EXHIBIT 10.5

PLEDGE AND SECURITY AGREEMENT

This PLEDGE AND SECURITY AGREEMENT, dated as of March 31, 2008 (as amended,
supplemented, amended and restated or otherwise modified from time to time, this
“Security Agreement”), is made by FLOTEK INDUSTRIES, INC., a Delaware
corporation and each subsidiary of the Borrower signatory hereto (together with
the Borrower, the “Grantors” and individually, a “Grantor”), in favor of WELLS
FARGO BANK, N.A. (“Wells Fargo”), as administrative agent (together with any
successor(s) and assign(s) thereto, in such capacity, the “Administrative
Agent”) for each of the Secured Parties (as defined below).

WITNESSETH:

WHEREAS, pursuant to a Credit Agreement, dated as of March 31, 2008 (as amended,
supplemented, amended and restated or otherwise modified from time to time, the
“Credit Agreement”), among the Borrower, the lenders from time to time parties
thereto (the “Lenders”), Wells Fargo Bank, N.A., as the Administrative Agent, as
the issuing lender (in such capacity, the “Issuing Lender”), and as the swing
line lender (in such capacity, the “Swing Line Lender”) have extended
Commitments to the Borrower; and

WHEREAS, pursuant to the terms of the Credit Agreement, and in consideration of
the loans made by the Lenders to the Borrower and the letters of credit issued
by the Issuing Lender for the account of the Borrower or any Subsidiary of the
Borrower (including certain of the Grantors), certain Grantors have executed and
delivered certain Guaranty Agreement dated as of the date hereof (the
“Guaranty”), guaranteeing the Secured Obligations (as defined in the Credit
Agreement); and

WHEREAS, as a condition precedent to the execution of the Credit Agreement, each
Grantor is required to execute and deliver this Security Agreement; and

WHEREAS, it is in the best interests of each Grantor to execute this Security
Agreement inasmuch as each Grantor will derive substantial direct and indirect
benefits from the transactions contemplated by the Credit Agreement, and in
order to induce the Lenders or their Affiliates to enter into one or more
Hedging Arrangements with the Borrower or any Subsidiary thereof, and in order
to induce the Lenders or their Affiliates to provide Banking Services to the
Borrower or any Subsidiary thereof, each Grantor is willing to execute and
deliver and perform its obligations under this Security Agreement to secure its
obligations under the Guaranty and the other Credit Documents;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, each Grantor agrees, for the benefit of each
Secured Party, as follows:

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ARTICLE I

DEFINITIONS

SECTION 1.1. Certain Terms. The following terms (whether or not underscored)
when used in this Security Agreement, including its preamble and recitals, shall
have the following meanings (such definitions to be equally applicable to the
singular and plural forms thereof):

“Administrative Agent” is defined in the preamble.

“Certificated Equipment” means any Equipment the ownership of which is evidenced
by a certificate of title or for which applicable Legal Requirement requires the
issuance of a certificate of title.

“Collateral” is defined in Section 2.1.

“Collateral Account” is defined in Section 4.3(b).

“Computer Hardware and Software Collateral” means (a) all computer and other
electronic data processing hardware, integrated computer systems, central
processing units, memory units, display terminals, printers, features, computer
elements, card readers, tape drives, hard and soft disk drives, cables,
electrical supply hardware, generators, power equalizers, accessories and all
peripheral devices and other related computer hardware, including all operating
system software, utilities and application programs in whatsoever form,
(b) software programs (including both source code, object code and all related
applications and data files), designed for use on the computers and electronic
data processing hardware described in clause (a) above, (c) all firmware
associated therewith, (d) all documentation (including flow charts, logic
diagrams, manuals, guides, specifications, training materials, charts and pseudo
codes) with respect to such hardware, software and firmware described in the
preceding clauses (a) through (c), and (e) all rights with respect to all of the
foregoing, including copyrights, licenses, options, warranties, service
contracts, program services, test rights, maintenance rights, support rights,
improvement rights, renewal rights and indemnifications and any substitutions,
replacements, improvements, error corrections, updates, additions or model
conversions of any of the foregoing.

“Control Agreement” means an authenticated record in form and substance
reasonably satisfactory to the Administrative Agent, that provides for the
Administrative Agent (for the ratable benefit of the Secured Parties) to have
“control” (as defined in the UCC) over certain Collateral.

“Copyright Collateral” means all copyrights of any Grantor, registered or
unregistered and whether published or unpublished, now or hereafter in force
throughout the world including all of such Grantor’s rights, titles and
interests in and to all copyrights registered in the United States Copyright
Office or anywhere else in the world, including without limitation those
copyrights referred to in Item C of Schedule III hereto, and registrations and
recordings thereof and all applications for registration thereof, whether
pending or in preparation, all copyright licenses, the right to sue for past,
present and future infringements of any of the foregoing, all rights
corresponding thereto, all extensions and renewals of any thereof and all
Proceeds of the foregoing, including licenses, royalties, income, payments,
claims, damages and Proceeds of suit, which are owned or licensed by such
Grantor.

 

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“Credit Agreement” is defined in the first recital.

“Distributions” means all cash, cash dividends, stock dividends, other
distributions, liquidating dividends, shares of stock resulting from (or in
connection with the exercise of) stock splits, reclassifications, warrants,
options, non-cash dividends, and all other distributions or payments (whether
similar or dissimilar to the foregoing) on or with respect to, or on account of,
any Pledged Share or Pledged Interest or other rights or interests constituting
Collateral.

“Equipment” is defined in Section 2.1(a).

“Excluded Stock” means 34% of the Equity Interests in each direct Foreign
Subsidiary of the Grantors.

“Foreign Subsidiary” means any Subsidiary of Borrower that is a “controlled
foreign corporation” as defined in Section 957 of the Code.

“General Intangibles” means all “general intangibles” and all “payment
intangibles”, each as defined in the UCC, and shall include all interest rate or
currency protection or hedging arrangements, all tax refunds, all licenses,
permits, concessions and authorizations and all Intellectual Property Collateral
(in each case, regardless of whether characterized as general intangibles under
the UCC).

“Governmental Approval” is defined in Section 2.1(f).

“Grantor” is defined in the preamble.

“Indemnified Parties” is defined in Section 6.4(a).

“Intellectual Property Collateral” means, collectively, the Computer Hardware
and Software Collateral, the Copyright Collateral, the Patent Collateral, the
Trademark Collateral and the Trade Secrets Collateral.

“Inventory” is defined in Section 2.1(b).

“Lenders” is defined in the first recital.

“Obligor” means the Borrower or any Guarantor.

“Patent Collateral” means (a) all inventions and discoveries, whether patentable
or not, all letters patent and applications for letters patent throughout the
world, including without limitation those patents referred to in Item A of
Schedule III hereto, and any patent applications in preparation for filing,
(b) all reissues, divisions, continuations, continuations-in-part, extensions,
renewals and reexaminations of any of the items described in clause (a), (c) all
patent licenses, and other agreements providing any Grantor with the right to
use any items of the type referred to in clauses (a) and (b) above, and (d) all
Proceeds of, and rights associated with, the foregoing (including licenses,
royalties income, payments, claims, damages and Proceeds of infringement suits),
the right to sue third parties for past, present or future infringements of any
patent or patent application, and for breach or enforcement of any patent
license.

 

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“Permitted Liens” means all Liens permitted by Section 6.2 of the Credit
Agreement or any other Credit Document.

“Pledged Interests” means all Equity Interests or other ownership interests of
any Pledged Interests Issuer described in Item A of Schedule I hereto; all
registrations, certificates, articles, by-laws, regulations, limited liability
company agreements or constitutive agreements governing or representing any such
interests; all options and other rights, contractual or otherwise, at any time
existing with respect to such interests, as such interests are amended,
modified, or supplemented from time to time, and together with any interests in
any Pledge Interests Issuer taken in extension or renewal thereof or
substitution therefor.

“Pledged Interests Issuer” means each Person identified in Item A of Schedule I
hereto as the issuer of the Pledged Shares or the Pledged Interests identified
opposite the name of such Person.

“Pledged Note Issuer” means each Person identified in Item B of Schedule I
hereto as the issuer of the Pledged Notes identified opposite the name of such
Person.

“Pledged Notes” means all promissory notes of any Pledged Note Issuer evidencing
Debt incurred pursuant to Section 6.1(b) of the Credit Agreement in form and
substance reasonably satisfactory to the Administrative Agent delivered by any
Grantor to the Administrative Agent as Pledged Property hereunder, as such
promissory notes, in accordance with Section 7.3, are amended, modified or
supplemented from time to time and together with any promissory note of any
Pledged Note Issuer taken in extension or renewal thereof or substitution
therefor.

“Pledged Property” means all Pledged Notes, Pledged Interests, Pledged Shares,
all assignments of any amounts due or to become due with respect to the Pledged
Interests or the Pledged Shares, all other instruments which are now being
delivered by any Grantor to the Administrative Agent or may from time to time
hereafter be delivered by any Grantor to the Administrative Agent for the
purpose of pledge under this Security Agreement or any other Credit Document,
and all proceeds of any of the foregoing.

“Pledged Shares” means all Equity Interests of any Pledged Interests Issuer
identified under Item A of Schedule I which are delivered by any Grantor to the
Administrative Agent as Pledged Property hereunder.

“Receivables” is defined in Section 2.1(c).

“Related Contracts” is defined in Section 2.1(c).

“Secured Obligations” is defined in Section 2.2.

“Secured Parties” has the meaning set forth in the Credit Agreement.

“Securities Act” is defined in Section 6.2(a).

 

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“Security Agreement” is defined in the preamble.

“Termination Date” means the date that all Secured Obligations (other than
contingent Obligations with respect to indemnity and reimbursement of expenses
as to which no claim has been made as of the time of determination) have been
paid in full in cash, all Letters of Credit have been terminated or expired (or
been cash collateralized to the satisfaction of the Issuing Lender), all Hedging
Arrangements with any Secured Party have been terminated or novated to a
counterparty that is not Secured Party, and all Commitments shall have
terminated.

“Trademark Collateral” means (a) (i) all trademarks, trade names, corporate
names, company names, business names, fictitious business names, trade styles,
service marks, certification marks, collective marks, logos and other source or
business identifiers, and all goodwill of the business associated therewith, now
existing or hereafter adopted or acquired, including without limitation those
trademarks referred to in Item B of Schedule III hereto, whether currently in
use or not, all registrations and recordings thereof and all applications in
connection therewith, whether pending or in preparation for filing, including
registrations, recordings and applications in the United States Patent and
Trademark Office or in any office or agency of the United States of America, or
any State thereof or any other country or political subdivision thereof or
otherwise, and all common-law rights relating to the foregoing, and (ii) the
right to obtain all reissues, extensions or renewals of the foregoing
(collectively referred to as the “Trademark”), (b) all trademark licenses for
the grant by or to any Grantor of any right to use any trademark, (c) all of the
goodwill of the business connected with the use of, and symbolized by the items
described in, clause (a), and to the extent applicable clause (b), (d) the right
to sue third parties for past, present and future infringements of any Trademark
Collateral described in clause (a) and, to the extent applicable, clause (b),
and (e) all Proceeds of, and rights associated with, the foregoing, including
any claim by any Grantor against third parties for past, present or future
infringement or dilution of any Trademark, Trademark registration or Trademark
license, or for any injury to the goodwill associated with the use of any such
Trademark or for breach or enforcement of any Trademark license and all rights
corresponding thereto throughout the world.

“Trade Secrets Collateral” means all common law and statutory trade secrets and
all other confidential, proprietary or useful information and all know-how
obtained by or used in or contemplated at any time for use in the business of
any Grantor, (all of the foregoing being collectively called a “Trade Secret”),
including all Documents and things embodying, incorporating or referring in any
way to such Trade Secret, all Trade Secret licenses, and including the right to
sue for and to enjoin and to collect damages for the actual or threatened
misappropriation of any Trade Secret and for the breach or enforcement of any
such Trade Secret license.

