SENIOR SUBORDINATED NOTE PURCHASE AGREEMENT BETWEEN CHURCHILL CAPITAL PARTNERS IV, L.P. AND PW EAGLE, INC.

Exhibit 10.36

 

SENIOR SUBORDINATED

NOTE PURCHASE AGREEMENT

 

BETWEEN

 

CHURCHILL CAPITAL PARTNERS IV, L.P.

 

AND

 

PW EAGLE, INC.

 

 

Dated as of October 25, 2004

 

TABLE OF CONTENTS

 

 

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SENIOR SUBORDINATED

NOTE PURCHASE AGREEMENT

 

THIS SENIOR SUBORDINATED NOTE PURCHASE AGREEMENT, dated as of the 25 ^th day of October, 2004, by and between CHURCHILL CAPITAL PARTNERS IV, L.P., a Delaware limited partnership (the “Note Purchaser”), and PW EAGLE, INC., a Minnesota corporation (the “Company”).

 

WHEREAS, the Company will on the Closing Date sell its Senior Subordinated Notes (the “Notes”) in the principal amount of Sixteen Million Dollars $16,000,000 to the Note Purchaser, and the Note Purchaser will purchase such Notes from the Company on the terms and conditions set forth herein.

 

WHEREAS, concurrently with the purchase and sale of the Notes pursuant to this Agreement, the Company will sell its Junior Subordinated Notes in the principal amount of Eight Million Dollars ($8,000,000) to the Junior Note Purchaser, and the Junior Note Purchaser will purchase such Junior Subordinated Notes from the Company on the terms and conditions set forth in the Junior Subordinated Note Purchase Agreement.

 

WHEREAS, concurrently with the purchase and sale of the Notes pursuant to this Agreement and the Junior Subordinated Notes pursuant to the Junior Subordinated Note Purchase Agreement, the Note Purchaser, the Junior Note Purchaser and the Company will enter into the Warrant Agreement (as defined below) pursuant to which the Company will issue to the Note Purchaser and the Junior Note Purchaser warrants to purchase 366,651 shares of Common Stock, par value $.01 per share, of the Company (subject to adjustment as provided in the Warrant Agreement) for an exercise price of $.01 per share (subject to adjustment as provided in the Warrant Agreement).

 

NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained in this Agreement, the parties hereto agree as follows:

 

I. DEFINITIONS

 

Section 1.1 Defined Terms . Each accounting term not defined herein and each accounting term partly defined herein to the extent not defined shall have the meaning given to it under GAAP. The following capitalized terms shall have the following meanings, applicable both to the singular and plural forms of the terms so defined, except as set forth herein:

 

“ 1999 Subordinated Notes ” shall mean those certain subordinated promissory notes dated on or about September 20, 1999 in the original aggregate principal amount of $32,500,000 executed by the Company in favor of the purchasers thereof. The 1999 Subordinated Notes shall be repaid in full on the Closing Date.

 

“ ADA ” shall mean the Americans With Disabilities Act of 1990, as amended, and the rules and regulations promulgated thereunder.

 

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“ Affiliate ” shall mean, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract or otherwise. Without limitation, any director, executive officer or beneficial owner of five percent (5%) or more of the equity of a Person shall, for the purposes of this Agreement, be deemed to control such Person. Notwithstanding the foregoing, neither Note Purchaser nor any of its Affiliates shall be deemed an “Affiliate” of the Company or of any Subsidiary.

 

“ Agent ” shall mean Fleet Capital Corporation, in its capacity as agent under the Senior Credit Agreement, or any other financial institution performing such function.

 

“ Agreement ” shall mean this Senior Subordinated Note Purchase Agreement, dated as of October 25, 2004, between the Note Purchaser and the Company, as amended from time to time, together with the Schedules attached hereto.

 

“ Availability ” shall mean Availability under and as defined in the Senior Credit Agreement as in effect on the date hereof (together with all defined terms set forth therein), without giving effect to any modification or amendment thereto not consented to by the Note Purchaser (including any modification or amendment to the definition of Borrowing Base or any other defined term set forth therein) but without giving effect to the Availability Block (as defined under the Senior Credit Agreement as in effect on the date hereof) and without giving effect to any Overadvance under and as defined in the Senior Credit Agreement as in effect on the date hereof in an aggregate amount not in excess of $1,000,000.

 

“ Business Day ” shall mean any day except a Saturday, Sunday or other day on which commercial banks in the State of Minnesota are authorized or required by law to close.

 

“ Capital Expenditures ” shall mean expenditures made or liabilities incurred for the acquisition of any fixed assets or improvements, replacements, substitutions or additions thereto which have a useful life of more than one year, including the total principal portion of Capitalized Lease Obligations.

 

“ Capitalized Lease Obligation ” shall mean any Indebtedness represented by obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP.

 

“ Cash Equivalents ” shall mean: (a) securities issued or fully guaranteed or insured by the United States Government or any agency thereof having maturities of not more than six (6) months from the date of acquisition; (b) certificates of deposit, time deposits, repurchase agreements, reverse repurchase agreements, or bankers’ acceptances, having in each case a tenor of not more than six (6) months, issued by any Senior Creditor under the Senior Credit Agreement or by any U.S. commercial bank or any branch or agency of a non-U.S. bank licensed to conduct business in the U.S. having combined capital and surplus of not less than $250,000,000, (c) commercial paper of an issuer rated at least A-1 by Standard & Poor’s Corporation or P-1 by Moody’s Investors Service Inc. and in

 

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either case having a tenor of not more than three (3) months; and (d) money market funds that invest exclusively in the foregoing instruments and securities.

