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Exhibit 10.4

 
SECURITY AGREEMENT
 
This SECURITY AGREEMENT (this “Agreement”), dated as of February 24, 2011, among
the Grantor(s) listed on the signature pages hereof and those additional
entities that hereafter become parties hereto by executing the form of
Supplement attached hereto as Annex 1 (collectively, jointly and severally, the
“Grantors” and each, individually, a “Grantor”), and XXXXXXXXX (together with
its successors and assigns, the “Secured Party”).
 
 
W I T N E S S E T H:
 
WHEREAS, the Secured Party is the holder of that certain Senior Secured
Promissory Note bearing even date herewith in the principal amount of $2,250,000
(together with any and all promissory notes issued by Blast Energy Services,
Inc. (the “Company”) after the date hereof pursuant to the Purchase Agreement
(as defined below), collectively and each individually, the “Note”) issued or to
be issued by the Company pursuant to the terms of the Note Purchase Agreement
dated as of the date hereof (as amended, amended and restated, supplemented, or
otherwise modified from time to time, the “Purchase Agreement”) by and between
the Company and the Secured Party, and
 
WHEREAS, pursuant to the terms and conditions of the Purchase Agreement, the
Secured Party has agreed to extend loans to the Company, repayment of which is
evidenced by the Note, and
 
WHEREAS, in order to induce Secured Party to enter into the Purchase Agreement
and other Transaction Documents and to extend the loans pursuant to the Purchase
Agreement, each of Eagle Domestic Drilling Operations LLC (“Eagle”), and Blast
AFJ, Inc. (“Blast AFJ”; Eagle and Blast AFJ, collectively, the “Guarantors” and
each, individually, a “Guarantor”) have agreed to jointly and severally guaranty
the obligations of the Company to the Secured Party pursuant to that certain
Guaranty dated as of the date hereof (as amended, amended and restated,
supplemented, or otherwise modified from time to time, the “Guaranty”) executed
by the Guarantors in favor of the Secured Party, and
 
WHEREAS, in order to induce Secured Party to enter into the Purchase Agreement
and other Transaction Documents and to extend the loans pursuant to the Purchase
Agreement, the Grantors have agreed to execute and deliver to the Secured Party
this Agreement and other collateral documents and to grant the Secured Party a
continuing security interest in and to the Collateral in order to secure the
prompt and complete payment, observance and performance of, among other things,
the Secured Obligations, and
 
NOW, THEREFORE, for and in consideration of the recitals made above and other
good and valuable consideration, the receipt, sufficiency and adequacy of which
are hereby acknowledged, the parties hereto agree as follows:
 
 
 
 

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1. Defined Terms. All capitalized terms used herein (including in the preamble
and recitals hereof) without definition shall have the meanings ascribed thereto
in the Note, or if not expressly defined in the Note, then in the Purchase
Agreement.  Any terms used in this Agreement that are defined in the Code
(whether or not capitalized) shall be construed and defined as set forth in the
Code unless otherwise defined herein or in Note or the Purchase Agreement;
provided, however, that if the Code is used to define any term used herein and
if such term is defined differently in different Articles of the Code, the
definition of such term contained in Article 9 of the Code shall govern. In
addition to those terms defined elsewhere in this Agreement, as used in this
Agreement, the following terms shall have the following meanings:
 
(a) “Account” means an account (as that term is defined in the Code).
 
(b) “Account Debtor” means an account debtor (as that term is defined in the
Code).
 
(c)  “Books” means books and records (including each Grantor’s Records
indicating, summarizing, or evidencing such Grantor’s assets (including the
Collateral) or liabilities, each Grantor’s Records relating to such Grantor’s
business operations or financial condition, and each Grantor’s goods or General
Intangibles related to such information).
 
(d) “Chattel Paper” means chattel paper (as that term is defined in the Code)
and includes tangible chattel paper and electronic chattel paper.
 
(e) “Closing Date” has the meaning specified therefor in the Purchase Agreement.
 
(f) “Code” means the New York Uniform Commercial Code, as in effect from time to
time; provided, however, that in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection, priority, or
remedies with respect to Secured Party’s Liens on any Collateral is governed by
the Uniform Commercial Code as enacted and in effect in a jurisdiction other
than the State of New York, the term “Code” shall mean the Uniform Commercial
Code as enacted and in effect in such other jurisdiction solely for purposes of
the provisions thereof relating to such attachment, perfection, priority, or
remedies.
 
(g) “Collateral” has the meaning specified therefor in Section 2.
 
(h) “Commercial Tort Claims” means commercial tort claims (as that term is
defined in the Code), and includes those commercial tort claims listed on
Schedule 10 attached hereto.
 
(i) “Company” has the meaning specified therefor in the recitals to this
Agreement.
 
(j) “Copyrights” means copyrights and copyright registrations, and also includes
(i) the copyright registrations and applications listed on Schedule 2 attached
hereto and made a part hereof (as the same may be amended or modified from time
to time), (ii) all extensions or renewals thereof, (iii) all income, royalties,
damage awards and payments now and hereafter due or payable under and with
respect thereto, including payments under all licenses entered into in
connection therewith and damages and payments for past or future infringements
thereof, (iv) the right to sue for past, present and future infringements
thereof, and (v) all of each Grantor’s rights corresponding thereto throughout
the world.
 
 
 
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(k) “Deposit Account” means a deposit account (as that term is defined in the
Code).
 
(l) “Equipment” means equipment (as that term is defined in the Code).
 
(m) “Event of Default” has the meaning specified therefor in the Note.
 
(n) “General Intangibles” means general intangibles (as that term is defined in
the Code), and, in any event, includes payment intangibles, contract rights,
rights to payment, rights arising under common law, statutes, or regulations,
choses or things in action, goodwill (including the goodwill associated with any
Trademark), Patents, Trademarks, Copyrights, URLs and domain names, industrial
designs and other Intellectual Property or rights therein or applications
therefor, whether under license or otherwise, programs, programming materials,
blueprints, drawings, purchase orders, customer lists, monies due or recoverable
from pension funds, route lists, rights to payment and other rights under any
royalty or licensing agreements, including Intellectual Property Licenses,
infringement claims, computer programs, information contained on computer disks
or tapes, software, literature, reports, catalogs, pension plan refunds, pension
plan refund claims, insurance premium rebates, tax refunds, and tax refund
claims, interests in a partnership or limited liability company which do not
constitute a security under Article 8 of the Code, and any other personal
property other than Commercial Tort Claims, money, Accounts, Chattel Paper,
Deposit Accounts, goods, Investment Related Property, Negotiable Collateral, and
oil, gas, or other minerals before extraction.
 
(o) “Governmental Authority” means any federal, state, local, or other
governmental or administrative body, instrumentality, board, department, or
agency or any court, tribunal, administrative hearing body, arbitration panel,
commission, or other similar dispute-resolving panel or body.
 
(p) “Grantor” and “Grantors” have the meanings specified therefor in the
recitals to this Agreement.
 
(q) “Guarantor” has the meaning specified therefor in the recitals to this
Agreement.
 
(r) “Guaranty” has the meaning specified therefor in the recitals to this
Agreement.
 
(s) “Insolvency Proceeding” means any proceeding commenced by or against any
Person under any provision of title 11 of the United States Code, as in effect
from time to time, or under any other state or federal bankruptcy or insolvency
law, assignments for the benefit of creditors, formal or informal moratoria,
compositions, extensions generally with creditors, or proceedings seeking
reorganization, arrangement or other similar relief.
 
 
 
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(t) “Intellectual Property” means Patents, Copyrights, Trademarks, the goodwill
associated with such Trademarks, trade secrets and confidential and proprietary
customer lists, and Intellectual Property Licenses.
 
(u) “Intellectual Property Licenses” means rights under or interests in any
patent, trademark, copyright or other intellectual property, including software
license agreements with any other party, whether the applicable Grantor is a
licensee or licensor under any such license agreement, including the license
agreements listed on Schedule 3 attached hereto and made a part hereof.
 
