AGENTED REVOLVING CREDIT AND TERM LOAN AGREEMENT

 

<PAGE>

 

                                                                     EXHIBIT 4.2

 

                          AGENTED REVOLVING CREDIT AND

                               TERM LOAN AGREEMENT

 

      This Agented Revolving Credit and Term Loan Agreement is dated as of

October 15, 2002, among ORCHIDS PAPER PRODUCTS COMPANY, a Delaware corporation

("Borrower"), and BANK OF OKLAHOMA, N.A. and LOCAL OKLAHOMA BANK, N.A.

(individually a "Bank" and collectively the "Banks"), and BANK OF OKLAHOMA,

N.A., as agent for the Banks hereunder (in such capacity, the "Agent").

 

                                    RECITALS

 

      Subject to the terms and conditions set forth below, Banks have agreed to

extend to Borrower the following loans: (i) a $6,500,000 term loan ("$6,500,000

Term Loan"), (ii) a $4,000,000 term loan ("$4,000,000 Term Loan"), and (iii) a

$4,500,000 revolving line of credit ("$4,500,000 Revolving Line").

 

                                    AGREEMENT

 

      For valuable consideration received, it is agreed as follows:

 

      1. DEFINED TERMS. As used in this Agreement, the following terms have the

following meanings (terms defined in the singular to have the same meaning when

used in the plural and vice versa).

 

            1.1. Accounting Terms. All accounting terms not specifically defined

      herein shall be construed in accordance with GAAP consistent with those

      applied in the preparation of the financial statements referred to in

      Section 6.9, and all financial data submitted pursuant to this Agreement

      shall be prepared in accordance with such principles.

 

            1.2. "Adjusted LIBOR Rate" shall mean the LIBOR Rate plus the LIBOR

      Rate Margin. The Adjusted LIBOR Rate shall be recalculated on not less

      than a quarterly basis, upon Agent's receipt of Borrower's quarterly

      financial statements. From the date of this Agreement to the first

      recalculation, the Adjusted LIBOR Rate shall be set at the LIBOR Rate plus

      two and three quarters percent (2.75%) per annum, with the first

      recalculation to be effected upon Agent's receipt of Borrower's December

      31, 2002 quarterly financial statement, but in no event later than

      February 15, 2003.

 

            1.3. "Adjusted Prime Rate" shall mean the Prime Rate plus the Prime

      Rate Margin. The Adjusted Prime Rate shall be recalculated on not less

      than a quarterly basis, upon Agent's receipt of Borrower's quarterly

      financial statements. From the date of this Agreement to the first

      recalculation, the Adjusted Prime Rate shall be set at the Prime Rate,

      with the first recalculation to be effected upon Agent's receipt of

      Borrower's December 31, 2002 quarterly financial statement, but in no

      event later than February 15, 2003.

 

<PAGE>

 

            1.4. "Affiliate" means any Person: (i) which directly or indirectly

      controls, or is controlled by, or is under common control with, Borrower;

      (ii) which directly or indirectly beneficially owns or holds five percent

       (5%) or more of any class of voting stock of Borrower; or (iii) five

      percent (5%) or more of the voting stock of which is directly or

      indirectly beneficially owned or held by Borrower. The term "control"

      means the possession, directly or indirectly, of the power to direct or

      cause the direction of the management and policies of a Person, whether

      through the ownership of voting securities, by contract, or otherwise.

 

            1.5. "Agreement" means this Agented Revolving Credit and Term Loan

      Agreement, as amended, supplemented, or modified from time to time.

 

            1.6. "Borrowing Base" means, at any date of determination thereof,

      the sum of eighty percent (80%) of Borrower's Qualified Receivables at

       such date, plus fifty percent (50%) of Borrower's Qualified Inventory at

      such date, as determined by Agent based upon the most recent information

      relating thereto provided to Agent pursuant to Section 2.3; provided,

      however, that Qualified Inventory shall not exceed the Qualified Inventory

      Cap as determined by Agent in its sole discretion. The "Qualified

      Inventory Cap" shall equal the lesser of 50% of Qualified Inventory or 80%

      of Borrower's Qualified Receivables such that Qualified Inventory

      comprises no more than 50% of the overall Borrowing Base.

 

            1.7. "Borrowing Base Certificate" means each certificate from

      Borrower to Agent relating to the Borrowing Base, substantially in the

      form of Schedule "1.7" hereto.

 

            1.8. "Borrowing Resolutions" means certified Resolutions from the

      Secretary of Borrower, in form and content as set forth on Schedule "1.8"

      attached hereto.

 

            1.9. "Business Day" means any day other than a Saturday, Sunday, or

      other day on which commercial banks in Oklahoma are authorized or required

      to close under the laws of the State of Oklahoma.