 

“ Change of Control ” means the occurrence of any of the following events: (i) all or substantially all of the Company’s assets, on a consolidated basis, are sold as an entirety to any Person or related group of Persons or there shall be consummated any consolidation or merger of the Company (A) in which the Company is not the continuing or surviving company (other than a consolidation or merger with a wholly owned Subsidiary in which all shares of common stock of the Company outstanding immediately prior to the effectiveness thereof are changed into or exchanged for the same consideration) or (B) pursuant to which the common stock of the Company would be converted into cash, securities or other property, in any case, other than a sale of assets or consolidation or merger of the Company in which the holders of the common stock of the Company immediately prior to the sale of assets or consolidation or merger have, directly or indirectly, at least a majority of the common stock of the transferee or continuing or surviving company immediately after such sale of assets or consolidation or merger, (ii) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than the Spell Group, is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act provided that such person shall be deemed to have “beneficial ownership” of all shares that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 35% of the total voting power of the outstanding voting securities of the Company; (iii) any member of the Spell Group sells, transfers, or otherwise disposes to any Person who is not a member of the Spell Group (including any sale, transfer or other disposition to the Company permitted pursuant to Section 7.5 hereof) 10% or more of the securities of the Company (including warrants, options or other instruments convertible into, or exchangeable or exercisable for securities of the Company) now owned by him or hereafter acquired by him as employment compensation; provided, however, that any member of the Spell Group may sell securities of the Company to repay loans incurred to purchase securities of the Company, or (iv) during any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company (together with any new directors whose election by such members of the board of directors of the Company or whose nomination for election by the shareholders of the Company, as the case may be, was approved by a vote of at least a majority of the directors of the Company then still in office) cease for any reason to constitute a majority of the board of directors of the Company then in office.

 

“ Closing ” shall have the meaning specified in Section 2.3.

 

“ Closing Date ” shall mean October 25, 2004, or such other date as may be agreed to by the parties hereto.

 

“ Code ” shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.

 

“ Collateral ” shall mean all property and interests in property and proceeds thereof in or upon which a mortgage, lien or security interest now or hereafter exists in favor of the holders of the Notes to directly or indirectly secure the Obligations, whether under this Agreement or under any of the other Note Documents.

 

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“ Company ” shall mean PW Eagle, Inc., a Minnesota corporation, and its permitted successors and assigns.

 

“ Compliance Certificate ” shall mean the Compliance Certificate, in the form of Schedule 6.6 hereto, whereby either the chief executive officer or the chief financial officer of the Company certifies as to the matters required by Section 6.6 hereof.

 

“ Consolidated ” means the consolidation in accordance with GAAP of the accounts or other items as to which such term applies or as the context may require.

 

“ Consolidated Net Income ” means, with respect to the Company and its Subsidiaries (other than PW Poly) for any fiscal period, the net income (or loss) of the Company and its Subsidiaries for such period taken as a whole (determined in accordance with GAAP on a Consolidated basis), but excluding in any event: (a) any gains or losses on the sale or other disposition of Investments or fixed or capital assets or from any transaction classified as extraordinary under GAAP, any taxes on such excluded gains and any tax deductions or credits on account of any such excluded losses; (b) the proceeds of any life insurance policy; (c) net earnings and losses of any business entity, substantially all the assets of which have been acquired in any manner by the Company, realized by such business entity prior to the date of such acquisition; (d) net earnings and losses of any business entity which shall have merged into the Company earned or incurred prior to the date of such merger; (e) net earnings of any business entity (other than a Consolidated Subsidiary) in which the Company has an ownership interest unless such net earnings shall have been received by the Company in the form of cash distributions; (f) earnings resulting from a reappraisal, revaluation or write-up of assets; (g) any charge to net earnings resulting from the amortization of the value of stock options given to employees to the extent required by FASB 25; (h) any increase or decrease of net income arising from a change in the Company’s accounting methods; (i) any gains resulting from the forgiveness of Funded Debt or the retirement of Funded Debt at a discount; (j) any gain arising from the acquisition of any securities of the Company; (k) any reversal of any contingency reserve, unless the provision for such contingency reserve shall have been made from income arising during the fiscal period in question; and (l) any charge to earnings resulting from the write-off of deferred loan costs and/or debt discounts in connection with repayment of (A) the 1999 Subordinated Notes, (B) the obligations under the Third Amended and Restated Loan and Security Agreement dated as of September 30, 2002 among the Company, Agent and certain lenders, and (C) the obligations under the Loan and Security Agreement dated March 14, 2003 among Extrusion Technologies, Inc., Agent and certain lenders.

 

“ Contingent Obligation ” shall mean, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person: (i) with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto; (ii) with respect to any letter of credit issued for the account of that person or as to which that Person is otherwise liable for reimbursement of drawings; (iii) under any swap agreements or other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange

 

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rates; (iv) to make take-or-pay or similar payments if required regardless of nonperformance by any other party or parties to an agreement; or (v) for the obligations of another through any agreement to purchase, repurchase or otherwise acquire such obligation or any property constituting security therefor, to provide funds for the payment of discharge of such obligation or to maintain the solvency, financial condition or any balance sheet item or level of income of another Person. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported or, if not a fixed and determined amount, the maximum amount so guaranteed or supported.

 

“ Default ” shall mean any event or circumstance which, with the giving of notice or the passage of time, or both, would constitute an Event of Default.

 

“ Default Interest Rate ” shall have the meaning specified in the Notes.

 

“ Deferred Interest ” shall mean all interest on the Notes accrued at the Deferred Rate (as defined in the Notes), including any such interest which has been compounded and added to principal.

 

“ Derivative Obligation ” shall mean every obligation of a Person under any forward contract, futures contract, exchange contract, swap, option or other financing agreement or arrangement (including, without limitation, caps, floors, collars and similar agreement), the value of which is dependent upon interest rates, currency exchange rates, commodities or other indices.