(v) “Inventory” means inventory (as that term is defined in the Code).
 
(w) “Investment Related Property” means (i) investment property (as that term is
defined in the Code), and (ii) all of the following (regardless of whether
classified as investment property under the Code):  all Pledged Interests and
Pledged Operating Agreements.
 
(x)  “Negotiable Collateral” means letters of credit, letter-of-credit rights,
instruments, promissory notes, drafts, and documents.
 
(y) “Obligations” means all of the liabilities and obligations (primary,
secondary, direct, contingent, sole, joint or several) due or to become due, or
that are now or may be hereafter contracted or acquired, or owing, of any
Grantor to the Secured Party under this Agreement, the Note, the Purchase
Agreement, the Guaranty, the other Transaction Documents, and any other
instruments, agreements or other documents executed and/or delivered in
connection herewith or therewith, in each case, whether now or hereafter
existing, voluntary or involuntary, direct or indirect, absolute or contingent,
liquidated or unliquidated, whether or not jointly owed with others, and whether
or not from time to time decreased or extinguished and later increased, created
or incurred, and all or any portion of such obligations or liabilities that are
paid, to the extent all or any part of such payment is avoided or recovered
directly or indirectly from the Secured Party as a preference, fraudulent
transfer or otherwise as such obligations may be amended, supplemented,
converted, extended or modified from time to time.  Without limiting the
generality of the foregoing, the term “Obligations” shall include, without
limitation: (i) principal of, and interest on, the Note and the loans extended
pursuant thereto (including any interest that accrues after the commencement of
an Insolvency Proceeding regardless of whether allowed or allowable in whole or
in part as a claim in such Insolvency Proceeding); (ii) any and all other fees,
legal fees and other expenses, indemnities, costs, obligations and liabilities
of the Grantors from time to time under or in connection with this Agreement,
the Note, the Purchase Agreement, the Guaranty, the other Transaction Documents,
and any other instruments, agreements or other documents executed and/or
delivered in connection herewith or therewith; (iii) payment of the Major
Transaction Prepayment Price (as defined in the Note), and (iv) all amounts in
respect of the foregoing that would be payable but for the fact that the
obligations to pay such amounts are unenforceable or not allowable due to the
existence of a bankruptcy, reorganization or similar proceeding involving any
Grantor.  Any reference in this Agreement or in the Transaction Documents to the
Obligations shall include all or any portion thereof and any extensions,
modifications, renewals or alterations thereof, both prior and subsequent to any
Insolvency Proceeding.
 
 
 
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(z) “Organizational Documents” means, with respect to each Grantor, the
documents by which such Grantor was organized (such as a certificate of
incorporation, certificate of limited partnership or articles of organization,
and including, without limitation, any certificates of designation for preferred
stock or other forms of preferred equity) and which relate to the internal
governance of such Grantor (such as bylaws, a partnership agreement or an
operating, limited liability or members agreement).
 
(aa) “Patents” means patents and patent applications, and also includes (i) the
patents and patent applications listed on Schedule 4 attached hereto and made a
part hereof (as the same may be amended or modified from time to time), (ii) all
divisions, continuations, continuations-in-part, reissues and extensions
thereof, (iii) all income, royalties, damage awards and payments now and
hereafter due or payable under and with respect thereto, including payments
under all licenses entered into in connection therewith and damages and payments
for past or future infringements thereof, (iv) the right to sue for past,
present and future infringements thereof, and (v) all of each Grantor’s rights
corresponding thereto throughout the world.
 
(bb) “Patent Security Agreement” means each Patent Security Agreement among
Grantors, or any of them, and Secured Party in substantially the form of Exhibit
A attached hereto, pursuant to which Grantors have granted to Secured Party a
security interest in all their respective Patents.
 
(cc) “Permitted Encumbrances” has the meaning specified therefor in the Purchase
Agreement.
 
(dd) “Person” has the meaning specified therefor in the Purchase Agreement.
 
(ee) “Pledged Companies” means, each Person listed on Schedule 5 hereto as a
“Pledged Company”, together with each other Person, all or a portion of whose
Stock, is acquired or otherwise owned by a Grantor after the Closing Date.
 
(ff) “Pledged Interests” means all of each Grantor’s right, title and interest
in and to all of the Stock now or hereafter owned by such Grantor, regardless of
class or designation, including all substitutions therefor and replacements
thereof, all proceeds thereof and all rights relating thereto, also including
any certificates representing the Stock, the right to receive any certificates
representing any of the Stock, all warrants, options, share appreciation rights
and other rights, contractual or otherwise, in respect thereof, and the right to
receive dividends, distributions of income, profits, surplus, or other
compensation by way of income or liquidating distributions, in cash or in kind,
and cash, instruments, and other property from time to time received,
receivable, or otherwise distributed in respect of or in addition to, in
substitution of, on account of, or in exchange for any or all of the foregoing.
 
 
 
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(gg) “Pledged Interests Addendum” means a Pledged Interests Addendum
substantially in the form of Exhibit B to this Agreement.
 
(hh) “Pledged Operating Agreements” means all of each Grantor’s rights, powers,
and remedies under the limited liability company operating agreements of each of
the Pledged Companies that are limited liability companies.
 
(ii) “Proceeds” has the meaning specified therefor in Section 2.
 
(jj) “Purchase Agreement” has the meaning specified therefor in the recitals to
this Agreement.
 
(kk) “Real Property” means any estates or interests in real property, including
Oil and Gas Properties, now owned or hereafter acquired by any Grantor and the
improvements thereto.
 
(ll) “Records” means information that is inscribed on a tangible medium or which
is stored in an electronic or other medium and is retrievable in perceivable
form.
 
(mm) “Security Interest” has the meaning specified therefor in Section 2.
 
(nn) “Secured Obligations” means each and all of the following: (a) all of the
present and future obligations of Grantors arising from this Agreement, the
Note, the Purchase Agreement, the Guaranty or the other Transaction Documents,
and (b) all Obligations of the Company or any Guarantor, including, in the case
of each of clauses (a) and (b), reasonable attorneys fees and expenses and any
interest, fees, or expenses that accrue after the filing of an Insolvency
Proceeding, regardless of whether allowed or allowable in whole or in part as a
claim in any Insolvency Proceeding.
 
(oo) “Secured Party’s Liens” means the Liens granted by the Grantors to Secured
Party under the Transaction Documents.
 
(pp) “Securities Account” means a securities account (as that term is defined in
the Code).
 
(qq) “Stock” means all shares, options, warrants, interests, participations, or
other equivalents (regardless of how designated) of or in a Person, whether
voting or nonvoting, including common stock, preferred stock, or any other
“equity security” (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the Commission under the Exchange Act).
 
(rr) “Supporting Obligations” means supporting obligations (as such term is
defined in the Code).
 
(ss) “Trademarks” means trademarks, trade names, trademark applications, service
marks, service mark applications, and also includes (i) the registered or
applied for trade names, trademarks, trademark applications, service marks, and
service mark applications listed on Schedule 6 attached hereto and made a part
hereof (as the same may be amended or modified from time to time), and (ii) all
renewals thereof, (iii) all income, royalties, damage awards and payments now
and hereafter due or payable under and with respect thereto, including payments
under all licenses entered into in connection therewith and damages and payments
for past or future (A) infringements and dilutions thereof and (B) injury to the
goodwill associated therewith, (iv) the right to sue for past, present and
future (A) infringements and dilutions thereof and (B) injury to the goodwill
associated therewith, (v) the goodwill of each Grantor’s business symbolized by
the foregoing or connected therewith, and (v) all of each Grantor’s rights
corresponding thereto throughout the world.
 
 
 
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(tt) “Transaction Documents” has the meaning specified therefor in the Purchase
Agreement.
 
(uu) “URL” means “uniform resource locator,” an internet web address.
 
