Exhibit 10.2 $35,000,000 TERM LOAN AGREEMENT dated as of April 19, 2005 among THE PACIFIC LUMBER COMPANY and BRITT LUMBER CO., INC., as Borrowers THE LENDERS PARTY HERETO, CREDIT SUISSE FIRST BOSTON, as Administrative Agent and CREDIT SUISSE FIRST BOSTON, acting through its New York Branch, as Sole Bookrunner and Sole Lead Arranger TABLE OF CONTENTS ARTICLE I. DEFINITIONS. SECTION 1.01 Defined Terms SECTION 1.02 Terms Generally SECTION 1.03 Classification of Loans and Borrowings SECTION 1.04 Pro Forma Calculations ARTICLE II. THE CREDITS SECTION 2.01 Loans SECTION 2.02 Borrowings SECTION 2.03 [Intentionally Omitted] SECTION 2.04 Repayment of Loans; Evidence of Debt SECTION 2.05 Fees SECTION 2.06 Interest on Loans SECTION 2.07 Default Interest SECTION 2.08 Alternate Rate of Interest SECTION 2.09 Termination of Commitments SECTION 2.10 Conversion and Continuation of Borrowings SECTION 2.11 Repayment of Borrowings SECTION 2.12 Prepayment SECTION 2.13 Mandatory Prepayments SECTION 2.14 Reserve Requirements; Change in Circumstances SECTION 2.15 Change in Legality SECTION 2.16 Indemnity SECTION 2.17 Pro Rata Treatment SECTION 2.18 Sharing of Setoffs SECTION 2.19 Payments SECTION 2.20 Taxes SECTION 2.21 Assignment of Commitments Under Certain Circumstances; Duty to Mitigate SECTION 2.22 [Intentionally Omitted] SECTION 2.23 [Intentionally Omitted] SECTION 2.24 Relationship Between the Borrowers ARTICLE III. REPRESENTATIONS AND WARRANTIES SECTION 3.01 Organization; Powers SECTION 3.02 Authorization; No Conflicts SECTION 3.03 Enforceability SECTION 3.04 Governmental Approvals SECTION 3.05 Financial Statements SECTION 3.06 No Material Adverse Change SECTION 3.07 Title to Properties; Possession Under Leases SECTION 3.08 Subsidiaries SECTION 3.09 Litigation; Compliance with Laws SECTION 3.10 Agreements SECTION 3.11 Federal Reserve Regulations SECTION 3.12 Investment Company Act; Public Utility Holding Company Act SECTION 3.13 Use of Proceeds SECTION 3.14 Tax Returns SECTION 3.15 No Material Misstatements SECTION 3.16 Employee Benefit Plans SECTION 3.17 Environmental Matters SECTION 3.18 Insurance SECTION 3.19 Security Documents SECTION 3.20 Location of Real Property SECTION 3.21 Labor Matters SECTION 3.22 Liens SECTION 3.23 Intellectual Property SECTION 3.24 Solvency SECTION 3.25 Permits SECTION 3.26 Deposit and Disbursement Accounts ARTICLE IV. CONDITIONS OF LENDING SECTION 4.01 All Credit Events SECTION 4.02 First Credit Event ARTICLE V. AFFIRMATIVE COVENANTS SECTION 5.01 Existence; Businesses and Properties SECTION 5.02 Insurance SECTION 5.03 Obligations and Taxes SECTION 5.04 Financial Statements, Reports, etc SECTION 5.05 Litigation and Other Notices SECTION 5.06 Information Regarding Collateral SECTION 5.07 Maintaining Records; Access to Properties and Inspections; Environmental Assessments SECTION 5.08 Use of Proceeds SECTION 5.09 Additional Collateral, etc SECTION 5.10 Further Assurances SECTION 5.11 [Intentionally Omitted] SECTION 5.12 Cash Management Systems; Bank Accounts SECTION 5.13 Landlords' Agreements, Mortgagee Agreements, Bailee Letters and Real Estate Purchases ARTICLE VI. NEGATIVE COVENANTS SECTION 6.01 Indebtedness SECTION 6.02 Liens SECTION 6.03 Sale and Lease-Back Transactions SECTION 6.04 Investments, Loans and Advances SECTION 6.05 Mergers, Consolidations, Sales of Assets and Acquisitions SECTION 6.06 Restricted Payments; Restrictive Agreements SECTION 6.07 Transactions with Affiliates SECTION 6.08 Business of the Borrowers and Subsidiaries; Limitation on Hedging Agreements SECTION 6.09 Other Indebtedness and Agreements SECTION 6.10 Capital Expenditures SECTION 6.11 Minimum Combined EBITDA SECTION 6.12 Fiscal Year ARTICLE VII. EVENTS OF DEFAULT ARTICLE VIII. THE ADMINISTRATIVE AGENT AND THE ARRANGER ARTICLE IX. MISCELLANEOUS SECTION 9.01 Notices SECTION 9.02 Survival of Agreement SECTION 9.03 Binding Effect SECTION 9.04 Successors and Assigns SECTION 9.05 Expenses; Indemnity SECTION 9.06 Right of Setoff SECTION 9.07 Applicable Law SECTION 9.08 Waivers; Amendment SECTION 9.09 Interest Rate Limitation SECTION 9.10 Entire Agreement SECTION 9.11 WAIVER OF JURY TRIAL SECTION 9.12 Severability SECTION 9.13 Counterparts SECTION 9.14 Headings SECTION 9.15 Jurisdiction; Consent to Service of Process SECTION 9.16 Confidentiality SECTION 9.17 Delivery of Lender Addenda SECTION 9.18 Disclosures Exhibits and Schedules Exhibit A Form of Administrative Questionnaire Exhibit B [Intentionally Omitted] Exhibit C Form of Assignment and Acceptance Exhibit D [Intentionally Omitted] Exhibit E Form of Lender Addendum Exhibit F Form of Perfection Certificate Exhibit G Form of Exemption Certificate Exhibit H [Intentionally Omitted] Exhibit I Closing Checklist Schedule 1.01 Mortgaged Properties Schedule 3.08 Subsidiaries Schedule 3.09 Litigation Schedule 3.10 Agreements Schedule 3.17 Environmental Matters Schedule 3.18 Insurance Schedule 3.19(a) UCC Filing Offices Schedule 3.19(c) Mortgage Filing Offices Schedule 3.20 Owned and Leased Real Property Schedule 3.26 Deposit and Disbursement Accounts Schedule 6.01 Existing Indebtedness Schedule 6.02 Existing Liens Schedule 6.04 Existing Investments Schedule 6.07 Transactions with Affiliates TERM LOAN AGREEMENT dated as of April 19, 2005 (this "Agreement"), among THE PACIFIC LUMBER COMPANY ("PALCO"), a Delaware corporation and BRITT LUMBER CO., INC. ("Britt"), a California corporation, the LENDERS from time to time party hereto, CREDIT SUISSE FIRST BOSTON, acting through its New York Branch, as administrative agent (in such capacity and together with its successors, the "Administrative Agent"). The parties hereto agree as follows: ARTICLE I. DEFINITIONS SECTION 1.01 Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Accounts" means all now owned or hereafter acquired or arising accounts of either Borrower, as defined in the UCC, including any rights to payment for the sale or lease of goods or rendition of services, whether or not they have been earned by performance "Adjusted LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum equal to the product of (a) the LIBO Rate in effect for such Interest Period and (b) Statutory Reserves. "Administrative Agent" shall have the meaning assigned to such term in the preamble. "Administrative Borrower" shall have the meaning assigned to such term in Section 2.24(a). "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form of Exhibit A, or such other form as may be supplied from time to time by the Administrative Agent. "Affiliate" shall mean, when used with respect to a specified person, another person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the person specified; provided, however, that, for purposes of Section 6.07, the term "Affiliate" shall also include any person that directly or indirectly owns 5% or more of any class of Equity Interests of the person specified or that is an officer or director of the person specified. "Agreement" shall have the meaning assigned to such term in the preamble. "Alternate Base Rate" shall mean, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Applicable Margin" shall mean (a) with respect to the Loans comprising each ABR Borrowing, 5.00% per annum and (b) with respect to the Loans comprising each Eurodollar Borrowing, 6.00% per annum. "Arranger" shall have the meaning assigned to such term in the preamble. "Asset Sale" shall mean the sale, lease, sale and leaseback, assignment, conveyance, transfer, issuance or other disposition (by way of merger, casualty, condemnation or otherwise) by PALCO or any of the Subsidiaries to any person other than PALCO or any Subsidiary Guarantor of (a) any Equity Interests of any of the Subsidiaries (other than directors' qualifying shares) or (b) any other assets of PALCO or any of the Subsidiaries, including Equity Interests of any person that is not a Subsidiary (other than inventory, obsolete or worn out assets, scrap and Permitted Investments, in each case disposed of in the ordinary course of business); provided that any asset sale or series of related asset sales described in clause (b) above having a value not in excess of $100,000 shall be deemed not to be an "Asset Sale" for purposes of this Agreement. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee (with the consent of any person whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit C or such other form as shall be approved by the Administrative Agent. "Benefit Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Tax Code or Section 307 of ERISA, and in respect of which the Borrowers or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States of America. "Borrowers" shall mean PALCO and Britt. "Borrowing" shall mean Loans of the same Type made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect. "Breakage Event" shall have the meaning assigned to such term in Section 2.16. "Business Day" shall mean any day other than a Saturday, Sunday or day on which commercial banks in New York City are authorized or required by law to close; provided, however, that when used in connection with a Eurodollar Loan (including with respect to all notices and determinations in connection therewith and any payments of principal, interest or other amounts thereon), the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Expenditures" shall mean, for any period, with respect to any person, (a) the additions to property, plant and equipment and other capital expenditures of such person and its subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of such person for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by such person and its subsidiaries during such period. "Capital Lease Obligations" of any person shall mean the obligations of such person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such person under GAAP, and the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Change in Control" shall be deemed to have occurred if (a) Maxxam shall fail to own directly or indirectly, beneficially and of record, Equity Interests representing at least 51% of the aggregate ordinary voting power and aggregate equity value represented by the issued and outstanding Equity Interests in PALCO; (b) Maxxam, through direct representation or through persons nominated by it, ceases to control a majority of the Board of Directors of PALCO necessary to effectuate any actions of the Board of Directors of PALCO; (c) PALCO shall at any time fail to own directly or indirectly, beneficially and of record, 100% of each class of issued and outstanding Equity Interests in Britt, (unless PALCO owns no Equity Interests in Britt), free and clear of all Liens (other than Liens created by the Guarantee and Collateral Agreement); (d) PALCO shall fail to own directly or indirectly, beneficially and of record, Equity Interests representing at least 51% of the aggregate ordinary voting power and aggregate equity value represented by the issued and outstanding Equity Interests in Scotia Pacific or (e) PALCO, through direct representation or through persons nominated by it, ceases to control a majority of the Board of Managers of Scotia Pacific necessary to effectuate any actions of the Board of Managers of Scotia Pacific. "Change in Law" shall mean (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.14, by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Charges" shall have the meaning assigned to such term in Section 9.09. "Closing Date" shall mean April 19, 2005. "Collateral" shall mean all property and assets of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document, and shall include the Mortgaged Properties. "Combined EBITDA" shall mean, for any period, Combined Net Income for such period plus (a) without duplication and to the extent deducted in determining such Combined Net Income, the sum of (i) Combined Interest Expense for such period, (ii) combined income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period and (iv) any non-cash charges (other than the write-down of current assets) for such period (provided that to the extent that all or any portion of the income of any person is excluded from Combined Net Income pursuant to the definition thereof for all or any portion of such period any amounts set forth in the preceding clauses (i) through (iv) that are attributable to such person shall not be included for purposes of this definition for such period or portion thereof), and minus (b) without duplication (i) all cash payments made during such period on account of reserves, restructuring charges and other non-cash charges added to Combined Net Income pursuant to clause (a)(iv) above in a previous period and (ii) to the extent included in determining such Combined Net Income, any extraordinary gains and all non-cash items of income for such period, all determined on a combined basis in accordance with GAAP (except that Inventory is presented on a FIFO basis). "Combined Interest Expense" shall mean, for any period, the sum of (a) the interest expense (including imputed interest expense in respect of Capital Lease Obligations) of the Borrowers on a combined basis for such period (including all commissions, discounts and other fees and charges owed by the Borrowers on a combined basis with respect to letters of credit and bankers' acceptance financing), net of interest income, in each case determined on a combined basis in accordance with GAAP, plus (b) any interest accrued during such period in respect of Indebtedness of the Borrowers on a combined basis that is required to be capitalized rather than included in interest expense for such period in accordance with GAAP. For purposes of the foregoing, interest expense shall be determined after giving effect to any net payments made or received by the Borrowers on a combined basis with respect to interest rate Hedging Agreements. "Combined Net Income" shall mean, for any period, the net income or loss of the Borrowers on a combined basis for such period determined on a combined basis in accordance with GAAP; provided that there shall be excluded (a) the income of any Subsidiary (other than Britt), (b) the income or loss of any person accrued prior to the date it is merged into or consolidated with a Borrower or the date that such person's assets are acquired by a Borrower, (c) the income of any person other than a Borrower, except to the extent of the amount of dividends or other distributions actually paid to a Borrower by such person during such period, and (d) any gains attributable to sales of assets out of the ordinary course of business. "Commitment" shall mean, with respect to each Lender, the commitment, if any, of such Lender to make Loans hereunder as set forth on the Lender Addendum delivered by such Lender, or in the Assignment and Acceptance pursuant to which such Lender assumed its Commitment, as applicable, as the same may be (a) reduced from time to time pursuant to Section 2.09 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial aggregate amount of the Commitments is $35,000,000. "Control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a person, whether through the ownership of voting securities, by contract or otherwise, and the terms "Controlling" and "Controlled" shall have meanings correlative thereto. "Control Agreement" means tri-party deposit account, securities account or commodities account control agreements by and among the applicable Loan Party, the Administrative Agent, certain other parties and the depository, securities intermediary or commodities intermediary, and each in form and substance satisfactory in all respects to the Administrative Agent and in any event proving to the Administrative Agent "control" of such deposit account, securities or commodities account within the meaning of Articles 8 and 9 of the UCC. "Credit Event" shall have the meaning assigned to such term in Section 4.01. "Current Assets" shall mean, at any time, the current assets (other than cash and Permitted Investments) of the Borrowers on a combined basis. "Current Liabilities" shall mean, at any time, the current liabilities of the Borrowers on a combined basis at such time, but excluding, without duplication, (a) the current portion of any long-term Indebtedness and (b) outstanding Loans. "Default" shall mean any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would constitute an Event of Default. "dollars" or "$" shall mean lawful money of the United States of America. "Environmental Laws" shall mean all former, current and future Federal, state, local and foreign laws (including common law), treaties, regulations, rules, ordinances, codes, decrees, judgments, directives, orders (including consent orders), and agreements in each case, relating to protection of the environment, natural resources, human health and safety or the presence, Release of, threatened Release, or exposure to, Hazardous Materials, or the generation, manufacture, processing, distribution, use, treatment, storage, transport, recycling or handling of, or the arrangement for such activities with respect to, Hazardous Materials. "Environmental Liability" shall mean all liabilities, obligations, damages, losses, claims, actions, suits, judgments, orders, fines, penalties, fees, expenses and costs (including administrative oversight costs, natural resource damages and remediation costs), whether contingent or otherwise, arising out of or relating to (a) compliance or non-compliance with any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release or threatened Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "Environmental Permit" shall mean any Permit under Environmental Law. "Equipment" means all now owned and hereafter acquired machinery, equipment, furniture, furnishings, fixtures, of either Borrower and other tangible personal property (except Inventory), including embedded software, motor vehicles with respect to which a certificate of title has been issued, aircraft, dies, tools, jigs, molds and office equipment, as well as all of such types of property leased by either Borrower and all of such Borrower's rights and interests with respect thereto under such leases (including, without limitation, options to purchase); together with all present and future additions and accessions thereto, replacements therefor, component and auxiliary parts and supplies used or to be used in connection therewith, and all substitutes for any of the foregoing, and all manuals, drawings, instructions, warranties and rights with respect thereto; wherever any of the foregoing is located. "Equity Interests" shall mean shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity interests in any person, or any obligations convertible into or exchangeable for, or giving any person a right, option or warrant to acquire, such equity interests or such convertible or exchangeable obligations. "Equity Issuance" shall mean any issuance or sale by PALCO of any Equity Interests of PALCO, or the receipt by PALCO of any capital contribution, as applicable, except in each case for (a) any issuance of directors' qualifying shares and (b) sales or issuances of common stock of PALCO to management or employees of PALCO or any Subsidiary under any employee stock option or stock purchase plan or employee benefit plan in existence from time to time in the ordinary course of business. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with the Borrowers, is treated as a single employer under Section 414(b) or (c) of the Tax Code, or solely for purposes of Section 302 of ERISA and Section 412 of the Tax Code, is treated as a single employer under Section 414 of the Tax Code. "ERISA Event" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Benefit Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Benefit Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Tax Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Tax Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Benefit Plan; (d) the incurrence by the Borrowers or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Benefit Plan or the withdrawal or partial withdrawal of the Borrowers or any of its ERISA Affiliates from any Benefit Plan or Multiemployer Plan; (e) the receipt by the Borrowers or any of its ERISA Affiliates from the PBGC or a plan administrator of any notice relating to the intention to terminate any Benefit Plan or Plans or to appoint a trustee to administer any Benefit Plan; (f) the adoption of any amendment to a Benefit Plan that would require the provision of security pursuant to Section 401(a)(29) of the Tax Code or Section 307 of ERISA; (g) the receipt by the Borrowers or any of their ERISA Affiliates of any notice, or the receipt by any Multiemployer Plan from the Borrowers or any of their ERISA Affiliates of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; (h) the occurrence of a "prohibited transaction" with respect to which the Borrowers or any of the Subsidiaries is a "disqualified person" (within the meaning of Section 4975 of the Tax Code) or with respect to which the Borrowers or any such Subsidiary could otherwise be liable; or (i) any other event or condition with respect to a Benefit Plan or Multiemployer Plan that could result in liability of any Loan Party in an amount in excess of $2,500,000. "Eurodollar", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "Event of Default" shall have the meaning assigned to such term in Article VII. "Excess Cash Flow" shall mean, for any fiscal year of the Borrowers, the excess of (a) the sum, without duplication, of (i) Combined EBITDA for such fiscal year and (ii) the decrease, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year minus (b) the sum, without duplication, of (i) the amount of any Taxes payable in cash by the Borrowers on a combined basis with respect to such fiscal year, (ii) Combined Interest Expense for such fiscal year payable in cash, (iii) Capital Expenditures made in cash in accordance with Section 6.10 during such fiscal year, except to the extent financed with the proceeds of Indebtedness, equity issuances, casualty proceeds, condemnation proceeds or other proceeds that would not be included in Combined EBITDA, (iv) permanent repayments of Indebtedness (other than mandatory prepayments of Loans under Section 2.13) made by the Borrowers on a combined basis during such fiscal year, but only to the extent that such prepayments by their terms cannot be reborrowed or redrawn and do not occur in connection with a refinancing of all or any portion of such Indebtedness and (v) the increase, if any, in Current Assets minus Current Liabilities from the beginning to the end of such fiscal year. "Excluded Taxes" shall mean, with respect to the Administrative Agent, any Lender, or any other recipient of any payment to be made by or on account of any obligation of the Borrowers hereunder, (a) taxes imposed on (or measured by) its net income as a result of a connection between such recipient and the jurisdiction imposing such tax (or any political subdivision thereof), other than any such connection arising solely from such recipient having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any other Loan Document and (b) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Administrative Borrower under Section 2.21(a)), any United States withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with Section 2.20(d), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from PALCO with respect to such withholding tax pursuant to Section 2.20(a). "Existing Credit Facility" shall mean the $30,000,000 credit facility of the Borrowers under the Credit Agreement dated as of January 23, 2004, among the Borrowers, Bank of America, N.A., as a lender and as agent for all lenders, and the other lenders party thereto, as amended. "Facility" shall mean the Commitments and the extensions of credit made thereunder. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for the day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "Fee Letter" shall mean the Engagement Letter dated as of the Closing Date between PALCO and Credit Suisse First Boston, acting through its New York Agency. "Fees" shall have the meaning assigned to such term in Section 2.05(a). "Financial Officer" of any person shall mean the chief financial officer, principal accounting officer, treasurer or controller of such person and in addition to such persons for purposes of certifying compliance with financial covenants, the "Financial Officer" shall include the financial reporting manager and general accounting manager or any other person having substantially the same authority and responsibility. "Foreign Lender" shall mean any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "GAAP" shall mean generally accepted accounting principles in the United States. "Governmental Authority" shall mean the government of the United States of America or any other nation, any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Granting Lender" shall have the meaning assigned to such term in Section 9.04(i). "Guarantee" of or by any person (the "guarantor") shall mean any obligation, contingent or otherwise, of (a) the guarantor or (b) another person (including any bank under a letter of credit) to induce the creation of which the guarantor has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation, contingent or otherwise, of the guarantor, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, (iv) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation or (v) to otherwise assure or hold harmless the owner of such Indebtedness or other obligation against loss in respect thereof; provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "Guarantee and Collateral Agreement" shall mean each Guarantee and Collateral Agreement executed and delivered by one or more Loan Parties, each in form and substance reasonably satisfactory to the Administrative Agent. "Guarantors" shall mean the Subsidiary Guarantors. "Hazardous Materials" shall mean any petroleum (including crude oil or fraction thereof) or petroleum products or byproducts, or any pollutant, contaminant, chemical, compound, constituent, or hazardous, toxic or other substances, materials or wastes defined, or regulated as such by, or pursuant to, any Environmental Law, or requires removal, remediation or reporting under any Environmental Law, including asbestos, or asbestos containing material, radon or other radioactive material, polychlorinated biphenyls and urea formaldehyde insulation. "Hedging Agreement" shall mean any agreement with respect to any swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, fuel or other commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions. "Holdings" shall mean MAXXAM Group Inc. "Indebtedness" of any person shall mean, without duplication, (a) all obligations of such person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such person under conditional sale or other title retention agreements relating to property or assets acquired by such person, (d) all obligations of such person in respect of the deferred purchase price of property or services (other than current trade accounts payable incurred in the ordinary course of business), (e) all obligations of such person, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Equity Interests in such person, (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such person of Indebtedness of others, (h) all Capital Lease Obligations of such person, (i) all obligations, contingent or otherwise, of such person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such person in respect of bankers' acceptances. The Indebtedness of any person shall include the Indebtedness of any other person (including any partnership in which such person is a general partner) to the extent such person is liable therefor as a result of such person's ownership interest in, or other relationship with, such other person, except to the extent the terms of such Indebtedness provide that such person is not liable therefor. "Indemnified Taxes" shall mean Taxes other than Excluded Taxes and Other Taxes. "Indemnitee" shall have the meaning assigned to such term in Section 9.05(b). "Information" shall have the meaning assigned to such term in Section 9.16. "Intellectual Property Collateral" shall have the meaning assigned to such term in the Guarantee and Collateral Agreement. "Intellectual Property Security Agreement" shall mean all Intellectual Property Security Agreements to be executed and delivered by the Loan Parties, each substantially in the applicable form required by the Guarantee and Collateral Agreement. "Intercreditor Agreement" shall mean that certain Intercreditor Agreement dated as of the Closing Date by and among the Borrowers, the Guarantors, Holdings, the Administrative Agent and the Administrative Agent (as defined in the Term Loan Agreement). "Interest Payment Date" shall mean (a) with respect to any ABR Loan, the last Business Day of each calendar month, and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day that would have been an Interest Payment Date had successive Interest Periods of three months' duration been applicable to such Borrowing. "Interest Period" shall mean, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is 1, 2, 3 or 6 months thereafter (or 9 or 12 months thereafter if, at the time of the relevant Borrowing, an interest period of such duration is available to all Lenders participating therein), as the Borrowers may elect; provided, however, that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Inventory" means all now owned and hereafter acquired inventory, goods and merchandise of either Borrower, wherever located, to be furnished under any contract of service or held for sale or lease, all returned goods, raw materials, work-in-process, finished goods (including embedded software), other materials and supplies of any kind, nature or description which are used or consumed in either Borrower's business or used in connection with the packing, shipping, advertising, selling or finishing of such goods, merchandise, and all documents of title or other Documents representing them. "Investments" shall have the meaning assigned to such term in Section 6.04. "Lender Addendum" shall mean, with respect to any initial Lender, a Lender Addendum in the form of Exhibit E, or such other form as may be supplied by the Administrative Agent, to be executed and delivered by such Lender on the Closing Date. "Lenders" shall mean (a) the persons that deliver a Lender Addendum (other than any such person that has ceased to be a party hereto pursuant to an Assignment and Acceptance) and (b) any person that has become a party hereto pursuant to an Assignment and Acceptance. "LIBO Rate" shall mean, with respect to any Eurodollar Borrowing for any Interest Period, the rate per annum determined by the Administrative Agent at approximately 11:00 a.m., London time, on the date that is two Business Days prior to the commencement of such Interest Period by reference to the British Bankers' Association Interest Settlement Rates for deposits in dollars (as set forth by the Bloomberg Information Service or any successor thereto or any other service selected by the Administrative Agent which has been nominated by the British Bankers' Association as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period; provided that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition, the "LIBO Rate" shall be the interest rate per annum determined by the Administrative Agent to be the average of the rates per annum at which deposits in dollars are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Administrative Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the beginning of such Interest Period. "Lien" shall mean, with respect to any asset, (a) any mortgage, deed of trust, lien (statutory or otherwise), pledge, hypothecation, encumbrance, collateral assignment, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Documents" shall mean this Agreement and the Security Documents. "Loan Parties" shall mean the Borrowers and each Subsidiary that is or becomes a party to a Loan Document. "Loans" means Loans made by the Lenders to the Borrowers pursuant to Sections 2.01. "Margin Stock" shall have the meaning assigned to such term in Regulation U. "Material Adverse Effect" shall mean a material adverse condition or material adverse change in or materially affecting (a) the business, assets, liabilities, operations or condition (financial or otherwise) or prospects of PALCO and the Subsidiaries, taken as a whole, or (b) the validity or enforceability of any of the Loan Documents or the rights and remedies of the Arranger, the Administrative Agent, or the Secured Parties thereunder. "Material Indebtedness" shall mean Indebtedness (other than the Loans), or obligations in respect of one or more Hedging Agreements, of any one or more of PALCO and the Subsidiaries in an aggregate outstanding principal amount exceeding $1,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of PALCO or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that PALCO or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Maturity Date" shall mean April 19, 2010. "Maximum Rate" shall have the meaning assigned to such term in Section 9.09. "Maxxam" means MAXXAM Inc. "Moody's" shall mean Moody's Investors Service, Inc. "Mortgaged Properties" shall mean, initially, each parcel of real property and the improvements thereto owned or leased by a Loan Party and specified on Schedule 1.01, and shall include each other parcel of real property and improvements thereto with respect to which a Mortgage is granted pursuant to Section 5.09 or 5.10. "Mortgages" shall mean the fee or leasehold mortgages or deeds of trust, assignments of leases and rents and other security documents granting a Lien on any Mortgaged Property to secure the Obligations, each in form and substance reasonably satisfactory to the Administrative Agent, with such changes as shall be advisable under the law of the jurisdiction in which such Mortgage is to be recorded and as are reasonably satisfactory to the Administrative Agent, as the same may be amended, supplemented, replaced or otherwise modified from time to time in accordance with this Agreement. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Cash Proceeds" shall mean (a) with respect to any Asset Sale or Recovery Event, the proceeds thereof in the form of cash (including any such proceeds subsequently received (as and when received) in respect of noncash consideration initially received), net of (i) selling expenses (including reasonable and customary broker's fees or commissions, legal fees, transfer and similar taxes incurred by the Borrowers and the Subsidiaries in connection therewith and the Borrowers' good faith estimate of income taxes paid or payable in connection with such sale, after taking into account any available tax credits or deductions and any tax sharing arrangements), (ii) amounts provided as a reserve, in accordance with GAAP, against any liabilities under any indemnification obligations or purchase price adjustment associated with such Asset Sale (provided that, to the extent and at the time any such amounts are released from such reserve, such amounts shall constitute Net Cash Proceeds) and (iii) the principal amount, premium or penalty, if any, interest and other amounts on any Indebtedness for borrowed money which is secured by the asset sold in such Asset Sale and which is required to be repaid with such proceeds (other than Indebtedness hereunder or any such Indebtedness assumed by the purchaser of such asset); and (b) with respect to any issuance or disposition of Indebtedness or any Equity Issuance, the cash proceeds thereof, net of all taxes and reasonable and customary fees, commissions, costs and other expenses incurred by the Borrowers and the Subsidiaries in connection therewith. "Obligations" shall mean all obligations defined as "Obligations" in the Guarantee and Collateral Agreement and the other Security Documents. "Other Taxes" shall mean any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (including interest, fines, penalties and additions to tax) arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Perfection Certificate" shall mean the Pre-Closing UCC Diligence Certificate substantially in the form of Exhibit F or any other form approved by the Administrative Agent. "Permits" shall mean any and all franchises, licenses, leases, permits, approvals, notifications, certifications, registrations, authorizations, exemptions, qualifications, easements, rights of way, Liens and other rights, privileges and approvals required under any Requirement of Law. "Permitted Investments" shall mean: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, the Administrative Agent or any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria of clause (c) above; (e) investments in "money market funds" within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above; (f) taxable auction rate securities commonly known as "money market notes" that at the time of purchase have been rated and the ratings for which (A) for direct issues, must not be less than "P1" if rated by Moody's Investors Services, Inc. and not less than "A1" if rated by Standard and Poor's Corporation, or (B) for collateralized issues which follow the asset coverage tests set forth in the Investment Company Act of 1940, as amended, must have long-term ratings of at least "AAA" if rated by Standard & Poor's Corporation and "Aaa" if rated by Moody's Investors Services, Inc.; and (g) other short-term investments utilized by Subsidiaries in accordance with normal investment practices for cash management in investments of a type analogous to the foregoing. "Permitted Refinancing Indebtedness" shall mean Indebtedness issued or incurred (including by means of the extension or renewal of existing Indebtedness) to refinance, refund, extend, renew or replace existing Indebtedness ("Refinanced Indebtedness"); provided that (a) the principal amount of such refinancing, refunding, extending, renewing or replacing Indebtedness is not greater than the principal amount of such Refinanced Indebtedness plus the amount of any premiums or penalties and accrued and unpaid interest paid thereon and reasonable fees and expenses, in each case associated with such refinancing, refunding, extension, renewal or replacement, (b) such refinancing, refunding, extending, renewing or replacing Indebtedness has a final maturity that is no sooner than, and a weighted average life to maturity that is no shorter than, such Refinanced Indebtedness, (c) if such Refinanced Indebtedness or any Guarantees thereof are subordinated to the Obligations, such refinancing, refunding, extending, renewing or replacing Indebtedness and any Guarantees thereof remain so subordinated on terms no less favorable to the Lenders, (d) the obligors in respect of such Refinanced Indebtedness immediately prior to such refinancing, refunding, extending, renewing or replacing are the only obligors on such refinancing, refunding extending, renewing or replacing Indebtedness and (e) such refinancing, refunding, extending, renewing or replacing Indebtedness contains covenants and events of default and is benefited by Guarantees, if any, which, taken as a whole, are determined in good faith by a Financial Officer of PALCO to be no less favorable to the Borrowers or the applicable Subsidiary and the Lenders in any material respect than the covenants and events of default or Guarantees, if any, in respect of such Refinanced Indebtedness. "person" shall mean any natural person, corporation, trust, business trust, joint venture, joint stock company, association, company, limited liability company, partnership, Governmental Authority or other entity. "Pledged Collateral" shall have the meaning assigned to such term in the Guarantee and Collateral Agreement. "Prime Rate" shall mean the rate of interest per annum announced from time to time by Credit Suisse First Boston as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective as of the opening of business on the date such change is announced as being effective. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually available. "Pro Rata Percentage" of any Lender, at any time, shall mean the percentage of the total Commitments represented by such Lender's Commitment. In the event the Commitments shall have expired or been terminated, the Pro Rata Percentage of any Lender shall be determined on the basis of the Commitments most recently in effect prior thereto. "Real Property" shall mean all Mortgaged Property and all other real property owned or leased from time to time by any Loan Party. "Recovery Event" shall mean any settlement of or payment in respect of any property or casualty insurance claim or any taking under power of eminent domain or by condemnation or similar proceeding of or relating to any property or asset of the Borrowers or any Subsidiary. "Register" shall have the meaning assigned to such term in Section 9.04(d). "Regulation T" shall mean Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation U" shall mean Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" shall mean Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Related Parties" shall mean, with respect to any specified person, such person's Affiliates and the respective directors, officers, employees, agents and advisors of such person and such person's Affiliates. "Release" shall mean any release, spill, seepage, emission, leaking, pumping, injection, pouring, emptying, deposit, disposal, discharge, dispersal, dumping, escaping, leaching, or migration into, onto or through the environment or within or upon any building, structure, facility or fixture. "Repayment Date" shall have the meaning given to such term in Section 2.11. "Required Lenders" shall mean, at any time, Lenders having Loans representing at least a majority of the sum of all Loans at such time. "Required Prepayment Percentage" shall mean (a) in the case of any Asset Sale or Recovery Event, 100%; (b) in the case of any Equity Issuance, 50%, (c) in the case of any issuance or other incurrence of Indebtedness, 100%, and (d) in the case of any Excess Cash Flow, 75%. "Requirement of Law" shall mean as to any person, the governing documents of such person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such person or any of its Real Property or personal property or to which such person or any of its property of any nature is subject. "Restricted Payment" shall mean any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in PALCO or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, defeasance, retirement, acquisition, cancellation or termination of any Equity Interests in PALCO or any Subsidiary or any option, warrant or other right to acquire any such Equity Interests in PALCO or any Subsidiary. "Revolving Credit Agreement" shall mean that certain Revolving Credit Agreement dated the date hereof among PALCO, Britt, The CIT Group/Business Credit, Inc., as the administrative agent, and the financial institutions from time to time party thereto as lenders, as amended, modified, supplemented or otherwise modified from time to time. "S&P" shall mean Standard & Poor's Ratings Group, Inc. "Salmon Creek" shall mean Salmon Creek LLC, a Delaware limited liability company. "Scotia Inn" shall mean Scotia Inn, Inc., a Delaware corporation. "Scotia Pacific" shall mean Scotia Pacific Company LLC, a Delaware limited liability company. "Scotia Pacific Bankruptcy" means the happening of any of the following events: (a) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Scotia Pacific, or of a substantial part of the property or assets of Scotia Pacific, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Scotia Pacific or for a substantial part of the property or assets of Scotia Pacific or (iii) the winding-up or liquidation of Scotia Pacific, and such proceeding or petition shall continue undismissed for 60 days; or (b) Scotia Pacific shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (a) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Scotia Pacific or for a substantial part of the property or assets of Scotia Pacific, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due, and such event or circumstances shall continue for 60 days; provided, however, that it shall not constitute a "Scotia Pacific Bankruptcy" if, within 90 days of a voluntary proceeding described in clause (b)(i) above Scotia Pacific files a proposed plan of reorganization with the applicable bankruptcy court and the Administrative Agent has received evidence satisfactory to it in its reasonable discretion, that such proposed plan of reorganization is supported by creditors of Scotia Pacific sufficient to cause such proposed plan of reorganization to become effective. "Secured Parties" shall have the meaning assigned to such term in the Guarantee and Collateral Agreement. "Security Documents" shall mean the Guarantee and Collateral Agreement, the Mortgages, the Intellectual Property Security Agreements, the Intercreditor Agreement and each of the other security agreements, pledges, mortgages, consents and other instruments and documents executed and delivered pursuant to any of the foregoing or pursuant to Section 5.09 or 5.10. "Settlement Property" shall mean the approximately 200 acres of real property to be deeded from Scotia Pacific to PALCO, and then substantially concurrently deeded from PALCO to Ms. Kristi Wrigley, pursuant to that certain Stipulation for Settlement CCP Section 664.6 in Kristi Wrigley, et al. v. Charles Hurwitz, et al., State of California, Humboldt County Superior Court, Case No. DR 9700399. "SPC" shall have the meaning assigned to such term in Section 9.04(i). "Statutory Reserves" shall mean a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board and any other banking authority, domestic or foreign, to which the Administrative Agent or any Lender (including any branch, Affiliate or other fronting office making or holding a Loan) is subject for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "subsidiary" shall mean, with respect to any person (herein referred to as the "parent"), any corporation, partnership, limited liability company, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or more than 50% of the general partnership interests are, at the time any determination is being made, owned, controlled or held, or (b) that is, at the time any determination is made, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean any subsidiary of PALCO, other than Scotia Pacific or a subsidiary of Scotia Pacific. "Subsidiary Guarantor" shall mean each Subsidiary other than Britt. "Survey" shall have the meaning assigned to such term in Section 4.02(p). "Tax Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Taxes" shall mean any and all present or future taxes, levies, imposts, duties, deductions, charges, liabilities or withholdings imposed by any Governmental Authority. "Title Insurance Company" shall have the meaning assigned to such term in Section 4.02(n). "Transactions" shall mean, collectively, (a) the execution, delivery and performance by the Loan Parties of the Loan Documents to which they are a party, (b) the borrowings hereunder and the use of proceeds of each of the foregoing, (c) the granting of Liens pursuant to the Security Documents, (d) the repayment of all obligations under the Existing Credit Facility and (e) any other transactions related to or entered into in connection with any of the foregoing. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, the term "Rate" shall include the Adjusted LIBO Rate and the Alternate Base Rate. "UCC" shall mean the Uniform Commercial Code. "Uniform Customs" shall have the meaning assigned to such term in Section 9.07. "United States" or "U.S." shall mean the United States of America. "wholly owned subsidiary" of any person shall mean a subsidiary of such person of which securities (except for directors' qualifying shares) or other ownership interests representing 100% of the Equity Interests are, at the time any determination is being made, owned, controlled or held by such person or one or more wholly owned subsidiaries of such person or by such person and one or more wholly owned subsidiaries of such person; a "wholly owned Subsidiary" shall mean any wholly owned Subsidiary of one or more of the Borrowers. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02 Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including", and words of similar import, shall not be limiting and shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". The words "asset" and "property" shall be construed as having the same meaning and effect and to refer to any and all rights and interests in tangible and intangible assets and properties of any kind whatsoever, whether real, personal or mixed, including cash, securities, Equity Interests, accounts and contract rights. The words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision of this Agreement unless the context shall otherwise require. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, (a) any definition of, or reference to, any Loan Document or any other agreement, instrument or document in this Agreement shall mean such Loan Document or other agreement, instrument or document as amended, restated, supplemented or otherwise modified from time to time (subject to any restrictions on such amendments, restatements, supplements or modifications set forth herein) and (b) all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that if the Administrative Borrower notifies the Administrative Agent that the Borrowers wish to amend any covenant in Article VI or any related definition to eliminate the effect of any change in GAAP occurring after the date of this Agreement on the operation of such covenant (or if the Administrative Agent notifies the Administrative Borrower that the Required Lenders wish to amend Article VI or any related definition for such purpose), then the Borrowers' and their Subsidiaries' compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrowers and the Required Lenders. SECTION 1.03 Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., a "Eurodollar Loan"). Borrowings also may be classified and referred to by Type (e.g., a "Eurodollar Borrowing"). SECTION 1.04 Pro Forma Calculations. All pro forma calculations permitted or required to be made by PALCO or any Subsidiary pursuant to this Agreement shall include only those adjustments that would be permitted or required by Regulation S-X under the Securities Act of 1933, as amended, together with those adjustments that (a) have been certified by a Financial Officer of PALCO as having been prepared in good faith based upon reasonable assumptions and (b) are based on reasonably detailed written assumptions reasonably acceptable to the Administrative Agent. ARTICLE II. THE CREDITS SECTION 2.01 Loans. Subject to the terms and conditions hereof and relying upon the representations and warranties set forth herein, each Lender agrees, severally and not jointly, to make a Loan to the Borrowers on the Closing Date in a principal equal to its Commitment. Amounts paid or prepaid in respect of Loans may not be reborrowed. SECTION 2.02 Borrowings. (a) The Loans comprising any Borrowing shall be in an aggregate principal amount that is (i) an integral multiple of $1,000,000 and not less than $1,000,000 or (ii) equal to the remaining available balance of the Loans. Subject to Sections 2.08 and 2.15, each Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Administrative Borrower may request pursuant to Section 2.10; provided that all Borrowings as of the Closing Date and during the period ending seven days thereafter shall be ABR Borrowings (and may not be converted into Eurodollar Borrowings until the end of such seven-day period), and no Borrowings may be converted into or continued as a Eurodollar Borrowing having an Interest Period in excess of one month prior to the date which is 60 days after the Closing Date. Each Lender may at its option make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrowers to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time; provided, however, that the Administrative Borrower shall not be entitled to request any Borrowing that, if made, would result in more than five (5) Eurodollar Borrowings outstanding hereunder at any time. For purposes of the foregoing, Borrowings having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Borrowings. (b) Each Lender shall make each Loan to be made by it hereunder on the Closing Date by wire transfer of immediately available funds to such account designated by the Administrative Agent, and the Administrative Agent shall promptly credit the amounts so received to an account in the name of the applicable Borrowers. (c) Notwithstanding any other provision of this Agreement, the Administrative Borrower shall not be entitled to request any Interest Period which would end after the Maturity Date. SECTION 2.03 [Intentionally Omitted]. SECTION 2.04 Repayment of Loans; Evidence of Debt. (a) The Borrowers hereby unconditionally promise to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Loan of such Lender made to the Borrowers as provided in Section 2.11. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrowers to such Lender resulting from each Loan made by such Lender to the Borrowers from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain accounts in which it will record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrowers to each Lender hereunder and (iii) the amount of the sum received by the Administrative Agent hereunder from the Borrowers or any Guarantor and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrowers to repay the Loans made to the Borrowers in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it hereunder be evidenced by a promissory note. In such event, the Borrowers shall execute and deliver to such Lender a promissory note payable to such Lender and its registered assigns and in a form and substance reasonably acceptable to the Administrative Agent. Notwithstanding any other provision of this Agreement, in the event any Lender shall request and receive such a promissory note, the interests represented by such note shall at all times (including after any assignment of all or part of such interests pursuant to Section 9.04) be represented by one or more promissory notes payable to the payee named therein or its registered assigns. SECTION 2.05 Fees. (a) The Borrowers agree to pay to the Administrative Agent and the Arranger, for its own account, the fees in the amounts and at the times from time to time agreed to in writing by the Borrowers (or any Affiliate) and the Administrative Agent and/or the Arranger, including pursuant to the Fee Letter (the "Fees"). (b) If on or prior to the fourth anniversary of the Closing Date any Borrower pays after acceleration or prepays all or any portion of the Loan, whether voluntarily or involuntarily and whether before or after acceleration of the Obligations, Borrowers shall pay to the Administrative Agent, for the benefit of Lenders as liquidated damages and compensation for the costs of being prepared to make funds available hereunder an amount equal to the Applicable Percentage (as defined below) multiplied by the principal amount of the Loan paid after acceleration or prepaid. As used herein, the term "Applicable Percentage" shall mean (w) 4%, in the case of a prepayment on or prior to the first anniversary of the Closing Date, (x) 3%, in the case of a prepayment after the first anniversary of the Closing Date but on or prior to the second anniversary thereof, (y) 2% in the case of a prepayment after the second anniversary of the Closing Date or on or prior to the third anniversary of the Closing Date, and (z) 1%, in the case of a prepayment after the third anniversary of the Closing Date but on or prior to the fourth anniversary of the Closing Date; provided, however, that no amount shall be payable pursuant to this Section 2.05(b) in connection with a termination which occurs simultaneously with repayment of the Obligations with the proceeds of a credit facility under which such Lender is a lender. The Loan Parties agree that the Applicable Percentages are a reasonable calculation of Lenders' lost profits in view of the difficulties and impracticality of determining actual damages from a prepayment of the Loans. Notwithstanding the foregoing, no prepayment fee shall be payable by Borrowers upon a mandatory prepayment made pursuant to Section 2.13. (c) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.06 Interest on Loans. (a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin in effect from time to time. (b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin in effect from time to time. (c) Interest on each Loan shall be increased by 2.00% per annum at all times that a Scotia Pacific Bankruptcy exists. (d) Interest on each Loan shall be payable on the Interest Payment Dates applicable to such Loan except as otherwise provided in this Agreement. The applicable Alternate Base Rate or Adjusted LIBO Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.07 Default Interest. If an Event of Default has occurred and is continuing and the Required Lenders so elect, the Borrowers shall on written demand from time to time pay interest, to the extent permitted by law, on such defaulted amount to but excluding the date of actual payment (after as well as before judgment) (a) in the case of overdue principal, at the rate otherwise applicable to such Loan pursuant to Section 2.06 plus 2.00% per annum and (b) in all other cases, at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when determined by reference to the Prime Rate and over a year of 360 days at all other times) equal to the rate that would be applicable to an ABR Loan plus 2.00%. SECTION 2.08 Alternate Rate of Interest. In the event, and on each occasion, that prior to the commencement of any Interest Period for a Eurodollar Borrowing (a) the Administrative Agent shall have determined that adequate and reasonable means do not exist for determining the Adjusted LIBO Rate for such Interest Period or (b) the Administrative Agent is advised by the Required Lenders in respect of the Facility that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period, the Administrative Agent shall, as soon as practicable thereafter, give written or fax notice of such determination to the Borrowers and the Lenders. In the event of any such determination, until the Administrative Agent shall have advised the Borrowers and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any request by the Administrative Borrower for a Eurodollar Borrowing pursuant to Section 2.10 shall be deemed to be a request for an ABR Borrowing and (ii) any Interest Period election that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective. Each determination by the Administrative Agent under this Section 2.08 shall be conclusive absent manifest error. SECTION 2.09 Termination of Commitments. Notwithstanding the foregoing, all the Commitments shall automatically terminate at 5:00 p.m., New York City time, on April 19, 2005, if the initial Credit Event shall not have occurred by such time. SECTION 2.10 Conversion and Continuation of Borrowings. The Administrative Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (a) not later than 12:00 (noon), New York City time, one Business Day prior to conversion, to convert any Eurodollar Borrowing of the Borrowers into an ABR Borrowing, (b) not later than 12:00 (noon), New York City time, three Business Days prior to conversion or continuation, to convert any ABR Borrowing of the Borrowers into a Eurodollar Borrowing or to continue any Eurodollar Borrowing of the Borrowers as a Eurodollar Borrowing for an additional Interest Period and (c) not later than 12:00 (noon), New York City time, three Business Days prior to conversion, to convert the Interest Period with respect to any Eurodollar Borrowing of the Borrowers to another permissible Interest Period, subject in each case to the following: (i) each conversion or continuation shall be made pro rata among the Lenders in accordance with the respective principal amounts of the Loans comprising the converted or continued Borrowing; (ii) if less than all the outstanding principal amount of any Borrowing shall be converted or continued, then each resulting Borrowing shall satisfy the limitations specified in Sections 2.02(a) regarding the principal amount and maximum number of Borrowings of the relevant Type; (iii) each conversion shall be effected by each Lender and the Administrative Agent by recording for the account of such Lender the new Loan of such Lender resulting from such conversion and reducing the Loan (or portion thereof) of such Lender being converted by an equivalent principal amount; accrued interest on any Eurodollar Loan (or portion thereof) being converted shall be paid by the Borrowers at the time of conversion; (iv) if any Eurodollar Borrowing is converted at a time other than the end of the Interest Period applicable thereto, the Borrowers shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.16; (v) any portion of a Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurodollar Borrowing; (vi) any portion of a Eurodollar Borrowing that cannot be converted into or continued as a Eurodollar Borrowing by reason of the immediately preceding clause shall be automatically converted at the end of the Interest Period in effect for such Borrowing into an ABR Borrowing; (vii) no Interest Period may be selected for any Eurodollar Borrowing that would end later than a Repayment Date occurring on or after the first day of such Interest Period if, after giving effect to such selection, the aggregate outstanding amount of (A) the Eurodollar Borrowings with Interest Periods ending on or prior to such Repayment Date and (B) the ABR Borrowings would not be at least equal to the principal amount of Borrowings to be paid on such Repayment Date; and (viii) after the occurrence and during the continuance of a Default or Event of Default, no outstanding Loan may be converted into, or continued as, a Eurodollar Loan. Each notice pursuant to this Section 2.10 shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Borrowing that the Administrative Borrower request be converted or continued, (ii) whether such Borrowing is to be converted to or continued as a Eurodollar Borrowing or an ABR Borrowing, (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day) and (iv) if such Borrowing is to be converted to or continued as a Eurodollar Borrowing, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurodollar Borrowing, the Administrative Borrower shall be deemed to have selected an Interest Period of one month's duration. The Administrative Agent shall advise the Lenders of any notice given pursuant to this Section 2.10 and of each Lender's portion of any converted or continued Borrowing. If the Administrative Borrower shall not have given notice in accordance with this Section 2.10 to continue any Borrowing into a subsequent Interest Period (and shall not otherwise have given notice in accordance with this Section 2.10 to convert such Borrowing), such Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be converted or continued into an ABR Borrowing. SECTION 2.11 Repayment of Borrowings. (a) On the dates set forth below, or if any such date is not a Business Day, on the next preceding Business Day (each such date being called a "Repayment Date"), the Borrowers shall pay to the Administrative Agent, for the account of the Lenders, a principal amount of the Loans (as adjusted from time to time pursuant to Sections 2.11(b), 2.12 and 2.13(e)) equal to the amount set forth below for such date, together in each case with accrued and unpaid interest on the amount to be paid to but excluding the date of such payment: Repayment Date Amount June 30, 2005 $87,500 September 30, 2005 $87,500 December 31, 2005 $87,500 March 31, 2006 $87,500 June 30, 2006 $87,500 September 30, 2006 $87,500 December 31, 2006 $87,500 March 31, 2007 $87,500 June 30, 2007 $87,500 September 30, 2007 $87,500 December 31, 2007 $87,500 March 31, 2008 $87,500 June 30, 2008 $87,500 September 30, 2008 $87,500 December 31, 2008 $87,500 March 31, 2009 $87,500 June 30, 2009 $87,500 September 30, 2009 $87,500 December 31, 2009 $87,500 March 31, 2010 $87,500 Maturity Date Remainder (b) To the extent not previously paid, all Loans shall be due and payable on the Maturity Date, together with accrued and unpaid interest on the principal amount to be paid to but excluding the date of payment. (c) All repayments pursuant to this Section 2.11 shall be subject to Section 2.16, but shall otherwise be without premium or penalty. SECTION 2.12 Prepayment. (a) On or after the first anniversary of the Closing Date, the Borrowers shall have the right at any time and from time to time to prepay any Borrowing, in whole or in part, upon at least three Business Days' prior written or fax notice (or telephone notice promptly confirmed by written or fax notice) in the case of Eurodollar Loans, or written or fax notice (or telephone notice promptly confirmed by written or fax notice) at least one Business Day prior to the date of prepayment in the case of ABR Loans, to the Administrative Agent before 12:00 (noon), New York City time; provided, however, that each partial prepayment shall be in an amount that is an integral multiple of $250,000 and not less than $750,000; provided, additionally, that the Borrowers shall be permitted prior to the first anniversary of the Closing Date to prepay any Borrowing if such prepayment is made simultaneously with the repayment or restructuring of the outstanding Indebtedness of Scotia Pacific. (b) Optional prepayments of Loans shall be applied pro rata to the remaining scheduled installments thereof. (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the Borrowers to prepay such Borrowing by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Sections 2.05(b) and 2.16. All prepayments under this Section 2.12 shall be accompanied by accrued and unpaid interest on the principal amount to be prepaid to but excluding the date of payment. SECTION 2.13 Mandatory Prepayments. (a) Not later than the third Business Day following the completion of any Asset Sale or the occurrence of any Recovery Event, the Borrowers shall apply the Required Prepayment Percentage of the Net Cash Proceeds received with respect thereto to prepay outstanding Loans in accordance with Section 2.13(e); provided, however, that with respect to any Net Cash Proceeds received from property or casualty insurance relating to Collateral consisting of fixed assets, the Administrative Agent shall permit, within 180 days of receipt of such Net Cash Proceeds, the applicable Borrower to use such Net Cash Proceeds, or any part thereof, to replace, repair, restore or rebuild the relevant fixed assets in a diligent and expeditious manner with materials and workmanship of substantially the same quality as existed before the loss, damage or destruction so long as (1) no Default or Event of Default has occurred and is continuing and (2) the applicable Borrower (i) provides the Administrative Agent and Required Lenders with plans and specifications for any such repair or restoration which shall be reasonably satisfactory to the Administrative Agent and the Required Lenders and (ii) demonstrates to the reasonable satisfaction of the Administrative Agent and the Required Lenders that funds available to it will be sufficient to complete such project in the manner provided therein. (b) In the event and on each occasion that an Equity Issuance occurs, the Borrowers shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, apply the Required Prepayment Percentage of the Net Cash Proceeds therefrom to prepay outstanding Loans in accordance with Section 2.13(e). (c) In the event that any Loan Party or any subsidiary of a Loan Party shall receive Net Cash Proceeds from the issuance or other incurrence of Indebtedness of any Loan Party or any subsidiary of a Loan Party (other than Indebtedness permitted pursuant to Section 6.01), the Borrowers shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the receipt of such Net Cash Proceeds by such Loan Party or such subsidiary, apply an amount equal to the Required Prepayment Percentage of such Net Cash Proceeds to prepay outstanding Loans in accordance with Section 2.13(e). (d) No later than the earlier of (i) 90 days after the end of each fiscal year of the Borrowers, commencing with the fiscal year ending on December 31, 2005, and (ii) the date on which the financial statements with respect to such period are delivered pursuant to Section 5.04(a), the Borrowers shall prepay outstanding Loans in accordance with Section 2.13(e), in an aggregate principal amount equal to the Required Prepayment Percentage of Excess Cash Flow for the fiscal year then ended. (e) Mandatory prepayments of outstanding Loans under this Agreement shall be applied pro rata against the remaining scheduled installments due in respect of the Loans. SECTION 2.14 Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or the Administrative Agent (except any such reserve requirement which is reflected in the Adjusted LIBO Rate) or (ii) impose on any Lender or the Administrative Agent or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount deemed by such Lender or the Administrative Agent to be material, then the Borrowers will pay to such Lender or the Administrative Agent, as the case may be, upon demand such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender or the Administrative Agent shall have determined that any Change in Law regarding capital adequacy has or would have the effect of reducing the rate of return on such Lender's or the Administrative Agent's capital or on the capital of such Lender's or the Administrative Agent's holding company, if any, as a consequence of this Agreement or the Loans made by such Lender to a level below that which such Lender or the Administrative Agent or such Lender's or the Administrative Agent's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Administrative Agent's policies and the policies of such Lender's or the Administrative Agent's holding company with respect to capital adequacy) by an amount deemed by such Lender or the Administrative Agent to be material, then from time to time the Borrowers shall pay to such Lender or the Administrative Agent, as the case may be, such additional amount or amounts as will compensate such Lender or the Administrative Agent or such Lender's or the Administrative Agent's holding company for any such reduction suffered. (c) A certificate of a Lender or the Administrative Agent setting forth the amount or amounts necessary to compensate such Lender or the Administrative Agent or its holding company, as applicable, as specified in paragraph (a) or (b) of this Section 2.14 shall be delivered to the Borrowers and shall be conclusive absent manifest error. The Borrowers shall pay such Lender or the Administrative Agent, as the case may be, the amount or amounts shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure or delay on the part of any Lender or the Administrative Agent to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Administrative Agent's right to demand such compensation; provided that the Borrowers shall not be under any obligation to compensate any Lender or the Administrative Agent under paragraph (a) or (b) above for increased costs or reductions with respect to any period prior to the date that is 180 days prior to such request if such Lender or the Administrative Agent knew or could reasonably have been expected to know of the circumstances giving rise to such increased costs or reductions and of the fact that such circumstances would result in a claim for increased compensation by reason of such increased costs or reductions; provided further that the foregoing limitation shall not apply to any increased costs or reductions arising out of the retroactive application of any Change in Law within such 180-day period. The protection of this Section shall be available to each Lender and the Administrative Agent regardless of any possible contention of the invalidity or inapplicability of the Change in Law that shall have occurred or been imposed. SECTION 2.15 Change in Legality. (a) Notwithstanding any other provision of this Agreement, if any Change in Law shall make it unlawful for any Lender to make or maintain any Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to any Eurodollar Loan, then, by written notice to the Administrative Borrower and to the Administrative Agent: (i) such Lender may declare that Eurodollar Loans will not thereafter (for the duration of such unlawfulness) be made by such Lender hereunder (or be continued for additional Interest Periods and ABR Loans will not thereafter (for such duration) be converted into Eurodollar Loans), whereupon any request for a Eurodollar Borrowing (or to convert an ABR Borrowing to a Eurodollar Borrowing or to continue a Eurodollar Borrowing for an additional Interest Period) shall, as to such Lender only, be deemed a request for an ABR Loan (or a request to continue an ABR Loan as such for an additional Interest Period or to convert a Eurodollar Loan into an ABR Loan, as the case may be), unless such declaration shall be subsequently withdrawn; and (ii) such Lender may require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under (i) or (ii) above, all payments and prepayments of principal that would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. Any such conversion of a Eurodollar Loan under (i) above shall be subject to Section 2.16. (b) For purposes of this Section 2.15, a notice to the Administrative Borrower by any Lender shall be effective as to each Eurodollar Loan made by such Lender, if lawful, on the last day of the Interest Period then applicable to such Eurodollar Loan; in all other cases such notice shall be effective on the date of receipt by the Borrowers. SECTION 2.16 Indemnity. The Borrowers shall indemnify each Lender against any loss or expense that such Lender may sustain or incur as a consequence of (a) any event, other than a default by such Lender in the performance of its obligations hereunder, which results in (i) such Lender receiving or being deemed to receive any amount on account of the principal of any Eurodollar Loan prior to the end of the Interest Period in effect therefor, (ii) the conversion of any Eurodollar Loan to an ABR Loan, or the conversion of the Interest Period with respect to any Eurodollar Loan, in each case other than on the last day of the Interest Period in effect therefor or (iii) any Eurodollar Loan to be made by such Lender (including any Eurodollar Loan to be made pursuant to a conversion or continuation under Section 2.10) not being made after notice of such Loan shall have been given by the Administrative Borrower hereunder (any of the events referred to in this clause (a) being called a "Breakage Event") or (b) any default in the making of any payment or prepayment required to be made hereunder. In the case of any Breakage Event, such loss shall include an amount equal to the excess, as reasonably determined by such Lender, of (i) its cost of obtaining funds for the Eurodollar Loan that is the subject of such Breakage Event for the period from the date of such Breakage Event to the last day of the Interest Period in effect (or that would have been in effect) for such Loan over (ii) the amount of interest likely to be realized by such Lender in redeploying the funds released or not utilized by reason of such Breakage Event for such period. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section 2.16 shall be delivered to the Borrowers and shall be conclusive absent manifest error. SECTION 2.17 Pro Rata Treatment. Except as required under Section 2.15, each Borrowing, each payment or prepayment of principal of any Borrowing, each payment of interest on the Loans, and each conversion of any Borrowing to or continuation of any Borrowing as a Borrowing of any Type shall be allocated pro rata among the Lenders in accordance with their respective applicable Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Loans). Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole dollar amount. SECTION 2.18 Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrowers or any other Loan Party, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Loan or Loans as a result of which the unpaid principal portion of its Loans shall be proportionately less than the unpaid principal portion of the Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Loans of such other Lender, so that the aggregate unpaid principal amount of the Loans and participations in Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Loans then outstanding as the principal amount of its Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.18 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. The Borrowers expressly consent to the foregoing arrangements and agrees that any Lender holding a participation in a Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrowers to such Lender by reason thereof as fully as if such Lender had made a Loan directly to the Borrowers in the amount of such participation. SECTION 2.19 Payments. (a) The Borrowers shall make each payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder and under any other Loan Document not later than 12:00 (noon), New York City time, on the date when due in immediately available dollars, without setoff, defense or counterclaim. Each such payment shall be made to the Administrative Agent at its offices at Eleven Madison Avenue, New York, New York 10010. All payments hereunder and under each other Loan Document shall be made in dollars. (b) Except as otherwise expressly provided herein, whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.20 Taxes. (a) Any and all payments by or on account of any obligation of the Borrowers or any other Loan Party hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if any Indemnified Taxes or Other Taxes are required to be withheld or deducted from such payments, then (i) the sum payable by the Borrowers shall be increased as necessary so that after all required deductions or withholding (including deductions or withholdings applicable to additional sums payable under this Section 2.20) the Administrative Agent or such Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrowers or such other Loan Party shall make (or cause to be made) such deductions and (iii) the Borrowers or such other Loan Party shall pay (or cause to be paid) the full amount deducted to the relevant Governmental Authority in accordance with applicable law. In addition, the Borrowers or any other Loan Party hereunder shall pay (or cause to be paid) any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (b) The Borrowers shall indemnify the Administrative Agent and each Lender, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent or such Lender, as the case may be, or any of their respective Affiliates, on or with respect to any payment by or on account of any obligation of any Loan Party hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrowers by a Lender, or by the Administrative Agent on its behalf or on behalf of a Lender, shall be conclusive absent manifest error. (c) As soon as practicable after any payment of Indemnified Taxes or Other Taxes pursuant to Section 2.20(a), and in any event within 30 days of any such payment being due, the Borrowers shall deliver (or cause to be delivered) to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (d) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrowers is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Administrative Borrower (with a copy to the Administrative Agent), at the reasonable written request of the Administrative Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate; provided that such Lender is legally entitled to complete, execute and deliver such documentation and in such Lender's judgment such completion, execution or delivery would not materially prejudice the legal position of such Lender. In addition, each Foreign Lender shall (i) furnish on or before it becomes a party to the Agreement either (a) two accurate and complete originally executed U.S. Internal Revenue Service Form W-8BEN (or successor form) or (b) an accurate and complete U.S. Internal Revenue Service Form W-8ECI (or successor form), certifying, in either case, to such Foreign Lender's legal entitlement to an exemption or reduction from U.S. Federal withholding tax with respect to all interest payments hereunder, and (ii) provide a new Form W-8BEN (or successor form) or U.S. Internal Revenue Service Form W-8ECI (or successor form) upon the expiration or obsolescence of any previously delivered form to reconfirm any complete exemption from, or any entitlement to a reduction in, U.S. Federal withholding tax with respect to any interest payment hereunder; provided that any Foreign Lender that is not a "bank" within the meaning of Section 881(c)(3)(A) of the Tax Code and is relying on the so-called "portfolio interest exemption" shall also furnish a "Non-Bank Certificate" in the form of Exhibit G together with a U.S. Internal Revenue Service Form W-8BEN. Notwithstanding any other provision of this paragraph, a Foreign Lender shall not be required to deliver any form pursuant to this paragraph that such Foreign Lender is not legally able to deliver. (e) Any Lender that is a United States person, as defined in Section 7701(a)(30) of the Tax Code, and is not an exempt recipient within the meaning of Treasury Regulations Section 1.6049-4(c) shall deliver to the Borrowers (with a copy to the Administrative Agent) two accurate and complete original signed copies of Internal Revenue Service Form W-9, or any successor form that such person is entitled to provide at such time in order to comply with United States back-up withholding requirements. (f) Without prejudice to the survival of any other agreement of the Borrowers hereunder, the agreements and obligations of the Borrowers contained in this Section 2.20 shall survive the payment in full of all amounts due hereunder. SECTION 2.21 Assignment of Commitments Under Certain Circumstances; Duty to Mitigate. (a) In the event (i) any Lender delivers a certificate requesting compensation pursuant to Section 2.14, (ii) any Lender delivers a notice described in Section 2.15, (iii) the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender pursuant to Section 2.20 or (iv) any Lender does not consent to a proposed amendment, modification or waiver of this Agreement requested by the Administrative Borrower which requires the consent of all of the Lenders or all of the Lenders under any Facility to become effective (and which is approved by at least the Required Lenders), the Borrowers may, at their sole expense and effort (including with respect to the processing and recordation fee referred to in Section 9.04(b)), upon notice to such Lender and the Administrative Agent, require such Lender to transfer and assign, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all of its interests, rights and obligations under this Agreement to an assignee that shall assume such assigned obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (x) such assignment shall not conflict with any law, rule or regulation or order of any court or other Governmental Authority having jurisdiction, (y) solely with respect to replacements of Lenders pursuant to clauses (i), (ii) or (iii) of this Section, the