 

“ EBITDA ” shall mean with respect to any fiscal period, the sum of Consolidated Net Income for such period plus amounts deducted in determining such Consolidated Net Income in respect of: (a) any provision for (or less any benefit from) income taxes whether current or deferred; (b) amortization and depreciation expense; and (c) Interest Expense for such period. For purposes of Schedule 6.5, EBITDA for fiscal periods ending on or prior to December 31, 2004, shall not include restructuring charges of up to $1,000,000 which were incurred in fiscal year 2003, but were expensed in fiscal year 2004 and up to $400,000 of expenses which have been or will be incurred in the PW Poly Spinoff.

 

“ Environmental Audits ” shall mean the Phase I Environmental Site Assessments set forth in Schedule 1.1(a) hereto.

 

“ Environmental Laws ” shall have the meaning specified in Section 4.22.

 

“ Equity Documents ” shall mean, collectively, the Warrant Agreement, the Warrants and the Registration Rights Agreement, together with all exhibits, schedules and amendments thereto.

 

“ ERISA ” shall mean the Employee Retirement Income Security Act of 1974, as the same may from time to time be amended, and the rules and regulations promulgated thereunder by any governmental agency or authority, as may from time to time be in effect.

 

“ ETI Subordinated Note ” shall mean that certain unsecured promissory note in the original principal amount of $243,439 dated as of March 11, 2003 and executed by Extrusion Technologies, Inc. in favor of Uponor North America, Inc.

 

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“ Event of Default ” shall mean an Event of Default as defined in Section 8.1 hereof.

 

“ Existing Subordinated Debt ” shall mean the 14% Senior Subordinated Notes due 2007 of the Company and any other obligations of the Company under the Securities Purchase Agreement dated as of September 20, 1999 among the Company and the Investors, as defined therein.

 

“ Financial Projections ” shall have the meaning specified in Section 4.7(d).

 

“ Financing Statements ” shall mean all Uniform Commercial Code financing statements (or comparable documents now or hereafter filed in accordance with the Uniform Commercial Code or comparable law) given by any Related Party in favor of any holder of a Note in connection with the transactions contemplated hereby.

 

“ Fixed Charges ” means, for any period of determination, the sum of (a) scheduled principal payments of Funded Debt (including the principal portion of scheduled payments of Capital Lease Obligations) during such period, (b) Interest Expense paid in cash included in the determination of Consolidated Net Income during such period, (c) dividends paid on, or repurchases or redemptions of, the Company’s capital stock during such period and (d) the amount of the reduction in the Fixed Asset Maximum Amount (as such term is defined the Senior Credit Agreement as in effect on the Closing Date) occurring within such period of determination.

 

“ Fixed Charge Coverage Ratio ” shall mean, with respect to any period of determination, the ratio of (i) EBITDA for such period minus income taxes paid in cash and non-financed Capital Expenditures during such period to (ii) Fixed Charges for such period.

 

“ Funded Debt ” means: (i) Indebtedness arising from the lending of money by any Person to the Company or any of its Subsidiaries, including, without limitation, the Obligations, the obligations of the Company under the Junior Subordinated Note Purchase Agreement and the Senior Debt; (ii) Indebtedness, whether or not in any such case arising from the lending by any Person of money to the Company or any of its Subsidiaries (A) which is represented by notes payable or drafts accepted that evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for property; (iii) Indebtedness that constitutes a Capitalized Lease Obligation; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit; and (v) Indebtedness of the Company or any of its Subsidiaries under any guaranty of obligations that would constitute Funded Debt under clauses (i) through (iv) hereof if owed directly by the Company or any of its Subsidiaries. In computing the amount of Funded Debt, the Notes and the notes issued pursuant to the Junior Subordinated Note Purchase Agreement will be valued at full face value (less any payments thereon) without giving effect to any original issue discount.

 

“ GAAP ” shall mean generally accepted accounting principles as in effect from time to time in the United States, consistently applied.

 

“ Indebtedness ” as applied to a Person means, without duplication:

 

(i) all items which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person as at the date as of which Indebtedness is to be determined, including, without limitation, Capitalized Lease Obligations;

 

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(ii) all obligations of other Persons which such Person has guaranteed;

 

(iii) all reimbursement obligations in connection with letters of credit or letter of credit guaranties issued for the account of such Person;

 

(iv) Derivative Obligations; and

 

(v) in the case of the Company (without duplication), the Obligations, the obligations under the Junior Subordinated Note Purchase Agreement and the Senior Debt.

 

“ Interest Coverage Ratio ” shall mean, with respect to any period of determination, the ratio of (i) EBITDA for such period to (ii) Interest Expense paid in cash during such period all as determined in accordance with GAAP.

 

“ Interest Expense ” means, with respect to any fiscal period, the interest expense incurred for such period excluding interest income as determined in accordance with GAAP.

 

“ Investments ” shall have the meaning specified in Section 7.1(c) hereof.

 

“ Junior Note Purchaser ” shall mean the note purchaser party to the Junior Subordinated Note Purchase Agreement.

 

“ Junior Subordinated Note Purchase Agreement ” shall mean that certain Junior Subordinated Note Purchase Agreement dated as of the date hereof between the Junior Note Purchaser and the Company.

 

“ Junior Subordination Agreement ” shall mean that certain Junior Subordination Agreement between the Note Purchaser and the Junior Note Purchaser and acknowledged by the Related Parties.

 

“ knowledge ,” with respect to any Person, shall mean the knowledge of such Person after reasonable inquiry and investigation concerning the subject matter of the representation and warranty. Any statements, representations or warranties that are based upon the knowledge of any Person shall be deemed to have been made after due inquiry by such Person with respect to the matter in question.