2. Grant of Security.  Each Grantor hereby unconditionally grants, assigns, and
pledges to Secured Party a continuing security interest (herein referred to as
the “Security Interest”) in all personal property, tangible or intangible, of
such Grantor whether now owned or hereafter acquired or arising and wherever
located, including such Grantor’s right, title, and interest in and to the
following, whether now owned or hereafter acquired or arising and wherever
located (the “Collateral”):
 
(a) all of such Grantor’s Accounts;
 
(b) all of such Grantor’s Books;
 
(c) all of such Grantor’s Chattel Paper;
 
(d) all of such Grantor’s Deposit Accounts;
 
(e) all of such Grantor’s Equipment and fixtures;
 
(f) all of such Grantor’s General Intangibles;
 
(g) all of such Grantor’s Inventory;
 
(h) all of such Grantor’s Investment Related Property;
 
(i) all of such Grantor’s Negotiable Collateral;
 
(j) all of such Grantor’s rights in respect of Supporting Obligations;
 
(k) all of such Grantor’s Commercial Tort Claims;
 
(l) all of such Grantor’s money, cash equivalents, or other assets of each such
Grantor that now or hereafter come into the possession, custody, or control of
Secured Party;
 
 
 
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(m) all of the proceeds and products, whether tangible or intangible, of any of
the foregoing, including proceeds of insurance or Commercial Tort Claims
covering or relating to any or all of the foregoing, and any and all Accounts,
Books, Chattel Paper, Deposit Accounts, Equipment, General Intangibles,
Inventory, Investment Related Property, Negotiable Collateral, Supporting
Obligations, money, or other tangible or intangible property resulting from the
sale, lease, license, exchange, collection, or other disposition of any of the
foregoing, the proceeds of any award in condemnation with respect to any of the
foregoing, any rebates or refunds, whether for taxes or otherwise, and all
proceeds of any such proceeds, or any portion thereof or interest therein, and
the proceeds thereof, and all proceeds of any loss of, damage to, or destruction
of the above, whether insured or not insured, and, to the extent not otherwise
included, any indemnity, warranty, or guaranty payable by reason of loss or
damage to, or otherwise with respect to any of the foregoing (the
“Proceeds”).  Without limiting the generality of the foregoing, the term
“Proceeds” includes whatever is receivable or received when Investment Related
Property or proceeds are sold, exchanged, collected, or otherwise disposed of,
whether such disposition is voluntary or involuntary, and includes proceeds of
any indemnity or guaranty payable to any Grantor or Secured Party from time to
time with respect to any of the Investment Related Property.
 
3. Security for Obligations.  This Agreement and the Security Interest created
hereby secures the payment and performance of the Secured Obligations, whether
now existing or arising hereafter.  Without limiting the generality of the
foregoing, this Agreement secures the payment of all amounts which constitute
part of the Secured Obligations and would be owed by Grantors, or any of them,
to Secured Party but for the fact that they are unenforceable or not allowable
due to the existence of an Insolvency Proceeding involving any Grantor.
 
4. Grantors Remain Liable.  Anything herein to the contrary notwithstanding, (a)
each of the Grantors shall remain liable under the contracts and agreements
included in the Collateral, including the Pledged Operating Agreements, to
perform all of the duties and obligations thereunder to the same extent as if
this Agreement had not been executed, (b) the exercise by Secured Party of any
of the rights hereunder shall not release any Grantor from any of its duties or
obligations under such contracts and agreements included in the Collateral, and
(c) Secured Party shall not have any obligation or liability under such
contracts and agreements included in the Collateral by reason of this Agreement,
nor shall Secured Party be obligated to perform any of the obligations or duties
of any Grantors thereunder or to take any action to collect or enforce any claim
for payment assigned hereunder.  Until an Event of Default shall occur and be
continuing, except as otherwise provided in this Agreement, the Note, the
Purchase Agreement, or other Transaction Documents, Grantors shall have the
right to possession and enjoyment of the Collateral for the purpose of
conducting the ordinary course of their respective businesses, subject to and
upon the terms hereof and of the Note, the Purchase Agreement and the other
Transaction Documents.  Without limiting the generality of the foregoing, it is
the intention of the parties hereto that record and beneficial ownership of the
Pledged Interests, including all voting, consensual, and dividend rights, shall
remain in the applicable Grantor until Secured Party, after the occurrence and
during the continuance of an Event of Default, shall exercise its voting,
consensual, or dividend rights with respect to the Pledged Interests pursuant to
Section 15 hereof.
 
 
 
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5. Representations and Warranties.  Each Grantor hereby represents and warrants
as follows:
 
(a) The exact legal name, jurisdiction of incorporation, organization or
formation, organizational identification number, if any, and chief executive
officer of each of the Grantors is set forth on Schedule 1  attached hereto.  No
Grantor has trade names except as set forth on Schedule 1 attached hereto.  No
Grantor has used any name other than that as set forth on Schedule 1 for the
preceding five years.  No entity has merged into any Grantor or been acquired by
any Grantor within the past five years except as set forth on Schedule 1.
 
(b) Schedule 7 attached hereto sets forth all Real Property owned or leased by
Grantors as of the Closing Date.
 
(c) As of the Closing Date, no Grantor has any interest in, or title to, any
Patents except as set forth on Schedule 4, or material Copyrights, Intellectual
Property Licenses, or Trademarks except as set forth on Schedules 2, 3, and 6,
respectively, attached hereto.  This Agreement is effective to create a valid
and continuing Lien on such Copyrights, Intellectual Property Licenses, Patents
and Trademarks and, upon filing of the Patent Security Agreement with the United
States Patent and Trademark Office, and the filing of appropriate financing
statements in the jurisdictions listed on Schedule 8 hereto, all action
necessary or desirable to protect and perfect the Security Interest in the
United States in and to each Grantor’s Patents, Trademarks, Copyrights or
Intellectual Property Licenses has been taken and such perfected Security
Interest is enforceable as such as against any and all creditors of and
purchasers from any Grantor.  No Grantor has any interest in any material
Copyright that is necessary in connection with the operation of such Grantor’s
business, except for those Copyrights identified on Schedule 2 attached hereto
which have been registered with the United States Copyright Office.
 
(d) Each Grantor has the requisite corporate, partnership, limited liability
company or other power and authority to enter into this Agreement and the other
Transaction Documents to which it is a party and otherwise to carry out its
obligations hereunder. The execution, delivery and performance by each Grantor
of this Agreement and the filings contemplated herein and the other Transaction
Documents to which it is a party have been duly authorized by all necessary
action on the part of such Grantor and no further action is required by such
Grantor.  This Agreement and the other Transaction Documents to which it is a
party has been duly executed by each Grantor.  This Agreement and the other
Transaction Documents to which it is a party constitutes the legal, valid and
binding obligation of each Grantor, enforceable against such Grantor in
accordance with its terms except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization and similar laws of general
application relating to or affecting the rights and remedies of creditors and by
general principles of equity.
 
(e) No written claim has been received by any Grantor that any Collateral or any
Grantor’s use of any Collateral violates the rights of any third party. There
has been no adverse decision to any Grantor’s claim of ownership rights in or
exclusive rights to use the Collateral in any jurisdiction or to such Grantor’s
right to keep and maintain such Collateral in full force and effect, and there
is no proceeding involving said rights pending or, to the best knowledge of such
Grantor, threatened before any court, judicial body, administrative or
regulatory agency, arbitrator or other governmental authority.
 
 
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(f) Each Grantor shall at all times maintain its books of account and records
relating to the Collateral at its principal place of business (except when
temporarily kept at the offices of its attorneys or accountants) and its
Collateral at the locations set forth on Schedule 7 attached hereto and may not
relocate such books of account and records or tangible Collateral unless it
delivers to Secured Party at least thirty (30) days prior to such relocation (i)
written notice of such relocation and the new location thereof (which must be
within the United States) and (ii) evidence that appropriate financing
statements under the Code and other necessary documents have been filed and
recorded and other steps have been taken to perfect the Security Interests to
create in favor of Secured Party, subject to Permitted Encumbrances, a valid,
perfected and continuing perfected first priority lien in the Collateral.
 
