the Guaranties, the Subordination Agreements, the
Reimbursement Agreement and each other agreement executed in connection with
the transactions contemplated hereby or thereby, as each of the same may
hereafter or thereafter be amended, supplemented or otherwise modified from
time to time.

 

“Material Adverse Effect” shall mean a material adverse effect on (i)
the business, operations, properties or condition, financial or otherwise, of
the Co-Borrowers taken as a whole or of the Co-Borrowers and their
Subsidiaries, taken as a whole, or (ii) the ability of the Co-Borrowers, their
Subsidiaries or any of them to perform their obligations hereunder or under the
Loan Documents.

 

“Mortgages” shall mean, collectively, the (a) Mortgage and Security
Agreement with respect to the Embassy Premises, (b) Mortgage and Security
Agreement with respect to the Jupiter Premises, (c) Mortgage and Security
Agreement with respect to the Bowling Green Premises, and (d) Mortgage and
Security Agreement with respect to the Tampa Premises, each in the form
attached hereto as Exhibit K, each to be executed and delivered on the Closing
Date by the applicable Co-Borrower, as the same may hereafter be amended,
restated, supplemented or otherwise modified, from time to time.

 

“Net Income”
shall mean, for any Person for any period, the net income of such Person for
such period determined in accordance with GAAP.

 

“Net Loss”
shall mean, for any Person for any period, the Net Loss of such Person for such
period determined in accordance with GAAP.

 

“Notice of Borrowing” shall mean the Notice of Borrowing substantially
in the form attached hereto as Exhibit F.

 

“Obligations” shall mean all obligations, liabilities and indebtedness
of the Co-Borrowers and the other Obligors to the Lenders and the Issuing
Lender (whether now existing or hereafter created, absolute or contingent,
direct or indirect, due or not, whether created directly or acquired by
assignment or otherwise) arising under any Loan Document, including, without
limitation, all obligations, liabilities and indebtedness of the Co-Borrowers
with respect to the principal of and interest on the Loans and the payment and
performance of all other obligations, liabilities, and indebtedness of the
Obligors to the Administrative Agent and each Lender hereunder, under the

 

17

 

Notes or any other Loan
Document or with respect to the Loans, including without limitation all fees,
costs, expenses and indemnity obligations hereunder.

 

“Obligor”
shall mean each Co-Borrower and each Guarantor.

 

“Payment Office” shall mean, with respect to the Administrative Agent,
its office located at 730 Veterans Memorial Highway, Hauppauge, New York 11788
or such other office as it may designate from time to time and, with respect to
the Issuing Lender, its office located at 730 Veterans Memorial Highway,
Hauppauge, New York 11788 or such other office as it may designate from time to
time.

 

“PBGC” shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor thereto.

 

“Permitted Acquisition” shall mean any acquisition by a Co-Borrower of
more than 50% of the outstanding capital stock, membership interest,
partnership interest or other similar ownership interest of a Person organized
under the laws of the United States or any state thereof which is engaged in a
line of business similar to the business of P&F or any of its Subsidiaries
or the purchase of all or substantially all of the assets used by such Person
or a division of such Person; provided (a) the business which is the subject of
such acquisition does not have a negative EBITDA for the four fiscal quarters
immediately prior to the date of consummation of the proposed acquisition for
which financial statements are available; (b) no Default or Event of Default
shall have occurred and be continuing immediately prior to or would occur after
giving effect to the acquisition, (c) the acquisition has either (i) been
approved by the Board of Directors or other governing body of the Person which
is the subject of the acquisition or (ii) been recommended for approval by the
Board of Directors or other governing body of such Person to the shareholders
or other members of such Person and subsequently approved by all of the
shareholders or all of such members if shareholder or such member approval is required
under applicable law or by the by-laws, certificate of incorporation or other
governing instruments of such Person, (d) 
prior to the closing of any such acquisition, the Co-Borrowers shall
have delivered evidence to the Administrative Agent (with sufficient copies for
each of the Lenders) that, on a pro  forma basis, the Co-Borrowers
will be in compliance with the financial condition covenants of Section 7.13
hereof upon completion of such acquisition; (e) the aggregate Permitted
Acquisition Purchase Price paid in connection with any single Permitted
Acquisition shall not exceed $5,000,000 and (f) the aggregate Permitted
Acquisition Purchase Price paid in connection with all Permitted Acquisitions
shall not exceed $15,000,000.

 

“Permitted Acquisition Purchase Price”
shall mean, with respect to any Permitted Acquisition, collectively, without
duplication, (a) all cash paid by any Co-Borrower or any of its Subsidiaries in
connection with such Permitted Acquisition, including transaction costs, fees
and other expenses incurred by such Co-Borrower or such Subsidiary in
connection with such Permitted Acquisition, (b) all Indebtedness created, and
all Indebtedness assumed, by the any Co-Borrower or any of their respective
Subsidiaries in connection with such Permitted Acquisition, (c) the value of
all capital stock issued by any Co-Borrower or any of their respective
Subsidiaries in connection with such Permitted Acquisition, and (d) the
deferred portion of the purchase price (exclusive of interest thereon) or any
other costs paid by any Co-Borrower or any of their respective Subsidiaries in
connection with such Permitted Acquisition,

 

18

 

including, but not limited to, any
incremental amount payable as a result of consulting agreements and non-compete
agreements, as estimated by P&F in good faith, as reasonably approved by
the Administrative Agent.

 

“Permitted Discretion” shall mean the
reasonable discretion of the Administrative Agent exercised in good faith.

 

“Permitted Investments”  shall
mean (a) direct obligations of the United States of America or any governmental
agency thereof, provided that such obligations mature within one year from the
date of acquisition thereof; (b) dollar denominated certificates of time
deposit maturing within eighteen months issued by any commercial bank organized
and existing under the laws of the United Sates or any state thereof and having
aggregate capital and surplus in excess of $1,000,000,000; (c) money market
mutual funds having assets in excess of $2,500,000,000; (d) commercial paper
rated not less than P-1 or A-1 or their equivalent by Moody’s Investor
Services, Inc. or Standard & Poor’s Corporation, respectively; or (e) tax
exempt securities of a U.S. issuer rated A or better by Standard and Poor’s
Corporation or Moody’s Investors Service, Inc.

 

“Permitted
Liens” shall mean the Liens specified in clauses (a) through (l) of Section
7.01.

 

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

 

“Plan” shall mean any multi-employer or single-employer plan defined in
Section 4001 of ERISA, which is maintained, or at any time during the five
calendar years preceding the date of this Agreement was maintained, by any
Co-Borrower or an ERISA Affiliate for employees of any Co-Borrower or an ERISA
Affiliate.

 

“Pledge Agreement” shall mean the Pledge Agreement in the form annexed
hereto as Exhibit I and each Pledge Agreement hereafter executed and delivered
by any Co-Borrower to the Administrative Agent, as each of the same may
hereafter be amended, restated, supplemented or otherwise modified, from time
to time.

 

“Prime Rate” shall mean the rate per annum publicly announced by the
Administrative Agent from time to time as its prime rate in effect at its
principal office, each change in the Prime Rate to be effective on the date
such change is announced to become effective.

 

“Prime Rate Loan” shall mean the portion of a Loan at such time as it
is bearing interest at the Prime Rate.

 

“Purchase Agreement” shall mean that certain Asset Purchase Agreement
between Woodmark International L.P., a Texas limited partnership and Stair
House, Inc., a Georgia corporation, as Sellers, and Woodmark,  as
Purchaser, dated as of June 30, 2004, and all exhibits and schedules thereto.

 

19

 

“Regulation D” shall mean Regulation D of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.

 

“Reimbursement Agreement” shall mean the Reimbursement Agreement, dated
as of the September 16, 1998, between Citibank, N.A. and Green.

 

 “Reportable Event” shall mean
an event described in Section 4043(c) of ERISA as to which the 30 day notice
requirement has not been waived by the PBGC and which event occurs with respect
to a Plan.

 

“Required Lenders” shall mean Lenders owed seventy five percent (75%)
of the sum of the Aggregate Outstandings plus the Term Loans, or if no such
Loans are outstanding, Lenders have seventy five percent (75%) of the Total
Commitments.

 

“Reserve Adjusted Libor” shall mean with respect to the Interest Period
pertaining to a LIBOR Loan, the rate per annum equal to the product (rounded
upwards to the next higher 1/100 of one percent) of (a) the annual rate of
interest at which Dollar deposits of an amount comparable to the amount of the
portion of the LIBOR Loan allocable to the entity which is the Administrative
Agent and for a period equal to the Interest Period applicable thereto which
appear on Telerate Page 3750 at approximately 11:00 a.m. (London time) on the
second Business Day prior to the commencement of such Interest Period,
multiplied by (b) the Eurocurrency Reserve Requirement.

 

“Revolving Credit Commitment” shall mean, with respect to each Lender,
the obligation of such Lender to make Revolving Credit Loans to the
Co-Borrowers and to acquire participations in Letters of Credit and Banker’s Acceptances
in an aggregate amount not to exceed the amount set forth opposite such
Lender’s name on the signature pages hereof under the caption “Revolving Credit
Commitment”, as such amounts may be adjusted in accordance with the terms of
this Agreement.

 

“Revolving Credit Commitment Period” shall mean the period from and
including the Closing Date to, but not including, the Revolving Credit
Commitment Termination Date or such earlier date as the Revolving Credit
Commitments shall terminate as provided herein.

 

“Revolving Credit Commitment Termination Date” shall mean June 29,
2005.

 

“Revolving Credit Loan” shall have the meaning specified in Section
2.01.

 

“Revolving Credit Notes” shall mean, collectively, the promissory notes
of the Co-Borrowers issued to each Lender in accordance with Section 2.02
hereof, each in the form attached as Exhibit A hereto evidencing the Revolving
Credit Loans, as the same may be amended, supplemented or otherwise modified
from time to time.

 

“Security Agreement” shall mean the Security Agreement, substantially
in the form attached hereto as Exhibit E to be executed and delivered on the
Closing Date by each Co-Borrower and each Guarantor, and thereafter, by any
Person who may be required to execute the

 

20

 

same pursuant to Section 6.10,
as each of the same may hereafter be amended, restated, supplemented or
otherwise modified from time to time.

 

“Security Documents” shall mean the Security Agreement, the Pledge
Agreement and, at any time following their effectiveness in accordance with
Section 6.14 and Section 8.01 hereof, the Mortgages.

 

“Sherstad Subordinated Note” shall mean the Subordinated Note,
substantially in the form of Exhibit J-2 to be executed and delivered by
Woodmark to Mr. Sam Sherstad on the Closing Date, as the same may hereafter be
amended, restated, supplemented or otherwise, modified from time to time.

 

“SHI
Receivable” shall mean all amounts payable to Stair House, Inc., a Georgia
corporation (“SHI”), under that certain Promissory Note and Security Agreement,
dated April 7, 2003, in the aggregate principal amount of $83,350.39, issued by
Stair Systems Holding Company, a Georgia corporation, to SHI, and the related
guaranty thereof by David E. Taylor.

 

“Sight Letter of Credit” shall mean a Letter of Credit wherein the
draft is drawn at sight (i.e., drawn payable upon presentment).

 

“Solvent” shall mean with respect to any Person as of the date of
determination thereof that (a) the amount of the “present fair saleable value”
of the assets of such Person will, as of such date, exceed the amount of all
“liabilities of such Person, contingent or otherwise,” as of such date, as such
quoted terms are determined in accordance with applicable federal and state
laws governing determinations of the insolvency of debtors, (b) the present
fair saleable value of the assets of such Person will, as of such date, be
greater than the amount that will be required on its debts as such debts become
absolute and matured, (c) such Person will not have as of such date, an
unreasonably small amount of capital with which to conduct its business, and
(d) such Person will be able to pay its debts as they mature.

 

“Standby Letter of Credit” shall mean any letter of credit issued to
support an obligation of a Person and which may only be drawn upon the failure
of such Person to perform such obligation or another contingency.

 

“Subordinated Debt” or “Subordinated Indebtedness” shall mean all debt
which is subordinated in right of payment to the prior indefeasible payment in
full of the Obligations of the Obligor party to such Subordinated Debt or
Subordinated Indebtedness, such subordination to be on terms satisfactory to
and approved in writing by the Required Lenders.  The Woodmark Subordinated Note and the Sherstad Subordinated Note
constitute Subordinated Debt.

 

“Subordination Agreements” shall mean the subordination provisions
contained in the Woodmark Subordinated Note and the Sherstad Subordinated Note.

 

“Subsidiaries” shall mean with respect to any Person any corporation,
association or other business entity more than 50% of the voting stock or other
ownership interests of which is at the time owned or controlled, directly or
indirectly, by such Person or one or more of its Subsidiaries or a combination
thereof.

 

21

 

“Tampa
Premises” means the real property owned by Countrywide at 10333 Windhorst Road,
Tampa, Florida 33619.

 

“Telerate Page
3750” shall mean the display designated as “Page 3750” on the Associated
Press-Dow Jones Telerate Service (or such other page as may replace Page 3750
on the Associated Press-Dow Jones Telerate Serve or such other service as may
be nominated by the British Bankers’ Association as the information vendor for
the purpose of displaying British Bankers’ Association interest settlement
rates for Dollar deposits).  Each
Reserve Adjusted LIBOR rate based on the rate displayed on Telerate Page 3750
shall be subject to corrections, if any, made in such rate and displayed by the
Associated Press-Dow Jones Telerate Service within one hour of the time when
such rate is first displayed by such service.

 

“Term Loan Commitment” shall mean, with respect to each Lender, the
obligation of such Lender to make the Term Loan to the Co-Borrowers in an
aggregate amount not to exceed the amount set forth opposite such Lender’s name
on the signature pages hereof under the caption “Term Loan Commitment”.

 

“Term Loan” shall have the meaning specified in Section 2.04.

 

“Term Loan Maturity Date” shall mean June 30, 2011.

 

“Term Loan Note” shall mean the promissory note of the Co-Borrowers in
the form attached as Exhibit C hereto evidencing the Term Loans, as the same
may be amended, supplemented or otherwise modified from time to time.

 

“Total Commitment” shall mean, at any time, the aggregate of the
Commitments in effect at such time which, initially, shall be $46,000,000.

 

“Total Equipment Loan Commitment” shall mean the aggregate of the
Equipment Loan Commitments in effect on the Closing Date, which shall be
$3,000,000.

 

“Total Revolving Credit Commitment” shall mean, at any time, the
aggregate of the Revolving Credit Commitments in effect at such time, which,
initially shall be $12,000,000.

 

“Total Term Loan Commitment” shall mean the aggregate of the Term Loan
Commitments in effect on the Closing Date, which shall be $34,000,000.

 

“Type” shall have the meaning set forth in the definition of “Loans”.

 

“Unfunded Current Liability” of any Plan shall mean the amount, if any,
by which the present value of the accrued benefits under the Plan as of the
close of its most recent plan year exceeds the fair market value of the assets
allocable thereto, determined in accordance with Section 412 of the Code.

 

“Woodmark Acquisition” shall mean the acquisition by Woodmark of assets
and the assumption of certain liabilities of the Sellers pursuant to the
Purchase Agreement.

 

22

 

“Woodmark Subordinated Note” shall mean the Subordinated Note,
substantially in the form attached hereto as Exhibit J-1 to be executed and
delivered on the Closing Date by Woodmark International L.P., as the same may
hereafter be amended, restated, supplemented or otherwise modified from time to
time.

 

SECTION 1.02.    Accounting Terms. 
Except as otherwise herein specifically provided, each accounting term
used herein shall have the meaning given to it under GAAP.

 

SECTION 1.03.    Terms Generally. 
The definitions of terms herein shall apply equally to the singular and
plural forms of the terms defined. 
Whenever the context may require, pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, feminine and the
neuter.  Except as otherwise herein
specifically provided, each accounting term used herein shall have the meaning
given to it under GAAP.  The term
“including” shall not be limited or exclusive, unless specifically indicated to
the contrary.  The word “will” shall be
construed to have the same meaning in effect as the word “shall”.  The words “herein”, “hereof” and “hereunder”
and other words of similar import refer to this Agreement as a whole, including
the exhibits and schedules hereto and any amendments thereof, all of which are
by this reference incorporated into this Agreement.

 

 

ARTICLE II LOANS

 

SECTION 2.01.    Revolving Credit Loans. 
(a) Subject to the terms and conditions, and relying upon the
representations and warranties, set forth herein, each Lender agrees, severally
but not jointly, to make loans (individually, a “Revolving Credit Loan” and,
collectively, the “Revolving Credit Loans”) to the Co-Borrowers during the
Revolving Credit Commitment Period up to but not exceeding at any one time
outstanding the amount of its Revolving Credit Commitment; provided, however,
that no Revolving Credit Loan shall be made if, after giving effect to such
Revolving Credit Loan, (i) Aggregate Outstandings would exceed the Total
Revolving Credit Commitment or (ii) Aggregate RC Outstandings would exceed the
Borrowing Base.  Within the foregoing
limits, the Co-Borrowers may from time to time borrow, repay and reborrow
hereunder on or after the Closing Date and prior to the Revolving Credit
Commitment Termination Date, subject to the terms, provisions and limitations
set forth herein.  The Revolving Credit
Loans may be LIBOR Loans or Prime Rate Loans or a combination thereof.

 

(b)           The Co-Borrowers
shall give the Administrative Agent irrevocable written notice (or telephonic
notice promptly confirmed in writing), not later than 11:00 a.m., New York, New
York time, three Business Days prior to the date of each proposed LIBOR Loan
under this Section 2.01 (other than the initial LIBOR Loan funded on the
Closing Date) or on the date of each proposed Prime Rate Loan under this
Section 2.01.  Such notice shall be
irrevocable and shall specify the amount and Type of the proposed borrowing,
the initial Interest Period if a LIBOR Loan, and the proposed Borrowing
Date.  Upon receipt of such notice from
the Co-Borrowers, the Administrative Agent shall promptly notify each Lender
thereof.  Each borrowing pursuant to the
Total Revolving Credit Commitment shall be in an aggregate principal amount of
(i) the lesser of (x) $100,000 or whole multiples thereof or
(y) the Available Revolving Credit Commitment, with respect to Prime Rate
Loans, and (ii) $500,000 or whole multiples of

 

23

 

$100,000 in excess thereof with
respect to LIBOR Loans provided the Available Revolving Credit Commitment is at
least $500,000.

 

(c)           The Co-Borrowers
shall have the right, upon not less than three Business Days’ prior written
notice to the Administrative Agent and each Lender, to terminate the Total
Revolving Credit Commitment or, from time to time, to permanently reduce the
amount of the Total Revolving Credit Commitment; provided, however,
that no such termination or reduction shall be permitted if, after giving
effect thereto and to any prepayments of the Revolving Credit Loans made on the
effective date thereof, Aggregate Outstandings would exceed the Total Revolving
Credit Commitment; provided, further, that any such termination
or reduction requiring prepayment of any LIBOR Loans shall be made only on the
last day of the Interest Period with respect thereto or on the date of payment
in full of all amounts owing to the Lenders pursuant to Section 3.08 as a
result of such termination or reduction. 
The Administrative Agent shall notify each Lender of each notice from
the Co-Borrowers to terminate or permanently reduce the Total Revolving Credit
Commitment pursuant to this Section 2.01(d). 
Any such reduction shall be in the aggregate amount of $1,000,000 or
whole multiples of $100,000 in excess thereof, and shall reduce permanently the
amount of the Total Revolving Credit Commitment then in effect.

 

(e)           The several
agreements of the Lenders to make Revolving Credit Loan pursuant to this
Section 2.01 shall automatically terminate on the Revolving Credit Commitment
Termination Date.  Upon such
termination, the Co-Borrowers shall immediately repay in full the principal
amount of the Revolving Credit Loans then outstanding, together with all
accrued interest thereon and all other amounts due and payable hereunder.

 

SECTION 2.02.    Revolving Credit Notes.   The Revolving Credit Loans made by each Lender shall be evidenced
by a Revolving Credit Note, appropriately completed, duly executed and
delivered on behalf of the Co-Borrowers and payable to the order of each Lender
in a principal amount equal to the Revolving Credit Commitment of such Lender.  Each Revolving Credit Note shall (a) be
dated the Closing Date, (b) be stated to mature on the Revolving Credit
Commitment Termination Date, and (c) bear interest from the date thereof until
paid in full on the unpaid principal amount thereof from time to time
outstanding as provided in Section 3.01. 
Each Lender is authorized to record the date, Type and amount of each
Revolving Credit Loan and the date and amount of each payment or prepayment of
principal of each Revolving Credit Loan of such Lender on the grid schedule
annexed to the Revolving Credit Note of such Lender, and the Co-Borrowers
authorize each Lender to make such recordation; provided, however,
that the failure of a Lender to set forth each such Revolving Credit Loan,
payment and other information on such grid shall not in any manner affect the
obligation of the Co-Borrowers to repay each Revolving Credit Loan made by such
Lender in accordance with the terms of the Revolving Credit Note and this
Agreement.  The Revolving Credit Note,
the grid schedule and the books and records of each Lender shall constitute
prima facie evidence of the Revolving Credit Loans absent manifest error.

 

SECTION
2.03.    Equipment Loans. (a)
Subject to the terms and conditions set forth in this Agreement, the
Co-Borrowers may utilize up to $3,000,000 of the Revolving Credit Commitment to
borrow equipment term loans from the Lenders and each Lender agrees, severally
but not jointly, to make loans (individually, an “Equipment Loan” and,
collectively, the “Equipment Loans”) to the

 

24

 

Co-Borrowers at any time during
the Revolving Credit Commitment Period up to but not exceeding at any one time
outstanding the amount of its Equipment Loan Commitment; provided, however,
that no Equipment Loan shall be made if, after giving effect to such Equipment
Loan, (i) the outstanding principal amount of the Equipment Loans at such time
would exceed the Total Equipment Loan Commitment, or (ii) Aggregate
Outstandings would exceed the Total Revolving Credit Commitment.

 

(b)           Each Equipment Loan
made by each Lender to the Co-Borrowers shall be evidenced by an Equipment Loan
Note, appropriately completed, duly executed on behalf of the Co-Borrowers and
payable to the order of each Lender in a principal amount equal to such
Lender’s Commitment Proportion of such Equipment Loan.  Each Equipment Loan shall be a Prime Rate
Loan, a LIBOR Loan or a Fixed Rate Loan and shall have a term designated by the
Co-Borrower in the Notice of Borrowing but which shall not exceed five (5)
years from the date of the borrowing and, in the absence of any such
designation shall be five (5) years. 
Each Equipment Loan shall be payable in monthly or quarterly (as
determined by the Lenders) installments of interest and principal.  The date and amount of each Equipment Loan
and the date and amount of each payment or prepayment of principal of such
Equipment Loan shall be recorded on a schedule annexed to each such Equipment
Loan Note, and the Co-Borrowers authorize each Lender to make such recordation;
provided, however, that the failure of any Lender to set forth
payments and other information in such grid shall not in any manner affect the
obligation of the Co-Borrowers to repay any Equipment Loan made by the Lenders
in accordance with the terms of this Agreement.  Each Equipment Loan Note, the grid schedule and the books and
records of each Lender shall be prima facie evidence of the information so
recorded absent manifest error.

 

(c)           The Co-Borrowers
shall deliver to the Administrative Agent a completed Notice of Borrowing not
later than 11:00 a.m., New York, New York time, three Business Days prior to
the date of each proposed LIBOR Loan under this Section 2.03, on the date of
each proposed Prime Rate Loan under this Section 2.03 or two Business Days
prior to the date of each proposed borrowing of a Fixed Rate Loan pursuant to
this Section 2.03.  Such notice shall be
irrevocable and shall specify specifying (i) the amount to be borrowed, which
shall not exceed the Total Equipment Loan Commitment, (ii) the Type or Types of
such Equipment Loans and the related amounts for each, (iii) if such Equipment
Loan is an LIBOR Loan, the initial Interest Period selected for such Equipment
Loan, and (iv) the proposed Borrowing Date. 
Upon receipt of such notice from the Co-Borrowers, the Administrative
Agent shall promptly notify each Lender thereof.  Each borrowing of an Equipment Loan shall be in an aggregate
principal amount of (i) the lesser of (x) $100,000 or whole multiples
thereof or (y) the Available Revolving Credit Commitment, with respect to
Prime Rate Loans or Fixed Rate Loans, and (ii) $500,000 or whole multiples
of $100,000 in excess thereof with respect to LIBOR Loans provided the
Available Revolving Credit Commitment is at least $500,000.

 

SECTION 2.04.    Term Loan. 
Subject to the terms and conditions hereof, each Lender severally agrees
to make a term loan (individually, a “Term Loan” and, collectively, the
“Term Loans”) to the Co-Borrowers on the Closing Date in an amount not
to exceed its Term Loan Commitment.  The
Co-Borrowers shall give the Administrative Agent irrevocable written notice on
or before the Closing Date specifying (i) the amount to be borrowed, which
shall not exceed the Total Term Loan Commitment, (ii) the Type or Types of such
Term Loan and the related amounts for each,

 

25

 

and (iii) if all or any portion of the
Term Loan is a LIBOR Loan, the initial Interest Period selected for the Term
Loan.  Upon receipt of such notice from
the Co-Borrowers, the Administrative Agent shall promptly notify each Lender
thereof.  The Term Loans may, at the
election of the Co-Borrowers, be (i) LIBOR Loans, (ii) Prime Rate Loans or
(iii) a combination thereof.  The Total
Term Loan Commitment shall terminate upon funding of the Term Loans on the
Closing Date.

 

SECTION
2.05.    Term Loan Notes. 
The Term Loan made by each Lender shall be evidenced by a Term Loan
Note, appropriately completed, duly executed and delivered on behalf of the
Co-Borrowers and payable to the order of each Lender in a principal amount
equal to the Term Credit Commitment of such Lender.  Each Lender is authorized to record the Type of its Term Loan and
the date and amount of each payment or prepayment of principal thereof in such
Lender’s records or on the grid schedule annexed to the Term Loan Note; provided,
however, that the failure of a Lender to set forth each payment and
other information shall not in any manner affect the obligation of the
Co-Borrowers to repay the Term Loan made by such Lender in accordance with the
terms of its Term Loan Note and this Agreement.  The Term Loan Note, the grid schedule and the books and records
of each Lender shall constitute presumptive evidence of the information so
recorded absent demonstrable error. 
Each Term Loan Note shall (a) be dated the Closing Date, (b) be stated
to mature on the Term Loan Maturity Date and (c) be payable as to principal in
twenty eight (28) consecutive quarterly installments commencing on September
30, 2004 and continuing on the last day of each December, March, June and
September thereafter as follows: the first four (4) quarterly installments
shall each be in an aggregate amount equal to $250,000 and the fifth through
the twenty-eighth quarterly installments shall each be in an aggregate amount
each to 1/24th of the outstanding principal amount of the Term Loan
as of September 30, 2005, all for the pro-rata distribution to the Lenders
based upon their Term Loan Commitment, provided that the final payment on the
Term Loan Maturity Date shall be in an amount equal to the outstanding unpaid
principal amount of the Term Loan.  Each
Term Loan Note, the grid schedule and the books and records of each Lender
shall be prima facie evidence of the information so recorded absent manifest
error.

 

SECTION 2.06.    Letters of Credit and Banker’s Acceptances.  (a) 
Subject to the terms and conditions set forth in this Agreement, upon
the written request of the Co-Borrowers in accordance herewith, the Issuing
Lender shall issue Letters of Credit and create Banker’s Acceptances, at any
time during the Revolving Credit Commitment Period, with pro rata participation
by all of the Lenders in accordance with their respective Commitment
Proportions.  Notwithstanding the
foregoing, no Letter of Credit or Banker’s Acceptance shall be issued or
created if, after giving effect to the same, (i) Aggregate Outstandings would
exceed the Total Revolving Credit Commitment or (ii) Aggregate RC Outstandings
would exceed the then current Borrowing Base. 
Furthermore, in no event shall (i) the Aggregate Bankers Acceptances
Outstanding exceed $6,000,000 at any time or (ii) (A) the Aggregate Letters of
Credit Outstanding plus (B) the Existing Letter of Credit, exceed
$6,000,000, at any time. 
Notwithstanding anything contained herein to the contrary, the Issuing
Lender shall be under no obligation to issue a Letter of Credit or create a
Banker’s Acceptance, if any order, judgment or decree of any court, arbitrator
or governmental authority shall purport by its terms to enjoin, restrict or
restrain the Issuing Lender in any respect relating to the issuance of such
Letter of Credit or creation of such Banker’s Acceptance or a similar letter of
credit or Banker’s acceptance, or any law, rule, regulation, policy, guideline
or directive (whether or not having the

 

26

 

force of law) from any governmental
authority with jurisdiction over the Issuing Lender shall prohibit or direct
the Issuing Lender in any respect relating to the issuance of such Letter of
Credit or the creation of such Banker’s Acceptance or similar letter of credit
or Banker’s acceptance, or shall impose upon the Issuing Lender with respect to
any Letter of Credit or Banker’s Acceptance any restrictions, any reserve or
capital requirement or any loss, cost or expense not reimbursed by the
Co-Borrowers to the Issuing Lender. 
Each request for issuance of a Letter of Credit shall be in writing and
shall be received by the Issuing Lender by no later than 12:00 p.m. on the day
which is at least two Business Days prior to the proposed date of
issuance.  Such issuance or creation, as
applicable, shall occur by no later than 5:00 p.m. on the proposed date of
issuance or creation (assuming proper prior notice as aforesaid).  Subject to the terms and conditions
contained herein, the expiry dates, the type of Letter of Credit (i.e., Sight
Letter of Credit or Standby Letter of Credit), the purpose, the amounts and the
beneficiaries of the Letters of Credit will be as designated by the
Co-Borrowers.  The Issuing Lender shall
promptly notify the Lenders of the amounts of all Letters of Credit issued
hereunder and Banker’s Acceptances created hereunder, and of any extension,
reduction, termination or amendment of any Letter of Credit or Banker’s
Acceptance.  Each Letter of Credit
issued by the Issuing Lender hereunder shall identify: (i) the dates of
issuance and expiry of such Letter of Credit, (ii) the amount of such
Letter of Credit (which shall be a sum certain, although partial drawings shall
be permitted), (iii) the beneficiary and account party of such Letter of
Credit, and (iv) the drafts and other documents necessary to be presented
to the Issuing Lender upon drawing thereunder. 
No Sight Letter of Credit issued hereunder shall expire more than 180
days from the date of issuance, no Standby Letter of Credit issued hereunder
shall expire more than one year from the date of issuance and no Banker’s
Acceptance shall mature more than 180 days from the date of creation thereof,
and in no event shall any Letter of Credit (including any Standby Letter of
Credit) expire or any Banker’s Acceptance mature, after the Business Day which
is immediately prior to the Revolving Credit Commitment Termination Date.  The Co-Borrowers agree to execute and
deliver to the Issuing Lender such further documents and instruments in
connection with any Letter of Credit issued or Banker’s Acceptance created
hereunder (including, without limitation, applications therefor and the Issuing
Lender’s Master Letter of Credit Agreement and Standard Acceptance Credit
Agreement) as the Issuing Lender in accordance with its customary practices may
request.  To the extent of any
inconsistency between those documents and this Agreement, the provisions of
this Agreement shall control and such other documents shall not impose any
operating restrictions, financial covenants, or payment obligations or require
Co-Borrowers to provide any collateral in addition to or different from those
imposed under this Agreement.