“UCC” means the Uniform Commercial Code, as in effect in the State of Texas, as
the same may be amended from time to time.

SECTION 1.2. Credit Agreement Definitions. Unless otherwise defined herein or
the context otherwise requires, terms used in this Security Agreement, including
its preamble and recitals, have the meanings provided in the Credit Agreement.

 

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SECTION 1.3. UCC Definitions. Unless otherwise defined herein or the context
otherwise requires, terms for which meanings are provided in the UCC are used in
this Security Agreement, including its preamble and recitals, with such
meanings.

ARTICLE II

SECURITY INTEREST

SECTION 2.1. Grant of Security Interest. Each Grantor hereby pledges,
hypothecates, assigns, charges, mortgages, delivers, and transfers to the
Administrative Agent, for its benefit and the ratable benefit of each of the
Secured Parties, and hereby grants to the Administrative Agent, for its benefit
and the ratable benefit of each of the other Secured Parties, a continuing
security interest in all of such Grantor’s following property, whether now or
hereafter existing, owned or acquired by such Grantor, and wherever located,
(collectively, the “Collateral”):

(a) all equipment in all of its forms (including but not limited to drilling
platforms and rigs and remotely operated vehicles, trenchers, and other
equipment used by any Grantor, vehicles, motor vehicles, rolling stock, vessels,
aircraft), of such Grantor, wherever located, and all machinery, apparatus,
installation facilities and other tangible personal property, and all parts
thereof and all accessions, additions, attachments, improvements, substitutions,
replacements and proceeds thereto and therefore (any and all of the foregoing
being the “Equipment”);

(b) all inventory in all of its forms of such Grantor, wherever located,
including (i) all oil, gas, or other hydrocarbons and all products and
substances derived therefrom, all raw materials and work in process therefore,
finished goods thereof, and materials used or consumed in the manufacture or
production thereof, (ii) all goods in which such Grantor has an interest in mass
or a joint or other interest or right of any kind (including goods in which such
Grantor has an interest or right as consignee), and (iii) all goods which are
returned to or repossessed by such Grantor, and all accessions thereto, products
thereof and documents therefore (any and all such inventory, materials, goods,
accessions, products and documents being the “Inventory”);

(c) all accounts, money, payment intangibles, deposit accounts (including the
Collateral Accounts and all amounts on deposit therein and all cash equivalent
investments carried therein and all proceeds thereof), contracts, contract
rights, all rights constituting a right to the payment of money, chattel paper,
documents, documents of title, instruments, letters of credit, letter-of-credit
rights and General Intangibles of such Grantor, whether or not earned by
performance or arising out of or in connection with the sale or lease of goods
or the rendering of services, including all moneys due or to become due in
repayment of any loans or advances, and all rights of such Grantor now or
hereafter existing in and to all security agreements, guaranties, leases,
agreements and other contracts securing or otherwise relating to any such
accounts, money, payment intangibles, deposit accounts, contracts, contract
rights, rights to the payment of money, chattel paper, documents, documents of
title, instruments, letters of credit, letter-of-credit rights and General
Intangibles (any and all such accounts, money, payment intangibles, deposit
accounts, contracts, contract rights, rights to the payment of money, chattel
paper,

 

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documents, documents of title, instruments, letters of credit, letter-of-credit
rights and General Intangibles being the “Receivables”, and any and all such
security agreements, guaranties, leases, agreements and other contracts being
the “Related Contracts”);

(d) all Intellectual Property Collateral of such Grantor;

(e) all books, correspondence, credit files, records, invoices, tapes, cards,
computer runs, writings, data bases, information in all forms, paper and
documents and other property relating to, used or useful in connection with,
evidencing, embodying, incorporating or referring to, any of the foregoing in
this Section 2.1;

(f) all governmental approvals, permits, licenses, authorizations, consents,
rulings, tariffs, rates, certifications, waivers, exemptions, filings, claims,
orders, judgments and decrees (each a “Governmental Approval”), to the extent a
security interest may be granted therein; provided that any Governmental
Approval that by its terms or by operation of law would be void, voidable,
terminable or revocable if mortgaged, pledged or assigned hereunder is expressly
excepted and excluded from the Liens and terms of this Security Agreement,
including the grant of security interest in this Section 2.1;

(g) all interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements, and all other agreements or arrangements designed to
protect such Grantor against fluctuations in interest rates or currency exchange
rates and all commodity hedge, commodity swap, exchange, forward, future, floor,
collar or cap agreements, fixed price agreements and all other agreements or
arrangements designed to protect such Grantor against fluctuations in commodity
prices (including, without limitation, any Hedging Arrangement);

(h) to the extent not included in the foregoing, all bank accounts, investment
property, fixtures and supporting obligations;

(i) all Pledged Interests, Pledged Notes, Pledged Shares and any other Pledged
Property whether now or hereafter delivered to the Administrative Agent in
connection with this Security Agreement and all Distributions, interest, and
other payments and rights with respect to such Pledged Property;

(j) all accessions, substitutions, replacements, products, offspring, rents,
issues, profits, returns, income and proceeds of and from any and all of the
foregoing Collateral (including proceeds which constitute property of the types
described in clauses (a), (b), (c), (d), (e), (f), (g), (h), and (i) and
proceeds deposited from time to time in any lock boxes of such Grantor, and, to
the extent not otherwise included, all payments and proceeds under insurance
(whether or not the Administrative Agent is the loss payee thereof), or any
condemnation award, indemnity, warranty or guaranty, payable by reason of loss
or damage to or otherwise with respect to any of the Collateral); and

(k) all of such Grantor’s other property and rights of every kind and
description and interests therein, including without limitation, all other
“Accounts”, “Certificated Securities”, “Chattel Paper”, “Commercial Tort
Claims”, “Commodity

 

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Accounts”, “Commodity Contracts”, “Deposit Accounts”, “Documents”, “Equipment”,
“Fixtures”, “General Intangibles”, “Goods”, “Instruments”, “Inventory”,
“Investment Property”, “Letter of Credit Rights”, “Letters of Credit”, “Money”,
“Proceeds”, “Securities”, “Securities Account”, “Security Entitlements”,
“Supporting Obligations” and “Uncertificated Securities” as such terms are
defined in the UCC;

Notwithstanding anything to the contrary contained herein, Excluded Equity shall
be excluded from the lien and security interest granted hereunder (and shall, as
applicable, not be included as “Collateral”, General Intangibles”, “Investment
Property”, or “Pledged Property” for the purposes hereof.

SECTION 2.2. Security for Obligations. This Security Agreement, and the
Collateral in which the Administrative Agent for the benefit of the Secured
Parties is granted a security interest hereunder by each Grantor, secures the
prompt and indefeasible payment in full and performance of all Secured
Obligations (as defined in the Credit Agreement) of each Grantor and each other
Obligor now or hereafter existing, whether for principal, interest, costs, fees,
expenses or otherwise, howsoever created, arising or evidenced, whether direct
or indirect, primary or secondary, fixed or absolute or contingent, joint or
several, or now or hereafter existing under this Security Agreement and each
other Credit Document to which it is or may become a party (all such Secured
Obligations and other obligations of each Grantor being the “Secured
Obligations”).

SECTION 2.3. Continuing Security Interest; Transfer of Loans; Reinstatement.
This Security Agreement shall create continuing security interests in the
Collateral and shall (a) remain in full force and effect until the Termination
Date, (b) be binding upon each Grantor and its successors, transferees and
assigns, and (c) inure, together with the rights and remedies of the
Administrative Agent hereunder, to the benefit of the Administrative Agent and
each other Secured Party and its respective successors, transferees and assigns,
subject to the limitations as set forth in the Credit Agreement. Without
limiting the generality of the foregoing clause (c), any Lender may assign or
otherwise transfer (in whole or in part) any Note or any Advance held by it as
provided in Section 9.7 of the Credit Agreement, and any successor or assignee
thereof shall thereupon become vested with all the rights and benefits in
respect thereof granted to such Secured Party under any Credit Document
(including this Security Agreement), or otherwise, subject, however, to any
contrary provisions in such assignment or transfer, and as applicable to the
provisions of Section 9.7 and Article 8 of the Credit Agreement. If at any time
all or any part of any payment theretofore applied by the Administrative Agent
or any Secured Party to any of the Secured Obligations is or must be rescinded
or returned by the Administrative Agent or any such Secured Party for any reason
whatsoever (including, without limitation, the insolvency, bankruptcy,
reorganization or other similar proceeding of any Grantor or any other Person),
such Secured Obligations shall, for purposes of this Security Agreement, to the
extent that such payment is or must be rescinded or returned, be deemed to have
continued to be in existence, notwithstanding any application by the
Administrative Agent or such Secured Party or any termination agreement or
release provided to any Grantor, and this Security Agreement shall continue to
be effective or reinstated, as the case may be, as to such Secured Obligations,
all as though such application by the Administrative Agent or such Secured Party
had not been made.

 

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SECTION 2.4. Grantors Remain Liable. Anything herein to the contrary
notwithstanding, (a) each Grantor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein, and will
perform all of its duties and obligations under such contracts and agreements to
the same extent as if this Security Agreement had not been executed, (b) the
exercise by the Administrative Agent of any of its rights hereunder shall not
release any Grantor from any of its duties or obligations under any such
contracts or agreements included in the Collateral, and (c) neither the
Administrative Agent nor any other Secured Party shall have any obligation or
liability under any contracts or agreements included in the Collateral by reason
of this Security Agreement, nor shall the Administrative Agent nor any Secured
Party be obligated to perform any of the obligations or duties of any Grantor
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder.

SECTION 2.5. Delivery of Pledged Property.

(a) Other than as provided in the last sentence of Section 4.5 below, all
certificates or instruments representing or evidencing any Collateral, including
all Pledged Shares and Pledged Notes, shall be delivered to and held by or on
behalf of (or in the case of the Pledged Notes, endorsed to the order of) the
Administrative Agent pursuant hereto, shall be in suitable form for transfer by
delivery, and shall be accompanied by all necessary indorsements or instruments
of transfer or assignment, duly executed in blank.

(b) To the extent any of the Collateral constitutes an “uncertificated security”
(as defined in Section 8-102(a)(18) of the UCC) or a “security entitlement” (as
defined in Section 8-102(a)(17) of the UCC), the applicable Grantor shall take
and cause the appropriate Person (including any issuer, entitlement holder or
securities intermediary thereof) to take all actions necessary to grant
“control” (as defined in 8-106 of the UCC) to the Administrative Agent (for the
ratable benefit of the Secured Parties) over such Collateral.

SECTION 2.6. Distributions on Pledged Shares. In the event that any Distribution
with respect to any Pledged Shares or Pledged Interests pledged hereunder is
permitted to be paid (in accordance with Section 6.9 of the Credit Agreement),
such Distribution or payment may be paid directly to the applicable Grantor. If
any Distribution is made in contravention of Section 6.9 of the Credit
Agreement, the applicable Grantor shall hold the same segregated and in trust
for the Administrative Agent until paid to the Administrative Agent in
accordance with Section 4.1(e).