 

            1.10. "Capital Lease" means all leases which have been or should be

      capitalized on the books of the lessee in accordance with GAAP.

 

            1.11. "Certificates of Good Standing" means a Certificate of Good

      Standing issued by the Secretary of State of incorporation for the

      Borrower and such other states in which Borrower does business and is

      required to domesticate or otherwise register, indicating that Borrower is

      in good standing with the laws of such state(s).

 

            1.12. "Code" means the Internal Revenue Code of 1986, as amended

      from time to time, and the regulations and published interpretations

      thereof.

 

                                       -2-

 

<PAGE>

 

            1.13. "Collateral" means all property in which the Banks are

      intended to have a security interest, as described in Section 3.

 

            1.14. "Commitment" means each Bank's obligation to make loans to the

      Borrower pursuant to this Agreement.

 

            1.15. "Commonly Controlled Entity" means an entity, whether or not

      incorporated, which is under common control with the Borrower within the

      meaning of Section 414(b) or 414(c) of the Code.

 

            1.16. "Debt" means, including but not limited to: (i) indebtedness

      or liability for borrowed money; (ii) obligations evidenced by bonds,

      debentures, notes, or other similar instruments; (iii) obligations for

      the deferred purchase price of property or services (including trade

      obligations); (iv) obligations under letters of credit; (v) obligations

      under acceptance facilities; (vi) all guaranties, endorsements (other than

      for collection or deposit in the ordinary course of business), and other

      contingent obligations to purchase, to provide funds for payment, to

      supply funds to invest in any Person or entity, or otherwise to assure a

      creditor against loss; and (vii) obligations secured by any Liens, whether

      or not the obligations have been assumed.

 

            1.17. "Debt Service Coverage Ratio" shall mean the ratio of (i)

      EBITDA for the preceding four (4) consecutive fiscal quarters of Borrower,

      to (ii) Borrower's Debt Service Requirement for the same four (4)

      consecutive fiscal quarters.

 

            1.18. "Debt Service Requirement" shall mean the sum of (i) interest

      expense (whether paid or accrued and including interest attributable to

      Capital Leases), (ii) scheduled principal payments on borrowed money, and

      (iii) capitalized lease expenditures, all determined without duplication

      and in accordance with GAAP.

 

            1.19. "EBITDA" shall mean net income plus (i) interest expense, (ii)

      depreciation, depletion, obsolescence and amortization of property, (iii)

      capitalized lease expense, and (iv) tax expense, all determined in

       accordance with GAAP, and for a particular period.

 

            1.20. "Equipment Appraisal" an appraisal of Borrower's equipment

      which is part of the Collateral hereunder, in form and content

      satisfactory to the Banks, evidencing an aggregate minimum value

      reasonably acceptable to Banks.

 

            1.21. "ERISA" means the Employee Retirement Income Security Act of

      1974, as amended from time to time, and the regulations and published

      interpretations thereof.

 

            1.22. "$4,333,550 Term Note" shall mean the $4,333,500 Promissory

      Note in form and content as set forth on Schedule "1.22" attached hereto.

 

                                       -3-

 

<PAGE>

 

            1.23. "Funded Debt" shall mean the amount outstanding under notes

      payable, capitalized lease obligations and any other similar instruments

      of Borrower, on any date of determination.

 

            1.24. "GAAP" means generally accepted accounting principles in the

      United States, applied on a consistent basis.

 

            1.25. "Guarantor" means any future Subsidiary which guarantees the

      Obligations hereunder in accordance with Section 6.12 hereof.

 

            1.26. "Guaranty Agreement" means the guaranty agreement executed and

       provided to Agent by any Guarantor in accordance with Section 6.12 hereof.

 

            1.27. "Initial Default" means any of the events specified in Section

      9, whether or not any requirement for the giving of notice, the lapse of

      time, or both, or any other condition has been satisfied.

 

            1.28. "Interest Period" shall mean a period of time equal to the

      lesser of: (i) at the election of the Borrower, thirty (30), sixty (60),

      or ninety (90) days; or (ii) the number of days between the contemplated

      effective date specified by the Borrower in the applicable Interest Rate

      Election and the maturity date of the applicable Note.

 

            1.29. "Interest Rate Election" means written notice from Borrower to

      Agent no earlier than twenty (20) days and no later than five (5) days

      prior to the contemplated effective date, substantially in form and

      content as set forth on Schedule "1.29" hereto, whereby Borrower may elect

      from time to time that interest shall accrue under the Notes at the

      Adjusted Prime Rate or the Adjusted LIBOR Rate.