 

“ Leases ” shall mean the leases for real property set forth on Schedule 1.1(b).

 

“ Lessor’s Agreement ” shall mean the Landlord’s Waivers and Consents with respect to the Leases.

 

“ Lien ” means any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on common law, statute or contract. The term “Lien” shall also include rights of sellers under conditional sales contracts or title

 

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retention agreements, reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting property. For the purpose of this Agreement, the Company shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes.

 

“ Management Fee Subordination Agreement ” shall mean that certain Management Fee Subordination Agreement among the Agent, the Note Purchaser, the Junior Note Purchaser, the Company and Spell Capital Partners LLC pursuant to which certain consulting and other fees payable to Spell Capital Partners LLC are subordinated to the obligations of the Company under the Senior Credit Agreement, the Notes and the obligations of the Company under the Junior Subordinated Note Purchase Agreement.

 

“ Material Adverse Effect ” shall mean (a) a material adverse change in, or a material adverse effect upon, the operations, business, prospects, properties or condition (financial or otherwise) of (i) the Company or (ii) the Related Parties taken as a whole; (b) an impairment of the ability of any Related Party to perform in any material respect its obligations under this Agreement or the Notes or any other Note Document or any Equity Documents; or (c) an impairment of (i) the legality, validity, binding effect or enforceability of any Note Document or any Equity Documents, or (ii) the perfection or priority of any lien granted to the Note Purchaser under any of the Security Documents in respect of Collateral having an aggregate fair market value of more than $500,000.

 

“ Mortgages ” shall mean the Mortgages whereby the Company grants to the Note Purchaser a second mortgage lien, subject to the first lien of the Agent on behalf of the Senior Creditors, against its Owned Real Property and shall include the Mortgages granted on the date hereof and any future Mortgages granted pursuant to Section 6.11 or 6.12 of this Agreement.

 

“ Multiemployer Plan ” has the meaning set forth in Section 4001(a)(3) of ERISA.

 

“ Note Documents ” shall mean this Agreement, the Notes, the Security Documents and all documents delivered to any holder of a Note in connection herewith or therewith, but shall not include the Equity Documents.

 

“ Note Purchaser ” shall mean Churchill Capital Partners IV, L.P., a Delaware limited partnership, and its permitted successors and assigns, including without limitation, as the context may require, subsequent holder(s) of the Notes.

 

“ Notes ” shall mean, as of a particular time, all of the Notes delivered under this Agreement, and each Note delivered in substitution or exchange for any such Note.

 

“ Obligations ” shall mean the obligation of the Company:

 

(a) to pay the principal of and interest on the Notes in accordance with the terms thereof and to satisfy all of its other liabilities and obligations to the Note Purchaser and holders of the Notes, whether hereunder, under the Notes or any other Note Document or otherwise, whether now existing

 

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or hereafter incurred, matured or unmatured, direct or contingent, or joint or several, including any extensions, modifications, renewals and substitutions thereof;

 

(b) to repay to the Note Purchaser and any holder of a Note all amounts advanced by the Note Purchaser or holder of a Note hereunder or otherwise on behalf of the Company, including, but without limitation, advances for principal or interest payments to prior secured parties, mortgagees, or lienors, or for taxes, levies, insurance, rent, or repairs to, or maintenance or storage of, any of the Owned Real Property or other Collateral; and

 

(c) to reimburse the Note Purchaser or any holder of a Note for its fees and expenses as provided in Section 10.1 hereof; and

 

(d) to perform the indemnification as required by Section 10.2 hereof.

 

“ Opening Day Balance Sheet ” shall mean that certain Opening Day Balance Sheet dated as of October 25, 2004.

 

“ Original Principal Balance ” shall have the meaning specified in Section 2.1.

 

“ OSHA ” shall mean the Occupational Safety and Health Act of 1970, as amended, and the rules and regulations promulgated thereunder.

 

“ Owned Real Property ” shall mean the Company’s real property identified on Schedule 1.1(c) and any additional real property acquired by the Company or any of its Subsidiaries after the date hereof.

 

“ PBGC ” shall mean the Pension Benefit Guaranty Corporation or any successor board, authority, agency, officer or official of the United States administering the principal functions assigned on the date hereof to the Pension Benefit Guaranty Corporation under ERISA.

 

“ Permitted Liens ” shall mean:

 

(i) Liens now or hereafter securing the Senior Debt and any refinancings or renewals thereof permitted hereunder;

 

(ii) Liens incurred or deposits made in the ordinary course of business (A) in connection with workers’ compensation, social security, unemployment insurance and other like laws, or (B) in connection with sales contracts, leases, statutory obligations, work in progress advances and other similar obligations not incurred in connection with the borrowing of money or the payment of the deferred purchase price of property;

 

(iii) attachment, judgment and other similar Liens that do not constitute Events of Default hereunder;

 

(iv) title exceptions or encumbrances granted in the ordinary course of business, affecting real property owned by the Company or any of its Subsidiaries, provided that such exceptions do not

 

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in the aggregate materially detract from the value of such property or materially interfere with its use in the ordinary conduct of the Company’s or such Subsidiary’s business;

 

(v) Purchase Money Liens securing Permitted Purchase Money Indebtedness;

 

(vi) other Liens set forth on Schedule 1.1(d) hereof and any refinancings or renewals thereof;

 

(vii) Liens securing Indebtedness of one of the Company’s Subsidiaries to the Company or another such Subsidiary;

 

(viii) Liens securing the Obligations; and

 

(ix) Liens securing the obligations of the Company under the Junior Subordinated Note Purchase Agreement.