SECTION 2.7. Security Interest Absolute, etc. This Security Agreement shall in
all respects be a continuing, absolute, unconditional and irrevocable grant of
security interest, and shall remain in full force and effect until the
Termination Date. All rights of the Secured Parties and the security interests
granted to the Administrative Agent (for its benefit and the ratable benefit of
each other Secured Party) hereunder, and all obligations of each Grantor
hereunder, shall, in each case, be absolute, unconditional and irrevocable
irrespective of (a) any lack of validity, legality or enforceability of any
Credit Document, (b) the failure of any Secured Party (i) to assert any claim or
demand or to enforce any right or remedy against any Grantor or any other Person
under the provisions of any Credit Document or otherwise, or (ii) to exercise
any

 

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right or remedy against any other guarantor of, or collateral securing, any
Secured Obligations, (c) any change in the time, manner or place of payment of,
or in any other term of, all or any part of the Secured Obligations, or any
other extension, compromise or renewal of any Secured Obligations, (d) any
reduction, limitation, impairment or termination of any Secured Obligations
(except in the case of the occurrence of the Termination Date) for any reason,
including any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to (and each Grantor hereby waives any right to or claim
of) any defense or setoff, counterclaim, recoupment or termination whatsoever by
reason of the invalidity, illegality, nongenuineness, irregularity, compromise,
unenforceability of, or any other event or occurrence affecting, any Secured
Obligations or otherwise, (e) any amendment to, rescission, waiver, or other
modification of, or any consent to or departure from, any of the terms of any
Credit Document, (f) any addition, exchange or release of any Collateral of the
Secured Obligations, or any surrender or non-perfection of any collateral, or
any amendment to or waiver or release or addition to, or consent to or departure
from, any other guaranty held by any Secured Party securing any of the Secured
Obligations, or (g) any other circumstance which might otherwise constitute a
defense available to, or a legal or equitable discharge of, any Grantor or any
other Obligor, any surety or any guarantor.

SECTION 2.8. Waiver of Subrogation. Until one year and one day after the
Termination Date, each Grantor hereby irrevocably waives any claim or other
rights which it may now or hereafter acquire against any Obligor that arise from
the existence, payment, performance or enforcement of such Grantor’s obligations
under this Security Agreement or any other Credit Document, including any right
of subrogation, reimbursement, exoneration or indemnification, any right to
participate in any claim or remedy of any Secured Party against any Obligor or
any collateral which any Secured Party now has or hereafter acquires, whether or
not such claim, remedy or right arises in equity, or under contract, statute or
common law, including the right to take or receive from any Obligor, directly or
indirectly, in cash or other property or by set-off or in any manner, payment or
security on account of such claim or other rights. If any amount shall be paid
to any Grantor in violation of the preceding sentence and the Secured
Obligations shall not have been indefeasibly paid in full in cash or all
Commitments and all other commitments by any Secured Party to any Obligor have
not been terminated or all Letters of Credit have not terminated or expired,
then such amount shall be deemed to have been paid to such Grantor for the
benefit of, and held in trust for, the Administrative Agent (on behalf of the
Secured Parties), and shall forthwith be paid to the Administrative Agent to be
credited and applied upon the Secured Obligations, whether matured or unmatured.
Each Grantor acknowledges that it will receive direct and indirect benefits from
the financing arrangements contemplated by the Credit Agreement and that the
waiver set forth in this Section 2.8 is knowingly made in contemplation of such
benefits.

SECTION 2.9. Election of Remedies. Except as otherwise provided in the Credit
Agreement, if any Secured Party may, under applicable law, proceed to realize
its benefits under any of this Security Agreement or the other Credit Documents
giving any Secured Party a lien upon any Collateral, either by judicial
foreclosure or by non-judicial sale or enforcement, such Secured Party may, at
its sole option, determine which of its remedies or rights it may pursue without
affecting any of its rights and remedies under this Security Agreement. If, in
the exercise of any of its rights and remedies, any Secured Party shall forfeit
any of its rights or remedies, including its right to enter a deficiency
judgment against any Obligor or any other

 

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Person, whether because of any applicable laws pertaining to “election of
remedies” or the like, each Grantor hereby consents to such action by such
Secured Party and waives any claim based upon such action, even if such action
by such Secured Party shall result in a full or partial loss of any rights of
subrogation that such Grantor might otherwise have had but for such action by
such Secured Party.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

In order to induce the Secured Parties to enter into the Credit Agreement and
make Advances thereunder and for the Issuing Lender to issue Letters of Credit
thereunder, and to induce the Secured Parties to enter into Hedging
Arrangements, each Grantor represents and warrants unto each Secured Party, as
at date hereof and at the date of each pledge and delivery hereunder by such
Grantor to the Administrative Agent of any Collateral (including each pledge and
delivery of any Pledged Shares or Pledged Notes), as set forth in this Article.

SECTION 3.1. Validity, etc. This Security Agreement and the other Credit
Documents to which such Grantor is a party constitutes the legal, valid and
binding obligations of such Grantor, enforceable against such Grantor in
accordance with their respective terms (except, in any case, as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors’ rights generally and by
principles of equity).

SECTION 3.2. Ownership, No Liens, etc. Such Grantor is the legal and beneficial
owner of, and has good and defensible title to (and has full right and authority
to pledge, grant and assign) the Collateral, free and clear of all Liens, except
for any Lien (a) granted pursuant to this Security Agreement in favor of the
Administrative Agent, or (b) that is a Permitted Lien. No effective UCC
financing statement or other filing similar in effect covering all or any part
of the Collateral is on file in any recording office, except those filed in
favor of the Administrative Agent relating to this Security Agreement, Permitted
Liens or as to which a duly authorized termination statement relating to such
UCC financing statement or other instrument has been delivered to the
Administrative Agent on the Effective Date. This Security Agreement creates a
valid security interest in the Collateral, securing the payment of the Secured
Obligations, and, except for the proper filing of the applicable filing
statements with the Secretary of State of the State of Delaware, all filings and
other actions necessary to perfect and protect such security interest have been
duly taken and such security interest shall be a first priority security
interest.

SECTION 3.3. As to Equity Interests of the Subsidiaries, Investment Property.

(a) With respect to the Pledged Shares, all such Pledged Shares are duly
authorized and validly issued, fully paid and non-assessable, and represented by
a certificate.

(b) With respect to the Pledged Interests, no such Pledged Interests (i) are
dealt in or traded on securities exchanges or in securities markets,
(ii) expressly provide that such Pledged Interests are securities governed by
Article 8 of the UCC, or (iii) are held in a Securities Account, except, with
respect to this clause (b), Pledged Interests (A)

 

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for which the Administrative Agent is the registered owner or (B) with respect
to which the Pledged Interests Issuer has agreed in an authenticated record with
such Grantor and the Administrative Agent to comply with any instructions of the
Administrative Agent without the consent of such Grantor.

(c) Such Grantor has delivered all Certificated Securities constituting
Collateral held by such Grantor on the Effective Date to the Administrative
Agent, together with duly executed undated blank stock powers, or other
equivalent instruments of transfer reasonably acceptable to the Administrative
Agent.

(d) With respect to Uncertificated Securities constituting Collateral owned by
such Grantor, such Grantor has caused the Pledged Interests Issuer or other
issuer thereof either (i) to register the Administrative Agent as the registered
owner of such security, or (ii) to agree in an authenticated record with such
Grantor and the Administrative Agent that such Pledged Interests Issuer or other
issuer will comply with instructions with respect to such security originated by
the Administrative Agent without further consent of such Grantor.

(e) The percentage of the issued and outstanding Pledged Shares and Pledged
Interests of each Issuer pledged by such Grantor hereunder is as set forth on
Schedule I. All of the Pledged Shares and Pledged Interests constitute one
hundred percent (100%) of such Grantor’s interest in the applicable Pledged
Interests Issuer and the percentage of the total membership, partnership and/or
other equity interests in the Pledged Interests Issuer indicated on Schedule I.

(f) Such Grantor has no outstanding rights, rights to subscribe, options,
warrants or convertible securities outstanding or any other rights outstanding
whereby any Person would be entitled to acquire shares, member interests or
units of any Pledged Interest Issuer.

(g) In the case of each Pledged Note, all of such Pledged Notes have been duly
authorized, executed, endorsed, issued and delivered, and are the legal, valid
and binding obligation of the issuers thereof, and are not in default.

SECTION 3.4. Grantor’s Name, Location, etc.

(a) (i) the jurisdiction in which such Grantor is located for purposes of
Sections 9.301 and 9.307 of the UCC is set forth in Item A-1 of Schedule II
hereto, (ii) the place of business of such Grantor or, if such Grantor has more
than one place of business, the chief executive office of such Grantor and the
office where such Grantor keeps its records concerning the Receivables, and all
originals of all chattel paper which evidence Receivables, is set forth in Item
A-2 of Schedule II hereto, and (iii) such Grantor’s federal taxpayer
identification number is set forth in Item A-3 of Schedule II hereto.

(b) Such Grantor has not been known by any legal name different from the one set
forth on the signature page hereto, nor has such Grantor been the subject of any
merger or other corporate reorganization, except as set forth in Item B of
Schedule II hereto.

 

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(c) Such Grantor is not a party to any federal, state or local government
contract except contracts with Mineral Management Services or other Federal
leases.

(d) Such Grantor does not maintain any Deposit Accounts, Securities Accounts or
Commodity Accounts with any Person, in each case, except as set forth on Item C
of Schedule II.

(e) None of the Receivables is evidenced by a promissory note or other
instrument other than a promissory note or instrument that has been delivered to
the Administrative Agent (with appropriate endorsements).

(f) Such Grantor is not the beneficiary of any Letters of Credit, except as set
forth on Item D of Schedule II (as such schedule may be amended or supplemented
from time to time) hereto and such Grantor has obtained the consent of each
issuer of any Letter of Credit with a stated amount in excess of $250,000 to the
assignment of the proceeds of the letter of credit to the Administrative Agent.

(g) Such Grantor does not have Commercial Tort Claims (i) in which a suit has
been filed by such Grantor, and (ii) where the amount of damages reasonably
expected to be claimed exceeds $250,000, except as set forth on Item E of
Schedule II.

(h) The name set forth on the signature page attached hereto is the true and
correct legal name (as defined in the UCC) of such Grantor.

(i) Such Grantor has obtained a legal, valid and enforceable consent of each
issuer of any Letter of Credit with a stated amount in excess of $250,000 to the
assignment of the Proceeds of such Letter of Credit to the Administrative Agent
and has not consented to, and is otherwise aware of, any Person (other than the
Administrative Agent pursuant hereto) having control (within the meaning of
Section 9.104 of the UCC) over, or any other interest in any of such Grantor’s
rights in respect thereof.

SECTION 3.5. Possession of Inventory, Control; etc. Such Grantor (a) has
exclusive possession and control, subject to Permitted Liens, of the Equipment
and Inventory, and (b) is the sole entitlement holder of its Accounts and no
other Person (other than the Administrative Agent pursuant to this Security
Agreement or any other Person with respect to Permitted Liens) has “control” or
“possession” of, or any other interest in, any of its Accounts or any other
securities or property credited thereto except as permitted pursuant to this
Security Agreement.

SECTION 3.6. Negotiable Documents, Instruments and Chattel Paper. Such Grantor
has, contemporaneously herewith, delivered to the Administrative Agent
possession of all originals of all Documents, Instruments, Promissory Notes,
Pledged Notes and tangible Chattel Paper owned or held by such Grantor (duly
endorsed, in blank, if requested by the Administrative Agent).