 

(b)           Drawings
Under Letters of Credit and Payments of Banker’s Acceptances.  The Co-Borrowers hereby absolutely and
unconditionally promise to pay to the Issuing Lender on the date of any drawing
under a Letter of Credit or the maturity of a Banker’s Acceptance, in
immediately available funds from its accounts, the amount of such drawing under
such Letter of Credit or Banker’s Acceptance. 
If the Co-Borrowers so request by a Notice of Borrowing delivered to the
Issuing Lender and the Lenders not later than 12:30 p.m. (New York, New York
time) on the date of the drawing under a Letter of Credit or the maturity of a
Banker’s Acceptance in accordance with the terms hereof and if each of the
conditions precedent to the making of a Loan set forth in Article V of this
Agreement has been satisfied, on the Business Day on which a drawing under a
Letter of Credit or the maturity of a Banker’s Acceptance occurs, the amount of
such drawing, plus interest thereon, or the amount of such Banker’s Acceptance,
for which the Issuing Lender has not been reimbursed by the Co-Borrowers, shall

 

27

 

become a Revolving Credit Loan
bearing interest at the Prime Rate made by the Lenders to the Co-Borrowers on
such day.   The Issuing Lender agrees to
notify each Lender of the amount of each drawing under a Letter of Credit
promptly upon the occurrence thereof. 
Each Lender agrees that if notified of any draw under a Letter of Credit
prior to 12:00 noon on a Business Day then prior to 4:00 p.m. on the same
Business Day (or, if notified after such time on a Business Day, not later than
12:00 noon on the next succeeding Business Day) it will make available to the
Issuing Lender at its office located at its Payment Office, in federal funds or
other immediately available funds, its Commitment Proportion of any such
drawing or payment, plus any interest which shall have accrued thereon,
provided that each Lender’s obligation shall be reduced by its Commitment
Proportion of any reimbursement by the Co-Borrowers in respect of any such
drawing or payment pursuant to this Section.

 

(c)           Letter
of Credit and Banker’s Acceptance Obligations Absolute.  (i) The obligations of the Co-Borrowers
to reimburse the Issuing Lender as provided hereunder in respect of drawings or
payments under Letters of Credit and Banker’s Acceptances shall rank pari
passu with the obligations of the Co-Borrowers to repay the Loans
hereunder, shall be absolute and unconditional under any and all circumstances
and shall be secured pro rata with the other Obligations (if any)
pursuant to the Security Document in accordance with the provisions of the
Security Agreements. Without limiting the generality of the foregoing, the
obligation of the Co-Borrowers to reimburse the Issuing Lender in respect of
drawings under Letters of Credit and upon the maturity of Banker’s Acceptances
shall not be subject to any defense based on the non-application or
misapplication by the beneficiary of the proceeds of any such payment or the
legality, validity, regularity or enforceability of the Letters of Credit or
Banker’s Acceptances or any related document or any dispute between or among
the Co-Borrowers, or any of them, the beneficiary of any Letter of Credit or
any financing institution or other party to which any Letter of Credit or
Banker’s Acceptances may be transferred. 
The Issuing Lender may accept or pay any draft presented to it under any
Letter of Credit regardless of when drawn or made and whether or not negotiated,
if such draft, accompanying certificate or documents and any transmittal advice
are presented or negotiated on or before the expiry date of the Letter of
Credit or any renewal or extension thereof then in effect, and conforms to the
terms and conditions of such Letter of Credit. 
Furthermore, neither the Issuing Lender nor any of its correspondents
shall be responsible, as to any document presented under a Letter of Credit
which appears to be regular on its face, and appears on its face to conform to
the terms of the Letter of Credit, for the validity or sufficiency of any
signature or endorsement, for delay in giving any notice or failure of any
instrument to bear adequate reference to the Letter of Credit, or for failure
of any Person to note the amount of any draft on the reverse of the Letter of
Credit.  The Issuing Lender shall have
the right, in its sole discretion, to decline to accept any documents and to
decline making payment under any Letter of Credit if the documents presented
are not in strict compliance with the terms of such Letter of Credit.

 

(ii)           Any action,
inaction or omission on the part of the Issuing Lender or any of its
correspondents under or in connection with any Letter of Credit or the related
instruments, documents or property, if in good faith and in conformity with
such laws, regulations or customs as are applicable, shall be binding upon the
Co-Borrowers and shall not place the Issuing Lender or any of its
correspondents under any liability to the Co-Borrowers, or any of them, in the
absence of (i) gross negligence or willful misconduct by the Issuing
Lender or its correspondents or (ii) the failure by the Issuing Lender to
pay under a Letter of Credit after presentation of a

 

28

 

draft and documents strictly complying
with such Letter of Credit unless the Issuing Lender is prohibited from making
such payment pursuant to a court order. 
The Issuing Lender’s rights, powers, privileges and immunities specified
in or arising under this Agreement are in addition to any heretofore or at any
time hereafter otherwise created or arising, whether by statute or rule of law
or contract.  All Letters of Credit
issued hereunder will, except to the extent otherwise expressly provided hereunder,
be governed by the Uniform Customs and Practice for Documentary Credits (1993
Revision), International Chamber of Commerce, Publication No. 500, and any
subsequent revisions thereof.

 

(d)           Obligations of Lenders in Respect of Letters of Credit
and Banker’s Acceptances.  Each
Lender acknowledges that each Letter of Credit issued and each Banker’s
Acceptance created by the Issuing Lender pursuant to this Agreement is issued
or created by the Issuing Lender on behalf of and with the ratable
participation of all of the Lenders (i.e., in accordance with their Commitment
Proportions), and each Lender agrees to make the payments required by
subsection (b) hereof and agrees to be responsible for its pro  rata
share of all liabilities incurred by the Issuing Lender in respect of each
Letter of Credit issued, established, opened or extended and each Banker’s
Acceptance created by the Issuing Lender hereunder for the account of any
Co-Borrower.  Each Lender agrees with
the Issuing Lender and the other Lenders that its obligation to make the
payments required by subsection (b) hereof shall not be affected in any
way by any circumstances (other than the gross negligence or willful misconduct
of the Issuing Lender) occurring before or after the making of any payment by
the Issuing Lender pursuant to any Letter of Credit or Banker’s Acceptance,
including, without limitation: (i) any modification or amendment of, or
any consent, waiver, release or forbearance with respect to, any of the terms
of this Agreement or any other instrument or document referred to herein;
(ii) the existence of any Default or Event of Default; or (iii) any
change of any kind whatsoever in the financial position or credit worthiness of
the Co-Borrowers.

 

(e)           Existing Letter of Credit.   The
Co-Borrowers, the Issuing Lender and the Lenders agree that, from and after the
Closing Date, subject to the satisfaction of the conditions precedent to the
initial Loans hereunder as set forth in Article V hereof, the Existing Letter
of Credit shall be a Letter of Credit for all purposes under the Agreement.

 

 

ARTICLE III INTEREST RATE; FEES AND PAYMENTS; USE OF PROCEEDS

 

SECTION 3.01.    Interest Rate. 
(a) Each Prime Rate Loan shall bear interest for the period from the
date thereof on the unpaid principal amount thereof at a fluctuating rate per
annum equal to the Prime Rate, plus, in the case of Revolving Credit
Loans, the applicable “Prime Rate Margin” as provided in the definition of
“Applicable Revolving Credit Loan Margin,” and in the case of Equipment Loans
and Term Loans, the applicable “Prime Rate Margin” as provided in the
definition of “Applicable Term Loan/Equipment Loan Margin.”

 

(b)           Each LIBOR Loan shall bear interest
for the Interest Period applicable thereto on the unpaid principal amount
thereof at a rate per annum equal to the Reserve Adjusted Libor determined for
each Interest Period thereof in accordance with the terms hereof, plus,
in the case of Revolving Credit Loans, the applicable “LIBOR Margin” as
provided in the definition of “Applicable Revolving Credit Loan Margin,” and in
the case of Equipment Loans

 

29

 

and Term Loans, the applicable “LIBOR
Margin” as provided in the definition of “Applicable Term Loan/Equipment Loan
Margin.”

 

(c)           Each Fixed Rate Loan
shall bear interest on the unpaid principal amount thereof at a rate per annum
equal to the Fixed Rate established by the Administrative Agent for such Loan
in accordance with the terms hereof.

 

(d)           If the Co-Borrowers
shall default in the payment of the principal of or interest on any portion of
any Loan or any other amount becoming due hereunder, whether with respect to
reimbursement of drawings under Letters of Credit or payments of Banker’s
Acceptances, interest, fees, expenses or otherwise, the Co-Borrowers shall on
demand from time to time pay interest on such defaulted amount accruing from
the date of such default (without reference to any period of grace) up to and
including the date of actual payment (after as well as before judgment) at a
rate of 2% per annum in excess of the rate otherwise in effect from time to
time, or if a rate of interest is not otherwise in effect, 2% per annum in
excess of the Prime Rate.

 

(e)           Upon the occurrence
and during the continuance of an Event of Default, the outstanding principal
amount of the Loans (excluding any defaulted payment accruing interest in
accordance with clause (c) above), shall, at the option of the Required Lenders
bear interest payable on demand at a rate of interest equal to 2% above the
rate otherwise in effect with respect to such Loans.

 

(f)            The Co-Borrowers
may elect from time to time to convert a portion of the outstanding Loans from
a LIBOR Loan to a Prime Rate Loan by giving the Administrative Agent at least
three Business Days’ prior irrevocable written notice of such election,
provided that any such conversion of LIBOR Loans shall only be made on the last
day of an Interest Period with respect thereto or upon the date of payment in
full of any amounts owing pursuant to Section 3.08 as a result of such
conversion.  Upon receipt of such
notice, the Administrative Agent shall promptly notify each Lender
thereof.  The Co-Borrowers may elect
from time to time to convert a portion of outstanding Loans from Prime Rate
Loans to LIBOR Loans by giving the Administrative Agent irrevocable written
notice of such election not later than 11:00 a.m. New York, New York time,
three (3) Business Days prior to the date of the proposed conversion.  Upon receipt of such notice, the
Administrative Agent shall promptly notify each Lender thereof.  All or any part of outstanding Prime Rate
Loans may be converted as provided herein, provided that each conversion shall
be in the principal amount of $500,000  or whole multiples of $100,000  in
excess thereof.  Any conversion to or
from LIBOR Loans hereunder shall be made proportionately for each Lender in
accordance with its Commitment Proportion and shall be in such amounts and be
made pursuant to such elections so that, after giving effect thereto, the
aggregate principal amount of all LIBOR Loans having the same Interest Period
shall not be less than $500,000  or a whole multiple of $100,000 in excess
thereof.

 

(g)           Any LIBOR Loans may
be continued as such upon the expiration of an Interest Period with respect
thereto by compliance by the Co-Borrowers with the notice provisions contained
in the definition of Interest Period; provided, that during the occurrence and
continuance of a Default or Event of Default, the Co-Borrowers may not select
Interest Periods longer than one month.

 

30

 

(h)           No Loan may be
funded, converted to or continued as a LIBOR Loan if the Interest Period would
extend beyond the Revolving Credit Commitment Termination Date, with respect to
Revolving Credit Loans, the Term Loan Maturity Date, with respect to the Term
Loan, or the Equipment Loan Maturity Date, with respect to an Equipment Loan.

 

(i)            Anything in this
Agreement or in any Note to the contrary notwithstanding, the obligation of the
Co-Borrowers to make payments of interest shall be subject to the limitation
that payments of interest shall not be required to be paid to each Lender to
the extent that the charging or receipt thereof would not be permissible under
the law or laws applicable to such Lender limiting the rates of interest that
may be charged or collected by such Lender. 
If the provisions of this Agreement or any Note would at any time
otherwise require payment by the Co-Borrowers to a Lender of any amount of
interest in excess of the maximum amount permitted by applicable law the
interest payments shall be reduced to the extent necessary so that such Lender
shall not receive interest in excess of such maximum amount.  To the extent that, pursuant to the
foregoing sentence, any Lender shall receive interest payments hereunder or
under any Note in an amount less than the amount otherwise provided herein or
in any Note, such deficit (hereinafter called the “Interest Deficit”) will
cumulate and will be carried forward (without interest) until the termination
of this Agreement.  Interest otherwise
payable to such Lender hereunder and under any Note for any subsequent period
shall be increased by such maximum amount of the Interest Deficit that may be
so added without causing such Lender to receive interest in excess of the maximum
amount then permitted by applicable law. 
The amount of the Interest Deficit shall to the extent not prohibited by
law be treated as a prepayment penalty and paid in full at the time of any
optional prepayment by the Co-Borrowers to such Lender of all or any part of
its Commitment Proportion of the applicable Loan.  The amount of the Interest Deficit relating to any Note at the
time of any complete payment of any Note at that time outstanding (other than
an optional prepayment thereof) shall be cancelled and not paid.

 

(j)            Interest
on each Loan shall be payable in arrears on each Interest Payment Date and
shall be calculated on a year of 360 days for the actual days elapsed.  Any rate of interest on the Loans or other
Obligations which is computed on the basis of the Prime Rate shall change when
and as the Prime Rate changes in accordance with the definition thereof.  Each determination by the Administrative
Agent of an interest rate or fee hereunder shall, absent manifest error, be
conclusive and binding for all purposes.

 

SECTION
3.02.    Use of Proceeds. The
proceeds of the Revolving Credit Loans shall be used by the Co-Borrowers for
general corporate purposes, to finance ongoing working capital requirements and
to refinance a portion of the Existing Indebtedness.  The proceeds of the Term Loan shall be used by the Co-Borrowers
to finance all or a portion of the cash portion of the purchase price of the
Woodmark Acquisition and to refinance a portion of the Existing
Indebtedness.  The proceeds of the Equipment
Loans shall be used by the Co-Borrowers to finance the acquisition of
equipment.   Letters of Credit shall be
issued and Bankers’ Acceptances shall be created by the Issuing Lender for the
account of the Co-Borrowers and shall be issued or created, as the case may be,
for purposes in connection with, and in the ordinary course of, the business of
the Co-Borrowers consistent with historical purposes of the Co-Borrowers prior
to the date hereof.

 

SECTION 3.03.    Prepayments. 
(a) Voluntary Prepayments. 
The Co-Borrowers may repay the then outstanding Loans, in whole or
in part, without premium or penalty except as provided in Section

 

31

 

3.08, upon not less than three Business
Days’ irrevocable written notice to the Administrative Agent with respect to
prepayments of LIBOR Loans or Fixed Rate Loans and on the same Business Day
irrevocable written notice with respect to Prime Rate Loans, specifying the
date and amount of repayment and whether such repayment is of LIBOR Loans,
Fixed Rate Loans or Prime Rate Loans or a combination thereof, and if a
combination thereof, the amount of repayment allocable to each.  Upon receipt of such notice, the
Administrative Agent shall promptly notify each Lender thereof.  If such notice is given, the Co-Borrowers
shall make such repayment and the payment amount specified in such notice shall
be due and payable, on the date specified therein, together with accrued
interest to such date on the amount repaid to the Lenders.  Partial prepayments of any Term Loan or
Equipment Loan pursuant to this Section 3.03 shall be (a) in an aggregate
principal amount of (i) $50,000 or whole multiples of $25,000 in excess thereof
with respect to Prime Rate Loans or Fixed Rate Loans and (ii) $250,000 or whole
multiples of $50,000 in excess thereof with respect to LIBOR Loans and (b)
applied to the remaining installments of principal of the Term Loan or
Equipment Loan, as the case may be, in inverse order of maturity.  Notwithstanding anything to the contrary
herein, the Co-Borrowers may prepay a portion of the Term Loan on the Business
Day immediately following the Closing Date in an amount equal to the difference
between the amount of the Term Loan funded on the Closing Date and the actual
amount required by the Co-Borrowers in order to fund the cash portion of the
purchase price of the Woodmark Acquisition, without any premium or penalty
including interest in accordance with subsection (d) below, upon one Business
Days’ notice.

 

(b)           Mandatory Prepayment.  In the event that (i) Aggregate
Outstandings exceeds the Revolving Credit Commitment or (ii) Aggregate RC
Outstandings exceeds the Borrowing Base, the Co-Borrowers shall immediately pay
or prepay so much of the Loans as shall be necessary in order for the Aggregate
Outstandings to be in compliance with the Revolving Credit Commitment and
Aggregate RC Outstandings not to exceed the Borrowing Base, as the case may
be.  To the extent that such prepayments
are insufficient to reduce the Aggregate Outstandings to an amount equal to or
less than the then current Borrowing Base, the Co-Borrowers shall pledge Cash
Collateral, in an amount equal to the amount of such short-fall which Cash
Collateral shall secure the reimbursement obligations with respect to Letters
of Credit and Banker’s Acceptances.

 

(c)           Prepayments of Fixed Rate Loans.  The Co-Borrowers agree that all
prepayments of Fixed Rate Loans hereunder shall be accompanied by interest
accrued on the amount prepaid through the date of prepayment together with a
prepayment charge as liquidated damages and not as a penalty equal to the net
present value (as determined by the Administrative Agent) of (a)(i) the
difference (if positive) between the relevant Fixed Rate (less 175 basis
points) and the then current yield on U.S. Treasury Securities with maturities
approximately equal to the remaining time between the date of prepayment and
the maturity date of such Fixed Rate Loan (expressed as a percentage), multiplied
by (ii) the total amount of principal prepaid, divided  by
(iii) 360 multiplied by (b) the actual number of days remaining until
the maturity date of such Fixed Rate Loan.

 

(d)           General Provisions Applicable to Prepayment.    All prepayments required by clauses
(b) and (c) above shall be applied, first, to Prime Rate Loans
outstanding, second, to LIBOR Loans outstanding having the shortest remaining
Interest Periods, and third, as collateral security to secure the Co-Borrower’s
reimbursement obligations with respect to Letters of Credit and Banker’s
Acceptance.  Any prepayment made
pursuant to this Section 3.03 shall be

 

32

 

accompanied by accrued interest
on the principal amount being prepaid to the date of prepayment.

 

SECTION
3.04.    Fees.

 

(a)           Origination Fee.  The
Co-Borrowers agree to pay to the Administrative Agent for the account of, and
pro rata distribution to, each Lender an origination fee of $117,632, which fee
shall be payable on the Closing Date .

 

(b)           Letters of Credit.  The Co-Borrowers shall pay to the
Administrative Agent for the account of, and pro rata distribution to, the
Lenders a commission with respect to the Lenders’ participation with respect to
each Sight Letter of Credit, upon the issuance of such Sight Letter of Credit,
an amount equal to 1/8 of 1% of the face amount of such Letter of Credit and
upon presentation of such Letter of Credit for payment to the Issuing Lender, a
payment commission equal to 1/8 of 1% on the face amount of such Letter of
Credit.  The Co-Borrowers further agree
to pay to the Administrative Agent for the account of, and pro rata
distribution to, the Lenders a commission with respect to the Lenders’
participation in Standby Letters of Credit, a payment fee equal to 1.00% of the
stated amount of each Standby Letter of Credit  upon the issuance of such
Letter of Credit.

 

(c)           Banker’s Acceptances.  The Co-Borrowers shall pay to the
Administrative Agent for the account of, and pro rata distribution to, the
Lenders a commission with respect to the Lenders’ participation with respect to
each Banker’s Acceptance, a percentage amount equal to the Applicable Revolving
Credit Loan Margin for LIBOR Loans  on the face amount of each Banker’s
Acceptance, payable on the creation of such Banker’s Acceptances.

 

(d)           Additional Letter of Credit and Bankers Acceptance
Fees.  The Co-Borrowers
agree to pay the Issuing Lender, on demand, in addition to the amounts set
forth in clauses (b) and (c) alone, all standard fees and commissions charged
by the Issuing Lender with respect to the issuance and maintenance of Letters
of Credit (including, without limitation, amendments to letters of credit) and
the creation of Bankers Acceptances which fees and commissions may change from
time to time without notice to the Co-Borrowers.

 

SECTION 3.05.    Inability to Determine
Interest Rate.  In the event that the Administrative
Agent shall have determined (which determination shall be conclusive and
binding upon the Co-Borrowers) that, by reason of circumstances affecting the
London interbank market, adequate and reasonable means do not exist for
ascertaining the Reserve Adjusted Libor applicable pursuant to Section 3.01(b)
for any requested Interest Period with respect to (a) the making of an LIBOR
Loan, (b) a LIBOR Loan that will result from the requested conversion of a
Prime Rate Loan into a LIBOR Loan, or (c) the continuation of a LIBOR Loan
beyond the expiration of the then current Interest Period with respect thereto,
the Administrative Agent shall forthwith give notice of such determination,
confirmed in writing, to the Co-Borrowers and the Lenders at least one Business
Day prior to, as the case may be, the requested Borrowing Date for such LIBOR
Loan, the conversion date of such Prime Rate Loan or the last day of such
Interest Period.  If such notice is
given (a) any LIBOR Loan that was to have been made shall be made as a Prime
Rate Loan, (b) any Prime Rate Loan that was to have been converted to a LIBOR
Loan shall be continued as a Prime Rate Loan and (c) any outstanding LIBOR Loan
shall be converted, on the last day of the

 

33

 

then current Interest Period with respect
thereto, to a Prime Rate Loan.  Until
such notice has been withdrawn by the Administrative Agent, which notice of
withdrawal shall be given promptly after the Administrative Agent determines
that such conditions no longer exist, the Co-Borrowers shall not have the right
to request a LIBOR Loan or to convert a Prime Rate Loan to a LIBOR Loan.

 

SECTION 3.06.    Illegality. 
Notwithstanding any other provisions herein, if any introduction of or
change in any law, regulation, treaty or directive or in the interpretation or
application thereof shall make it unlawful for a Lender to make or maintain
LIBOR Loans as contemplated by this Agreement, such Lender shall forthwith give
notice of such circumstances, confirmed in writing, to the Co-Borrowers and the
Administrative Agent and (a) the commitment of such Lender to make and to allow
conversion to or continuations of LIBOR Loans shall forthwith be cancelled for
the duration of such illegality and (b) the Loans then outstanding as LIBOR
Loans, if any, shall be converted automatically to Prime Rate Loans on the next
succeeding last day of each Interest Period applicable to such LIBOR Loans or
within such earlier period as may be required by law.  The Co-Borrowers shall pay to the requesting Lender, upon demand,
any additional amounts required to be paid pursuant to Section 3.08 hereof.  A Lender’s notice of such costs, as
certified to the Co-Borrowers, shall be conclusive absent manifest error.

 

SECTION 3.07.    Other Events. 
(a) In the event that any
introduction of or change in any applicable law, regulation, treaty, order,
directive or in the interpretation or application thereof (including, without
limitation, any request, guideline or policy, whether or not having the force
of law of, or from any central bank or other governmental authority, agency or
instrumentality and including, without limitation, Regulation D), by any
authority charged with the administration or interpretation thereof shall
occur, which:

 

(i)            shall subject any
Lender or the Issuing Lender to any tax of any kind whatsoever with respect to
this Agreement, any Note, any Loans, any Letter of Credit or Banker’s
Acceptance, or change the basis of taxation of payments to the Lender or
Issuing Lender of principal, interest, fees or any other amount payable
hereunder (other than any tax that is measured with respect to the overall net
income of a Lender or the Issuing Lender or of a lending office of a Lender or
the Issuing Lender and that is imposed by the United States of America, or any
political subdivision or taxing authority thereof or therein, or by the
jurisdiction in which the such Lender or the Issuing Lender has its lending
office, or by the jurisdiction in which such Lender or the Issuing Lender is
organized, has its principal office or is managed and controlled); or

 

(ii)  shall impose, modify or
hold applicable any reserve, special deposit, compulsory loan or similar requirement
(whether or not having the force of law but excluding any of the foregoing
included in the computation of Reserve Adjusted LIBOR) against assets held by,
or deposits or other liabilities in or for the account of, advances or loans
by, or other credit extended by, or any other acquisition of funds by, any
office of a Lender or the Issuing Lender; or

 

(iii) shall impose on a Lender or the Issuing Lender any other
condition, or change therein;

 

34

 

and the result of any of the foregoing is to increase the cost to a
Lender or the Issuing Lender of making, renewing or maintaining advances or
extensions of credit or to reduce any amount receivable hereunder, in each case
by an amount which such Lender or the Issuing Lender deems material, then, in
any such case, the Co-Borrowers, shall pay such Lender or the Issuing Lender,
as the case may be, upon demand, such additional amount or amounts as such
Lender or the Issuing Lender shall have determined will compensate such Lender
or the Issuing Lender for such increased costs or reduction.  Any determination by a Lender or the Issuing
Lender of such additional amounts shall be conclusive absent manifest error.  This Section 3.07 shall survive the
termination of this Agreement and payment of the Notes.

 

(b)  No failure on the part of
any Lender or the Issuing Lender to demand compensation under clause (a) above
on one occasion shall constitute a waiver of its right to demand compensation
on any other occasion and no failure on the part of a Lender or the Issuing
Lender to promptly notify the Co-Borrowers shall in any way reduce any
obligations of the Co-Borrowers to such Lender or the Issuing Lender under this
Section 3.07, except that no compensation shall be payable with respect to any
event giving rise to a request for compensation unless such request is made
within 180 days after a Lender or the Issuing Lender has actual knowledge of
such event.

 

SECTION 3.08.    Indemnity.
(a)  The Co-Borrowers agree to indemnify
each Lender and to hold each Lender harmless from any loss, cost or expense
which such Lender sustains or incurs, including, without limitation, interest
or fees payable by a Lender to lenders of funds obtained by it in order to
maintain LIBOR Loans hereunder (but such loss shall not include any loss of
profit), as a consequence of (i) default by the Co-Borrowers in payment of the
principal amount of or interest on any LIBOR Loan, (ii) default by the
Co-Borrowers to accept or make a borrowing of a LIBOR Loan or a conversion or
continuation of a LIBOR Loan after the Co-Borrowers have requested such
borrowing, conversion or continuation, (iii) default by the Co-Borrowers in
making any prepayment of any LIBOR Loan after the Co-Borrowers give a notice in
accordance with Section 3.03 of this Agreement and/or (iv) the making of any
payment or prepayment (whether mandatory or optional) of a LIBOR Loan or the
making of any conversion of a LIBOR Loan to a Prime Rate Loan on a day which is
not the last day of the applicable Interest Period with respect thereto.  A certificate of a Lender setting forth such
amounts shall be conclusive absent manifest error.    The Co-Borrowers shall pay such Lender the amount shown as due
on any certificate within ten days after receipt thereof.  This Section 3.08 shall survive termination
of this Agreement and payment of the Obligations.

 

(b)           This Section 3.08
shall survive termination of this Agreement and payment of the Notes.

 

SECTION 3.09.    Funds; Manner of Payment. (a) Unless otherwise specified herein
each payment and prepayment of principal of and interest on each Loan shall be
made by the Co-Borrowers not later than 12:00 noon, New York, New York time, on
the date on which it is payable.