Borrowers shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, and (z) the Borrowers or such assignee shall have paid to the affected Lender in immediately available funds an amount equal to the sum of the principal of and interest accrued to the date of such payment on the outstanding Loans of such Lender, plus all Fees and other amounts accrued for the account of such Lender hereunder (including any amounts under Section 2.14 and Section 2.16); provided further that, if prior to any such transfer and assignment the circumstances or event that resulted in such Lender's claim for compensation under Section 2.14 or notice under Section 2.15 or the amounts paid pursuant to Section 2.20, as the case may be, cease to cause such Lender to suffer increased costs or reductions in amounts received or receivable or reduction in return on capital, or cease to have the consequences specified in Section 2.15, or cease to result in amounts being payable under Section 2.20, as the case may be (including as a result of any action taken by such Lender pursuant to paragraph (b) below), or if such Lender shall waive its right to claim further compensation under Section 2.14 in respect of such circumstances or event or shall withdraw its notice under Section 2.15 or shall waive its right to further payments under Section 2.20 in respect of such circumstances or event, as the case may be, then such Lender shall not thereafter be required to make any such transfer and assignment hereunder. In connection with any such replacement, if the replaced Lender does not execute and deliver to the Administrative Agent a duly completed Assignment and Acceptance reflecting such replacement within five Business Days of the date on which the replacement Lender executes and delivers such Assignment and Acceptance to the replaced Lender, then such replaced Lender shall be deemed to have executed and delivered such Assignment and Acceptance. (b) If (i) any Lender shall request compensation under Section 2.14, (ii) any Lender delivers a notice described in Section 2.15 or (iii) the Borrowers are required to pay any additional amount to any Lender or any Governmental Authority on account of any Lender, pursuant to Section 2.20, then such Lender shall use reasonable efforts (which shall not require such Lender to incur an unreimbursed loss or unreimbursed cost or expense or otherwise take any action inconsistent with its internal policies or legal or regulatory restrictions or suffer any disadvantage or burden deemed by it to be significant) (x) to file any certificate or document reasonably requested in writing by the Administrative Borrower or (y) to assign its rights and delegate and transfer its obligations hereunder to another of its offices, branches or affiliates, if such filing or assignment would reduce its claims for compensation under Section 2.14 or enable it to withdraw its notice pursuant to Section 2.15 or would reduce amounts payable pursuant to Section 2.20, as the case may be, in the future. The Borrowers hereby agree to pay all reasonable costs and expenses incurred by any Lender in connection with any such filing or assignment, delegation and transfer. SECTION 2.22 [Intentionally Omitted]. SECTION 2.23 [Intentionally Omitted]. SECTION 2.24 Relationship Between the Borrowers. (a) Administrative Borrower. Britt hereby appoints PALCO, and PALCO (in such capacity, the "Administrative Borrower") shall act under this Agreement, as the agent, attorney-in-fact and legal representative of Britt for all purposes, including requesting Loans and receiving account statements and other notices and communications to the Borrowers (or any of them) from the Administrative Agent or any Lender. The Administrative Agent and the Lenders may rely, and shall be fully protected in relying, on any disbursement instruction, report, information or any notice or communication made or given by the Administrative Borrower, whether in its own name, as Borrowers' agent, on behalf of Britt or on behalf of the Borrowers, and neither the Administrative Agent nor any Lender shall have any obligation to make any inquiry or request any confirmation from or on behalf of any other Borrower as to the binding effect on it of any such notice, request, instruction, report, information, other notice or communications, nor shall the joint and several character of the Borrowers' obligations hereunder be affected, provided that the provisions of this Section 2.24 shall not be construed so as to preclude either Borrower from taking actions permitted to be taken by a "Borrower" hereunder. (b) Joint and Several Obligations. The obligations of the Borrowers pursuant to the Loan Documents shall be joint and several. Each Borrower hereby irrevocably and unconditionally guaranties, as primary obligor and not merely as surety, the due and punctual payment in full of all Obligations of the other Borrower when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a)). (c) Obligations Absolute. The obligations of each Borrower under this Section 2.24 are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Borrower agrees that: (i) its obligation under this Section 2.24 with respect to the obligations of the other Borrower is a guaranty of payment when due and not of collectibility; (ii) the Administrative Agent and any Lender may enforce this obligation upon the occurrence of an Event of Default hereunder notwithstanding the existence of any dispute between the other Borrower and the Administrative Agent or any Lender with respect to the existence of such Event of Default; (iii) the obligations of each Borrower hereunder are independent of each of the obligations of the other Borrower under the Loan Documents and the obligations of any other Person and a separate action or actions may be brought and prosecuted against each Borrower whether or not any action is brought against the other Borrower or any other Person and whether or not the other Borrower or any other Person is joined in any such action or actions; and (iv) a payment of a portion, but not all, of the Obligations by any Borrower shall in no way limit, affect, modify or abridge the liability of such or any other Borrower for any portion of the Obligations that has not been paid. Each Borrower agrees that its obligation under this Section 2.24 with respect to the obligations of the other Borrower is a continuing guaranty and shall be binding upon each Borrower and its successors and assigns, and each Borrower irrevocably waives any right to revoke its obligations under this Section 2.24 as to future transactions giving rise to any Obligations. (d) Actions by the Administrative Agent and the Lenders. The Administrative Agent and any Lender may from time to time, without notice or demand and without affecting the validity or enforceability of this Section 2.24 or giving rise to any limitation, impairment or discharge of any Borrower's liability hereunder, but subject to the provisions of Section 2.24 (i) renew, extend, accelerate or otherwise change the time, place, manner or terms of payment of the Obligations of the other Borrower with the consent of such other Borrower, (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Obligations of the other Borrower or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations, (iii) request and accept other guaranties of the Obligations of the other Borrower and take and hold security for the payment of such Obligations, (iv) release, exchange, compromise, subordinate or modify, with or without consideration, any security for payment of the Obligations of the other Borrower, any other guaranties of such Obligations, or any other obligation of any Person with respect to such Obligations, (v) enforce and apply any security now or hereafter held from the other Borrower by or for the benefit of the Administrative Agent or any Lender in respect of the Obligations of the other Borrower and direct the order or manner of sale thereof, or exercise any other right or remedy that the Administrative Agent or the Lenders, or any of them, may have against any such security, in each case as the Administrative Agent or the Lenders in their discretion may determine consistent with this Agreement and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable, and (vi) exercise any other rights available to the Administrative Agent or the Lenders, or any of them, under the Loan Documents. (e) No Discharge. The obligations of each Borrower under this Section 2.24 shall be valid and enforceable and shall not be subject to any limitation, impairment or discharge for any reason (other than payment in full of the Obligations), including the occurrence of any of the following, whether or not any Borrower shall have had notice or knowledge of any of them: (i) any failure to assert or enforce or agreement not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy with respect to the Obligations of the other Borrower or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of such Obligations, (ii) any waiver or modification of, or any consent to departure from, any of the terms or provisions of this Agreement or any of the other Loan Documents or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Obligations of the other Borrower, (iii) the Obligations of the other Borrower, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect, (iv) the application of payments received from any source to the payment of indebtedness other than the Obligations of the other Borrower, even though the Administrative Agent or the Lenders, or any of them, might have elected to apply such payment to any part or all of the Obligations of the other Borrower, (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Obligations of the other Borrower, (vi) any defenses, set-offs or counterclaims which the other Borrower or any other Person may assert against the Administrative Agent or any Lender in respect of the Obligations, including but not limited to failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury and (vii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Borrower as an obligor in respect of the Obligations. (f) Waivers. Each Borrower waives, for the benefit of the Administrative Agent and each Lender: (i) any right to require the Administrative Agent or any Lender, as a condition of payment or performance by such Borrower, to (A) proceed against the other Borrower or any other Person, (B) proceed against or exhaust any security held from the other Borrower or any other Person, (C) proceed against or have resort to any balance of any deposit account or credit on the books of the Administrative Agent or any Lender in favor of the other Borrower or any other Person, or (D) pursue any other remedy in the power of the Administrative Agent or any Lender; (ii) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of the other Borrower including any defense based on or arising out of the lack of validity or the unenforceability of the Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of the other Borrower from any cause other than payment in full of the Obligations; (iii) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (iv) any defense based upon the Administrative Agent's or any Lender's errors or omissions in the administration of the Obligations, except behavior that amounts to gross negligence or willful misconduct; (v) (A) any principles or provisions of law, statutory or otherwise, that are or might be in conflict with the terms of this Section 2.24 and any legal or equitable discharge of such Borrower's obligations hereunder, (B) the benefit of any statute of limitations affecting such Borrower's liability hereunder or the enforcement hereof, (C) any rights to set-offs, recoupments and counterclaims and (D) promptness, diligence and any requirement that the Administrative Agent or any Lender protect, secure, perfect or insure any Lien or any property subject thereto; (vi) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance of this Section 2.24, notices of default under this Agreement or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Obligations or any agreement related thereto, notices of any extension of credit to the other Borrower and notices of any of the matters referred to in Sections 2.24(d) and (e) and any right to consent to any thereof; and (vii) to the fullest extent permitted by law, any defenses or benefits that may be derived from or afforded by law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms of this Section 2.24. As used in this paragraph, any reference to "the principal" includes each Borrower and any reference to "the creditor" includes the Administrative Agent and each of the Lenders. In accordance with Section 2856 of the California Civil Code each Borrower waives any and all rights and defenses available to it by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code, including any and all rights or defenses such Borrower may have because the Obligations are secured by real property or by reason of protection afforded to the principal with respect to any of the Obligations, or to any other guarantor of any of the Obligations with respect to any of such guarantor's obligations under its guaranty, in either case pursuant to the antideficiency or other laws of the State of California limiting or discharging the principal's indebtedness or such guarantor's obligations, including Section 580a, 580b, 580d or 726 of the California Code of Civil Procedure. Consequently, among other things: (1) the creditor may collect from such Borrower without first foreclosing on any real or personal property collateral pledged by the principal; and (2) if the creditor forecloses on any real property collateral pledged by the principal: (x) the amount of the Obligations may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price and (y) the creditor may collect from such Borrower even if the creditor, by foreclosing on the real property collateral, has destroyed any right such Borrower may have to collect from the principal. This is an unconditional and irrevocable waiver of any rights and defenses such Borrower may have because the Obligations are secured by real property. Each Borrower also waives all rights and defenses arising out of an election of remedies by the creditor, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for an Obligation, has destroyed such Borrower's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the Code of Civil Procedure or otherwise; and even though that election of remedies by the creditor, such as nonjudicial foreclosure with respect to security for an obligation of any other guarantor of any of the Obligations, has destroyed such Borrower's rights of contribution against such other Borrower or any other guarantor. No other provision of this Section 2.24 shall be construed as limiting the generality of any of the covenants and waivers set forth in this paragraph. (g) Borrowers' Rights of Subrogation, Contribution, Etc.; Subordination of Other Obligations. Each Borrower waives any claim, right or remedy, direct or indirect, that such Borrower now has or may hereafter have against the other Borrower or any of its assets in connection with this Section 2.24 or the performance by such Borrower of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute (including under California Civil Code Section 2847, 2848 or 2849), under common law or otherwise and including (i) any right of subrogation, reimbursement or indemnification that such Borrower now has or may hereafter have against the other Borrower, (ii) any right to enforce, or to participate in, any claim, right or remedy that the Administrative Agent or any Lender now have or may hereafter have against the other Borrower and (iii) any benefit of, and any right to participate in, any collateral or security now or hereafter held by the Administrative Agent or any Lender. In addition, until the Obligations shall have been paid in full, each Borrower shall withhold the exercise of any right of contribution such Borrower may have against the other Borrower. Each Borrower further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Borrower may have against the other Borrower or against any collateral or security, and any rights of contribution such Borrower may have against such other Borrower, shall be junior and subordinate to any rights the Administrative Agent or any Lender may have against such Borrower to all right, title and interest the Administrative Agent or any Lender may have in any such collateral or security, and to any right the Administrative Agent or any Lender may have against such other Borrower. Any indebtedness of any Borrower now or hereafter held by any Borrower is subordinated in right of payment to the Obligations, and any such indebtedness of the other Borrower to such Borrower collected or received by such Borrower after an Event of Default has occurred and is continuing, and any amount paid to a Borrower on account of any subrogation, reimbursement, indemnification or contribution rights referred to in the preceding paragraph when all Obligations have not been paid in full, shall be held in trust for the Administrative Agent and the Lenders and shall forthwith be paid over to the Administrative Agent for the benefit of the Lenders to be credited and applied against the Obligations. (h) Fraudulent Transfer Laws. Anything contained in this Section 2.24 to the contrary notwithstanding, the obligations of each Borrower under this Section 2.24 shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of such Borrower, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws and after giving effect as assets to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation, reimbursement, indemnification or contribution of such Borrower pursuant to applicable law or pursuant to the terms of any agreement. (i) Related Guaranties. Each Borrower under this Section 2.24 and any other guaranties, if any, relating to the Agreement (the "Related Guaranties") that contain a contribution provision similar to that set forth in this Section 2.24, together desire to allocate among themselves (collectively, the "Contributing Guarantors"), in a fair and equitable manner, their obligations arising under this Section 2.24 and the Related Guaranties. Accordingly, in the event any payment or distribution is made on any date by any Borrower under this Section 2.24 or a guarantor under a Related Guaranty, each such Borrower or such guarantor shall be entitled to a contribution from each of the other Contributing Guarantors in the maximum amount permitted by law so as to maximize the aggregate amount of the Obligations paid to the Administrative Agent and the Lenders. ARTICLE III. REPRESENTATIONS AND WARRANTIES Each of the Borrowers, jointly and severally, represents and warrants to the Arranger, the Administrative Agent and each of the Lenders that: SECTION 3.01 Organization; Powers. Each of the Loan Parties (a) is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its organization or formation, (b) has all requisite power and authority, and the legal right, to own and operate its property and assets, to lease the property it operates as lessee and to carry on its business as now conducted and as proposed to be conducted, (c) is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required, except where the failure so to qualify, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect and (d) has the power and authority, and the legal right, to execute, deliver and perform its obligations under this Agreement, each of the other Loan Documents, and each other agreement or instrument contemplated thereby to which it is or will be a party, including, in the case of the Borrowers, to borrow hereunder, in the case of each Loan Party and Holdings, to grant the Liens contemplated to be granted by it under the Security Documents and, in the case of each Guarantor, to Guarantee the Obligations as contemplated by the Guarantee and Collateral Agreement. SECTION 3.02 Authorization; No Conflicts. The Transactions (a) have been duly authorized by all requisite corporate, partnership or limited liability company and, if required, stockholder, partner or member action and (b) will not (i) violate (A) any provision of law, statute, rule or regulation, or of the certificate or articles of incorporation or other constitutive documents or by-laws of Loan Party, (B) any order of any Governmental Authority or arbitrator or (C) any provision of any indenture, agreement or other instrument to which a Loan Party is a party or by which any of them or any of their property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under, or give rise to any right to accelerate or to require the prepayment, repurchase or redemption of any obligation under any such indenture, agreement or other instrument or (iii) result in the creation or imposition of any Lien upon or with respect to any property or assets now owned or hereafter acquired by any Loan Party (other than Liens created under the Security Documents). SECTION 3.03 Enforceability. This Agreement has been duly executed and delivered by each Loan Party and constitutes, and each other Loan Document when executed and delivered by each Loan Party thereto will constitute, a legal, valid and binding obligation of such Loan Party enforceable against such Loan Party in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.04 Governmental Approvals. No action, consent or approval of, registration or filing with, Permit from, notice to, or any other action by, any Governmental Authority is or will be required in connection with the Transactions, except for (a) the filing of UCC financing statements and filings with the United States Patent and Trademark Office and the United States Copyright Office, (b) recordation of the Mortgages and (c) such as have been made or obtained and are in full force and effect. SECTION 3.05 Financial Statements. PALCO has heretofore furnished to the Lenders (i) balance sheets and statements of income, stockholder's equity and cash flows for the Borrowers on a combined basis as of and for the fiscal years ended December 31, 2004 and December 31, 2003, in each case audited by and accompanied by the opinion of Deloitte & Touche LLP, independent public accountants and (ii) the unaudited balance sheet and related statement of income and cash flows for Britt as of the period from and including January 1, 2001 through and including December 31, 2004. All of such financial statements present fairly in all material respects the financial condition and results of operations and cash flows of the applicable entities as of such dates and for such periods. Such balance sheets and the notes thereto disclose all material liabilities, direct or contingent, of the applicable entities as of the dates thereof. Such financial statements were prepared in accordance with GAAP (except for the exclusion of PALCO's wholly owned subsidiaries, Scotia Pacific and Salmon Creek, except as losses in excess of investments in subsidiaries as a component of stockholder's equity unless otherwise indicated or the context indicates otherwise and consolidating the financial statements thereof) applied on a consistent basis. SECTION 3.06 No Material Adverse Change. No event, change or condition has occurred since December 31, 2004 that has caused, or would reasonably be expected to cause, a Material Adverse Effect. SECTION 3.07 Title to Properties; Possession Under Leases. (a) Each of the Loan Parties has good and marketable title to, or valid leasehold interests in, all its material properties and assets (including all Real Property), except for liens permitted under Section 6.02 and minor defects in title that, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with its ability to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. Each parcel of Real Property is free from material structural defects and all building systems contained therein are in good working order and condition, as necessary to permit the Loan Party using the Real Property to conduct its business as currently conducted or to utilize such Real Property for its intended purpose, ordinary wear and tear dispositions, abandonments and breakdowns arising in the ordinary course of business excepted, suitable for the purposes for which they are currently being used. Each parcel of Real Property and the current use thereof complies in all material respects with all applicable laws (including building and zoning ordinances and codes) and with all insurance requirements. (b) Each of the Loan Parties is in compliance in all material respects, with all obligations under all material leases to which it is a party and all such leases are legal, valid, binding and in full force and effect and are enforceable in accordance with their terms. Each of the Loan Parties enjoys peaceful and undisturbed possession under all such material leases. The Loan Parties are not in default of their payment or other material obligations under any material lease and no legal proceedings have been instituted against any Loan Party by any landlord with respect to any claimed default under any such leases. Except as set forth in Schedule 3.20, none of the Real Property is subject to any lease, sublease, license or other agreement granting to any person any right to the use, occupancy, possession or enjoyment of the Real Property or any portion thereof, except for easements or similar rights which do not materially detract from the value of the property subject thereto or interfere with the ability of such Loan Party to conduct its business as currently conducted or to utilize such properties and assets for their intended purposes. PALCO has delivered to the Administrative Agent true, complete and correct copies of all leases (whether as landlord or tenant) of Real Property. (c) None of the Loan Parties has received any notice of, nor has any knowledge of, any pending or contemplated condemnation proceeding affecting the Real Properties or any sale or disposition thereof in lieu of condemnation. (d) Except as set forth on Schedule 3.07, none of the Loan Parties is obligated under any right of first refusal, option or other contractual right to sell, assign or otherwise dispose of any Real Property or any interest therein. (e) There are no pending or, to the knowledge of PALCO, proposed special or other assessments for public improvements or otherwise affecting any material portion of the owned Real Property, nor are there any contemplated improvements to such owned Real Property that may result in such special or other assessments. No Loan Party has suffered, permitted or initiated the joint assessment of any material portion of any owned Real Property with any other real property constituting a separate tax lot. Each owned parcel of Real Property is comprised of one or more parcels, each of which constitutes a separate tax lot and none of which constitutes a portion of any other tax lot not constituting Collateral. (f) Such Loan Party has obtained all permits, licenses, variances and certificates required by applicable law to be obtained and necessary to the use and operation of each parcel of Real Property, except where the failure to have such permit, license, certificate or variance would not prohibit the use of such parcel of Real Property as it is currently being used. The use being made of each parcel of Real Property conforms with the certificate of occupancy and/or such other permits, licenses, variances and certificates for such Real Property and any other restrictions, covenants or conditions affecting such Real Property, except for any such nonconformity that would not reasonably be expected to be enjoined or to result in material fines. (g) Each developed parcel of Real Property has adequate rights of access to public ways or reasonable rights to permit the Real Property to be used for its intended purpose, and is served by installed, operating and adequate water, electric, gas, telephone, sewer, sanitary sewer and storm drain facilities as necessary to permit the Loan Party using such Real Property to conduct its business as currently conducted or to utilize such Real Property for its intended purpose; (ii) all public utilities necessary to the continued use and enjoyment of each parcel of Real Property as used and enjoyed on the Closing Date are located in the public right-of-way abutting the premises or easements permitting the location of such utilities, and all such utilities are connected so as to serve such Real Property without passing over other Property except for land of the utility company providing such utility service or, in the case of leased Real Property, contiguous land owned by the lessor of such leased Real Property; (iii) each developed parcel of Real Property, including each leased parcel, has adequate available parking to meet legal and operating requirements; (iv) all roads necessary for access to each developed parcel of Real Property to permit its use for its current purpose have been completed and dedicated to public use and accepted by all governmental authorities or are the subject of access easements for the benefit of such Real Property; and (v) no building or structure constituting Real Property or any appurtenance thereto or equipment thereon, or the use, operation or maintenance thereof, violates any restrictive covenant or encroaches on any easement or on any property owned by others, which violation or encroachment interferes with the use or could materially adversely affect the value of such building, structure or appurtenance or which encroachment is necessary for the operation of the business at any Real Property. SECTION 3.08 Subsidiaries. Schedule 3.08 sets forth as of the Closing Date a list of all Subsidiaries, including each Subsidiary's exact legal name (as reflected in such Subsidiary's certificate or articles of incorporation or other constitutive documents) and jurisdiction of incorporation or formation and the percentage ownership interest of PALCO (direct or indirect) therein, and identifies each Subsidiary that is a Loan Party. The shares of capital stock or other Equity Interests so indicated on Schedule 3.08 are fully paid and non-assessable and are owned by PALCO, directly or indirectly, free and clear of all Liens (other than Liens created under the Security Documents). SECTION 3.09 Litigation; Compliance with Laws. (a) Except as set forth in Schedule 3.09, there are no actions, suits or proceedings at law or in equity or by or before any arbitrator or Governmental Authority now pending or, to the knowledge of PALCO, threatened against or affecting any Loan Party or any business, property or rights of any such person (i) that involve any Loan Document or the Transactions or (ii) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, would reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect. (b) Since the date of this Agreement, there has been no change in the status of the matters disclosed on Schedule 3.09 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. (c) None of the Loan Parties or any of their respective material properties or assets is in violation of, nor will the continued operation of their material properties and assets as currently conducted violate, any law, rule or regulation (including any zoning, building, Environmental Law, ordinance, code or approval or any building permits) or any restrictions of record or agreements affecting the Mortgaged Property, or is in default with respect to any judgment, writ, injunction, decree or order of any Governmental Authority, where such violation or default, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. (d) Certificates of occupancy and permits are in effect for each Mortgaged Property as currently constructed, and true and complete copies of such certificates of occupancy have been delivered to the Administrative Agent as mortgagee with respect to each Mortgaged Property. SECTION 3.10 Agreements. (a) Except as set forth in Schedule 3.10, none of the Loan Parties is a party to any agreement or instrument, or subject to any corporate restriction, that, individually or in the aggregate, has resulted or would reasonably be expected to result in a Material Adverse Effect. (b) None of the Loan Parties is in default in any manner under any provision of any indenture or other agreement or instrument evidencing Indebtedness, or any other material agreement or instrument to which it is a party or by which it or any of its properties or assets are or may be bound, where such default, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. SECTION 3.11 Federal Reserve Regulations. (a) None of the Loan Parties is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for purchasing or carrying Margin Stock or for the purpose of purchasing, carrying or trading in any securities under such circumstances as to involve any Loan Party in a violation of Regulation X or to involve any broker or dealer in a violation of Regulation T. No Indebtedness being reduced or retired out of the proceeds of any Loans was or will be incurred for the purpose of purchasing or carrying any Margin Stock. Following the application of the proceeds of the Loans, Margin Stock will not constitute more than 25% of the value of the assets of the aggregate assets of the Loan Parties. None of the transactions contemplated by this Agreement will violate or result in the violation of any of the provisions of the Regulations of the Board, including Regulation T, U or X. If requested by any Lender or the Administrative Agent, the Borrowers will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in Regulation U. SECTION 3.12 Investment Company Act; Public Utility Holding Company Act. None of the Loan Parties is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940, as amended, or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935, as amended. SECTION 3.13 Use of Proceeds. The Borrowers will use the proceeds of the Loans solely for general corporate purposes, including the repayment of all obligations under the Existing Credit Facility. SECTION 3.14 Tax Returns. Each of the Loan Parties has timely filed or timely caused to be filed all material Federal, state, local and foreign tax returns or materials required to have been filed by it and all such tax returns and related materials are correct and complete in all material respects. Each of the Loan Parties has timely paid or timely caused to be paid all material Taxes due and payable by it and all assessments received by it, except Taxes that are being contested in good faith by appropriate proceedings and for which the applicable Loan Party, shall have set aside on its books adequate reserves in accordance with GAAP. Each of the Loan Parties has made adequate provision in accordance with GAAP for all Taxes not yet due and payable. No Lien relating to Taxes has been filed, and to the knowledge of any of the Loan Parties, no Lien is being asserted or threatened, with respect to any Tax. None of the Loan Parties (a) intends to treat the Loans or any of the transactions contemplated by any Loan Document as being a "reportable transaction" (within the meaning of Treasury Regulation Section 1.6011-4) or (b) is aware of any facts or events that would result in such treatment. SECTION 3.15 No Material Misstatements. Each of the Loan Parties has disclosed to the Arranger, the Administrative Agent and the Lenders all agreements, instruments and corporate or other restrictions to which any Loan Party is subject, and all other matters known to any of them, that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect. No other information, report, financial statement, exhibit or schedule furnished by or on behalf of any Loan Party to the Arranger, the Administrative Agent or any Lender for use in connection with the transactions contemplated by the Loan Documents or in connection with the negotiation of any Loan Document or included therein or delivered pursuant thereto contained, contains or will contain any material misstatement of fact or omitted, omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were, are or will be made, not misleading; provided that to the extent any such information, report, financial statement, exhibit or schedule was based upon or constitutes a forecast or projection, the Borrowers represent only that they acted in good faith and utilized reasonable assumptions and due care in the preparation of such information, report, financial statement, exhibit or schedule. SECTION 3.16 Employee Benefit Plans. Each Loan Party and each of its ERISA Affiliates is in compliance in all material respects with the applicable provisions of ERISA and the Tax Code and the regulations and published interpretations thereunder. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events, would reasonably be expected to result in material liability of the Borrowers or any of their ERISA Affiliates. SECTION 3.17 Environmental Matters. (a) Except as set forth in Schedule 3.17 and except with respect to any other matters that, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, none of the Loan Parties: (i) has failed to comply with any Environmental Law or to take, in a timely manner, all actions necessary to obtain, maintain, renew and comply with any Environmental Permit, and all such Environmental Permits are in full force and effect and not subject to any administrative or judicial appeal; (ii) has become a party to any governmental, administrative or judicial proceeding or possesses knowledge of any such proceeding that has been threatened under Environmental Law; (iii)has received notice of, become subject to, or is aware of any facts or circumstances that could form the basis for, any Environmental Liability other than those which have been fully and finally resolved and for which no obligations remain outstanding; (iv) possesses knowledge that any Mortgaged Property (A) is subject to any Lien, restriction on ownership, occupancy, use or transferability imposed pursuant to Environmental Law or (B) contains or previously contained Hazardous Materials of a form or type or in a quantity or location that would reasonably be expected to result in any Environmental Liability; (v) possess knowledge that there has been a Release or threat of Release of Hazardous Materials at or from the Mortgaged Properties (or from any facilities or other properties formerly owned, leased or operated by any Loan Party) in violation of, or in amounts or in a manner that could give rise to liability under, any Environmental Law; (vi) has generated, treated, stored, transported, or Released Hazardous Materials from the Mortgaged Properties (or from any facilities or other properties formerly owned, leased or operated by any Loan Party) in violation of, or in a manner or to a location that could give rise to liability under, any Environmental Law; (vii)is aware of any facts, circumstances, conditions or occurrences in respect of any of the facilities and properties owned, leased or operated that could (A) form the basis of any action, suit, claim or other judicial or administrative proceeding relating to liability under or noncompliance with Environmental Law on the part of any Loan Party or (B) interfere with or prevent continued compliance with Environmental Laws by any Loan Party; or (viii) has pursuant to any order, decree, judgment or agreement by which it is bound or has assumed the Environmental Liability for any Person. (b)......Since the date of this Agreement, there has been no change in the status of the matters disclosed on Schedule 3.17 that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. SECTION 3.18 Insurance. Schedule 3.18 sets forth a true, complete and correct description of all insurance maintained by or on behalf of the Loan Parties as of the Closing Date. As of the Closing Date, such insurance is in full force and effect and all premiums have been duly paid. The Loan Parties are insured by financially sound and reputable insurers and such insurance is in such amounts and covering such risks and liabilities (and with such deductibles, retentions and exclusions) as are in accordance with normal and prudent industry practice. None of the Loan Parties (a) has received notice from any insurer (or any agent thereof) that substantial capital improvements or other substantial expenditures will have to be made in order to continue such insurance or (b) has any reason to believe that it will not be able to renew its existing coverage as and when such coverage expires or to obtain similar coverage from similar insurers at a substantially similar cost. SECTION 3.19 Security Documents. (a) The Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and enforceable security interest in the Collateral described therein and proceeds thereof and (i) in the case of the Pledged Collateral, upon the earlier of (A) when such Pledged Collateral is delivered to the Administrative Agent and (B) when financing statements in appropriate form are filed in the offices specified on Schedule 3.19(a) and (ii) in the case of all other Collateral described therein (other than Intellectual Property Collateral), when financing statements in appropriate form are filed in the offices specified on Schedule 3.19(a), the Guarantee and Collateral Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Secured Parties in such Collateral and proceeds thereof, as security for the Obligations, in each case prior and superior to the rights of any other person (except, in the case of all Collateral other than Pledged Collateral, with respect to Liens expressly permitted by Section 6.02). (b) Each Intellectual Property Security Agreement is effective to create in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and enforceable security interest in the Intellectual Property Collateral described therein and proceeds thereof. When each Intellectual Property Security Agreement is filed in the United States Patent and Trademark Office and the United States Copyright Office, respectively, together with financing statements in appropriate form filed in the offices specified in Schedule 3.19(a), such Intellectual Property Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereunder in the Intellectual Property Collateral and proceeds thereof, as security for the Obligations, in each case prior and superior in right to any other person (except with respect to Liens expressly permitted by Section 6.02) (it being understood that subsequent recordings in the United States Patent and Trademark Office and the United States Copyright Office may be necessary to perfect a lien on registered trademarks, trademark applications and copyrights acquired by the grantors after the date hereof). (c) Each of the Mortgages is effective to create in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, a legal, valid, binding and enforceable Lien on, and security interest in, all of the Loan Parties' right, title and interest in and to the Mortgaged Property thereunder and proceeds thereof, and when the Mortgages are filed in the offices specified on Schedule 3.19(c), each such Mortgage shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the grantors thereof in such Mortgaged Property and proceeds thereof, as security for the Obligations, in each case prior and superior in right to any other person (except with respect to Liens expressly permitted by Section 6.02). SECTION 3.20 Location of Real Property. Schedule 3.20 lists completely and correctly as of the Closing Date all Real Property and the addresses thereof, indicating for each parcel whether it is owned or leased, including in the case of leased Real Property, the landlord name, lease date and lease expiration date. The Loan Parties own in fee or have valid leasehold interests in, as the case may be, all the real property set forth on Schedule 3.20. SECTION 3.21 Labor Matters. As of the Closing Date, there are no strikes, lockouts or slowdowns against any Loan Party pending or, to the knowledge of the Borrowers, threatened. The hours worked by and payments made to employees of the Loan Parties have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters. All payments due from any of the Loan Parties, or for which any claim may be made against any of the Loan Parties, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the Loan Parties to the extent required by GAAP. The consummation of the Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which any of the Loan Parties is bound. SECTION 3.22 Liens. There are no Liens of any nature whatsoever on any of the properties or assets of any of the Loan Parties (other than Liens expressly permitted by Section 6.02). SECTION 3.23 Intellectual Property. Each of the Loan Parties owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Loan Parties does not infringe upon the rights of any other person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.24 Solvency. Immediately after the consummation of the Transactions to occur on the Closing Date and immediately following the making of each Loan (or other extension of credit hereunder) and after giving effect to the application of the proceeds of each Loan (or other extension of credit hereunder), (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) no Loan Party will have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Closing Date. SECTION 3.25 Permits. Except where any such failure would not reasonably be expected to have a Material Adverse Effect: (a) Each Loan Party has obtained and holds all Permits required in respect of all Real Property and for any other property otherwise operated by or on behalf of, or for the benefit of, such person and for the operation of each of its businesses as presently conducted and as proposed to be conducted, (b) all such Permits are in full force and effect, and each Loan Party has performed and observed all requirements of such Permits, (c) no event has occurred that allows or results in, or after notice or lapse of time would allow or result in, revocation or termination by the issuer thereof or in any other impairment of the rights of the holder of any such Permit, (d) no such Permits contain any restrictions, either individually or in the aggregate, that are materially burdensome to any Loan Party, or to the operation of any of its businesses or any property owned, leased or otherwise operated by such person, (e) each Loan Party reasonably believes that each of its Permits will be timely renewed and complied with, without material expense, and that any additional Permits that may be required of such Person will be timely obtained and complied with, without material expense and (f) the Borrowers have no knowledge or reason to believe that any Governmental Authority is considering limiting, suspending, revoking or renewing on materially burdensome terms any such Permit. SECTION 3.26 Deposit and Disbursement Accounts. Schedule 3.26 lists all banks and other financial institutions at which any Loan Party maintains deposit or other accounts as of the Closing Date and such Schedule correctly identifies the name, address and telephone number of each depository, the name in which the account is held, a description of the purpose of the account, and the complete account number therefor. ARTICLE IV. CONDITIONS OF LENDING The obligations of the Lenders to make Loans are subject to the satisfaction of the following conditions: SECTION 4.01 All Credit Events. On the date of each Borrowing (each such event being called a "Credit Event"): (b) The representations and warranties set forth in each Loan Document shall be true and correct in all material respects on and as of the date of such Credit Event with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct in all material respects on and as of such earlier date. (c) The Borrowers and each other Loan Party shall be in compliance with all the terms and provisions set forth in each Loan Document on its part to be observed or performed, and, at the time of and immediately after such Credit Event, no Event of Default or Default shall have occurred and be continuing. Each Credit Event shall be deemed to constitute a joint and several representation and warranty by each of the Borrowers on the date of such Credit Event as to the matters specified in paragraphs (a) and (b) of this Section 4.01. SECTION 4.02 First Credit Event. On the Closing Date: (a) The Administrative Agent shall have received, on behalf of itself and the Lenders, a favorable written opinion of (i) Andrews Kurth LLP, counsel for the Loan Parties, and (ii) each special and local counsel to the Loan Parties as the Administrative Agent may reasonably request, in each case (A) dated the Closing Date, (B) addressed to the Administrative Agent, the Arranger and the Lenders and (C) covering such matters relating to the Loan Documents and the Transactions as the Administrative Agent shall reasonably request and which are customary for transactions of the type contemplated herein, and the Loan Parties hereby request such counsel to deliver such opinions. (b) The Administrative Agent shall have received (i) a copy of the certificate or articles of incorporation or other formation documents, including all amendments thereto, of each Loan Party, certified as of a recent date by the Secretary of State of the state of its organization, and a certificate as to the good standing of each Loan Party as of a recent date, from such Secretary of State; (ii) a certificate of the Secretary or Assistant Secretary of each Loan Party dated the Closing Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of such Loan Party as in effect on the Closing Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Loan Party authorizing the execution, delivery and performance of the Loan Documents to which such person is a party, in the case of the Borrowers, the borrowings hereunder, in the case of each Loan Party, the granting of the Liens contemplated to be granted by it under the Security Documents and, in the case of each Guarantor, the Guaranteeing of the Obligations as contemplated by the Guarantee and Collateral Agreement, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate or articles of incorporation or other formation documents of such Loan Party have not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (i) above and (D) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of such Loan Party; (iii) a certificate of another officer as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above; and (iv) such other documents as the Administrative Agent, the Arranger or the Lenders may reasonably request. (c) The Administrative Agent shall have received a certificate, dated the Closing Date and signed by a Financial Officer of the Borrowers, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01. (d) The Administrative Agent shall have received (i) this Agreement, executed and delivered by a duly authorized officer of each of the Borrowers, (ii) the Guarantee and Collateral Agreement, executed and delivered by a duly authorized officer of each of each Loan Party and Holdings, (iii) a Mortgage covering each of the Mortgaged Properties, executed and delivered by a duly authorized officer of each Loan Party thereto, (iv) the Intellectual Property Security Agreements, executed and delivered by a duly authorized officer of each Loan Party thereto, (v) if requested by any Lender pursuant to Section 2.04, a promissory note or notes conforming to the requirements of Section 2.04 and executed and delivered by a duly authorized officer of the Borrowers and (vi) a Lender Addendum executed and delivered by each Lender and accepted by the Borrowers. (e) The Administrative Agent, for the ratable benefit of the Secured Parties, shall have been granted on the Closing Date perfected Liens on the Collateral (subject, in the case of all Collateral other than Pledged Collateral, only to Liens expressly permitted by Section 6.02) and shall have received such other reports, documents and agreements as the Administrative Agent shall reasonably request and which are customarily delivered in connection with security interests in real property assets. The Pledged Collateral shall have been duly and validly pledged under the Guarantee and Collateral Agreement to the Administrative Agent, for the ratable benefit of the Secured Parties, and certificates representing such Pledged Collateral, accompanied by instruments of transfer and stock powers endorsed in blank, shall be in the possession of the Administrative Agent. (f) The Administrative Agent shall have received a duly executed Perfection Certificate dated on or prior to the Closing Date. The Administrative Agent shall have received the results of a recent Lien and judgment search in each relevant jurisdiction with respect to each of the Loan Parties that shall be Subsidiary Guarantors or shall otherwise have assets that are included in the Collateral, and such search shall reveal no Liens on any of the assets of each of the Loan Parties except, in the case of Collateral other than Pledged Collateral, for Liens expressly permitted by Section 6.02 and except for Liens to be discharged on or prior to the Closing Date pursuant to documentation reasonably satisfactory to the Administrative Agent. (g) Intentionally Omitted. (h) After giving effect to the Transactions and the other transactions contemplated hereby, the Loan Parties shall have outstanding no Indebtedness or preferred stock other than (i) the Loans and other extensions of credit hereunder, (ii) borrowings under the Revolving Credit Agreement and (iii) the Indebtedness set forth on Schedule 6.01. The Borrowers shall have repaid all amounts outstanding under the Existing Credit Facility. The Administrative Agent shall have received satisfactory evidence that (i) the Existing Credit Facility shall have been terminated, all amounts then due and payable or to become due and payable (other than indemnification obligations not yet having been requested) thereunder shall have been paid in full and all commitments and reimbursement obligations thereunder shall have been terminated and (ii) satisfactory arrangements shall have been made for the termination of all Liens granted in connection therewith, in each case on terms and conditions satisfactory to the Administrative Agent. (i) The Administrative Agent shall have received (i) the financial statements described in Section 3.05 and (ii) unaudited combined preliminary special purpose balance sheets and related statements of income, stockholders' equity and cash flows of PALCO and Britt prepared in accordance with GAAP (except for the exclusion of PALCO's wholly owned subsidiaries Scotia Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments in subsidiaries as a component of stockholder's equity and consolidating the financial statements thereof, and inventory presented on a FIFO basis), for March, 2005 and year-to-date through March, 2005. (j) The Administrative Agent shall have received projections of the Loan Parties for the years 2005 through 2006 and for the quarters beginning with the second fiscal quarter of 2005 and through the fourth fiscal quarter of 2006, in form and substance satisfactory to the Administrative Agent. (k) The Administrative Agent shall have received a certificate from the chief financial officer of PALCO certifying that each of the Loan Parties, after giving effect to the Transactions and the other transactions contemplated hereby, are solvent. (l) All material governmental and third party consents and approvals with respect to the Transactions and the other transactions contemplated hereby to the extent required shall have been obtained, all applicable appeal periods shall have expired and there shall be no litigation, governmental, administrative or judicial action, actual or, to the knowledge of any Loan Party, threatened, that could reasonably be expected to restrain, prevent or impose materially burdensome conditions on the Transactions or the other transactions contemplated hereby. (m) The Administrative Agent shall have received all documentation and other information required by bank regulatory authorities under applicable "know your customer" and anti-money laundering rules and regulations, including the U.S.A. Patriot Act. (n) The Administrative Agent shall have received in respect of each Mortgaged Property a mortgagee's title insurance policy (or policies) or marked up unconditional binder for such insurance. Each such policy shall be in a form and in an amount satisfactory to the Administrative Agent and issued by title companies satisfactory to the Administrative Agent (including any such title companies acting as co-insurers or reinsurers, at the option of the Administrative Agent) (in each such case, a "Title Insurance Company"). The Administrative Agent shall have received evidence satisfactory to it that all premiums in respect of each such policy, all charges for mortgage recording tax, and all related expenses, if any, have been paid. The Administrative Agent shall have received a copy of all recorded documents referred to, or listed as exceptions to title in, the title policy or policies referred to above and a copy of all other material documents affecting the Mortgaged Property. (o) If requested by the Administrative Agent, the Administrative Agent shall have received (i) a policy of flood insurance that (A) covers any parcel of improved Mortgaged Property that is located in a flood zone and (B) is written in an amount not less than the outstanding principal amount of the indebtedness secured by such Mortgage that is reasonably allocable to such Mortgaged Property or the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, whichever is less. (p) The Administrative Agent shall have received evidence satisfactory to the Administrative Agent demonstrating that after giving effect to the Transactions, Borrowing Availability (as defined in the Revolving Credit Agreement) shall be at least $14,000,000. (q) Borrowers shall have delivered all documents listed on, and taken all actions set forth on and satisfied all other conditions precedent listed in the Closing Checklist attached hereto as Exhibit I, all in form and substance, or in a manner, satisfactory to the Administrative Agent and Lenders. ARTICLE V. AFFIRMATIVE COVENANTS Each of the Borrowers covenants and agrees with each Lender that so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document shall have been paid in full, each of the Borrowers will, and will cause each of the Loan Parties: SECTION 5.01 Existence; Businesses and Properties. (a) Do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence, except as otherwise expressly permitted under Section 6.05. (b) Do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect the rights, licenses, permits, franchises, authorizations, patents, copyrights, trademarks and trade names material to the conduct of its business; maintain and operate such business in substantially the manner in which it is presently conducted and operated; comply in all material respects with all applicable laws, rules, regulations and decrees and orders of any Governmental Authority, whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of such business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.02 Insurance. Maintain the insurance required by the Guarantee and Collateral Agreement. SECTION 5.03 Obligations and Taxes. Pay and discharge promptly when due all material taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its property, before the same shall become delinquent or in default, as well as all lawful claims for labor, materials and supplies or otherwise that, if unpaid, might give rise to a Lien upon such properties or any part thereof; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings and the Borrowers or the applicable Subsidiary shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP and such contest operates to suspend collection of the contested obligation, tax, assessment or charge and enforcement of a Lien and, in the case of a Mortgaged Property, there is no risk of forfeiture of such property. SECTION 5.04 Financial Statements, Reports, etc. Furnish to the Administrative Agent, who will deliver to each Lender: (a) within 90 days after the end of each fiscal year, the balance sheet and related statements of income, stockholders' equity and cash flows showing the financial condition of the Borrowers on a combined basis as of the close of such fiscal year and the results of its operations and the operations of the Borrowers on a combined basis during such year, together with comparative figures for the immediately preceding fiscal year, all audited by an independent public accountant of recognized national standing and accompanied by an opinion of such accountants (which shall not be qualified in any material respect except for a going concern qualification and as indicated below) to the effect that such financial statements fairly present the financial condition and results of operations of the Borrowers in accordance with GAAP (except for the exclusion of Scotia Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments in subsidiaries as a component of stockholder's equity unless otherwise indicated or the context indicates otherwise) consistently applied; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, the balance sheet and related statements of income, stockholders' equity and cash flows showing the financial condition of the Borrowers on a combined basis as of the close of such fiscal quarter and the results of its operations and the operations of the Borrowers during such fiscal quarter and the then elapsed portion of the fiscal year, and commencing April, 2006, comparative figures for the same periods in the immediately preceding fiscal year, all certified by one of PALCO's Financial Officers as fairly presenting the financial condition and results of operations of the Borrowers on a combined basis in accordance with GAAP (except for the exclusion of Scotia Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments in subsidiaries as a component of stockholder's equity and consolidating the financial statements thereof, and inventory presented on a FIFO basis) consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (c) within 30 days after the end of each fiscal month of each fiscal quarter, (i) the combined balance sheet and related statements of income and cash flows showing the financial condition of the Borrowers during such fiscal month and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers as fairly presenting the financial condition and results of operations of the Borrowers in accordance with GAAP (except for the exclusion of Scotia Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments in subsidiaries as a component of stockholder's equity and consolidating the financial statements thereof, and inventory presented on a FIFO basis) consistently applied, subject to normal year-end audit adjustments and the absence of footnotes and (ii) the separate, internally prepared entity-only balance sheet and related statements of income and cash flows showing the financial condition of each Borrower, and the eliminations reflected in the corresponding financial statements delivered pursuant to the preceding clause (i), for such month and the then-elapsed portion of the fiscal year (and, commencing with such financial statements for the month of April, 2006, for the corresponding month and elapsed portion of the preceding fiscal year) all certified by one of its Financial Officers as fairly presenting the financial condition and results of operations of the Borrowers in accordance with GAAP (except for the exclusion of PALCO's wholly owned subsidiaries Scotia Pacific, Salmon Creek and Scotia Inn except as losses in excess of investments in subsidiaries as a component of stockholder's equity and consolidating the financial statements thereof, and inventory presented on a FIFO basis) consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (d) concurrently with any delivery of financial statements under paragraph (a) or (b) above, (i) a certificate of the accounting firm (in the case of paragraph (a)) or Financial Officer (in the case of paragraph (b)) opining on or certifying such statements and certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto (which certificate, when furnished by an accounting firm, may be limited to providing negative assurances regarding financial covenants related to accounting matters and disclaim responsibility for legal interpretations) and (ii) a certificate executed by any officer of PALCO setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the covenants contained in Sections 6.10 and 6.11; (e) at least 30 days prior to the end of each fiscal year of PALCO, a detailed consolidated budget for the following fiscal year (including a projected consolidated and consolidating balance sheet and related statements of projected operations and cash flows as of the end of and for such following fiscal year and setting forth the assumptions used for purposes of preparing such budget) and, promptly when available, any significant revisions of such budget; (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by PALCO or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange; (g) promptly after the receipt thereof by either PALCO or any of the Subsidiaries, a copy of any final "management letter" received by any such person from its certified public accountants and the management's response thereto (it being understood that the term "management letter" does not include communications from such public accountants to an audit committee that by their terms expressly state that they may not provided to third parties); and (h) promptly, from time to time, such other information regarding the operations, business affairs and financial condition of any Loan Party or Scotia Pacific, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request. SECTION 5.05 Litigation and Other Notices. Furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) any Event of Default or Default, specifying the nature and extent thereof and the corrective action (if any) taken or proposed to be taken with respect thereto; (b) the filing or commencement of, or any threat or notice of intention of any person to file or commence, any action, suit or proceeding, whether at law or in equity or by or before any arbitrator or Governmental Authority, against any Loan Party or Scotia Pacific that would reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event described in clause (b) of the definition thereof or any other ERISA Event that, alone or together with any other ERISA Events that have occurred, would reasonably be expected to result in liability of any Loan Party or Scotia Pacific in an aggregate amount exceeding $1,000,000; and (d) any development that has resulted in, or would reasonably be expected to result in, a Material Adverse Effect. SECTION 5.06 Information Regarding Collateral. (a) Furnish to the Administrative Agent prompt written notice of any change (i) in any Loan Party's corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its properties, (ii) in the location of any Loan Party's chief executive office, its principal place of business, any office in which it maintains books or records relating to Collateral owned by it or any office or facility at which Collateral owned by it is located (including the establishment of any such new office or facility), (iii) in any Loan Party's identity or corporate structure or (iv) in any Loan Party's Federal Taxpayer Identification Number. Each of the Borrowers agrees not to effect or permit any change of its corporate or identity or state of organization unless all filings have been made under the UCC or otherwise and all other actions have been taken that are required in order for the Administrative Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. The Administrative Borrower also agrees promptly to notify the Administrative Agent if any material portion of the Collateral is damaged or destroyed. (b) Deliver to the Administrative Agent, each year, at the time of delivery of the annual financial statements with respect to the preceding fiscal year pursuant to Section 5.04(a), a certificate of a Financial Officer setting forth the information required pursuant to Section I of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Closing Date or the date of the most recent certificate delivered pursuant to this Section. SECTION 5.07 Maintaining Records; Access to Properties and Inspections; Environmental Assessments. (a) Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law are made of all dealings and transactions in relation to its business and activities. Each of the Borrowers will, and will cause each of the Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender to visit and inspect the financial records and the properties of the Loan Party at reasonable times and as often as reasonably requested and to make extracts from and copies of such financial records, and permit any representatives designated by the Administrative Agent or any Lender to discuss the affairs, finances and condition of the Loan Parties with the officers thereof and independent accountants therefor. (b) [Intentionally Omitted] (c) In the event that the Administrative Agent or any Lender shall have reason to believe that Hazardous Materials have been Released or are threatened to be Released on or from any Mortgaged Property or other facility of any Loan Party or that any such property or facility is not being operated in compliance with applicable Environmental Law, the Administrative Agent may, at its election and after reasonable notice to the Administrative Borrower, retain an independent engineer or other qualified environmental consultant to evaluate whether Hazardous Materials are present in the soil, groundwater, or surface water at such Mortgaged Property or facility or whether the facilities or properties are being operated and maintained in compliance with applicable Environmental Laws. Such environmental assessments may include detailed visual inspections of the Mortgaged Property or facility, including any and all storage areas, storage tanks, drains, dry wells and leaching areas, and the taking of soil samples, surface water samples and groundwater samples as well as such other reasonable investigations or analyses as are necessary. The scope of any such environmental assessments under this paragraph shall be determined in the sole discretion of the Administrative Agent. Each of the Borrowers shall, and shall cause each of the Subsidiaries to, cooperate in the performance of any such environmental assessment and permit any such engineer or consultant designated by the Administrative Agent to have full access to each property or facility at reasonable times and after reasonable notice to the Administrative Borrower of the plans to conduct such an environmental assessment. All environmental assessments conducted pursuant to this paragraph shall be at the Borrowers' sole cost and expense. SECTION 5.08 Use of Proceeds Use the proceeds of the Loans only for the purposes set forth in Section 3.13. SECTION 5.09 Additional Collateral, etc. (a) With respect to any Collateral acquired after the Closing Date (other than the Settlement Property) or, in the case of inventory or equipment, any material Collateral moved after the Closing Date by any other Loan Party (other than any Collateral described in paragraphs (b) or (c) of this Section 5.09) as to which the Administrative Agent, for the benefit of the Secured Parties, does not have a perfected security interest, promptly (and, in any event, within 10 days following the date of such acquisition) (i) execute and deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement or such other Security Documents as the Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the benefit of the Secured Parties, a security interest in such Collateral and (ii) take all actions necessary or advisable to grant to, or continue on behalf of, the Administrative Agent, for the benefit of the Secured Parties, a perfected security interest in such Collateral, including the filing of UCC financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement or by law or as may be requested by the Administrative Agent. (b) With respect to any fee interest in any Collateral consisting of Real Property (other than the Settlement Property) or any material lease of Collateral consisting of Real Property acquired or leased after the Closing Date by the Borrowers or any other Loan Party, promptly (and, in any event, within 10 days following the date of such acquisition) (i) execute and deliver a first priority Mortgage in favor of the Administrative Agent, for the benefit of the Secured Parties, covering such real property and complying with the provisions herein and in the Security Documents, (ii) provide the Secured Parties with title and extended coverage insurance in an amount at least equal to the purchase price of such Real Property (or such other amount as the Administrative Agent shall reasonably specify), Surveys, and if applicable, flood insurance, lease estoppel certificates, memoranda or amendments, all in accordance with the standards for deliveries contemplated on the Closing Date, (iii) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent and (iv) deliver to the Administrative Agent a notice identifying, and upon the Administrative Agent's request, provide a copy of, the consultant's reports, environmental site assessments or other documents relied upon by any Loan Party to determine that any such real property included in such Collateral does not contain Hazardous Materials of a form or type or in a quantity or location that could reasonably be expected to result in a material Environmental Liability. (c) With respect to any Subsidiary created or acquired after the Closing Date by any Loan Party, promptly (and, in any event, within 10 days following such creation or the date of such acquisition) (i) execute and deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement as the Administrative Agent deems necessary or advisable to grant to the Administrative Agent (subject only to Liens permitted by Section 6.02), for the benefit of the Secured Parties, a valid, perfected first priority security interest in the Equity Interests in such new Subsidiary that are owned by any Loan Party (subject to Liens permitted by Section 6.02), (ii) deliver to the Administrative Agent the certificates, if any, representing such Equity Interests, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrowers or such Subsidiary, as the case may be, (iii) cause such new Subsidiary (A) to become a party to the Guarantee and Collateral Agreement (and provide Guarantees of the Obligations) and the Intellectual Property Security Agreements and (B) to take such actions necessary or advisable to grant to the Administrative Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement and the Intellectual Property Security Agreement with respect to such new Subsidiary, including the recording of instruments in the United States Patent and Trademark Office and the United States Copyright Office and the filing of UCC financing statements in such jurisdictions as may be required by the Guarantee and Collateral Agreement, the Intellectual Property Security Agreement or by law or as may be requested by the Administrative Agent and (iv) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. SECTION 5.10 Further Assurances. From time to time duly authorize, execute and deliver, or cause to be duly authorized, executed and delivered, such additional instruments, certificates, financing statements, agreements or documents, and take all such actions (including filing UCC and other financing statements), as the Administrative Agent may reasonably request, for the purposes of implementing or effectuating the provisions of this Agreement and the other Loan Documents, or of more fully perfecting or renewing the rights of the Administrative Agent and the Secured Parties with respect to the Collateral (or with respect to any additions thereto or replacements or proceeds or products thereof or with respect to any other property or assets hereafter acquired by or any of the Loan Parties which may be deemed to be part of the Collateral) pursuant hereto or thereto. Upon the exercise by the Administrative Agent, or any Lender of any power, right, privilege or remedy pursuant to this Agreement or the other Loan Documents which requires any consent, approval, recording, qualification or authorization of any Governmental Authority, each of the Borrowers will execute and deliver, or will cause the execution and delivery of, all applications, certifications, instruments and other documents and papers that the Administrative Agent or such Lender may be required to obtain from any Loan Party for such governmental consent, approval, recording, qualification or authorization. SECTION 5.11 [Intentionally Omitted]. SECTION 5.12 Cash Management Systems; Bank Accounts. Borrowers shall, and shall cause each other Loan Party to, enter into Control Agreements with respect to each deposit account maintained by any Loan Party (other than any payroll account so long as such payroll account is a zero balance account) as of or after the Closing Date. Each such deposit account control agreement shall be in form and substance satisfactory to the Administrative Agent. Borrowers shall, and shall cause any Subsidiary to, provide prior written notice to the Administrative Agent before directly or indirectly establishing any new bank account and prior to the establishment thereof, the Administrative Agent, Borrowers or such Subsidiary and the bank at which the account is to be opened shall enter into a Control Agreement regarding such bank account pursuant to which such bank (i) acknowledges the security interest of the Administrative Agent in such bank account, (ii) agrees to comply with instructions originated by the Administrative Agent directing disposition of the funds in the bank account without further consent from Borrowers, and (iii) agrees to subordinate and limit any security interest the bank may have in the bank account on terms satisfactory to the Administrative Agent. SECTION 5.13 Landlords' Agreements, Mortgagee Agreements, Bailee Letters and Real Estate Purchases. Upon the request of the Administrative Agent, each Loan Party shall use reasonable efforts to obtain a landlord's agreement, mortgagee agreement or bailee letter, as applicable, from the lessor of each leased property (other than the lessor of the leased property which the mill owned by Britt on the Closing Date is on), mortgagee of owned property or bailee with respect to any warehouse, processor or converter facility or other location where Collateral is stored or located, which agreement or letter shall contain a waiver or subordination of all Liens or claims that the landlord, mortgagee or bailee may assert against the Collateral at that location, and shall otherwise be reasonably satisfactory in form and substance to the Administrative Agent. After the Closing Date, no real property or warehouse space shall be leased by any Loan Party and no Inventory shall be shipped to a processor or converter under arrangements established after the Closing Date (excluding renewals of existing leases and arrangements) without the prior written consent of the Administrative Agent (which consent, in the Administrative Agent's discretion, may be conditioned upon the establishment of Reserves acceptable to the Administrative Agent) or, unless and until a satisfactory landlord agreement or bailee letter, as appropriate, shall first have been obtained with respect to such location. Each Loan Party shall and shall cause its Subsidiaries to timely and fully pay and perform their obligations under all leases and other agreements with respect to each leased location or public warehouse where any Collateral is or may be located (other than Collateral in an aggregate amount for all such locations not to exceed $100,000 in the aggregate). ARTICLE VI. NEGATIVE COVENANTS Each of the Borrowers covenants and agrees with each Lender that, so long as this Agreement shall remain in effect and until the Commitments have been terminated and the principal of and interest on each Loan, all Fees and all other expenses or amounts payable under any Loan Document have been paid in full, neither the Borrowers will, nor will they cause or permit Loan Party to: SECTION 6.01 Indebtedness. Incur, create, assume or permit to exist any Indebtedness, except: (a) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and any Permitted Refinancing Indebtedness in respect of any such Indebtedness; (b) Indebtedness created hereunder and under the other Loan Documents; (c) unsecured intercompany Indebtedness of the Borrowers to the extent permitted by Section 6.04(f) so long as such Indebtedness is evidenced by a subordinated note in form and substance satisfactory to the Administrative Agent; (d) Indebtedness of any Loan Party incurred to finance the acquisition, construction or improvement of any fixed or capital assets, and any Permitted Refinancing Indebtedness in respect of any such Indebtedness; provided that (i) such original Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this Section 6.01(d), when combined with the aggregate principal amount of all Capital Lease Obligations incurred pursuant to Section 6.01(e), shall not exceed $2,500,000 at any time outstanding; (e) Capital Lease Obligations in an aggregate principal amount, when combined with the aggregate principal amount of all Indebtedness incurred pursuant to Section 6.01(d), not exceeding $2,500,000 at any time outstanding; (f) Indebtedness of the Borrowers under the Revolving Credit Agreement in an aggregate principal amount not to exceed $35,000,000 and Indebtedness of the Guarantors under any Guarantees in respect thereof and any Permitted Refinancing Indebtedness in respect of any such Indebtedness; (g) Indebtedness under performance bonds or with respect to workers' compensation claims, in each case incurred in the ordinary course of business; (h) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; provided that such Indebtedness is promptly covered by a Loan Party; and (i) other unsecured Indebtedness of the Borrowers or the Subsidiaries in an aggregate principal amount not exceeding $500,000 at any time outstanding. SECTION 6.02 Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including Equity Interests or other securities of any person, including any Subsidiary) now owned or hereafter acquired by it or on any income or revenues or rights in respect of any thereof, except: (a) Liens on property or assets of the Borrowers and the Subsidiaries existing on the date hereof and set forth in Schedule 6.02; provided that such Liens shall secure only those obligations which they secure on the date hereof and refinancings, extensions, renewals and replacements thereof permitted hereunder; (b) any Lien created under the Loan Documents; (c) Liens for Taxes not yet due or which are being contested in compliance with Section 5.03; (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's, lumberman's or other like Liens arising in the ordinary course of business and securing obligations that are not due and payable or which are being contested in compliance with Section 5.03; (e) pledges and deposits made in the ordinary course of business in compliance with workmen's compensation, unemployment insurance and other social security laws or