 

“ Permitted Purchase Money Indebtedness ” means Purchase Money Indebtedness of the Company incurred after the date hereof which is secured by a Purchase Money Lien and the principal amount of which, when aggregated with the principal amount of all other such Indebtedness and Capitalized Lease Obligations of the Company and its Subsidiaries at the time outstanding, does not exceed $1,250,000. For the purposes of this definition, the principal amount of any Purchase Money Indebtedness consisting of capitalized leases (as opposed to operating leases) shall be computed as a Capitalized Lease Obligation.

 

“ Person ” shall mean any individual, corporation, partnership, limited liability company, association, joint-stock company, trust, estate, unincorporated organization, joint venture, court, or governmental or political subdivision or agency thereof.

 

“ Plan ” shall mean each employee benefit plan, or other class of benefits covered by Title IV of ERISA, now or hereafter established or maintained for employees of the Company or its Subsidiaries.

 

“ Purchase Money Indebtedness ” means (i) Indebtedness (other than the Senior Debt) for the payment of all or any part of the purchase price of any fixed assets, (ii) any Indebtedness (other than the Senior Debt) incurred at the time of or within 10 days prior to or after the acquisition of any fixed assets for the purpose of financing all or any part of the purchase price thereof, and (iii) any renewals, extensions or refinancings thereof, but not any increases in the principal amounts thereof outstanding at the time.

 

“ Purchase Money Lien ” means a Lien upon fixed assets which secures Purchase Money Indebtedness, but only if such Lien shall at all times be confined solely to the fixed assets the purchase price of which was financed through the incurrence of the Purchase Money Indebtedness secured by such Lien.

 

“ PW Poly ” means USPoly Company (formerly known as PW Poly Corp.), a Minnesota corporation.

 

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“ PW Poly Spinoff ” shall mean the transaction consisting of the sale of certain of the shares of capital stock of PW Poly, and the distribution of all of the remaining shares of capital stock of PW Poly, or the cash received from the sale of such shares, to the shareholders and certain holders of warrants to purchase shares of the Company.

 

“ Registration Rights Agreement ” shall mean that certain Registration Rights Agreement between the Note Purchaser, the Junior Note Purchaser and the Company dated as of the Closing Date.

 

“ Related Party ” shall mean the Company and each Subsidiary of the Company.

 

“ Reportable Event ” means any of the events set forth in Section 4043(c) of ERISA.

 

“ Resin Supply Agreement ” shall mean collectively the various agreements separately disclosed to the Note Purchaser.

 

“ Responsible Officer ” shall mean the chief executive officer or the president of the Company, or any other officer having substantially the same responsibility (or having substantially the same knowledge of the contents of the certificate, document or other item being delivered) and authority with respect to the matter at hand; or, with respect to compliance with financial covenants or delivery of financial information, the chief financial officer or the treasurer of the Company, or any other officer having substantially the same responsibility (or having substantially the same knowledge of the contents of the certificate, document or other item being delivered) and authority with respect to the matter at hand.

 

“ Sale and Leaseback Documents ” means the Sale and Leaseback Agreement together with all exhibits, schedules and related documents.

 

“ Sale and Leaseback Transaction ” means the sale and leaseback by the Company of its real property located in Perris, California, Eugene, Oregon, West Jordan, Utah and Tacoma, Washington pursuant to that certain Lease Agreement (“Sale and Leaseback Agreement”) dated as of February 28, 2002, by and between Company and PWE (Multi) 14-85, Inc. (“Lessor”).

 

“ Security Agreement ” shall mean the Senior Subordinated Security Agreement dated the Closing Date between the Company and the Note Purchaser whereby the Company grants to the Note Purchaser a security interest in the personal property of the Company.

 

“ Security Agreement - Intellectual Property ” shall mean collectively the Senior Subordinated Patent and License Security Agreement and the Senior Subordinated Trademark and License Security Agreement dated the Closing Date between the Company and the Note Purchaser whereby the Company grants to the Note Purchaser a security interest in its intellectual property.

 

“ Security Documents ” shall mean the Security Agreement, the Financing Statements, the Security Agreement - Intellectual Property, the Mortgages, the Lessor’s Agreements and all other security agreements, mortgages, pledges, patent and trademark assignments, lease assignments, guarantees and other similar agreements, and all amendments, restatements, modifications or

 

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supplements thereof or thereto, by or between any one or more of the Related Parties and any holder of a Note now or hereafter delivered to any holder of Note pursuant to or in connection with the transactions contemplated hereby.

 

“ Senior Credit Agreement ” shall mean that certain Fourth Amended and Restated Loan and Security Agreement among the Agent, the Senior Creditors and the Company dated as of October 25, 2004.

 

“ Senior Creditors ” shall mean, collectively, the lenders from time to time party to the Senior Credit Agreement.

 

“ Senior Debt ” shall mean the obligations of the Company under the Senior Credit Agreement, subject to the limitations set forth in the Senior Subordination Agreement.

 

“ Senior Subordination Agreement ” shall mean the Subordination Agreement dated the Closing Date among the Agent, the Junior Note Purchaser and the Note Purchaser and acknowledged by the Related Parties.

 

“ Spell Group ” shall mean (x) William H. Spell and Harry W. Spell, and any of their spouses or any family trust which is controlled by either of the foregoing, (y) Dobson West and Bruce Richard, and (z) Jerry Dukes, Scott Long, Jack Cobb and Mike Stickel so long as they are employed by the Company.

 

“ Subsidiary ” shall mean any corporation or other business entity as to which an aggregate of more than 50% of the outstanding voting securities or more than 50% of the equity is at any time directly or indirectly owned by the Company, or by one or more of its Subsidiaries or by the Company and one or more of its Subsidiaries.