 

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SECTION 3.7. Intellectual Property Collateral. Such Grantor represents that
except for any Patent Collateral, Trademark Collateral, and Copyright Collateral
specified in Item A, Item B and Item C, respectively, of Schedule III hereto,
and any and Trade Secrets Collateral, such Grantor owns and has no interests in
any Intellectual Property Collateral as of the date hereof, other than the
Computer Hardware and Software Collateral. Such Grantor further represents and
warrants that, with respect to all Intellectual Property Collateral (a) such
Intellectual Property Collateral is valid, subsisting, unexpired and enforceable
and has not been abandoned or adjudged invalid or unenforceable, in whole or in
part except as could not reasonably be expected to have a Material Adverse
Effect, (b) such Grantor is the sole and exclusive owner of the entire and
unencumbered right, title and interest in and to such Intellectual Property
Collateral, subject to Permitted Liens, and no claim has been made that the use
of such Intellectual Property Collateral does or may, conflict with, infringe,
misappropriate, dilute, misuse or otherwise violate any of the rights of any
third party in any material respects, (c) such Grantor has made all necessary
filings and recordations to protect its interest in such material Intellectual
Property Collateral, including recordations of any of its interests in the
Patent Collateral and Trademark Collateral in the United States Patent and
Trademark Office and in corresponding offices throughout the world, and its
claims to the Copyright Collateral in the United States Copyright Office and in
corresponding offices throughout the world, and, to the extent necessary, has
used proper statutory notice in connection with its use of any material patent,
Trademark and copyright in any of the Intellectual Property Collateral, (d) such
Grantor has taken all reasonable steps to safeguard its Trade Secrets and to its
knowledge none of the Trade Secrets of such Grantor has been used, divulged,
disclosed or appropriated for the benefit of any other Person other than such
Grantor, (e) to such Grantor’s knowledge, no third party is infringing upon any
material Intellectual Property owned or used by such Grantor in any material
respect, or any of its respective licensees, (f) no settlement or consents,
covenants not to sue, nonassertion assurances, or releases have been entered
into by such Grantor or to which such Grantor is bound that adversely affects
its rights to own or use any Intellectual Property except as would not
reasonably have a Material Adverse Effect, (g) such Grantor has not made a
previous assignment, sale, transfer or agreement constituting a present or
future assignment, sale or transfer of any Intellectual Property for purposes of
granting a security interest or as Collateral that has not been terminated or
released, (h) such Grantor uses adequate standards of quality in the
manufacture, distribution, and sale of all products sold and in the provision of
all services rendered under or in connection with any Trademarks and has taken
all commercially reasonable action necessary to insure that any licensees of any
Trademarks owned by such Grantor use such adequate standards of quality, (i) the
consummation of the transactions contemplated by the Credit Agreement and this
Security Agreement will not result in the termination or material impairment of
any material portion of the Intellectual Property Collateral, and (j) such
Grantor owns directly or is entitled to use by license or otherwise, any
patents, trademarks, tradenames, Trade Secrets, copyrights, mask works,
licenses, technology, know-how, processes and rights with respect to any of the
foregoing used in, and necessary for the conduct of such Grantor’s business in
any material respect.

SECTION 3.8. Authorization, Approval, etc. Except as have been obtained or made
and are in full force and effect, no Governmental Approval, authorization,
approval or other action by, and no notice to or filing with, any Governmental
Authority or any other third party is required either (a) for the grant by such
Grantor of the security interest granted hereby or for the execution, delivery
and performance of this Security Agreement by such Grantor, (b) for the

 

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perfection or maintenance of the security interests hereunder including the
first priority (subject to Permitted Liens) nature of such security interest
(except with respect to the filing statements or, with respect to Intellectual
Property Collateral, the recordation of any agreements with the U.S. Patent and
Trademark Office or the U.S. Copyright Office) or the exercise by the
Administrative Agent of its rights and remedies hereunder, or (c) for the
exercise by the Administrative Agent of the voting or other rights provided for
in this Security Agreement, except (i) with respect to any Pledged Shares or
Pledged Interests, as may be required in connection with a disposition of such
Pledged Shares or Pledged Interests by laws affecting the offering and sale of
securities generally, the remedies in respect of the Collateral pursuant to this
Security Agreement and (ii) any “change of control” or similar filings required
by state licensing agencies.

SECTION 3.9. Best Interests. It is in the best interests of each Grantor (other
than the Borrower) to execute this Security Agreement in as much as such Grantor
will, as a result of being an Affiliate or Subsidiary of the Borrower, derive
substantial direct and indirect benefits from the Loans and other extensions of
credit made from time to time to one or both of the Borrower by the Lenders and
the Issuing Lender pursuant to the Credit Agreement, and each Grantor agrees
that the Secured Parties are relying on this representation in agreeing to make
such Loans and other extensions of credit pursuant to the Credit Agreement to
the Borrower.

SECTION 3.10. Certificated Equipment. The aggregate book value of all
Certificated Equipment owned by all Grantors as to which the relevant
certificates of title have not been endorsed and delivered to the Administrative
Agent, is less than $3,000,000.

SECTION 3.11. Reaffirmation of Representations and Warranties. All of the
representations and warranties made by the Borrower or any other Obligor
regarding any Grantor in the Credit Agreement or in any other Credit Document
are true and correct in all respects as if such representations and warranties
were incorporated herein in their entirety and made by such Grantor.

ARTICLE IV

COVENANTS

Each Grantor covenants and agrees that, until the Termination Date, it will
perform, comply with and be bound by the obligations set forth below.

SECTION 4.1. As to Investment Property, etc.

(a) Equity Interests of Subsidiaries. No Grantor shall allow or permit any of
its Subsidiaries (i) that is a corporation, business trust, joint stock company
or similar Person, to issue Uncertificated Securities, unless such Person
promptly takes the actions set forth in Section 4.1(b)(ii) with respect to any
such Uncertificated Securities, (ii) that is a partnership or limited liability
company, to (A) issue Equity Interests that are to be dealt in or traded on
securities exchanges or in securities markets, (B) expressly provide in its
organizational documents that its Equity Interests are securities governed by
Article 8 of the UCC, or (C) place such Subsidiary’s Equity Interests in a
Securities Account, unless

 

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such Person promptly takes the actions set forth in Section 4.1(b)(ii) with
respect to any such Equity Interests , and (iii) to issue Equity Interests in
addition to or in substitution for the Pledged Property or any other Equity
Interests pledged hereunder, except for additional Equity Interests issued to
such Grantor; provided that (A) such Equity Interests are immediately pledged
and delivered to the Administrative Agent, and (B) such Grantor delivers a
supplement to Schedule I to the Administrative Agent identifying such new Equity
Interests as Pledged Property, in each case pursuant to the terms of this
Security Agreement. No Grantor shall permit any of its Subsidiaries to issue any
warrants, options, contracts or other commitments or other securities that are
convertible to any of the foregoing or that entitle any Person to purchase any
of the foregoing, and except for this Security Agreement or any other Credit
Document, shall not, and shall not permit any of its Subsidiaries to, enter into
any agreement creating any restriction or condition upon the transfer, voting or
control of any Pledged Property.

(b) Investment Property (other than Certificated Securities). With respect to
any Deposit Accounts, Securities Accounts, Commodity Accounts, Commodity
Contracts or Security Entitlements constituting Investment Property owned or
held by any Grantor, such Grantor will, unless otherwise permitted under the
Credit Agreement, upon the Administrative Agent’s request either (i) cause the
intermediary maintaining such Investment Property to execute a Control Agreement
relating to such Investment Property pursuant to which such intermediary agrees
to comply with the Administrative Agent’s instructions with respect to such
Investment Property without further consent by such Grantor, or (ii) transfer
such Investment Property to intermediary’s that have or will agree to execute
such Control Agreements. With respect to any Uncertificated Securities (other
than Uncertificated Securities credited to a Securities Account) constituting
Investment Property owned or held by any Grantor, such Grantor will cause the
Pledged Interests Issuer or other issuer of such securities to either
(i) register the Administrative Agent as the registered owner thereof on the
books and records of the issuer, or (ii) execute a Control Agreement relating to
such Investment Property pursuant to which the Pledged Interests Issuer or other
issuer agrees to comply with the Administrative Agent’s instructions with
respect to such Uncertificated Securities without further consent by such
Grantor.

(c) Certificated Securities (Stock Powers). Each Grantor agrees that all Pledged
Shares (and all other certificated shares of Equity Interests constituting
Collateral) delivered by such Grantor pursuant to this Security Agreement will
be accompanied by duly endorsed undated blank stock powers, or other equivalent
instruments of transfer acceptable to the Administrative Agent. Each Grantor
will, from time to time upon the request of the Administrative Agent, promptly
deliver to the Administrative Agent such stock powers, instruments and similar
documents, satisfactory in form and substance to the Administrative Agent, with
respect to the Collateral as the Administrative Agent may reasonably request and
will, from time to time upon the request of the Administrative Agent during the
occurrence of any Default, promptly transfer any Pledged Shares, Pledged
Interests or other shares of Equity Interests constituting Collateral into the
name of any nominee designated by the Administrative Agent.

 

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(d) Continuous Pledge. Each Grantor will (subject to the terms of the Credit
Agreement) deliver to the Administrative Agent and at all times keep pledged to
the Administrative Agent pursuant hereto, on a first-priority, perfected basis
all Pledged Property, Investment Property, all Dividends and Distributions with
respect thereto, all Payment Intangibles to the extent they are evidenced by a
Document, Instrument, Promissory Note or Chattel Paper, and all interest and
principal with respect to such Payment Intangibles, and all Proceeds and rights
from time to time received by or distributable to such Grantor in respect of any
of the foregoing Collateral. Each Grantor agrees that it will, promptly (but in
any event no later than ten (10) Business Days) following receipt thereof,
deliver to the Administrative Agent possession of all originals of Pledged
Interests, Pledged Shares, Pledged Notes and any other Pledged Property,
negotiable Documents, Instruments, Promissory Notes and Chattel Paper that it
acquires following the Effective Date and shall deliver to the Administrative
Agent a supplement to Schedule I identifying any such new Pledged Interests,
Pledged Shares, Pledged Notes or other Pledged Property.

(e) Voting Rights; Dividends, etc. Each Grantor agrees:

(i) that promptly upon receipt of notice of the occurrence and continuance of an
Event of Default from the Administrative Agent and without any request therefor
by the Administrative Agent, so long as such Event of Default shall continue, to
deliver (properly endorsed where required hereby or requested by the
Administrative Agent) to the Administrative Agent all Distributions with respect
to Investment Property, all interest principal and other cash payments on
Payment Intangibles, the Pledged Property and all Proceeds of the Pledged
Property or any other Collateral, in case thereafter received by such Grantor,
all of which shall be held by the Administrative Agent as additional Collateral;
and

(ii) if an Event of Default shall have occurred and be continuing and the
Administrative Agent has notified such Grantor of the Administrative Agent’s
intention to exercise its voting power under this Section 4.1(e)(iii),

(A) the Administrative Agent may exercise (to the exclusion of such Grantor) the
voting power and all other incidental rights of ownership with respect to any
Pledged Shares, Investment Property or other Equity Interests constituting
Collateral. EACH GRANTOR HEREBY GRANTS THE ADMINISTRATIVE AGENT AN IRREVOCABLE
PROXY (WHICH IRREVOCABLE PROXY SHALL CONTINUE IN EFFECT UNTIL SUCH DEFAULT SHALL
HAVE BEEN CURED OR WAIVED) EXERCISABLE UNDER SUCH CIRCUMSTANCES, TO VOTE THE
PLEDGED SHARES, PLEDGED INTERESTS, INVESTMENT PROPERTY AND SUCH OTHER
COLLATERAL; AND

 

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(B) promptly to deliver to the Administrative Agent such additional proxies and
other documents as may be necessary to allow the Administrative Agent to
exercise such voting power.

All Distributions, interest, principal, cash payments, Payment Intangibles and
Proceeds that may at any time and from time to time be held by any Grantor but
which such Grantor is then obligated to deliver to the Administrative Agent,
shall, until delivery to the Administrative Agent, be held by such Grantor
separate and apart from its other property in trust for the Administrative
Agent. The Administrative Agent agrees that unless a Default shall have occurred
and be continuing and the Administrative Agent shall have given the notice
referred to in Section 4.1 (e), each Grantor shall be entitled to receive and
retain all Distributions and shall have the exclusive voting power, and is
granted a proxy, with respect to any Equity Interests (including any of the
Pledged Shares) constituting Collateral. Administrative Agent shall, upon the
written request of any Grantor, promptly deliver such proxies and other
documents, if any, as shall be reasonably requested by such Grantor which are
necessary to allow such Grantor to exercise that voting power with respect to
any such Equity Interests (including any of the Pledged Shares) constituting
Collateral; provided, however, that no vote shall be cast, or consent, waiver,
or ratification given, or action taken by such Grantor that would violate any
provision of the Credit Agreement or any other Credit Document (including this
Security Agreement).