 

(b)           All payments made by
the Co-Borrowers hereunder or under any Note will be made without setoff,
counterclaim, deductions or other defense. 
All such payments will be made free and clear of, and without deduction
or withholding for, any present or future taxes, levies, imposts, duties, fees,
assessments or other charges of whatever nature now or hereafter

 

35

 

imposed by any jurisdiction or
by any political subdivision or taxing authority thereof or therein (but
excluding any tax imposed on or measured by the net income of any Lender) and
all interest, penalties or similar liabilities with respect thereto (such
non-excluded items being hereinafter collectively referred to as “Taxes”).  If any Taxes are so levied or imposed, the
Co-Borrowers will pay the full amount of such Taxes and such additional amounts
as may be necessary so that every payment of all amounts due hereunder or under
any Note, after withholding or deduction for or on account of any Taxes, will
not be less than the amount provided for herein or in such Note.  The Co-Borrowers will furnish to the
Administrative Agent within 30 days after the date the payment of any Taxes is
due pursuant to applicable law certified copies of tax receipts evidencing such
payment by the Co-Borrowers.  The
Co-Borrowers will indemnify and hold harmless the Administrative Agent, the
Issuing Lender and the Lenders, and reimburse the Administrative Agent, the
Issuing Lender and each Lender, upon its written request, for the amount of any
Taxes so levied or imposed and paid by the Administrative Agent, the Issuing
Lender or such Lender, which indemnity shall survive termination of this
Agreement and payment of the Notes.  All
payments under this Agreement shall be made in lawful money of the United
States of America in immediately available funds at the Payment Office of the
Administrative Agent.

 

(c)           On or before the
date on which it becomes a party to this Agreement, each Lender that is not
organized under the laws of the United States or a state thereof agrees that it
will deliver to the Co-Borrowers and the Administrative Agent (i) two duly
completed copies of United States Internal Revenue Service Form W-8BEN or
W-8ECI or successor applicable form, as the case may be, certifying in each
case that such Lender is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income taxes, and
(ii) if such Lender is not a “bank” within the meaning of Section 881(c)(3)(A)
of the Code, an Internal Revenue Service Form W-8BEN or successor applicable
form, and a statement in the form of Exhibit J hereto.  Each Lender which delivers to the
Co-Borrowers and the Administrative Agent a Form W-8BEN or W-8ECI pursuant to
the preceding sentence further undertakes to deliver to the Administrative
Agent two further copies of the said statement and Form W-8BEN or W-8ECI, or
successor applicable forms, or other manner of certification, as the case may
be, on or before the date that any such statement or form expires or becomes
obsolete or after the occurrence of any event requiring a change in the most
recent statement or form previously delivered by it to the Administrative
Agent, and such extensions or renewals thereof as may be requested by the
Administrative Agent, certifying in the case of a Form W-8BEN or W-8ECI that
such Lender is entitled to receive payments under this Agreement without
deduction or withholding of any United States federal income taxes. Each Lender
shall promptly notify the Co-Borrowers and the Administrative Agent at any time
it determines that it is no longer in a position to provide any previously
delivered above-mentioned form or statement (or successor thereto) to the
Co-Borrowers and the Administrative Agent.

 

(d)           The Administrative
Agent shall directly charge all interest and principal payments due in respect
of the Loans and all fees payable hereunder to one or more of the accounts of
the Co-Borrowers at the Payment Office or other office of the Administrative
Agent.  The Issuing Lender may, in its
sole discretion, directly charge reimbursement obligations with respect to
Letters of Credit and Banker’s Acceptances to the Co-Borrowers’ accounts at any
office of the Issuing Lender.

 

36

 

SECTION
3.10.  Pro Rata Treatment and Payments.
(a) Each borrowing by the Co-Borrowers from the Lenders, each conversion of a
Loan pursuant to Section 3.01(f) hereof or continuation of a Loan pursuant to
Section 3.01(g) hereof, each payment by the Co-Borrowers on account of any fee
(other than with respect to fees which are expressly payable to the
Administrative Agent or the Issuing Lender for its own account), reimbursements
by the Co-Borrowers to the Issuing Lender with respect to drawings under letters
of Credit and payments of Banker’s Acceptances pursuant to Section 2.06 hereof,
and any reduction of the Commitments of the Lenders hereunder shall be made pro
rata according to the respective relevant Commitment Proportions of the
Lenders.  Each payment (including each
prepayment) by the Co-Borrowers on account of principal of and interest on each
Loan shall be made pro  rata according to the respective
outstanding principal amounts of such Loans held by each Lender.  All payments (including prepayments) to be
made by the Co-Borrowers on account of principal, interest, fees and
reimbursement obligations shall be made without set-off or counterclaim and
shall be made to the Administrative Agent, for the account of the Lenders
(except as specified above), at the Payment Office of the Administrative Agent
in Dollars in immediately available funds. 
The Administrative Agent shall distribute such payments to the Lenders
promptly upon receipt in like funds by wire transfer of each Lender’s portion
of such payment to such Lender for the account of its Lending Office.  Except as otherwise provided in the
definition of “Interest Period”, if any payment hereunder becomes due and
payable on a day other than a Business Day, such payment shall be extended to
the next succeeding Business Day, and, with respect to payments of principal,
interest thereon shall be payable at the then applicable rate during such
extension.

 

SECTION
3.11.  Funding and Disbursement of Loans.
(a)  Each Lender shall make each Loan to
be made by it hereunder available to the Administrative Agent at the Payment
Office for the account of such office and the Administrative Agent by 1:00 p.m.
New York, New York time on the Borrowing Date in Dollars in immediately
available funds.  Unless any applicable
condition specified in Article V has not been satisfied, the amount so received
by the Administrative Agent will be made available to the Co-Borrowers at the
Payment Office by crediting the account of P&F or such other Co-Borrower
specified in the Notice of Borrowing of the Co-Borrowers with such amount and
in like funds as received by the Administrative Agent; provided, however, that
if the proceeds of any Loan or any portion thereof are to be used to prepay
outstanding Loans, Banker’s Acceptance obligations or Letter of Credit
obligations, then the Administrative Agent shall apply such proceeds for such
purpose to the extent necessary and credit the balance, if any, to the
Co-Borrowers’ accounts.

 

(b)           Unless the
Administrative Agent shall have been notified in writing by any Lender prior to
a proposed Borrowing Date that such Lender will not make the amount which would
constitute its Commitment Proportion of the borrowing on such Borrowing Date
available to the Administrative Agent, the Administrative Agent may assume that
such Lender has made such amount available to the Administrative Agent on such
Borrowing Date, and the Administrative Agent may, in reliance upon such
assumption, make available to the Co-Borrowers a corresponding amount.  If such amount is not made available to the
Administrative Agent until a date after such Borrowing Date, such Lender shall
pay to the Administrative Agent on demand interest on such Lender’s Commitment
Proportion of such borrowing at a rate equal to the greater of (i) the daily
average Federal Funds Effective Rate and (ii) a rate determined by the
Administrative Agent in accordance with banking industry rules on interbank
compensation during such period, from and including such Borrowing Date to the
date on which such Lender’s

 

37

 

Commitment Proportion of such borrowing shall have become immediately
available to the Administrative Agent. 
A certificate of the Administrative Agent submitted to any Lender with
respect to any amounts due pursuant to this Section 3.11(b) shall be conclusive
absent demonstrable error.  Nothing
herein shall be deemed to relieve any Lender from its obligations to fulfill
its commitment hereunder or to prejudice any right which the Co-Borrowers may
have against any Lender as a result of any default by such Lender hereunder.

 

 

ARTICLE IV  REPRESENTATIONS AND WARRANTIES

 

In order to
induce the Administrative Agent, the Lenders and the Issuing Lender to enter
into this Agreement and to make the financial accommodations herein provided
for, the Co-Borrowers each represent and warrant to the Administrative Agent,
the Lenders and the Issuing Lender that:

 

SECTION
4.01.  Organization, Corporate Powers, etc.
Each of the Co-Borrowers and their respective Subsidiaries (a) is a
corporation, company or partnership duly formed or incorporated, validly
existing and in good standing under the laws of the state of its formation, (b)
has the power and authority to own its properties and to carry on its business
as now being conducted, (c) is duly qualified to do business in every
jurisdiction wherein the failure to be so qualified could reasonably be
expected to, individually or in the aggregate, have a Material Adverse Effect,
(d) has the company, partnership or corporate power to execute and perform each
of the Loan Documents to which it is a party, (e) with respect to each
Co-Borrower, has the corporate power to borrow hereunder and to execute and
deliver the Notes, and (f) is in compliance in all material respects with all
applicable federal, state and local laws, rules and regulations the violation
of which could reasonably be expected to, individually or the aggregate, have a
Material Adverse Effect.

 

SECTION
4.02.  Authorization of Borrowing, Enforceable
Obligations. The execution, delivery and performance by each
Co-Borrower of this Agreement, and the other Loan Documents to which it is a
party, the borrowings by the Co-Borrowers hereunder, and the execution,
delivery and performance of each Subsidiary of the Loan Documents to which such
Subsidiary is a party, (a) have been duly authorized by all requisite
corporate, partnership or company action, (b) will not violate or require any
consent (other than consents as have been made or obtained and which are in
full force and effect) under (i) any provision of law applicable to any
Co-Borrower or any Subsidiary, any governmental rule or regulation, or the
Certificate of Incorporation, By-laws or other organizational documents, as
applicable, of any Co-Borrower or any Subsidiary or (ii) any order of any court
or other agency of government binding on any Co-Borrower or any Subsidiary or
any indenture, agreement or other instrument to which any Co-Borrower or any
Subsidiary is a party, or by which any Co-Borrower or any Subsidiary or any of
its property is bound, and (c) will not be in conflict with, result in a breach
of or constitute (with due notice and/or lapse of time) a default under, any
such indenture, agreement or other instrument, or result in the creation or imposition
of any lien, charge or encumbrance of any nature whatsoever upon any of the
property or assets of any Co-Borrower or any Subsidiary other than as
contemplated by this Agreement or the other Loan Documents.  This Agreement and each other Loan Document
to which the Co-Borrowers and each Subsidiary is a party constitutes a legal,
valid and binding obligation of each Co-Borrower and each Subsidiary, as the
case may be, enforceable against

 

38

 

each Co-Borrower and each Subsidiary, as the
case may be, in accordance with its terms except to the extent enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors’ rights generally or by general
principles of equity, regardless of whether considered in a proceeding in
equity or at law.

 

SECTION
4.03.  Financial Condition.  (a) The Co-Borrowers have heretofore
furnished to the Lenders (i) the audited Consolidated balance sheet of P&F
and its Subsidiaries and the related Consolidated statement of income,
shareholders equity and cash flow of P&F and its Subsidiaries, dated
December 31, 2003, audited by independent certified accountants for the fiscal
year ended December 31, 2003, (ii) the unaudited Consolidated balance sheet of
P&F and its Subsidiaries and the related Consolidated statements of income,
shareholders equity and cash flow of P&F and its Subsidiaries for the three
month period ended March 31, 2004 and (iii) the audited balance sheet of
Woodmark International, L.P., a Texas limited partnership, and its Subsidiaries
and the related statements of income, shareholders equity and cash flow of
Woodmark International, L.P., a Texas limited partnership, and its
Subsidiaries, dated December 31, 2003, audited by independent certified
accounts for the fiscal year ended December 31, 2003.  Such audited financial statements were prepared in conformity
with GAAP and fairly present the financial position and results of operations
of P&F and its Subsidiaries as of the date of such financial statements and
for the periods to which they relate and, since December 31, 2003, no event
which has had a Material Adverse Effect has occurred.  The Co-Borrowers shall deliver to the Lenders a certificate by
the Chief Financial Officer of the Co-Borrowers to that effect on the Closing
Date.  As of the Closing Date, there are
no material obligations or liabilities contingent or otherwise of P&F or
any of its Subsidiaries which are not reflected or disclosed on such audited
statements referred to in subsection (i) above other than obligations arising
in the ordinary course of business since March 31, 2004 and those resulting
from the Woodmark Acquisition.

 

(b)           Each of the
Co-Borrowers and the Guarantors is Solvent (taking into account contribution
rights).

 

SECTION
4.04.  Taxes.  To the best knowledge of the Co-Borrowers,
all assessed deficiencies resulting from Internal Revenue Service examinations
of the federal income tax returns of the Co-Borrowers, or any of them, or any
of their Subsidiaries have been discharged or reserved against in accordance
with GAAP.  To the best knowledge of the
Co-Borrowers, each Co-Borrower and each of their Subsidiaries has filed or
caused to be filed all federal, state and local tax returns which are required
to be filed, and has paid or has caused to be paid all taxes as shown on said
returns or on any assessment received by them, to the extent that such taxes
have become due, except taxes which (a) are being contested in good faith and
which are reserved against in accordance with GAAP, or (b) are less than
$100,000 in the aggregate.

 

SECTION
4.05.  Title to Properties.  Each Co-Borrower and each of their
Subsidiaries has good title to their respective properties and assets except
for such properties and assets as have been disposed of as no longer used or
useful in the conduct of their respective business or as have been disposed of
in the ordinary course of business, and all such properties and assets are free
and clear of all Liens other than Permitted Liens.

 

39

 

SECTION
4.06.  Litigation.  (a) Except as set forth in Schedule VII,
there are no actions, suits or proceedings (whether or not purportedly on
behalf of the Co-Borrowers, or any of them, or any of their Subsidiaries)
pending or, to the knowledge of the Co-Borrowers, threatened against or
affecting the Co-Borrowers, or any of them, or any of their Subsidiaries at law
or in equity or before or by any Governmental Authority, which involve any of
the transactions contemplated herein or which could reasonably be expected to
result in a Material Adverse Effect; and (b) none of the Co-Borrowers nor any
of their Subsidiaries is in default with respect to any judgment, writ,
injunction, decree, rule or regulation of any Governmental Authority which
could reasonably be expected to have a Material Adverse Effect.

 

SECTION
4.07.  Agreements.  None of the Co-Borrowers or any of their
Subsidiaries is a party to any agreement or instrument or subject to any
charter or other corporate restriction or any judgment, order, writ,
injunction, decree or regulation which could reasonably be expected to have a
Material Adverse Effect.  None of the
Co-Borrowers or any of their Subsidiaries is in default in any manner which
could reasonably be expected to have a Material Adverse Effect in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any agreement or instrument to which it is a party.

 

SECTION 4.08.  Compliance with ERISA.  Each Plan is in compliance in all material
respects with ERISA; to the knowledge of the Co-Borrowers no Plan which is a
“Multi-Employer Plan (as defined in Section 4001(a)(3) of ERISA) is insolvent
(as defined in Section 4245 of ERISA) or in reorganization (as defined in
Section 4241 of ERISA), no Plan or Plans which are single employer Plans
(within the meaning of Section 4001(a)(15) of ERISA) have an Unfunded Current
Liability, which is reasonably likely to have a Material Adverse Effect and no
Plan which is a single employer Plan (within the meaning of Section 4001(a)(15)
of ERISA) has an accumulated or waived funding deficiency within the meaning of
Section 412 of the Code; none of the Co-Borrowers nor any ERISA Affiliate has
incurred any material liability to or on account of a Plan pursuant to Section
515, 4062, 4063, 4064, 4201 or 4204 of ERISA or reasonably expects to incur any
liability under any of the foregoing sections on account of the prior
termination of participation in or contributions to any such Plan; to the
knowledge of the Co-Borrowers no proceedings have been instituted to terminate
any Plan; to the knowledge of the Co-Borrowers no condition exists which
presents a risk to the Co-Borrowers, or any ERISA Affiliate of incurring a
liability to or on account of a Plan pursuant to the foregoing provisions of
ERISA and the Code in excess of $500,000 in the aggregate; and no lien imposed
under the Code or ERISA on the assets of any Co-Borrower or any of their ERISA Affiliates
exists or, to the knowledge of the Co-Borrowers, is likely to arise on account
of any Plan.  None of the Plans is on
the date hereof a defined benefit plan. 
For purposes hereof, the term “defined benefit plan” shall mean any plan
which is not a “defined contribution plan” as defined in Section 414(i) of the
Code.

 

SECTION
4.09.  Federal Reserve Regulations; Use of
Proceeds.  (a) None of
the Co-Borrowers nor any of their Subsidiaries is engaged principally in, nor
has as one of its important activities, the business of extending credit for
the purpose of purchasing or carrying any “margin stock” (within the meaning of
Regulation U of the Board of Governors of the Federal Reserve System of the
United States, as amended from time to time). 
If requested by the Administrative Agent, the Co-Borrowers will, and
will cause each of their Subsidiaries to, furnish to the Administrative Agent
such a statement on Federal Reserve Form U-1.

 

40

 

(b)           No part of the proceeds
of any Loan and no other extension of credit hereunder will be used, whether
directly or indirectly, and whether immediately, incidentally or ultimately,
(i) to purchase or to carry margin stock or to extend credit to others for the
purpose of purchasing or carrying margin stock, or to refund indebtedness
originally incurred for such purposes, or (ii) for any purpose which violates
or is inconsistent with the provisions of the Regulations T, U, or X of the
Board of Governors of The Federal Reserve System.

 

(c)           The proceeds of each
Loan and each other extension of credit hereunder shall be used solely for the
purposes permitted under Section 3.02.

 

SECTION
4.10.  Approvals.  No registration with or consent or approval
of, or other action by, any Governmental Authority or any other Person is
required in connection with the execution, delivery and performance of this
Agreement by any of the Co-Borrowers or any of their Subsidiaries, or with the
execution and delivery of the other Loan Documents to which it is a party or,
with respect to the Co-Borrowers, the borrowings and each other extension of
credit hereunder other than registrations, consents and approvals received
prior to the date hereof and disclosed to the Lenders and which are in full
force and effect or as may be required in the perfection or continuation of
perfection of any security interest in any collateral for the Loans or in
connection with any sale of collateral for the Loans.

 

SECTION 4.11.  Subsidiaries.  Attached hereto as Schedule I is
a true, correct and complete list of all of the Co-Borrower’s Subsidiaries and
indicating, as to each Subsidiary, its name, the jurisdiction of its
incorporation, its shareholders or other owners of an interest in such
Subsidiary and the number of outstanding shares or other ownership interest
owned by each shareholder or other owner of an interest.

 

SECTION
4.12.  Hazardous Materials.  Except as may be relevant with respect to
the matters set forth on Schedule VIII, the Co-Borrowers and each of their Subsidiaries
are in compliance in all material respects with all applicable Environmental
Laws and none of the Co-Borrowers nor any of their Subsidiaries has used
Hazardous Materials on, from, or affecting any property now owned or occupied
or hereafter owned or occupied by any of the Co-Borrowers or any of their
Subsidiaries in any manner which violates any applicable Environmental
Law.  To the best knowledge of the
Co-Borrowers, no prior owner of any such property or any tenant, subtenant,
prior tenant or prior subtenant have used Hazardous Materials on, from, or
affecting such property in any manner which violates any applicable
Environmental Law in any material respect.

 

SECTION
4.13.  Investment Company Act.  None of the Co-Borrowers or any of their
Subsidiaries is an “investment company”, or a company “controlled” by an
“investment company”, within the meaning of the Investment Company Act of 1940,
as amended.

 

SECTION
4.14.  Security Agreement.  The Security Agreement when executed by the
Co-Borrowers and the Guarantors shall, pursuant to its terms, constitute a
valid and continuing lien on and security interest in the collateral referred
to in such Security Agreement in favor of the Administrative Agent for the
ratable benefit of the Lenders.

 

41

 

SECTION 4.15.  No Default.  No event has occurred and is continuing and no condition exists
which constitutes a Default or an Event of Default.

 

SECTION 4.16.   Permits and Licenses. The Co-Borrowers
and each of their Subsidiaries has all permits, licenses, certifications,
authorizations and approvals required for it lawfully to own and operate their
respective businesses, except where the failure to do so could not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.

 

SECTION 4.17.  Compliance with Law.  The Co-Borrowers and each of their
Subsidiaries are in compliance with all laws, rules, regulations, orders and
decrees which are applicable to them, or to any of their respective properties,
except where the failure to be in compliance could not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

 

SECTION 4.18.  Disclosure. None of the reports,
financial statements, certificates or other documents, certificates or other
written statements furnished to the Administrative Agent and the Lenders by or
on behalf of the Co-Borrowers, or any of them, or any of their Subsidiaries
hereunder or any other Loan Document for use in connection with the
transactions contemplated by this Agreement or any other Loan Document taken as
a whole contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances in which they were made.

 

SECTION
4.19.  Pledge Agreements.  The Pledge Agreements, when executed by
P&F and Countywide shall, pursuant to their respective terms, pledge and
grant to the Administrative Agent for the ratable benefit of the Lenders a
first security interest in all of their right, title and interest in and to all
of the issued and outstanding shares of capital stock of each of their
respective Subsidiaries.

 

SECTION 4.20.  Representations
in Purchase Agreement.  To
the knowledge of the Co-Borrowers, each of the representations and warranties
made by Woodmark International L.P. and Stair House, Inc. to Woodmark pursuant
to the Purchase Agreement taken as a whole are true and correct in all material
respects.

 

ARTICLE V  CONDITIONS OF LENDING

 

SECTION
5.01.  Conditions to the Initial Extensions of
Credit.  The several
obligations of each Lender and of the Issuing Lender to make the initial
extensions of credit hereunder are subject to the following conditions precedent:

 

(a)           Revolving Credit Notes and Term Loan Notes. 
On or prior to the Closing Date, the Administrative Agent shall have
received for the account of each Lender the Revolving Credit Notes and the Term
Loan Notes, each duly executed by the Co-Borrowers.

 

(b)           Intentionally Omitted.

 

42

 

(c)           Security Agreement.  On or prior to the Closing Date, the
Administrative Agent shall have received, with any executed counterpart of each
Lender, the Security Agreement, duly executed by each Co-Borrower, along with
UCC financing statements in a form acceptable to the Administrative Agent for
such jurisdictions as the Administrative Agent determines are necessary to
perfect the liens created by the Security Agreement.

 

(d)           Subordination Agreements.  On or prior to the Closing Date, the Agent
shall have received, with an executed counterpart for each Lender, the Woodmark
Subordinated Note and the Sherstad Subordinated Note, duly executed by
Woodmark.

 

(e)           Opinion of Counsel.  On or prior to the Closing Date, the
Administrative Agent shall have received the favorable written opinion of
counsel for the Co-Borrowers and the Guarantors dated the Closing Date and
addressed to the Administrative Agent and the Lender, substantially in the form
of Exhibit G attached hereto.

 

(f)            Supporting Documents.  The Administrative Agent shall have received
on or prior to the Closing Date (i) a certificate of good standing for each
Co-Borrower and each Guarantor (if any) from the secretary of the state of
their respective jurisdiction of incorporation dated as of a recent date; (ii)
certified copies of the Certificate of Incorporation (or certificate of
formation) and By-laws (or operating agreement) of each Co-Borrower and each
Guarantor (if any); (iii) a certificate of the Secretary or an Assistant
Secretary of each Co-Borrower and each Guarantor (if any) dated the Closing
Date and certifying (a) that neither the Certificates of Incorporation (or
certificate of formation) nor the By-laws (or operating agreement) of such
Co-Borrower or such Guarantor has been amended since the date of their
certification; (b) that attached thereto is a true and complete copy of
resolutions adopted by the Board of Directors of such Co-Borrower and by the
Board of Directors and the shareholders of such Guarantor authorizing the
execution, delivery and performance of each Loan Document to which it is a
party and, with respect to each Co-Borrower, the borrowings hereunder; and (c)
the incumbency and specimen signature of each officer of such Co-Borrower and
such Guarantor executing each Loan Document to which such Co-Borrower or
Guarantor is a party and any certificates or instruments furnished pursuant
hereto or thereto, and a certification by another officer of each Co-Borrower
and each Guarantor as to the incumbency and signature of the Secretary or
Assistant Secretary of such Co-Borrower and such Guarantor; and (iv) such other
documents as the Administrative Agent may reasonably request.

 

(g)           Insurance.  The Administrative Agent shall have received on or prior to the
Closing Date a certificate of insurance from an independent insurance broker
confirming the insurance required to be maintained pursuant to Section 6.01
hereof and evidence that the Administrative Agent has been named loss payee and
additional insured for the ratable benefit of the Lenders with respect to each
policy of such insurance (other than relating to real estate and buildings), to
the extent required by Section 6.01 and the Administrative Agent shall be
satisfied with its review thereof.

 

(h)           Assets Free from Encumbrances.  The Administrative Agent shall have received
on or prior to the Closing Date evidence satisfactory to the Administrative
Agent that

 

43

 

the accounts receivable, inventory, equipment and all other assets of
each Co-Borrower and each Guarantor are free and clear of all Liens, except
those Liens permitted pursuant to Section 7.01.

 

(i)            No Material Adverse Changes.  There shall not have occurred in the sole
opinion of the Lenders any event since December 31, 2003 which could reasonably
be expected to cause a Material Adverse Effect.

 

(j)            Fees. 
Concurrently with the funding of the initial Loans, the Co-Borrowers
shall have paid the fees payable on the Closing Date referred to in Section
3.04 and all costs and expenses incurred by the Administrative Agent in
connection with the negotiation, preparation and execution of the Loan
Documents and the creation and perfection of the Liens granted pursuant to the
Security Agreements.

 

(k)           Certain Agreements.  Receipt and satisfactory review by the
Administrative Agent of all shareholder agreements, voting trust agreements,
employment agreements, consulting agreements, management agreements and any
agreement between the Co-Borrowers, or any of them, their Subsidiaries, and any
of their respective shareholders.

 

(l)            Intentionally Omitted.

 

(m)          Lease Schedule.  Prior to the Closing Date the Lenders shall
have received a schedule of all lease agreements to which any Co-Borrower or
any Guarantor is a party (other than leases of real property, leases of
equipment which do not require an annual lease expenditure in excess of $50,000
and leases of motor vehicles) and the Administrative Agent shall have been
satisfied with its review thereof or, in lieu thereof, a copy of each lease
agreement shall be delivered to the Administrative Agent prior to the Closing
Date.

 

(n)           Intentionally Omitted.

 

(o)           Payment of Indebtedness.  On the Closing Date, the Administrative
Agent shall have received evidence satisfactory to it that the Existing
Indebtedness of the Co-Borrowers shall be paid in full simultaneously with the
consummation of the transactions contemplated hereby.

 

(p)           Pledge Agreements.  On or prior to the Closing Date, the
Administrative Agent shall have received the Pledge Agreements, duly executed
by each of P&F and Countrywide along with all share certificates evidencing
the shares pledged thereunder and stock powers executed in blank.

 

(q)           Pro Forma Borrowing Base Certificate.  Prior to the Closing Date, the
Administrative Agent shall have received for its satisfactory review, a
Borrowing Base Certificate prepared as of May 31, 2004, on a pro forma basis,
which shall be computed on the basis that the Woodmark Acquisition has been
consummated.

 

(r)            Intentionally Omitted.

 

(s)           Landlord Waivers.  The Administrative Agent shall have received
duly executed Landlord Waivers for each of the Co-Borrowers’ leased locations,
all in form and substance

 

44

 

satisfactory to the Administrative Agent or shall have instituted such
reserves against Eligible Inventory (as described in the definition of
“Eligible Inventory”), as the Administrative Agent shall require in its Permitted
Discretion.

 

(t)            Purchase Agreement.  On or prior to the Closing Date, the
Administrative Agent shall have received full and complete copies of the
Purchase Agreement, together with all exhibits and schedules thereto and all
documents execution in connection therewith.

 

(u)           Woodmark Acquisition Conditions.  The Woodmark Acquisition shall be
consummated (i) in accordance with the terms and conditions set forth in the
Purchase Agreement and the documents executed in connection therewith and (ii)
in compliance with all applicable laws, all reasonably satisfactory to the
Administrative Agent and the Lenders.

 

(v)           Officer’s
Certificate.  On or prior
to the Closing Date, the Administrative Agent shall have received a certificate
of a duly authorized officer of the Co-Borrowers, dated the Closing Date,
stating that the representations and warranties in Article IV hereof are true
and correct on such date as though made on and as of such date and that no
event has occurred and is continuing which constitutes a Default or Event of
Default.

 

(w)          Title Reports.  On or prior to the Closing Date, the
Administrative shall have received
title reports issued by (i) a title insurance company authorized to transact
business in New York, with respect to the Embassy Premises, and (ii) a title
insurance company authorized to transact business in Florida, with respect to
the Jupiter Premises and Tampa Premises, and (iii) a title insurance company
authorized to transact business in Ohio with respect to the Bowling Green
Premises, and each acceptable to the Administrative Agent in its sole
discretion.

 

(x)            Completion of Proceedings.  All corporate and other proceedings, and all
documents, instruments and other legal matters in connection with the
transactions contemplated by the Loan Documents shall be reasonably
satisfactory in form and substance to the Administrative Agent, each Lender and
their respective counsel.

 

(y)           Other Information, Documentation.  The Administrative Agent and each Lender
shall have received such other and further information and documentation as it
may reasonably require, including, but not limited, to any information or
documentation relating to compliance by the Co-Borrower, or any of them, or any
of their Subsidiaries with the requirements of all federal, state and local
laws, ordinances, rules, regulations or policies governing the use, storage,
treatment, transportation, refinement, handling, production or disposal of
Hazardous Materials.