 

            1.30. "Letter of Credit" means any letter of credit issued pursuant

      to Section 2.3, for which, when issued, a Letter of Credit Fee should be

       paid.

 

            1.31. "Letter of Credit Fee" means a fee of two percent (2%) per

      annum on the face amount of any Letter of Credit issued or renewed after

      the date hereof.

 

            1.32. "LIBOR Loan" means any Loan when and to the extent that the

      interest rate therefor is determined by reference to the LIBOR Rate.

 

            1.33. "LIBOR Rate" means the London Interbank Offered Rate composite

      rate per annum for U.S. Dollars for the applicable Interest Period which

      appears on the LIBOR 01 page of the Reuters information service on the day

      the Interest Rate Election is received by Agent. The LIBOR Rate shall

      remain fixed during the applicable Interest Period.

 

            1.34. "LIBOR Margin" shall mean the following:

 

                                       -4-

 

<PAGE>

 

<TABLE>

<CAPTION>

              RATIO OF FUNDED DEBT TO EBITDA                                 LIBOR MARGIN

              ------------------------------                                 ------------

<S>                                                                          <C>

Greater than 2.5 to 1                                                            3.25%

Greater than or equal to 1.75 to 1 but less than 2.5 to 1                        2.75%

Less than 1.75 to 1                                                              2.25%

</TABLE>

 

            1.35. "Lien" means any mortgage, pledge, hypothecation, assignment,

      deposit arrangement, encumbrance, lien (statutory or other), or

      preference, priority or other security agreement or preferential

      arrangement of any kind or nature whatsoever (including, without

      limitation, any conditional sale or other title retention agreement, any

      financing lease having substantially the same economic effect as any of

      the foregoing, and the filing of any financing statement under the UCC or

      comparable law of any jurisdiction in respect of any of the foregoing.)

 

            1.36. "Loan" means advances under the $4,500,000 Revolving Line, the

      $6,500,000 Term Loan or the $4,000,000 Term Loan.

 

            1.37. "Loan Documents" means this Agreement, the Notes, the Security

      Agreement, the Mortgage, the UCC-1 Financing Statement and all other

      instruments, documents or agreements required under this Agreement.

 

            1.38. "London Interbank Offered Rate" applicable to any Interest

      Period for a LIBOR Loan means the arithmetic average of the rates per

      annum (rounded upward, if necessary, to the nearest 1/100 of 1%) quoted at

      approximately 11:00 a.m. London time, by the principal loan branch of each

      Bank two Business Days prior to the first day of such Interest Period for

      the offering to leading banks in the London interbank market of Dollar

      deposits for a period, and in an amount, comparable to the Interest Period

      and principal amount of the LIBOR Loan which shall be made by the Banks

      and outstanding during such Interest Period.

 

            1.39. "Matured Default" means any of the events specified in Section

      9, provided that any requirement for the giving of notice, the lapse of

      time, or both, or any other condition has been satisfied.

 

            1.40. "Mortgage" means that certain first and prior Mortgage,

      Assignment of Rents and Leases, Security Agreement and Financing Statement

      in favor of Agent, for the benefit of the Banks, on the Mortgaged

      Property, in form and content substantially as set forth on Schedule

      "1.40" hereto.

 

            1.41. "Mortgaged Property" means the property set forth on Schedule

      "1.41" hereto.

 

            1.42. "Mortgage Related Documents" means, with regard to the

      Mortgaged Property:

 

                                       -5-

 

<PAGE>

 

                  (i) a commitment for title prior to the Closing, and final

            title insurance policy within sixty (60) days of the Closing to

            Agent, evidencing only those exceptions acceptable to Agent;

 

                  (ii) an appraisal on the Mortgaged Property, in form and

            content satisfactory to Agent, evidencing an aggregate minimum value

            reasonably acceptable to Agent;

 

                  (iii) a Phase I Environmental Audit from an auditor and in

             form and content acceptable to Agent; and

 

                  (iv) evidence that flood insurance is not required by Agent.

 

            1.43. "Multiemployer Plan" means a Plan described in Section

      4001(a)(3) of ERISA.

 

            1.44. "Non-use Fee" means the amount payable by the Borrower to the

      Agent, for the account of each Bank, from the date hereof to the

      Termination Date, computed at a rate equal to three-eighths of one percent

      (3/8%) per annum on the average daily amount of the unused portion of the

      $4,500,000 Revolving Line payable quarterly on the 15th day of each

      January, April, July and October and on the Termination Date or such

      earlier date as the $4,500,000 Revolving Line shall terminate as provided

      herein, commencing January 15, 2003. Upon receipt of any Non-use Fee, the

      Agent will promptly thereafter cause to be distributed such payment to

      each Bank in its Pro Rata Share.