SECTION 4.2. Organizational Documents; Change of Name, etc. No Grantor will
change its state of incorporation, formation or organization or its name,
identity, organizational identification number or corporate structure unless
such Grantor shall have (a) given the Administrative Agent at least thirty
(30) days’ prior notice of such change, (b) obtained the consent of the
requisite Secured Parties, if such consent is so required by the Credit
Documents, and (c) taken all actions necessary or as requested by the
Administrative Agent to ensure that the Liens on the Collateral granted in favor
of the Administrative Agent for the benefit of the Lender Parties remain
perfected, first-priority Liens.

SECTION 4.3. As to Accounts.

(a) Each Grantor shall have the right to collect all Accounts so long as no
Event of Default shall have occurred and be continuing.

(b) Upon (i) the occurrence and continuance of an Event of Default and (ii) the
delivery of notice by the Administrative Agent to each Grantor, all Proceeds of
Collateral received by any Grantor shall be delivered in kind to the
Administrative Agent for deposit in a Deposit Account of such Grantor
(A) maintained with the Administrative Agent or (B) maintained at a depositary
bank other than the Administrative Agent to which such Grantor, the
Administrative Agent and the depositary bank have entered into a Control
Agreement in form and substance acceptable to the Administrative Agent in its
sole discretion providing that the depositary bank will comply with the
instructions originated by the Administrative Agent directing disposition of the
funds in the account without further consent by such Grantor (any such Deposit
Accounts, together with any other Accounts pursuant to which any portion of the
Collateral is deposited with the Administrative Agent, a “Collateral Account,”
and collectively, the “Collateral Accounts”), and such Grantor shall not
commingle any such Proceeds, and shall hold

 

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separate and apart from all other property, all such Proceeds in express trust
for the benefit of the Administrative Agent until delivery thereof is made to
the Administrative Agent.

(c) Following the delivery of notice pursuant to clause (b)(ii), the
Administrative Agent shall have the right to apply any amount in the Collateral
Account to the payment of any Secured Obligations which are due and payable or
in accordance with the Credit Documents.

(d) With respect to each of the Collateral Accounts, it is hereby confirmed and
agreed that (i) deposits in such Collateral Account are subject to a security
interest as contemplated hereby, (ii) such Collateral Account shall be under the
control of the Administrative Agent and (iii) the Administrative Agent shall
have the sole right of withdrawal over such Collateral Account; provided that
withdrawals shall only be made during the existence of a Default.

(e) No Grantor shall adjust, settle, or compromise the amount or payment of any
Receivable, nor release wholly or partly any account debtor or obligor thereof,
nor allow any credit or discount thereon; provided that, a Grantor may make such
adjustments, settlements or compromises and release wholly or partly any account
debtor or obligor thereof and allow any credit or discounts thereon so long as
(i) no Event of Default has occurred and is continuing, (ii) such action is
taken in the ordinary course of business and consistent with past practices,
(iii) such action is, in such Grantor’s good faith business judgment,
commercially reasonable, and (iv) the aggregate amount of such adjustments,
settlements and compromises which are effected between redeterminations of the
Borrowing Base under the Credit Agreement shall not exceed $200,000.

SECTION 4.4. As to Grantor’s Use of Collateral.

(a) Subject to clause (b), each Grantor (i) may in the ordinary course of its
business, at its own expense, sell, lease or furnish under the contracts of
service any of the Inventory normally held by such Grantor for such purpose, and
use and consume, in the ordinary course of its business, any raw materials, work
in process or materials normally held by such Grantor for such purpose,
(ii) shall, at its own expense, endeavor to collect, as and when due, all
amounts due with respect to any of the Collateral, including the taking of such
action with respect to such collection as the Administrative Agent may request
following the occurrence and during the continuance of a Default or, in the
absence of such request, as such Grantor may deem advisable, and (iii) may
grant, in the ordinary course of business, to any party obligated on any of the
Collateral, any rebate, refund or allowance to which such party may be lawfully
entitled, and may accept, in connection therewith, the return of Goods, the sale
or lease of which shall have given rise to such Collateral.

(b) At any time following the occurrence and during the continuance of a
Default, whether before or after the maturity of any of the Secured Obligations,
the Administrative Agent may (i) revoke any or all of the rights of any Grantor
set forth in clause (a), (ii) notify any parties obligated on any of the
Collateral to make payment to the Administrative Agent of any amounts due or to
become due thereunder, and (iii)

 

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enforce collection of any of the Collateral by suit or otherwise and surrender,
release, or exchange all or any part thereof, or compromise or extend or renew
for any period (whether or not longer than the original period) any indebtedness
thereunder or evidenced thereby.

(c) Upon request of the Administrative Agent following the occurrence and during
the continuance of a Default, each Grantor will, at its own expense, notify any
parties obligated on any of the Collateral to make payment to the Administrative
Agent of any amounts due or to become due thereunder.

(d) At any time following the occurrence and during the continuation of a
Default, the Administrative Agent may endorse, in the name of the applicable
Grantor, any item, howsoever received by the Administrative Agent, representing
any payment on or other Proceeds of any of the Collateral.

SECTION 4.5. As to Equipment and Inventory and Goods. Each Grantor hereby agrees
that it shall (a) keep all of the Equipment and Inventory (other than Inventory
sold in the ordinary course of business) and Goods located in a jurisdiction
within the United States of America or its offshore waters where all
representations and warranties set forth in Article III shall be true and
correct, and all action required pursuant to the second sentence of Section 4.12
shall have been taken with respect to the Equipment and Inventory and Goods, and
(b) pay promptly when due all property and other taxes, assessments and
governmental charges or levies imposed upon, and all claims (including claims
for labor, materials and supplies) against, the Equipment and Inventory and
Goods, except to the extent the validity thereof is being contested in good
faith by appropriate proceedings and for which adequate reserves in accordance
with GAAP have been set aside. Notwithstanding the foregoing, the Grantors may
keep Equipment, Inventory and Goods located in a jurisdiction outside of the
United States of America or its offshore waters so long as the aggregate book
value of the Equipment, Inventory and Goods located in such foreign
jurisdictions does not exceed $2,500,000 at any time. With respect to
Certificated Equipment now or hereafter owned by a Grantor, such Grantor shall
not be required to deliver such title to the Administrative Agent or take any
other action to enable the Administrative Agent perfect its Lien in such
Equipment; provided that if (i) a Default has occurred and is continuing,
(ii) the value of such Certificated Equipment is used in determining the OLV of
Fixed Assets under the Credit Agreement or (iii) the aggregate value of
Certificated Equipment as to which the relevant certificates of title have not
been endorsed and delivered to the Administrative Agent shall exceed $3,000,000,
then such Grantor agrees to take such action (or cause its Subsidiaries to take
such action), including endorsing certificates of title or executing
applications for transfer of title, as is reasonably required by the
Administrative Agent to enable it to properly perfect and protect its Lien on
such Certificated Equipment and to transfer the same.

SECTION 4.6. As to Intellectual Property Collateral. Each Grantor covenants and
agrees to comply with the following provisions as such provisions relate to any
Intellectual Property Collateral material to the operations or business of such
Grantor:

(a) such Grantor will not (i) do or fail to perform any act whereby any material
Patent Collateral may lapse or become abandoned or dedicated to the public or

 

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unenforceable, (ii) permit any of its licensees to (A) fail to continue to use
any of the Trademark Collateral in order to maintain all of the Trademark
Collateral in full force free from any claim of abandonment for non-use,
(B) fail to maintain as in the past the quality of products and services offered
under all of the Trademark Collateral, (C) fail to employ all of the Trademark
Collateral registered with any federal or state or foreign authority with an
appropriate notice of such registration, (D) adopt or use any other Trademark
which is confusingly similar or a colorable imitation of any of the Trademark
Collateral, (E) use any of the Trademark Collateral registered with any federal,
state or foreign authority except for the uses for which registration or
application for registration of all of the Trademark Collateral has been made,
or (F) do or permit any act or knowingly omit to do any act whereby any of the
Trademark Collateral may lapse or become invalid or unenforceable, or (iii) do
or permit any act or knowingly omit to do any act whereby any of the Copyright
Collateral or any of the Trade Secrets Collateral may lapse or become invalid or
unenforceable or placed in the public domain except upon expiration of the end
of an unrenewable term of a registration thereof, unless, in the case of any of
the foregoing requirements in clauses (i), (ii) and (iii), such Grantor shall
either (x) reasonably and in good faith determine that any of such Intellectual
Property Collateral is of negligible economic value to such Grantor, or (y) the
loss of the Intellectual Property Collateral would not be reasonably likely to
have a Material Adverse Effect on the business;

(b) such Grantor shall promptly notify the Administrative Agent if it knows that
any application or registration relating to any material item of the
Intellectual Property Collateral may become abandoned or dedicated to the public
or placed in the public domain or invalid or unenforceable, or of any adverse
determination or development (including the institution of, or any such
determination or development in, any proceeding in the United States Patent and
Trademark Office, the United States Copyright Office or any foreign counterpart
thereof or any court) regarding such Grantor’s ownership of any of the
Intellectual Property Collateral, its right to register the same or to keep and
maintain and enforce the same;

(c) in no event will such Grantor or any of its agents, employees, designees or
licensees file an application for the registration of any material Intellectual
Property Collateral with the United States Patent and Trademark Office, the
United States Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, unless it promptly informs the
Administrative Agent, and upon request of the Administrative Agent (subject to
the terms of the Credit Agreement), executes and delivers all agreements,
instruments and documents as the Administrative Agent may reasonably request to
evidence the Administrative Agent’s security interest in such Intellectual
Property Collateral;

(d) such Grantor will take all necessary steps, including in any proceeding
before the United States Patent and Trademark Office, the United States
Copyright Office or (subject to the terms of the Credit Agreement) any similar
office or agency in any other country or any political subdivision thereof, to
maintain and pursue any application (and to obtain the relevant registration)
filed with respect to, and to maintain any registration of, each material
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applications for renewal, affidavits of use, affidavits of incontestability and
opposition, interference and cancellation proceedings and the payment of fees
and taxes (except to the extent that dedication, abandonment or invalidation is
permitted under the foregoing clause (a) or (b));

(e) following the obtaining of an interest in any material Intellectual Property
by such Grantor, such Grantor shall deliver a supplement to Schedule II
identifying such new Intellectual Property; and

(f) following the obtaining of an interest in any material Intellectual Property
by such Grantor or, following the occurrence and during the continuance of an
Event of Default, upon the request of the Administrative Agent, such Grantor
shall deliver all agreements, instruments and documents the Administrative Agent
may reasonably request to evidence the Administrative Agent’s security interest
in such Intellectual Property Collateral and as may otherwise be required to
acknowledge or register or perfect the Administrative Agent’s interest in any
part of such item of Intellectual Property Collateral unless such Grantor shall
determine in good faith (with the consent of the Administrative Agent) that any
Intellectual Property Collateral is of negligible economic value to such
Grantor.

SECTION 4.7. As to Letter-of-Credit Rights.

(a) Each Grantor, by granting a security interest in its Letter-of-Credit Rights
to the Administrative Agent, intends to (and hereby does) collaterally assign to
the Administrative Agent its rights (including its contingent rights ) to the
Proceeds of all Letter-of-Credit Rights of which it is or hereafter becomes a
beneficiary or assignee. Promptly following the date on which any Grantor
obtains any Letter of Credit Rights after the date hereof, such Grantor shall
(i) deliver a supplement to Schedule II identifying such new Letter-of-Credit
Right and (ii) with respect to Letter of Credit Rights in excess of $250,000
cause the issuer of each Letter of Credit and each nominated person (if any)
with respect thereto to consent to such assignment of the Proceeds thereof in a
consent agreement in form and substance reasonably satisfactory to the
Administrative Agent and deliver written evidence of such consent to the
Administrative Agent.