 

SECTION
5.02.  Conditions to all Loans.  The obligation of each Lender and the
Issuing Lender to make the financial accommodations hereunder shall be subject
to the conditions precedent set forth in Section 5.01 and 5.03, to the extent
applicable, and the following conditions precedent:

 

(a)           Representations and Warranties.  On the date of each borrowing hereunder and
on the date of each issuance of a Letter of Credit and creation of a Banker’s
Acceptance, the representations and warranties by the Co-Borrowers and each
Guarantor pursuant to this

 

45

 

Agreement and the Loan Documents to which each is a party shall be true
and correct on and as of the Borrowing Date with the same effect as though such
representations and warranties had been made on and as of such date (unless limited
to an earlier date, in which event they will be true as of such earlier date).

 

(b)           No Default.  On the date of each borrowing hereunder and on the date of each
issuance of a Letter of Credit and creation of a Banker’s Acceptance, the
Co-Borrowers shall be in compliance with all the terms and provisions set forth
in the Agreement and in each Loan Document on their part to be observed or
performed and no Default or Event of Default shall have occurred and be
continuing or will result after giving effect to the Loan requested.

 

(c)           Notice of Borrowing.  The Administrative Agent shall have received
a Notice of Borrowing duly executed by an Executive Officer of the Co-Borrowers
with respect to the requested Loan.

 

(d)           Letter of Credit Documentation.  With respect to the issuance, amendment,
renewal or extension of any Letter of Credit, the Issuing Lender shall have
received the documents and instruments requested by the Issuing Lender in
accordance with the penultimate sentence of Section 2.06(a) hereof.

 

Each Notice of
Borrowing and each submission to the Issuing Lender of a request for the
issuance of a Letter of Credit or the creation of a Banker’s Acceptance and the
acceptance by the Co-Borrowers of the proceeds of each Loan or the issuance of
each Letter of Credit or creation of each Banker’s Acceptance shall constitute
a representation and warranty that the statements contained in Sections 5.02(a)
and 5.02(b) above are true and correct as of the date of such Loan, the
issuance of such Letter of Credit or the creation of such Banker’s Acceptance.

 

SECTION
5.03.  Additional Conditions with respect to
each Equipment Loan.  The
obligation of each Lender to make each Equipment Loan hereunder is subject to
the conditions precedent set forth in Section 5.01 and 5.02 and to the
following conditions precedent.

 

(a)           Equipment Loan Note.  The Administrative Agent shall have received
for the account of each Lender an Equipment Loan Note, each duly executed by
the Co-Borrowers, which Equipment Loan Notes shall each be dated the date of
such Equipment Loan, be stated to mature in consecutive monthly or quarterly
installments of principal, have a term not to exceed five (5) years and shall
bear interest for a period from the date such Loan is made on the unpaid principal
amount thereof at the applicable rates per annum specified herein.

 

(b)           Equipment Free from Encumbrances.  The Administrative Agent shall have been
provided a description of the equipment to be acquired with the proceeds of
such Equipment Loan and shall be satisfied that such equipment is being
acquired free and clear of all Liens, other than Liens permitted pursuant to
Section 7.01.

 

(c)           Security Interest of the Administrative Agent.  The Administrative Agent shall be satisfied
that the equipment to be acquired with the proceeds of such Equipment Loan
shall be subject to the Lien granted to the Administrative Agent for the
ratable benefit of the Lenders pursuant to the Security Agreement and the
Co-Borrowers shall take all steps determined by the

 

46

 

Administrative Agent to be necessary or desirable to perfect the Liens
of the Administrative Agent on such equipment.

 

ARTICLE VI  AFFIRMATIVE COVENANTS

 

Each Co-Borrower covenants and agrees with
the Lenders and the Issuing Lender that so long as this Agreement shall remain
in effect or any of the principal of or interest on any Note or any other
Obligations hereunder shall be unpaid it will, and will cause each of its
Subsidiaries to:

 

SECTION
6.01.  Corporate Existence, Properties, etc.  Do or cause to be done all things necessary
to preserve and keep in full force and effect its corporate, partnership or
company existence (except any Obligor may convert to a partnership, corporation
or limited liability company); at all times maintain, preserve and protect all
franchises and trade names and preserve all of its property, except to the
extent that failure to do so is not reasonably likely to have a Material
Adverse Effect; and keep the same in good repair, working order and condition,
ordinary wear and tear excepted, and from time to time make, or cause to be
made, all needful and proper repairs, renewals, replacements, betterments and
improvements thereto so that the business carried on in connection therewith may
be properly and advantageously conducted at all times; at all times keep its
insurable properties adequately insured and maintain (a) insurance to such
extent and against such risks, including fire, as is customary with companies
in the same or similar businesses, (b) worker’s compensation insurance in the
amount required by applicable law, (c) public liability insurance, which shall
include product liability insurance, in the amount customary with companies in
the same or similar business against claims for personal injury or death or
properties owned, occupied or controlled by it, and (d) such other insurance as
may be required by law or as may be reasonably required in writing by the
Lenders.  Each such policy of insurance
shall provide for at least thirty (30) days’ prior written notice to the
Administrative Agent of any modification or cancellation of such policies and
shall name the Administrative Agent as additional insured and loss payee.  So long as no Default or Event of Default
has occurred and is then continuing insurance proceeds received or to be
received by the Administrative Agent as loss payee with respect to any claim
(a) not in excess of $500,000, shall be paid to the Co-Borrowers, and (b)
greater than $500,000, shall be used as a prepayment of the Revolving Credit
Loans provided that if no Revolving Credit Loans are then outstanding such
insurance proceeds shall be made available to the Co-Borrowers to repair,
replace or rebuild the asset subject to the damage or buy other assets useful in
the business of the Co-Borrowers.  Each
Co-Borrower shall provide to the Administrative Agent promptly upon receipt of
written request therefor, evidence of the annual renewal of each such policy.

 

SECTION
6.02.  Payment of Indebtedness, Taxes, etc.
(a) Pay all indebtedness and obligations, including, but not limited to, all
principal and interest on the Notes, whether now existing or hereafter arising,
as and when due and payable except where the failure to make such payment
pending such contest could not reasonably be expected to have Material Adverse
Effect, and (b) pay and discharge or cause to be paid and discharged promptly
all taxes, assessments and government charges or levies imposed upon it or upon
its income and profits, or upon any of its property, real, personal or mixed,
or upon any part thereof, before the same shall become in default, as well as
all lawful claims for labor, materials and supplies or otherwise which, if
unpaid, might become a Lien or charge upon such properties or any part thereof;
provided,

 

47

 

however, that none
of the Co-Borrowers nor any of their Subsidiaries shall be required to pay and
discharge or cause to be paid and discharged any such tax, assessment, charge,
levy or claim so long as (i) the validity thereof shall be contested in good
faith by appropriate proceedings, and the relevant Co-Borrower or Subsidiary,
as the case may be, shall have set aside on its books adequate reserves
determined in accordance with GAAP with respect to any such tax, assessment,
charge, levy or claim so contested, or (ii) the amount thereof is less than
$100,000, in the aggregate, and; further,  provided that, subject
to the foregoing proviso, each Co-Borrower and each of its Subsidiaries will
pay or cause to be paid all such taxes, assessments, charges, levies or claims
upon the commencement of proceedings to foreclose any lien which has attached
as security therefor.

 

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

 

(a)           (i) as soon as
available, but in any event within 90 days after the end of each fiscal year of
the Co-Borrowers, a copy of the audited consolidated balance sheet of P&F
and its Subsidiaries as of the end of such year and the related audited
consolidated statements of income, shareholders equity and cash flow for such
year, setting forth in each case in comparative form the respective figures for
the previous fiscal year end, and accompanied by a report thereon of BDO Siedman,
LLP or other independent certified public accountants of recognized standing
selected by the Co-Borrowers and reasonably satisfactory to the Required
Lenders (the “Auditor”), which report shall be unqualified; and (ii) as soon as
available, but in any event within 90 days after the end of each fiscal year of
P&F and each of its Subsidiaries, a copy of the management prepared
consolidating financial statements of the Co-Borrowers setting forth in
comparative form the respective figures for the previous fiscal year end and
which support the financial statements delivered pursuant to clause (i), in
each case of (i) and (ii) prepared in accordance with GAAP, applied on a
consistent basis and with respect to the statements referred to in clause (ii)
accompanied by a certificate to that effect executed by the Chief Financial
Officer of P&F;

 

(b)           as soon as available,
but in any event not later than 60 days after the end of each quarterly period
of each fiscal year of the Co-Borrowers, a copy of the unaudited interim
consolidated and consolidating balance sheet of P&F and its Subsidiaries as
of the end of each such quarter and the related unaudited interim consolidated
and consolidating statements of income, shareholders equity and cash flow for
such quarter and the portion of the fiscal year through such date and setting
forth in each case in comparative form the respective figures for the
corresponding date and period in the previous fiscal year, in each case
prepared by the Chief Financial Officer of P&F in accordance with GAAP,
applied on a consistent basis and accompanied by a certificate to that effect
executed by the Chief Financial Officer of P&F;

 

(c)           a certificate prepared
and signed by the Chief Financial Officer of P&F with each delivery
required by (a) and (b), as to whether or not, as of the close of such
preceding period and at all times during such preceding period, the
Co-Borrowers were in compliance with all the provisions in this Agreement,
showing computation of financial covenants and quantitative negative covenants,
and if the Auditor or Chief Financial Officer of P&F, as the case may be,
shall have obtained knowledge of any default in such compliance or notice of
such default, it shall disclose in such certificate such default or defaults or
notice thereof and the nature thereof, whether or not the same shall constitute
an Event of Default hereunder;

 

48

 

(d)           at all times indicated
in (a) above, a copy of the management letter, if any, prepared by the Auditor;

 

(e)           on or prior to the
twenty-fifth (25th) day of each calendar month a detailed schedule of accounts
receivable of the Co-Borrowers certified by the Chief Financial Officer of
P&F and current as of the last Business Day of the preceding month, which
schedule shall include accounts receivable agings on an invoice date basis, all
in form satisfactory to the Required Lenders;

 

(f)            on or prior to the
twenty-fifth (25th) day of each calendar month a completed Borrowing
Base Certificate executed by the Chief Financial Officer of P&F and current
as of the last day of the immediately preceding month;

 

(g)           promptly after filing
thereof, copies of all regular and periodic financial information, proxy
materials and other information and reports which P&F or any of its
Subsidiaries shall file with the Securities and Exchange Commission;

 

(h)           promptly after
submission to any government or regulatory agency, all documents and
information furnished to such government or regulatory agency other than such
documents and information prepared in the normal course of business and which
could not reasonably be expected to result in any materially adverse action to
be taken by such agency; and

 

(i)            promptly, from time to
time, such other information regarding the operations, business affairs and
condition, financial or otherwise, of the Co-Borrowers, or any of them, or any
of their Subsidiaries as any Lender may reasonably request.

 

SECTION
6.04.  Access to Premises and Records.  (a) Maintain financial records in accordance
with GAAP and permit representatives of the Administrative Agent and each
Lender upon reasonable written prior notice to have access during normal
business hours to the premises of each Co-Borrower and each of their
Subsidiaries upon request, and to examine and make excerpts from the minute
books, books of accounts, reports and other records and to discuss the affairs,
finances and accounts of each Co-Borrower and their Subsidiaries with their
respective executive officers or with their respective independent
accountants.  The Co-Borrowers shall be
entitled to have a representative present at any meetings with such
accountants.

 

(b)           At any time that the outstanding principal
amount of the Loans is equal to or greater than $25,000,000, permit the Administrative
Agent or its representative to conduct field audits of the Co-Borrowers’
accounts receivable and inventory, and all related books and records, as the
Administrative Agent deems necessary or desirable, provided that so long as no
Default or Event of Default shall have occurred, the Co-Borrowers shall pay for
the costs, expenses and charges of only one such asset audit per year in an
amount not to exceed $7,500 per audit.

 

SECTION
6.05.  Notice of Adverse Change.  Promptly notify each Lender in writing of
(a) any change in the business or the operations of the Co-Borrowers, or any of
them, or any of their Subsidiaries which could reasonably be expected to have a
Material Adverse Effect, disclosing the nature

 

49

 

thereof, and (b) any information which
indicates that any financial statements which are the subject of any
representation contained in this Agreement, or which are furnished to the
Administrative Agent or any Lender pursuant to this Agreement, fail, in any
material respect, to present fairly, as of the date thereof and for the periods
covered thereby, the financial condition and results of operations purported to
be presented therein, disclosing the nature thereof.

 

SECTION
6.06.  Notice of Default.  Promptly notify each Lender of
any Default or Event of Default which notice shall include a written statement
as to such occurrence, specifying the nature thereof and the action which is
proposed to be taken with respect thereto.

 

SECTION
6.07.  Notice of Litigation.  Give each Lender prompt written notice of
any action, suit or proceeding at law or in equity or by or before any
governmental instrumentality or other agency which, if adversely determined
against the Co-Borrowers, or any of them, or any of their Subsidiaries on the
basis of the allegations and information set forth in the complaint or other
notice of such action, suit or proceeding, or in the amendments thereof, if
any, would (a) materially impair the right of the Co-Borrowers, or any of them,
or any of their Subsidiaries to carry on their business substantially as now
conducted or (b) have a Material Adverse Effect.

 

SECTION
6.08.  ERISA.  Promptly deliver to each Lender a
certificate of the Chief Financial Officer of the Co-Borrowers setting forth
details as to such occurrence and such action, if any, which the Co-Borrowers,
or any of them, or any ERISA Affiliate is required or proposes to take,
together with any notices required to be given to or filed with or by (as
applicable) the Co-Borrowers, or any of them, any ERISA Affiliate, the PBGC, a
Plan participant or the Plan Administrator, with respect thereto:  that a Reportable Event has occurred with
respect to a Plan, that an accumulated funding deficiency (as defined in
Section 412 of the Code) has been incurred or an application has been made to
the Secretary of the Treasury for a waiver or modification of the minimum
funding standard (including of any required installment payments) or for an
extension of any amortization period under Section 412 of the Code with respect
to a Plan that is a single employer plan (within the meaning of Section
4001(a)(15) of ERISA), that a Plan has been terminated, reorganized,
partitioned or declared insolvent under Title IV of ERISA, that one or more
Plans that are Single Employer Plans within the meaning of Section 4001(a)(15)
of ERISA) have an Unfunded Current Liability in excess of an amount which is
reasonably likely to have a Material Adverse Effect, that proceedings have been
instituted to terminate a Plan, that a proceeding has been instituted pursuant
to Section 515 of ERISA to collect a delinquent contribution to a Plan, or that
the Co-Borrowers, or any of them, or any ERISA Affiliate will incur any
liability (including any contingent or secondary liability) to or on account of
the termination of or withdrawal from a Plan under Section 4062, 4063, 4064,
4201 or 4204 of ERISA.  Upon request of
the any Lender, the Co-Borrowers will deliver to the Lenders a complete copy of
the annual report (Form 5500) of each Plan that is a single employer Plan
(within the meaning of Section 4001(a)(15) of ERISA), required to be filed with
the Internal Revenue Service.  In
addition to any certificates or notices delivered to the Lenders pursuant to
the first sentence hereof, copies of annual reports and any other notices
received by the Co-Borrowers, or any of them, or any of their Subsidiaries
required to be delivered to the Lenders hereunder shall be delivered to the
Lenders no later than 10 days after the later of the date such report or notice
has been filed with the Internal Revenue Service or the PBGC, given to Plan
participants or received by the Co-Borrowers, or any of them, or any of the
Subsidiaries.

 

50

 

SECTION
6.09.  Compliance with Applicable Laws.  Comply in all material respects with the
requirements of all laws, rules, regulations and orders of any Governmental
Authority, which are necessary to the business and/or operations of any
Co-Borrower or Guarantor and maintain all licenses and permits necessary or
useful to the conduct of the business of each Co-Borrower and each Guarantor.

 

SECTION
6.10.  Subsidiaries.  Promptly notify each Lender prior to the
occurrence thereof, of the creation, establishment or acquisition, in any
manner, including without limitation, as a result of a Permitted Acquisition,
of any Subsidiary of any Co-Borrower or any Guarantor not existing on the date
hereof.  The Co-Borrowers shall cause
each Subsidiary to execute a Guaranty and a Security Agreement, or a joinder
agreement with respect to any previously executed Guaranty or Security
Agreement, each in favor of the Administrative Agent, as agent for the Lenders,
in each case, concurrently with the creation, establishment or acquisition of
such Subsidiary and in connection therewith shall provide to the Administrative
Agent the supporting documents identified in Section 5.01(f) in each case with
respect to such Subsidiary, together with a favorable written opinion of
counsel to such Subsidiary in form and substance satisfactory to the
Administrative Agent and its counsel, as to the due execution, delivery and
enforceability of such documents and such other usual and customary matters
(with usual and customary exceptions) as the Administrative Agent may
reasonably request.  All costs and
expenses incurred by the Administrative Agent or its representatives in
connection with the execution of such Guaranties or Security Agreements shall
be for the account of the Co-Borrowers, including reasonable attorneys’ fees.

 

SECTION
6.11.  Default in Other Agreements.  Promptly notify each Lender of any default
in the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any agreement or instrument to which the
Co-Borrowers, or any of them, or any of their Subsidiaries is a party, which
default could reasonably be expected to have a Material Adverse Effect.

 

SECTION
6.12.  Environmental Laws.  Comply in all material respects with the
requirements of all applicable Environmental Laws, except with respect to those
matters set forth on Schedule VIII, provide to the Lenders all documentation in
connection with such compliance that the Lenders may reasonably request, and
defend, indemnify, and hold harmless each Lender, the Administrative Agent and
their respective employees, agents, officers, and directors, from and against
any claims, demands, penalties, fines, liabilities, settlements, damages,
costs, or expenses of whatever kind or nature, known or unknown, contingent or
otherwise, arising out of, or in any way related to, (a) the presence,
disposal, release, or threatened release of any Hazardous Materials on any
property at any time owned or occupied by the Co-Borrowers, or any of them, or
any of their Subsidiaries; (b) any personal injury (including wrongful death)
or property damage (real or personal) arising out of or related to such
Hazardous Materials; (c) any lawsuit brought or threatened, settlement reached,
or government order relating to such Hazardous Materials; and/or (d) any
violation of laws, orders, regulations, requirements, or demands of government
authorities, which are based upon or in any way related to such Hazardous
Materials including, without limitation, reasonable attorney and consultant
fees, investigation and laboratory fees, court costs, and litigation expenses.

 

51

 

SECTION 6.13.  Further
Assurances.    Execute and deliver to the Administrative
Agent all such documents and instruments and do all such other acts and things
as may be necessary or required by the Administrative Agent to enable the
Administrative Agent to exercise and enforce for the ratable benefit of the
Lenders the rights under the Loan Documents to which the Administrative Agent
or the Lenders are a party.

 

SECTION
6.14.  Mortgages.  Upon
the occurrence and continuance of an Event of Default the Administrative Agent
may, upon five (5) Business Days prior written notice to the Co-Borrowers,
record the Mortgages and, in connection therewith, the Co-Borrowers shall
provide to the Administrative Agent, within fifteen (15) Business Days
following such date, (a) a title policy and a lender’s title insurance binder
issued by an insurance company authorized to transact business in the State of
New York and acceptable to the Administrative Agent naming the Administrative
Agent as insured and insuring that the Mortgages create continuing, valid liens
on the Embassy Premises, the Jupiter Premises, the Tampa Premises and the Bowling
Green Premises, prior to all Liens (other than Permitted Liens), and each
securing an amount and on terms and conditions satisfactory to the Required
Lenders at such time, (b) a current legal description and updated survey of the
Embassy Premises, the Jupiter Premises, the Tampa Premises and the Bowling
Green Premises, certified to the Administrative Agent and the title company,
(c) a certificate of insurance from an independent insurance broker confirming
the insurance required to be maintained pursuant to the Mortgages, with respect
to the Embassy Premises, the Jupiter Premises, the Tampa Premises and the
Bowling Green Premises, each naming the Administrative Agent as mortgagee with
respect to such insurance, and (d) such other documents, promissory notes,
agreements and information, including opinions of counsel, that the
Administrative Agent may request.  The
Co-Borrowers acknowledge that the Mortgages have been prepared based upon a
standard New York form of Mortgage and agree to make such changes to the forms
of Mortgages and execute such additional documents as may be required in order
to record such Mortgages in any jurisdiction other than the State of New York,
and to employ local counsel with respect to any such Mortgage as the
Administrative Agent may require in order to ensure that such Mortgage properly
grants to the Administrative Agent a recorded on the premises referenced
therein.  The Co-Borrowers further agree
to pay all title insurance premiums, recording and filing fees and charges and
other expenses incurred by the Administrative Agent in connection with the
recording of the Mortgages and the delivery of the other documents required
pursuant to this Section 6.14.

 

ARTICLE
VII  NEGATIVE COVENANTS

 

Each
Co-Borrower covenants and agrees with each Lender and the Issuing Lender that
so long as this Agreement shall remain in effect or any of the principal of or
interest on any Note or any other Obligations hereunder shall be unpaid, it
will not, and will not cause or permit any of its Subsidiaries, directly or
indirectly, to:

 

SECTION
7.01.  Liens.  Incur, create, assume or suffer to exist any Lien on
any of their respective assets now or hereafter owned, other than:

 

(a)           Liens existing on the
date hereof as set forth on Schedule II attached hereto and accept to each
Lender, including any renewals or extensions thereof or any

 

52

 

amendments or modifications thereto, or, with respect to the liens of
Wachovia Bank on the Jupiter Premises, the Embassy Premises and the Tampa
Premises, any refinancings of such debt with the same or new lenders; provided
that no such Lien is extended, modified or otherwise amended to cover any
additional property and that the amount of Indebtedness secured thereby is not
increased;

 

(b)           Liens for taxes,
assessments or other governmental charges or levies not yet delinquent or which
are being contested in good faith by appropriate proceedings, provided, however,
that adequate reserves with respect thereto are maintained on the books of the
relevant Co-Borrower or Subsidiary in accordance with GAAP;

 

(c)           carriers’,
warehousemans’, mechanics’, suppliers, or other like Liens arising in the
ordinary course of business and not overdue for a period of more than 45 days
or which are being contested in good faith by appropriate proceedings in a
manner which will not jeopardize or diminish in any material respect the
interest of the Administrative Agent in any of the collateral subject to the
Security Agreements;

 

(d)           Liens incurred or
deposits to secure the performance of tenders, bids, trade contracts, leases,
statutory obligations, surety, performance and appeal bonds, and other
obligations of a similar nature incurred in the ordinary course of business;

 

(e)           any attachment, judgment
or similar Lien arising in connection with any court or governmental proceeding
provided that the execution or other enforcement of such Lien is effectively
stayed;

 

(f)            easements, rights of
way, restrictions and other similar charges or encumbrances which in the
aggregate do not materially interfere with the occupation, use and enjoyment by
the Co-Borrowers, or any of them, or any of their Subsidiaries of the property
or assets encumbered thereby in the normal course of their respective business
or materially impair the value of the property subject thereto;

 

(g)           deposits under
workmen’s compensation, unemployment insurance and social security laws;

 

(h)           purchase money Liens
for fixed or capital assets, including obligations under any Capital Lease; provided,
in each case, (x) no Event of Default or event which, upon notice or lapse of
time or both, would constitute an Event of Default shall have occurred and be
continuing or shall occur after the grant of the proposed Lien, and (y) such
purchase money Lien does not exceed 100% of the purchase price and encumbers
only the property being acquired and such other property that may have been
previously acquired from such Person or an affiliate of such Person, so long as
such Lien does not, at any time, extend to any items of collateral not so
acquired from such Person;

 

(i)            Liens on assets
acquired in a Permitted Acquisition, provided that such Liens (i) only cover
assets acquired thereunder and (ii) are the result of the continuation of Liens
on such assets in existence on the date of the closing of such Permitted
Acquisition;

 

53

 

(j)            Liens on assets
acquired in the Woodmark Acquisition, provided that such Liens (i) only cover
assets acquired thereunder and (ii) are the result of the continuation of Liens
on such assets in existence on the date of the closing of such Acquisition;

 

(k)           Liens granted to the
Administrative Agent for the benefit of the Lenders pursuant to the Loan
Documents; and

 

(l)            Liens on escrow funds
granted under the terms of the Purchase Agreement and in other escrow funds
constituting a possible portion of the purchase price under any Permitted
Acquisition.

 

SECTION
7.02.  Indebtedness.  Incur, create, assume or suffer to exist or
otherwise become liable in respect of any Indebtedness, other than:

 

(a)           Indebtedness incurred
prior to the date hereof as described in Schedule III attached hereto and
acceptable to each Lender, including any renewals or extensions thereof or any
amendments or modifications thereto; provided such renewal, extension,
amendment or modification does not result in an increase in the aggregate
principal amount of such Indebtedness;

 

(b)           Indebtedness to each
Lender and the Issuing Lender under this Agreement and the Notes;

 

(c)           Indebtedness for trade
payables incurred in the ordinary course of business which are not overdue;

 

(d)           Indebtedness
consisting of guarantees permitted pursuant to Section 7.03;

 

(e)           Subordinated
Indebtedness approved in writing by the Lenders;

 

(f)            Indebtedness secured
by purchase money liens as permitted under Section 7.01(h) for Capital
Expenditures permitted hereunder; provided no Default or Event of Default shall
have occurred and be continuing or would occur after giving effect to the
incurrence of such Indebtedness;

 

(g)           Indebtedness under
hedging agreements entered into to manage interest rate or currency risk and
not for purposes of speculation; and

 

(i)            Additional
Indebtedness not otherwise permitted by this Section 7.01 in an amount not to
exceed $1,000,000, in the aggregate, at any time.

 

SECTION
7.03.  Guaranties.  Guarantee, endorse, become surety for, or
otherwise in any way become or be responsible for the Indebtedness or
obligations of any Person, whether by agreement to maintain working capital or
equity capital or otherwise to maintain the net worth or solvency of any Person
or by agreement to purchase the Indebtedness of any other Person, or agreement
for the furnishing of funds, directly or indirectly, through the purchase of goods,
supplies or services for the purpose of discharging the Indebtedness of any
other Person or otherwise, or enter into or

 

54

 

be a party to any contract for the purchase
of merchandise, materials, supplies for other property if such contract
provides that payment for such merchandise, materials, supplies or other
property shall be made regardless of whether delivery of such merchandise,
supplies or other property is ever made or tendered except:

 

(a)           guaranties executed
prior to the date hereof as described on Schedule IV attached hereto and
acceptable to the Lenders but not including any renewals, extensions or other
modifications thereof;

 

(b)           endorsements of
negotiable instruments for collection or deposit in the ordinary course of
business;

 

(c)           guaranties of any
Indebtedness under this Agreement; and

 

(d)           guarantees of
Indebtedness permitted under Section 7.02, provided, that, any guarantee of
Subordinated Indebtedness shall be subordinated in the same manner and to the
same extent as the Subordinated Indebtedness.

 

SECTION
7.04.  Sale of Assets.  Sell, lease, transfer or otherwise dispose
of their respective properties and assets to a Person other than Obligor,
whether or not pursuant to an order of a federal agency or commission, except
for (a) the sale of inventory disposed of in the ordinary course of business
and (b) the sale or other disposition of properties or assets (including assets
specified on the Closing Date to the Administrative Agent in the certificate
delivered pursuant to Section 5.01(v)) no longer used or useful in the conduct
of their respective businesses.

 

SECTION
7.05.  Sales of Notes.  Sell, transfer, discount or otherwise
dispose of notes, accounts receivable or other obligations owing to the
Co-Borrowers, or any of them, or any of their Subsidiaries, with or without
recourse, except for collection in the ordinary course of business.

 

SECTION
7.06.  Loans and Investments.  Make or commit to make any advance, loan,
extension of credit, or capital contributions to or purchase or hold
beneficially any stock or other securities, or evidence of Indebtedness of,
purchase or acquire all or a substantial part of the assets of, make or permit
to exist any interest whatsoever in, any other Person except for (a) the
ownership of stock of any Subsidiaries existing as of the Closing Date or
acquired after the date hereof whether pursuant to a Permitted Acquisition or
otherwise, provided the Co-Borrowers have complied with their obligations under
Section 6.10 with respect to such Subsidiary, (b) investments described on
Schedule VI attached hereto, (c) loans by any Co-Borrower to any other
Co-Borrower or any Guarantor and loans by any Guarantor to any Co-Borrower or
any other Guarantor, (d) Permitted Investments, (e) the Woodmark Acquisition
and (f) Permitted Acquisitions provided that (i) aggregate principal
balance of the Term Loan is not greater than $12,5000,000, at the time of any
such acquisition, (ii) no more than one (1) Permitted Acquisition shall be
permitted in any twelve month period and (iii) no more than four (4) Permitted
Acquisitions shall be permitted prior to the Term Loan Maturity Date.

 

SECTION
7.07.  Nature of Business.   Change or alter, in any material respect,
the primary nature of its business from the nature of the business engaged in
by it on the date hereof but nothing herein

 

55

 

shall prevent any acquisition of a business
which is engaged in the same line of business of the Co-Borrowers or a business
incidental thereto.

 

SECTION
7.08.  Sale and Leaseback.  Enter into any arrangement, directly or
indirectly, with any Person whereby it shall sell or transfer any property,
whether real or personal, used or useful in its business, whether now owned or
hereafter acquired, if at the time of such sale or disposition it intends to
lease or otherwise acquire the right to use or possess (except by purchase)
such property or like property for a substantially similar purpose.

 

SECTION
7.09.  Federal Reserve Regulations.   Permit any Loan or the proceeds of any Loan
to be used for any purpose which violates or is inconsistent with the
provisions of Regulations T, U or X of the Board of Governors of the Federal
Reserve System.