 

“ Title Policy ” shall mean a mortgagee’s title insurance policy issued by a title insurance company acceptable to the Note Purchaser in an amount satisfactory to the Note Purchaser with respect to each parcel of Owned Real Property insuring the Mortgage as a second lien on a good and marketable fee simple title to each parcel of Owned Real Property subject only to “Permitted Encumbrances” (as that term is defined in the Mortgages) and otherwise in form and substance satisfactory to the Note Purchaser.

 

“ Transfer ” shall have the meaning specified in Section 3.6.

 

“ Warrants ” shall mean those certain warrants to purchase common stock of the Company issued to the Note Purchaser and the Junior Note Purchaser pursuant to the Warrant Agreement.

 

“ Warrant Agreement ” shall mean that certain Warrant Agreement dated as of the Closing Date among the Note Purchaser, the Junior Note Purchaser and the Company.

 

Section 1.2 Rules of Construction . Where any provision in this Agreement refers to action to be taken by a Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. Except as otherwise

 

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indicated, all agreements or instruments herein defined shall mean agreements as the same may from time to time be supplemented or amended or the terms thereof waived or modified to the extent permitted, and in accordance with, the terms thereof. Each covenant contained in this Agreement shall be construed (absent an express contrary provision therein) as being independent of each other covenant contained herein and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any or all covenants.

 

Whenever the terms “satisfactory to Note Purchaser,” “determined by Note Purchaser,” “acceptable to Note Purchaser,” “consent of Note Purchaser,” “Note Purchaser shall elect,” “Note Purchaser shall request” or similar terms are used in this Agreement, the Notes or any other Note Document, except as otherwise specifically provided therein, such terms shall mean satisfactory to, at the election of, determined by, acceptable to or requested by, as applicable, Note Purchaser in its sole and unlimited discretion. In addition, the Note Purchaser shall be permitted to condition the giving of its consent upon the giving of additional collateral security, the payment of a fee, or any other matter.

 

Whenever the Company is to deliver or make available a copy of any document, agreement, statement, notice or other writing to the Note Purchaser, such copy shall be a true, correct and complete copy thereof, including all exhibits, schedules and attachments referenced therein.

 

Each warranty and representation contained in this Agreement shall be conclusively presumed to have been relied on by Note Purchaser regardless of any investigation made or information possessed by Note Purchaser. The warranties and representations set forth herein shall be cumulative and in addition to any and all other warranties and representations that the Company shall now or hereafter give, or cause to be given, to Note Purchaser.

 

No provision of this Agreement, the Notes or any of the other Note Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or drafted such provision.

 

The terms “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. Any pronoun used shall be deemed to cover all genders. The section titles, table of contents and list of schedules appear as a matter of convenience only and shall not affect the interpretation of the Agreement. All references to statutes and related regulations shall include any amendments of same and any successor statutes and regulations. The words “including,” “includes” and “include” shall be deemed to be followed by the words “without limitation.”

 

It is the intent of the parties that all defined terms and methodologies of calculation set forth in Section 6.5 or Schedule 6.5 or 6.6 attached hereto shall be identical to the defined terms and methodologies of calculation of the corresponding terms and ratios as set forth in the Senior Credit Agreement. To the extent of any inconsistency between the defined terms and methodologies of calculation as set forth in Section 6.5 or Schedule 6.5 or 6.6 attached hereto and the defined terms and methodologies of calculation as set forth in the Senior Credit Agreement, Section 6.5 and Schedule 6.5 and 6.6 shall be amended to incorporate the corresponding defined terms and

 

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methodologies set forth in the Senior Credit Agreement (together with all defined terms set forth herein), as in effect on the date hereof and without giving effect to any modification or amendment thereto not consented to by the Note Purchaser.

 

II. SALE AND PURCHASE OF THE NOTES

 

Section 2.1 Original Notes . The Company will authorize for issuance to the Note Purchaser on the Closing Date Notes in an original principal amount of Sixteen Million Dollars $16,000,000 (the “Original Principal Balance”). The Notes shall accrue interest from and after the Closing Date and have such other characteristics as set forth in the Notes. The Company agrees to sell the Notes to the Note Purchaser on the Closing Date, and the Note Purchaser agrees to purchase such Notes from the Company, on the terms and conditions set forth herein.

 

Section 2.2 Investment Unit . The Note Purchaser and the Company hereby acknowledge and agree that the Notes are part of an “investment unit” within the meaning of Section 1273(c)(2) of the Code, which includes the Warrants. Notwithstanding anything to the contrary contained herein or in the Warrant Agreement, the Note Purchaser and the Company hereby further acknowledge and agree that solely for United States federal income tax purposes the aggregate “issue price” of the Notes and the Warrants allocated to the Notes pursuant to Schedule 2.2 to the Warrant Agreement under Section 1273(b) of the Code (and for purposes of comparable state and local income tax laws) shall equal $15,286,892.66 and $713,107.34, respectively. The Note Purchaser and the Company agree to use the foregoing issue prices for all income tax purposes with respect to this transaction.

 

Section 2.3 Closing on Sale of Notes . The Closing of the purchase and sale of the Notes pursuant to Section 2.1 hereof shall be held on October 25, 2004 at the offices of counsel for Note Purchaser, or at such other date or location as the parties hereto may agree (the “Closing”).

 

At the Closing, the Note Purchaser shall make payment to the Company of the purchase price for such Notes by wire transfer of immediately available funds to an account designated by the Company or by such alternative means of payment to which the parties may agree. At the Closing, the Company shall deliver Notes, registered in the name of the Note Purchaser and in such denominations, as the Note Purchaser may reasonably request.