(b) During the existence of an Event of Default, each Grantor will, promptly
upon request by the Administrative Agent, (i) notify (and each Grantor hereby
authorizes the Administrative Agent to notify) the issuer and each nominated
person with respect to each of the Letters of Credit that the Proceeds thereof
have been assigned to the Administrative Agent hereunder and any payments due or
to become due in respect thereof are to be made directly to the Administrative
Agent and (ii) arrange for the Administrative Agent to become the transferee
beneficiary Letter of Credit.

SECTION 4.8. As to Commercial Tort Claims. Each Grantor covenants and agrees
that, until the Termination Date, with respect to any Commercial Tort Claim in
excess of $250,000 individually or in the aggregate hereafter arising, it shall
deliver to the Administrative Agent a supplement to Schedule II in form and
substance reasonably satisfactory to the Administrative Agent, identifying such
new Commercial Tort Claims.

 

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SECTION 4.9. Electronic Chattel Paper and Transferable Records. If any Grantor
at any time holds or acquires an interest in any electronic chattel paper or any
“transferable record,” as that term is defined in Section 201 of the U.S.
Federal Electronic Signatures in Global and National Commerce Act, or in
Section 16 of the U.S. Uniform Electronic Transactions Act as in effect in any
relevant jurisdiction, with a value in excess of $250,000, such Grantor shall
promptly notify the Administrative Agent thereof and, at the request of the
Administrative Agent, shall take such action as the Administrative Agent may
request to vest in the Administrative Agent control (for the ratable benefit of
Secured Parties) under Section 9.105 of the U.C.C. of such electronic chattel
paper or control under Section 201 of the Federal Electronic Signatures in
Global and National Commerce Act or, as the case may be, Section 16 of the
Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of
such transferable record. The Administrative Agent agrees with each Grantor that
the Administrative Agent will arrange, pursuant to procedures reasonably
satisfactory to the Administrative Agent and so long as such procedures will not
result in the Administrative Agent’s loss of control, for such Grantor to make
alterations to the electronic chattel paper or transferable record permitted
under Section 9.105 of the U.C.C. or, as the case may be, Section 201 of the
U.S. Federal Electronic Signatures in Global and National Commerce Act or
Section 16 of the U.S. Uniform Electronic Transactions Act for a party in
control to allow without loss of control, unless an Event of Default has
occurred and is continuing or would occur after taking into account any action
by such Grantor with respect to such electronic chattel paper or transferable
record.

SECTION 4.10. Transfers and Other Liens. No Grantor shall: (a) sell, assign (by
operation of law or otherwise) or otherwise dispose of any of the Collateral,
except Inventory in the ordinary course of business or as specifically permitted
by the Credit Agreement, or (b) create or suffer to exist any Lien or other
charge or encumbrance upon or with respect to any of the Collateral to secure
Debt of any Person or entity, except for the security interest created by this
Security Agreement and except for Liens and other charges or encumbrances
specifically permitted by the Credit Agreement.

SECTION 4.11. Taxes. Each Grantor agrees to comply in all material respects with
all Applicable Law, including the appropriate payment (before the same become
delinquent), by, or on behalf of, such Grantor of all Taxes imposed upon such
Grantor or any of its direct or indirect Subsidiaries or upon their property
except to the extent being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP have been
set aside on the books of such Grantor or such Subsidiaries, as applicable.

SECTION 4.12. Further Assurances, etc. Each Grantor shall warrant and defend the
right and title herein granted unto the Administrative Agent in and to the
Collateral (and all right, title and interest represented by the Collateral)
against the claims and demands of all Persons whomsoever. Each Grantor agrees
that, from time to time at its own expense, it will promptly execute and deliver
all further instruments and documents, and take all further action, that may be
necessary or that the Administrative Agent may reasonably request, in order to
perfect, preserve and protect any security interest granted or purported to be
granted hereby or to enable the Administrative Agent to exercise and enforce its
rights and remedies hereunder with respect to any Collateral. Each Grantor
agrees that, upon the acquisition after the date hereof by such Grantor of any
Collateral, with respect to which the security interest granted hereunder is not
perfected automatically upon such acquisition, to take such actions with respect
to such Collateral or any part thereof as required by the Credit Documents.
Without limiting the generality of the foregoing, each Grantor will:

(a) from time to time upon the request of the Administrative Agent, promptly
deliver to the Administrative Agent such stock powers, instruments and similar
documents, reasonably satisfactory in form and substance to the Administrative
Agent, with respect to such Collateral as the Administrative Agent may
reasonably request and will, from time to time upon the request of the
Administrative Agent, after the occurrence and during the continuance of any
Event of Default, promptly transfer any securities constituting Collateral into
the name of any nominee designated by the Administrative Agent; if any
Collateral shall be evidenced by an Instrument, negotiable Document, Promissory
Note or tangible Chattel Paper, deliver and pledge to the Administrative Agent
hereunder such Instrument, negotiable Document, Promissory Note, Pledged Note or
tangible Chattel Paper duly endorsed and accompanied by duly executed
instruments of transfer or assignment, all in form and substance reasonably
satisfactory to the Administrative Agent;

 

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(b) file (and hereby authorize the Administrative Agent to file after delivery
of a copy thereof to such Grantor) such filing statements or continuation
statements, or amendments thereto, and such other instruments or notices
(including any assignment of claim form under or pursuant to the federal
assignment of claims statute, 31 U.S.C. § 3726, any successor or amended version
thereof or any regulation promulgated under or pursuant to any version thereof),
as may be necessary or that the Administrative Agent may request in order to
perfect and preserve the security interests and other rights granted or
purported to be granted to the Administrative Agent hereby. The authorization
contained in this Section 4.12 shall be irrevocable and continuing until the
Termination Date;

(c) deliver to the Administrative Agent and at all times keep pledged to the
Administrative Agent pursuant hereto, on a first-priority, perfected basis, at
the request of the Administrative Agent, all Investment Property constituting
Collateral (except for Permitted Liens), all Distributions with respect thereto
(which shall only be delivered to the Administrative Agent during the
continuance of a Default), and all interest and principal with respect to
Promissory Notes, and all Proceeds and rights from time to time received by or
distributable to such Grantor in respect of any of the foregoing Collateral;

(d) not take or omit to take any action the taking or the omission of which
would result in any impairment or alteration of any obligation of the maker of
any Payment Intangible or other Instrument constituting Collateral, except as
provided in Section 4.4;

(e) not create any tangible Chattel Paper without placing a legend on such
tangible Chattel Paper reasonably acceptable to the Administrative Agent
indicating that the Administrative Agent has a security interest in such Chattel
Paper;

(f) furnish to the Administrative Agent, from time to time at the Administrative
Agent’s request, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as the
Administrative Agent may reasonably request, all in reasonable detail; and

 

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(g) do all things reasonably requested by the Administrative Agent in accordance
with this Security Agreement in order to enable the Administrative Agent to have
and maintain control over the Collateral consisting of Investment Property,
Deposit Accounts, Letter-of-Credit-Rights and Electronic Chattel Paper.

Each Grantor agrees that a carbon, photographic or other reproduction of this
Security Agreement or any UCC financing statement covering the Collateral or any
part thereof shall be sufficient as a UCC financing statement where permitted by
law. Each Grantor hereby authorizes the Administrative Agent to file financing
statements describing as the collateral covered thereby “all of the debtor’s
personal property or assets” or words to that effect, notwithstanding that such
wording may be broader in scope than the Collateral described in this Security
Agreement.

ARTICLE V

THE ADMINISTRATIVE AGENT

SECTION 5.1. Administrative Agent Appointed Attorney-in-Fact. Each Grantor
hereby irrevocably appoints the Administrative Agent its attorney-in-fact, with
full authority in the place and stead of such Grantor and in the name of such
Grantor or otherwise, from time to time in the Administrative Agent’s
discretion, following the occurrence and during the continuance of an Event of
Default, to take any action and to execute any instrument which the
Administrative Agent may deem necessary or advisable to accomplish the purposes
of this Security Agreement, including (a) to ask, demand, collect, sue for,
recover, compromise, receive and give acquittance and receipts for moneys due
and to become due under or in respect of any of the Collateral, (b) to receive,
endorse, and collect any drafts or other Instruments, Documents and Chattel
Paper, in connection with clause (a) above, (c) to file any claims or take any
action or institute any proceedings which the Administrative Agent may deem
necessary or desirable for the collection of any of the Collateral or otherwise
to enforce the rights of the Administrative Agent with respect to any of the
Collateral, and (d) to perform the affirmative obligations of such Grantor
hereunder. EACH GRANTOR HEREBY ACKNOWLEDGES, CONSENTS AND AGREES THAT THE POWER
OF ATTORNEY GRANTED PURSUANT TO THIS SECTION 5.1 IS IRREVOCABLE AND COUPLED WITH
AN INTEREST AND SHALL BE EFFECTIVE UNTIL THE TERMINATION DATE.

SECTION 5.2. Administrative Agent May Perform. If any Grantor fails to perform
any agreement contained herein, the Administrative Agent may itself perform, or
cause performance of, such agreement, and the expenses of the Administrative
Agent incurred in connection therewith shall be payable by such Grantor pursuant
to Section 6.4 hereof and Section 9.1 of the Credit Agreement and the
Administrative Agent may from time to time take any other action which the
Administrative Agent reasonably deems necessary for the maintenance,
preservation or protection of any of the Collateral or of its security interest
therein.

 

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SECTION 5.3. Administrative Agent Has No Duty. The powers conferred on the
Administrative Agent hereunder are solely to protect its interest (on behalf of
the Secured Parties) in the Collateral and shall not impose any duty on it to
exercise any such powers. Except for reasonable care of any Collateral in its
possession and the accounting for moneys actually received by it hereunder, the
Administrative Agent shall have no duty as to any Collateral or responsibility
for (a) ascertaining or taking action with respect to calls, conversions,
exchanges, maturities, tenders or other matters relative to any Investment
Property and any other Pledged Property, whether or not the Administrative Agent
has or is deemed to have knowledge of such matters, or (b) taking any necessary
steps to preserve rights against prior parties or any other rights pertaining to
any Collateral.

SECTION 5.4. Reasonable Care. The Administrative Agent is required to exercise
reasonable care in the custody and preservation of any of the Collateral in its
possession; provided, that the Administrative Agent shall be deemed to have
exercised reasonable care in the custody and preservation of any of the
Collateral (a) if such Collateral is accorded treatment substantially equal to
that which the Administrative Agent accords its own personal property, or (b) if
the Administrative Agent takes such action for that purpose as any Grantor
reasonably requests in writing at times other than upon the occurrence and
during the continuance of an Event of Default; provided, further, that failure
of the Administrative Agent to comply with any such request at any time shall
not in itself be deemed a failure to exercise reasonable care.

ARTICLE VI

REMEDIES

SECTION 6.1. Certain Remedies. If any Event of Default shall have occurred and
be continuing:

(a) The Administrative Agent may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise available
to it, all the rights and remedies of a secured party on default under the UCC
(whether or not the UCC applies to the affected Collateral) and also may
(i) take possession of any Collateral not already in its possession without
demand and without legal process, (ii) require any Grantor to, and each Grantor
hereby agrees that it will, at its expense and upon request of the
Administrative Agent forthwith, assemble all or part of the Collateral as
directed by the Administrative Agent and make it available to the Administrative
Agent at a place to be designated by the Administrative Agent that is reasonably
convenient to both parties, (iii) subject to applicable law or agreements with
landlords, enter onto the property where any Collateral is located and take
possession thereof without demand and without legal process, (iv) without notice
except as specified below, lease, license, sell or otherwise dispose of the
Collateral or any part thereof in one or more parcels at public or private sale,
at any of the Administrative Agent’s offices or elsewhere, for cash, on credit
or for future delivery, and upon such other terms as the Administrative Agent
may deem commercially reasonable. Each Grantor agrees that, to the extent notice
of sale shall be required by law, at least ten (10) days’ prior notice to the
applicable Grantor of the time and place of any public sale or the time of any
private sale is to be made shall constitute reasonable notification; provided,
however, that with respect to Collateral that is (x)

 

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perishable or threatens to decline speedily in value, or (y) is of a type
customarily sold on a recognized market (including but not limited to,
Investment Property), no notice of sale or disposition need be given. For
purposes of this Article VI, notice of any intended sale or disposition of any
Collateral may be given by first-class mail, hand-delivery (through a delivery
service or otherwise), facsimile or email, and shall be deemed to have been
“sent” upon deposit in the U.S. Mails with adequate postage properly affixed,
upon delivery to an express delivery service or upon electronic submission
through telephonic or internet services, as applicable. The Administrative Agent
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given. The Administrative Agent may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned.