(g) The execution, delivery and performance of this Agreement and the other
Transaction Documents to which it is a party by each Grantor do not (i) violate
any of the provisions of the Organizational Documents of any Grantor or any
judgment, decree, order or award of any court, governmental body or arbitrator
or any applicable law, rule or regulation applicable to any Grantor or (ii)
conflict with, or constitute a default (or an event that with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing such Grantor’s debt or otherwise) or other understanding
to which any Grantor is a party or by which any property or asset of any Grantor
is bound or affected, except, in all cases, for such conflicts, defaults,
terminations, amendments, acceleration, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect. If any,
all required consents (including, without limitation, from stockholders or
creditors of the Grantor) necessary for the Grantor to enter into and perform
its obligations hereunder have been obtained.
 
(h) This Agreement creates a valid security interest in the Collateral of each
of Grantors, to the extent a security interest therein can be created under the
Code, securing the payment of the Secured Obligations.  Except to the extent a
security interest in the Collateral cannot be perfected by the filing of a
financing statement under the Code,  all filings and other actions necessary or
desirable to perfect and protect such security interest have been duly taken or
will have been taken upon the filing of financing statements listing each
applicable Grantor, as a debtor, and Secured Party, as secured party, in the
jurisdictions listed next to such Grantor’s name on Schedule 8 attached
hereto.  Upon the making of such filings, Secured Party shall have, subject to
Permitted Encumbrances, a first priority perfected security interest in the
Collateral of each Grantor to the extent such security interest can be perfected
by the filing of a financing statement.  All action by any Grantor necessary to
protect and perfect such security interest on each item of Collateral has been
duly taken.
 
 
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(i) (i) Except for the Security Interest created hereby, each Grantor is and
will at all times be the sole holder of record and the legal and beneficial
owner, free and clear of all Liens other than Permitted Encumbrances, of the
Pledged Interests indicated on Schedule 5 as being owned by such Grantor and,
when acquired by such Grantor, any Pledged Interests acquired after the Closing
Date; (ii) all of the Pledged Interests are duly authorized, validly issued,
fully paid and nonassessable and the Pledged Interests constitute or will
constitute the percentage of the issued and outstanding Stock of the Pledged
Companies of such Grantor identified on Schedule 5 hereto as supplemented or
modified by any Pledged Interests Addendum or any Supplement to this Agreement;
(iii) such Grantor has the right and requisite authority to pledge the
Investment Related Property pledged by such Grantor to Secured Party as provided
herein; (iv) all actions necessary or desirable to perfect, establish, subject
to Permitted Encumbrances, the first priority of, or otherwise protect, Secured
Party’s Liens in the Investment Related Collateral, and the proceeds thereof,
have been duly taken, (A) upon the execution and delivery of this Agreement, (B)
upon the taking of possession by Secured Party or its representative of any
certificates constituting the Pledged Interests, to the extent such Pledged
Interests are represented by certificates, together with undated powers endorsed
in blank by the applicable Grantor; (C) upon the filing of financing statements
in the applicable jurisdiction set forth on Schedule 8 attached hereto for such
Grantor with respect to the Pledged Interests of such Grantor that are not
represented by certificates, and (D) with respect to any Securities Accounts or
Deposit Accounts, upon the delivery of account control agreements with respect
thereto; and (v) each Grantor has delivered to and deposited with Secured Party
(or, with respect to any Pledged Interests created or obtained after the Closing
Date, will deliver and deposit in accordance with Sections 6(a) and 8 hereof)
all certificates representing the Pledged Interests owned by such Grantor to the
extent such Pledged Interests are represented by certificates, and undated
powers endorsed in blank with respect to such certificates. None of the Pledged
Interests owned or held by such Grantor has been issued or transferred in
violation of any securities registration, securities disclosure, or similar laws
of any jurisdiction to which such issuance or transfer may be subject.
 
(j) No consent, approval, authorization, or other order or other action by, and
no notice to or filing with, any Governmental Authority or any other Person is
required (i) for the grant of a Security Interest by such Grantor in and to the
Collateral pursuant to this Agreement or for the execution, delivery, or
performance of this Agreement and the other Transaction Documents to which it is
a party by such Grantor, or (ii) for the exercise by Secured Party of the voting
or other rights provided for in this Agreement or any other Transaction Document
with respect to the Investment Related Property or the remedies in respect of
the Collateral pursuant to this Agreement or any other Transaction Document,
except as may be required in connection with such disposition of Investment
Related Property by laws affecting the offering and sale of securities
generally.
 
(k) Schedule 9 attached hereto sets forth all motor vehicles owned by Grantors
as of the Closing Date, by model, model year and vehicle identification number
(“VIN”).
 
6. Covenants.  Each Grantor, jointly and severally, covenants and agrees with
Secured Party that from and after the date of this Agreement and until the date
of termination of this Agreement in accordance with Section 22 hereof:
 
 
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(a) Possession of Collateral.  In the event that any Collateral, including
Proceeds, is evidenced by or consists of Negotiable Collateral, Investment
Related Property, or Chattel Paper, and if and to the extent that perfection or
priority of Secured Party’s Security Interest is dependent on or enhanced by
possession, the applicable Grantor, promptly (and in any event within one (1)
Business Day) upon the request of Secured Party, shall execute such other
documents and instruments as shall be reasonably requested by Secured Party or,
if applicable, endorse and deliver physical possession of such Negotiable
Collateral, Investment Related Property, or Chattel Paper to Secured Party or
its representative, together with such undated powers endorsed in blank as shall
be reasonably requested by Secured Party;
 
(b) Chattel Paper.
 
(i) Each Grantor shall take all steps reasonably necessary to grant Secured
Party control of all electronic Chattel Paper in accordance with the Code and
all “transferable records” as that term is defined in Section 16 of the Uniform
Electronic Transaction Act and Section 201 of the federal Electronic Signatures
in Global and National Commerce Act as in effect in any relevant jurisdiction;
 
(ii) If any Grantor retains possession of any Chattel Paper or instruments
(which retention of possession shall be subject to the extent permitted hereby
and by the Purchase Agreement), promptly upon the request of Secured Party, such
Chattel Paper and instruments shall be marked with the following legend: “This
writing and the obligations evidenced or secured hereby are subject to the
Security Interest of XXXXXXXXX”;
 
(c) Control Agreements.
 
(i) Except to the extent otherwise permitted by the Purchase Agreement, each
Grantor shall obtain an authenticated account control agreement (or other
similar agreement) from each bank or financial institution maintaining a Deposit
Account or a Securities Account for such Grantor to which the proceeds of any
Collateral are to be received that Secured Party deems necessary or desirable to
perfect Secured Party’s Liens in such Deposit Account or Securities Account, as
applicable;
 
(ii) Except to the extent otherwise permitted by the Purchase Agreement, each
Grantor shall obtain authenticated control agreements, from each issuer of
uncertificated securities, securities intermediary, or commodities intermediary
issuing or holding any financial assets or commodities to or for any Grantor
that Secured Party deems necessary or desirable to perfect Secured Party’s Liens
in such financial assets or commodities, as applicable;
 
(d) Letter-of-Credit Rights.  Each Grantor that is or becomes the beneficiary of
a letter of credit shall promptly (and in any event within two (2) Business Days
after becoming a beneficiary), notify Secured Party thereof and, thereafter,
upon the request by Secured Party, except with respect to documentary letters of
credit received by a Grantor from customers in the ordinary course of business
if no Event of Default has occurred and is continuing, enter into a tri-party
agreement with Secured Party and the issuer or confirmation bank with respect to
letter-of-credit rights assigning such letter-of-credit rights to Secured Party
and directing all payments thereunder to a deposit account designated by Secured
Party, all in form and substance reasonably satisfactory to Secured Party;
 