 

Section 2.4 Security for the Notes . Payment of all Obligations, including indebtedness evidenced by the Notes, shall be secured by mortgages, liens and security interests in the Collateral and other assets, property rights and interests as described in the Security Documents.

 

III. THE NOTES

 

Section 3.1 Principal and Interest . Payment of principal and interest on the Notes shall be made in accordance with the terms of each such Note as specified therein.

 

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Section 3.2 Prepayment . Prepayment on the Notes shall be made in accordance with the terms of each such Note as specified therein.

 

Section 3.3 Subordination . Payment of principal and accrued interest and all other amounts due under the Notes shall be subordinated to the rights of the Senior Creditors to the extent provided in the Senior Subordination Agreement.

 

Section 3.4 Method and Place of Payment of Principal and Interest . The Company will pay to the holder of a Note in immediately available funds to an account designated by such holder all amounts payable to it when due in respect of the principal of, or interest or premium on, any of the Notes then held by such holder, without any presentation of such Notes.

 

Section 3.5 Exchange of Notes . The holder of any Notes may, at its option, in person or by duly authorized attorney, surrender the same for exchange at the principal office of the Company maintained pursuant to Section 6.4(b) and, within a reasonable time thereafter and without expense for the issuance of the replacement Notes, receive in exchange therefor one or more duly executed Notes, dated as of the date to which interest has been paid on the Note or Notes so surrendered, or if no interest has yet been so paid, then dated the date hereof, and registered in such name or names, all as may be designated by such holder, for the same aggregate principal amount as the then unpaid principal amount of the Note or Notes so surrendered. The Company covenants and agrees to take and cause to be taken all action necessary to effect such exchanges. Any such issuance of new Notes shall not be deemed to be the sale of new securities and shall in all respects be subject to compliance with applicable federal and state securities laws.

 

Section 3.6 Revival of Obligations . If the incurring of any debt or the payments of money or transfers of property made to Note Purchaser by or on behalf of the Company contemplated by the Note, this Agreement, any of the other Note Documents or any document delivered hereunder (collectively, a “Transfer”) should for any reason subsequently be declared to be “voidable” or “avoidable” within the meaning of any state or federal law relating to creditor’s rights, including, without limitation, as fraudulent conveyances, fraudulent transfers, preferences or otherwise voidable or recoverable payments of money or transfer of property, in whole or in part, for any reason under the United States Bankruptcy Code or any other federal or state law, and Note Purchaser is required to repay or restore such Transfer, or the amount of any portion thereof, then as to any such amount repaid or restored (including all reasonable costs, expenses and attorneys’ fees of Note Purchaser related thereto), the liability of the Company shall automatically be revived, reinstated, and restored and shall exist as though such Transfer had never been made, notwithstanding the surrender of any Note or cancellation of any instrument or document relating to this Agreement.

 

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IV. REPRESENTATIONS AND WARRANTIES

 

The Company represents and warrants to the Note Purchaser that after giving effect to the transactions described in the Equity Documents, the Senior Credit Agreement, the Junior Subordinated Note Purchase Agreement and herein:

 

Section 4.1 Organization and Authority . Each of the Related Parties is duly and validly organized and an existing corporation in good standing under the laws of its jurisdiction of incorporation and is duly licensed or qualified and in good standing as a foreign corporation in all other jurisdictions where the ownership or leasing of property or the nature of business transacted make such qualification necessary and where the failure to be so qualified and in good standing would, in the aggregate, have a Material Adverse Effect. Each of the Related Parties is entitled and authorized to own its properties and assets and to carry on its business as, and in the places where, such properties and assets are now owned or operated or such business is now conducted and presently proposed to be conducted.

 

Section 4.2 Organizational Information . Schedule 4.2 to this Agreement correctly sets forth (i) the state or other jurisdiction in which each of the Related Parties is incorporated or organized, (ii) the state or states in which each of the Related Parties conducts its businesses, (iii) a list of each class of stock of each of the Related Parties showing in each case the number of shares of stock of each class outstanding and the ownership of such shares (provided, however, that in the case of the Company, ownership of shares by Persons other than the Spell Group, officers and directors of the Company and owners of 5% or more of the outstanding capital stock of the Company may be aggregated), and (iv) a list of each outstanding option, warrant or other right to acquire any class of stock of any of the Related Parties which has been granted by such Related Party and each security convertible into any class of stock of any of the Related Parties showing in each case the number of shares of stock of each class issuable upon exercise or conversion of such option, warrant, right or convertible security, the purchase or conversion price and other material terms of such option, warrant, right or convertible security, and the ownership of such option, warrant, right or convertible security (provided, however, that in the case of the Company, ownership of options by employees of any of the Related Parties who are not members of the Spell Group or officers or directors of the Company may be aggregated). The shares of stock listed in Schedule 4.2 have been duly issued and are fully paid and nonassessable. As of the Closing Date, the Company does not own capital stock or other equity interests in any corporation or other Person other than as set forth on Schedule 4.2. Schedule 4.2 shall be deemed to be updated by each of the Company’s filings with the Securities and Exchange Commission after the date hereof pursuant to the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, so long as the Company has delivered a copy of such public filing to Note Purchaser.

 

Section 4.3 Transactions Legal and Authorized . The issuance and sale of the Notes and compliance by the Related Parties with all the provisions of the Note Documents are within the corporate powers of the Related Party executing the same. This Agreement has been duly authorized, executed and delivered by and is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. The other Note Documents have been duly authorized by each of the Related Parties executing the same and, when executed and delivered by such Related Parties in accordance with this Agreement, will be legal, valid and binding obligations of such Related Parties, enforceable in accordance with their respective terms. The foregoing representations in this Section 4.3 are subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws now or hereafter in effect generally relating to or affecting creditors’ rights.