(b) Each Grantor agrees and acknowledges that a commercially reasonable
disposition of Inventory, Equipment, Goods, Computer Hardware and Software
Collateral, or Intellectual Property may be by lease or license of, in addition
to the sale of, such Collateral. Each Grantor further agrees and acknowledges
that the following shall be deemed a reasonable commercial disposition: (i) a
disposition made in the usual manner on any recognized market, (ii) a
disposition at the price current in any recognized market at the time of
disposition, and (iii) a disposition in conformity with reasonable commercial
practices among dealers in the type of property subject to the disposition.

(c) All cash Proceeds received by the Administrative Agent in respect of any
sale of, collection from, or other realization upon, all or any part of the
Collateral shall be applied by the Administrative Agent against, all or any part
of the Obligations as set forth in Section 7.6 of the Credit Agreement. The
Administrative Agent shall not be obligated to apply or pay over for application
noncash proceeds of collection or enforcement unless (i) the failure to do so
would be commercially unreasonable, and (ii) the affected party has provided the
Administrative Agent with a written demand to apply or pay over such noncash
proceeds on such basis.

(d) The Administrative Agent may do any or all of the following: (i) transfer
all or any part of the Collateral into the name of the Administrative Agent or
its nominee, with or without disclosing that such Collateral is subject to the
Lien hereunder, (ii) notify the parties obligated on any of the Collateral to
make payment to the Administrative Agent of any amount due or to become due
thereunder, (iii) withdraw, or cause or direct the withdrawal, of all funds with
respect to the Collateral Account, (iv) enforce collection of any of the
Collateral by suit or otherwise, and surrender, release or exchange all or any
part thereof, or compromise or extend or renew for any period (whether or not
longer than the original period) any obligations of any nature of any party with
respect thereto, (v) endorse any checks, drafts, or other writings in the
applicable Grantor’s name to allow collection of the Collateral, (vi) take
control of any Proceeds of the Collateral, or (vii) execute (in the name, place
and stead of the applicable Grantor) endorsements, assignments, stock powers and
other instruments of conveyance or transfer with respect to all or any of the
Collateral.

 

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SECTION 6.2. Securities Laws. If the Administrative Agent shall determine to
exercise its right to sell all or any of the Collateral that are Equity
Interests pursuant to Section 6.1, each Grantor agrees that, upon request of the
Administrative Agent, such Grantor will, at its own expense:

(a) execute and deliver, and cause (or, with respect to any issuer which is not
a Subsidiary of such Grantor, use its reasonable efforts to cause) each Pledged
Interests Issuer or other issuer of the Collateral contemplated to be sold and
the directors and officers thereof to execute and deliver, all such instruments
and documents, and do or cause to be done all such other acts and things, as may
be necessary or, in the reasonable opinion of the Administrative Agent,
advisable to register such Collateral under the provisions of the Securities Act
of 1933, as from time to time amended (the “Securities Act”), and cause the
registration statement relating thereto to become effective and to remain
effective for such period as prospectuses are required by law to be furnished,
and to make all amendments and supplements thereto and to the related prospectus
which, in the reasonable opinion of the Administrative Agent, are necessary or
advisable, all in conformity with the requirements of the Securities Act and the
rules and regulations of the SEC applicable thereto;

(b) use its reasonable efforts to exempt the Collateral under the state
securities or “Blue Sky” laws and to obtain all necessary Governmental Approvals
for the sale of the Collateral, as requested by the Administrative Agent;

(c) cause (or, with respect to any issuer that is not a Subsidiary of such
Grantor, use its reasonable efforts to cause) each such Pledged Interests Issuer
or other issuer to make available to its security holders, as soon as
practicable, an earnings statement that will satisfy the provisions of
Section 11(a) of the Securities Act; and

(d) do or cause to be done all such other acts and things as may be reasonably
necessary to make such sale of the Collateral or any part thereof valid and
binding and in compliance with applicable law.

Each Grantor acknowledges the impossibility of ascertaining the amount of
damages that would be suffered by the Administrative Agent or the Secured
Parties by reason of the failure by such Grantor to perform any of the covenants
contained in this Section and consequently agrees that, if such Grantor shall
fail to perform any of such covenants, it shall pay, as liquidated damages and
not as a penalty, an amount equal to the value (as reasonably determined by the
Administrative Agent in good faith) of such Collateral on the date the
Administrative Agent shall demand compliance with this Section 6.2.

SECTION 6.3. Compliance with Restrictions. Each Grantor agrees that in any sale
of any of the Collateral whenever an Event of Default shall have occurred and be
continuing, the Administrative Agent is hereby authorized to comply with any
limitation or restriction in connection with such sale as it may be advised by
counsel is necessary in order to avoid any violation of applicable law
(including compliance with such procedures as may restrict the number of
prospective bidders and purchasers, require that such prospective bidders and
purchasers have certain qualifications, and restrict such prospective bidders
and purchasers to Persons who will represent and agree that they are purchasing
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investment and not with a view to the distribution or resale of such
Collateral), or in order to obtain any required approval of the sale or of the
purchaser by any Governmental Authority or official, and each Grantor further
agrees that such compliance shall not result in such sale being considered or
deemed not to have been made in a commercially reasonable manner, nor shall the
Administrative Agent be liable nor accountable to such Grantor for any discount
allowed by the reason of the fact that such Collateral is sold in compliance
with any such limitation or restriction.

SECTION 6.4. Indemnity and Expenses.

(a) WITHOUT LIMITING THE GENERALITY OF THE PROVISIONS OF SECTION 9.2 OF THE
CREDIT AGREEMENT, EACH GRANTOR HEREBY INDEMNIFIES AND HOLDS HARMLESS THE
ADMINISTRATIVE AGENT, EACH SECURED PARTY AND EACH OF THEIR RESPECTIVE OFFICERS,
DIRECTORS, EMPLOYEES AND AGENTS (THE “INDEMNIFIED PARTIES”) FROM AND AGAINST ANY
AND ALL CLAIMS, LOSSES AND LIABILITIES ARISING OUT OF OR RESULTING FROM THIS
SECURITY AGREEMENT OR ANY OTHER CREDIT DOCUMENT (INCLUDING, WITHOUT LIMITATION,
ENFORCEMENT OF THIS SECURITY AGREEMENT), EXCEPT CLAIMS, LOSSES OR LIABILITIES
RESULTING FROM ANY INDEMNIFIED PARTY’S GROSS NEGLIGENCE, WILLFUL MISCONDUCT OR
UNLAWFUL ACTS; PROVIDED, HOWEVER, THAT IT IS THE INTENTION OF THE PARTIES HERETO
THAT EACH INDEMNIFIED PARTY BE INDEMNIFIED IN THE CASE OF ITS OWN NEGLIGENCE
(OTHER THAN GROSS NEGLIGENCE), REGARDLESS OF WHETHER SUCH NEGLIGENCE IS SOLE OR
CONTRIBUTORY, ACTIVE OR PASSIVE, IMPUTED, JOINT OR TECHNICAL. If and to the
extent that the foregoing undertaking may be unenforceable for any reason, each
Grantor hereby agrees to make the maximum contribution to the payment and
satisfaction of each of the foregoing which is permissible under applicable law.

(b) Other than as set forth in clause (c) below, each Grantor will upon demand
pay to the Administrative Agent and any local counsel the amount of any and all
expenses, including the reasonable fees and disbursements of its counsel and of
any experts and agents, which the Administrative Agent and any local counsel may
incur in connection herewith, including without limitation in connection with
the administration of this Security Agreement and the custody, preservation, use
or operation of, any of the Collateral.

(c) Each Grantor will upon demand pay to the Administrative Agent and any local
counsel the amount of any and all expenses, including the fees and disbursements
of its counsel and of any experts and agents, which the Administrative Agent and
any local counsel may incur in connection (i) the sale of, collection from, or
other realization upon, any of the Collateral, (ii) the exercise or enforcement
of any of the rights of the Administrative Agent and any local counsel or any of
the Secured Parties hereunder, or (iii) the failure by any Grantor to perform or
observe any of the provisions hereof.

SECTION 6.5. Warranties. The Administrative Agent may sell the Collateral
without giving any warranties or representations as to the Collateral. The
Administrative Agent may disclaim any warranties of title or the like. Each
Grantor agrees that this procedure will not be considered to adversely affect
the commercial reasonableness of any sale of the Collateral.

 

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ARTICLE VII

MISCELLANEOUS PROVISIONS

SECTION 7.1. Credit Document. This Security Agreement is a Credit Document
executed pursuant to the Credit Agreement and shall (unless otherwise expressly
indicated herein) be construed, administered and applied in accordance with the
terms and provisions thereof, including Article 9 thereof.

SECTION 7.2. Binding on Successors, Transferees and Assigns; Assignment. This
Security Agreement shall remain in full force and effect until the Termination
Date has occurred, shall be binding upon each Grantor and its successors,
transferees and assigns and, subject to the limitations set forth in the Credit
Agreement, shall inure to the benefit of and be enforceable by each Secured
Party and its successors, transferees and assigns; provided that no Grantor
shall (unless otherwise permitted under the terms of the Credit Agreement or
this Security Agreement) assign any of its obligations hereunder without.

SECTION 7.3. Amendments, etc. No amendment to or waiver of any provision of this
Security Agreement, nor consent to any departure by any Grantor from its
obligations under this Security Agreement, shall in any event be effective
unless the same shall be in writing and signed by the Administrative Agent (on
behalf of the Lenders or the Majority Lenders, as the case may be, pursuant to
Section 9.3 of the Credit Agreement) and such Grantor and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.

SECTION 7.4. Notices. Except as otherwise provided in this Security Agreement,
all notices and other communications provided for hereunder shall be in writing
or by facsimile and addressed, delivered or transmitted to the appropriate party
at the address or facsimile number of such party specified in the Credit
Agreement, on the signature pages of this Security Agreement or at such other
address or facsimile number as may be designated by such party in a notice to
the other party. Except as otherwise provided in this Security Agreement, any
notice or other communication, if mailed and properly addressed with postage
prepaid or if properly addressed and sent by pre-paid courier service, shall be
deemed given when received; any such notice or other communication, if
transmitted by facsimile, shall be deemed given when transmitted and
electronically confirmed.

SECTION 7.5. Release of Liens. Upon (a) the Disposition of Collateral in
accordance with the Credit Agreement or (b) the occurrence of the Termination
Date, the security interests granted herein shall automatically terminate with
respect to (i) such Collateral (in the case of clause (a)) or (ii) all
Collateral (in the case of clause (b)). Upon any such Disposition or
termination, the Administrative Agent will deliver to the applicable Grantor, at
such Grantor’s sole expense, without any representations, warranties or recourse
of any kind whatsoever, all Collateral held by the Administrative Agent
hereunder, and execute and deliver to such Grantor such documents as such
Grantor shall reasonably request to evidence such termination.

 

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SECTION 7.6. No Waiver; Remedies. In addition to, and not in limitation of
Section 2.7, no failure on the part of any Secured Party to exercise, and no
delay in exercising, any right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any right hereunder preclude any other
or further exercise thereof or the exercise of any other right. The remedies
herein provided are cumulative and not exclusive of any remedies provided by
law.

SECTION 7.7. Headings. The various headings of this Security Agreement are
inserted for convenience only and shall not affect the meaning or interpretation
of this Security Agreement or any provisions thereof.