 
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(e) Commercial Tort Claims.  Each Grantor shall promptly (and in any event
within two (2) Business Days of receipt thereof), notify Secured Party in
writing upon incurring or otherwise obtaining a Commercial Tort Claim after the
date hereof and, upon request of Secured Party, promptly amend Schedule 10 to
this Agreement to describe such after-acquired Commercial Tort Claim in a manner
that reasonably identifies such Commercial Tort Claim, and hereby authorizes the
filing of additional financing statements or amendments to existing financing
statements describing such Commercial Tort Claims, and agrees to do such other
acts or things deemed necessary or desirable by Secured Party to give Secured
Party, subject to Permitted Encumbrances, a first priority perfected security
interest in any such Commercial Tort Claim;
 
(f) Government Contracts.  If any Account or Chattel Paper arises out of a
contract or contracts with the United States of America or any department,
agency, or instrumentality thereof, Grantors shall promptly (and in any event
within two (2) Business Days of the creation thereof) notify Secured Party
thereof in writing and execute any instruments or take any steps reasonably
required by Secured Party in order that all moneys due or to become due under
such contract or contracts shall be assigned to Secured Party, and shall provide
written notice thereof under the Assignment of Claims Act or other applicable
law;
 
(g) Intellectual Property.
 
(i) Upon request of Secured Party, in order to facilitate filings with the
United States Patent and Trademark Office, each Grantor shall execute and
deliver to Secured Party one or more Patent Security Agreements to further
evidence Secured Party’s Liens on such Grantor’s Patents, Trademarks, or
Copyrights, and the General Intangibles of such Grantor relating thereto or
represented thereby;
 
(ii) Each Grantor shall have the duty, to the extent necessary or economically
desirable in the operation of such Grantor’s business, (A) to promptly sue for,
or take such other action with respect to, infringement, misappropriation, or
dilution and to recover any and all awarded damages for such infringement,
misappropriation, or dilution, (B) to prosecute diligently any trademark
application or service mark application that is part of such Grantor’s
Trademarks pending as of the date hereof or hereafter until the termination of
this Agreement, (C) to prosecute diligently any patent application that is part
of such Grantor’s Patents pending as of the date hereof or hereafter until the
termination of this Agreement, and (D) to take all reasonable and necessary
action to preserve and maintain all of such Grantor’s Trademarks, Patents,
Copyrights, Intellectual Property Licenses, and its rights therein, including
the filing of applications for renewal, affidavits of use, affidavits of
noncontestability and opposition and interference and cancellation
proceedings.  Each Grantor shall promptly file an application with the United
States Copyright Office for any Copyright that has not been registered with the
United States Copyright Office if such Copyright is necessary or economically
desirable in the operation of such Grantor’s business. Any expenses incurred in
connection with the foregoing shall be borne by the appropriate Grantor.  Each
Grantor further agrees not to abandon any Trademark, Patent, Copyright, or
Intellectual Property License that is necessary or economically desirable in the
operation of such Grantor’s business;
 
 
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(iii) Grantors acknowledge and agree that Secured Party shall have no duties
with respect to the Trademarks, Patents, Copyrights, or Intellectual Property
Licenses.  Without limiting the generality of this Section 6(g), Grantors
acknowledge and agree that Secured Party shall not be under any obligation to
take any steps necessary to preserve rights in the Trademarks, Patents,
Copyrights, or Intellectual Property Licenses against any other Person, but
Secured Party may do so at its option from and after the occurrence and during
the continuance of an Event of Default, and all expenses incurred in connection
therewith (including reasonable fees and expenses of attorneys and other
professionals) shall be for the sole account of the Company and Guarantors and
shall be chargeable to the Company and Guarantors;
 
(iv) In no event shall any Grantor, either itself or through any agent,
employee, licensee, or designee, file an application for the registration of any
Patent, Trademark, or Copyright with the United States Patent and Trademark
Office, the United States Copyright Office or any similar office or agency
without giving Secured Party prompt (and in any event within ten (10) Business
Days) written notice thereof.  Promptly upon any such filing, each Grantor shall
comply with Section 6(g)(i) hereof;
 
(h) Investment Related Property.
 
(i) If any Grantor shall receive or become entitled to receive any Pledged
Interests after the Closing Date, it shall promptly (and in any event within
five (5) Business Days of receipt thereof) deliver to Secured Party a duly
executed Pledged Interests Addendum identifying such Pledged Interests;
 
(ii) Upon the occurrence and during the continuance of an Event of Default, all
sums of money and property paid or distributed in respect of the Investment
Related Property which are received by any Grantor shall be held by the Grantors
in trust for the benefit of Secured Party segregated from such Grantor’s other
property, and such Grantor shall deliver it forthwith to Secured Party in the
exact form received;
 
(iii) Each Grantor shall promptly deliver to Secured Party a copy of each notice
or other communication received by it in respect of any Pledged Interests;
 
(iv) No Grantor shall make or consent to any amendment or other modification or
waiver with respect to any Pledged Interests or Pledged Operating Agreement, or
enter into any agreement or permit to exist any restriction with respect to any
Pledged Interests other than pursuant to the Transaction Documents;
 
(v) Each Grantor agrees that it will cooperate with Secured Party in obtaining
all necessary approvals and making all necessary filings under federal, state,
local, or foreign law in connection with the Security Interest on the Investment
Related Property or any sale or transfer thereof;
 
 
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(vi) As to all limited liability company interests issued under any Pledged
Operating Agreement, each Grantor hereby represents, warrants and covenants that
the Pledged Interests issued pursuant to such agreement (A) are not and shall
not be dealt in or traded on securities exchanges or in securities markets, (B)
do not and will not constitute investment company securities, and (C) are not
and will not be held by such Grantor in a securities account.  In addition, none
of the Pledged Operating Agreements or any other agreements governing any of the
Pledged Interests issued under any Pledged Operating Agreement provide or shall
provide that such Pledged Interests are securities governed by Article 8 of the
Uniform Commercial Code as in effect in any relevant jurisdiction;
 
(i) Real Property; Fixtures.  Each Grantor covenants and agrees that upon the
acquisition of any fee interest in Real Property it will promptly (and in any
event within two (2) Business Days of acquisition) notify Secured Party of the
acquisition of such Real Property and will grant to Secured Party a first
priority Mortgage on each fee interest in Real Property now or hereafter owned
by such Grantor and shall deliver such other documentation and opinions, in form
and substance satisfactory to Secured Party, in connection with the grant of
such Mortgage as Secured Party shall request in its reasonable credit judgment,
including title insurance policies, financing statements, fixture filings and
environmental audits and such Grantor shall pay all recording costs, intangible
taxes and other fees and costs (including reasonable attorneys fees and
expenses) incurred in connection therewith.  Each Grantor acknowledges and
agrees that, to the extent permitted by applicable law, all of the Collateral
shall remain personal property regardless of the manner of its attachment or
affixation to real property.
 