 

SECTION
7.10.  Accounting Policies and Procedures.  Permit any change in the accounting policies
and procedures of the Co-Borrowers, any Guarantor or any of their respective
Subsidiaries, including a change in fiscal year, except such internal policy
changes which do not materially affect the preparation of the financial
statements to be delivered pursuant to this Agreement and the calculation of
the financial covenants set forth in Section 7.13 hereof, provided, however,
that any policy or procedure required to be changed by the Financial Accounting
Standards Board (or other board or committee thereof) in order to comply with
Generally Accepted Accounting Principles may be so changed.

 

SECTION
7.11.  Hazardous Materials. 
Cause or permit any of its properties or assets to be used to generate,
manufacture, refine, transport, treat, store, handle, dispose of, transfer,
produce or process Hazardous Materials, except in compliance with all
applicable federal, state and local laws or regulations, or cause or permit, as
a result of any intentional or negligent act or omission on the part of any
Co-Borrower, any Guarantor or any of their respective Subsidiaries, a release
of Hazardous Materials onto such property or asset or onto any other property,
except in compliance with such laws and regulations.

 

SECTION
7.12.  Limitations on Fundamental Changes.   Merge or consolidate with, or sell, assign,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions) all or substantially all of its assets (whether now owned or
hereafter acquired) to any Person, or, except with respect to a Permitted
Acquisition, acquire all of the stock or all or substantially all of the assets
or the business of any Person or liquidate, wind up or dissolve or suffer any
liquidation or dissolution; provided, however, any Guarantor may
merge or consolidate with any other Guarantor or merge with and into a
Co-Borrower (provided the Co-Borrower is the surviving corporation).

 

SECTION 7.13.  Financial
Condition Covenants.

 

(a)           Fixed Charge Coverage Ratio.  Permit the ratio of (i) Consolidated EBITDA minus
cash taxes paid to (ii) Consolidated Interest Expense plus Consolidated
Current Maturities on Long Term Debt to be less than 1.20:1.00 as of the end of
any fiscal year of the Co-Borrowers.

 

56

 

(b)           Minimum Capital Base.  Maintain a Consolidated Capital Base during
the periods set forth below of not less than the amount set forth below
opposite the applicable period:

 

	
  Period

  	
   

  	
  Amount

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  June 30, 2004 through December 30, 2004

  	
   

  	
  $

  	
  7,000,000

  	
   

  
	
  December 31, 2004 through December 30, 2005

  	
   

  	
  $

  	
  9,500,000

  	
   

  
	
  December 31, 2005 through December 30, 2006

  	
   

  	
  $

  	
  16,500,000

  	
   

  
	
  December 31, 2006 through December 30, 2007

  	
   

  	
  $

  	
  23,000,000

  	
   

  
	
  December 31, 2007 and thereafter

  	
   

  	
  $

  	
  28,000,000

  	
   

  

 

(c)           Consolidated Senior Debt to Consolidated EBITDA.  Permit the ratio of Consolidated Senior Debt
to Consolidated EBITDA during the periods set forth below to be greater than
the ratio set forth below opposite the applicable period:

 

	
  Period

  	
   

  	
  Ratio

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  September 30, 2004 through December 30,
  2005

  	
   

  	
  3.90:1.00

  	
   

  
	
  December 31, 2005 through December 30, 2007

  	
   

  	
  3.00:1.00

  	
   

  
	
  December 31, 2007 and thereafter

  	
   

  	
  2.50:1.00

  	
   

  

 

(d)           Consolidated
Capital Expenditures. 
Permit Consolidated Capital Expenditures to exceed $3,000,000 for any
fiscal year, provided, that up to $1,500,000 of an unexpended amount in any
fiscal year may be carried forward for use in the immediately following fiscal
year only.  Capital Expenditures in any
fiscal year shall be deemed to be made, first, from the amount carried forward,
if any, from the prior fiscal year and, second, from the amount otherwise
available under this Section 7.13(d).

 

(e)           No
Consolidated Net Loss. 
Incur for any four consecutive fiscal quarter of the Co-Borrowers a
Consolidated Net Loss calculated exclusive of extraordinary gains.

 

All financial
condition covenants included in this Section 7.13 (other than Section 7.13(d))
shall be tested on a “rolling four quarters” basis.  If any Permitted Acquisition is consummated, then for purposes of
calculating compliance with this Section 7.13, for each of the first three
quarters following consummation of such Permitted Acquisition, Consolidated
EBITDA shall be determined on the basis of including the annualized EBITDA of
the acquired Person in computation of Consolidated EBITDA.  For purposes of calculating compliance with
the provisions of Section 7.13(a) and (c) above, Consolidated EBITDA at any
time shall mean Consolidated EBITDA as determined on the basis of the financial
statements most recently delivered to the Administrative Agent pursuant to
Section 6.03.

 

SECTION
7.14.  Subordinated Debt.  (i) Directly or indirectly prepay, defease,
purchase, redeem, or otherwise acquire any Subordinated Debt, except in
accordance with the terms of the Subordination Agreements or (ii) amend,
supplement or otherwise modify any of the terms thereof without the prior
written consent of the Required Lenders.

 

57

 

SECTION
7.15.  Transactions with Affiliates.  Enter into any transaction, including,
without limitation, the purchase, sale, or exchange of property or the
rendering of any service, with any Affiliate (other than (i) transactions with
a Co-Borrower or a Guarantor, (ii) indemnification and compensation
arrangements with officers and directors in their capacity as an officer or
director, and (iii) payment of dividends otherwise permitted by this
Agreement), except in the ordinary course of and pursuant to the reasonable
requirements of the business of such Co-Borrower or of its Subsidiary and upon
fair and reasonable terms no less favorable to the such entity than it would
obtain in a comparable arms-length transaction with a Person not an Affiliate.

 

SECTION
7.16.  Impairment of Security Interest.  Take or omit to take any action which could
reasonably be expected to adversely affect or impair the security interest in
any property subject to a security interest in favor of the Administrative
Agent nor grant to any Person any interest whatsoever in any property subject
to a security interest in favor of the Administrative Agent.

 

ARTICLE
VIII  EVENTS OF DEFAULT

 

SECTION
8.01.  Events of Default.  In the case of the happening of any of the
following events (each an “Event of Default”):

 

(a)           failure by the
Co-Borrowers to (i) pay the principal or interest on any Loan when due and
payable, (ii) make any reimbursement obligations with respect to a drawing
under any Letter of Credit when due and payable or any amounts payable in
connection with Banker’s Acceptances, or (iii) pay any fees or other amounts
payable under any Loan Document when due or payable and, with respect to clause
(iii), such failure shall continue unremedied for a period of three (3)
Business Days;

 

(b)           default shall be made
in (i) the due observance or performance of any covenant, condition or
agreement of the Co-Borrowers, or any of them, or any of their Subsidiaries to
be performed pursuant to Section 6.03, 6.04, 6.05, 6.06, 6.07, or 6.14 or Article
VII of this Agreement, or (ii) the due observance or performance of any other
covenant, condition or agreement of the Co-Borrowers, or any of them, or any of
their Subsidiaries to be performed pursuant to this Agreement or any other Loan
Document (other than those specified in clause (a) of this Section 8.01) and
such failure shall continue unremedied for a period of ten (10) days after
written notice thereof from the Administrative Agent;

 

(c)           any representation or
warranty made in this Agreement or any other Loan Document or in any report,
certificate, financial statement or other instrument furnished in connection
with this Agreement or any other Loan Document, shall prove to be false or
misleading in any material respect when made or given or when deemed made or
given;

 

(d)           default in the
performance or compliance in respect of any agreement or condition relating to
any Indebtedness (other than any Note and unsecured trade payables) of the
Co-Borrowers or any of their Subsidiaries in excess of $500,000, individually
or in the aggregate, if the effect of such default is to accelerate the
maturity of such Indebtedness or to permit the holder or obligee thereof (or a
trustee on behalf of such holder or obligee) to cause

 

58

 

such Indebtedness to become due prior to the stated maturity thereof,
or any Indebtedness (other than unsecured trade payables) in excess of
$500,000, individually or in the aggregate, shall not be paid when due;

 

(e)           the Co-Borrowers, or
any of them, or any of their Subsidiaries shall (i) voluntarily commence any
proceeding or file any petition seeking relief under Title 11 of the United
States Code or any other federal or state bankruptcy, insolvency or similar
law, (ii) consent to the institution of, or fail to controvert in a timely and
appropriate manner, any such proceeding or the filing of any such petition,
(iii) apply for or consent to the employment of a receiver, trustee, custodian,
sequestrator or similar official for the Co-Borrowers, or any of them, or any
of their Subsidiaries or for a substantial part of its property; (iv) file an
answer admitting the material allegations of a petition filed against it in
such proceeding, (v) make a general assignment for the benefit of creditors,
(vi) take corporate action for the purpose of effecting any of the foregoing,
or (vii) the Co-Borrowers, or any of them, or any of their Subsidiaries shall
become unable or admit in writing its inability or fail generally to pay its
debts as they become due;

 

(f)            an involuntary
proceeding shall be commenced or an involuntary petition shall be filed in a
court of competent jurisdiction seeking (i) relief in respect of the
Co-Borrowers, or any of them, or any of their Subsidiaries or of a substantial
part of their respective property, under Title 11 of the United States Code or
any other federal or state bankruptcy, insolvency or similar law, (ii) the
appointment of a receiver, trustee, custodian, sequestrator or similar official
for the Co-Borrowers, or any of them, or any of their Subsidiaries or for a
substantial part of their property, or (iii) the winding-up or liquidation of
the Co-Borrowers, or any of them, or any of their Subsidiaries and such
proceeding or petition shall continue undismissed for 30 days or an order or
decree approving or ordering any of the foregoing shall continue unstayed and
in effect for 30 days;

 

(g)           One or more orders,
judgments or decrees for the payment of money in excess of $500,000 in the
aggregate shall be rendered against the Co-Borrowers, or any of them, or any of
their Subsidiaries and the same shall not have been paid in accordance with
such judgment, order or decree and either (i) an enforcement proceeding shall
have been commenced by any creditor upon such judgment, order or decree which
is not stayed, or (ii) there shall have been a period of sixty (60) days during
which a stay of enforcement of such judgment order or decree, by reason of
pending appeal or otherwise, was not in effect;

 

(h)           any Plan which is a single
employer Plan shall fail to comply in any material respect with the minimum
funding standard required under Section 412 of the Code for any Plan year or
part thereof or a waiver of such standard is applied for or granted under
Section 412 of the Code, any Plan is terminated by the Co-Borrowers, or any of
them, or any ERISA Affiliate or the subject of termination proceedings by the
PBGC under ERISA, any Plan shall have an Unfunded Current Liability which is
reasonably likely to have a Material Adverse Effect, a Reportable Event shall
have occurred with respect to a Plan or the Co-Borrowers, or any of them, or
any ERISA Affiliate shall have incurred a liability to or on account of a Plan
under Section 515, 4062, 4063, 4063, 4201 or 4204 of ERISA, and there shall
result from any such event or events the imposition of a lien upon the assets
of the Co-Borrowers, or any of them, or any ERISA Affiliate, the granting of a
security interest on such assets, or a liability to

 

59

 

the PBGC or a Plan or a trustee appointed under ERISA or a penalty
under Section 4971 of the Code, and in each case, such event or condition,
together with all such events or conditions, if any, could reasonably be
expected to result in liability of the Co-Borrowers, or any of them, or any of
their Subsidiaries in an aggregate amount exceeding $500,000;

 

(i)            any material provision
of any Loan Document shall for any reason cease to be in full force and effect
in accordance with its terms or the Co-Borrowers, or any of them, or any
Guarantor shall so assert in writing; or

 

(j)            any of the Liens
purposed to be granted pursuant to any Security Document shall fail or cease
for any reason to be legal, valid and enforceable Liens on the collateral purported
to be covered thereby or shall fail or cease to have the priority purported to
be created thereby, or

 

then, at any time thereafter
during the continuance of any such event, the Administrative Agent may, and,
upon the request of the Required Lenders, shall, take either or both of the
following actions, at the same or different times (A) terminate the Commitments
and declare (i) the Notes, both as to principal and interest, (ii) an amount
equal to the Aggregate Letters of Credit Outstanding, and (iii) an amount equal
to the Aggregate Banker’s Acceptances Outstanding, to be forthwith due and
payable, without presentment, demand, protest or other notice of any kind, all
of which are hereby expressly waived, anything contained herein or in the Notes
to the contrary notwithstanding; provided, however, that if an
event specified in Section 8.01 (e) and (f) shall have occurred, the
Commitments shall automatically terminate and the Notes and an amount equal to
the Aggregate Letters of Credit Outstanding and to the Aggregate Banker’s
Acceptances Outstanding, shall be immediately due and payable; (B) exercise any
or all of the rights and remedies afforded to the Bank in the Security
Agreements, by the Uniform Commercial Code or otherwise possessed by the Bank and,
realize upon, dispose of, or sell, all or any part of the collateral given by
the Co-Borrowers and the Guarantors to the Bank, and the Bank may apply the net
proceeds of such realization, disposal or sale to the payment of any
liabilities of the Co-Borrowers under the Notes or this Agreement as set forth
in the Security Agreements and (C) record the Mortgages provided that the
recording of the Mortgages shall not be deemed a waiver of any Event of Default
then in existence.  With respect to all
Letters of Credit that shall not have matured or presentment for honor shall
not have occurred, and with respect to Banker’s Acceptances the maturity date
of which has not occurred, the amounts in respect thereof as described in the
preceding sentence shall be deposited in an account under the sole domain and
control of the Bank, as Cash Collateral for the obligation of the Co-Borrowers
to reimburse the Bank in the event of any drawing or payment in respect
thereof.

 

60

 

THE ADMINISTRATIVE AGENT

 

SECTION 9.01.  Appointment, Powers and
Immunities.  Each Lender
hereby appoints and authorizes the Administrative Agent to act as its agent
hereunder, under the Security Documents and the other Loan Documents with such
powers as are specifically delegated to the Administrative Agent by the terms
of this Agreement, the Security Documents and the other Loan Documents together
with such other powers as are reasonably incidental thereto.  The Administrative Agent shall not have any
duties or responsibilities except those expressly set forth in this Agreement,
the Security Documents and the other Loan Documents and shall not be a trustee
for any Lender, nor is the Administrative Agent acting in a fiduciary capacity
of any kind under this Agreement, the Security Documents or the other Loan
Documents or in respect thereof or in respect of any Lender.  The Administrative Agent shall not be
responsible to the Lenders for any recitals, statements, representations or
warranties contained in this Agreement, the Security Documents, or the other
Loan Documents, in any certificate or other document referred to or provided
for in, or received by any of them under, this Agreement, the Security
Documents or the other Loan Documents, or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement,
the Security Documents or the other Loan Documents or any other document
referred to or provided for herein or therein or for the collectibility of the
Loans or for the validity, effectiveness or value of any interest or security
covered by the Security Documents or for the value of any collateral or for the
validity or effectiveness of any assignment, mortgage, pledge, security
agreement, financing statement, document or instrument, or for the filing,
recording, re-filing, continuing or re-recording of any thereof or for any
failure by any Co-Borrowers or any of their respective Subsidiaries to perform
any of its obligations hereunder or under the other Loan Documents.  The Administrative Agent may take all
actions by itself and/or it may employ agents and attorneys-in-fact, and shall
not be responsible to any Lender, except as to money or the securities received
by it or its authorized agents, for the negligence or misconduct of itself or
its employees or of any such agents or attorneys-in-fact, if such agents or
attorneys-in-fact are selected by it with reasonable care.  Neither the Administrative Agent nor any of
its directors, officers, employees or agents shall be liable or responsible for
any action taken or omitted to be taken by it or them hereunder, under the
Security Documents or the other Loan Documents or in connection herewith or
therewith, except for its or their own gross negligence or willful misconduct.

 

SECTION 9.02.  Reliance by Administrative
Agent.  The
Administrative Agent shall be entitled to rely upon, and shall not incur any
liability to any Lender for relying upon, any certification, notice or other
communication (including any thereof by telephone, telex, telegram, facsimile
or cable) believed by it to be genuine and correct and to have been signed or
sent by or on behalf of the proper Person or Persons, and upon advice and
statements of legal counsel, independent accountants and other experts selected
by the Administrative Agent.  As to any
matters not expressly provided for by this Agreement, the Security Documents or
the other Loan Documents, the Administrative Agent shall in all cases be fully
protected in acting, or in refraining from acting, hereunder, under the
Security Documents or the other Loan Documents in accordance with instructions
signed by the Required Lenders, or such other number of Lenders as is specified
in Section 10.04 hereof, and such instructions of the Required Lenders or other
number of Lenders as aforesaid and any action taken or failure to act pursuant
thereto shall be binding on all of the Lenders.

 

61

 

SECTION 9.03.  Events of Default.  The Administrative Agent shall not be deemed
to have knowledge of the occurrence of a Default or Event of Default (other
than the non-payment of principal of or interest on the Loans or of fees to the
extent the same is required to be paid to the Administrative Agent for the
account of the Lenders) unless the Administrative Agent has received notice
from a Lender or the Co-Borrowers specifying such Default or Event of Default
and stating that such notice is a “Notice of Default”.  In the event that the Administrative Agent
receives such a notice of the occurrence of a Default, the Administrative Agent
shall give prompt notice thereof to the Lenders.  The Administrative Agent shall (subject to Section 9.07 hereof)
take such action with respect to such Default as shall be directed by the
Required Lenders, except as otherwise provided in Section 10.04 hereof;
provided that unless and until the Administrative Agent shall have received
such directions, the Administrative Agent may (but is not obligated to) take
such action, or refrain from taking such action, with respect to such Default
or Event of Default as it shall deem advisable in the best interest of the
Lenders.

 

SECTION 9.04.  Rights as a Lender.  With respect to its Commitment and the Loans
made by it, the Administrative Agent in its capacity as a Lender hereunder
shall have the same rights and powers hereunder as any other Lender and may
exercise the same as though it were not acting as the Administrative Agent, and
the term “Lender” or “Lenders” shall, unless the context otherwise indicates,
include each entity which is the Administrative Agent in its individual
capacity.  Each entity which is the
Administrative Agent and its Affiliates may (without having to account
therefore to any Lender) accept deposits from, lend money to and generally
engage in any kind of banking, trust or other business with the Co-Borrowers or
any of their respective Affiliates, as if it were not acting as the
Administrative Agent, and, except to the extent otherwise herein specifically
set forth, each entity which is the Administrative Agent may accept fees and
other consideration from the Co-Borrowers or any of their respective
Affiliates, for services in connection with this Agreement, the Security
Documents or any of the other Loan Documents or otherwise without having to
account for the same to the Lenders.

 

SECTION
9.05.  Indemnification.  The Lenders shall indemnify the
Administrative Agent (to the extent not reimbursed by the Co-Borrowers under
Section 10.03 hereof), ratably in accordance with the aggregate outstanding
principal amount of the Loans made by the Lenders (or, if no Loans are at the
time outstanding, ratably in accordance with their respective Commitments), for
any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind and nature
whatsoever which may be imposed on, incurred by or asserted against the
Administrative Agent in its capacity as the Administrative Agent in any way
relating to or arising out of this Agreement, the Security Documents or any of
the other Loan Documents or any other documents contemplated by or referred to
herein or therein or the transactions contemplated hereby and thereby
(including, without limitation, the costs and expenses which the Co-Borrowers
are obligated to pay under Section 10.03 hereof or under the applicable
provisions of any other Loan Document) or the enforcement of any of the terms
hereof or of the Security Documents, or of any other Loan Document, provided
that no Lender shall be liable for any of the foregoing to the extent they
arise from the gross negligence or willful misconduct of the Administrative
Agent.

 

62

 

SECTION 9.06.  Non-Reliance on
Administrative Agent and Other Lenders.  Each Lender agrees that it has,
independently and without reliance on the Administrative Agent or any other
Lender, and based on such documents and information as it has deemed
appropriate, made its own credit analysis of the Co-Borrowers and decision to
enter into this Agreement and that it will, independently and without reliance
upon the Administrative 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 analysis and decisions in taking or not taking action under this Agreement,
the Security Documents or the other Loan Documents.  The Administrative Agent shall not be required to keep itself
informed as to the performance or observance by the Co-Borrowers of this Agreement,
the Security Documents or the other Loan Documents or any other document
referred to or provided for herein or therein or to inspect the properties or
books of the Co-Borrowers.  Except for
notices, reports and other documents and information expressly required to be
furnished to the Lenders by the Administrative Agent hereunder or under the
Security Documents, or the other Loan Documents, or furnished to the
Administrative Agent with counterparts or copies for the Lenders in accordance
with the terms of this Agreement (which the Administrative Agent shall forward
to the Lenders), the Administrative Agent shall not have any duty to provide
any Lender with any credit or other information concerning the affairs,
financial condition or business of the Co-Borrowers, which may come into the
possession of the Administrative Agent or any of its Affiliates.

 

SECTION 9.07.  Failure to Act.  Except for actions expressly required of the
Administrative Agent hereunder or under the Security Documents, the Administrative
Agent shall in all cases be fully justified in failing or refusing to act
hereunder or thereunder unless it shall be indemnified to its satisfaction by
the Lenders against any and all liability (except gross negligence and willful
misconduct) and expense which may be incurred by it by reason of taking or
continuing to take any such action.

 

SECTION 9.08.  Resignation of the
Administrative Agent.  Subject to the appointment and acceptance of
a successor Administrative Agent as provided in this Section 9.08, the
Administrative Agent may resign at any time by notifying the Lenders and the
Co-Borrowers.  Upon any such
resignation, the Required Lenders shall have the right, with the approval of
the Co-Borrowers provided no Default or Event of Default shall have occurred
and then be continuing, and such approval not to be unreasonably withheld,
delayed or conditioned, to appoint a successor to such Administrative
Agent.  If no successor shall have been
so appointed by the Required Lenders (with the approval of the Co-Borrowers)
and shall have accepted such appointment within 30 days after the resigning
Administrative Agent gives notice of its resignation, then the resigning
Administrative Agent may, on behalf of the Lenders, appoint a successor
Administrative Agent which shall be a bank of similar standing with an office
in New York, New York, or an Affiliate of any such bank.  Upon the acceptance of its appointment as
Administrative Agent hereunder by a successor, such successor shall succeed to
and become vested with all the rights, powers, privileges and duties of the
resigning Administrative Agent, and the resigning Administrative Agent shall be
discharged from its duties and obligations hereunder as of such date.  The fees payable by the Co-Borrowers to a
successor Administrative Agent shall be the same as those payable to its
predecessor unless otherwise agreed between the Co-Borrowers and such
successor.  After the Administrative
Agent’s resignation hereunder, the provisions of this Article and Section 10.03
hereof shall continue in effect for the benefit of such resigning
Administrative Agent in respect of any actions taken or omitted to be taken by
it while it was acting as the Administrative Agent.

 

63

 

SECTION
9.09.  Sharing of Collateral and Payments.  In the event that at any time any Lender
shall obtain payment in respect of the Obligations, or receive any collateral
in respect thereof, whether voluntarily or involuntarily, through the exercise
of a right of banker’s lien, set-off or counterclaim against any Co-Borrower or
otherwise, which results in it receiving more than its pro rata share of the
aggregate payments with respect to all of the Obligations (other than any
payment expressly provided hereunder to be distributed on other than a pro rata
basis), then such Lender shall be deemed to have simultaneously purchased from
the other Lenders a share in their Obligations so that the amount of the
Obligations held by each of the Lenders shall be pro rata;  provided, however, that if all or any portion
of such excess payment or benefits is thereafter recovered from the Lender
which received the proportionate over-payment, such purchase shall be
rescinded, and the purchase price and benefits returned, to the extent of such
recovery, but without interest.  Each
Co-Borrower agrees, to the extent it may do so under applicable law, that each
Lender so purchasing a portion of another Lender’s Loan or participation in any
Letter of Credit or Banker’s Acceptance may exercise all rights of payment
(including, without limitation, rights of set-off) with respect to such portion
as fully as if such Lender were the direct holder of such portion.

 

ARTICLE X  MISCELLANEOUS

 

SECTION 10.01.  Notices.  All notices, requests and demands to or upon the
respective parties hereto to be effective shall be in writing (including
telecopy), and unless otherwise expressly provided herein, shall be
conclusively deemed to have been received by a party hereto and to be effective
on the day on which delivered by hand to such party or one Business Day after
being sent by overnight mail to the address set forth below, or, in the case of
telecopy notice, when acknowledged as received, or if sent by registered or
certified mail, three Business Days after the day on which mailed in the United
States, addressed to such party at such address:

 

(a)           if to Administrative
Agent, Bank, at

 

Citibank, N.A.

730 Veterans
Memorial Highway

Hauppauge, New
York  11788

Attention:              Mr. Stephen G. Kelly

Telecopy:              (631) 265-4888

 

with a copy
to:

 

Farrell Fritz,
P.C.

EAB Plaza

Uniondale,
NY  11556

Attention:              Robert C. Creighton

Telecopy:              (516) 227-0777

 

64

 

(b)           if to the Co-Borrowers
at

 

P & F
Industries, Inc.

300 Smith Street

Farmingdale,
New York 11735

Attention:              Mr. Joseph A.
Molino, Jr.

Telecopy:              (631) 694-1836

 

with a copy
to:

 

Willkie Farr
& Gallagher LLP

787 Seventh
Avenue

New York, New
York 10019-6099

Attention:              Neil Novikoff, Esq.

Telecopy:              (212) 728-8111

 

(c)           if
to any Lender, to its address set forth in the signature page of this Agreement
and to the person so designated

 

- and -

 

(d)           as to each such party at such other address
as such party shall have designated to the other in a written notice complying
as to delivery with the provisions of this Section 10.01.

 

SECTION 10.02.  Effectiveness; Survival of Agreement.  This Agreement shall become effective on the
date on which all parties hereto shall have signed a counterpart copy hereof
and shall have delivered the same to the Administrative Agent.  All covenants, agreements, representations
and warranties made herein and in the other Loan Documents and in the
certificates delivered pursuant hereto or thereto shall survive the making by
the Lenders of the Loans, and the issuance by the Issuing Lender of Letters of
Credit and creation of Banker’s Acceptances, in each case, as herein
contemplated and the execution and delivery to the Lenders of the Notes
evidencing the Loans shall survive as long as the Obligations hereunder remain
outstanding and unpaid and the Revolving Credit Commitments are in effect.  The obligations of the Co-Borrowers pursuant
to Section 3.07, Section 3.08, Section 3.09 and Section 10.03 shall survive termination
and payment of the Obligations. 
Whenever in this Agreement any of the parties hereto is referred to,
such reference shall be deemed to include the successors and assigns of such
party; and all covenants, promises and agreements by or on behalf of the
Co-Borrowers, or any of them, and their Subsidiaries which are contained in
this Agreement shall bind and inure to the benefit of the respective successors
and assigns of the Lenders.  The
Co-Borrowers may not assign or transfer any of their interest under this
Agreement, any Note or any other Loan Document without the prior written
consent of the Bank.

 

SECTION 10.03.  Expenses of the Bank.  The Co-Borrowers agree (a) to indemnify,
defend and hold harmless the Administrative Agent, the Issuing Lender and each
Lender and their respective officers, directors, employees and affiliates
(each, an “indemnified person”) from and against any and all losses, claims,
damages, liabilities or judgments to which any such indemnified person may be
subject and arising out of or in connection with the Loan Documents, the
financings contemplated hereby, the use of any proceeds of such financings or
any related

 

65

 

transaction or any claim, litigation,
investigation or proceeding relating to any of the foregoing, whether or not
any of such indemnified person is a party thereto, and to reimburse each of
such indemnified persons upon demand for any reasonable legal or other expenses
incurred in connection with the investigation or defending of any of the
foregoing; provided that the foregoing indemnity will not, as to any
indemnified person, apply to losses, claims, damages, liabilities, judgments or
related expenses to the extent arising from the wilful misconduct or gross
negligence of such indemnified person; and (b) to pay or reimburse the
Administrative Agent for all its out-of-pocket costs and expenses incurred in
connection with the preparation and execution of and any amendment, supplement
or modification to this Agreement, the Notes any other Loan Documents, and any
other documents prepared in connection herewith or therewith, and the
consummation of the transactions contemplated hereby and thereby, including
without limitation, the reasonable fees and disbursements of Farrell Fritz,
P.C., counsel to the Administrative Agent, and (c) to pay or reimburse each
Lender and the Administrative Agent for all their costs and expenses incurred
in connection with the enforcement and preservation of any rights under this
Agreement, the Notes, the other Loan Documents, and any other documents
prepared in connection herewith or therewith, including, without limitation,
the reasonable fees and disbursements of counsel (including, without
limitation, in-house counsel) to the Administrative Agent and to the several
Lenders, including all such out-of-pocket expenses incurred during any
work-out, restructuring or negotiations in respect of the Obligations.