 

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Section 4.4 No Defaults, Restrictions; Compliance with Laws . None of the execution and delivery of this Agreement or the other Note Documents, the consummation of the transactions contemplated hereby or thereby, nor compliance with their terms and conditions, will conflict or result in breach of, or constitute a default under, any of the terms, obligations, covenants, conditions or provisions of any corporate restriction or of any indenture, mortgage, deed of trust, pledge, bank loan or credit agreement, articles, by-laws, operating agreement or any other agreement or instrument to which any Related Party is a party or by which its properties may be bound or affected, or any judgment, order, writ, injunction, decree or demand of any court, arbitrator, grand jury, or any governmental agency, or any law, rule, or regulation applicable to any Related Party, or, with the exception of the note purchase transactions contemplated hereby, result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of any Related Party. None of the Related Parties is a party to, nor is it bound by, any contract or agreement or instrument, or subject to any charter or other corporate restriction, which materially and adversely affects its business, property, assets, operations or condition, financial or otherwise. Except as disclosed on Schedule 4.4, none of the Related Parties is in material default in the performance, observance or fulfillment of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other agreement creating, evidencing or securing material Indebtedness or pursuant to which any such Indebtedness is issued, or other agreement or instrument to which such Related Party is a party or by which its properties may be bound or affected. Each Related Party has complied with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of its business or the ownership of its properties, except where non-compliance therewith would not have a Material Adverse Effect.

 

Section 4.5 Consents . Except as indicated on Schedule 4.5 hereto, no consents, orders, permissions, approvals or authorizations by or from any governmental entity or other Person are required to be obtained, and no registrations or declarations are required to be filed, in connection with the execution and delivery of any of the Note Documents.

 

Section 4.6 Business . Schedule 4.6 to this Agreement correctly sets forth a brief description of the business (as conducted and presently proposed to be conducted) of the Related Parties.

 

Section 4.7 Financial Statements .

 

(a) The audited financial statements of the Related Parties as of and for each of the five fiscal years ended December 31, 2003, as certified by its independent certified pubic accountants, which has been delivered to Note Purchaser, and the unaudited financial statements of the Related Parties for the eight-month interim period ended August 31, 2004, were prepared in accordance with GAAP consistently applied throughout the fiscal years and interim period involved; are correct, and completely and fairly present in all material respects the financial position and results of operations of the Related Parties as of said dates and for each of the periods indicated. The unaudited financial statements accurately reflect (or have been restated to accurately reflect) the financial condition and results of operation of the Company and its Subsidiaries after giving effect to the PW Poly Spinoff.

 

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Copies of the financial statements described in this Section 4.7(a) are attached hereto as part of Schedule 4.7.

 

(b) The Related Parties have no Indebtedness other than Indebtedness permitted pursuant to Section 7.2 and have no Contingent Obligations other than Contingent Obligations permitted pursuant to Section 7.4 hereof.

 

(c) The Opening Day Balance Sheet of the Related Parties delivered to the Note Purchaser as part of Schedule 4.7 has been prepared by management of the Company on a reasonable basis, taking into consideration the effect of the note purchase transaction contemplated hereby, the transactions contemplated by the Senior Credit Agreement, the transactions contemplated by the Junior Subordinated Note Purchase Agreement and the transactions contemplated by the Equity Documents, and neither the Company nor its management is aware of any fact which casts doubt on the material accuracy or completeness thereof. To the Company’s knowledge, after giving effect to such transactions, none of the Related Parties will have any material liabilities, contingent or otherwise, which are not referred to in the Opening Day Balance Sheet or in the notes thereto other than liabilities not required to be disclosed in accordance with GAAP (and none of such non-disclosed liabilities are material).

 

(d) The Financial Projections separately disclosed to the Note Purchaser (the “Financial Projections”) have been prepared in good faith and are based on what the Company believes on the date hereof to be a reasonable assessment of the future performance of the Related Parties subject to general business conditions and economic factors which may be beyond its control or other unanticipated future events which could have an unforeseen impact on the performance or condition of the Related Parties. All material assumptions used in the preparation of the Financial Projections are set forth in the notes thereto or in this Agreement or on a Schedule hereto.

 

Section 4.8 Full Disclosure . Neither this Agreement nor any of the other Note Documents nor any Schedule hereto or thereto or closing certificate furnished by any Related Party to the Note Purchaser nor the Confidential Private Placement Memorandum relating to $15 million Convertible Preferred Stock delivered to Note Purchaser (together will the filings made by the Company with the Securities and Exchange Commission since the date thereof, the information made available to the Note Purchaser on site at the Company’s office in February 2004, and the financial statements, projections and other information provided as part of the Schedules to this Agreement) contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein or herein not misleading in light of the circumstances in which made. There is no fact which the Company has not disclosed to the Note Purchaser in writing which could reasonably be expected to have a Material Adverse Effect.

 

Section 4.9 No Event Having a Material Adverse Effect . Since December 31, 2003, none of the business, operations, properties nor assets of the Related Parties have been affected by an event or circumstance having a Material Adverse Effect.

 

Section 4.10 Pending Litigation . There are no actions, suits, investigations or proceedings (whether or not purportedly on behalf of any Related Party) pending or, to the knowledge of the

 

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Company, threatened against or affecting any Related Party, or the business, operations, properties, prospects, profits or condition (financial or otherwise) of any Related Party, before or by any governmental department, commission, board, regulatory authority, bureau, agency, or instrumentality, domestic, foreign, federal, state or municipal, or any court, arbitrator or grand jury, which, if determined adversely to any Related Party, could reasonably be expected to have a Material Adverse Effect or (wi