(j) Transfers and Other Liens.  Except as otherwise expressly permitted hereby
or by the Purchase Agreement, Grantors shall not (i) sell, assign (by operation
of law or otherwise) or otherwise dispose of, or grant any option with respect
to, any of the Collateral, or (ii) create or permit to exist any Lien upon or
with respect to any of the Collateral of any of Grantors, except for Permitted
Encumbrances.  The inclusion of Proceeds in the Collateral shall not be deemed
to constitute Secured Party’s consent to any sale or other disposition of any of
the Collateral except as expressly permitted in this Agreement, the Purchase
Agreement or the other Transaction Documents;
 
(k) Other Actions as to Any and All Collateral.  Each Grantor shall promptly
(and in any event, within 5 Business Days of acquiring or obtaining such
Collateral) notify Secured Party in writing upon (i) acquiring or otherwise
obtaining any Collateral after the date hereof consisting of Trademarks,
Patents, Copyrights, Intellectual Property Licenses, Investment Related
Property, Chattel Paper (electronic, tangible or otherwise), documents (as
defined in Article 9 of  the Code), promissory notes (as defined in the Code, or
instruments (as defined in the Code) or (ii) any amount payable under or in
connection with any of the Collateral being or becoming evidenced after the date
hereof by any Chattel Paper, documents, promissory notes, or instruments and, in
each such case upon the request of Secured Party, promptly execute such other
documents, or if applicable, deliver such Chattel Paper, other documents or
certificates evidencing any Investment Related Property and do such other acts
or things deemed reasonably necessary or desirable by Secured Party to protect
Secured Party’s Liens therein;
 
 
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(l) Motor Vehicles.  Upon request of Secured Party, with respect to all motor
vehicles owned by any Grantor, Grantor shall deliver to Secured Party, a
certificate of title for all such motor vehicles and shall cause those title
certificates to be filed (with the Secured Party’s Liens noted thereon) in the
appropriate state motor vehicle filing office; and
 
(m) Insurance.  The Grantors shall maintain with financially sound and reputable
insurers, insurance with respect to the Collateral, including Collateral
hereafter acquired, against loss or damage of the kinds and in the amounts
customarily insured against by entities of established reputation having similar
properties similarly situated and in such amounts as are customarily carried
under similar circumstances by other such entities and otherwise as is prudent
for entities engaged in similar businesses but in any event sufficient to cover
the full replacement cost thereof.  The Grantors shall cause each insurance
policy issued in connection herewith to provide, and the insurer issuing such
policy to certify to Secured Party that (a) Secured Party will be named as
lender loss payee (mortgagee, as applicable) and additional insured under each
such insurance policy; (b) if such insurance be proposed to be cancelled or
materially changed for any reason whatsoever, such insurer will promptly notify
Secured Party and such cancellation or change shall not be effective as to
Secured Party for at least thirty (30) days after receipt by Secured Party of
such notice, unless the effect of such change is to extend or increase coverage
under the policy; and (c) Secured Party will have the right (but no obligation)
at its election to remedy any default in the payment of premiums within thirty
(30) days of notice from the insurer of such default.  If no Event of Default
exists and if the proceeds arising out of any claim or series of related claims
do not exceed $25,000, loss payments in each instance will be available to the
Grantors and applied by the Grantors to the repair and/or replacement of
property with respect to which the loss was incurred.  If no Event of Default
exists and such proceeds exceed $25,000, and after an Event of Default occurs,
all proceeds then or thereafter in existence shall be paid to Secured Party (for
application to the Obligations) and, if received by any Grantor, shall be held
in trust for Secured Party and promptly paid over to Secured Party (for
application to the Obligations) unless otherwise directed in writing by Secured
Party.  Copies of such policies or the related certificates, in each case,
naming Secured Party as lender loss payee and additional insured shall be
delivered to Secured Party at least annually and at the time any new policy of
insurance is issued
 
(n) Inspection.  The Grantors shall permit Secured Party and its representatives
and agents reasonable access to inspect the Collateral during normal business
hours, upon reasonable prior notice and without undue interference with the
Grantors’ business operations, and to make copies of records pertaining to the
Collateral as may be reasonably requested by Secured Party from time to time.
 
7. Relation to Other Security Documents.  The provisions of this Agreement shall
be read and construed with the other Transaction Documents referred to below in
the manner so indicated.
 
(a) Purchase Agreement. In the event of any conflict between any provision in
this Agreement and a provision in the Purchase Agreement, such provision of the
Purchase Agreement shall control.
 
 
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(b) Note. In the event of any conflict between any provision in this Agreement
and a provision in the Note, such provision of the Note shall control.
 
(c) Patent Security Agreements.  The provisions of the Patent Security
Agreements are supplemental to the provisions of this Agreement, and nothing
contained in the Patent Security Agreements shall limit any of the rights or
remedies of Secured Party hereunder.
 
8. Further Assurances.
 
(a) Each Grantor agrees that from time to time, at its own expense, such Grantor
will promptly execute and deliver all further instruments and documents, and
take all further action, that may be necessary or that Secured Party may
reasonably request, in order to perfect and protect the Security Interest
granted or purported to be granted hereby or to enable Secured Party to exercise
and enforce its rights and remedies hereunder with respect to any of the
Collateral.
 
(b) Subject to Section 8(c), each Grantor authorizes the filing by Secured Party
of financing or continuation statements, or amendments thereto, and such Grantor
will execute and deliver to Secured Party such other instruments or notices, as
may be necessary or as Secured Party may reasonably request, in order to perfect
and preserve the Security Interest granted or purported to be granted hereby.
 
(c) Each Grantor authorizes Secured Party at any time and from time to time to
file, transmit, or communicate, as applicable, financing statements and
amendments (i) describing the Collateral as “all personal property of debtor” or
“all assets of debtor” or words of similar effect, (ii) describing the
Collateral as being of equal or lesser scope or with greater detail, or (iii)
that contain any information required by part 5 of Article 9 of the Code for the
sufficiency or filing office acceptance.  Each Grantor also hereby ratifies any
and all financing statements or amendments previously filed by Secured Party in
any jurisdiction.
 
(d) Each Grantor acknowledges that it is not authorized to file any financing
statement or amendment or termination statement with respect to any financing
statement filed in connection with this Agreement without the prior written
consent of Secured Party, subject to such Grantor’s rights under Section
9-509(d)(2) of the Code.
 
9. Secured Party’s Right to Perform Contracts, Exercise Rights, etc.  Upon the
occurrence and during the continuance of an Event of Default, Secured Party (or
its designee) (a) may proceed to perform any and all of the obligations of any
Grantor contained in any contract, lease, or other agreement and exercise any
and all rights of any Grantor therein contained as fully as such Grantor itself
could, (b) shall have the right to use any of Grantor’s rights under
Intellectual Property Licenses in connection with the enforcement of the Secured
Party’s rights hereunder, including the right to prepare for sale and sell any
and all Inventory and Equipment now or hereafter owned by any Grantor and now or
hereafter covered by such licenses, but only to the extent permitted by such
licenses or the licensors thereunder or applicable law, and (c) shall have the
right to request that any Stock that is pledged hereunder be registered in the
name of Secured Party or any of its nominees.
 
 
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10. Secured Party Appointed Attorney-in-Fact.  Each Grantor hereby irrevocably
appoints Secured Party its attorney-in-fact, with full authority in the place
and stead of such Grantor and in the name of such Grantor or otherwise, at such
time as an Event of Default has occurred and is continuing under the Note, to
take any action and to execute any instrument which Secured Party may reasonably
deem necessary or advisable to accomplish the purposes of this 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 connection
with the Accounts or any Supporting Obligations in connection therewith or any
other Collateral of such Grantor;
 
(b) to receive and open all mail addressed to such Grantor and to notify postal
authorities to change the address for the delivery of mail to such Grantor to
that of Secured Party;
 
(c) to receive, indorse, and collect any drafts or other instruments, documents,
Negotiable Collateral or Chattel Paper;
 
(d) to file any claims or take any action or institute any proceedings which
Secured Party may deem necessary or desirable for the collection of any of the
Collateral of such Grantor or otherwise to enforce the rights of Secured Party
with respect to any of the Collateral;
 
(e) to repair, alter, or supply goods, if any, necessary to fulfill in whole or
in part the purchase order of any Person obligated to such Grantor in respect of
any Account of such Grantor;
 
(f) to use any labels, Patents, Trademarks, trade names, URLs, domain names,
industrial designs, Copyrights, advertising matter or other industrial or
intellectual property rights, in advertising for sale and selling Inventory and
other Collateral and to collect any amounts due under Accounts, contracts or
Negotiable Collateral of such Grantor; and
 
(g) Secured Party shall have the right, but shall not be obligated, to bring
suit in its own name to enforce the Trademarks, Patents, Copyrights and
Intellectual Property Licenses and, if Secured Party shall commence any such
suit, the appropriate Grantor shall, at the request of Secured Party, do any and
all lawful acts and execute any and all proper documents reasonably required by
Secured Party in aid of such enforcement.
 