 

            1.45. "Note Rate" means (i) the Adjusted Prime Rate or (ii) the

      Adjusted LIBOR Rate, as elected by Borrower pursuant to an Interest Rate

      Election; provided, that at the end of any applicable Interest Period, the

      Note Rate shall revert to the Adjusted Prime Rate unless a new Interest

      Rate Election has been properly made by Borrower.

 

            1.46. "Notes" means, separately and collectively, the $4,333,550

      Term Note, the $2,166,450 Term Note, the $2,666,800 Term Note, the

      $1,333,200 Term Note, the $3,000,150 Line Note and the $1,499,850 Line

      Note.

 

            1.47. "Obligations" means the Obligations defined in Section 3.

 

            1.48. "$1,499,850 Line Note" shall mean the $1,499,850 Promissory

      Note in form and content as set forth on Schedule "1.48" attached hereto.

 

            1.49. "$1,333,200 Term Note" shall mean the $1,333,200 Promissory

      Note in form and content as set forth on Schedule "1.49" attached hereto.

 

                                       -6-

 

<PAGE>

 

            1.50. "Opinion of Borrower's Counsel" means a legal opinion from

      Borrower's legal counsel including, without limitation, the opinions

      relating to Borrower and this loan transaction as set forth on Schedule

      "1.50" attached hereto.

 

            1.51. "PBGC" means the Pension Benefit Guaranty Corporation or any

      entity succeeding to any or all of its functions under ERISA.

 

            1.52. "Permitted Liens" means, as to Borrower and all Subsidiaries:

 

                  (1) Liens in favor of the Banks;

 

                  (2) Liens for taxes or assessments or other government charges

            or levies if not yet due and payable or, if due and payable or, if

            they are being contested in good faith by appropriate proceedings

             and for which appropriate reserves are maintained;

 

                  (3) Liens imposed by law, such as mechanics', materialmen's,

            landlords', warehousemen's, and carriers' liens, and other similar

            Liens, securing obligations incurred in the ordinary course of

            business which are not past due for more than thirty (30) days or

            which are being contested in good faith by appropriate proceedings

            and for which appropriate reserves have been established;

 

                  (4) Liens under workers' compensation, unemployment insurance,

            Social Security, or similar legislation;

 

                  (5) Liens, deposits, or pledges to secure the performance of

            bids, tenders, contracts (other than contracts for the payment of

            money), leases (permitted under the terms of this Agreement), public

            or statutory obligations, surety, stay, appeal, indemnity,

            performance or other similar bonds, or other similar obligations

            arising in the ordinary course of business;

 

                  (6) The liens described on Schedule "1.52(6)";

 

                  (7) Judgment and other similar liens arising in connection

            with court proceedings, provided the execution or other enforcement

            of such Liens is effectively bonded, stayed and the claims secured

            thereby are being actively contested in good faith and by

            appropriate proceedings;

 

                  (8) Easements, rights-of-way, restrictions, and other similar

            encumbrances which, in the aggregate, do not materially interfere

            with the occupation, use and enjoyment by the Borrower of the

            property or assets encumbered thereby in the normal course of its

            business or materially impair the value of the property subject

            thereto; and

 

                                       -7-

 

<PAGE>

 

                  (9) Purchase-money liens on any property hereafter acquired or

            the assumption of any lien on property existing at the time of such

            acquisition (and not created in contemplation of such acquisition),

            or a lien incurred in connection with any conditional sale or other

            title retention agreement or a Capital Lease; provided that:

 

                        (a) Any property subject to any of the foregoing is

                  acquired by the Borrower or any subsidiary in the ordinary

                  course of its business; and

 

                        (b) Each such lien shall attach only to the property so

                  acquired and fixed improvements thereon.

 

            1.53. "Person" means an individual, partnership, corporation,

      limited liability company, business trust, joint stock company, trust,

      unincorporated association, joint venture, governmental authority, or

      other entity of whatever nature.

 

            1.54. "Plan" means any pension plan which is covered by Title IV of

      ERISA and in respect of which the Borrower or a Commonly Controlled Entity

      is an "employer" as defined in Section 3(5) of ERISA.

 

            1.55. "Prime Loan" means any Loan when and to the extent that the

      interest rate therefor is determined by reference to the Prime Rate.