 

SECTION 10.04.  Amendments and Waivers.  With the written consent of the Required
Lenders, the Administrative Agent and the Co-Borrowers may, from time to time,
enter into written amendments, supplements or modifications hereto for the
purpose of adding any provisions to this Agreement or the Notes or any of the
other Loan Documents or changing in any manner the rights of the Lenders or of
the Co-Borrower hereunder or thereunder, and with the written consent of the
Required Lenders, the Administrative Agent on behalf of the Lenders may execute
and deliver to the Co-Borrowers a written instrument waiving, on such terms and
conditions as the Administrative Agent or the Required Lenders may specify in
such instrument, any of the requirements of this Agreement or the Notes or any
of the other Loan Documents or any Event of Default; provided, however,
that no such waiver and no such amendment, or supplement or modification shall
(a) extend the maturity of any Note, or any installment thereof, (b) reduce the
rate or extend the time of payment of interest on any Note or any fees payable
to the Lenders hereunder, (c) reduce the principal amount of any Note or the
amount of any reimbursement due in respect of any Letter of Credit or Banker’s
Acceptance, (d) increase the Commitments, (e) amend, modify or waive any
provision of this Section 10.04, (f) reduce the percentage specified in the definition
of Required Lenders or amend or modify any other provision hereof specifying
the number or percentage of Lenders required to waive, amend or modify any
rights hereunder or make any determination granting consent hereunder, (g)
consent to the assignment or transfer by any Co-Borrower or any Guarantor of
any of its rights or obligations under this Agreement or any other Loan
Document, (h) except as expressly permitted pursuant to this Agreement or any
other Loan Document release any collateral security granted to the
Administrative Agent under the Security Documents or (i) release any Guarantor
from its Guaranty, or limit any Guarantor’s liability with respect to its
Guaranty, in each case specified in clauses (a) through (i) above without the
written consent of all the Lenders; and provided, further, that
no such waiver and no such amendment, supplement or modification shall (i)
amend, modify, supplement or waive any provision of Article IX with respect to
the Administrative Agent without the written consent of the Administrative
Agent or (ii) increase the

 

66

 

amount of any Lender’s Revolving Credit
Commitment without the written consent of such Lender.  Any such waiver and any such amendment,
supplement or modification shall apply equally to each of the Lenders and shall
be binding upon the Co-Borrowers, the Lenders, the Administrative Agent and all
future holders of the Notes.

 

SECTION 10.05.  Successors and Assigns; Participations.

 

(a)           This Agreement shall be
binding upon and inure to the benefit of the Co-Borrowers, the Lenders, the
Administrative Agent, all future holders of the Notes and their respective
successors and assigns, except that no Co-Borrower may assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of each Lender.

 

(b)           Any Lender may, in the
ordinary course of its commercial banking business and in accordance with
applicable law, at any time sell to one or more banks or other financial
institutions (“Participants”) participating interests in any Loan owing
to such Lender, any Note held by such Lender, any Commitment of such Lender or
any other interest of such Lender hereunder. 
In the event of any such sale by a Lender of participating interests to
a Participant, such Lender’s obligations under this Agreement to the other
parties under this Agreement shall remain unchanged, such Lender shall remain
solely responsible for the performance thereof, such Lender shall remain the
holder of any such Note for all purposes under this Agreement, and the
Co-Borrowers and the Administrative Agent shall continue to deal solely and
directly with such Lender in connection with such Lender’s rights and
obligations under this Agreement.  The
Co-Borrowers agree that each Participant shall be entitled to the benefits of
Sections 3.07, 3.08 and 3.09 with respect to its participation in the
Commitments and in the Loans and Letters of Credit and Banker’s Acceptances
outstanding from time to time; provided, however, that no
Participant shall be entitled to receive any greater amount pursuant to such
sections than the transferor Lender would have been entitled to receive in
respect of the amount of the participation transferred by such transferor
Lender to such Participant had no such transfer occurred.  No Participant shall have the right to
consent to any amendment to, or waiver of, any provision of this Agreement,
except the transferor Lender may provide in its agreement with the Participant
that such Lender will not, without the consent of the Participant, agree to any
amendment or waiver described in clause (a) through clause (h) of Section
10.04.

 

(c)           Subject to the last
sentence of this paragraph (c) any Lender may, in the ordinary course of its
commercial banking business and in accordance with applicable law, at any time
sell to any Lender or any domestic banking affiliate thereof, and, with (i) the
consent of the Administrative Agent, and (ii) unless an Event of Default shall
have occurred and is then continuing, the consent of the Co-Borrower (which
shall not be unreasonably withheld), to one or more additional banks or
financial institutions (“Purchasing Lenders”) all or any part of its
rights and obligations under this Agreement and the Notes pursuant to an
Assignment and Acceptance Agreement, executed by such Purchasing Lender, such
transferor Lender and the Administrative Agent (and, in the case of an
Assignment and Acceptance Agreement relating to a Purchasing Lender that is not
then a Lender or a domestic banking affiliate thereof, also executed by the
Co-Borrowers), and delivered to the Administrative Agent for its
acceptance.  Upon such execution,
delivery and acceptance from and after the effective date specified in such
Assignment and Acceptance Agreement, (i) the Purchasing Lender thereunder shall
be a party hereto and, to the extent provided in such Assignment and Acceptance
Agreement, have the

 

67

 

rights and obligations of a Lender hereunder with Commitments as set
forth therein and (ii) the transferor Lender thereunder shall, to the extent
provided in such Assignment and Acceptance Agreement, be released from its
obligations under this Agreement arising after such transfer (and, in the case
of an Assignment and Acceptance Agreement covering all or the remaining portion
of a transferor Lender’s rights and obligations under this Agreement, such
transferor Lender shall cease to be a party hereto except as to Sections 3.07,
3.08, 3.09 and 10.03 for the period prior to the effective date).  Such Assignment and Acceptance Agreement
shall be deemed to amend this Agreement to the extent, and only to the extent,
necessary to reflect the addition of such Purchasing Lender and the resulting
adjustment of Commitment Proportions arising from the purchase by such
Purchasing Lender of all or a portion of the rights and obligations of such
transferor Lender under or in respect of this Agreement and the Notes.  On or prior to the effective date specified
in such Assignment and Acceptance Agreement, the Co-Borrowers, at their own
expense, shall execute and deliver to the Administrative Agent, in exchange for
the surrendered Notes, new Notes to the order of such Purchasing Lender in an
amount equal to the Commitments assumed by it pursuant to such Assignment and
Acceptance Agreement and, if the transferor Lender has retained any Commitment
hereunder, a new Note to the order of the transferor Lender in an amount equal
to such Commitment retained by it hereunder. 
Such new Notes shall be in a principal amount equal to the principal
amount of such surrendered Notes, shall be dated the effective date specified
in the Assignment and Acceptance Agreement and shall otherwise be in the form
of the Notes replaced thereby.  The Notes
surrendered by the transferor Lender shall be returned by the Administrative
Agent to the Co-Borrowers marked “cancelled”. 
Anything in this Section 10.05 to the contrary notwithstanding, (i) no
transfer to a Purchasing Lender shall be made pursuant to this paragraph (c) if
such transfer by any one transferor Lender to any one Purchasing Lender (other
than a Purchasing Lender which is a Lender hereunder prior to such transfer)
(x) is in respect of less than $1,000,000 of the Commitments of such transferor
Lender or (y) if less than all of the Commitment of such transferor Lender is
transferred, after giving effect to such transfer the amount held by any
Transferor Lender would be less than $1,000,000 and (ii) each transfer to a
Purchasing Lender shall be made in the same pro-rata portion with respect to
the Revolving Credit Commitment, the Equipment Loan Commitment and the Term
Loan Commitment.  A Purchasing Lender
shall be required to deliver the forms, if applicable, required by Section
3.09.

 

(d)           The Administrative
Agent shall maintain at its address referred to in Section 10.01 a copy of each
Assignment and Acceptance Agreement delivered to it and a register (the “Register”)
for the recordation of the names and addresses of the Lenders and the commitments
of, and principal amount of the Loans owing to, each Lender from time to
time.  The entries in the Register shall
be conclusive, in the absence of demonstrable error and the Co-Borrowers, the
Administrative Agent and the Lenders may treat each Person whose name is
recorded in the Register as the owner of the Loans recorded therein for all
purposes of this Agreement.  The
Register shall be available for inspection by the Co-Borrowers or any Lender at
any reasonable time and from time to time upon reasonable prior notice.

 

(e)           Upon its receipt of an
Assignment and Acceptance Agreement executed by a transferor Lender and a
Purchasing Lender (and, in the case of a Purchasing Lender that is not then a
Lender or an Affiliate thereof, by the Co-Borrowers) together with payment by
the Purchasing Lender to the Administrative Agent of a registration and
processing fee of  $3,500 if the Purchasing Lender is not a Lender prior to the
execution of an Assignment and Acceptance

 

68

 

Agreement and $2,500 if the Purchasing Lender is a Lender prior to the
execution of an Assignment and Acceptance Agreement, the Administrative Agent
shall (i) accept such Assignment and Acceptance Agreement, (ii) record the
information contained therein in the Register, and (iii) give prompt notice of
such acceptance and recordation to the Lenders and the Co-Borrowers.

 

(f)            Subject to Section
10.17, the Co-Borrowers 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
Co-Borrowers, the Guarantors and their respective Affiliates which has been
delivered to such Lender by or on behalf of the Co-Borrowers pursuant to this
Agreement or which has been delivered to such Lender by the Co-Borrowers in
connection with such Lender’s credit evaluation of the Co-Borrowers and their
Subsidiaries prior to entering into this Agreement.

 

(g)           Any Lender may at any time
pledge or assign or grant a security interest in all or any part of its rights
under this Agreement and the other Loan Documents, including any portion of its
Notes, to any of the twelve (12) Federal Reserve Banks organized under Section
4 of the Federal Reserve Act, 12 U.S.C. Section 341, provided that no such
assignment shall release the transferor Lender from its Commitments or its
obligations hereunder or substitute any such pledgee or assignee for such
Lender as a party to this Agreement.

 

SECTION 10.06.  No Waiver; Cumulative Remedies.  Neither any failure nor any delay on the
part of any Lender, the Issuing Lender or the Administrative Agent in
exercising any right, power or privilege hereunder or under any Note or any
other Loan Document shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any other
right, power or privilege.   The rights,
remedies, powers and privileges herein provided or provided in the other Loan
Documents are cumulative and not exclusive of any rights, remedies powers and
privileges provided by law.

 

SECTION 10.07.  APPLICABLE LAW.  THIS AGREEMENT AND EACH NOTE SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OR CHOICE OF LAW.

 

SECTION 10.08.  SUBMISSION TO JURISDICTION; JURY WAIVER.  EACH CO-BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE
JURISDICTION OF ANY FEDERAL OR STATE COURT IN THE STATE OF NEW YORK, COUNTY OF
NASSAU OR SUFFOLK IN ANY ACTION, SUIT OR PROCEEDING BROUGHT AGAINST IT AND
RELATED TO OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR
ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, AND TO THE EXTENT
PERMITTED BY APPLICABLE LAW, EACH CO-BORROWER HEREBY WAIVES AND AGREES NOT TO
ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUCH SUIT, ACTION OR
PROCEEDING ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
SUCH FEDERAL OR STATE COURTS, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN
AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS

 

69

 

IMPROPER, OR THAT THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT OR ANY OTHER DOCUMENT OR INSTRUMENT REFERRED TO HEREIN OR THEREIN
OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE LITIGATED IN OR BY SUCH
FEDERAL OR STATE COURTS.  TO THE EXTENT
PERMITTED BY APPLICABLE LAW, EACH CO-BORROWER AGREES NOT TO (a) SEEK AND HEREBY
WAIVES THE RIGHT TO ANY REVIEW OF THE JUDGMENT OF ANY SUCH FEDERAL OR STATE
COURT BY ANY COURT OF ANY OTHER NATION OR JURISDICTION WHICH MAY BE CALLED UPON
TO GRANT AN ENFORCEMENT OF SUCH JUDGMENT OR (b) ASSERT ANY COUNTERCLAIM IN ANY
SUCH SUIT, ACTION OR PROCEEDING UNLESS SUCH COUNTERCLAIM IS A COMPULSORY
COUNTERCLAIM UNDER APPLICABLE RULES OF CIVIL PROCEDURE.  EACH CO-BORROWER AGREES THAT SERVICE OF
PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL TO THE ADDRESS FOR
NOTICES SET FORTH IN THIS AGREEMENT OR ANY METHOD AUTHORIZED BY THE LAWS OF NEW
YORK.  EACH PARTY HERETO WAIVES ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR
INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY NOTE
OR ANY OTHER LOAN DOCUMENT.

 

SECTION 10.09.  Severability. 
In case any one or more of the provisions contained in this Agreement,
any Note or in any other Loan Document should be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby.

 

SECTION 10.10.  Reinstatement; Certain Payments. 
If claim is ever made upon any Lender, the Issuing Lender or the
Administrative Agent for repayment or recovery of any amount or amounts
received by such Lender, the Issuing Lender or the Administrative Agent in
payment or on account of any of the Obligations under this Agreement, such
Lender, the Issuing Lender or the Administrative Agent, as applicable, shall
give prompt notice of such claim to the Co-Borrowers, and if such Lender, the
Issuing Lender or the Administrative Agent repays all or part of said amount by
reason of (i) any judgment, decree or order of any court or administrative body
having jurisdiction over such Lender, the Issuing Lender or the Administrative
Agent or any of its property, or (ii) any settlement or compromise of any such
claim effected by such Lender, the Issuing Lender or the Administrative Agent
with any such claimant, then and in such event each Co-Borrower agrees that any
such judgment, decree, order, settlement or compromise shall be binding upon
such Co-Borrower notwithstanding the cancellation of any Note or other
instrument evidencing the Obligations under this Agreement or the termination of
this Agreement, and the Co-Borrower shall be and remain liable to such Lender,
the Issuing Lender or the Administrative Agent hereunder for the amount so
repaid or recovered to the same extent as if such amount had never originally
been received by such Lender, the Issuing Lender or the Administrative Agent,
as the case may be.

 

SECTION 10.11.  Right of Setoff.  If an Event of Default shall have occurred
and be continuing, the Administrative Agent, the Issuing Lender, each Lender
and each of their respective Affiliates are each hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand, provisional or
final)

 

70

 

at any time held and other indebtedness at
any time owing by the Administrative Agent, the Issuing Lender, any Lender or
any Affiliate of any Lender to or for the credit or the account of the
Co-Borrowers or any of them, against any and all the Obligations of the
Co-Borrowers now or hereafter existing under this Agreement and the Notes held
by such Lender.  The rights of the
Administrative Agent, the Issuing Lender and of each Lender under this Section
10.11 are in addition to other rights and remedies (including, without
limitation, other rights of setoff) which they may have.

 

SECTION 10.12.  Joint and Several Obligations of the
Co-Borrowers.   The
obligations of the Co-Borrowers hereunder constitute joint and several
obligations of the Co-Borrowers and may be enforced against any of the
Co-Borrowers to the full extent thereof without proceeding against the others.

 

SECTION 10.13.  Entire Agreement.   This Agreement, each of the other Loan Documents and any
separate letter agreements with respect to fees payable to the Administrative
Agent, constitute the entire agreement among the parties, relating to the
subject matter hereof, and supercede any and all previous agreements and
understandings, oral or written, relating to the subject matter hereof.

 

SECTION 10.14.  Counterparts.  This Agreement may be executed in
counterparts, each of which shall constitute an original, but all of which,
taken together, shall constitute one and the same instrument.

 

SECTION 10.15.  Headings.  Section headings used herein are for
convenience of reference only and are not to affect the construction of or be
taken into consideration in interpreting this Agreement.

 

SECTION 10.16.  Construction.  This Agreement is the result of negotiations
between, and has been reviewed by, each of the Co-Borrowers, the Administrative
Agent, the Lenders and their respective counsel.  Accordingly, this Agreement shall be deemed to be the product of
each party hereto, and no ambiguity shall be construed in favor of or against
any of the Co-Borrowers, the Administrative Agent, or any Lender.

 

Confidentiality.  Each of the Administrative Agent, the
Issuing Bank and the Lenders agrees to maintain the confidentiality of the
Information (as defined below), except that Information may be disclosed (i) to
its and its Affiliates’ officers, directors, employees and agents, including
accountants, legal counsel and other advisors (it being understood that the
persons to whom such disclosure is made will be informed of the confidential
nature of such Information and instructed to keep such Information
confidential), (ii) to the extent requested by any regulatory authority or
quasi-regulatory authority (such as the National Association of Insurance
Commissioners), (iii) to the extent required by applicable laws or regulations
or by any subpoena or similar legal process, (iv) in connection with the
exercise of any remedies hereunder or under the other Loan Documents or any
suit, action or proceeding relating to the enforcement of its rights hereunder or
thereunder, (v) subject to an agreement containing provisions substantially the
same as those of this Section 10,17, to (A) any actual or prospective assignee
or pledge of or participant in any of its rights or obligations under this
Agreement and the other Loan Documents or (B) any actual or prospective
counterparty (or its advisors) to any swap or derivative transaction relating
to the Borrower or any Subsidiary or any 

 

71

 

of their respective obligations, (vi) with
the consent of the Borrower or (vii) to the extent such Information becomes
publicly available other than as a result of a breach of this Section
10.17.  For the purposes of this
Section, “Information” shall mean all information received from any Co-Borrower
or any of its Subsidiaries and related to any such Person or their business,
other than any such information that was available to the Administrative Agent,
the Issuing Bank or any Lender on a nonconfidential basis prior to its
disclosure by the Co-Borrowers or their Subsidiaries; provided that, in the
case of Information received from a Co-Borrower or Subsidiary after the date
hereof, such information is clearly identified at the time of the delivery as
confidential.  Any person required to
maintain the confidentiality of Information as provided in this Section 10.17
shall be considered to have complied with its obligation to do so if such
person has exercised the same degree of care to maintain the confidentiality of
such Information as such person would accord its own confidential information.

 

[next
page is signature page]

 

72

 

 

IN WITNESS WHEREOF,
the Co-Borrowers and the Bank have caused this Agreement to be duly executed by
their duly authorized officers, as of the day and year first above written.

 

	
   

  	
  THE CO-BORROWERS:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  P&F INDUSTRIES, INC.

  
	
   

  	
  FLORIDA PNEUMATIC MANUFACTURING

  
	
   

  	
  CORPORATION

  
	
   

  	
  EMBASSY INDUSTRIES, INC.

  
	
   

  	
  GREEN MANUFACTURING, INC.
COUNTRYWIDE HARDWARE, INC.

  
	
   

  	
  NATIONWIDE INDUSTRIES, INC.

  WOODMARK INTERNATIONAL, L.P.

  
	
   

  	
  By:

  	
  Countrywide Hardware, Inc., its General

  
	
   

  	
   

  	
  Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Joseph
  A. Molino, Jr.

  	
   

  
	
   

  	
   

  	
  Joseph A.
  Molino, Jr., the Vice President of

  each of the foregoing corporations

  
					

 

73

 

	
  Revolving
  Credit Commitment: $7,800,000

  	
  CITIBANK, N.A.

  
	
   

  	
  as a Lender
  and as Administrative Agent

  
	
  Term Loan
  Commitment:  $22,100,000

  	
   

  
	
   

  	
   

  
	
  Equipment
  Loan Commitment:  $1,950,000

  	
  By:

  	
      /s/
  Stephen Kelly

  
	
   

  	
  Title: Vice
  President

  
	
  Commitment
  Proportion: 65%

  	
   

  
	
   

  	
   

  
	
   

  	
  Lending
  Office for Prime Rate Loans:

  
	
   

  	
   

  
	
   

  	
  Citibank,
  N.A.

  
	
   

  	
  730 Veterans
  Memorial Highway

  
	
   

  	
  Hauppauge,
  New York  11788

  
	
   

  	
   

  
	
   

  	
  Lending
  Office for LIBOR Loans:

  
	
   

  	
   

  
	
   

  	
  Citibank,
  N.A.

  
	
   

  	
  730 Veterans
  Memorial Highway

  
	
   

  	
  Hauppauge,
  New York  11788

  
	
   

  	
   

  
	
   

  	
  Address for
  Notices:

  
	
   

  	
   

  
	
   

  	
  Citibank,
  N.A.

  
	
   

  	
  730 Veterans
  Memorial Highway

  
	
   

  	
  Hauppauge,
  New York  11788

  
	
   

  	
  Att:
  Relationship Manager – P&F Industries, Inc.

  
	
   

  	
  Telecopy:  (631) 265-4888

  

 

74

 

	
  Revolving
  Credit Commitment: $4,200,000

  	
  HSBC BANK USA

  
	
   

  	
  as a Lender

  
	
  Term Loan
  Commitment:  $11,900,000

  	
   

  
	
   

  	
   

  
	
  Equipment
  Loan Commitment:  $1,050,000

  	
  By:

  	
      /s/
  Raymond Fincken

  
	
   

  	
  Title:  Vice President

  
	
  Commitment
  Proportion: 35%

  	
   

  
	
   

  	
   

  
	
   

  	
  Lending Office for Prime Rate Loans:

  
	
   

  	
   

  
	
   

  	
  HSBC Bank USA

  
	
   

  	
  534 Broad Hollow Road

  
	
   

  	
  Melville, New York 11747

  
	
   

  	
   

  
	
   

  	
  Lending Office for LIBOR Loans:

  
	
   

  	
   

  
	
   

  	
  HSBC Bank USA

  
	
   

  	
  534 Broad Hollow Road

  
	
   

  	
  Melville, New York 11747

  
	
   

  	
   

  
	
   

  	
  Address for Notices:

  
	
   

  	
   

  
	
   

  	
  HSBC Bank USA

  
	
   

  	
  534 Broad Hollow Road

  
	
   

  	
  Melville, New York 11747

  
	
   

  	
  Att: Relationship Manager – P&F Industries, Inc.

  
	
   

  	
  Telecopy: (631) 752-4340

  

 

75Exhibit 4.1

 

ARTICLES OF AMALGAMATION

 

Business Corporations Act

(Alberta)

Section 185

1.                        Name of Amalgamated
Corporation:

 

BAYTEX ENERGY LTD.

 

2.                        The classes of shares, and
any maximum number of shares that the Corporation is authorized to issue:

 

See
Schedule ”A” attached hereto

 

3.                        Restriction on share
transfers, if any:

 

None

 

4.                        Number, or minimum and
maximum number of directors:

 

Minimum
of three (3); Maximum of eleven (11)

 

5.                        If the corporation is
restricted FROM carrying on a certain business or restricted TO carrying on a
certain business, specify the restriction(s):

 

None

 

6.                        Other Provisions, if any:

 

See
Schedule ”B” attached hereto

 

	
  7.

  	
  Name of
  Amalgamating Corporations:

  	
  Corporate Access Number:

  
	
  Baytex Energy Ltd.

  	
  209673466

  
	
  Baytex Acquisition Corp.

  	
  2010518252

  

 

 

	
  Shannon
  M. Gangl

  	
   

  	
   

  
	
  Name
  of Person Authorizing (please print)

  	
   

  	
  Signature

  
	
   

  	
   

  	
   

  
	
  Solicitor

  	
   

  	
  September 2,
  2003

  
	
  Title
  (please print)

  	
   

  	
  Date

  

 

This information is being
collected for purposes of corporate registry records in accordance with the
Business Corporations Act.  Questions about the collection of this
information can be directed to the Freedom of Information and Protection of
Privacy Co-ordinator for Alberta Registries, Research and Program Support, 3rd
Floor, Commerce Place, 10155 – 102 Street, Edmonton, Alberta T5J 4L4, (780)
422-7330.

 

 

SCHEDULE ”A”

 

The Corporation is
authorized to issue:

 

(a)                                      
an unlimited number of
Common Shares without nominal or par value; and

 

(b)                                    
an unlimited number of
Exchangeable Shares without nominal or par value.

 

The right, privileges,
restrictions and conditions attached to each class of shares are set forth
below.

 

PROVISIONS
RELATING TO THE COMMON SHARES

 

The unlimited number of
Common Shares shall have attached thereto the following rights, privileges,
restrictions and conditions:

 

1.                                       The holders of Common Shares shall be
entitled to notice of, to attend and to one vote per share held at any meeting
of the shareholders of the Corporation (other than meetings of a class or
series of shares of the Corporation other than the Common Shares as such);

 

2.                                       The holders of Common Shares shall be
entitled to receive dividends as and when declared by Board of Directors of the
Corporation on the Common Shares as a class, subject to prior satisfaction of
all preferential rights to dividends attached to all shares of other classes of
shares of the Corporation ranking in priority to the Common Shares in respect
of dividends; and

 

3.                                       The holders of Common Shares shall be
entitled in the event of any liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of the
assets of the Corporation among its shareholders for the purpose of winding-up
its affairs, and subject to prior satisfaction of all preferential rights to
return of capital on dissolution attached to all shares of other classes of
shares of the Corporation ranking in priority to the Common Shares in respect
of return of capital on dissolution, to share rateably, together with the
holders of the shares of any other class of shares of the Corporation ranking
equally with the Common Shares in respect of return of capital on dissolution,
in such assets of the Corporation as are available for distribution.

 

PROVISIONS
ATTACHING TO THE EXCHANGEABLE SHARES

 

The Exchangeable Shares
shall have the following rights, privileges, restrictions and conditions:

 

1.            