To the extent permitted by law, each Grantor hereby ratifies all that such
attorney-in-fact shall lawfully do or cause to be done by virtue hereof.  This
power of attorney is coupled with an interest and shall be irrevocable until
this Agreement is terminated.
 
11. Secured Party May Perform.  If any of Grantors fails to perform any
agreement contained herein, Secured Party may itself perform, or cause
performance of, such agreement, and the reasonable expenses of Secured Party
incurred in connection therewith shall be payable, jointly and severally, by
Grantors.
 
 
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12. Secured Party’s Duties.  The powers conferred on Secured Party hereunder are
solely to protect Secured Party’s interest in the Collateral, and shall not
impose any duty upon Secured Party to exercise any such powers.  Except for the
safe custody of any Collateral in its actual possession and the accounting for
moneys actually received by it hereunder, Secured Party shall have no duty as to
any Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to any Collateral.  Secured
Party shall be deemed to have exercised reasonable care in the custody and
preservation of any Collateral in its actual possession if such Collateral is
accorded treatment substantially equal to that which Secured Party accords its
own property.
 
13. Collection of Accounts, General Intangibles and Negotiable Collateral.  At
any time upon the occurrence and during the continuance of an Event of Default,
Secured Party or Secured Party’s designee may (a) notify Account Debtors of any
Grantor that the Accounts, General Intangibles, Chattel Paper or Negotiable
Collateral have been assigned to Secured Party or that Secured Party has a
security interest therein, and (b) collect the Accounts, General Intangibles and
Negotiable Collateral directly, and any collection costs and expenses shall
constitute part of such Grantor’s Secured Obligations under the Transaction
Documents.
 
14. Disposition of Pledged Interests by Secured Party.  None of the Pledged
Interests existing as of the date of this Agreement are, and none of the Pledged
Interests hereafter acquired on the date of acquisition thereof will be,
registered or qualified under the various federal or state securities laws of
the United States and disposition thereof after an Event of Default may be
restricted to one or more private (instead of public) sales in view of the lack
of such registration.  Each Grantor understands that in connection with such
disposition, Secured Party may approach only a restricted number of potential
purchasers and further understands that a sale under such circumstances may
yield a lower price for the Pledged Interests than if the Pledged Interests were
registered and qualified pursuant to federal and state securities laws and sold
on the open market.  Each Grantor, therefore, agrees that:  (a) if Secured Party
shall, pursuant to the terms of this Agreement, sell or cause the Pledged
Interests or any portion thereof to be sold at a private sale, Secured Party
shall have the right to rely upon the advice and opinion of any nationally
recognized brokerage or investment firm (but shall not be obligated to seek such
advice and the failure to do so shall not be considered in determining the
commercial reasonableness of such action) as to the best manner in which to
offer the Pledged Interest or any portion thereof for sale and as to the best
price reasonably obtainable at the private sale thereof; and (b) such reliance
shall be conclusive evidence that Secured Party has handled the disposition in a
commercially reasonable manner.
 
15. Voting Rights.
 
(a) Upon the occurrence and during the continuation of an Event of Default, (i)
Secured Party may, at its option, and with no prior notice to any Grantor, and
in addition to all rights and remedies available to Secured Party under any
other agreement, at law, in equity, or otherwise, exercise all voting rights,
and all other ownership or consensual rights in respect of the Pledged Interests
owned by such Grantor, but under no circumstances is Secured Party obligated by
the terms of this Agreement to exercise such rights, and (ii) if Secured Party
duly exercises its right to vote any of such Pledged Interests, each Grantor
hereby appoints Secured Party, such Grantor’s true and lawful attorney-in-fact
and irrevocable proxy to vote such Pledged Interests in any manner Secured Party
deems advisable for or against all matters submitted or which may be submitted
to a vote of shareholders, partners or members, as the case may be.  The
power-of-attorney granted hereby is coupled with an interest and shall be
irrevocable.
 
 
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(b) For so long as any Grantor shall have the right to vote the Pledged
Interests owned by it, such Grantor covenants and agrees that it will not,
without the prior written consent of Secured Party, vote or take any consensual
action with respect to such Pledged Interests which would materially adversely
affect the rights of Secured Party or the value of the Pledged Interests.
 
(c) If any of the Collateral subject to this Agreement consists of nonvoting
equity or ownership interests (regardless of class, designation, preference or
rights) that may be converted into voting equity or ownership interests upon the
occurrence of certain events (including, without limitation, upon the transfer
of all or any of the other stock or assets of the issuer), it is agreed that the
pledge of such equity or ownership interests pursuant to this Agreement or the
enforcement of any of Secured Party’s rights hereunder shall not be deemed to be
the type of event which would trigger such conversion rights notwithstanding any
provisions in the Organizational Documents or agreements to which the Grantor is
subject or to which the Grantor is party.
 
16. Remedies.  Upon the occurrence and during the continuance of an Event of
Default:
 
(a) Secured Party may exercise in respect of the Collateral, in addition to
other rights and remedies provided for herein, in the other Transaction
Documents, or otherwise available to it, all the rights and remedies of a
secured party on default under the Code or any other applicable law.  Without
limiting the generality of the foregoing, each Grantor expressly agrees that, in
any such event, Secured Party without demand of performance or other demand,
advertisement or notice of any kind (except a notice specified below of time and
place of public or private sale) to or upon any of Grantors or any other Person
(all and each of which demands, advertisements and notices are hereby expressly
waived to the maximum extent permitted by the Code or any other applicable law),
may take immediate possession of all or any portion of the Collateral and (i)
require Grantors to, and each Grantor hereby agrees that it will at its own
expense and upon request of Secured Party forthwith, assemble all or part of the
Collateral as directed by Secured Party and make it available to Secured Party
at one or more locations where such Grantor regularly maintains Inventory, and
(ii) without notice except as specified below, sell or otherwise dispose of the
Collateral or any part thereof in one or more parcels at public or private sale
or other disposition, at any of Secured Party’s offices or elsewhere, for cash,
on credit, and upon such other terms as Secured Party may deem commercially
reasonable. Without limiting the generality of the foregoing, Secured Party may
disclaim any and all representations and warranties in connection with any such
sale or other disposition.  Each Grantor agrees that, to the extent notice of
sale shall be required by law, at least ten (10) days notice to any of Grantors
of the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification and specifically
such notice shall constitute a reasonable “authenticated notification of
disposition” within the meaning of Section 9-611 of the Code.  Secured Party
shall not be obligated to make any sale of Collateral regardless of notice of
sale having been given.  Secured Party 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.
 
 
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(b) Secured Party is hereby granted a license or other right to use, without
liability for royalties or any other charge, each Grantor’s labels, Patents,
Copyrights, rights of use of any name, trade secrets, trade names, Trademarks,
service marks and advertising matter, URLs, domain names, industrial designs,
other industrial or intellectual property or any property of a similar nature,
whether owned by any of Grantors or with respect to which any of Grantors have
rights under license, sublicense, or other agreements, as it pertains to the
Collateral, in preparing for sale, advertising for sale and selling any
Collateral, and each Grantor’s rights under all licenses and all franchise
agreements shall inure to the benefit of Secured Party.
 
(c) Any cash held by Secured Party as Collateral and all cash proceeds received
by Secured Party in respect of any sale of, collection from, or other
realization upon all or any part of the Collateral shall be applied against the
Secured Obligations in the order set forth in the Purchase Agreement.   In the
event the proceeds of Collateral are insufficient to satisfy all of the Secured
Obligations in full, each Grantor shall remain jointly and severally liable for
any such deficiency.
 