 

            1.56. "Prime Rate" means a fluctuating interest rate per annum as in

      effect from time to time, which interest rate per annum shall at all times

      be equal to the rate of interest announced publicly from time to time

       (whether or not charged in each instance), by J.P. Morgan Chase Bank

      ("Rate Bank"), as its base rate or general reference rate. Each change in

      the Prime Rate (or any component thereof) shall become effective hereunder

      without notice to Borrower (which notice is hereby expressly waived by

      Borrower), on the effective date of each such change. Should the Rate Bank

      abolish or abandon the practice of announcing or publishing a Prime Rate,

      then the Prime Rate used during the remaining term of the Notes shall be

      that interest rate or other general reference rate then in effect at the

      Rate Bank which, from time to time, in the reasonable judgment of Agent,

      most effectively approximates the initial definition of the "Prime Rate."

      Borrower acknowledges that Banks may, from time to time, extend credit to

      other borrowers at rates of interest varying from, and having no

      relationship to, the Prime Rate. The rate of interest payable upon the

      indebtedness evidenced by the Notes shall not, however, at any time exceed

      the maximum rate of interest permitted under the laws of the State of

      Oklahoma for loans of the type and character evidenced by the Notes.

 

            1.57. "Prime Rate Margin" shall mean the following:

 

                                       -8-

 

<PAGE>

 

<TABLE>

<CAPTION>

            RATIO OF FUNDED DEBT TO EBITDA                                         PRIME RATE MARGIN

            ------------------------------                                          -----------------

<S>                                                                                <C>

Less than 2.5 to 1                                                                         +.5%

Greater than or equal to 1.75 to 1 but less than 2.5 to 1                                Prime

Less than 1.75 to 1                                                                        -.5%

</TABLE>

 

            1.58. "Principal Office" means the main office of each Bank, set

       forth on the signature pages hereof.

 

            1.59. "Prohibited Transaction" means any transaction set forth in

      Section 406 of ERISA or Section 4975 of the Code.

 

            1.60. "Pro Rata Share" means, as to Bank of Oklahoma, N.A.,

      Sixty-six and Sixty-seven Hundredths percent (66.67%), and as to Local

      Oklahoma Bank, N.A., Thirty-three and Thirty-three Hundredths percent

      (33.33%).

 

            1.61. "Qualified Inventory" means the amount of inventory of

      Borrower located in the United States of America or Canada that is not

      subject to any Lien or adverse claim and that conforms to the

      representations and warranties contained in this Agreement and that is

      acceptable to the Agent in its sole discretion, less any packaging

      materials and supplies, damaged or unsalvageable goods returned or

      rejected by its customers, goods to be returned to its suppliers, goods in

      transit to third parties (other than its agent or warehouses) and goods

      out at contractors, and less any reserves required by the Agent in its

      sole discretion for special order goods, market value declines and bill

      and hold (deferred shipment) sales. Notwithstanding the foregoing,

      however, parent rolls and furnish products shall be included as Qualified

      Inventory.

 

            1.62. "Qualified Receivables" means and includes only accounts

      receivable of Borrower which meet the following specifications at the time

      they came into existence and continue to meet the same until collected in

      full.

 

                  1.62.1. The account is due and payable. No account shall be

            outstanding for more than ninety (90) days from the date of the

            applicable invoice.

 

                   1.62.2. The account arose from a bona fide outright sale of

            goods previously made or from the performance of services, but not

            from leasing, and Borrower has possession of or has delivered to

            Agent shipping and delivery receipts evidencing shipment of the

            goods or, if representing services, the services have been fully

            performed for the respective account debtor.

 

                  1.62.3. The account is not subject to any assignment, claim,

             lien or security interest of any character or subject to any

            attachment, levy, garnishment or other judicial process, except the

            security interest of Agent.

 

                                       -9-

 

<PAGE>

 

                   1.62.4. The account is not subject to any claim for credit,

            setoff, allowance, adjustment by the account debtor or counterclaim,

            and Borrower has not received any notice of any such claim for

            credit, setoff, allowance, adjustment or counterclaim from or on

            behalf of the account debtor.

 

                  1.62.5. The account arose in the ordinary course of Borrower's

            business and no notice of the bankruptcy, insolvency or adverse

            change in the financial condition of the account debtor has been

            received by Borrower or Agent.

 

                  1.62.6. Agent has not previously notified Borrower that the

            account or the account debtor is or has become unsatisfactory, based

            upon reasonable credit standards, or the account debtor has been

            adjudicated bankrupt or is subject to a similar proceeding.

 

                  1.62.7. The account is not evidenced by a judgment, an

            instrument or chattel paper.

 

                  1.62.8. The account debtor is not a governmental entity or a

            foreign (i.e., residing or incorporated in or organized under a

            jurisdiction outside the United States) person or company and is not

            a parent, subsidiary, officer, employee, director, agent or

            Affiliate of any Borrower, and the account debtor and any Borrower

            do not have common shareholders, officers or directors.