INTERPRETATION

 

1.1          
For the purposes of these share provisions:

 

“Act” means the Business
Corporations Act (Alberta), as amended;

 

“affiliate” has the meaning given to that term in the
Securities Act;

 

“Annual Redemption” has the meaning given to that term in
Section 5.1(d) of these share provisions;

 

“Annual Redemption Date” means any date that is within the first
90 days of any calendar year commencing in 2004;

 

“Automatic Redemption” has the meaning given to that term in
Section 5.1(a) of these share provisions;

 

“Automatic Redemption Date” means the date that is the tenth
anniversary of the Effective Date;

 

“Baytex ExchangeCo” means Baytex ExchangeCo Ltd., a corporation
incorporated under the Act;

 

“Baytex Energy Trust” means the Baytex Energy Trust, a trust
established under the laws of Alberta;

 

“Baytex Units” means the trust units of Baytex Energy Trust as
constituted on the Effective Date;

 

“Baytex Unitholders” means holders of Baytex Units;

 

“Board of Directors” means the Board of Directors of the
Corporation;

 

“Business Day” means any day on which commercial banks are
generally open for business in Calgary, Alberta, other than a Saturday, a
Sunday or a day observed as a holiday in Calgary, Alberta under the laws of the
Province of Alberta or the federal laws of Canada;

 

“Call Notice” has the meaning given to that term in
Section 4.3 of these share provisions;

 

“Call Rights” means the Liquidation Call Right, the Redemption
Call Right and the Retraction Call Right, collectively;

 

 

“Common Shares” means the common shares in the capital of the
Corporation;

 

“Corporation” means Baytex Acquisition Corp., a corporation
incorporated under the Act;

 

“Cumulative Dividend Amount Exchange Ratio”, at any time, shall
equal the Exchange Ratio at such time less one;

 

“Current Market Price” means, in respect of an Baytex Unit on
any date, the weighted average trading price of an Baytex Unit on the TSX for
the 5 trading days preceding that date, or, if the Baytex Units are not then
listed on the TSX, on such other stock exchange or automated quotation system
on which the Baytex Units are listed or quoted, as the case may be, as may be
selected by the Board of Directors for such purpose; provided, however, that if
in the opinion of the Board of Directors the public distribution or trading
activity of Baytex Units for that period does not result in a weighted average
trading price which reflects the fair market value of an Baytex Unit, then the
Current Market Price of an Baytex Unit shall be determined by the Board of
Directors, in good faith and in its sole discretion, and provided further that
any such selection, opinion or determination by the Board of Directors shall be
conclusive and binding;

 

“De Minimus Redemption” has the meaning given to that term in
Section 5.1(c) of these share provisions;

 

“De Minimus Redemption Date” has the meaning given to that term
in Section 5.1(c) of these share provisions;

 

“Distribution” means a distribution paid by Baytex Energy Trust
in respect of the Baytex Units, expressed as an amount per Baytex Unit;

 

“Distribution Payment Date” means a date on which a
Distribution is paid to Baytex Unitholders, generally being the 15th
day of the month following any Distribution Record Date (or if such day is not
a Business Day, on the next Business Day);

 

“Distribution Record Date” means the day on which Baytex
Unitholders are identified for purposes of determining entitlement to a
Distribution, generally being the last Business Day of each month;

 

“Dividend Record Date” has the meaning given to that term in
Section 3.3 of these share provisions;

 

“Effective Date” means September 2, 2003 or such other date
as may be designated by the Board of Directors;

 

“Exchange Ratio”, at any time and in respect of each
Exchangeable Share, shall be equal to 1.00000, as at the Effective Date, and
shall be cumulatively adjusted thereafter by: (a) increasing the Exchange Ratio
on each Distribution Payment Date between the Effective Date and the time as of
which the Exchange Ratio is calculated by an amount, rounded to the nearest
five decimal places, equal to a fraction having as its numerator the
Distribution, expressed as an amount per Baytex Unit, paid on that Distribution
Payment Date, multiplied by the Exchange Ratio immediately prior to the
Distribution Record Date for such Distribution and having as its denominator
the Current Market Price on the first Business Day following the Distribution
Record Date for such Distribution; and (b) decreasing the Exchange Ratio on
each Dividend Record Date between the Effective Date and the time as of which
the Exchange Ratio is calculated by an amount, rounded to the nearest five decimal
places, equal to a fraction having as its numerator the dividend declared on
that Dividend Record Date, expressed as an amount per Exchangeable Share
multiplied by the Exchange Ratio immediately prior to that Dividend Record
Date, and having as its denominator the Current Market Price on the date that
is seven Business Days prior to that Dividend Record Date;

 

“Exchange Rights” has the meaning given to that term in the
Voting and Exchange Trust Agreement;

 

“Exchangeable Shares” mean the non-voting exchangeable shares
in the capital of the Corporation, having the rights, privileges, restrictions
and conditions set forth herein;

 

“Governmental Entity” means any (a) multinational, federal,
provincial, state, regional, municipal, local or other government, governmental
or public department, central bank, court, tribunal, arbitral body, commission,
board, bureau or agency, domestic or foreign, (b) any subdivision, agent,
commission, board, or authority of any of the foregoing, or (c) any
quasi-governmental or private body exercising any regulatory, expropriation or
taxing authority under or for the account of any of the foregoing;

 

“holder” means, when used with reference to the Exchangeable
Shares, the holders of Exchangeable Shares shown from time to time in the
register maintained by or on behalf of the Corporation in respect of the
Exchangeable Shares;

 

“LCR Exercising Party” has the meaning given to that term in
Section 6.5 of these share provisions;

 

“Liquidation Amount” has the meaning given to that term in
Section 6.1 of these share provisions;

 

“Liquidation Call Right” has the meaning ascribed thereto in
Section 6.5 of these share provisions;

 

“Liquidation Date” has the meaning given to that term in
Section 6.1 of these share provisions;

 

“Liquidation Offer” has the meaning given to that term in
Section 6.5 of these share provisions;

 

“Optional Redemption” has the meaning given to that term in
Section 5.1(b) of these share provisions;

 

“Optional Redemption Date” means any date that is after the
second anniversary of the Effective Date;

 

 

“Person” includes any individual, firm, partnership, joint
venture, venture capital fund, limited liability company, unlimited liability
company, association, trust, trustee, executor, administrator, legal personal
representative, estate, group, body corporate, corporation, unincorporated
association or organization, Governmental Entity, syndicate or other entity,
whether or not having legal status;

 

“Promissory
Note” means the
promissory note of the Corporation in favour of Baytex Energy Trust dated the
Effective Date;

 

“Purchase Price” has the meaning given to that term in
Section 4.3 of these share provisions;

 

“RCR Exercising Party”, for the purpose of Article 4 of
these share provisions, has the meaning given to the term in Section 4.3
of these share provisions and, for the purpose of Article 5 of these share
provisions, has the meaning given to that term in Section 5.5 of these
share provisions;

 

“Redemption Call Right” has the meaning given to that term in
Section 5.5 of these share provisions;

 

“Redemption Date” means any of the Automatic Redemption Date,
the Optional Redemption Date, the De Minimus Redemption Date or the Annual
Redemption Date, as the context requires;

 

“Redemption Offer” has the meaning given to that term in
Section 5.5 of these share provisions;

 

“Redemption Price” means a price per Exchangeable Share equal
to the amount determined by multiplying the Exchange Ratio on the last Business
Day prior to the applicable Redemption Date by the Current Market Price of a
Baytex Unit on the last Business Day prior to such Redemption Date;

 

“Regulation S” means Regulation S under the U.S.
Securities Act;

 

“Retracted Shares” has the meaning given to that term in
Section 4.1(a) of these share provisions;

 

“Retraction Call Right” has the meaning given to that term in
Section 4.1(b) of these share provisions;

 

“Retraction Date” means the date that is three Business Days
after the date on which the Corporation or the Transfer Agent receives a
Retraction Request in respect of the Retracted Shares;

 

“Retraction Offer” has the meaning given to that term in
Section 4.1(b) of these share provisions;

 

“Retraction Price” has the meaning given to that term in
Section 4.1 of these share provisions;

 

“Retraction Request” has the meaning given to that term in
Section 4.1 of these share provisions;

 

“Securities Act” means the Securities
Act (Alberta) and the rules, regulations and policies made
thereunder, as now in effect and as they may be amended from time to time prior
to the Effective Date;

 

“Support Agreement” means the agreement made among Baytex
Energy Trust, Baytex ExchangeCo, the Corporation and the Trustee and dated as
of the Effective Date;

 

“TSX” means the Toronto Stock Exchange;

 

“Transfer Agent” means Valiant Trust Company or such other
Person as may from time to time be appointed by the Corporation as the
registrar and transfer agent for the Exchangeable Shares;

 

“Trustee” means the trustee chosen by Baytex Energy Trust to
act as trustee under the Voting and Exchange Trust Agreement, being a
corporation organized and existing under the laws of Canada and authorized to
carry on the business of a trust company in all the provinces of Canada, and
any successor trustee appointed under the Voting and Exchange Trust Agreement;

 

“U.S. Person” means a U.S. Person as defined in
Rule 902(k) under Regulation S;

 

“U.S. Securities Act” means the United States Securities Act of 1933, as amended;

 

“United States” or “U.S.”
means the United States of America, its territories and possessions, any State
of the United States and the District of Columbia; and

 

“Voting and Exchange Trust Agreement” means the agreement made
among Baytex Energy Trust, Baytex ExchangeCo, the Corporation and the Trustee
and dated as of the Effective Date.

 

2.            

AUTHORIZED NUMBER OF EXCHANGEABLE SHARES AND RANKING OF EXCHANGEABLE SHARES

 

2.1                                                                                 The Corporation is authorized to issue an
unlimited number of Exchangeable Shares without nominal or par value.

 

2.2                                                                                 The Exchangeable Shares shall, subject to the
following, be entitled to a preference over the Common Shares and any other
shares ranking junior to the Exchangeable Shares with respect to the payment of
dividends and the distribution of

 

 

assets in the event of the
liquidation, dissolution or winding-up of the Corporation, whether voluntary or
involuntary, or any other distribution of the assets of the Corporation among
its shareholders for the purpose of winding up its affairs; provided that
notwithstanding such ranking the Corporation shall not be restricted in any way
from repaying indebtedness of the Corporation to Baytex Energy Trust from time
to time, including without limitation, the indebtedness evidenced by the
Promissory Note.

 

3.            

DIVIDENDS

 

3.1                                                                                 The holders of Exchangeable Shares, in
priority to the Common Shares and any class of shares of the Corporation
ranking junior to the Exchangeable Shares with respect to the payment of
dividends, shall be entitled to receive, and the Corporation shall pay on each
Exchangeable Share, if, as and when declared by the Board of Directors in its
sole discretion from time to time out of the money, assets or property of the
Corporation properly applicable to the payment of dividends, (which may include
Baytex Units), cumulative preferential cash dividends in an amount per
Exchangeable Share as set out in this Section 3.1.  The accrued
amount of such preferential cumulative dividend with respect to an Exchangeable
Share on any date from time to time shall be the Cumulative Dividend Amount
Exchange Ratio in effect on the last Business Date prior to such date
multiplied by the Current Market Price on the last Business Day prior to such
date.  Such dividends, whether or not declared, shall accrue and shall be
cumulative from the Effective Date.

 

3.2                                                                                 Cheques of the Corporation payable at par at
any branch of the bankers of the Corporation shall be issued in respect of any
cash dividends by the sending of such a cheque to each holder of an
Exchangeable Share, which shall satisfy the cash dividend represented thereby
unless the cheque is not paid on presentation. Certificates registered in the
name of the registered holder of Exchangeable Shares shall be issued or
transferred in respect of any stock dividends by the sending of such a
certificate to each holder of an Exchangeable Share, which shall satisfy the
stock dividend represented thereby. Such other type and amount of property in
respect of any dividends shall be issued, distributed or transferred by the
Corporation in such manner as it shall determine and the issuance, distribution
or transfer thereof by the Corporation to each holder of an Exchangeable Share
shall satisfy the dividend represented thereby. No holder of an Exchangeable
Share shall be entitled to recover by action or other legal process against the
Corporation any dividend that is represented by a cheque that has not been duly
presented to the Corporation’s bankers for payment or that otherwise remains
unclaimed for a period of six years from the date on which such dividend was
payable.

 

3.3                                                                                 The record date (a “Dividend Record Date”)
for the determination of the holders of Exchangeable Shares entitled to receive
payment of, and the payment date for, any dividend declared on the Exchangeable
Shares under Section 3.1 of these share provisions and whether any such
dividend is in fact declared shall be determined in the sole discretion of the
Board of Directors.

 

3.4                                                                                 If on any payment date for any dividends
declared on the Exchangeable Shares under Section 3.1 of these share
provisions the dividends are not paid in full on all of the Exchangeable Shares
then outstanding, any such dividends that remain unpaid shall be paid on a
subsequent date or dates determined by the Board of Directors on which the
Corporation shall have sufficient moneys, assets or property properly
applicable to the payment of such dividends.

 

4.            

RETRACTION OF EXCHANGEABLE SHARES BY HOLDER

 

4.1                                 Subject to applicable law, and provided
neither Baytex Energy Trust nor Baytex ExchangeCo has exercised the Retraction
Call Right, a holder of Exchangeable Shares shall be entitled at any time, upon
compliance with the provisions of this Article 4, to require the
Corporation to redeem any or all of the Exchangeable Shares registered in the
name of such holder for an amount per share (the “Retraction Price”) equal to
the amount determined by multiplying the Exchange Ratio on the last Business
Day prior to the Retraction Date by the Current Market Price of a Baytex Unit
on the last Business Day prior to the Retraction Date, which payment of the
Retraction Price shall be satisfied in full by the Corporation delivering or
causing to be delivered to such holder that number of Baytex Units equal to the
Exchange Ratio as at the last Business Day prior to Retraction Date in accordance
with Section 4.2 of these share provisions, for each Exchangeable Share
presented and surrendered by the holder. To effect such redemption, the holder
shall present and surrender to the Corporation at the principal office of the
Transfer Agent in Toronto or Calgary or at such other address as may be
specified by the Corporation by notice to the holders of Exchangeable Shares
from time to time the certificate or certificates representing the Exchangeable
Shares which the holder desires to have the Corporation redeem, together with
such other documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent and the Corporation
may reasonably require, and together with a duly executed statement (the
“Retraction Request”) in the form of Schedule A hereto or in such other
form as may be acceptable to the Corporation:

 

 

(a)                                  specifying that the holder desires to have
all or any number specified therein of the Exchangeable Shares represented by
such certificate or certificates (the “Retracted Shares”) redeemed by the
Corporation; and

 

(b)                                 appointing the Corporation as its agent for
the purpose of offering its Retracted Shares for sale to Baytex Energy Trust
and Baytex ExchangeCo (the “Retraction Offer”) on the terms and conditions set
out in Section 4.3 below  (Baytex Energy Trust’s and Baytex
ExchangeCo’s right to accept the Retraction Offer and to complete the purchase
of the Retracted Shares pursuant to the Retraction Offer is referred to as the
“Retraction Call Right”).

 

4.2                                 Subject to the exercise by Baytex Energy
Trust or Baytex ExchangeCo of the Retraction Call Right, upon receipt by the
Corporation or the Transfer Agent in the manner specified in Section 4.1
hereof of documents including, without limitation, a certificate or
certificates representing the number of Retracted Shares, together with a
Retraction Request, and provided that the Retraction Request is not revoked by
the holder in the manner specified in Section 4.7, the Corporation shall
redeem the Retracted Shares effective at the close of business on the
Retraction Date and shall cause to be delivered to such holder the Retraction
Price. If only a part of the Exchangeable Shares represented by any certificate
is redeemed (or purchased by Baytex Energy Trust or Baytex ExchangeCo pursuant
to the Retraction Call Right), a new certificate for the balance of such
Exchangeable Shares shall be issued to the holder at the expense of the
Corporation.

 

4.3                                 Baytex ExchangeCo shall only be entitled to
exercise its Retraction Call Right with respect to those Exchangeable Shares,
if any, in respect of which Baytex Energy Trust has not exercised its
Retraction Call Right.  Upon receipt by the Corporation of a Retraction
Request, the Corporation shall immediately provide to Baytex Energy Trust and
Baytex ExchangeCo a copy of the Retraction Request and, as agent for the holder
who submitted the Retraction Request, shall be deemed to have made the
Retraction Offer to Baytex Energy Trust and Baytex ExchangeCo in respect of the
holder’s Retracted Shares by providing to Baytex Energy Trust and Baytex
ExchangeCo a copy of the Retraction Request as aforesaid.  In order to
exercise the Retraction Call Right and accept the Retraction Offer, Baytex
Energy Trust or Baytex ExchangeCo must notify the Corporation of its
determination to do so (the “Call Notice”) on or before 4:30 p.m. (Calgary
time) on the date of notification to Baytex Energy Trust and Baytex ExchangeCo
by the Corporation of the receipt by the Corporation of the Retraction
Request.  If Baytex Energy Trust or Baytex ExchangeCo does not so notify
the Corporation on or before 4:30 p.m. (Calgary time) on the date of notification
by the Corporation of the receipt by the Corporation of the Retraction Request,
the Corporation will notify the holder as soon as possible thereafter that
neither Baytex Energy Trust nor Baytex ExchangeCo will exercise the Retraction
Call Right and accept the Retraction Offer.  If Baytex Energy Trust or
Baytex ExchangeCo delivers the Call Notice on or before 4:30 p.m. (Calgary
time) on the date of notification by the Corporation of the receipt by the
Corporation of the Retraction Request and provided that the Retraction Offer is
not revoked by the holder in the manner specified in Section 4.7, the
Retraction Request shall thereupon be considered only the Retraction Offer by
the holder to sell the Retracted Shares to Baytex Energy Trust or Baytex ExchangeCo,
as applicable (in this Article 4, the “RCR Exercising Party”), and all
other aspects of the Retraction Request will be null and void. In such event,
the Corporation shall not redeem the Retracted Shares and the RCR Exercising
Party shall purchase from such holder and such holder shall sell to the RCR
Exercising Party on the Retraction Date the Retracted Shares for an amount per
share (the “Purchase Price”) equal to the Retraction Price, which payment of
the Purchase Price shall be satisfied in full by the RCR Exercising Party
delivering or causing to be delivered to such holder that number of Baytex
Units equal to the Exchange Ratio as at the last Business Day prior to the
Retraction Date for each Retracted Share.  To the extent that the RCR
Exercising Party pays the Purchase Price in respect of the Retracted Shares,
the Corporation shall no longer be obligated to pay any amount in respect of
the Retraction Price for such Retracted Shares.  Provided that the RCR
Exercising Party has complied with Section 4.4, the closing of the
purchase and sale of the Retracted Shares pursuant to the Retraction Call Right
shall be deemed to have occurred as at the close of business on the Retraction
Date and, for greater certainty, no redemption by the Corporation of such Retracted
Shares shall take place on the Retraction Date. In the event that neither
Baytex Energy Trust nor Baytex ExchangeCo delivers a Call Notice within the
time required for the exercise of the Retraction Call Right as set forth above,
and provided that the Retraction Request is not revoked by the holder in the
manner specified in Section 4.7, the Corporation shall redeem the
Retracted Shares on the Retraction Date and in the manner otherwise
contemplated in this Article 4.

 

4.4                                 The Corporation, Baytex Energy Trust or
Baytex ExchangeCo, as the case may be, shall deliver or cause the Transfer
Agent to deliver to the relevant holder, at the address of the holder recorded
in the register of shareholders of the Corporation for the Exchangeable Shares
or at the address specified in the holder’s Retraction Request, or by holding
for pick-up by the holder at the office of the Transfer Agent specified in the
holder’s Retraction Request, certificates representing the Baytex Units (which
securities shall be duly issued as fully paid and non-assessable and shall be
free and clear of any lien, claim or encumbrance) registered in the name of the
holder or in such other name as the holder may request in payment of the total
Retraction Price or the total Purchase Price, as the case may be, in each case
less any amounts withheld on account of tax required to be deducted and
withheld therefrom, and such delivery of such certificates by or on behalf of
the Corporation, Baytex Energy Trust or Baytex ExchangeCo, as the case may be,
or by the Transfer Agent shall be deemed to be payment of and shall satisfy and
discharge all liability for the total Retraction Price or the total Purchase
Price, as the case may be, to the extent that the same is represented by such
certificates (plus any tax deducted and withheld therefrom and remitted to the
proper tax authority).

 

 

4.5                                 On and after the close of business on the
Retraction Date, the holder of the Retracted Shares shall cease to be a holder
of such Retracted Shares and shall not be entitled to exercise any of the
rights of a holder in respect thereof, other than:  (i) the right to
receive his proportionate part of the total Retraction Price or the total
Purchase Price, as the case may be, unless upon presentation and surrender of
certificates in accordance with the foregoing provisions, payment of the total
Retraction Price or the total Purchase Price, as the case may be, shall not be
made as provided in Section 4.4, in which case the rights of such holder
shall remain unaffected until the total Retraction Price or the total Purchase
Price, as the case may be, has been paid in the manner hereinbefore provided;
and (ii) the right to receive any declared and unpaid dividends on the
Retracted Shares.  On and after the close of business on the Retraction
Date, provided that presentation and surrender of certificates and payment of
the total Retraction Price or the total Purchase Price, as the case may be, has
been made in accordance with the foregoing provisions, the holder of the
Retracted Shares so redeemed by the Corporation or purchased by Baytex Energy
Trust or Baytex ExchangeCo shall thereafter be considered and deemed for all
purposes to be a holder of the Baytex Units delivered to it.

 

4.6                                 Notwithstanding any other provision of this Article 4,
the Corporation shall not be obligated to redeem Retracted Shares specified by
a holder in a Retraction Request to the extent that such redemption of
Retracted Shares would be contrary to solvency requirements or other provisions
of applicable law. If the Corporation believes that on any Retraction Date it
would not be permitted by any of such provisions to redeem the Retracted Shares
tendered for redemption on such date, and provided that neither Baytex Energy
Trust nor Baytex ExchangeCo shall have exercised the Retraction Call Right with
respect to the Retracted Shares, the Corporation shall only be obligated to
redeem Retracted Shares specified by a holder in a Retraction Request to the
extent of the maximum number that may be so redeemed (rounded down to a whole
number of shares) as would not be contrary to such provisions and shall notify
the holder and the Trustee at least two Business Days prior to the Retraction
Date as to the number of Retracted Shares which will not be redeemed by the Corporation.
In any case in which the redemption by the Corporation of Retracted Shares
would be contrary to solvency requirements or other provisions of applicable
law, the Corporation shall redeem Retracted Shares in accordance with
Section 4.2 of these share provisions on a pro rata basis and shall issue
to each holder of Retracted Shares a new certificate, at the expense of the
Corporation, representing the Retracted Shares not redeemed by the Corporation
pursuant to Section 4.2 hereof. Provided that the Retraction Request is
not revoked by the holder in the manner specified in Section 4.7, the
holder of any such Retracted Shares not redeemed by the Corporation pursuant to
Section 4.2 of these share provisions as a result of solvency requirements
or other provisions of applicable law shall be deemed by giving the Retraction
Request to have exercised the Exchange Rights so as to require Baytex Energy
Trust or Baytex ExchangeCo to purchase such Retracted Shares from such holder
on the Retraction Date or as soon as practicable thereafter on payment by
Baytex Energy Trust or Baytex ExchangeCo to such holder of the Purchase Price
for each such Retracted Share, all as more specifically provided in the Voting
and Exchange Trust Agreement.

 

4.7                                 A holder of Retracted Shares may, by notice
in writing given by the holder to the Corporation before the close of business
on the Business Day immediately preceding the Retraction Date, revoke its
Retraction Request or Retraction Offer, as applicable, in which event such
Retraction Request or Retraction Offer shall be null and void

 

5.            

REDEMPTION OF EXCHANGEABLE SHARES BY THE CORPORATION

 

5.1                                 Subject to applicable law, and provided
neither Baytex Energy Trust nor Baytex ExchangeCo has exercised the Redemption
Call Right, the Corporation:

 

(a)                                  shall, on the Automatic Redemption Date,
redeem all but not less than all of the then outstanding Exchangeable Shares
for the Redemption Price (such redemption being an “Automatic Redemption”);

 

(b)                                 may, on any Optional Redemption Date, redeem
all but not less than all of the then outstanding Exchangeable Shares (such
redemption being an “Optional Redemption”);

 

(c)                                  may, on any date when the aggregate number of
issued and outstanding Exchangeable Shares is less than 1,000,000 (such
redemption date being the “De Minimus Redemption Date”), redeem all but not
less than all of the then outstanding Exchangeable Shares for the Redemption
Price (such redemption being a “De Minimus Redemption”); and

 

(d)                                 may, on any Annual Redemption Date, redeem up
to that number of Exchangeable Shares equal to 40% of the Exchangeable Shares
outstanding on the Effective Date (such redemption being an “Annual
Redemption”);

 

such payment of the
Redemption Price per Exchangeable Share to be satisfied in full in all cases by
the Corporation delivering or causing to be delivered, at the election of the
Corporation, either that number of Baytex Units equal to the Exchange Ratio as
at the last Business Day prior to the applicable Redemption Date or an amount
in cash equal to the Redemption Price, in accordance with Section 5.3 of
these share provisions.  In case only part of the then outstanding
Exchangeable Shares are at any time to be redeemed pursuant to an Annual
Redemption, the Exchangeable Shares to be redeemed shall be redeemed pro rata,
excluding

 

 

fractions, from the holdings
of all shareholders of Exchangeable Shares, other than the Baytex Energy Trust
and Baytex ExchangeCo, or in such other manner as the Board of Directors deems
reasonable.

 

5.2                                 In any case of a redemption of Exchangeable
Shares under this Article 5, the Corporation shall, at least 90 days
before the applicable Redemption Date, send or cause to be sent to each holder
of Exchangeable Shares a notice in writing of the redemption by the Corporation
or the purchase by Baytex Energy Trust or Baytex ExchangeCo under the
Redemption Call Right, as the case may be, of the Exchangeable Shares held by
such holder.  Such notice shall set out the formula for determining the
Redemption Price, the Redemption Date and, if applicable, particulars of the
Redemption Call Right and/or Annual Redemption.  The accidental failure or
omission to give any notice of redemption under this Section 5.2 to less
than 10% of the holders of Exchangeable Shares (other than Baytex Energy Trust
and Baytex ExchangeCo) shall not affect the validity of any redemption of
Exchangeable Shares pursuant to such notice.

 

5.3                                 On or after the applicable Redemption Date
and subject to the exercise by Baytex Energy Trust or Baytex ExchangeCo of the
Redemption Call Right, the Corporation shall deliver or cause to be delivered
to the holders of the Exchangeable Shares to be redeemed the Redemption Price
for each such Exchangeable Share upon presentation and surrender of the
certificates representing such Exchangeable Shares, together with such other
documents and instruments as may be required to effect a transfer of
Exchangeable Shares under the Act and the by-laws of the Corporation and such
additional documents and instruments as the Transfer Agent and the Corporation
may reasonably require, at the registered office of the Corporation or at any
office of the Transfer Agent as may be specified by the Corporation in such
notice. Payment of the total Redemption Price for such Exchangeable Shares,
shall be made by delivery to each holder, at the address of the holder recorded
in the register of holders of the Exchangeable Shares maintained by or on
behalf of the Corporation or by holding for pick-up by the holder at the
registered office of the Corporation or at any office of the Transfer Agent as
may be specified by the Corporation in such notice, on behalf of the
Corporation, of certificates representing Baytex Units (which securities shall
be duly issued as fully paid and non-assessable and shall be free and clear of
any lien, claim or encumbrance), or, if applicable, a cheque of the Corporation
payable at par at any branch of the bankers of the Corporation, in each case
less any amounts withheld on account of tax required to be deducted and withheld
therefrom. On and after the applicable Redemption Date, the holders of the
Exchangeable Shares called for redemption shall cease to be holders of such
Exchangeable Shares and shall not be entitled to exercise any of the rights of
holders in respect thereof, other than:  (i) the right to receive their
proportionate part of the total Redemption Price, unless payment of the total
Redemption Price for such Exchangeable Shares shall not be made upon
presentation and surrender of certificates in accordance with the foregoing
provisions, in which case the rights of the holders shall remain unaffected
until the total Redemption Price has been paid in the manner hereinbefore
provided; and (ii) the right to receive any declared and unpaid dividends on
such Exchangeable Shares.  If only part of the Exchangeable Shares
represented by any certificate are to be redeemed, a new certificate for the
balance shall be issued at the expense of the Corporation.

 

5.4                                 The Corporation shall have the right at any
time after the sending of notice of its intention to redeem the Exchangeable
Shares as aforesaid to deposit or cause to be deposited the total Redemption
Price for the Exchangeable Shares so called for redemption, or of such of the
said Exchangeable Shares represented by certificates that have not at the date
of such deposit been surrendered by the holders thereof in connection with such
redemption, in a custodial account with any chartered bank or trust company in
Canada named in such notice, less any amounts withheld on account of tax
required to be deducted and withheld therefrom. Upon the later of such deposit
being made and the applicable Redemption Date, the Exchangeable Shares in
respect whereof such deposit shall have been made shall be redeemed and the
rights of the holders thereof after such deposit or that Redemption Date, as
the case may be, shall be limited to:  (i) receiving their proportionate
part of the total Redemption Price (in each case less any amounts withheld on
account of tax required to be deducted or withheld therefrom) for such
Exchangeable Shares so deposited, against presentation and surrender of the
said certificates held by them, respectively, in accordance with the foregoing
provisions; and (ii) receiving any declared and unpaid dividends on such
Exchangeable Shares. Upon such payment or deposit of the total Redemption
Price, the holders of the Exchangeable Shares that have been so redeemed shall
thereafter be considered and deemed for all purposes to be holders of the
Baytex Units or to have had cash delivered to them or the custodian on their
behalf; as applicable.

 

5.5                                 Subject to the limitations set forth in
Section 5.6 of these share provisions, the Corporation is appointed as
agent for the holders of Exchangeable Shares for the purpose of offering to
Baytex Energy Trust and Baytex ExchangeCo (the “Redemption Offer”) the
overriding right (Baytex Energy Trust’s and Baytex ExchangeCo’s right to accept
the Redemption Offer and complete the purchase of the Exchangeable Shares is
referred to as the “Redemption Call Right”), in the event of any proposed
redemption of Exchangeable Shares by the Corporation pursuant to this
Article 5, to purchase from all but not less than all of the holders of
Exchangeable Shares (other than Baytex Energy Trust or Baytex ExchangeCo) on
the applicable Redemption Date all but not less than all of the Exchangeable
Shares held by each such holder, in the case of an Automatic Redemption, an
Optional Redemption or a De Minimus Redemption, or to purchase from all but not
less than all of the holders of Exchangeable Shares (other than Baytex Energy
Trust or Baytex ExchangeCo) on the applicable Redemption Date the designated
percentage of the Exchangeable Shares held by each such holder, in the case of
an Annual Redemption, on payment by whichever of Baytex Energy Trust or Baytex
ExchangeCo is exercising such right (in this Article 5, the “RCR
Exercising Party”) to each such holder of an

 

 

amount per Exchangeable
Share equal to the Redemption Price, which payment of the Redemption Price
shall be satisfied in full by the RCR Exercising Party delivering or causing to
be delivered to such holder, at the election of the RCR Exercising Party,
either that number of Baytex Units equal to the Exchange Ratio as at the last
Business Day prior to the applicable Redemption Date or an amount in cash equal
to the Redemption Price, in accordance with Section 5.7 of these share
provisions.  In the case of a redemption of Exchangeable Shares under this
Article 5, the Corporation, as agent for the holders of Exchangeable
Shares, shall make the Redemption Offer to Baytex Energy Trust and Baytex
ExchangeCo by sending or causing to be sent to Baytex Energy Trust and Baytex
ExchangeCo a notice in writing of the redemption by the Corporation of the
Exchangeable Shares.  In the event of the exercise of the Redemption Call
Right and the acceptance of the Redemption Offer, each holder of Exchangeable
Shares shall be obligated to sell all of the Exchangeable Shares held by that
holder to the RCR Exercising Party on the applicable Redemption Date on payment
by the RCR Exercising Party to such holder of the Redemption Price for each
such share, and the Corporation shall have no obligation to redeem, or to pay
any amount in respect of, such shares so purchased by the RCR Exercising Party.

 

5.6                                 Baytex ExchangeCo shall only be entitled to
exercise its Redemption Call Right with respect to those Exchangeable Shares,
if any, in respect of which Baytex Energy Trust has not exercised its
Redemption Call Right.  To exercise the Redemption Call Right and accept
the Redemption Offer, the RCR Exercising Party must notify the Transfer Agent,
as agent for the holders of Exchangeable Shares, and the Corporation of its
intention to exercise such right (and accept such offer) at least 60 days
before the applicable Redemption Date.  The Corporation shall cause the
Transfer Agent to notify the holders of the Exchangeable Shares as to whether
or not Baytex Energy Trust or Baytex ExchangeCo has exercised the Redemption Call
Right forthwith after the expiry of the period during which such right may be
exercised. If an RCR Exercising Party exercises its Redemption Call Right, such
RCR Exercising Party shall on the applicable Redemption Date purchase, and each
of the holders of Exchangeable Shares will sell, all of the Exchangeable Shares
then outstanding for a price per Exchangeable Share equal to the Redemption
Price.