SECTION 7.8. Severability. Any provision of this Security Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such provision and
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of this Security
Agreement or affecting the validity or enforceability of such provision in any
other jurisdiction.

SECTION 7.9. Counterparts. This Security Agreement may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Security Agreement by facsimile shall be effective as delivery of a manually
executed counterpart of this Security Agreement.

SECTION 7.10. Consent as Holder of Equity. Each Grantor hereby consents to
(a) the execution by each other Grantor of this Security Agreement and grant by
each other Grantor of a security interest, encumbrance, pledge and hypothecation
in all Pledged Interests and other Collateral of such other Grantor to the
Administrative Agent pursuant hereto, and (b) without limiting the generality of
the foregoing, each Grantor consents to the transfer of any Pledged Interest to
the Administrative Agent or its nominee following an Event of Default and to the
substitution of the Secured Party or its nominee as a partner under the limited
partnership agreement or as a member under the limited liability company
agreement, in any case, as heretofore and hereafter amended.

SECTION 7.11. Additional Grantors. Additional Subsidiaries of either Borrower
may from time to time enter into this Security Agreement as a Grantor. Upon
execution and delivery after the date hereof by the Administrative Agent and
such Subsidiary of an instrument in the form of Annex 1, such Subsidiary shall
become a Grantor hereunder with the same force and effect as if originally named
as a Grantor herein. The execution and delivery of any instrument adding an
additional Grantor as a party to this Security Agreement shall not require the
consent of any other Grantor hereunder. The rights and obligations of each
Grantor hereunder shall remain in full force and effect notwithstanding the
addition of any new Grantor as a party to this Security Agreement.

SECTION 7.12. Conflicts with Credit Agreement. To the fullest extent possible,
the terms and provisions of the Credit Agreement shall be read together with the
terms and provisions of this Security Agreement so that the terms and provisions
of this Security Agreement do not conflict with the terms and provisions of the
Credit Agreement; provided, however, notwithstanding the foregoing, in the event
that any of the terms or provisions of this

 

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Security Agreement conflict with any terms or provisions of the Credit
Agreement, the terms or provisions of the Credit Agreement shall govern and
control for all purposes; provided that the inclusion in this Security Agreement
of terms and provisions, supplemental rights or remedies in favor of the
Administrative Agent not addressed in the Credit Agreement shall not be deemed
to be a conflict with the Credit Agreement and all such additional terms,
provisions, supplemental rights or remedies contained herein shall be given full
force and effect.

SECTION 7.13. Waiver of Jury Trial. EACH GRANTOR HEREBY KNOWINGLY, VOLUNTARILY
AND INTENTIONALLY WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHTS IT MAY
HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING
OUT OF, UNDER, OR IN CONNECTION WITH, EACH CREDIT DOCUMENT, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF
THE ADMINISTRATIVE AGENT, ANY OTHER SECURED PARTY OR ANY OBLIGOR IN CONNECTION
THEREWITH. EACH GRANTOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND
SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH
OTHER CREDIT DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE ADMINISTRATIVE AGENT, EACH LENDER AND ISSUER
ENTERING INTO THE CREDIT DOCUMENTS.

SECTION 7.14. Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT
SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, EXCEPT TO THE
EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTERESTS HEREUNDER, OR
REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE
LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS.

THIS WRITTEN AGREEMENT AND THE OTHER CREDIT DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[Remainder of this page intentionally left blank. Signature pages to follow.]

 

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IN WITNESS WHEREOF, each of the parties hereto has caused this Security
Agreement to be duly executed and delivered by its Authorized Officer as of the
date first above written.

 

GRANTORS

FLOTEK INDUSTRIES, INC.

By

 

/s/ Jerry D. Dumas, Sr.

 

Jerry D. Dumas, Sr.

 

President and Chief Executive Officer

TELEDRIFT COMPANY

FLOTEK PAYMASTER, INC.

MATERIAL TRANSLOGISTICS, INC.

PETROVALVE, INC.

TURBECO, INC.

USA PETROVALVE, INC.

SOONER ENERGY SERVICES, INC.

CAVO DRILLING MOTORS, LTD. CO.

SES HOLDINGS, INC.

By

 

/s/ Jerry D. Dumas, Sr.

 

Jerry D. Dumas, Sr.

 

President and Chief Executive Officer

CESI CHEMICAL, INC.

PADKO INTERNATIONAL, INC.

By

 

/s/ Jerry D. Dumas, Sr.

 

Jerry D. Dumas, Sr.

 

Chief Executive Officer

Signature page to Pledge and Security Agreement

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ADMINISTRATIVE AGENT:

WELLS FARGO BANK, N.A.

By:

 

/s/ Eric Hollingsworth

 

Eric Hollingsworth

 

Senior Vice President

Signature page to Pledge and Security Agreement

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Annex 1 to Pledge and Security

Agreement

SUPPLEMENT NO.          dated as of             , 20     (the “Supplement”), to
the Pledge and Security Agreement dated as of March 31, 2008 (as amended,
supplemented, restated, or otherwise modified from time to time, the “Security
Agreement”), among FLOTEK INDUSTRIES, INC., a Delaware corporation and each
subsidiary of the Borrower signatory thereto (together with the Borrower, the
“Grantors” and individually, a “Grantor”), in favor of WELLS FARGO BANK, N.A.
(“Wells Fargo”), as administrative agent (together with any successor(s) and
assign(s) thereto, in such capacity, the “Administrative Agent”) for each of the
Secured Parties (as defined below).

A. Reference is made to that certain Credit Agreement, dated as of March 31,
2008 (as amended, supplemented, amended and restated or otherwise modified from
time to time, the “Credit Agreement”), among the Borrower, the lenders from time
to time parties thereto (the “Lenders”), Wells Fargo Bank, N.A., as the
Administrative Agent, as the issuing lender (in such capacity, the “Issuing
Lender”), and as the swing line lender (in such capacity, the “Swing Line
Lender”).

B. Capitalized terms used herein and not otherwise defined herein shall have the
meanings assigned to such terms in the Security Agreement and the Credit
Agreement.

C. Section 7.11 of the Security Agreement provides that additional Subsidiaries
of the Borrower may become Grantors under the Security Agreement by execution
and delivery of an instrument in the form of this Supplement. The undersigned
Subsidiary of the Borrower (the “New Grantor”) is executing this Supplement in
accordance with the requirements of the Credit Agreement to become a Grantor
under the Security Agreement.

Accordingly, the Administrative Agent and the New Grantor agree as follows:

SECTION 1. In accordance with Section 7.11 of the Security Agreement, the New
Grantor by its signature below becomes a Grantor under the Security Agreement
with the same force and effect as if originally named therein as a Grantor and
the New Grantor hereby agrees (a) to all the terms and provisions of the
Security Agreement applicable to it as a Grantor thereunder and (b) represents
and warrants that the representations and warranties made by it as a Grantor
thereunder are true and correct on and as of the date hereof. In furtherance of
the foregoing, the New Grantor, as security for the payment and performance in
full of the Secured Obligations (as defined in the Security Agreement), does
hereby create and grant to the Administrative Agent, its successors and assigns,
for the benefit of the Secured Parties, their successors and assigns as provided
in the Security Agreement, a continuing security interest in and lien on all of
the New Grantor’s right, title and interest in and to the Collateral (as defined
in the Security Agreement) of the New Grantor. Each reference to a “Grantor” in
the Security Agreement shall be deemed to include the New Grantor. The Security
Agreement is hereby incorporated herein by reference.

SECTION 2. The New Grantor represents and warrants to the Administrative Agent
and the other Secured Parties that this Supplement has been duly authorized,
executed and delivered

 

Annex I to Pledge and Security Agreement

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by it and constitutes its legal, valid and binding obligation, enforceable
against it in accordance with its terms (subject to applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors’
rights generally and subject, as to enforceability, to equitable principles of
general application (regardless of whether enforcement is sought in a proceeding
in equity or at law)).

SECTION 3. This Supplement may be executed in counterparts, each of which shall
constitute an original, but all of which when taken together shall constitute a
single contract. This Supplement shall become effective when the Administrative
Agent shall have received counterparts of this Supplement that, when taken
together, bear the signatures of the New Grantor and the Administrative Agent.
Delivery of an executed signature page to this Supplement by facsimile
transmission shall be as effective as delivery of a manually signed counterpart
of this Supplement.

SECTION 4. The New Grantor hereby agrees that the schedules attached to the
Security Agreement are hereby supplemented by the corresponding schedules
attached to this Supplement. The New Grantor hereby represents and warrants that
the information provided in the schedules attached hereto are true and correct
as of the date hereof.

SECTION 5. The New Grantor hereby expressly acknowledges and agrees to the terms
of Section 6.4. (Indemnity and Expenses) of the Security Agreement and expressly
acknowledges the irrevocable proxy provided in Section 4.1(e) of the Security
Agreement. In furtherance thereof, NEW GRANTOR HEREBY GRANTS THE ADMINISTRATIVE
AGENT AN IRREVOCABLE PROXY (WHICH IRREVOCABLE PROXY SHALL CONTINUE IN EFFECT
UNTIL THE TERMINATION DATE) EXERCISABLE UNDER THE CIRCUMSTANCES PROVIDED IN
SECTION 4.1 OF THE SECURITY AGREEMENT, TO VOTE THE PLEDGED SHARES, PLEDGED
INTERESTS, INVESTMENT PROPERTY AND SUCH OTHER COLLATERAL.

SECTION 6. Except as expressly supplemented hereby, the Security Agreement shall
remain in full force and effect.

SECTION 7. THIS SUPPLEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND
GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF TEXAS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE
SECURITY INTERESTS HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE
STATE OF TEXAS.

SECTION 8. In case any one or more of the provisions contained in this
Supplement should be held invalid, illegal or unenforceable in any respect,
neither party hereto shall be required to comply with such provision for so long
as such provision is held to be invalid, illegal or unenforceable, but the
validity, legality and enforceability of the remaining provisions contained
herein and in the Security Agreement shall not in any way be affected or
impaired. The parties hereto shall endeavor in good-faith negotiations to
replace the invalid, illegal or unenforceable provisions with valid provisions
the economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.

 

Annex I to Pledge and Security Agreement

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SECTION 9. All communications and notices hereunder shall be in writing and
given as provided in the Security Agreement. All communications and notices
hereunder to the New Grantor shall be given to it at the address set forth under
its signature hereto.

SECTION 10. The New Grantor agrees to reimburse the Administrative Agent for its
reasonable out-of-pocket expenses in connection with this Supplement, including
the reasonable fees, other charges and disbursements of counsel for the
Administrative Agent.

SECTION 11. NEW GRANTOR HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE TO
THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, EACH CREDIT DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE ADMINISTRATIVE
AGENT OR ANY OTHER SECURED PARTY LENDER OR ANY GRANTOR IN CONNECTION THEREWITH.
NEW GRANTOR ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT
CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER CREDIT
DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE ADMINISTRATIVE AGENT, EACH LENDER AND ISSUER ENTERING INTO
THE CREDIT DOCUMENTS.

THIS SUPPLEMENT, THE SECURITY AGREEMENT AND THE OTHER CREDIT DOCUMENTS, AS
DEFINED IN THE CREDIT AGREEMENT REFERRED TO IN THIS SUPPLEMENT, REPRESENT THE
FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO.

 

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IN WITNESS WHEREOF, the New Grantor and the Administrative Agent have duly
executed this Supplement to the Security Agreement as of the day and year first
above written.

 

[Name of New Grantor],

By:

 

 

Name:

 

 

Title:

 

 

Address:

 

 

 

 

 

 

WELLS FARGO BANK, N.A.,

as Administrative Agent

By:

 

 

Name:

 

 

Title:

 

 

 

Annex I to Pledge and Security Agreement

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SCHEDULES TO SUPPLEMENT NO. 1

[AS APPROPRIATE]

 

Annex I to Pledge and Security Agreement

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