 

                  1.62.9. All receivables of one account debtor shall become

            ineligible if more than 10% of such receivables are over ninety (90)

            days past due from the invoice.

 

                  1.62.10. The accounts receivable of the account debtor cannot

             exceed 10% of the total accounts receivable, and any amounts over

            10% will be excluded from the Borrowing Base unless specifically

            waived in writing in each instance by Agent in its sole discretion.

            Notwithstanding the foregoing, the accounts receivable of Dollar

            General shall be included as Qualified Receivables up to 40% of the

            total accounts receivable, and any amounts over 40% will be excluded

            from the Borrowing Base unless specifically waived in writing in

            each instance by Agent in its sole discretion.

 

            1.63. "Reportable Event" means any of the events set forth in

      Section 4043 of ERISA.

 

            1.64. "Security Agreement" means the Security Agreement and other

      Collateral documents described in Section 3.

 

            1.65. "Subsidiary" or "Subsidiaries" means, separately and

      collectively, any corporation of which shares of stock having ordinary

      voting power (other than stock having

 

                                      -10-

 

<PAGE>

 

      such power only by reason of the happening of a contingency) to elect a

      majority of the board of directors or other managers of such corporation

      are at the time owned, or the management of which is otherwise controlled,

      directly or indirectly through one or more intermediaries, or both, by the

      Borrower.

 

            1.66. "Termination Date" means October 14, 2003.

 

            1.67. "$3,000,150 Line Note" shall mean the $3,000,150 Promissory

      Note in form and content as set forth on Schedule "1.67" attached hereto.

 

            1.68. "$2,166,450 Term Note" shall mean the $2,166,450 Promissory

      Note in form and content as set forth on Schedule "1.68" attached hereto,

 

            1.69. "$2,666,800 Term Note" shall mean the $2,666,800 Promissory

      Note in form and content as set forth on Schedule "1.69" attached hereto.

 

            1.70. "UCC" shall mean the Uniform Commercial Code of the applicable

      jurisdiction.

 

            1.71. "UCC-1 Chattel Check" means a UCC Information and/or Copy

      Request as to Borrower from the Chattel Records Division of the Secretary

      of State of Delaware, the Oklahoma County Clerk, and from any other office

      deemed necessary or advisable by Agent, which chattel checks must evidence

      no conflicting security interests, except the Permitted Liens.

 

            1.72. "UCC-1 Financing Statement" means a financing statement in

      form and content substantially as set forth on Schedule "1.72" attached

      hereto, which will be filed with the appropriate office and shall evidence

      perfection of a first and prior security interest in the collateral

      described in the Security Agreement in favor of Agent, for the benefit of

      the Banks, except for the Permitted Liens.

 

      2. AMOUNT AND TERMS OF THE LOANS.

 

            2.1. $6,500,000 Term Loan. Subject to the terms and conditions of

      this Agreement, each Bank agrees to loan Borrower said Bank's Pro Rata

      Share of the aggregate principal amount of $6,500,000, to be further

      evidenced by the $4,333,550 Term Note and the $2,166,450 Term Note. The

      purpose of the advance under the $6,500,000 Term Loan is to enable

      Borrower to refinance existing term debt.

 

            2.2. $4,000,000 Term Loan. Subject to the terms and conditions of

      this Agreement, each Bank agrees to loan Borrower said Bank's Pro Rata

      Share of the aggregate principal amount of $4,000,000, to be further

      evidenced by the $2,666,800 Term Note and the $1,333,200 Term Note. The

      purpose of the advance under the $4,000,000 Term Loan is to enable

      Borrower to refinance stockholder equity.

 

                                      -11-

 

<PAGE>

 

             2.3. $4,500,000 Revolving Line. Subject to the terms and conditions

      of this Agreement, and so long as no Initial Default or Matured Default

      has occurred, each Bank agrees to loan to Borrower (by advancing funds or

      issuing Letters of Credit in amounts not to exceed $4,500,000 in the

      aggregate), such amounts up to said Bank's Pro Rata Share of the aggregate

      principal amount of $4,500,000 as Borrower may request from time to time

      on or before the Termination Date, to be further evidenced by the

      $3,000,150 Line Note and the $1,499,850 Line Note; provided that the

      aggregate outstanding principal amount of advances at any time outstanding

      shall not exceed the lesser of (i) $4,500,000 or (ii) the Borrowing Base.

      Such Borrowing Base shall be computed on a monthly basis, and Borrower

      agrees to provide to Agent on the 15th day of each month with regard to

      the immediately preceding month all information requested in connection

      therewith, including without limitation a Borrowing Base Certificate. In

      the event Banks shall make advances in excess of the formula set forth

      above, any such advance shall, nevertheless, be secured by all Collateral.