 

5.7                                 For the purposes of completing the purchase
of the Exchangeable Shares pursuant to the Redemption Call Right, the RCR
Exercising Party shall deposit with the Transfer Agent, on or before the
applicable Redemption Date, certificates representing the aggregate number of
Baytex Units deliverable by the RCR Exercising Party (which securities shall be
duly issued as fully paid and non-assessable and shall be free and clear of any
lien, claim or encumbrance) or, if applicable, a cheque of the RCR Exercising
Party payable at par at any branch of the bankers of the RCR Exercising Party
in payment of the total Redemption Price, in each case less any amounts
withheld on account of tax required to be deducted and withheld
therefrom.  Provided that the total Redemption Price has been so deposited
with the Transfer Agent, on and after the applicable Redemption Date the rights
of each holder of Exchangeable Shares (other than Baytex Energy Trust and
Baytex ExchangeCo) shall be limited to:  (i) receiving such holder’s
proportionate part of the total Redemption Price payable by the RCR Exercising
Party upon presentation and surrender by the holder of certificates
representing the Exchangeable Shares held by such holder and the holder shall
on and after that Redemption Date be considered and deemed for all purposes to
be the holder of the Baytex Units to which it is entitled; and (ii) receiving
any declared and unpaid dividends on such Exchangeable Shares.  Upon
surrender to the Transfer Agent of a certificate or certificates representing
Exchangeable Shares, together with such other documents and instruments as may
be required to effect a transfer of Exchangeable Shares under the Act and the
by-laws of the Corporation and such additional documents and instruments as the
Transfer Agent and the Corporation may reasonably require, the holder of such
surrendered certificate or certificates shall be entitled to receive in
exchange therefor, and the Corporation shall cause the Transfer Agent on behalf
of the RCR Exercising Party to deliver to such holder, certificates
representing the Baytex Units to which the holder is entitled or a cheque of
the RCR Exercising Party payable at par at any branch of the bankers of the RCR
Exercising Party, of the total Redemption Price, less any amounts withheld on
account of tax required to be deducted and withheld therefrom.  If neither
Baytex Energy Trust nor Baytex ExchangeCo exercises the Redemption Call Right
in the manner described above, on the applicable Redemption Date the holders of
the Exchangeable Shares shall be entitled to receive in exchange therefor the
Redemption Price otherwise payable by the Corporation in connection with the
redemption of the Exchangeable Shares pursuant to Section 5.1 of these
share provisions.

 

6.            

DISTRIBUTION ON LIQUIDATION

 

6.1                                 In the event of the liquidation, dissolution
or winding-up of the Corporation or any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding up its affairs, a
holder of Exchangeable Shares shall be entitled, subject to applicable law, to
receive from the assets of the Corporation in respect of each Exchangeable
Share held by such holder on the effective date (the “Liquidation Date”) of
such liquidation, dissolution or winding-up, before any distribution of any
part of the assets of the Corporation among the holders of the Common Shares or
any other shares ranking junior to the Exchangeable Shares, an amount per share
(the “Liquidation Amount”) equal to the amount determined by multiplying the
Exchange Ratio on the last Business Day prior to the Liquidation Date by the
Current Market Price of an Baytex Unit on the last Business Day prior to the
Liquidation Date, which payment of the Liquidation Amount shall be satisfied in
full by the Corporation

 

 

delivering or causing to be
delivered to such holder that number of Baytex Units equal to the Exchange
Ratio as at the last Business Day prior to the Liquidation Date, in accordance
with Section 6.2 of these share provisions.

 

6.2                                 On or promptly after the Liquidation Date,
and subject to the exercise by Baytex Energy Trust or Baytex ExchangeCo of the
Liquidation Call Right, the Corporation shall deliver or cause to be delivered
to the holders of the Exchangeable Shares the Liquidation Amount for each such
Exchangeable Share upon presentation and surrender of the certificates
representing such Exchangeable Shares, together with such other documents and
instruments as may be required to effect a transfer of Exchangeable Shares
under the Act and the by-laws of the Corporation and such additional documents
and instruments as the Transfer Agent and the Corporation may reasonably
require, at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation by notice to the holders
of the Exchangeable Shares. Payment of the total Liquidation Amount for such
Exchangeable Shares shall be made by delivery to each holder, at the address of
the holder recorded in the register of holders of the Exchangeable Shares
maintained by or on behalf of the Corporation or by holding for pick-up by the
holder at the registered office of the Corporation or at any office of the
Transfer Agent as may be specified by the Corporation by notice to the holders
of Exchangeable Shares, on behalf of the Corporation, of certificates
representing Baytex Units (which securities shall be duly issued as fully paid
and non-assessable and shall be free and clear of any lien, claim or
encumbrance), less any amounts withheld on account of tax required to be
deducted and withheld therefrom. On and after the Liquidation Date, the holders
of the Exchangeable Shares shall cease to be holders of such Exchangeable
Shares and shall not be entitled to exercise any of the rights of holders in
respect thereof, other than:  (i) the right to receive their proportionate
part of the total Liquidation Amount, unless payment of the total Liquidation
Amount for such Exchangeable Shares shall not be made upon presentation and
surrender of certificates in accordance with the foregoing provisions, in which
case the rights of the holders shall remain unaffected until the total
Liquidation Amount has been paid in the manner hereinbefore provided; and (ii)
the right to receive any declared and unpaid dividends on such Exchangeable
Shares.

 

6.3                                 The Corporation shall have the right at any
time after the Liquidation Date to deposit or cause to be deposited the total
Liquidation Amount in respect of the Exchangeable Shares represented by
certificates that have not at the Liquidation Date been surrendered by the
holders thereof in a custodial account with any chartered bank or trust company
in Canada, less any amounts withheld on account of tax required to be deducted
or withheld therefrom. Upon such deposit being made, the rights of the holders
of Exchangeable Shares after such deposit shall be limited to:  (i)
receiving their proportionate part of the total Liquidation Amount (less any
amounts withheld on account of tax required to be deducted and withheld
therefrom) for such Exchangeable Shares so deposited, against presentation and
surrender of the said certificates held by them, respectively, in accordance
with the foregoing provisions; and (ii) receiving any declared and unpaid
dividends on such Exchangeable Shares. Upon such payment or deposit of the
total Liquidation Amount, the holders of the Exchangeable Shares shall thereafter
be considered and deemed for all purposes to be holders of the Baytex Units
delivered to them or the custodian on their behalf.

 

6.4                                 After the Corporation has satisfied its
obligations to pay the holders of the Exchangeable Shares the Liquidation
Amount per Exchangeable Share pursuant to Section 6.1 of these share
provisions, such holders shall not be entitled to share in any further
distribution of the assets of the Corporation.

 

6.5                                 Subject to the limitations set forth in
Section 6.6 of these share provisions, the Corporation is appointed as
agent for the holders of Exchangeable Shares for the purpose of offering to
Baytex Energy Trust and Baytex ExchangeCo (the “Liquidation Offer”) the
overriding right (Baytex Energy Trust’s and Baytex ExchangeCo’s right to accept
the Liquidation Offer and complete the purchase of the Exchangeable Shares is
referred to as the “Liquidation Call Right”), in the event of and
notwithstanding any proposed liquidation, dissolution or winding-up of the
Corporation or any other distribution of the assets of the Corporation among
its shareholders for the purpose of winding up its affairs, to purchase from
all but not less than all of the holders of Exchangeable Shares (other than
Baytex Energy Trust or Baytex ExchangeCo) on the Liquidation Date all but not
less than all of the Exchangeable Shares held by each such holder, on payment
by whichever of Baytex Energy Trust or Baytex ExchangeCo is exercising such
right (in this Article 6, the “LCR Exercising Party”) to each such holder
of an amount per Exchangeable Share equal to the Liquidation Amount, which
shall be satisfied in full by the LCR Exercising Party delivering or causing to
be delivered to such holder that number of Baytex Units equal to the Exchange
Ratio as at the last Business Day prior to the Liquidation Date, in accordance
with Section 6.7 of these share provisions.  In the event of the
exercise of the Liquidation Call Right and the acceptance of the Liquidation
Offer, each holder of Exchangeable Shares shall be obligated to sell all of the
Exchangeable Shares held by that holder to the LCR Exercising Party on the
Liquidation Date on payment by the LCR Exercising Party to such holder of the
Liquidation Amount for each such share, and the Corporation shall have no obligation
to pay any amount on account of the Liquidation Amount in respect of such
shares so purchased by the LCR Exercising Party.

 

6.6                                 Baytex ExchangeCo shall only be entitled to
exercise its Liquidation Call Right with respect to those Exchangeable Shares,
if any, in respect of which Baytex Energy Trust has not exercised its
Liquidation Call Right.  In the event of any proposed liquidation,
dissolution or winding-up of the Corporation or any other distribution of the
assets of the Corporation among its shareholders for the purpose of winding-up
its affairs, the Corporation, as agent for the holders of Exchangeable Shares,
shall make the Liquidation Offer by sending or causing to be sent to Baytex
Energy Trust and Baytex ExchangeCo a notice in

 

 

writing of the Liquidation
Offer.  To exercise the Liquidation Call Right and accept the Liquidation
Offer, the LCR Exercising Party must notify the Transfer Agent, as agent for
the holders of Exchangeable Shares, and the Corporation of its intention to exercise
such right (and accept such offer) at least 30 days before the Liquidation
Date, in the case of a voluntary liquidation, dissolution or winding-up of the
Corporation, and at least five Business Days before the Liquidation Date, in
the case of an involuntary liquidation, dissolution or winding-up of the
Corporation.  The Corporation shall cause the Transfer Agent to notify the
holders of the Exchangeable Shares as to whether or not Baytex Energy Trust or
Baytex ExchangeCo has exercised the Liquidation Call Right forthwith after the
expiry of the period during which such right may be exercised. If an LCR
Exercising Party exercises its Liquidation Call Right, such LCR Exercising
Party will on the Liquidation Date purchase, and each of the holders of Exchangeable
Shares will sell, all of the Exchangeable Shares then outstanding for a price
per Exchangeable Share equal to the Liquidation Amount.

 

6.7                                 For the purposes of completing the purchase
of the Exchangeable Shares pursuant to the Liquidation Call Right, the LCR
Exercising Party shall deposit with the Transfer Agent, on or before the
Liquidation Date, certificates representing the aggregate number of Baytex
Units deliverable by the LCR Exercising Party (which securities shall be duly
issued as fully paid and non-assessable and shall be free and clear of any
lien, claim or encumbrance), in payment of the total Liquidation Amount, less
any amounts withheld on account of tax required to be deducted and withheld
therefrom.  Provided that the total Liquidation Amount has been so
deposited with the Transfer Agent, on and after the Liquidation Date the rights
of each holder of Exchangeable Shares (other than Baytex Energy Trust and
Baytex ExchangeCo) shall be limited to:  (i) receiving such holder’s
proportionate share of the total Liquidation Amount payable by the LCR
Exercising Party upon presentation and surrender by the holder of certificates
representing the Exchangeable Shares held by such holder and the holder shall
on and after the Liquidation Date be considered and deemed for all purposes to
be the holder of the Baytex Units to which it is entitled; and (ii) receiving
any declared and unpaid dividends on such Exchangeable Shares.  Upon
surrender to the Transfer Agent of a certificate or certificates representing
Exchangeable Shares, together with such other documents and instruments as may
be required to effect a transfer of Exchangeable Shares under the Act and the
by-laws of the Corporation and such additional documents and instruments as the
Transfer Agent may reasonably require, the holder of such surrendered
certificate or certificates shall be entitled to receive in exchange therefor,
and the Corporation shall cause the Transfer Agent on behalf of the LCR
Exercising Party to deliver to such holder, certificates representing the
Baytex Units to which the holder is entitled, less any amounts withheld on
account of tax required to be deducted and withheld therefrom.  If neither
Baytex Energy Trust nor Baytex ExchangeCo exercises the Liquidation Call Right
in the manner described above, on the Liquidation Date the holders of the
Exchangeable Shares shall be entitled to receive in exchange therefor the
Liquidation Amount otherwise payable by the Corporation in connection with the
liquidation, dissolution or winding-up of the Corporation pursuant to
Section 6.1 of these share provisions.

 

7.            

CERTAIN RESTRICTIONS

 

7.1                                 So long as any of the Exchangeable Shares are
outstanding, the Corporation shall not at any time without, but may at any time
with, the approval of the holders of the Exchangeable Shares given as specified
in Section 10.2 of these share provisions:

 

(a)                                  pay any dividends on the Common Shares or any
other shares ranking junior to the Exchangeable Shares, other than stock
dividends payable in Common Shares or any such other shares ranking junior to
the Exchangeable Shares, as the case may be;

 

(b)                                 redeem or purchase or make any capital
distribution in respect of the Common Shares or any other shares ranking junior
to the Exchangeable Shares;

 

(c)                                  redeem or purchase any other shares of the
Corporation ranking equally with the Exchangeable Shares with respect to the
payment of dividends or on any liquidation distribution; or

 

(d)                                 issue any shares, other than Exchangeable
Shares or Common Shares, which rank superior to the Exchangeable Shares with
respect to the payment of dividends or on any liquidation distribution.

 

The restrictions in
Sections 7.1(a), (b) and (c) above shall only be applicable if dividends
which have been declared on the outstanding Exchangeable Shares have not been
paid as provided for herein.

 

 

8.            

PURCHASE FOR CANCELLATION

 

8.1                                 Subject to applicable law and notwithstanding
Section 8.2 and Section 8.3, the Corporation may at any time and from
time to time purchase for cancellation all or any part of the Exchangeable
Shares by private agreement with any holder of Exchangeable Shares for
consideration consisting of cash .

 

8.2                                 Subject to applicable law, the Corporation
may at any time and from time to time purchase for cancellation all or any part
of the outstanding Exchangeable Shares at any price by tender to all the
holders of record of Exchangeable Shares then outstanding or through the
facilities of any stock exchange on which the Exchangeable Shares are listed or
quoted at any price per share. If in response to an invitation for tenders
under the provisions of this Section 8.2, more Exchangeable Shares are
tendered at a price or prices acceptable to the Corporation than the
Corporation is prepared to purchase, the Exchangeable Shares to be purchased by
the Corporation shall be purchased as nearly as may be pro rata according to
the number of shares tendered by each holder who submits a tender to the
Corporation, provided that when shares are tendered at different prices, the
pro rating shall be effected (disregarding fractions) only with respect to the
shares tendered at the price at which more shares were tendered than the
Corporation is prepared to purchase after the Corporation has purchased all the
shares tendered at lower prices.  If part only of the Exchangeable Shares
represented by any certificate shall be purchased, a new certificate for the
balance of such shares shall be issued at the expense of the Corporation.

 

8.3                                 Subject to applicable law, the Corporation by
notice from time to time to Baytex Energy Trust or Baytex ExchangeCo, as
applicable, shall be entitled at any time to redeem all or any part of the
Exchangeable Shares held by Baytex Energy Trust or Baytex ExchangeCo which were
acquired by them pursuant to the Call Rights, the Exchange Rights or the
Automatic Exchange Rights (as defined in the Voting and Exchange Trust
Agreement) in exchange for the delivery of Baytex Units (the “Delivered Baytex
Units”) to or for the account of a holder(s) of Exchangeable Shares.  The
Exchangeable Shares to be redeemed as set forth in this Section 8.3 shall
be acquired by the Corporation in exchange for the issue by the Corporation to
Baytex Energy Trust or Baytex ExchangeCo, as applicable of a promissory note in
the principal amount equal to the fair market value of the Delivered Baytex
Units (where the fair market value of the Delivered Baytex Units is determined
by multiplying the number of Delivered Baytex Units by the weighted average
trading price of an Baytex Unit on the TSX for the ten trading days preceding
the date of purchase by Baytex Energy Trust or Baytex ExchangeCo, as applicable
of such Delivered Baytex Units).  All Exchangeable Shares which are
redeemed as set forth in this Section 8.3 shall be cancelled by the
Corporation.

 

9.            

VOTING RIGHTS

 

9.1                                 Except as required by applicable law and by
Article 10 hereof, the holders of the Exchangeable Shares shall not be
entitled as such to receive notice of or to attend any meeting of the shareholders
of the Corporation or to vote at any such meeting.

 

10.          

AMENDMENT AND APPROVAL

 

10.1                        
The rights, privileges, restrictions and conditions attaching to the
Exchangeable Shares may be added to, changed or removed but only with the
approval of the holders of the Exchangeable Shares given as hereinafter
specified.

 

10.2                        
Any approval given by the holders of the Exchangeable Shares to add to, change
or remove any right, privilege, restriction or condition attaching to the
Exchangeable Shares or any other matter requiring the approval or consent of
the holders of the Exchangeable Shares shall be deemed to have been
sufficiently given if it shall have been given in accordance with applicable
law subject to a minimum requirement that such approval be evidenced by
resolution passed by not less than two-thirds of the votes cast on such
resolution (other than the Exchangeable Shares held by Baytex Energy Trust,
Baytex ExchangeCo or any of their respective subsidiaries and other affiliates)
at a meeting of holders of Exchangeable Shares duly called and held at which
the holders of at least 10% of the outstanding Exchangeable Shares (other than
the Exchangeable Shares held by Baytex Energy Trust, Baytex ExchangeCo or any
of their respective subsidiaries and other affiliates) at that time are present
or represented by proxy; provided that if at any such meeting holders of at
least 10% of such outstanding Exchangeable Shares at that time are not present
or represented by proxy within one-half hour after the time appointed for such
meeting, then the meeting shall be adjourned to such place and time (not less
than ten days later) as may be designated by the Chairman of such meeting. At
such adjourned meeting the holders of Exchangeable Shares present or
represented by proxy thereat may transact the business for which the meeting
was originally called and a resolution passed thereat by the affirmative vote
of not less than two-thirds of the votes cast on such resolution at such
meeting shall constitute the approval or consent of the holders of the
Exchangeable Shares.

 

 

11.          

RECIPROCAL CHANGES, ETC. IN RESPECT OF BAYTEX UNITS

 

11.1                        
Each holder of an Exchangeable Share acknowledges that the Support Agreement
provides, in part, that the number of Baytex Units for which the Exchangeable
Shares are exchangeable shall, in addition to being adjusted from time to time
to conform to the Exchange Ratio, be simultaneously adjusted on an economically
equivalent basis if Baytex Energy Trust:

 

(a)                                  issues or distributes Baytex Units (or
securities exchangeable for or convertible into or carrying rights to acquire
Baytex Units) to the holders of all or substantially all of the then
outstanding Baytex Units by way of stock distribution or other distribution,
other than an issue of Baytex Units (or securities exchangeable for or
convertible into or carrying rights to acquire Baytex Units) to holders of
Baytex Units who exercise an option to receive distributions in Baytex Units
(or securities exchangeable for or convertible into or carrying rights to
acquire Baytex Units) in lieu of receiving cash distributions;

 

(b)                                 issues or distributes rights, options or
warrants to the holders of all or substantially all of the then outstanding
Baytex Units entitling them to subscribe for or to purchase Baytex Units (or
securities exchangeable for or convertible into or carrying rights to acquire
Baytex Units); or

 

(c)                                  issues or distributes to the holders of all
or substantially all of the then outstanding Baytex Units:

 

(i)                                     securities of Baytex Energy Trust of any
class other than Baytex Units (other than securities convertible into or
exchangeable for or carrying rights to acquire Baytex Units);

 

(ii)                                  rights, options or warrants other than those
referred to in Section 11.1(b) above;

 

(iii)                               evidences of indebtedness of Baytex Energy
Trust; or

 

(iv)                              assets of Baytex Energy Trust other than
Distributions which result in an adjustment to the Exchange Ratio,

 

(d)                                 subdivides, redivides or changes the then
outstanding Baytex Units into a greater number of Baytex Units;

 

(e)                                  reduces, combines, consolidates or changes
the then outstanding Baytex Units into a lesser number of Baytex Units; or

 

(f)                                    reclassifies or otherwise changes the Baytex
Units or effects an amalgamation, merger, reorganization or other transaction
affecting the Baytex Units.

 

The Support Agreement
further provides, in part, that the aforesaid provisions of the Support
Agreement shall not be changed without the approval of the holders of the
Exchangeable Shares given in accordance with Section 10.2 of these share
provisions.

 

12.          

ACTIONS BY THE CORPORATION UNDER SUPPORT AGREEMENT

 

12.1                        
The Corporation shall take all such actions and do all such things as shall be
necessary or advisable to perform and comply with and to ensure performance and
compliance by the Corporation, Baytex Energy Trust and Baytex ExchangeCo with
all provisions of the Support Agreement applicable to the Corporation, Baytex
Energy Trust and Baytex ExchangeCo, respectively, in accordance with the terms
thereof including, without limitation, taking all such actions and doing all
such things as shall be necessary or advisable to enforce to the fullest extent
possible for the direct benefit of the Corporation all rights and benefits in
favour of the Corporation under or pursuant to such agreement.

 

12.2                        
The Corporation shall not propose, agree to or otherwise give effect to any
amendment to, or waiver or forgiveness of its rights or obligations under, the
Support Agreement without the approval of the holders of the Exchangeable
Shares given in accordance with Section 10.2 of these share provisions
other than such amendments, waivers and/or forgiveness as may be necessary or
advisable for the purposes of:

 

(a)                                  adding to the covenants of the other parties
to such agreement for the protection of the Corporation or the holders of the
Exchangeable Shares thereunder;

 

(b)                                 making such provisions or modifications not
inconsistent with such agreement as may be necessary or desirable with respect
to matters or questions arising thereunder which, in the good faith opinion of
the Board of Directors, it may be expedient to make, provided that the Board of
Directors shall be of the good faith opinion, after consultation with counsel,

 

 

that
such provisions and modifications shall not be prejudicial to the interests of
the holders of the Exchangeable Shares; or

 

(c)                                  making such changes in or corrections to such
agreement which, on the advice of counsel to the Corporation, are required for
the purpose of curing or correcting any ambiguity or defect or inconsistent
provision or clerical omission or mistake or manifest error contained therein,
provided that the Board of Directors shall be of the good faith opinion, after
consultation with counsel, that such changes or corrections shall not be
prejudicial to the interests of the holders of the Exchangeable Shares.

 

13.          

LEGEND; CALL RIGHTS; WITHHOLDING RIGHTS

 

13.1                        
The certificates evidencing the Exchangeable Shares shall contain or have
affixed thereto a legend in form and on terms approved by the Board of
Directors, with respect to the Support Agreement, the Call Rights and the Voting
and Exchange Trust Agreement (including the provisions with respect to the
voting rights and exchange rights thereunder).

 

13.2                        
Each holder of an Exchangeable Share, whether of record or beneficial, by
virtue of becoming and being such a holder shall be deemed to acknowledge each
of the Liquidation Call Right, the Retraction Call Right and the Redemption
Call Right, in each case, in favour of Baytex Energy Trust and Baytex
ExchangeCo, and the overriding nature thereof in connection with the
liquidation, dissolution or winding-up of the Corporation or the retraction or
redemption of Exchangeable Shares, as the case may be, and to be bound thereby
in favour of Baytex Energy Trust and Baytex ExchangeCo as therein provided.

 

13.3                        
The Corporation, Baytex Energy Trust, Baytex ExchangeCo and the Transfer Agent
shall be entitled to deduct and withhold from any dividend or consideration
otherwise payable to any holder of Exchangeable Shares such amounts as the Corporation,
Baytex Energy Trust, Baytex ExchangeCo or the Transfer Agent is required to
deduct and withhold with respect to such payment under the Income Tax Act (Canada) or any provision
of provincial, local or foreign tax law, in each case, as amended.  To the
extent that amounts are so withheld, such withheld amounts shall be treated for
all purposes hereof as having been paid to the holder of the Exchangeable
Shares in respect of which such deduction and withholding was made, provided
that such withheld amounts are actually remitted to the appropriate taxing
authority.  To the extent that the amount so required or permitted to be
deducted or withheld from any payment to a holder exceeds the cash
consideration otherwise, if any, payable to the holder, the Corporation, Baytex
Energy Trust, Baytex ExchangeCo and the Transfer Agent are hereby authorized to
sell or otherwise dispose of such portion of the consideration as is necessary
to provide sufficient funds to the Corporation, Baytex Energy Trust, Baytex ExchangeCo
or the Transfer Agent, as the case may be, to enable it to comply with such
deduction or withholding requirement and the Corporation, Baytex Energy Trust,
Baytex ExchangeCo or the Transfer Agent shall notify the holder thereof and
remit any unapplied balance of the net proceeds of such sale.

 

14.          

NON-RESIDENT HOLDERS

 

14.1                        
Notwithstanding anything contained in these share provisions the obligation of
the Corporation, Baytex Energy Trust or Baytex ExchangeCo to pay the Retraction
Price, Purchase Price, Liquidation Price or Redemption Price, other than in
circumstances where the Corporation, Baytex Energy Trust or Baytex ExchangeCo
elects to pay the Redemption Price in cash, in respect of Exchangeable Shares
held by a person whom the Transfer Agent believes is a U.S. Person or a
resident of any foreign country, shall be satisfied by delivering the Baytex
Units which would have been received by the affected holder to the Transfer
Agent who shall sell such Baytex Units on the stock exchange on which the
Baytex Units are then listed and, upon such sale, the rights of the affected
holder shall be limited to receiving the net proceeds of sale (net of
applicable taxes) upon surrender of the certificates representing such Exchangeable
Shares.

 

15.          

SPECIFIED AMOUNT

 

15.1                        
The amount specified in respect of each Exchangeable Share for the purposes of
subsection 191(4) of the Income Tax Act
(Canada) shall be an amount equal to the fair market value of one
Baytex Unit on the Effective Date.

 

16.          

NO FRACTIONAL ENTITLEMENTS

 

16.1                        
Notwithstanding anything contained in this Agreement including, without
limitation, Articles 4, 5 or 6, no holder of an Exchangeable Share shall be
entitled to and neither the Corporation, Baytex Energy Trust, Baytex ExchangeCo
nor the Trustee shall deliver fractions of Baytex Units.  Where the
application of the provisions of this Agreement, including, without

 

 

limitation, Articles 4, 5
and 6 would otherwise result in a holder of Exchangeable Shares receiving a
fraction of an Baytex Unit, such holder of Exchangeable Shares shall only be
entitled to receive the nearest whole number of Baytex Units.

 

17.          

NOTICES

 

17.1                        
Any notice, request or other communication to be given to the Corporation by a
holder of Exchangeable Shares shall be in writing and shall be valid and
effective if given by mail (postage prepaid) or by telecopy or by delivery to
the registered office of the Corporation and addressed to the attention of the
President of the Corporation. Any such notice, request or other communication,
if given by mail, telecopy or delivery, shall only be deemed to have been given
and received upon actual receipt thereof by the Corporation.

 

17.2                        
Any presentation and surrender by a holder of Exchangeable Shares to the
Corporation or the Transfer Agent of certificates representing Exchangeable
Shares in connection with the liquidation, dissolution or winding-up of the
Corporation or the retraction or redemption of Exchangeable Shares shall be
made by registered mail (postage prepaid) or by delivery to the registered
office of the Corporation or to such office of the Transfer Agent as may be
specified by the Corporation, in each case, addressed to the attention of the
President of the Corporation. Any such presentation and surrender of
certificates shall only be deemed to have been made and to be effective upon
actual receipt thereof by the Corporation or the Transfer Agent, as the case
may be. Any such presentation and surrender of certificates made by registered
mail shall be at the sole risk of the holder mailing the same.

 

17.3                        
Any notice, request or other communication to be given to a holder of
Exchangeable Shares by or on behalf of the Corporation shall be in writing and
shall be valid and effective if given by mail (postage prepaid) or by delivery
to the address of the holder recorded in the register of shareholders of the
Corporation or, in the event of the address of any such holder not being so
recorded, then at the last known address of such holder. Any such notice,
request or other communication, if given by mail, shall be deemed to have been
given and received on the third Business Day following the date of mailing and,
if given by delivery, shall be deemed to have been given and received on the
date of delivery. Accidental failure or omission to give any notice, request or
other communication to one or more holders of Exchangeable Shares shall not
invalidate or otherwise alter or affect any action or proceeding to be taken by
the Corporation pursuant thereto.

 

 

SCHEDULE ”B”

 

a.                                       The directors of the corporation may, without
authorization of the shareholders:

 

i.                                          borrow money on the credit of the
Corporation;

 

ii.                                       issue, reissue, sell or pledge debt
obligations of the Corporation;

 

iii.                                    subject to the Business Corporations Act (Alberta), give a guarantee on
behalf of the Corporation to secure performance of an obligation of any person;
and

 

iv.                                   mortgage, hypothecate, pledge or otherwise
create a security interest in all or any property of the Corporation, owned or
subsequently acquired, to secure any obligation of the Corporation.

 

b.                                      The directors may, by resolution, delegate
the powers referred to in subsection (c) hereof to a director, a committee
of directors or an officer.

 

c.                                       The directors may, between annual general
meetings, appoint one or more additional directors of the Corporation to serve
until the next annual general meeting, but the number of additional directors
shall not at any time exceed 1/3 of the number of directors who held office at
the expiration of the last annual meeting of the Corporation.

 

d.                                      Meetings of the shareholders may be held:

 

i.                                          at any place within Alberta that the
directors determine from time to time; and

 

ii.                                       at any place outside Alberta that the
directors determine from time to time, including, without limitation, the
following cities:  Vancouver, British Columbia; Victoria, British
Columbia; Winnipeg, Manitoba; Toronto, Ontario; Ottawa, Ontario; Montreal,
Quebec; or Halifax, Nova Scotia.

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