regulations; (f) deposits in an amount not to exceed $500,000 in aggregate to secure the performance of bids, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) zoning restrictions, easements, rights-of-way, restrictions on use of real property and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of any Loan Party or the ability of any Loan Party to utilize such property for its intended purpose; (h) purchase money security interests in real property, improvements thereto or other fixed or capital assets hereafter acquired (or, in the case of improvements, constructed) by the Borrowers or any Subsidiary; provided that (i) such security interests secure Indebtedness permitted by Section 6.01, (ii) such security interests are incurred, and the Indebtedness secured thereby is created, within 90 days after such acquisition (or construction) and (iii) such security interests do not apply to any other property or assets of any Loan Party; (i) judgment Liens securing judgments not constituting an Event of Default under Article VII; (j) any interest or title of a lessor or sublessor under any lease entered into by a Loan Party in the ordinary course of business and covering only the assets so leased; (k) Liens securing the Indebtedness of the Borrowers under the Revolving Credit Agreement and Indebtedness of the Subsidiary Guarantors under any Guarantees in respect of the Revolving Credit Agreement as long as such Indebtedness are permitted under Section 6.01(f); (l) Liens on cash deposits and other funds maintained with a depositary institution, in each case arising in the ordinary course of business by virtue of any statutory or common law provision relating to banker's liens; provided that (i) the applicable deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by any Loan Party in excess of those set forth in regulations promulgated by the Board and (ii) the applicable deposit account is not intended by any Loan Party to provide collateral or security to the applicable depositary institution or any other person. (m) Liens on cash or deposit accounts to secure letters of credit incurred in connection with the Existing Credit Facility; and (n) Liens reflected on any mortgagee policy of title insurance issued in on or prior to the Closing Date in favor of Administrative Agent or the Lenders in connection with the Mortgages. SECTION 6.03 Sale and Lease-Back Transactions. Enter into any arrangement, directly or indirectly, with any person whereby it shall sell or transfer any property, real or personal or mixed, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred unless (a) the sale of such property is permitted by Section 6.05 and (b) any Capital Lease Obligations or Liens arising in connection therewith are permitted by Sections 6.01 and 6.02, respectively. SECTION 6.04 Investments, Loans and Advances. Purchase, hold or acquire any Equity Interests, evidences of indebtedness or other securities of, make or permit to exist any loans or advances or capital contributions to, or make or permit to exist any investment or any other interest in, any other person (all of the foregoing, "Investments"), except: (a) Permitted Investments; (b) Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business; (c) the Loan Parties may make loans and advances in the ordinary course of business to their respective employees so long as the aggregate principal amount thereof at any time outstanding (determined without regard to any write-downs or write-offs of such loans and advances) shall not exceed $200,000; (d) Investments existing on the date hereof and set forth on Schedule 6.04; (e) extensions of trade credit in the ordinary course of business; (f) Investments by a Borrower in another Borrower pursuant to cash management procedures consistent with those in existence on the Closing Date; (g) Investments after the Closing Date in Scotia Pacific in an aggregate amount not to exceed $5,000,000; and (h) in addition to Investments permitted by paragraphs (a) through (g) above, additional Investments by the Loan Parties so long as the aggregate amount invested, loaned or advanced pursuant to this paragraph (f) (determined without regard to any write-downs or write-offs of such investments, loans and advances) does not exceed $500,000 in the aggregate. SECTION 6.05 Mergers, Consolidations, Sales of Assets and Acquisitions. (a) Merge into or consolidate with any other person, or permit any other person to merge into or consolidate with it, or liquidate or dissolve, or sell, transfer, lease, issue or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all the assets (whether now owned or hereafter acquired) of any Loan Party or any of the Equity Interests of any Subsidiary, or purchase, lease or otherwise acquire (in one transaction or a series of transactions) all or any substantial part of the assets of any other person, except for (i) the purchase and sale by the Borrowers or any Subsidiary of inventory in the ordinary course of business, (ii) the sale or discount by the Borrowers or any Subsidiary in each case without recourse and in the ordinary course of business of overdue accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof consistent with customary industry practice (and not as part of any bulk sale or financing transaction), and (iii) if at the time thereof and immediately after giving effect thereto no Event of Default or Default shall have occurred and be continuing, (x) the merger or consolidation of any wholly owned Subsidiary into or with a Borrower in a transaction in which a Borrower is the surviving corporation, (y) the merger or consolidation of any wholly owned Subsidiary into or with any other wholly owned Subsidiary in a transaction in which the surviving entity is a wholly owned Subsidiary and no person other than a Borrower or a wholly owned Subsidiary receives any consideration. (b) Engage in any Asset Sale (other than the transaction described in that certain Letter of Intent, dated November 24, 2004, between K.D. Investments LLC and PALCO) unless (i) such Asset Sale is for cash consideration, (ii) such consideration is at least equal to the fair market value of the assets being sold, transferred, leased or disposed of and (iii) no Event of Default shall exist at such time. SECTION 6.06 Restricted Payments; Restrictive Agreements. (a) Declare or make, or agree to declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so; provided, however, that (i) any Subsidiary may declare and pay dividends or make other distributions ratably to its equity holders, (ii) so long as no Event of Default or Default shall have occurred and be continuing or would result therefrom, PALCO may, or may make distributions to Holdings so that Holdings may, repurchase its Equity Interests owned by employees of Holdings, PALCO or the Subsidiaries or make payments to employees of Holdings, PALCO or the Subsidiaries upon termination of employment in connection with the exercise of stock options, stock appreciation rights or similar equity incentives or equity based incentives pursuant to management incentive plans or in connection with the death or disability of such employees in an aggregate amount not to exceed for all of this clause (ii) $250,000 in any fiscal year, (iii) the Borrowers may make Restricted Payments to Holdings (x) in amount not to exceed $25,000 in any fiscal year to the extent necessary to pay general corporate and overhead expenses incurred by Holdings in the ordinary course of business and (y) in an amount necessary to pay the Tax liabilities of Holdings directly attributable to (or arising as a result of) the operations of the Borrowers and the Subsidiaries; provided that (A) the amount of such dividends pursuant to clause (iii)(y) shall not exceed the amount that the Borrowers and the Subsidiaries would be required to pay in respect of Federal, State and local Taxes were the Borrowers and the Subsidiaries to pay such Taxes as stand-alone taxpayers and (B) all Restricted Payments made to Holdings pursuant to clause (iii) shall be used by Holdings for the purpose specified herein within 20 days of the receipt thereof and (iv) consummate transactions pursuant to the agreements listed on Schedule 6.07 (other than the declaration of payment of a dividend or similar payment) consistent with past practices. (b) Enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (i) the ability of Holdings or any Loan Party to create, incur or permit to exist any Lien upon any of its property or assets intended to serve as Collateral, or (ii) the ability of any Subsidiary to pay dividends or other distributions with respect to any of its Equity Interests or to make or repay loans or advances to any Loan Party or to Guarantee Indebtedness of any Loan Party; provided that (A) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, (B) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (C) the foregoing shall not apply to restrictions and conditions imposed on any Subsidiary that is not a Loan Party (D) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness, (E) clause (i) of the foregoing shall not apply to restrictions or conditions imposed by the Revolving Credit Agreement and (F) clause (i) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof. SECTION 6.07 Transactions with Affiliates. Sell or transfer any property or assets to, or purchase or acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except that (a) any Loan Party may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the any Loan Party than could be obtained on an arm's-length basis from unrelated third parties, (b) Restricted Payments may be made to the extent provided in Section 6.06 and (c) the transactions pursuant to the agreements described on Schedule 6.07 may be consummated consistent with past practices. SECTION 6.08 Business of the Borrowers and Subsidiaries; Limitation on Hedging Agreements. (a) With respect to the Loan Parties, engage at any time in any business or business activity other than the business conducted by it as of the date hereof and business activities reasonably incidental thereto. (b) Enter into any Hedging Agreement other than (a) any such agreement or arrangement entered into in the ordinary course of business and consistent with prudent business practice to hedge or mitigate risks to which the Borrowers or any Subsidiary is exposed in the conduct of its business or the management of its liabilities or (b) any such agreement entered into to hedge against fluctuations in interest rates or currency incurred in the ordinary course of business and consistent with prudent business practice; provided that in each case such agreements or arrangements shall not have been entered into for speculation purposes. SECTION 6.09 Other Indebtedness and Agreements. (a) Permit any waiver, supplement, modification or amendment, termination or release of any indenture, instrument or agreement pursuant to which any Material Indebtedness of any Loan Party (other than Material Indebtedness pursuant to the Revolving Credit Agreement) is outstanding if the effect of such waiver, supplement, modification or amendment, termination or release would materially increase the obligations of the obligor or confer additional material rights on the holder of such Indebtedness in a manner adverse to such Loan Party or the Lenders. (b) (i) Make any distribution, whether in cash, property, securities or a combination thereof, other than regular scheduled payments of principal and interest as and when due (to the extent not prohibited by applicable subordination provisions), in respect of, or pay, or offer or commit to pay, or directly or indirectly redeem, repurchase, retire or otherwise acquire for consideration, or set apart any sum for the aforesaid purposes, any Indebtedness, except (A) the payment of the Indebtedness created hereunder or under the Term Loan Agreement, (B) refinancings of Indebtedness permitted by Section 6.01, (C) the payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness and (D) payments after the Closing Date in an aggregate amount not to exceed $300,000, or (ii) pay in cash any amount in respect of any Indebtedness or preferred Equity Interests that may at the obligor's option be paid in kind or in other securities. SECTION 6.10 Capital Expenditures. Permit the aggregate amount of Capital Expenditures made by the Borrowers and the Subsidiaries in any period set forth below to exceed the amount set forth below for such period: Period Amount Fiscal Year 2005 $8,000,000 Fiscal Year 2006 $4,000,000 Fiscal Year 2007 $4,000,000 Fiscal Year 2008 $4,000,000 Fiscal Year 2009 $4,000,000 Fiscal Year 2010 $4,000,000 SECTION 6.11 Minimum Combined EBITDA. Permit the Combined EBITDA for the 12-month period (unless otherwise indicated below) then ended at the end of any fiscal quarter set forth below to be less than the amount set forth opposite such fiscal quarter set forth below: Fiscal Quarter Ending Amount Six months ended June 30, 2005 ($22,651,000) Nine months ended September 30, 2005 ($24,250,000) December 31, 2005 ($21,550,000) March 31, 2006 ($12,809,000) June 30, 2006 ($4,417,000) September 30, 2006 ($2,276,000) December 31, 2006 ($1,896,000) December 31, 2007 $9,700,000 December 31, 2008 $15,200,000 December 31, 2009 $16,000,000 December 31, 2010 $16,000,000 The parties agree that the minimum Combined EBITDA covenant set forth in this Section 6.11 for the 12-month period ended at the end of each of the first three fiscal quarters for each of fiscal years 2007, 2008, 2009 and 2010 shall be as set forth in a written notice from the Administrative Agent to the Administrative Borrower following consultation with the Borrowers with respect thereto within 60 days of the Closing Date; provided, however, that failure to give such written notice shall not otherwise change the covenant levels set forth in this Section 6.11. SECTION 6.12 Fiscal Year. With respect to any Loan Party, change its fiscal year-end to a date other than December 31. ARTICLE VII. EVENTS OF DEFAULT In case of the happening of any of the following events ("Events of Default"): (a) any representation or warranty made or deemed made in or in connection with any Loan Document or the Borrowings, or any representation, warranty, statement or information contained in any report, certificate, financial statement or other instrument furnished in connection with or pursuant to any Loan Document, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof in accordance with the Loan Documents; (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in (b) above) due under any Loan Document, when and as the same shall become due and payable, and such default shall continue unremedied for a period of three Business Days; (d) default shall be made in the due observance or performance by any Loan Party of any covenant, condition or agreement contained in Section 5.01(a), 5.02 (other than a default which arises as a result of the downgrade in the rating of an insurance carrier), 5.05 or 5.08 or in Article VI; (e) default shall be made in the due observance or performance by any Loan Party of any covenant, condition or agreement contained in Section 5.04(c), 5.04(h), 5.04(i) or 5.04(j) and such default shall continue unremedied for a period of 5 days; (f) default shall be made in the due observance or performance by any Loan Party or Holdings of any covenant, condition or agreement contained in any Loan Document (other than those specified in clauses (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days; (g) any Loan Party shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Material Indebtedness, when and as the same shall become due and payable, or (ii) any other event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (ii) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of any Loan Party (other than Salmon Creek), or of a substantial part of the property or assets of any Loan Party (other than Salmon Creek), under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Loan Party (other than Salmon Creek) or for a substantial part of the property or assets of any Loan Party (other than Salmon Creek) or (iii) the winding-up or liquidation of any Loan Party (other than Salmon Creek); and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) any Loan Party (other than Salmon Creek) shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for any Loan Party (other than Salmon Creek) or for a substantial part of the property or assets of any Loan Party (other than Salmon Creek), (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due; (j) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 or other judgments that, individually or in the aggregate, would reasonably be expected to result in a Material Adverse Effect shall be rendered against any Loan Party or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to levy upon assets or properties of any Loan Party to enforce any such judgment; (k) an ERISA Event described in clause (b) of the definition thereof shall have occurred or any other ERISA Event shall have occurred that, when taken together with all other such ERISA Events, would reasonably be expected to result in liability of any Loan Party and their ERISA Affiliates in an aggregate amount exceeding $5,000,000; (l) any Guarantee under the Guarantee and Collateral Agreement for any reason shall cease to be in full force and effect (other than in accordance with its terms), or any Guarantor shall deny that it has any further liability under its Guarantee (other than as a result of the discharge of such Guarantor in accordance with the terms of the Loan Documents); (m) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party or Holdings not to be, a valid, perfected and, with respect to the Secured Parties, first priority (except as otherwise expressly provided in this Agreement or such Security Document) Lien on any material Collateral covered thereby, except to the extent that any such loss of perfection or priority results from the failure of the Administrative Agent to maintain possession of certificates representing Equity Interests pledged under the Guarantee and Collateral Agreement; or (n) there shall have occurred a Change in Control; then, and in every such event (other than an event with respect to any Loan Party described in paragraph (h) or (i) above), and at any time thereafter during the continuance of such event either or both of the following actions may be taken: (i) the Administrative Agent may, and at the request of the Required Lenders with respect to the Facility shall, by notice to the Administrative Borrower, terminate forthwith the Revolving Credit Commitments and the Swingline Commitment and (ii) the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Administrative Borrower, declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein or in any other Loan Document to the contrary notwithstanding, and the Administrative Agent shall have the right to take all or any actions and exercise any remedies available to a secured party under the Security Documents or applicable law or in equity; and in any event with respect to any Loan Party described in paragraph (h) or (i) above, the Revolving Credit Commitments and the Swingline Commitment shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder and under any other Loan Document, shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrowers, anything contained herein or in any other Loan Document to the contrary notwithstanding, and the Administrative Agent shall have the right to take all or any actions and exercise any remedies available to a secured party under the Security Documents or applicable law or in equity. ARTICLE VIII. THE ADMINISTRATIVE AGENT AND THE ARRANGER Each of the Lenders hereby irrevocably appoints the Administrative Agent its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. Without limiting the generality of the foregoing, the Administrative Agent is hereby expressly authorized by the Lenders to execute any and all documents (including releases and the Security Documents) with respect to the Collateral and the rights of the Secured Parties with respect thereto, as contemplated by and in accordance with the provisions of this Agreement and the Security Documents. The Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holdings, the Borrowers or any Subsidiary or any of their respective Affiliates as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08), and (c) except as expressly set forth in the Loan Documents, the Administrative Agent shall not have any duty to disclose, nor shall it be liable for the failure to disclose, any information relating to Holdings, the Borrowers or any of the Subsidiaries that is communicated to or obtained by the bank serving as the Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.08) or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall not be deemed to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by Holdings, the Borrowers or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper person. The Administrative Agent may also rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for Holdings or the Borrowers), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by it. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as the Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Borrowers. Upon any such resignation of the Administrative Agent, the Required Lenders shall have the right, in consultation with the Borrowers, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrowers to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrowers and such successor. After an Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while acting as the Administrative Agent. The Arranger, in its capacity as such, shall have no duties or responsibilities, and shall incur no liability, under this Agreement or any other Loan Document. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, the Arranger, or any Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Arranger, or any Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any other Loan Document, any related agreement or any document furnished hereunder or thereunder. To the extent required by any applicable law, the Administrative Agent may withhold from any interest payment to any Lender an amount equivalent to any applicable withholding tax. If the Internal Revenue Service or any other Governmental Authority asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender because the appropriate form was not delivered or was not properly executed or because such Lender failed to notify the Administrative Agent of a change in circumstance which rendered the exemption from, or reduction of, withholding tax ineffective or for any other reason, such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax or otherwise, including any penalties or interest and together with all expenses (including legal expenses, allocated internal costs and out-of-pocket expenses) incurred. ARTICLE IX. MISCELLANEOUS SECTION 9.01 Notices. (a) Except as provided in Section 9.01(b), notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by fax, as follows: (i) if to the Administrative Borrower, to The Pacific Lumber Company 125 Main Street P.O. Box 37 Scotia, CA 95565 Attention: Gary L. Clark Fax No. (707) 764 4269 (ii) if to the Administrative Agent, to Credit Suisse First Boston Eleven Madison Avenue New York, New York 10010 Attention: Agency Group Manager Fax No.: (212) 325-8304 (iii)if to a Lender, to it at its address (or fax number) set forth in the Lender Addendum or the Assignment and Acceptance pursuant to which such Lender shall have become a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by fax or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 9.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 9.01. (b) Administrative Borrower hereby agrees, unless directed otherwise by the Administrative Agent, that it will, or will cause its Subsidiaries to, provide to the Administrative Agent or unless the electronic mail address referred to below has not been provided by the Administrative Agent to the Administrative Borrower all information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to the Loan Documents, including all notices, requests, financial statements, financial and other reports, certificates and other information materials, but excluding any such communication that (i) is or relates to Section 2.10, (ii) relates to the payment of any principal or other amount due under this Agreement prior to the scheduled date therefor, (iii) provides notice of any Default or Event of Default under this Agreement or any other Loan Document or (iv) is required to be delivered to satisfy any condition precedent to the effectiveness of this Agreement and/or the Borrowing (all such non-excluded communications being referred to herein collectively as "Communications"), by transmitting the Communications in an electronic/soft medium that is properly identified in a format acceptable to the Administrative Agent to an electronic mail address designated by Administrative Agent from time to time. In addition, Administrative Borrower agrees, and agrees to cause its Subsidiaries, to continue to provide the Communications to the Administrative Agent or the Lenders, as the case may be, in the manner specified in the Loan Documents but only to the extent requested by the Administrative Agent. Administrative Borrower further agrees that the Administrative Agent may make the Communications available to the Lenders by posting the Communications on Intralinks or a substantially similar electronic transmission system. SECTION 9.02 Survival of Agreement. All covenants, agreements, representations and warranties made herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans, regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement or any other Loan Document is outstanding and unpaid and so long as the Commitments have not been terminated. The provisions of Sections 2.14, 2.16, 2.20 and 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document or any investigation made by or on behalf of the Administrative Agent, the Arranger, any Lender. SECTION 9.03 Binding Effect This Agreement shall become effective when it shall have been executed by each of the parties hereto and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto. SECTION 9.04 Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the permitted successors and assigns of such party; and all covenants, promises and agreements by or on behalf of the Borrowers, the Administrative Agent or the Lenders that are contained in this Agreement shall bind and inure to the benefit of their respective successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided, however, that (i) the Administrative Agent must give its prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed); (ii) unless the Administrative Agent shall otherwise agree, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $1,000,000 (or, if less, the entire remaining amount of such Lender's Commitment) and shall be in an amount that is an integral multiple of $1,000,000 (or the entire remaining amount of such Lender's Commitment), (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance (such Assignment and Acceptance to be (A) electronically executed and delivered to the Administrative Agent via an electronic settlement system then acceptable to the Administrative Agent, which shall initially be the settlement system of ClearPar, LLC, or (B) manually executed and delivered together with a processing and recordation fee of $3,500 payable to the Administrative Agent and (iv) the assignee, if it shall not be a Lender immediately prior to the assignment, shall deliver to the Administrative Agent an Administrative Questionnaire and applicable tax forms. Upon acceptance and recording pursuant to paragraph (e) of this Section 9.04, from and after the effective date specified in each Assignment and Acceptance, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.14, 2.16, 2.20 and 9.05, as well as to any Fees accrued for its account and not yet paid). (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim and that its Commitment, and the outstanding balances of its Loans, in each case without giving effect to assignments thereof which have not become effective, are as set forth in such Assignment and Acceptance, (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto, or the financial condition of Holdings, the Borrowers or any Subsidiary or the performance or observance by Holdings, the Borrowers or any Subsidiary of any of its obligations under this Agreement, any other Loan Document or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements referred to in Section 3.05(a) or delivered pursuant to Section 5.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, the Arranger, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent, acting for this purpose as an agent of the Borrowers, shall maintain at one of its offices a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive absent manifest error and the Borrowers, the Administrative Agent, and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrowers, and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, an Administrative Questionnaire and applicable tax forms completed in respect of the assignee (unless the assignee shall already be a Lender hereunder) and the written consent of the Administrative Agent to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Lenders. No assignment shall be effective unless it has been recorded in the Register as provided in this paragraph (e). (f) Each Lender may without the consent of the Borrowers or the Administrative Agent sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the participating banks or other entities shall be entitled to the benefit of the cost protection provisions contained in Sections 2.14, 2.16 and 2.20 to the same extent as if they were Lenders (but, with respect to any particular participant, to no greater extent than the Lender that sold the participation to such participant) and (iv) the Borrowers, the Administrative Agent and the Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement, and such Lender shall retain the sole right to enforce the obligations of the Borrowers relating to the Loans and to approve any amendment, modification or waiver of any provision of this Agreement (other than amendments, modifications or waivers decreasing any fees payable hereunder or the amount of principal of or the rate at which interest is payable on the Loans, extending any scheduled principal payment date or date fixed for the payment of interest on the Loans, increasing or extending the Commitments or releasing any Guarantor or all or any substantial part of the Collateral). (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 9.04, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrowers furnished to such Lender by or on behalf of the Borrowers; provided that, prior to any such disclosure of information designated by the Borrowers as confidential, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of such confidential information on terms no less restrictive than those applicable to the Lenders pursuant to Section 9.16. (h) Any Lender may at any time assign all or any portion of its rights under this Agreement to secure extensions of credit to such Lender or in support of obligations owed by such Lender; provided that no such assignment shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. (i) Notwithstanding anything to the contrary contained herein, any Lender (a "Granting Lender") may grant to a special purpose funding vehicle (an "SPC"), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrowers, the option to provide to the Borrowers all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrowers pursuant to this Agreement; provided that (i) nothing herein shall constitute a commitment by any SPC to make any Loan and (ii) if an SPC elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPC hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPC shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPC, it will not institute against, or join any other person in instituting against, such SPC any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 9.04, any SPC may (i) with notice to, but without the prior written consent of, the Borrowers and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrowers and Administrative Agent) providing liquidity and/or credit support to or for the account of such SPC to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPC. (j) The Borrowers shall not assign or delegate any of its rights or duties hereunder without the prior written consent of the Administrative Agent and each Lender, and any attempted assignment without such consent shall be null and void. SECTION 9.05 Expenses; Indemnity. (a) The Borrowers agree, to pay all out-of-pocket costs and expenses incurred by the Administrative Agent and the Arranger in connection with the syndication of the Facility and the preparation and administration of this Agreement and the other Loan Documents or in connection with any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions hereby or thereby contemplated shall be consummated) or incurred by the Administrative Agent, the Arranger, or any Lender in connection with the enforcement or protection of its rights in connection with this Agreement and the other Loan Documents or in connection with the Loans, including in each case the fees, disbursements and other charges of counsel for the Arranger and the Administrative Agent, and, in connection with any such enforcement or protection, the reasonable fees, disbursements and other charges of any counsel for the Administrative Agent, the Arranger or any Lender. (b) The Borrowers agree to indemnify the Administrative Agent, the Arranger, each Lender and each Related Party of any of the foregoing persons (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related costs and expenses, including reasonable counsel fees, disbursements and other charges, incurred by or asserted against any Indemnitee arising out of, in any way connected with, or as a result of (i) the execution or delivery of this Agreement or any other Loan Document or any agreement or instrument contemplated thereby, the performance by the parties thereto of their respective obligations thereunder or the consummation of the Transactions and the other transactions contemplated thereby, (ii) the use of the proceeds of the Loans, (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto, or (iv) any actual or alleged presence or Release of Hazardous Materials on any property owned or operated by any Loan Party, or any Environmental Liability related in any way to any Loan Party; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related costs and expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from primarily the gross negligence or willful misconduct of such Indemnitee (and, upon any such determination, any indemnification payments with respect to such losses, claims, damages, liabilities or related costs and expenses previously received by such Indemnitee shall be subject to reimbursement by such Indemnitee). (c) To the extent that the Borrowers fail to pay any amount required to be paid by them to the Administrative Agent, or the Arranger, under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent or the Arranger, as the case may be, such Lender's pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent or the Arranger, in its capacity as such. (d) To the extent permitted by applicable law, neither of the Borrowers shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. (e) The provisions of this Section 9.05 shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the Transactions or the other transactions contemplated hereby, the repayment of any of the Loans, the expiration of the Commitments, the invalidity or unenforceability of any term or provision of this Agreement or any other Loan Document, or any investigation made by or on behalf of the Administrative Agent, the Arranger or any Lender. All amounts due under this Section 9.05 shall be payable on written demand therefor. SECTION 9.06 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, except to the extent prohibited by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrowers against any of and all the obligations of the Borrowers now or hereafter existing under this Agreement and other Loan Documents held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement or such other Loan Document and although such obligations may be unmatured. The rights of each Lender under this Section 9.06 are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.07 Applicable Law. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (OTHER THAN AS EXPRESSLY SET FORTH IN OTHER LOAN DOCUMENTS) SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 9.08 Waivers; Amendment. (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or any other Loan Document or consent to any departure by the Borrowers or any other Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on the Borrowers in any case shall entitle the Borrowers to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan, or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender affected thereby, (ii) increase or extend the Commitment or decrease or extend the date for payment of any Fees of any Lender without the prior written consent of such Lender, (iii) amend or modify the pro rata requirements of Section 2.17, the provisions of Section 9.04(j), the provisions of this Section or the definition of the term "Required Lenders," or release any Guarantor, without the prior written consent of each Lender, (iv) amend or modify the definition of the term "Required Lenders" without the prior written consent of each Lender affected thereby, (v) release all or any substantial part of the Collateral without the prior written consent of each Lender, or (vi) modify the protections afforded to an SPC pursuant to the provisions of Section 9.04(i) without the written consent of such SPC; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent or the Arranger hereunder or under any other Loan Document without the prior written consent of the Administrative Agent or Arranger, as applicable. SECTION 9.09 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or participation in accordance with applicable law, the rate of interest payable in respect of such Loan or participation hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or participation but were not payable as a result of the operation of this Section 9.09 shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or participations or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. SECTION 9.10 Entire Agreement. This Agreement, the Fee Letter and the other Loan Documents constitute the entire contract between the parties relative to the subject matter hereof. Any other previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement and the other Loan Documents. Nothing in this Agreement or in the other Loan Documents, expressed or implied, is intended to confer upon any person (other than the parties hereto and thereto, their respective successors and assigns permitted hereunder and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Arranger and the Lenders) any rights, remedies, obligations or liabilities under or by reason of this Agreement or the other Loan Documents. SECTION 9.11 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS APPLICABLE, BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.11. SECTION 9.12 Severability. In the event any one or more of the provisions contained in this Agreement or in any other Loan Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 9.13 Counterparts. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original but all of which when taken together shall constitute a single contract, and shall become effective as provided in Section 9.03. Delivery of an executed signature page to this Agreement or of a Lender Addendum by facsimile transmission shall be as effective as delivery of a manually signed counterpart of this Agreement. SECTION 9.14 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 9.15 Jurisdiction; Consent to Service of Process. (a) Each of the Borrowers hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent, the Arranger or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrowers or their properties in the courts of any jurisdiction. (b) Each of the Borrowers hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.16 Confidentiality. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information, except that Information may be disclosed (a) to its and its Affiliates' officers, directors, employees and agents, including accountants, legal counsel and other advisors (it being understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority or quasi-regulatory authority (such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) in connection with the exercise of any remedies hereunder or under the other Loan Documents or any suit, action or proceeding relating to the enforcement of its rights hereunder or thereunder, (e) subject to an agreement containing provisions substantially the same as those of this Section 9.16, to (i) any actual or prospective assignee of or participant in any of its rights or obligations under this Agreement and the other Loan Documents or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to any Loan Party or any of their respective obligations, (f) with the consent of the Borrowers or (g) to the extent such Information becomes publicly available other than as a result of a breach of this Section 9.16. For the purposes of this Section, "Information" shall mean all information received from the Borrowers and related to the Borrowers or their business, other than any such information that was available to the Administrative Agent or any Lender on a nonconfidential basis prior to its disclosure by Holdings or the Borrowers; provided that, in the case of Information received from the Borrowers after the date hereof, such information is clearly identified at the time of delivery as confidential. Any person required to maintain the confidentiality of Information as provided in this Section 9.16 shall be considered to have complied with its obligation to do so if such person has exercised the same degree of care to maintain the confidentiality of such Information as such person would accord its own confidential information. Notwithstanding any other express or implied agreement, arrangement or understanding to the contrary, each of the parties hereto agrees that each other party hereto (and each of its employees, representatives or agents) are permitted to disclose to any persons, without limitation, the tax treatment and tax structure of the Loans and the other transactions contemplated by the Loan Documents and all materials of any kind (including opinions and tax analyses) that are provided to the Loan Parties, the Lenders, the Arranger or the Administrative Agent related to such tax treatment and tax aspects. To the extent not inconsistent with the immediately preceding sentence, this authorization does not extend to disclosure of any other information or any other term or detail not related to the tax treatment or tax aspects of the Loans or the transactions contemplated by the Loan Documents. SECTION 9.17 Delivery of Lender Addenda. Each initial Lender shall become a party to this Agreement by delivering to the Administrative Agent a Lender Addendum duly executed by such Lender, the Borrower and the Administrative Agent. SECTION 9.18 Disclosures. The parties acknowledge and agree that the disclosure of any matter in the schedules to the Loan Documents shall not be deemed to constitute an acknowledgment that the matter is material or is not material for any purpose other than with respect to the Loan Documents. [remainder of page intentionally left blank] Signature Page to Term Credit Agreement IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE PACIFIC LUMBER COMPANY By:/s/ Gary L. Clark ____________________________ Name: Gary L. Clark Title: VP Finance & Administration and CFO BRITT LUMBER CO., INC. By:/s/ Gary L. Clark ____________________________ Name: Gary L. Clark Title: VP Finance & Administration and CFO CREDIT SUISSE FIRST BOSTON, acting through its New York Branch, as Administrative Agent By: /s/David Dodd ___________________________ Name: David Dodds Title: Vice President By: /s/Ian Nalitt _____________________________ Name:Ian Nalitt Title:Vice President By: /s/Thomas R. Cantello _____________________________ Name: Thomas R. Cantello Title: Vice President Administrative Questionaire Exhibit A ADMINISTRATIVE QUESTIONNAIRE I. Borrower Name: The Pacific Lumber Company Britt Lumber Co., Inc. ------------------------------------------------ ------------------------------------------------ II. Legal Name of Lender for Signature Page: ------------------------------------------------ III. Name of Lender for any eventual tombstone: ------------------------------------------------ IV. Legal Address: - ------------------------------------------------------------- - ------------------------------------------------------------- V. Contact Information: Credit Contact Operations Contact Legal Counsel Name: ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- Title: ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- Address: ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- Telephone: ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- Facsimile: ----------------------------- -------------------------- ---------------------------- ----------------------------- -------------------------- ---------------------------- Email: Address: ----------------------------- -------------------------- ---------------------------- VI. Lender's Wire Payment Instructions: Pay to: ------------------------------------------- ----------------------------------------------- ------------------------------------------- ----------------------------------------------- (Name of Lender) ------------------------------------------- ----------------------------------------------- ------------------------------------------- ----------------------------------------------- (ABA#) (City/State) ------------------------------------------- ----------------------------------------------- ------------------------------------------- ----------------------------------------------- (Account #) (Account Name) Please return this form, by fax, to the attention of [ ], fax (212) [ ], no later than 5:00 p.m. New York City time, on [ ], 2004.ADMINISTRATIVE QUESTIONNAIRE Borrower Name: The Pacific Lumber Company Britt Lumber Co., Inc. VII. Organizational Structure: Foreign Branch, organized under which laws etc. ------------------------------------------------- Lender's Tax ID: ------------------------------------------------- Tax withholding Form Attached (For Foreign Buyers) [___] Form W-9 [___] Form W-8 [___] Form 4224 effective: ____________________ [___] Form 1001 [___] W/Hold _________% Effective ________________ [___] Form 4224 on file with Administrative Agent from previous current year's transaction ___________________ VIII. Payment Instructions: Servicing Site: Pay To: IX. Name of Authorized Officer: ------------------------------------------------------------------ Name: ------------------------------------------------------------------ Signature: ------------------------------------------------------------------ Date: ------------------------------------------------------------------ ADMINISTRATIVE QUESTIONNAIRE X. Institutional Investor Sub-Allocations Institution Legal Name: ------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------- Fund Manager: ------------------------------------------------------------------------------------------- Sub-Allocations: - -------------------------- - ---------------- -- --------------------- -- ------------------- -- --------------------- Exact Legal Name Sub-Allocation Direct Signer to Purchase by Date of Post Credit Agreement Assignment Closing Assignment (for documentation (Indicate US$) purposes) (Yes / No) (Yes / No) - -------------------------- ---------------- --------------------- ------------------- --------------------- 1. - -------------------------- ---------------- --------------------- ------------------- --------------------- 2. - -------------------------- ---------------- --------------------- ------------------- --------------------- 3. - -------------------------- ---------------- --------------------- ------------------- --------------------- 4. - -------------------------- ---------------- --------------------- ------------------- --------------------- 5. - -------------------------- ---------------- --------------------- ------------------- --------------------- 6. - -------------------------- ---------------- --------------------- ------------------- --------------------- 7. - -------------------------- ---------------- --------------------- ------------------- --------------------- Total - -------------------------- - ---------------- -- --------------------- -- ------------------- -- --------------------- Special Instructions - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ Exhibit C FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Term Loan Agreement dated as of April 19, 2005 (the "Credit Agreement"), among The Pacific Lumber Company ("Palco"), Britt Lumber Co., Inc. (together with Palco, the "Borrowers"), the Lenders from time to time party thereto, and Credit Suisse First Boston, acting through its New York Branch, as administrative agent (in such capacity, the "Administrative Agent"). Terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. SECTION 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Effective Date set forth below (but not prior to the registration of the information contained herein in the Register pursuant to Section 9.04(d) of the Credit Agreement), the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the Credit Agreement and the other Loan Documents, including, without limitation, the amounts and percentages set forth below of (i) the Commitments of the Assignor on the Effective Date and (ii) the Loans owing to the Assignor which are outstanding on the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 9.04(c) of the Credit Agreement, a copy of which has been received by each such party. From and after the Effective Date (i) the Assignee shall be a party to and be bound by the provisions of the Credit Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and under the Loan Documents and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. SECTION 2. This Assignment and Acceptance is being delivered to the Administrative Agent together with (i) if the Assignee is organized under the laws of a jurisdiction outside the United States, any forms referred to in Section 2.20(d) of the Credit Agreement, duly completed and executed by such Assignee and (ii) if the Assignee is not already a Lender under the Credit Agreement, a completed Administrative Questionnaire. SECTION 3. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. Date of Assignment: Legal Name of Assignor: Legal Name of Assignee: Assignee's Address for Notices: Effective Date of Assignment: - ----------------------------- --------------------------------- ------------------------------------------- Principal Amount Assigned Percentage Assigned of Applicable Facility/Commitment (set forth, to at least 8 decimals, as a percentage of the Facility and the aggregate Commitments of all Lenders thereunder) --------------------------------- ------------------------------------------- Facility/Commitment - ----------------------------- --------------------------------- ------------------------------------------- Term Credit $ % - ----------------------------- --------------------------------- ------------------------------------------- [Remainder of page intentionally left blank] The terms set forth on the foregoing pages are hereby agreed to: Accepted* ___________________________, CREDIT SUISSE FIRST BOSTON, acting through its New as Assignor York Branch, as Administrative Agent, By:_________________________ By:_________________________ Name: Name: Title: Title: By:_________________________ Name: Title: __________________________, as Assignee By:_________________________ Name: Title: Exhibit E [INSERT LENDER NAME] LENDER ADDENDUM Reference is made to the Term Loan Agreement dated as of April ___, 2005 (the "Credit Agreement"), among The Pacific Lumber Company ("Palco"), Britt Lumber Co., Inc. (together with Palco, the "Borrowers"), the Lenders from time to time party thereto, and Credit Suisse First Boston, acting through its New York Branch, as administrative agent (in such capacity, the "Administrative Agent"). Terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. Upon execution and delivery of this Lender Addendum by the parties hereto as provided in Section 9.17 of the Credit Agreement, the undersigned hereby becomes a Lender thereunder having the Commitments set forth in Schedule 1 hereto, effective as of the Closing Date. THIS LENDER ADDENDUM SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. This Lender Addendum may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page hereof by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. [Remainder of page intentionally left blank] IN WITNESS WHEREOF, the parties hereto have caused this Lender Addendum to be duly executed and delivered by their proper and duly authorized officers as of this 19 day of April, 2005. Name of Lender By: Name: Title: Accepted and agreed: THE PACIFIC LUMBER COMPANY By: ____________________________ Name: Title: BRITT LUMBER CO., INC. By: ____________________________ Name: Title: CREDIT SUISSE FIRST BOSTON, acting through its New York Branch, as Administrative Agent By: ___________________________ Name: Title: By: _____________________________ Name: Title: By: _____________________________ Name: Title: Schedule 1 to Lender Addendum COMMITMENTS AND NOTICE ADDRESS 1. Name of Lender: Notice Address: Attention: Telephone: Facsimile: 2. Commitment: Exhibit F Form of Perfection Certificate In connection with the proposed transaction by and among The Pacific Lumber Company ("Palco"), Britt Lumber, Co., Inc. (the "Debtor"), and Credit Suisse First Boston, acting through its New York Branch, as administrative agent, the Borrowers hereby certify on behalf of themselves and the other Loan Parties as follows: I. Current Information A. Legal Names, Organizations, Corporate Functions, Jurisdictions of Organization and Organizational Identification Numbers. The full and exact legal name (as it appears in each respective certificate or articles of incorporation, limited liability membership agreement or similar organizational documents, in each case as amended to date), the type of organization, the corporate function, the jurisdiction of organization (or formation, as applicable) and the organizational identification number (not tax i.d. number) of each Loan Party are as follows: Type of Organization (e.g. Name of Loan corporation, limited liability Corporate Jurisdiction of Organizational Party company, limited partnership) Function Organization/ Formation Identification Number B. Chief Executive Offices and Mailing Addresses. The chief executive office address and the preferred mailing address (if different than chief executive office) of each Loan Party are as follows: Name of Loan Party Address of Chief Executive Office Mailing Address (if different than CEO) C. Changes in Names, Jurisdiction of Organization or Corporate Structure. Except as set forth below, no Loan Party has changed its name, jurisdiction of organization or its corporate structure in any way (e.g. by merger, consolidation, change in corporate form, change in jurisdiction of organization or otherwise) within the past five (5) years: Loan Party Date of Change Description of Change D. Prior Addresses. Except as set forth below, no Loan Party has changed its chief executive office within the past five (5) years: Loan Party Prior Address/City/State/Zip Code E. Acquisitions of Equity Interests or Assets. Except as set forth below, no Loan Party has acquired the equity interests of another entity or substantially all the assets of another entity within the past five (5) years: Loan Party Date of Acquisition Description of Acquisition F. Trade Names. Set forth below is each trade name or assumed name currently used (or used at any time during the past five years) by the Loan Party or by which the Debtor or any Grantor is known or is transacting any business (or has been known or has transacted any business during the past five years): Loan Party Trade/Assumed Name G. Corporate Ownership and Organizational Structure. Attached as Exhibit A hereto is a true and correct chart showing the ownership relationship of the Loan Parties. II. Additional Information A. Tangible Personal Property. Set forth below are all the locations where the Loan Party currently maintains or has maintained any material amount (fair market value of $100,000 or more) of its tangible personal property (including goods, inventory and equipment) of such Loan Party (whether or not in the possession of such Loan Party) within the past five (5) years: Description of Loan Party Address/City/State/Zip Code County Assets and Value B. Warehousemen and bailees. Except as set forth below, no persons (including warehousemen and bailees) other than the Loan Party have possession of any material amount (fair market value of $100,000 or more) of assets (including goods, inventory and equipment) of such Loan Party: Description of Loan Party Address/City/State/Zip Code County Assets and Value III. Investment Related Property A. Securities. Set forth below is a list of all equity interests owned by the Loan Party together with the type of organization which issued such equity interests (e.g. corporation, limited liability company, partnership or trust): # of % of Certificate No. Type of Shares Total Shares Interest (if uncertificated, Loan Party Issuer Organization Owned Outstanding Pledged please indicate so) Par Value B. Securities Accounts. Set forth below is a list of all securities accounts in which the Loan Party customarily maintains securities or other assets having an aggregate value in excess of $100,000: Name & Address of Financial Loan Party Type of Account Institutions C. Deposit Accounts. Set forth below is a list of all bank accounts (checking, savings, money market or the like) in which the Loan Party customarily maintains in excess of $100,000: Loan Party Type of Account Name & Address of Financial Institutions D. Instruments. Set forth below is a list of all instruments owed to the Loan Party in the principal amount of greater than $100,000: Principal Amount of Debtor/Grantor Issuer of Instrument Instrument Maturity Date IV. Intellectual Property A. Set forth below is a list of all copyrights, patents and trademarks and other intellectual property owned or used, or hereafter adopted, held or used, by the Loan Party: Loan Party Copyrights Filing Date Status Registration No. Loan Party Patents Filing Date Status Registration No. Loan Party Trademarks Filing Date Status Registration No. V. Real Estate Related UCC Collateral A. Fixtures. Set forth below are all the locations where the Loan Party owns or leases any real property: Owned or Loan Party Address/City/State/Zip Code County Leased VI. Miscellaneous A. Authority to File Financing Statements. The undersigned, on behalf of the Loan Party, hereby authorizes the Administrative Agent to file financing or continuation statements, and amendments thereto, in all jurisdictions and with all filing offices as the Administrative Agent may determine, in its sole discretion, are necessary or advisable to perfect the security interest granted or to be granted to the lenders and other secured parties under the credit agreement relating to proposed transaction. Such financing statements may describe the collateral in the same manner as described in the credit agreement and related security documents or may contain an indication or description of collateral that describes such property in any other manner as the Administrative Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the security interest in the collateral granted to the lenders and other secured parties, including, without limitation, describing such property as "all assets" or "all personal property." IN WITNESS WHEREOF, the undersigned hereto has caused this Perfection Certificate to be executed as of this day of April, 2005 by its officer thereunto duly authorized. THE PACIFIC LUMBER COMPANY By: ____________________________ Name: Title: BRITT LUMBER CO., INC. By: ____________________________ Name: Title: Exhibit G FORM OF EXEMPTION CERTIFICATE Reference is made to the Term Loan Agreement dated as of April ___, 2005 (the "Credit Agreement"), among The Pacific Lumber Company ("Palco"), Britt Lumber Co., Inc. (together with Palco, the "Borrowers"), the Lenders from time to time party thereto, and Credit Suisse First Boston, acting through its New York Branch, as administrative agent (in such capacity, the "Administrative Agent"). Capitalized terms used herein that are not defined herein shall have the meanings ascribed to them in the Credit Agreement. [_______________________] (the "Non-U.S. Lender") is providing this certificate pursuant to Section 2.20(d) of the Credit Agreement. The Non-U.S. Lender hereby represents and warrants that: 1. The Non-U.S. Lender is the sole record and beneficial owner of the Loans or the obligations evidenced by Note(s) in respect of which it is providing this certificate. 2. The Non-U.S. Lender is not a "bank" for purposes of Section 881(c)(3)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). In this regard, the Non-U.S. Lender further represents and warrants that: (a) the Non-U.S. Lender is not subject to regulatory or other legal requirements as a bank in any jurisdiction; and (b) the Non-U.S. Lender has not been treated as a bank for purposes of any tax, securities law or other filing or submission made to any Governmental Authority, any application made to a rating agency or qualification for any exemption from tax, securities law or other legal requirements; 3. The Non-U.S. Lender is not a 10-percent shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code; and 4. The Non-U.S. Lender is not a controlled foreign corporation receiving interest from a related person within the meaning of Section 881(c)(3)(C) of the Code. IN WITNESS WHEREOF, the undersigned has duly executed this certificate. [NAME OF NON-U.S. LENDER] By: Name: Title: Date: Schedule 1.01(a) MORTGAGE PROPERTIES Mfg Lessor/ Owner Parcel Number Property Description AcreageFacilitilessee Comments THE PACIFIC LUMBER COMPANY CR 101-291-008-000T 2N R 1W SEC 30 78.5 THE PACIFIC LUMBER COMPANY CR 101-291-014-000 160 THE PACIFIC LUMBER COMPANY CR 106-151-003-000T 2N R 1W SEC 29 160 THE PACIFIC LUMBER COMPANY CR 106-151-006-000T 2N R 1W SEC 29 83.5 THE PACIFIC LUMBER CO 200-021-004-000T 3N R 1W SEC 22 40 THE PACIFIC LUMBER CO 200-021-008-000T 3N R 1W SEC 22 40 THE PACIFIC LUMBER COMPANY 200-021-009-000T 3N R 1W SEC 22 40 THE PACIFIC LUMBER COMPANY CR 200-021-014-000T3N R1W SEC 27 71.79 THE PACIFIC LUMBER CO 2N R1W SEC 2 0Fortuna The following 17 Fortuna 200-363-006-000T Mill THE PACIFIC LUMBER CO 200-363-007-000T2N R1W SEC 2 0Fortuna parcels total 76.77 acres THE PACIFIC LUMBER CO 201-082-007-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 201-091-006-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 201-092-026-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 201-092-027-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 201-092-029-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 201-331-002-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 201-331-004-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 201-331-005-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 202-011-023-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 202-011-031-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 202-021-005-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 202-021-010-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO CR 202-021-017-000T2N R1W SEC 2 0Fortuna THE PACIFIC LUMBER CO 202-022-001-000T2N R1W SEC 11 0Fortuna THE PACIFIC LUMBER CO 204-032-001-000T2N R1E SEC 9 158 THE PACIFIC LUMBER CO 204-032-002-000T 2N R 1E SEC 9 406 THE PACIFIC LUMBER CO 204-033-006-000T2N R1E SEC 10 40 Yager THE PACIFIC LUMBER CO CR 204-121-004-000T2N R1E SEC 21 0Carlotta THE PACIFIC LUMBER COMPANY 204-121-005-000T2N R1E SEC 21 0Carlotta THE PACIFIC LUMBER COMPANY 204-121-006-000T2N R1E SEC 21 0Carlotta THE PACIFIC LUMBER COMPANY 204-251-001-000T2N R1E SEC 21 0Carlotta THE PACIFIC LUMBER CO CR 204-251-010-000T2N R1E SEC 21 0Carlotta THE PACIFIC LUMBER COMPANY CR 204-381-001-000 0 THE PACIFIC LUMBER COMPANY 205-061-012-000T1N R1E SEC 21 0 THE PACIFIC LUMBER CO 205-221-001-000T 1N R 1E SEC 22 16 THE PACIFIC LUMBER COMPANY 205-261-012-000RS, BK 60, PGS 74-76 9.5 THE PACIFIC LUMBER COMPANY CR 205-321-003-000T1N R1E SEC 23 0 THE PACIFIC LUMBER CO 205-321-032-000T1N R1E SEC 25 80 THE PACIFIC LUMBER CO 205-321-034-000T1N R1E SEC 26 333 THE PACIFIC LUMBER COMPANY 205-341-019-000T1N R1E SEC 21 171 THE PACIFIC LUMBER CO 205-351-001-000T 1N R 1E SEC 5 280 THE PACIFIC LUMBER CO 205-351-002-000T 1N R 1E SEC 5 39 THE PACIFIC LUMBER COMPANY 205-351-018-000T1N R1E SEC 17 & 20 475.3 THE PACIFIC LUMBER CO 205-351-019-000T2N R1E SEC 28 507.5 THE PACIFIC LUMBER CO 206-031-007-000T2N R2E SEC 5 170 THE PACIFIC LUMBER CO 206-101-031-000T2N R1E SEC 15 3 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314-154-001-000T 4N R 2E SEC 25 77.5 THE PACIFIC LUMBER COMPANY CR 314-154-002-000T 4N R 2E SEC 25 76 THE PACIFIC LUMBER COMPANY CR 314-201-007-000 156 THE PACIFIC LUMBER COMPANY CR 314-201-012-000 37 THE PACIFIC LUMBER COMPANY 314-333-004-000T4N R2E SEC 6 0 THE PACIFIC LUMBER COMPANY ,CR 316-084-001-000T 6N R 3E SEC 1 281 THE PACIFIC LUMBER COMPANY 404-121-012-000T 5N R 2E SEC 31 81 THE PACIFIC LUMBER COMPANY 404-131-016-000T5N R2E SEC 31 0 THE PACIFIC LUMBER CO 405-321-013-000T4N R1E SEC 1 160 THE PACIFIC LUMBER CO 905-000-474-000T4N R2W SEC 12 0 THE PACIFIC LUMBER CO 905-000-475-000T4N R2W SEC 13 0 THE PACIFIC LUMBER CO 200-032-01 T3N R1W SEC 22 40 THE PACIFIC LUMBER CO 311-111-09 T3N R1W SEC 15 200 THE PACIFIC LUMBER CO 311-113-02 T3N R1W SEC 23 80 BRITT 507-461-055-000 4.7 Arcata BRITT 507-121-014-000 3 Arcata BRITT 507-081-038-000 20.5 Arcata See attached "Legal Description Exhibit 'A'" relating to property owned by Salmon Creek LLC. LEGAL DESCRIPTION EXHIBIT "A" THE LAND REFERRED TO HEREIN BELOW IS SITUATED IN THE COUNTY OF HUMBOLDT, STATE OF CALIFORNIA AND IS DESCRIBED AS FOLLOWS: All fee interest in and to the following described lands EXCEPTING THEREFROM All right, title and interest in and to, including without limitation the right in perpetuity to harvest, all trees and timber, regardless of species and regardless of size or diameter, now located on or hereafter planted or growing in the soil of those portions of the parcels of land located in the County of Humboldt, State of California, described below (the "Property"), which are more particularly shown as "Salmon Creek Ownership" on that certain map of the Property identified as map no. 100, on the GIS system jointly used by Pacific Lumber Company, Salmon Creek Corporation and others, dated July 15, 1998, and each containing a notation executed by representatives of said parties, Fidelity National Title Insurance Company, and Skadden, Arps, Slate, Meagher & Flom and held in trust by U.S. Bank of California ("Escrow Holder") pursuant to the terms of that certain Escrow Agreement dated July 20, 1998 herewith by and the above stated parties and the Escrow Holder, together with the right to enter upon the Property for any and all purposes pertaining to the cultivation, ownership and harvesting of such trees and timber. Being the same rights described in the deed from Salmon Creek Corporation, a Delaware corporation to The Pacific Lumber Company, a Delaware corporation recorded July 17, 1998 as Instrument No. 1998-18649-3, Humboldt County Official Records. Said parcels of land being described as follows: Township 3 North, Range 1 East, Humboldt Meridian: PARCEL ONE Section 19: The North Half of the Southeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. APN 200-011-19 Section 20: The North Half of the Southwest Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 265. APN 200-011-21 The South Half of the Southeast Quarter. APN 311-091-03 Section 23: The East Half of the Southeast Quarter. EXCEPTING FROM the lands in Section 23 above described one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. APN 314-061-08 Section 23: The Southeast Quarter of the Southwest Quarter, and the Southwest Quarter of the Southeast Quarter. EXCEPTING FROM the 23 above described all oil, gas and minerals, with appurtenant rights as excepted in the deed from the Regents of the University of California recorded March 22, 1950 in Book 125 of Official Records, page 24. APN 314-061-07 Section 26: The Northwest Quarter, the North Half of the Southwest Quarter, the Southwest Quarter of the Southwest Quarter and the Southwest Quarter of the Northeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deeds recorded February 29, 1944 in Book 265 of Deeds, page 255 and 256. APN 314-064-04 Section 27: The West Half, the Northeast Quarter, the North Half of the Southeast Quarter and the Southeast Quarter of the Southeast Quarter. APN 314-053-04 Section 28: The East Half of the Southeast Quarter, the Northeast Quarter of the Northwest Quarter, and the Northeast Quarter. EXCEPTING THEREFROM and from the land in Section 27 last above described one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. APN 314-054-06, 314-054-07, 314-054-08 Section 28: The West Half of the Northwest Quarter, the Southeast Quarter of the Northwest Quarter, the West Half of the Southeast Quarter, the North Half of the Southwest Quarter and the Southeast Quarter of the Southwest Quarter. APN 314-054-10 and 314-054-11 Section 29: The North Half of the Northeast Quarter. APN 311-092-04 Section 33: The Northeast Quarter. APN 204-012-03 Section 35: The Northwest Quarter of the Northwest Quarter. EXCEPTING THEREFROM, one-half of all oil, gas and minerals, with appurtenant rights as reserved in the deeds recorded February 29, 1944 in Book 265 of Deeds, page 255 and 256. APN 206-011-08 EXCEPTING FROM ALL OF THE ABOVE DESCRIBED LANDS that portion thereof conveyed to the United States of America by deed recorded March 1, 1999 as Instrument No. 1999-6265-5, Humboldt County Official Records. PARCEL TWO Easements and rights of way as further described in and subject to the conditions contained in that certain Reciprocal Rights Agreement recorded March 22, 1993 as Instrument No. 1993-7890-136, Humboldt County Official Records. PARCEL THREE The right to use roads as further described in, and subject to the conditions contained in those certain Right of Way Grants executed by United States Department of the Interior Bureau of Land Management recorded March 1, 1999 as Instrument Nos. 1999-6271-8, 1999-6272-8, 1999-6273-8 and 1999-6274-8, Humboldt County Official Records. APN 200-011-019-000 Schedule 3.07 TITLE TO PROPERTIES; POSSESSION UNDER LEASES Rights of first refusal, Options or other Contractual Rights to sell, assign or otherwise dispose of any Real Property or any interest therein: 1. Amended and Restated Purchase and Sale Agreement dated as of January 7, 2005 between River View Terrace LLC and PALCO. 2. Real Estate Purchase Agreement dated on or about March 10, 2005 between PALCO and The FHK Companies. 3. Stipulation for Settlement CCP ยง 664.6 in Kristi Wrigley, et al. v. Charles Hurwitz, et al., State of California, Humboldt County Superior Court, Case No. DR 9700399 4. Letter of intent dated November 24, 2004 between K. D. Investments LLC and The Pacific Lumber Company. Schedule 3.08 PALCO AND ITS SUBSIDIARIES Name Domicile Qualifications The Pacific Lumber Company ("Palco") California - Palco Subsidiaries: Britt Lumber Co., Inc.* California - Salmon Creek LLC * Delaware California Scotia Inn Inc.* Delaware California Scotia Pacific Company LLC* Delaware California * None of these companies has any subsidiaries. Schedule 3.09 LITIGATION In March 1999, an action entitled Environmental Protection Information Association, Sierra Club v. California Department of Forestry and Fire Protection, California Department of Fish and Game, The Pacific Lumber Company, Scotia Pacific Company LLC, Salmon Creek Corporation, et al. (the "EPIC-SYP/Permits lawsuit") was filed in Superior Court in Humboldt County, California (No. CV-990445). This action alleged, among other things, various violations of the California Endangered Species Act ("CESA") and the California Environmental Quality Act ("CEQA"), and challenged, among other things, the validity and legality of Palco's sustained yield plan ("SYP") and the incidental take permits issued by California in connection with the Headwaters Agreement (the "California Permits"). The plaintiffs sought, among other things, to set aside California's approval of the SYP and the California Permits and injunctive relief to prevent implementation of timber harvesting plans ("THPs") approved in reliance upon these documents. In March 1999, a similar action, entitled United Steelworkers of America, AFL-CIO, CLC, and Donald Kegley v. California Department of Forestry and Fire Protection, The Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation (the "USWA lawsuit"), was filed in Humboldt County Superior Court (No. CV-990452) challenging the validity and legality of the SYP. The EPIC-SYP/Permits and USWA lawsuits were consolidated for trial. Following trial, the Court on October 31, 2003 entered a judgment invalidating the SYP and the California Permits due to several deficiencies in agency procedures and the failure of Palco to submit a complete and comprehensible SYP. The Court's decision, however, allowed for harvesting on THPs which rely on the SYP and were approved prior to July 23, 2003. The short-term effect of the ruling was to preclude approval, under the SYP, of a small number of THPs which were under review but had not been approved, and a minor reduction in 2003 harvesting that had been expected from these specific THPs. As a result of this case, Palco has since October 2002, when the Court issued a stay order preventing future reliance upon the SYP, been obtaining review and approval of new THPs under a procedure provided for in the forest practice rules that does not depend upon the SYP and the California Permits. Palco expects to follow this procedure until its Option A Plan is approved. Palco and the State of California have appealed the October 31, 2003, decision. In September 2004, the Court granted the plaintiffs' request for reimbursement of an aggregate of $5.8 million in attorneys fees and other expenses incurred in connection with these matters. Palco and the State of California have also appealed this decision. In July 2001, an action entitled Environmental Protection Information Center v. The Pacific Lumber Company, Scotia Pacific Company LLC (the "Bear Creek lawsuit") was filed in the U.S. District Court for the Northern District of California (No. C01-2821), and later amended to add the Environmental Protection Agency ("EPA") as a defendant. The lawsuit alleges that Palco's harvesting and other forestry activities under certain approved THPs will result in discharges of pollutants in violation of the federal Clean Water Act ("CWA"). The plaintiff asserts that the CWA requires the defendants to obtain a permit from the California North Coast Regional Water Quality Control Board (the "North Coast Water Board") before beginning timber harvesting and road construction activities and is seeking to enjoin these activities until such permit has been obtained. The plaintiff also seeks civil penalties of up to $27,500 per day for the defendant's alleged continued violation of the CWA. On October 14, 2003, in connection with certain motions that had been filed, the Court upheld the validity of an EPA regulation which exempts harvesting and other forestry activities from certain discharge requirements. Both state and federal agencies, along with Palco and other timber companies, have relied upon this regulation for more than 25 years. However, the Court interpreted the regulation in such a way as to narrow the forestry operations which are exempted, thereby limiting the regulation's applicability and subjecting culverts and ditches to permit requirements. This ruling has widespread implications for the timber industry in the United States. The case is not yet final as the trial has not yet been held, and there are many unresolved issues involving interpretation of the Court's decision and its application to actual operations. Should the decision ultimately become final and held to apply to all Palco's timber operations, it may have some or all of the following effects: imposing additional permitting requirements, delaying approvals of THPs, increasing harvesting costs, and adding water protection measures beyond those contained in Palco's habitat conservation plan ("HCP"). On November 20, 2002, two similar actions entitled Alan Cook, et al. v. Gary Clark, et al. (the "Cook action") and Steve Cave, et al. v. Gary Clark, et al. (the "Cave action") were filed in Humboldt County Superior Court (No.'s DR020718 and DR020719, respectively), which also name Palco and certain affiliates as defendants. On April 4, 2003, the plaintiffs in these actions filed amended complaints and served the defendants with notice of the actions. The Cook action alleges, among other things, that defendants' logging practices have contributed to an increase in flooding along Freshwater Creek (which runs through Palco's timberlands), resulting in personal injury and damage to the plaintiffs' properties. Plaintiffs further allege that in order to have THPs approved in the affected areas, the defendants engaged in certain unfair business practices. The plaintiffs seek, among other things, compensatory and exemplary damages, injunctive relief, and appointment of a receiver to ensure that the watershed is restored. The Cave action contains similar allegations and requests similar relief with respect to the Elk River watershed (a portion of which is contained on the Palco Timberlands). On February 25, 2003, the District Attorney of Humboldt County filed a civil suit entitled The People of the State of California v. The Pacific Lumber Company, Scotia Pacific Holding Company and Salmon Creek Corporation in the Humboldt County Superior Court (No. DR030070) (the "Humboldt DA action"). The suit was filed under California's unfair competition law and alleges that Palco used certain unfair business practices in connection with completion of the Headwaters Agreement, and that this resulted in Palco being able to harvest significantly more trees under the HCP and SYP than would have otherwise been the case. The suit sought a variety of remedies including a civil penalty of $2,500 for each additional tree that has been or will be harvested due to this alleged increase in harvest, as well as restitution and an injunction in respect of the additional timber harvesting allegedly being conducted. In response to motions filed by Palco for sanctions and dismissal of this suit, on April 30, 2004, the Court issued a ruling requiring the District Attorney to amend his suit to prove that "extrinsic" fraud occurred. In addition, the Court eliminated the remedies being sought, other than for civil penalties, and suggested that it would be inappropriate to base civil penalties on the additional trees harvested. The Court also ruled that it declined "at this juncture" to impose sanctions on the District Attorney. The District Attorney subsequently amended his suit, and Palco later filed new motions to dismiss and for sanctions. After delays resulting from the District Attorney's efforts to disqualify the trial judge, and that judge's later self-disqualification, a hearing on these motions was held on February 18, 2005. The Court rejected the sanctions motion, but has not yet ruled on the motion for dismissal. On November 2, 2004, an action entitled Environmental Protection Information Center v. U.S. Fish & Wildlife Service, NOAA Fisheries, et al. (No. C04-4647) was filed in the U.S. District Court for the Northern District of California (the "EPIC-USFWS/NOAA lawsuit"). This lawsuit alleges that two federal agencies have violated certain federal laws and related regulations in connection with their oversight of the HCP and related incidental take permits issued by the federal governments pursuant to the HCP and related federal incidental take permits (the "Federal Permits"). The plaintiff also alleges that the Federal Permit for the northern spotted owl was unlawfully issued and that Palco violated California's unfair competition law by using false advertising and making misleading environmental claims. The plaintiff seeks a variety of remedies, including requiring additional actions by the federal agencies and precluding them from authorizing take of the northern spotted owl, an injunction requiring Palco to cease certain alleged unlawful activities, as well as restitution and remediation by Palco. Motions have been filed by the federal government and Palco seeking dismissal of substantial portions of this case, but a hearing date on this motion has not yet been set. Schedule 3.10 AGREEMENTS None. Schedule 3.17 ENVIRONMENTAL MATTERS See attached memorandum of April 13, 2005 to Edgar B. Washburn from William Sloan, Andrea Mcafee and Catherine Berte of Stoel Rives LLP. PALCO is party to a "consent decree" settlement for its Carlotta and Yager operations. PALCO has completed some Phase II work at the Scotia facility (Mill A, Mill B, and portions of Scotia Value Added). Limited Phase I work has been conducted at both the Carlotta and Fortuna facilities. No environmental issues have been found warranting notification to regulatory agencies at either the Carlotta or Fortuna facilities as part of these Phase I activities. A technical memorandum summarizing the findings has been prepared for the completed Phase II work in Scotia. PALCO is conducting a remediation project concerning groundwater and soil contamination at the old company garage located on Main Street in Scotia and its coordinating that work through both the Humboldt County Environmental Health Department and the Regional Water Quality Control Board. There was a number of underground storage tanks located on PALCO property. All of these sites have been officially closed from a regulatory perspective except the one site, as mentioned above, at the old company garage on Main Street in Scotia. That site will be going through active remediation through a hydrogen peroxide injection process and is scheduled for complete closure within approximately four years. Another site located on PALCO property is in Carlotta; however, this site is from historic LP operations and is their responsibility for closure. PALCO is proactively managing its asbestos and lead paint program. PALCO has been surveying the Scotia town site for asbestos and lead based paint. As locations are identified that contain these building