      In the event outstanding advances with respect to Qualified Receivables or

      Qualified Inventory fail to comply with such formula, by reason of any

      accounts receivable or inventory ceasing to be so qualified, for whatever

      reason, then Borrower shall immediately notify Agent of such situation and

      shall, within five (5) Business Days of the imbalance, either (i) reduce

      the amount of the outstanding balances to bring such amounts within the

      formulas prescribed, or (ii) provide additional Qualified Receivable or

      Qualified Inventory, without any additional advance being made by Banks

      with respect thereto, necessary to comply with the formulas required

      herein. Within the limits set forth in this Section 2.3, Borrower may

      borrow, repay and reborrow at any one time and from time to time.

 

            2.4. Notice and Manner of Borrowing. The Borrower shall give the

      Agent notice of any Loans under this Agreement, specifying the date and

      amount thereof, in writing or via telephone (with voice verification by

      the appropriate officer), no later than 12:00 p.m. (Tulsa time) on the

      date of such Loan. The Agent shall promptly notify each Bank of each such

      notice. Not later than 2:00 p.m. on the date of such Loan, each Bank will

      make available to the Agent at Agent's Principal Office in immediately

      available funds, such Bank's Pro Rata Share of such Loan. After the

      Agent's receipt of such funds, and upon fulfillment of the applicable

      conditions, the Agent will make such Loan available to the Borrower in

      immediately available funds by crediting the amount thereof to the

      following account with the Agent: Account styled Orchids Paper Products

      Company, No. 209908802.

 

             2.5. Non-Receipt of Funds by Agent. Unless the Agent shall have

      received notice from a Bank prior to the date on which such Bank is to

      provide funds to the Agent for a Loan to be made by such Bank that such

      Bank will not make available to the Agent such funds, the Agent may assume

      that such Bank has made such funds available to the Agent on the date of

      such Loan in accordance with Section 2.4 and the Agent in its sole

      discretion may, but shall not be obligated to, in reliance upon such

      assumption, make available to the Borrower on such date a corresponding

      amount. If and to the extent such Bank shall not have made such funds

      available to the Agent, such Bank agrees to repay to the Agent forthwith

      on demand such corresponding amount together with interest thereon, for

      each day from the date such amount is made available to the Borrower until

      the date such amount is

 

                                      -12-

 

<PAGE>

 

      repaid to the Agent, at the customary rate set by the Agent for the

      correction of errors among banks for three (3) Business Days and

      thereafter at the Prime Rate. If such Bank shall repay to the Agent such

      corresponding amount, such amount so repaid shall constitute such Bank's

      Loan for purposes of this Agreement. If such Bank does not pay such

      corresponding amount forthwith upon the Agent's demand therefor, the Agent

      shall promptly notify the Borrower, and if the outstanding balance under

      the $4,500,000 Revolving Line is equal to or exceeds the Pro Rata Share of

      the Commitment of the remaining Bank, within ten (10) days of such notice

      the Borrower shall pay such corresponding amount to the Agent with

      interest thereon, for each day from the date such amount is made available

      to the Borrower until the date such amount is repaid to the Agent, at the

      rate of interest applicable at the time to such proposed Loan.

      Notwithstanding the above, as long as no Initial Default or Matured

      Default exists, Bank's shall not unreasonably withhold funding of an

      advance requested by Borrower in accordance with the terms of Section 2.3.

 

            Unless the Agent shall have received notice from the Borrower prior

      to the date on which any payment is due to the Banks hereunder that the

      Borrower will not make such payment in full, the Agent may assume that the

      Borrower has made such payment in full to the Agent on such date and the

      Agent in its sole discretion may, but shall not be obligated to, in

      reliance upon such assumption, cause to be distributed to each Bank on

      such due date an amount equal to the amount then due such Bank. If and to

      the extent the Borrower shall not have so made such payment in full to the

      Agent, each Bank shall repay to the Agent forthwith on demand such amount

      distributed to such Bank together with interest thereon, for each day from

      the date such amount is distributed to such Bank until the date such Bank

      repays such amount to the Agent, at the customary rate set by the Agent

      for the correction of errors among banks for three (3) Business Days and

      thereafter at the Prime Rate.

 

            2.6. Interest Rate Determination. Each Bank agrees to furnish to the

      Agent timely information for the purpose of determining each London

      Interbank Offered Rate. If any Bank shall not furnish such timely

      information to the Agent for determination of any such interest rate, the

      Agent shall determine such interest rate on the basis of timely

      information furnished by the remaining Bank. The Agent shall give prompt

      notice to the Borrower and the Banks of the applicable interest rate

      determined by the Agent pursuant to the terms of this Agreement.

 

            2.7. Method of Payment. The Borrower shall make each payment under

      this Agreement and under the Notes on the date when due in lawful money of

      the United States to the Agent at its Principal Office for the account of

      each Bank in immediately available funds. The Agent will promptly

      thereafter cause to be distributed each Bank's Pro Rata Share of such

      payments of principal and interest in like funds to each Bank. The

      Borrower hereby authorizes each Bank, if and to the extent payment is not

      made when due under this Agreement or under the Notes, to charge from time

      to time against any account of the Borrower with such Bank any amount as

       due. Whenever any payment to be made under this Agreement or under the

      Notes shall be stated to be due on a day other than a Business Day, such

      payment shall be made on the next succeeding Business Day, and such

      extension of

 

                                       -13-

 

<PAGE>

 

      time shall be included in the computation of the payment of interest and

      the Non-use Fee, as the case may be, except, in the case of a LIBOR Loan,

      if the result of such extension would be to extend such payment into

      another calendar month, such payment shall be made on the immediately

      preceding Business Day.

 

            2.8. Illegality. Notwithstanding any other provision in this

      Agreement, if any Bank determines that any applicable law, rule, or

      regulation, or any change therein, or any change in the interpretation or

      administration thereof by any governmental authority, central bank, or

      comparable agency charged with the interpretation or administration

      thereof, or compliance by such Bank with any request or directive (whether

      or not having the force of law) of any such authority, central bank, or

      comparable agency shall make it unlawful or impossible for such Bank to

      (1) maintain its Commitment, then upon notice to the Borrower by such Bank

      the Commitment of such Bank shall terminate; or (2) maintain or fund its

      LIBOR Loan, then upon notice to the Borrower by such Bank the outstanding

      principal amount of the LIBOR Loan, together with interest accrued

      thereon, and any other amounts payable to such Bank under this Agreement

      shall be repaid (a) immediately upon demand of such Bank if such change or

      compliance with such request, in the judgment of such Bank, requires

      immediate repayment; or (b) at the expiration of the last Interest Period

      to expire before the effective date of any such change or request.

 

            2.9. Disaster. Notwithstanding anything to the contrary herein, if

      Agent determines (which determination shall be conclusive) that:

 

                  (1) Quotations of interest rates for the relevant deposits

            referred to in the definition of LIBOR Rate, as the case may be, are

            not being provided in the relevant amounts or for the relative

            maturities for purposes of determining the rate of interest on a

            LIBOR Loan as provided in this Agreement; or

 

                  (2) The relevant rates of interest referred to in the

            definition of LIBOR Rate do not accurately cover the cost to the

            Banks of making or maintaining such LIBOR Loan;

 

      then the Agent shall forthwith give notice thereof to the Borrower,

      whereupon (a) the obligation of the Banks to make the LIBOR Loan shall be

      suspended until the Agent notifies the Borrower that the circumstances

      giving rise to such suspension no longer exist; and (b) any outstanding

      LIBOR Loan shall automatically be converted to a Prime Loan on the last

      day of the then current Interest Period, unless no later than such date

      the Borrower repays in full the then outstanding principal amount of each

      LIBOR Loan, together with accrued interest thereon.

 

            2.10. Increased Cost. The Borrower shall pay to the Agent, for the

      account of the applicable Bank, from time to time such amounts as any Bank

      may determine to be necessary to compensate such Bank for any costs

      incurred by such Bank which such Bank determines are attributable to its

      making or maintaining any LIBOR Loan hereunder or its obligation to

 

                                      -14-

 

<PAGE>

 

      make any such Loan hereunder, or any reduction in any amount receivable by

      such Bank under this Agreement or the Notes in respect of any such Loan or

      obligation (such increases in costs and reductions in amounts receivable

      being herein called "Additional Costs"), resulting from any change after

      the date of this Agreement in U.S. federal, state, municipal, or foreign

      laws or regulations (including Regulation D), or the adoption or making

      after such date of any interpretations, directives, or requirements

      applying to a class of banks including such Bank or under any U.S.

      federal, state, municipal, or any foreign laws or regulations (whether or

      not having the force of law) by any court or governmental or monetary

      authority charged with the interpretation or administration thereof

      ("Regulatory Change"), which: (1) changes the basis of taxation of any

      amounts payable to such Bank under this Agreement or the Notes in respect

      of any such Loan (other than taxes imposed on the overall net income of

      such Bank for any such Loan by the jurisdiction where the Principal Office

      is located); or (2) imposes or modifies any reserve, special deposit,

      compulsory loan, or similar requirements relating to any extensions of

      credit or other assets of, or any deposits with or other liabilities of,

      such Bank (including any