materials, they are noted and quantified in reports. Also, at the time of the surveys any damaged material is noted and further specified if conditions need to be abated. If conditions are noted during the surveys that need to be abated, they are scheduled with a contractor licensed to perform such work in the state of California. A large amount of material has been removed predominately from older and seldom used buildings. PALCO is undertaking to clean up one wood waste site at Hely creek. Another wood waste site at Yager is being managed by a contractor specializing in reclaiming wood waste. At Yager, related estimated costs of $200,000 to $300,000 per year over four years are included in PALCO's plan. These estimates are subject to potential downward revision. At Hely Creek, total costs of $200,000 are included in PALCO's plan, and these costs are subject to potential upward revision. In 2003, Scotia Pacific sold property to the State of California located in Redway, Humboldt County (portions of Sections 15 an 16, Township 4 South, Range 3 East, Humboldt Meridian). This property was owned by PALCO until 1993. A Phase 1 Environmental Site Assessment in connection with this sale found debris in the vicinity that suggested past activity by trespassers on the property; possible violations of Environmental Law may have occurred in connection with this activity. Regulatory and Environmental Factors Affecting Palco's Business (see Schedule 3.09 for various defined terms used herein) General Palco's business is subject to a variety of California and federal laws and regulations, as well as the HCP, dealing with timber harvesting practices, threatened and endangered species and habitat for such species, and air and water quality. Compliance with such laws and regulations also plays a significant role in Palco's business. The California Forest Practice Act (the "Forest Practice Act") and related regulations adopted by the California Board of Forestry and Fire Protection (the "BOF") set forth detailed requirements for the conduct of timber harvesting operations in California. These requirements include the obligation of timber companies to obtain regulatory approval of detailed THPs containing information with respect to areas proposed to be harvested. California law also requires large timberland owners, including Palco, to demonstrate that their proposed timber operations constitute the maximum sustainable production of their timberlands over time. The federal Endangered Species Act (the "ESA") and CESA provide in general for the protection and conservation of specifically listed wildlife and plants. These laws generally prohibit the take of certain species, except for specifically authorized incidental take pursuant to otherwise lawful activities which do not jeopardize the continued existence of the affected species and which are made in accordance with an approved habitat conservation plan and related incidental take permits. A habitat conservation plan, among other things, specifies measures to minimize and mitigate the potential impact of the incidental take of species and to monitor the effects of the activities covered by the plan. Palco is also subject to the CEQA, which provides for protection of the state's air and water quality and wildlife, and the California Porter-Cologne Water Quality Control Act and CWA, which require that Palco conduct its operations so as to reasonably protect the water quality of nearby rivers and streams. Compliance with such laws, regulations and judicial and administrative interpretations, together with other regulatory and environmental matters, have resulted in substantial restrictions on the scope and timing of Palco's timber operations, increased operational costs significantly, and engendered continual litigation and other challenges to its operations. Moreover, the cash flows of Palco and Scotia Pacific have recently been adversely affected by the failure of the North Coast Water Board to release for harvest THPs which have already been approved by the other government agencies that approve Scotia Pacific's THPs. See "Water Quality" below. Environmental Plans The HCP and the SYP (collectively, the "Environmental Plans"), which cover the substantial portion of the timberlands of Palco and its subsidiaries (the "Palco Timberlands"), were approved by the federal and state governments upon the consummation of the Headwaters Agreement. In connection with approval of the Environmental Plans, incidental take permits (the "Permits") were issued with respect to certain threatened, endangered and other species found on the timberlands covered by the Environmental Plans. The Permits were to cover the 50-year term of the HCP and allow incidental take of 17 different species covered by the HCP, including nine species which are found on the Palco Timberlands that have been listed under the ESA and/or the CESA. The agreements which implement the Environmental Plans also provide for various remedies (including the issuance of written stop orders and liquidated damages) in the event of a breach by Palco, Salmon Creek or Scotia Pacific (collectively, the "Palco Companies") of these agreements or the Environmental Plans. Under the HCP, harvesting activities are prohibited or restricted on certain areas of the Palco Timberlands. Some of these restrictions continue for the entire 50-year term of the HCP. For example, several areas (consisting of substantial quantities of timber, including old growth redwood and Douglas-fir timber) are designated as habitat conservation areas for the marbled murrelet, a coastal seabird, and certain other species. Harvesting in certain other areas of the Palco Timberlands is currently prohibited while these areas are evaluated for the potential risk of landslide. Further, additional areas alongside streams have been designated as buffers, in which harvesting is prohibited or restricted, to protect aquatic and riparian habitat. Restrictions on harvest in streamside buffers and potential landslide prone acres may be adjusted up or down, subject to certain minimum and maximum buffers, based upon the ongoing watershed analysis process described below. The adaptive management process described below may also be used to modify most of these restrictions. The first analysis of a watershed, Freshwater, was released in June 2001. This analysis was used by the Palco Companies and the government agencies to develop proposed harvesting prescriptions. Prescriptions for the Van Duzen watershed were approved in January 2004. Prescriptions for a third watershed (Lower Eel - Eel Delta) were approved in March 2004. The Freshwater, Van Duzen and Lower Eel prescriptions each resulted in a reduction in the size of the streamside buffers set forth in the Environmental Plans and also provide for geologic reviews in order to conduct any harvesting activities on potential landslide-prone areas. This effectively reduced both the size and operational restrictions in respect of landslide-prone areas. The analysis for a fourth watershed, Elk River, was submitted in mid-2004 for agency and public review, and prescriptions for Elk River have been developed and are undergoing review by the relevant agencies. The HCP required the Palco Companies, together with the government agencies, to establish a schedule resulting in completion of the initial watershed analysis process for all covered lands within five years. However, due largely to the number of agencies involved and the depth and complexity of the analyses, the process has proven to require more time than originally anticipated. Accordingly, the Palco Companies have been working with the government agencies to establish an appropriate timeline and to streamline the process for implementation of watershed analysis on the remaining portions of Palco Timberlands to ensure that such studies are time and cost efficient, and that such studies continue to provide scientific results necessary to evaluate potential changes to the harvesting restrictions on those lands. The Palco Companies have received an extension to March 2007 of the time in which the watershed analysis process must be completed. A proposed streamlined process is undergoing review by the relevant agencies. The HCP imposes certain restrictions on the use of roads on the timberlands covered by the HCP during several months of the year and during periods of wet weather. However, Palco has conducted, and expects to be able to continue to conduct, some harvesting during these periods. An adaptive management change approved in 2003 for the road restrictions has improved the ability to construct and use roads on the Palco Timberlands in ways that are consistent with the operational needs of the Palco Companies. The HCP also requires that 75 miles of roads be stormproofed (i.e., reconstructed to reduce sediment generation) on an annual basis and that certain other roads must be improved or repaired. The nature of this work requires that it be performed in the dry periods of the year. To date, over 450 miles of roads have been stormproofed. The HCP contains an adaptive management provision, which both the state and federal governments have clarified will be implemented on a timely and efficient basis, and in a manner which will be both biologically and economically sound. This provision allows the Palco Companies to propose changes to many of the HCP prescriptions based on, among other things, economic considerations. The regulatory agencies have also clarified that in applying this adaptive management provision, to the extent the changes proposed do not result in the jeopardy of a particular species, the regulatory agencies will consider the practicality of the suggested changes, including the cost and economic feasibility and viability. The Palco Companies and the agencies have implemented various adaptive management changes related to wildlife and rare plants, and other changes relating to roads and streamside buffers. These adaptive management changes have increased Palco's ability to conduct harvesting operations and/or reduce operating costs while still meeting the obligations of the Environmental Plans. Water Quality Laws and regulations dealing with water quality are impacting the Palco Companies primarily in four areas: efforts by the EPA and the North Coast Water Board to establish total maximum daily load limits ("TMDLs") in watercourses that have been declared to be water quality impaired; actions by the North Coast Water Board to impose waste discharge reporting requirements in respect of watersheds on the Palco Timberlands and in some cases, clean-up or prevention measures; actions by the North Coast Water Board during the THP approval process which impose certain operational requirements on individual THPs; and a directive of the North Coast Water Board to its staff to develop watershed-wide waste discharge requirements ("WWDRs") for the Freshwater and Elk River watersheds. Under the CWA, the EPA is required to establish TMDLs for relevant contaminants in watercourses that have been declared to be "water quality impaired." The EPA and the North Coast Water Board are in the process of establishing TMDLs for many northern California rivers and certain of their tributaries, including nine watercourses that flow within the Palco Timberlands. On the Palco Timberlands, the relevant contaminant is simple sediment dust, dirt and gravel that is abundant in watercourses largely as a function of the area's normally heavy rainfall and soil that erodes easily. Palco expects this process to continue into 2010. In December 1999, the EPA issued a report dealing with TMDLs on two of the nine watercourses. The agency indicated that the requirements under the HCP would significantly address the sediment issues that resulted in TMDL requirements for these watercourses. The North Coast Water Board has begun the process of establishing the TMDL requirements applicable to two other watercourses on the Palco Timberlands, with a targeted completion of 2006 for these two watercourses. Scotia Pacific's scientists are actively working with North Coast Water Board staff to ensure these TMDLs recognize and incorporate the environmental protection measures of the HCP. The final TMDL requirements applicable to the Palco Timberlands may require aquatic protection measures that are different from or in addition to those in the HCP or that result from the prescriptions to be developed pursuant to the watershed analysis process provided for in the HCP. For each of the three winter periods since 2002, the North Coast Water Board has required Palco to submit "Reports of Waste Discharge" in order to conduct winter harvesting operations in the Freshwater and Elk River watersheds. After consideration of these reports, the North Coast Water Board imposed requirements on the Palco Companies to implement additional mitigation and erosion control practices in these watersheds for each of the three winter operating periods. The North Coast Water Board has also extended the requirements for certain mitigation and erosion control practices in three additional watersheds (Bear, Jordan and Stitz Creek). The Palco Companies and the North Coast Water Board are currently in discussions to determine what these measures will be. The requirements imposed to date by the North Coast Water Board have significantly increased operating costs; additional requirements imposed in the future could further increase costs and cause delays in THP approvals. The North Coast Water Board has also issued a clean up and abatement order (the "Elk River Order") for the Elk River watershed, which is aimed at addressing existing sediment production sites through clean up actions. The North Coast Water Board has also initiated the process which could result in similar orders for the Freshwater and Bear Creek watersheds, and is contemplating similar actions for the Jordan and Stitz Creek watersheds. The Elk River Order has resulted in increased costs to Palco that could extend over a number of years. Additional orders in other watersheds (should they be issued), may also result in further cost increases. Palco's appeal of the Elk River Order to the State Water Resources Control Board (the "State Water Board") was denied. Palco has appealed the decision of the State Water Board in state court. In addition to the foregoing actions, the North Coast Water Board in December 2003 directed its staff to create WWDRs for the Freshwater and Elk River watersheds. As harvesting activities on the Palco Timberlands cannot readily be moved between watersheds due to, among other things, historic harvest patterns, adjacency restrictions, and the age classes of trees, that action and the other matters described above could, in addition to the potential effects noted above, individually or collectively result in reduced harvest. In that regard, the staff of the North Coast Water Board has not yet formulated the required WWDRs for the Freshwater and Elk River watersheds, and has on several occasions postponed its projected date for their completion. As a result, the North Coast Water Board has failed to release for harvest a number of Scotia Pacific's THPs that are located in the Freshwater and Elk River watersheds, even though these THPs have already been approved by the other government agencies which review Scotia Pacific's THPs and are in compliance with the HCP. The delay in receiving the release of these THPs has adversely impacted the cash flows of both Palco and Scotia Pacific. Furthermore, it is likely that additional delays in the development of the Freshwater and Elk River WWDRs will occur, and such delays could have adverse impacts beyond those currently being experienced. On February 25, 2005, the Executive Officer of the staff of the North Coast Water Board publicly announced approval of the release of additional THPs such that Palco would be allowed to harvest up to 50% of the harvest limit established by the CDF for the Freshwater and Elk River watersheds. On March 16, the North Coast Water Board ordered (the "March 16 Order") that additional THPs be enrolled that would allow the harvest of up to 75% of the harvest limit established by the CDF for the Freshwater and Elk River watersheds. Following an appeal of the March 16 Order to the State Water Resources Control Board (the "State Water Board"), on April 6, 2005, a hearing officer acting on behalf of the State Water Board issued an order staying the enrollment of the additional THPs under the March 16 Order. California Senate Bill 810, which became effective January 1, 2004, provides regional water quality control boards with additional authority related to the approval of THPs on land within impaired watersheds. Under this law, a THP "may not be approved if the appropriate regional water quality control board finds, based on substantial evidence, that the timber operations proposed in the plan will result in a discharge into a watercourse that has been classified as impaired due to sediment...that causes or contributes, to a violation of the regional water quality control plan. Palco is uncertain of the operational and financial effects which will ultimately result from Senate Bill 810. While this provision has not yet been invoked in respect of the Palco Timberlands, because substantially all rivers and waterbodies on the Palco Timberlands are classified as sediment-impaired, implementation of this law could result in delays in obtaining approval of THPs, lower harvest levels and increased costs and additional protection measures beyond those contained in the HCP. Memorandum April 13, 2005 TO: EDGAR B. WASHBURN FROM: WILLIAM SLOAN ANDREA MCAFEE CATHERINE BERTE' CLIENT: 92236 - PALCO MATTER: 012 - Regional Water Board Matters RE: List of Regional and State Water Board Orders and Actions Following is a summarized list of the orders issued and actions taken by the Regional or State Board affecting The Pacific Lumber Company. Regional Board Orders And Actions - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- # ORDER NO. DATE TITLE OF ORDER DESCRIPTION ISSUES DISPOSITION - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 1 87-113 09/24/87 Resolution No. 87-113, Waives the filing of ROWDs (unless PALCO had no issues with this PALCO did not appeal this order. *** Waiving Waste Discharge requested by the Board) and Resolution. Resolution Requirements for issuances of WDRs for specific *Rescinded by R1-2002-0109 (Categorical Specific Types of types of waste discharges under Under amendments to Cal. Water (Interim Categorical Waiver)* Waiver) Discharges Cal. Water Code ยง13269, including Code ยง13269 (SB 390), the existing stormwater runoff, erosion from waivers expired on 1/1/03. minor construction projects, minor stream channel alterations, and timber harvesting. "The Regional Board finds that waiver of [ROWDs and WDRs] . . . would enable Regional Board staff resources to be used more effectively." - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 2 97-115 09/23/97 Cleanup and Abatement Orders cleanup and abatement of First attempt to link landslides PALCO filed a petition for review. *** Order No. 97-115, North activities pertaining to and harvesting; no current issues CAO Fork Elk River landslides observed in and around since the CAO was superceded. *Rescinded by 98-100 (CAO)* (North Fork Elk) THP 94-360. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 3 98-100 09/22/98 Cleanup and Abatement Rescinds in part 97-115 (CAO). Contains findings that PALCO PALCO filed a petition for *** Order No. 98-100, North Orders further cleanup and caused the water quality problems review, but is complying with CAO CAO Fork Elk River abatement activities: (1) survey in the North Fork Elk River; no 98-100 requirements; has (North Fork Elk) downstream landowners utilizing formal evidentiary hearing was surveyed, provided water, and North Fork Elk for domestic or ever held, but the Regional and replaced water systems of various agricultural water supply; and (2) State Board have insisted landowners; PALCO could consider provide adversely affected (particularly in the THP 520 challenging the findings by downstream surface water users proceedings) that the stipulated invoking the settlement with alternative water supplies. settlement (02/22/99) serves as a agreement's provision with concession by PALCO that it was respect to new evidence. responsible for the conditions in the North Fork Elk River; PALCO has argued that the settlement agreement expressly states that PALCO is not admitting liability. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 4 N/A 09/09/00 Staff Report for Evaluates several adverse impacts PALCO submitted comments opposing *** Proposed Regional Water to beneficial uses of water caused the report at these workshops. Staff Report Board Actions in the by discharge of sediment from The report underlies many of the North Fork Elk River, lands owned by PALCO within the 5 other identified matters, but does Bear Creek, Freshwater watersheds. Alternatives not constitute its own order. Creek, Jordan Creek and addressed in the report include Stitz Creek Watersheds adoption of individual WDRs for timber harvest activities and expediting the time schedule for development of TMDLs for Freshwater Creek, Elk River, and the Middle Fork of the Eel River to which Stitz, Bear and Jordan Creeks are tributary. Proposes cease and desist orders limiting timber harvest rates in Bear at 72.75 acres/yr and in NFER at 39.57 acres/yr (rates developed by Leslie Reid). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 5 R1-2001-0019 03/28/01 Monitoring and Orders PALCO to conduct water At issue was the Regional Board's PALCO filed petition for review R *** Reporting Program quality monitoring in the South authority to require additional and stay of this order (SWRCB/OCC MRP Order No. R1-2001-0019 Fork Elk River watershed in monitoring after a THP has been File A-1380). The State Board (South Fork Elk) (South Fork Elk River) conjunction with THP 520. approved, particularly when no denied PALCO's stay request information changed and the (WQO-2001-0009) and modified the harvesting had not yet begun; monitoring requirements of PALCO argued that the Order was R1-2001-0019 (WQO-2001-0014). not supported by the weight of the evidence and that the burden of the monitoring outweighed any benefit. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 6 R1-2002-0080 10/24/02 Policy for Waiving As a result of the amendments to "Storm water runoff" is one of the PALCO did not appeal this order. *** Waste Discharge Water Code ยง13269 (SB 390), the waiver categories listed in Resolution Requirements for waiver categories listed in Attachment B, "Storm water runoff (Categorical Specific Types of Waste Attachment A would expire 1/1/03 is not governed by statewide Waiver) Discharge and be replaced by individual regulations, no water quality WDRs, waivers, or general orders. problems are anticipated and no WDRs are waived for categories NPDES permit is required." listed in Attachment B (these categories will be reviewed and amended within 5 years from date of resolution). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 7 R1-2002-0085 08/01/02 Cleanup and Abatement Ordered PALCO to prepare according PALCO has argued that the Regional PALCO filed a petition for review *** Order and Request for to a set time table: (1) work plan Board does not have the authority (SWRCB/OCC File A-1501). At CAO Technical Reports No. to conduct corrective actions on to issue CAOs as a collateral PALCO's request, the State Board (North & South R1-2002-0085 (North and roads identified in the PWA attack on approved THPs, that the is holding matter in abeyance Forks Elk) South Fork Elk Rivers) report, (2) a report identifying CAO is not supported by the until 10/11/06. options and preferred alternatives evidence, that the CAO cannot for remediation of each road and regulate natural or legacy *Rescinded by R1-2002-0114 (CAO); non-road related landslides conditions, and that the CAO is a PALCO's position is that contained in PWA report; (3) an breach of the Headwaters Agreement. R1-2002-0114 (CAO) is also being assessment of in-stream soil held in abeyance* deposits in Bridge Creek and the Little North Fork Elk River. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 8 Letter Order 08/05/02 Order Requiring Reports Order requires PALCO to provide PALCO raised a number of arguments PALCO filed a petition for review *** of Waste Discharge for reports of waste discharge for Elk against the ROWD (and the (SWRCB/OCC File A-1502). At ROWDs Elk River ("Elk River River; order addresses only wet subsequent WDRs), including that PALCO's request, the State Board (Elk) ROWD") weather conditions between Oct. 15 WDRs are unauthorized, barred by is holding matter in abeyance and May 1 of each years. collateral estoppel, are unduly until 10/11/06. burdensome, are not supported by the evidence, and breach the Headwaters Agreement. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 9 R1-2002-0088 08/15/02 Order Requiring Technical report order for Elk PALCO raised a number of arguments PALCO filed a petition for review *** Technical Information, River TMDL development monitoring. against the MRP Order, including (SWRCB/OCC File A-1507). At MRP Monitoring and that it is unauthorized, barred by PALCO's request, the State Board (Elk) Reporting Program collateral estoppel, is unduly is holding matter in abeyance R1-2002-0088 (Elk River) burdensome, not supported by the until 10/11/06. evidence, and breaches the Headwaters Agreement. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 10 R1-2002-0105 11/07/02 Waste Discharge Orders PALCO to comply with MRP No current issues since the WDRs PALCO did not appeal this order. *** Requirements No. R1-2002-0105 and submit on July 1 were rescinded. WDRs R1-2002-0105 (Elk River) of each year, a revised ROWD *Rescinded by R1-2003-0007 (WDRs)* (Elk) identifying all THPs and associated activities proposed to be conducted in the Elk River watershed during the winter months. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 11 R1-2002-0105 *** 11/07/02 Monitoring and Requires instream water sample No current issues since the MRP PALCO did not appeal this order. MRP Reporting Program No. collection at selected stream Order was rescinded. (Elk) R1-2002-0105 (Elk River) crossings; objective is to assess *Rescinded by R1-2003-0007 (MRP)* and demonstrate compliance with WDR Order R1-2002-0105. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 12 R1-2002-0109 12/10/02 Interim Categorical *Rescinds Resolution 87-113 This order was adopted in PALCO did not appeal this order. *** Waiver for Discharges (Categorical waiver resolution).* anticipation of the expiration of Resolution Related to Timber Waives issuance of WDRs and Resolution 87-113 on 1/1/03. The EPIC/HWC petitioned the State (Interim Operations in the North submittal of ROWDs for timber Regional Board did not permit Board for review and stay of this Categorical Waiver) Coast Region operations on private lands; PALCO to use this categorical order (SWRCB/ OCC File A-1539); dischargers must comply with the waiver for its Elk and Freshwater the stay was denied (see SWRCB requirements of the Basin Plan, THPs. 4/15/03 letter order below). monitoring programs instituted by the Executive Officer, and submit *Rescinded by R1-2003-0116 a Notice of Intent and approved (Interim Categorical Waiver)* THP prior to commencement of timber operations. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 13 R1-2002-0111 12/10/02 Waiver of Waste Renews the waivers of ROWDs and The categorical waiver granted PALCO did not appeal this order. *** Discharge Requirements WDRs for a number of active North under Resolution 87-113 was to Waiver of WDRs for Specific, Currently Coast THPs covered under the expire on 01/01/03; this order HWC filed a petition for review Active Timber Harvest timber harvesting categorical extended the waiver for an (see SWRCB/OCC File A-1542). By Plans as of January 1, waiver in Resolution 87-113 (see additional five years. letter of 03/21/03, the State 2003, on Private and #1 above); a list of the specific Board consolidated this petition State Lands Within the THPs is attached to the order. with HWC's later petition for North Coast Region review of Order R1-2003-0007 (MRP) (see #18 below). Both petitions were ultimately dismissed by the State Board. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 14 R1-2002-0114 12/17/02 Cleanup and Abatement Rescinds R1-2002-0085 (CAO). PALCO has argued that the Regional PALCO filed a petition for *** Order and Request for Orders PALCO to (1) conduct all Board does not have the authority review, which State Board CAO Technical Reports No. cleanup and abatement activities to issue CAOs as a collateral rejected by letter dated (North & South R1-2002-0114 (North and under direction of a CE; (2) attack on approved THPs, that the 1/28/03. PALCO then sent a Forks Elk) South Forks Elk River) prepare and submit a workplan to CAO is not supported by the letter explaining that the conduct corrective actions on evidence, that the CAO cannot material pertaining to this roads identified in PWA report; regulate natural or legacy matter is encompassed within (3) prepare and submit itemized conditions, and that the CAO is a SWRCB/OCC File A-1501 (PALCO report identifying all options and breach of the Headwaters Agreement. Petition for Review of preferred alternatives for the R1-2002-0085). remediation of each road and non-road related site in PWA *Since this order rescinded report; (4) prepare and submit an R1-2002-0085 (CAO), which the assessment of in-stream soil State Board was holding in deposits in Bridge Creek and the abeyance until 10/11/06 at North Branch of the NF Elk PALCO's request, PALCO's position is that R1-2002-0114 (CAO) is *Effectively did nothing more than also being held in abeyance* make grammatical changes to and alter deadlines for R1-2002-0085* - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 15 Letter Order 12/19/02 Letter order requiring Request for reports of waste PALCO filed suit on the primary PALCO filed a petition for review *** reports of waste discharges for certain THPs in grounds that the findings in this (SWRCB/OCC File A-1543). The ROWD discharge of Freshwater Freshwater. order (i.e., PALCO's harvesting is State Board dismissed without (Freshwater) Creek ("Freshwater the cause of water quality review or hearing; on 8/22/03, ROWD"). problems in the watershed) are not PALCO filed a Petition and supported by the evidence, that Complaint in Humboldt County the order is unauthorized under Superior Court (Case No. the comprehensive regulatory CV03-0650). regime established by the FPA and FPR, and that the order is barred by collateral estoppel and Gov't Code ยง51115.5; PALCO has also alleged breach of contract, promissory estoppel, violations of due process and equal protection, and an uncompensated taking. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 16 Letter Order 01/06/03 Section 13267 Order for Letter order requiring information PALCO decided it could live with PALCO did not appeal this order. *** Freshwater Creek relating to "early abatement" this order (effort was being made CAO Cleanup and Abatement actions for the Freshwater Creek to find common ground with (Freshwater) Activities Watershed, prior to completion of Regional Board). the TMDL development process. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 17 R1-2003-0007 01/31/03 Revision of Waste Rescinds R1-2002-0105 (WDRs). PALCO decided it could live with PALCO did not appeal this order. *** Discharge Requirements Enforces PALCO to submit reports this order (effort was being made WDRs No. R1-2003-0007 (Elk of waste discharge on fifteen Elk to find common ground with *Rescinded by R1-2003-0118 (WDRs)* (Elk) River) River THPs. Regional Board). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 18 R1-2003-0007 01/30/03 Monitoring and Rescinds R1-2002-0105 (MRP). PALCO decided it could live with PALCO did not appeal this order. *** Reporting Program No. Requires instream water sample this order (effort was being made MRP R1-2003-0007 (Elk River) collection at selected stream to find common ground with HWC filed a petition for review. (Elk) crossings; objective is to assess Regional Board). and the State Board consolidated and demonstrate compliance with this petition with HWC's earlier Revised WDR Order R1-2003-0007. petition for review of Order R1-2002-0111 (SWRCB/ OCC File A-1542) (see #13 above); both petitions were ultimately dismissed by the State Board. *Rescinded by R1-2003-0118 (WDRs)* - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 19 R1-2003-0027 02/27/03 Waste Discharge Enforces WDRS on Freshwater on PALCO decided it could live with PALCO did not appeal this order. *** Requirements No. THPs not already covered by WDRs this order (effort was being made WDRs R1-2003-0027 submitted by PALCO on 1/16/03 or to find common ground with *Rescinded by R1-2003-0119* (Freshwater) (Freshwater Creek) waiver thereof. Regional Board). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 20 R1-2003-0027 02/27/03 Monitoring and Enforces monitoring on Freshwater PALCO decided it could live with PALCO did not appeal this order. *** Reporting Program No. to "assess and demonstrate this order (effort was being made MRP R1-2003-0027 compliance with WDR R1-2003-0027. to find common ground with *Rescinded by R1-2003-0119* (Freshwater) (Freshwater Creek) Regional Board). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 21 Letter Order 03/26/03 Letter order requiring Letter seeks GIS data layers from PALCO filed suit on the primary PALCO filed a petition for review *** technical reports PALCO. grounds that the order violated (SWRCB/OCC File No. A-1564) and Technical Reports related to GIS layers due process by having no hearing, State Board dismissed without re GIS Layers pursuant to Water Code that such information cannot be review or hearing; PALCO filed (Elk & Freshwater) section 13267(b) (Elk compelled through the TMDL Petition and Complaint in River & Freshwater) process, that the evidence does Humboldt County Superior Court not support such an order, that (Case No. CV03-0761). the information constitutes privileged trade secrets, and that On 01/25/05, the Regional Board the order constitutes an wrote to PALCO (see #30 below) uncompensated taking, a violation stating it reserved discretion to of due process, and a violation of pursue enforcement actions for equal protection. failure to meet the deadlines of this order or to require compliance in the future. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 22 Letter Order 03/26/03 Letter order requiring Letter identifies six specific PALCO filed suit on the primary PALCO filed a petition for review *** technical reports categories of reports, including grounds that the order violated (SWRCB/OCC File No. A-1564) and Technical Reports related to several stream crossings information, due process by having no hearing, the State Board dismissed without re Information Gaps information gaps, inventories and maps to be that such information cannot be review or hearing; PALCO filed a (Elk & Freshwater) pursuant to Water Code disclosed by PALCO to the Regional compelled through the TMDL Petition and Complaint in section 13268(b) (Elk Board. process, that the evidence does Humboldt County Superior Court River & Freshwater) not support such an order, that (Case No. CV03-0761 - this is the the information constitutes same suit described in #21 above). privileged trade secrets, and that the order constitutes an uncompensated taking, a violation of due process, and a violation of equal protection. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 23 R1-2003-0073 06/26/03 Resolution Delegating Appoints Catherine Kuhlman as PALCO did not appeal this order. *** Certain Powers and Executive Officer of the Regional Resolution Duties to the Executive Board (effective 8/15/03) and (Powers of the Officer delegates all powers and duties of Executive Officer) the Regional Board to her. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 24 R1-2003-0076 08/27/03 Resolution Forwarding Regional Board initiated the If the nomination is approved by PALCO did not appeal this *** Elk River Sensitive nomination process under the the Board of Forestry, the Elk resolution, but did submit its Resolution Watershed Nomination to Forest Practice Rules to designate River watershed would be subjected opposition; the Board of Forestry (Elk River Board of Forestry the Elk River Watershed as a to substantial additional discussed this item at its Sensitive "Sensitive Watershed" under 14 CCR operating restrictions under the 10/9/03 meeting and requested Watershed ยง916.8; the BOF will now hold Forest Practice Rules. that two BOF members develop and Nomination) hearings and make the final formalize a process to form a determination. committee for exploration on how to evaluate a sensitive watershed nomination. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 25 R1-2003-0116 11/05/03 Interim Categorical Subject to the conditions of the PALCO did not appeal this order. *** Waiver for Discharges order, the Regional Board waived Interim Related to Timber the submittal of ROWDs and *Rescinded by R1-2004-0016 Categorical Waiver Operations in the North issuance of WDRs for waste (Categorical Waiver)* Coast Region discharges associated with timber operations on non-federal lands, unless the Executive Officer determined otherwise. The Executive Officer may deny coverage where a request for WDRs is received from a state agency or subdivision; where unique conditions warrant further regulation; or where timber operations involve discharges that could result in reduced water quality protection or pose a significant threat to water quality. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 26 R1-2003-0118 11/05/03 Waste Discharge Enforces WDRs on 22 THPs in Elk PALCO decided it could live with PALCO did not appeal this order. *** Requirements for PALCO River during winter operations (9 this order (effort was being made WDRs (Elk River) THPs were carried over from to find common ground with (Elk) R1-2003-0007). Regional Board). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 27 R1-2003-0118 11/05/03 Monitoring and Objective is to assess and Requires PALCO to collect instream PALCO did not appeal this order. *** Reporting Program for demonstrate compliance with WDR water samples at selected stream MRP PALCO (Elk River) Order R1-2003-0118. crossings on THPs covered by WDR (Elk) Order R1-2003-0118 and prepare monthly and quarterly reports. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 28 R1-2003-0119 11/05/03 Waste Discharge Enforces WDRs on 16 THPs in Elk PALCO decided it could live with PALCO did not appeal this order. *** Requirements for PALCO River during winter operations (4 this order (effort was being made WDRs (Freshwater} THPs were carried over from to find common ground with (Freshwater) R1-2003-0027). Regional Board). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 29 N/A 08/26/03 Phase II Report: Regional Board held a series of The primary issue that has evolved PALCO submitted comments opposing *** 08/27/03 Independent Scientific workshops on the Phase II Report from the ISRP is the Regional the report at these workshops. ISRP Report Phase 09/23/03 Review Panel of the ISRP. Board's unprecedented effort to The report underlies many of the II 11/04/03 impose a rate of harvesting other identified matters, but 12/02/03 restriction on PALCO to address does not constitute its own order. the Board's alleged concerns over water quality. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 30 Letter Order 06/17/04 Request for Reports of The letter request carries out the There is some overlap between the On 01/25/05, the Regional Board *** Waste Discharge for Board's December 2003 motion data requested in this letter wrote to PALCO "in the spirit of ROWDs Timber Harvesting and directing staff to address water order and the letter order of cooperation, and to allow the (Elk & Freshwater) Related Activities in quality impacts in the listed 03/26/03 requesting data under [WWDRs] to proceed to fruition" North Fork Elk River, watersheds. To be deemed Water Code ยง13267 (see #21 stating that the ROWDs were South Fork Elk River, complete, the 3 ROWDs must each above). PALCO will not agree to deemed complete and that the and Freshwater Creek contain a general summary of past, provide the Board with GIS data in Board would proceed with drafting Watersheds, Humboldt ongoing and foreseeable electronic format, but will the WWDRs. However, the Board County, California activities; project-specific provide the data in hard copy. reserved its discretion to pursue (pursuant to sediment delivery estimates; and enforcement actions for failure Porter-Cologne ยง13260) spatial data and maps (including to meet the deadlines set in the GIS layers). ยง13267 Order (see #21 above). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 31 R1-2004-0016 06/23/04 Categorical Waiver of Rescinds R1-2003-0116 (Categorical Order expires 6/23/09. PALCO did not appeal this order. *** Waste Discharge Waiver). Excludes projects Categorical Waiver Requirements for accepted for filing, but not Discharges Related to approved, by CDF prior to Timber Harvest 6/23/04. Those dischargers have Activities on until 10/15/04 to seek temporary Non-Federal Lands in coverage under R1-2003-0116 and the North Coast Region then be automatically covered under R1-2004-0016 provided they meet the eligibility criteria of R1-2004-0016. Order sets out 6 waiver categories for new projects and the criteria for each category. Projects that do not meet the eligibility criteria for one of the 6 waiver categories are subject to individual waivers, general WDRs (under R1-2004-0030), or individual WDRs. Attaches a Guidance Document and Certification Notice forms. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 32 R1-2004-0028 04/02/04 Cleanup and Abatement Requires PALCO to prepare and PALCO has attempted to comply with PALCO did not appeal this order. *** Order and Requirement submit sediment source inventory, this order in collaboration with CAO for Technical Reports sediment reduction work plans, Regional Board staff. (South & Mainstem for PALCO (South Fork treatment schedules, and annual Elk) Elk River and Mainstem summary reports and monitoring Elk River) plans. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 33 R1-2004-0030 06/23/04 General Waste Discharge Order adopts the Negative PALCO applied for GWDR permit PALCO did not appeal this order. *** Requirements for Declaration under CEQA and sets coverage for 22 THPs in Elk and GWDRs Discharges Related to out the requirements for obtaining Freshwater as a bridge between HWC filed petition for review and Timber Harvest general WDRs for timber harvest expiration of the 2004 permits and emergency stay after the 12/24/04 Activities on activities conducted on a delay in adopting new enrollment (SWRCB/OCC File Non-Federal Lands in non-federal lands. Projects that watershed-wide WDRs. On 12/24/04, A-1683). HWC's request for stay the North Coast Region do not qualify for a waiver of the Executive Officer enrolled 4 was denied (see WQO-2005-0001 WDRs under Order R1-2004-0016 of the THPs (THP 00-428, THP below). (Categorical Waiver) can apply for 01-193, THP 13-198 and THP 04-168) GWDRs. If coverage is denied under the GWDRs. HWC filed a second petition for individual ROWDs must be submitted review and stay after the 3/16/05 for individual WDRs On 3/16/05, the Regional Board enrollment (SWRCB/OCC File enrolled additional PALCO Elk and A-1692). This time, the State Freshwater THPs under GWDR Order Board granted HWC's stay (see R1-2004-0030 until the total WQO-2005-0006 below). acreage enrolled in the drainages equaled 75% of the acreage in the THPs previously approved by CDF. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 34 R1-2004-0042 05/12/04 Declining Request for Denies the 10/2/03 request of HWC Notes that in response to various On 5/5/04, PALCO had made an oral *** Order Requiring to have the Regional Board require investigations and concerns, "the commitment to staff that it (1) Dredging Dredging in the Elk PALCO to dredge sediment deposits Regional Board has directed staff agreed a flooding assessment was (Elk) River from NFER, SFER and Main Stem Elk to begin work on WWDRs in the needed; (2) would help with the and to issue WDRs to prevent above-noted watersheds." flooding assessment; and (3) further sediment discharges. The would release info it possesses resolution denies HWC's request concerning flooding. On 5/6/04, and directs the Executive Officer PALCO verified its commitment to to work with PALCO to compile participate in a flooding information necessary to conduct a assessment and provide logistical flooding assessment. and technical assistance. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- 35 R1-2004-0087 11/29/04 Resolution re Total Directs the Executive Officer to PALCO did not appeal this order. *** Maximum Daily Load develop a workplan addressing TMDL Development Implementation Policy watershed priorities for Statement for addressing sediment waste Sediment-Impaired discharges at the Receiving Waters in the watershed-specific level; directs North Coast Region staff to work with landowners to control sediment discharges; directs completion of report "Salmonid Freshwater Habitat Properly Functioning Conditions for Sediment-Related Parameters"; directs staff to consider EPA sediment TMDLs as "foundational technical documents upon which to base implementation actions"; and directs the EO to prepare amendments to the Basin Plan for established TMDLs. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- State Board Orders And Actions - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- # ORDER NO. DATE IN THE MATTER OF DESCRIPTION ISSUES DISPOSITION - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- A WQO-2001-0009 05/17/01 Petition of the Pacific Denies PALCO's request for stay of The Regional Board agreed not to *** Lumber Company and the monitoring and reporting pursue administrative civil SWRCB/OCC File Scotia Pacific Company requirements of R1-2001-0019 liability for violations of A-1380 LLC for Review of during the pendency of its R1-2002-0019, provided PALCO did Monitoring and petition for review.. not begin timber operations on THP Reporting Order No. 520 pending the State Board's R1-2001-0019 review on the merits. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- B WQO-2001-0014 10/18/01 Pacific Lumber and Orders PALCO to conduct water The primary issue on appeal is The State Board vacated the order *** Scotia Pacific Company quality monitoring in the South whether the Regional and State per the outcome of Humboldt SWRCB/OCC File LLC For Review of Fork Elk River watershed in Board's have the authority to County Superior Court litigation A-1380 Monitoring and conjunction with THP 520 per impose additional restrictions on (DR01-0860). The case is now Reporting Order No. Regional Board's Order No. a THP after it has been approved awaiting oral argument before the R1-2001-0019 R1-2001-0019. by CDF and no Head-of-Agency California Supreme Court. Appeal has been taken; the Superior Court held that the Boards do not have such authority; SB 810 was passed empowering the Regional Board with greater authority to stop a THP approval. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- C WQO-2002-0004 01/23/02 Humboldt Watershed State Board's order in response to This matter is effectively an State Board remands the matter to *** Council, Jesse Noel and HWC Petition. The Regional Board amalgam of the other matters the Regional Board for SWRCB/OCC File Ken Miller For is directed to expedite TMDL above, only the HWC wants even consideration and action. A-1361 Imposition of Waste development in the 5 watersheds further measures taken against Discharges Requirements and take other appropriate PALCO. Clarified by WQO-2002-0019. in the Freshwater Creek actions, such as progress reports and Elk River Drainages addressed to the State Board or for an Order Directing the North Coast Regional Water Quality Control Board to Conduct Hearings Regarding Waste Discharge Requirements Or to Take Other Appropriate Action Against Pacific Lumber Company - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- D WQO-2002-0019 10/17/02 Humboldt Watershed State Board's order in response to This matter is effectively an On 11/20/02, HWC filed suit in *** Council, Jesse Noel and HWC Renewed Petition alleging the amalgam of the other matters San Francisco Superior Court SWRCB/OCC File Ken Miller To Require Regional Board had not complied above, only HWC wants even further (Case No. CPF 02-502062), which A-1479 Reports of Waste with WQO-2002-0004. The order measures taken against PALCO; the PALCO successfully had Discharge and to Issue directs the Regional Board to Regional Board often cites this transferred to Humboldt County Waste Discharge continue taking action per order and WQ-2002-0004 as a where it filed a Motion to Requirements For All WQO-2002-0004 and to require WDRs directive for all of their actions. Dismiss (Case No. CV03-0438). Logging Conducted by as appropriate. It further Before the motion was heard, HWC Pacific Lumber Company clarifies the topics of Regional voluntarily dismissed the suit. in the Freshwater Board progress reports to be give Creek, Elk River, Stitz to the State Board and rejects On 12/17/03, HWC filed a second Creek, Bear Creek, and Petitioners' request to require suit in Humboldt County (Case No. Jordan Creek Drainages WDRs for all PALCO THPs in the 5 CV03-0961) and sought a temporary or to Direct the North watersheds. restraining order. The court Coast Regional Water denied the TRO on 1/12/04 and Quality Control Board HWC's subsequent petition for to Render a Decision on stay to the Court of Appeal was Issues Raised by denied. On 1/4/05, HWC dismissed Petitioner. the case with prejudice. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- E Letter Order 04/24/03 Petition of The State Board denied HWC's stay HWC appealed the Regional Board's The State Board denied HWC's *** Environmental request in a letter to Mike Lozeau adoption of interim categorical request for stay. SWRCB/OCC File Protection Information dated 4/24/03, on the grounds that waivers and requested a stay. A-1539 Center and Humboldt HWC did not prove there would be Watershed Council substantial harm to petitioner or (Interim Categorical the public if a stay was not Waiver for Discharges granted and failed to demonstrate Related to Timber that there will be a lack of harm Operations, Resolution to the public interest if a stay No. R1-2002-0109 is granted. The letter attached Craig Wilson's 4/15/05 memorandum to State Board Executive Director Celeste Cantu. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- F Head of Agency 09/19/03 Head of Agency Appeal State Board initiated a formal This is the first Head of Agency The State Board withdrew its Appeal to Board of Forestry on Head of Agency Appeal of THP Appeal taken by the State Board appeal on 09/26/03 before any *** THP 1-02-218 "Root 1-02-218 to the Board of Forestry (despite numerous requests by the action was taken; the THP has Canal." at the Regional Board's request Regional Board in the past). since been approved and harvested. (14 CCR ยง1056 et seq.). - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- G WQO-2005-0001 01/20/05 Petition of Humboldt State Board denied HWC's stay HWC appealed the Regional Board's The State Board denied HWC's *** Watershed Council for request on the grounds that HWC enrollment of 4 Elk and Freshwater request for stay after a hearing SWRCB/OCC File Review of Enrollment of did not prove substantial harm to THPs (THP 00-428, THP 01-193, THP on 1/19/05, but has deferred A-1683 Four Pacific Lumber the public and that while harm to 13-198 and THP 04-168) under GWDR consideration of the merits for Company Timber PALCO would be "relatively minor," Order R1-2004-0030; in its later proceedings. Harvesting Plans under harm to its employees and petition for review, HWC requested General Waste Discharge contractors would be great; the an emergency stay. Requirements, Order No. Board deferred consideration of R1-2004-0030 the merits of the petition for later proceedings. - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- H WQO-2005-0006 04/06/05 Petition of Humboldt State Board determined that the This appeal followed the Regional The State Board granted HWC's *** Watershed Council, evidence submitted made it clear Board's enrollment of additional request for stay after a hearing SWRCB/OCC Environmental that harm would result from THPs under GWDR Order R1-2004-0030 on 4/5/05. File A-1692 Protection Information continued timber operations and until the total acreage enrolled Center, and Sierra Club that the "harm will happen without in the Elk and Freshwater for Review of Directive question if no stay is issued, drainages equaled 75% of the to Enroll Pacific that financial harm to PALCO and acreage in the THPs previously Lumber Company Timber its contractors is largely PALCO's approved by CDF. Harvesting Plans Under fault, that the financial harm is General Waste Discharge not clearly significant, and that Requirements, Order No. there are significant legal issues R1-2004-0030 presented by the petition." - ------- -------------------- ------------ ------------------------- ------------------------------------ ------------------------------------ ----------------------------------- Schedule 3.18 INSURANCE MAXXAM Inc., including The Pacific Lumber Company and Britt Lumber Co., Inc. Schedule of Insurance as of 4/12/2005 - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Coverages Policy Number Policy Period Carrier Limits Deductible/SIR per occurrence - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Property Insurance MAXXAM/PALMAS: nderwriters at Lloyds (various) Total Limit $150 MM $100,000 except PDM which is Master Property WB401758 06/01/04 - 06/01/05 U $250,000 Including: 8753133 06/01/04 - 06/01/05 Lexington Ins. Co. each and every loss except rum & Forster Specialty subject to various sublimits and aggregate limits for certain Earthquake 5% of the total value Forest Products and PPX0004490 06/01/04 - 06/01/05 C coverages of the teadfast Ins. Co affected loc. At time of loss Puerto Rico SPP380557100 06/01/04 - 06/01/05 S except nderwriters at Lloyds (various) Windstorm 5% of total value of WB401759 06/01/04 - 06/01/05 U the affected WB401759 06/01/04 - 06/01/05 Great Lakes Reinsurance location at time of loss D35888962/002 06/01/04 - 06/01/05 Westchester Surplus Lines Ins Co ESP2046 06/01/04 - 06/01/05 Essex Insurance PALCO/BRITT/SCOPAC: nderwriters at Lloyds $1MM combined any one occ except WB0401760 06/01/04 - 06/01/05 U in reat Lakes Reinsurance respect of Town of Scotia which WB0401760 06/01/04 - 06/01/05 G is $100,000 combined except Earthquake 5% of the total value of the affected loc. at time of loss, subject to $1MM combined minimum - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Boiler & Machinery Extra Expense subject to various Forest Products and sublimits $ 25,000 All Other Puerto Rico coverage includes Terrorism 48 hours Service Interruption - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Property Terrorism Coverage nderwriters at Lloyds (various) $100 MM any one Occurrence in respect of 832 EO4RQ23932 06/01/04 - 06/01/05 U property $500,000 an one occurrence Forest Products and Puerto damage and business Rico interruption combined PD and BI combined ---------------------------------- - -------------------------------------------------------------------------------------------------------------------------------------- This chart is intended for information purposes only and is not a complete or exhaustive summary - refer to your policy for applicable terms and conditions. tatutory WC Benefits $500,000 each occ applies Workers' Compensation MWC11114600 10/14/2004-10/14/2005 Old Republic Insurance Co S separately for Cov. A&B Employers' Liability $1 Million Bodily Injury ea. Accident Except PALCO and Puerto Rico - ---------------------------- ---------------------------------------------------------- ------------------------- ----------------------------------------------------------- Directors & Officers 00DA021073904 07/01/04 - 07/01/05 Twin City Fire Ins. Co. $10 Million Aggregate $0 Non-indenmifiable Liability (Inclusive of Defense $1 MM Indemnifiable Cost) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Excess Directors & FD0403935 07/01/04 - 07/01/05 Und. At Lloyds (AFB)/Navigators $10 Million Aggregate X Excess Underlying $10MM Officers Liability 078460-014 iberty Mutual Ins. Co. $10 Million Aggregate X 07/01/04 - 07/01/05 L $20MM DOX0000505-00 rch Insurance Company $5 Million Aggregate X 07/01/04 - 07/01/05 A $30MM - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Directors & Officers NDA 1495172-00 07/01/02 - 07/01/08 Twin City Fire Ins. Co. $15 Million Aggregate $5 MM Liability Run-Off Coverage - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Excess Directors & Officers 7520070364 97 07/01/02 - 07/01/08 Executive Risk Indemnity $15MM Aggregate X $15MM Excess Underlying Liability Run-Off Coverage GA 6065875 07/01/02 - 07/01/08 Gulf Insurance Co. $25MM Aggregate X $30MM DOC 838524102 07/01/02 - 07/01/08 Zurich American Ins. Co. $25MM Aggregate X $55MM 752070367-97 07/01/02 - 07/01/08 Executive Risk Indemnity $10MM Aggregate X $80MM - ------------------------------------------------------------------------------------------------------------- ---------------------------------- -------------------------- General Liability MWZY 56551 10/14/04 - 10/14/05 Old Republic Ins. Co. Nil General Aggregate $1 MM $2 Million Products/Completed Operations (Matching Deductible) $1 Million Personal Injury/Advertising Injuryper occurrence $1 Million ea. Occurrence $2 Million Excess Employers Liab. BI by Accident $2 Million Excess Employers Liab. BI by Disease $2 Million Excess Employers Liab. Policy Limit $2 Million Liquor Liab. ea. Occurrence/Agg $1 Million Employee Benefits Liab. ea. Claim/Agg. Defense Cost - in addition to policy limits - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Occurrence Combined Auto Liability Single Limit per occurrence - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- This chart is intended for information purposes only and is not a complete or exhaustive summary - refer to your policy for applicable terms and conditions. - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- estchester Fire Ins. Co. $25 Million per Excess Liability CUW 781-551 10/14/04 - 10/14/05 W Occurrence/Aggregate UXP002070-00 10/14/04 - 10/14/05 Arch Specialty Ins. Co. $25 MM occ/agg xs $25MM AAU71014804 10/14/04 - 10/14/05 Axis Specialty Insurance $25 MM occ/agg xs $50MM LQ1-B71-198163-023 10/14/04 - 10/14/05 Liberty Insurance Undwr $25 MM occ/agg xs $75MM - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Corporate Fiduciary 6801-8520 12/07/04 - 12/07/05 Federal Insurance Company $15 Million Term $150,000 Liability Aggregate of Pittsburgh, PA - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Non-owned Aircraft PXLN 380 1747 12/31/2004-12/31/2005 XL Specialty Insurance Co. $5 Million ea. Occ. None combined limit BI/PD Liability including War hrough ZL Aerospace, Inc $5 Million Aggregate t Personal Injury $5,000 ea. Person - Medical Expense $500 ea. Person - Baggage Liability $20,000 ea. Occurrence - Baggage Liability - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Commercial Crime 7283148 1/31/2005 - 1/31/2006 American Home Assurance Co. $5 Million per Occurrence $100,000 per Occ. - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- Excess Crime TBA 1/31/2005 - 1/31/2006 Navigators Insurance Company $5 Million excess of $5 Million - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- The Directors & Officers Run-Off Insurance is placed on a consolidated basis with Kaiser Aluminum & Chemical Corporation (KACC) and other KACC entities. This chart is intended for information purposes only and is not a complete or exhaustive summary - refer to your policy for applicable terms and conditions. Schedule 3.19(a) UCC FILING OFFICES The Pacific Lumber Company The Secretary of State of the State of Delaware Britt Lumber Co., Inc. The Secretary of State of the State of California Scotia Inn, Inc. The Secretary of State of the State of Delaware Salmon Creek LLC The Secretary of State of the State of Delaware MAXXAM Group Inc. The Secretary of State of the State of Delaware Schedule 3.19(c) MORTGAGE FILING OFFICES The Real property records of the County of Humbolt, California Schedule 3.20 OWNED AND LEASED REAL PROPERTY Mfg Lessor/ Owner Parcel Number Property Description Acreage Facilitielessee Comments 1 THE PACIFIC LUMBER COMPANY CR 101-291-008-000 T 2N R 1W SEC 30 78.5 2 THE PACIFIC LUMBER COMPANY CR 101-291-014-000 160 3 THE PACIFIC LUMBER CO 103-012-004-000 T1S R1W SEC 1 168 Lessor 4 THE PACIFIC LUMBER COMPANY CR 106-151-001-000 T 2N R 1W SEC 29 82 Lessor 5 THE PACIFIC LUMBER COMPANY CR 106-151-003-000 T 2N R 1W SEC 29 160 6 THE PACIFIC LUMBER COMPANY CR 106-151-006-000 T 2N R 1W SEC 29 83.5 7 THE PACIFIC LUMBER CO 200-021-004-000 T 3N R 1W SEC 22 40 8 THE PACIFIC LUMBER CO 200-021-008-000 T 3N R 1W SEC 22 40 9 THE PACIFIC LUMBER COMPANY 200-021-009-000 T 3N R 1W SEC 22 40 10 THE PACIFIC LUMBER COMPANY CR 200-021-014-000 T3N R1W SEC 27 71.79 HE PACIFIC LUMBER CO 2N R1W SEC 2 The following 17 Fortuna 11 T 200-363-006-000 T 0 Fortuna Mill 12 THE PACIFIC LUMBER CO 200-363-007-000 T2N R1W SEC 2 0 Fortuna parcels total 76.77 acres 13 THE PACIFIC LUMBER COMPANY CR 200-411-006-000 2.53 Fortuna Lessor 14 THE PACIFIC LUMBER CO 201-082-007-000 T2N R1W SEC 2 0 Fortuna 15 THE PACIFIC LUMBER CO 201-091-006-000 T2N R1W SEC 2 0 Fortuna 16 THE PACIFIC LUMBER CO 201-092-026-000 T2N R1W SEC 2 0 Fortuna 17 THE PACIFIC LUMBER CO 201-092-027-000 T2N R1W SEC 2 0 Fortuna 18 THE PACIFIC LUMBER CO 201-092-029-000 T2N R1W SEC 2 0 Fortuna 19 THE PACIFIC LUMBER CO 201-331-002-000 T2N R1W SEC 2 0 Fortuna 20 THE PACIFIC LUMBER CO 201-331-004-000 T2N R1W SEC 2 0 Fortuna 21 THE PACIFIC LUMBER CO 201-331-005-000 T2N R1W SEC 2 0 Fortuna 22 THE PACIFIC LUMBER CO 202-011-023-000 T2N R1W SEC 2 0 Fortuna 23 THE PACIFIC LUMBER CO 202-011-031-000 T2N R1W SEC 2 0 Fortuna 24 THE PACIFIC LUMBER CO 202-021-005-000 T2N R1W SEC 2 0 Fortuna 25 THE PACIFIC LUMBER CO 202-021-010-000 T2N R1W SEC 2 0 Fortuna 26 THE PACIFIC LUMBER CO CR 202-021-017-000 T2N R1W SEC 2 0 Fortuna 27 THE PACIFIC LUMBER CO 202-022-001-000 T2N R1W SEC 11 0 Fortuna 28 THE PACIFIC LUMBER COMPANY CR 202-051-002-000 35.21 Lessor 29 THE PACIFIC LUMBER CO 204-032-001-000 T2N R1E SEC 9 158 30 THE PACIFIC LUMBER CO 204-032-002-000 T 2N R 1E SEC 9 406 31 THE PACIFIC LUMBER CO 204-033-002-000 T2N R1E SEC 10 97.5 Yager Lessor 32 THE PACIFIC LUMBER CO 204-033-006-000 T2N R1E SEC 10 40 Yager 33 THE PACIFIC LUMBER CO 204-034-002-000 T2N R1E SEC 15 161.5 Yager Lessor 34 THE PACIFIC LUMBER CO CR 204-121-004-000 T2N R1E SEC 21 0Carlotta 35 THE PACIFIC LUMBER COMPANY 204-121-005-000 T2N R1E SEC 21 0Carlotta 36 THE PACIFIC LUMBER COMPANY 204-121-006-000 T2N R1E SEC 21 0Carlotta 40 THE PACIFIC LUMBER COMPANY 204-251-001-000 T2N R1E SEC 21 0Carlotta 41 THE PACIFIC LUMBER CO CR 204-251-010-000 T2N R1E SEC 21 0Carlotta 42 THE PACIFIC LUMBER COMPANY CR 204-381-001-000 0 44 THE PACIFIC LUMBER CO CR 205-021-023-000 T1N R1W SEC 36 418.5 Lessor 45 THE PACIFIC LUMBER CO 205-051-009-000 T1N R1E SEC 31 120 Lessor 46 THE PACIFIC LUMBER COMPANY 205-061-012-000 T1N R1E SEC 21 0 47 THE PACIFIC LUMBER CO 205-221-001-000 T 1N R 1E SEC 22 16 49 THE PACIFIC LUMBER COMPANY 205-261-012-000 RS, BK 60, PGS 74-76 9.5 51 THE PACIFIC LUMBER COMPANY CR 205-321-003-000 T1N R1E SEC 23 0 52 THE PACIFIC LUMBER CO 205-321-032-000 T1N R1E SEC 25 80 53 THE PACIFIC LUMBER CO 205-321-034-000 T1N R1E SEC 26 333 54 THE PACIFIC LUMBER COMPANY 205-341-019-000 T1N R1E SEC 21 171 55 THE PACIFIC LUMBER CO 205-351-001-000 T 1N R 1E SEC 5 280 56 THE PACIFIC LUMBER CO 205-351-002-000 T 1N R 1E SEC 5 39 57 THE PACIFIC LUMBER CO 205-351-016-000 T1N R1E SEC 7 467.53 Scotia Lessor 58 THE PACIFIC LUMBER COMPANY 205-351-018-000 T1N R1E SEC 17 & 20 475.3 59 THE PACIFIC LUMBER CO 205-351-019-000 T2N R1E SEC 28 507.5 60 THE PACIFIC LUMBER CO 206-031-007-000 T2N R2E SEC 5 170 62 THE PACIFIC LUMBER CO 206-101-031-000 T2N R1E SEC 15 3 63 THE PACIFIC LUMBER CO 206-101-032-000 T2N R1E SEC 15 22 Yager 64 THE PACIFIC LUMBER COMPANY CR 206-191-014-000 T 2N R 1E SEC 36 536 Lessor 65 THE PACIFIC LUMBER CO 206-191-016-000 T2N R1E SEC 25 120 66 THE PACIFIC LUMBER COMPANY 206-281-002-000 T 2N R 1E SEC 10 21 Yager 67 THE PACIFIC LUMBER CO 206-281-003-000 T2N R1E SEC 10 83 Yager 68 THE PACIFIC LUMBER CO CR 206-351-004-000 T2N R1E SEC 28 0 70 THE PACIFIC LUMBER CO 209-201-011-000 T1N R2E SEC 28 140 72 THE PACIFIC LUMBER CO 211-011-004-000 T1S R1E SEC 6 40 Lessor 73 THE PACIFIC LUMBER CO 211-132-007-000 T 1S R 2E SEC 26 121.5 Lessor 74 THE PACIFIC LUMBER CO 211-132-008-000 T1S R2E SEC 35 0 75 THE PACIFIC LUMBER COMPANY CR 211-132-009-000 T 1S R 2E SEC 26 0 76 THE PACIFIC LUMBER COMPANY CR 211-133-007-000 0 77 THE PACIFIC LUMBER COMPANY CR 211-133-009-000 0 78 THE PACIFIC LUMBER CO 211-133-012-000 T1S R2E SEC 25 88 79 THE PACIFIC LUMBER CO 211-134-002-000 T1S R2E SEC 36 0 80 THE PACIFIC LUMBER CO 211-141-003-000 T 1S R 2E SEC 26 0 81 THE PACIFIC LUMBER COMPANY CR 211-273-003-000 T 1S R 3E SEC 30 0 82 THE PACIFIC LUMBER CO CR 211-275-010-000 T1S R3E SEC 32 0 83 THE PACIFIC LUMBER COMPANY CR 211-275-016-000 T1S R3E SEC 32 0 84 THE PACIFIC LUMBER COMPANY CR 211-276-011-000 T1S R3E SEC 33 0 85 THE PACIFIC LUMBER COMPANY CR 211-276-015-000 T1S R3E SEC 33 0 86 THE PACIFIC LUMBER COMPANY CR 211-283-007-000 T 1S R 3E SEC 34 0 Lessor 87 THE PACIFIC LUMBER COMPANY CR 211-283-008-000 0 88 THE PACIFIC LUMBER CO CR 211-492-009-000 T1S R1E SEC 22 0 89 THE PACIFIC LUMBER COMPANY CR 211-492-012-000 T1S R1E SEC 22 0 90 THE PACIFIC LUMBER CO 211-552-004-000 T 1S R 2E SEC 26 23 91 THE PACIFIC LUMBER COMPANY CR 212-291-013-000 T 3S R 3E SEC 10 0 Lessor 92 THE PACIFIC LUMBER COMPANY CR 214-114-010-000 0 97 THE PACIFIC LUMBER CO 304-011-003-000 T 4N R 1E SEC 19 272 111 THE PACIFIC LUMBER CO 311-031-004-000 T 4N R 1W SEC 25 67 Lessor 112 THE PACIFIC LUMBER CO 311-041-007-000 T4N R1W SEC 26 0 113 THE PACIFIC LUMBER CO 311-051-002-000 T 4N R 1W SEC 25 229 114 THE PACIFIC LUMBER CO 311-061-001-000 T 4N R 1E SEC 30 612 Lessor 115 THE PACIFIC LUMBER CO 311-114-001-000 T 3N R 1W SEC 22 248 116 THE PACIFIC LUMBER CO 314-061-011-000 1 117 THE PACIFIC LUMBER COMPANY CR 314-131-050-000 T 4N R 2E SEC 3 80 118 THE PACIFIC LUMBER COMPANY CR 314-131-051-000 T 4N R 2E SEC 4 120 119 THE PACIFIC LUMBER COMPANY CR 314-131-064-000 T 4N R 2E SEC 10 157 120 THE PACIFIC LUMBER COMPANY CR 314-131-065-000 T 4N R 2E SEC 10 80 121 THE PACIFIC LUMBER COMPANY CR 314-131-076-000 193.5 122 THE PACIFIC LUMBER COMPANY CR 314-143-004-000 T 4N R 2E SEC 13 110.5 123 THE PACIFIC LUMBER COMPANY CR 314-152-001-000 T 4N R 2E SEC 23 374.5 Lessor 124 THE PACIFIC LUMBER COMPANY CR 314-152-005-000 0 Lessor 125 THE PACIFIC LUMBER COMPANY CR 314-153-003-000 T 4N R 2E SEC 24 397 Lessor 126 THE PACIFIC LUMBER COMPANY CR 314-154-001-000 T 4N R 2E SEC 25 77.5 127 THE PACIFIC LUMBER COMPANY CR 314-154-002-000 T 4N R 2E SEC 25 76 128 THE PACIFIC LUMBER COMPANY CR 314-201-007-000 156 129 THE PACIFIC LUMBER COMPANY CR 314-201-012-000 37 130 THE PACIFIC LUMBER COMPANY 314-333-004-000 T4N R2E SEC 6 0 131 THE PACIFIC LUMBER COMPANY ,CR 316-084-001-000 T 6N R 3E SEC 1 281 139 THE PACIFIC LUMBER COMPANY 404-121-012-000 T 5N R 2E SEC 31 81 140 THE PACIFIC LUMBER COMPANY 404-131-016-000 T5N R2E SEC 31 0 146 THE PACIFIC LUMBER CO 405-321-013-000 T4N R1E SEC 1 160 148 THE PACIFIC LUMBER CO 905-000-474-000 T4N R2W SEC 12 0 149 THE PACIFIC LUMBER CO 905-000-475-000 T4N R2W SEC 13 0 150 THE PACIFIC LUMBER CO 200-032-01 T3N R1W SEC 22 40 151 THE PACIFIC LUMBER CO 311-111-09 T3N R1W SEC 15 200 152 THE PACIFIC LUMBER CO 311-113-02 T3N R1W SEC 23 80 153 BRITT 507-461-055-000 4.7 Arcata 154 BRITT 507-121-014-000 3 Arcata 155 BRITT 507-081-038-000 20.5 Arcata 156 VILLAGE CONCEPT 507-081-044-000 1.75 Arcata Lessee 157 LOUIS MARTIN 507-121-036-000 7 Arcata Lessee See attached "Legal Description Exhibit 'A'" relating to property owned by Salmon Creek LLC. LEGAL DESCRIPTION EXHIBIT "A" THE LAND REFERRED TO HEREIN BELOW IS SITUATED IN THE COUNTY OF HUMBOLDT, STATE OF CALIFORNIA AND IS DESCRIBED AS FOLLOWS: All fee interest in and to the following described lands EXCEPTING THEREFROM All right, title and interest in and to, including without limitation the right in perpetuity to harvest, all trees and timber, regardless of species and regardless of size or diameter, now located on or hereafter planted or growing in the soil of those portions of the parcels of land located in the County of Humboldt, State of California, described below (the "Property"), which are more particularly shown as "Salmon Creek Ownership" on that certain map of the Property identified as map no. 100, on the GIS system jointly used by Pacific Lumber Company, Salmon Creek Corporation and others, dated July 15, 1998, and each containing a notation executed by representatives of said parties, Fidelity National Title Insurance Company, and Skadden, Arps, Slate, Meagher & Flom and held in trust by U.S. Bank of California ("Escrow Holder") pursuant to the terms of that certain Escrow Agreement dated July 20, 1998 herewith by and the above stated parties and the Escrow Holder, together with the right to enter upon the Property for any and all purposes pertaining to the cultivation, ownership and harvesting of such trees and timber. Being the same rights described in the deed from Salmon Creek Corporation, a Delaware corporation to The Pacific Lumber Company, a Delaware corporation recorded July 17, 1998 as Instrument No. 1998-18649-3, Humboldt County Official Records. Said parcels of land being described as follows: Township 3 North, Range 1 East, Humboldt Meridian: PARCEL ONE Section 19: The North Half of the Southeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. APN 200-011-19 Section 20: The North Half of the Southwest Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 265. APN 200-011-21 The South Half of the Southeast Quarter. APN 311-091-03 Section 23: The East Half of the Southeast Quarter. EXCEPTING FROM the lands in Section 23 above described one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. APN 314-061-08 Section 23: The Southeast Quarter of the Southwest Quarter, and the Southwest Quarter of the Southeast Quarter. EXCEPTING FROM the 23 above described all oil, gas and minerals, with appurtenant rights as excepted in the deed from the Regents of the University of California recorded March 22, 1950 in Book 125 of Official Records, page 24. APN 314-061-07 Section 26: The Northwest Quarter, the North Half of the Southwest Quarter, the Southwest Quarter of the Southwest Quarter and the Southwest Quarter of the Northeast Quarter. EXCEPTING THEREFROM one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deeds recorded February 29, 1944 in Book 265 of Deeds, page 255 and 256. APN 314-064-04 Section 27: The West Half, the Northeast Quarter, the North Half of the Southeast Quarter and the Southeast Quarter of the Southeast Quarter. APN 314-053-04 Section 28: The East Half of the Southeast Quarter, the Northeast Quarter of the Northwest Quarter, and the Northeast Quarter. EXCEPTING THEREFROM and from the land in Section 27 last above described one-half of all oil, gas and minerals, with appurtenant rights, as reserved in the deed recorded February 29, 1944 in Book 265 of Deeds, page 256. APN 314-054-06, 314-054-07, 314-054-08 Section 28: The West Half of the Northwest Quarter, the Southeast Quarter of the Northwest Quarter, the West Half of the Southeast Quarter, the North Half of the Southwest Quarter and the Southeast Quarter of the Southwest Quarter. APN 314-054-10 and 314-054-11 Section 29: The North Half of the Northeast Quarter. APN 311-092-04 Section 33: The Northeast Quarter. APN 204-012-03 Section 35: The Northwest Quarter of the Northwest Quarter. EXCEPTING THEREFROM, one-half of all oil, gas and minerals, with appurtenant rights as reserved in the deeds recorded February 29, 1944 in Book 265 of Deeds, page 255 and 256. APN 206-011-08 EXCEPTING FROM ALL OF THE ABOVE DESCRIBED LANDS that portion thereof conveyed to the United States of America by deed recorded March 1, 1999 as Instrument No. 1999-6265-5, Humboldt County Official Records. PARCEL TWO Easements and rights of way as further described in and subject to the conditions contained in that certain Reciprocal Rights Agreement recorded March 22, 1993 as Instrument No. 1993-7890-136, Humboldt County Official Records. PARCEL THREE The right to use roads as further described in, and subject to the conditions contained in those certain Right of Way Grants executed by United States Department of the Interior Bureau of Land Management recorded March 1, 1999 as Instrument Nos. 1999-6271-8, 1999-6272-8, 1999-6273-8 and 1999-6274-8, Humboldt County Official Records. APN 200-011-019-000 Schedule 3.26 CURRENT BANK ACCOUNTS as of 4/8/2005 & 4/11/05 Book Balances Bank Balances & Investment w/ as of accrued Interest Bank accounts: Account Description 4/8/2005 4/8/2005 The Pacific Lumber Company: U. S. Bank of California General Account ($1,903,725.64) $1,730,287.70 " Admin Payroll ZBA ZBA " General Payroll ZBA ZBA " Worker's Comp ZBA ZBA " Health Care Benefits ZBA ZBA " Collection Account 34,087.53 34,087.53 Bank of America General Account 13,636.15 13,636.15 Loan account (10,958,381.32) (10,958,381.32) Lockbox account 1,805,621.79 1,805,621.79 Investment accounts: Bank of America $0.00 $0.00 0.00 0.00 Smith Barney Merrill Lynch 0.00 0.00 Merrill Lynch Money Mkt 0.00 0.00 Britt Lumber Company: 4/11/2005 4/11/2005 Bank accounts: Collection Account $149,195.88 $149,195.88 Bank of America Operating Account 3,303.24 193,280.88 " Medical Account 4,983.19 - Wells Fargo Payroll Account 4,393.17 5,105.26 Salmon Creek Company LLC: 4/8/2005 4/8/2005 Bank accounts: General / Accounts $33,392.68 $33,268.39 Wells Fargo Payable Investment accounts: Merrill Lynch $0.00 $0.00 Bank of America CD required per 2,390,715.00 2,396,094.11 Headwaters Agreement Schedule 6.01 INDEBTEDNESS (a) Obligations (Guaranty) as of March 31, 2005 The Pacific Lumber Company: Creditor O/S Obligation Property Legal Description Redwood Region Economic Development $54,372 Secured by a first lien on Furniture, Commission fixtures and equipment in the dining room and kitchen of the Scotia Inn, located at 100 Main Street, Scotia, CA Salmon Creek LLC N/A The Pacific Lumber Company's obligations under that certain Indemnification Agreement dated February 9, 2004 between The Pacific Lumber Company and Salmon Creek LLC Britt Lumber Company: NONE (b) Debt The Pacific Lumber Company: Creditor Loan O/S Property Legal Description SELCO Leasing** $229,554 Represents an interim loan on equipment. December 31, 1998 the loan was converted into a Capital Lease. IBM Credit Corp. Lease ** 6,081 AS 400 and additional software Optimum Solutions Inc.** - Payroll system Britt Lumber Company: Creditor Loan O/S Property Legal Description NONE - **Capital leases Letters of Credit as of March 31, 2005 LETTER OF CREDIT Date of Expiration NO. ISSUING COMPANY ISSUING BANK BENEFICIARY PURPOSE Issue Date AMOUNT LETTER OF CREDIT COLLATERIZED BY $20MM CARVE-OUT OF THE TPLC $30MM LINE OF CREDIT WITH BANK OF AMERICA: 228874 The Pacific Bank of America County of Humboldt & CA To collateralize the project of 05/28/96 05/30/05 46,500.00 Lumber Company Dept. of Conservation reclamation of river bars, access roads & stock pile area assoc'd with gravel extraction 3007279 The Pacific Bank of America Pacific Gas & Electric To collateralize the Agreement 07/05/97 07/08/05 167,422.00 Lumber Company (AUTOMATIC between PLC & PG&E RENEWAL UNLESS NOTIFIED W/I 60 DAYS) 3021805 The Pacific Bank of America County of Humboldt & CA To collateralize the project at 12/24/99 12/24/05 23,667.82 Lumber Company (AUTOMATIC Dept. of Conservation Quarry #3 RENEWAL) 3004206 The Pacific Bank of America County of Humboldt & CA To collateralize the project at 04/03/97 04/03/06 21,825.00 Lumber Company (AUTOMATIC Dept. of Conservation Quarry #2 RENEWAL) 3004207 The Pacific Bank of America County of Humboldt & CA To collateralize the project at 04/03/97 04/03/06 10,929.00 Lumber Company (AUTOMATIC Dept. of Conservation Quarry #1 RENEWAL) 3029754 The Pacific Bank of America County of Humboldt & CA To collateralize the project at 09/27/00 09/25/05 67,991.00 Lumber Company (AUTOMATIC Dept. of Conservation PALCO Stafford Left Quarry RENEWAL) Total Pacific Lumber $338,334.82 Capital Leases As of March 31, 2005 Remaining Company Lien Holder Payments Property Legal Description - --------------------------------- ------------------------------- ------------------ ------------------------------------- - --------------------------------- ------------------------------- ------------------ ------------------------------------- PALCO IBM Credit Corporation $ 6,081.00 IBM Software, Remarketed Service Suite, System Unit, IR Sales Tax, Vendor Sourced Products/Services 8800017023/SELCO Selco Service Leasing 229,554.00 Carlotta Mill Expansion Optimum Solutions Inc Optimum Solutions Inc - IBM AS400 Payroll Software Total Outstanding Capital Leases $ 235,635.00 Schedule 6.02 EXISTING LIENS $2.5 million certificate of deposit owned by Salmon Creek LLC is pledged to state or federal agencies. The liens relating to the Indebtedness described on Schedule 6.01 in favor of (i) Redwood Region Economic Development Commission, (ii) SELCO Leasing and (iii) IBM Credit Corp. Environmental restrictions imposed pursuant to the Implementation Agreement with Regard to Habitat Conservation Plan dated March 1, 1999, and the Agreement Relating to Enforcement of AB 1986 dated March 1, 1999, copies of which have been furnished or made available to the Lenders. Schedule 6.04 EXISTING INVESTMENTS The Pacific Lumber Company has the following investments: 1. Britt Lumber Co., Inc. - 750 shares of common stock, $10.00 par value per share 2. Salmon Creek LLC - 100% membership interest 3. Scotia Inn, Inc. - 1,000 shares of common stock, $1.00 par value per share 4. Scotia Pacific Company LLC - 100% membership interest Schedule 6.07 TRANSACTIONS WITH AFFILIATES Agreements (including any currently existing amendments thereto that have been provided to the Lenders on or prior to the Closing Date) 1. Agreement Relating to Enforcement of AB 1986, dated as of February 25, 1999, among The California Resources Agency, The California Department of Fish and Game, The California Department of Forestry, The California Wildlife Conservation Board, and The Pacific Lumber Company, Scotia Pacific Company LLC, and Salmon Creek Corporation, and filed for record on March 1, 1999 in the Official Records of Humboldt County, CA as Document No. 1999-6264-167. 2. Implementation Agreement with Regard to Habitat Conservation Plan for the Properties of The Pacific Lumber Company, Scotia Pacific Company, LLC, and Salmon Creek Corporation, dated as of February 1999, among The United States Fish and Wildlife Service, The National Marine Fisheries Service, The California Department of Fish and Game, The California Department of Forestry and Fire Protection, and The Pacific Lumber Company, Scotia Pacific Company LLC, and Salmon Creek Corporation 3. Streambed Alteration Agreement with regard to The Pacific Lumber Company Habitat Conservation Plan, dated as of February 1999, among The California Department of Fish and Game, and The Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation 4. Indenture between dated July 20, 1988 between Scotia Pacific Company LLC and State Street Bank and Trust Company, as Trustee 5. Master Lease Agreement, dated as of July 20, 1998, between Scotia Pacific Company LLC, as Lessor, and the Pacific Lumber Company, as Lessee 6. New Escrow Agreement, dated as of July 20, 1998, among The Pacific Lumber Company, Scotia Pacific Company LLC, Salmon Creek Corporation, and U.S. Bank of California 7. New Master Purchase Agreement, dated as of July 20, 1998, between Scotia Pacific Company LLC, as Seller, and The Pacific Lumber Company, as Purchaser 8. New Services Agreement, dated as of July 20, 1998, between The Pacific Lumber Company and Scotia Pacific Company LLC 9. New Additional Services Agreement, dated as of July 20, 1998, between Scotia Pacific Company LLC and The Pacific Lumber Company 10. New Reciprocal Rights Agreement, dated as of July 20, 1998, among The Pacific Lumber Company, Scotia Pacific Company LLC and Salmon Creek Corporation, and filed for record on July 17, 1998 in the Official Records of Humboldt County, CA as Document No. 1998-18656-155. 11. New Environmental Indemnification Agreement, dated as of July 20, 1998, between The Pacific Lumber Company and Scotia Pacific Company LLC 12. Letter dated March 1, 1999 from the U.S. Department of the Interior Fish and Wildlife Service and the U.S. Department of Commerce National Oceanic and Atmospheric Administration to Palco, Salmon Creek and Scotia Pacific LLC 13. Registration Rights Agreement of Scotia Pacific dated July 20, 1998. 14. Tax Allocation Agreement dated May 21, 1988 among Palco, Scotia Pacific Holding Company, Salmon Creek Corporation and MAXXAM Inc. 15. Tax Allocation Agreement between MAXXAM Inc. and Britt Lumber Co., Inc., dated July 3, 1990 16. Tax Allocation Agreement between MAXXAM Inc., MAXXAM Group Inc. The Pacific Lumber Company and Britt Lumber Co., Inc., dated February 9, 2004 17. Tax Allocation Agreement with The Pacific Lumber Company, Scotia Pacific Holding Company and Salmon Creek Corporation, dated March 23, 1993 (the "Palco Tax Allocation Agreement") 18. Amendment of Tax Allocation Agreement between MAXXAM Inc. and The Pacific Lumber Company, dated December 31, 2001 amending the Palco Tax Allocation Agreement 19. Tax Allocation Agreement between MAXXAM Inc. and MAXXAM Group Inc., dated August 4, 1993 (the "MGI Tax Allocation Agreement") 20. Amendment of Tax Allocation Agreement Between MAXXAM Inc. and MAXXAM Group Inc., dated December 31, 2001 amending the MGI Tax Allocation Agreement 21. Tax Allocation Agreement between MAXXAM Inc. and MAXXAM Group Holdings Inc., dated December 23, 1996 (the "MGHI Tax Allocation Agreement") 22. Amendment of Tax Allocation Agreement between MAXXAM Inc. and MAXXAM Group Holdings Inc., dated December 31, 2001 amending the MGHI Tax Allocation Agreement dated December 23, 1996 23. Indemnification Agreement dated February 9, 2004 between The Pacific Lumber Company and Salmon Creek LLC Payments Repayment/reimbursement by The Pacific Lumber Company, Britt Lumber Co, Inc., Scotia Inn, Inc. and Salmon Creek LLC to MAXXAM Inc. and its subsidiaries of amounts limited to $1.6 million per year due in respect of allocated overhead expenses and services provided by the employees of MAXXAM Inc. and its subsidiaries (including past due amounts aggregating approximately $ 1.9 million as of March 31, 2005 that are not limited by the $1.6 million per year cap). * To be completed to the extent consents are required under Section 9.04(b) of the Credit Agreement.
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Filed: 25 Apr 05, 12:00am