(d) Each Grantor hereby acknowledges that the Secured Obligations arose out of a
commercial transaction, and agrees that if an Event of Default shall occur and
be continuing Secured Party shall have the right to an immediate writ of
possession without notice of a hearing.  Secured Party shall have the right to
the appointment of a receiver for the properties and assets of each of Grantors,
and each Grantor hereby consents to such rights and such appointment and hereby
waives any objection such Grantors may have thereto or the right to have a bond
or other security posted by Secured Party.
 
17. Remedies Cumulative.  Each right, power, and remedy of Secured Party as
provided for in this Agreement or in the other Transaction Documents or now or
hereafter existing at law or in equity or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power,
or remedy provided for in this Agreement or in the other Transaction Documents
or now or hereafter existing at law or in equity or by statute or otherwise, and
the exercise or beginning of the exercise by Secured Party, of any one or more
of such rights, powers, or remedies shall not preclude the simultaneous or later
exercise by Secured Party of any or all such other rights, powers, or remedies.
 
18. Marshaling. Secured Party  shall not be required to marshal any present or
future collateral security (including but not limited to the Collateral) for, or
other assurances of payment of, the Secured Obligations or any of them or to
resort to such collateral security or other assurances of payment in any
particular order, and all of its rights and remedies hereunder and in respect of
such collateral security and other assurances of payment shall be cumulative and
in addition to all other rights and remedies, however existing or arising.  To
the extent that it lawfully may, each Grantor hereby agrees that it will not
invoke any law relating to the marshaling of collateral which might cause delay
in or impede the enforcement of Secured Party’s rights and remedies under this
Agreement or under any other instrument creating or evidencing any of the
Secured Obligations or under which any of the Secured Obligations is outstanding
or by which any of the Secured Obligations is secured or payment thereof is
otherwise assured, and, to the extent that it lawfully may, each Grantor hereby
irrevocably waives the benefits of all such laws.
 
 
21

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19. Indemnity and Expenses.
 
(a) Each Grantor agrees to indemnify Secured Party from and against all claims,
lawsuits and liabilities (including reasonable attorneys fees) growing out of or
resulting from this Agreement (including enforcement of this Agreement) or any
other Transaction Document to which such Grantor is a party, except claims,
losses or liabilities resulting from the gross negligence or willful misconduct
of the party seeking indemnification as determined by a final non-appealable
order of a court of competent jurisdiction.  This provision shall survive the
termination of this Agreement and the repayment of the Secured Obligations.
 
(b) Grantors, jointly and severally, shall, upon demand, pay to Secured Party
all the fees, costs, charges and expenses which Secured Party may incur in
connection with (i) the administration of this Agreement, (ii) the custody,
preservation, use or operation of, or, upon an Event of Default, the sale of,
collection from, or other realization upon, any of the Collateral in accordance
with this Agreement and the other Transaction Documents, (iii) the exercise or
enforcement of any of the rights of Secured Party hereunder or (iv) the failure
by any of Grantors to perform or observe any of the provisions hereof.
 
20. Merger, Amendments; Etc.  THIS AGREEMENT, TOGETHER WITH THE OTHER
TRANSACTION DOCUMENTS, REPRESENTS 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 AGREEMENTS BETWEEN THE
PARTIES.  No waiver of any provision of this Agreement, and no consent to any
departure by any of Grantors herefrom, shall in any event be effective unless
the same shall be in writing and signed by Secured Party, and then such waiver
or consent shall be effective only in the specific instance and for the specific
purpose for which given.  No amendment of any provision of this Agreement shall
be effective unless the same shall be in writing and signed by Secured Party and
each of Grantors to which such amendment applies.
 
21. Addresses for Notices.  All notices and other communications provided for
hereunder shall be given in the form and manner and delivered to Secured Party
at its address specified in the Purchase Agreement, and to any of the Grantors
at their respective addresses specified in the Purchase Agreement or Guaranty,
as applicable, or, as to any party, at such other address as shall be designated
by such party in a written notice to the other party.
 
 
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22. Continuing Security Interest: Assignments under Credit Agreement.  This
Agreement shall create a continuing security interest in the Collateral and
shall (a) remain in full force and effect until the Obligations have been
indefeasibly paid in full in cash in accordance with the provisions of the Note
and the Purchase Agreement, (b) be binding upon each of Grantors, and their
respective successors and assigns, and (c) inure to the benefit of, and be
enforceable by, Secured Party, and its successors, transferees and
assigns.  Without limiting the generality of the foregoing clause (c), Secured
Party may, in accordance with the provisions of the Note and the Purchase
Agreement, assign or otherwise transfer all or any portion of its rights and
obligations under the Note and the Purchase Agreement to any other Person, and
such other Person shall thereupon become vested with all the benefits in respect
thereof granted to Secured Party herein or otherwise.  Upon indefeasible payment
in full in cash of the Obligations in accordance with the provisions of the Note
and the Purchase Agreement, the Security Interest granted hereby shall terminate
and all rights to the Collateral shall revert to Grantors or any other Person
entitled thereto.  At such time, Secured Party shall authorize the filing of
appropriate termination statements to terminate such Security Interests.  No
transfer or renewal, extension, assignment, or termination of this Agreement or
of the Note, the Purchase Agreement, any other Transaction Document, or any
other instrument or document executed and delivered by any Grantor to Secured
Party nor any additional loans made by any Lender to the Company, nor the taking
of further security, nor the retaking or re-delivery of the Collateral to
Grantors, or any of them, by Secured Party, shall release any of Grantors from
any obligation, except a release or discharge executed in writing by Secured
Party in accordance with the provisions of the Note and the Purchase
Agreement.  Secured Party shall not by any act, delay, omission or otherwise, be
deemed to have waived any of its rights or remedies hereunder, unless such
waiver is in writing and signed by Secured Party and then only to the extent
therein set forth.  A waiver by Secured Party of any right or remedy on any
occasion shall not be construed as a bar to the exercise of any such right or
remedy which Secured Party would otherwise have had on any other occasion.
 
23. Governing Law.
 
(a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER TRANSACTION DOCUMENT IN RESPECT OF
SUCH OTHER TRANSACTION DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND
ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO
WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR
THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
 
(b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH
THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS SHALL BE TRIED AND LITIGATED
ONLY IN THE STATE AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, FEDERAL COURTS
LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK; PROVIDED, HOWEVER, THAT
ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE
BROUGHT, AT SECURED PARTY’S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE
SECURED PARTY ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER
PROPERTY MAY BE FOUND.  SECURED PARTY AND EACH GRANTOR WAIVE, TO THE EXTENT
PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE
OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS
BROUGHT IN ACCORDANCE WITH THIS SECTION 23(b).
 
 
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(c) TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, SECURED PARTY AND EACH
GRANTOR HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS.  SECURED
PARTY AND EACH GRANTOR REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.  IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
 
24. New Subsidiaries.  Without impairing the limitations and restrictions of
Section 3.20 of the Purchase Agreement, any new direct or indirect Subsidiary
(whether by acquisition or creation) of Grantor is required to enter into this
Agreement by executing and delivering in favor of Secured Party a supplement to
this Agreement in the form of Annex 1 attached hereto.  Upon the execution and
delivery of Annex 1 by such new Subsidiary, 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 Agreement shall not require the consent of
any Grantor hereunder.  The rights and obligations of each Grantor hereunder
shall remain in full force and effect notwithstanding the addition of any new
Grantor hereunder.
 
25. Secured Party.  Each reference herein to any right granted to, benefit
conferred upon or power exercisable by the “Secured Party” shall be a reference
to Secured Party, its successors and assigns.
 
26. Miscellaneous.
 
(a) This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Agreement.  Delivery of an
executed counterpart of this Agreement by telefacsimile or other electronic
method of transmission shall be equally as effective as delivery of an original
executed counterpart of this Agreement.  Any party delivering an executed
counterpart of this Agreement by telefacsimile or other electronic method of
transmission also shall deliver an original executed counterpart of this
Agreement but the failure to deliver an original executed counterpart shall not
affect the validity, enforceability, and binding effect of this Agreement.  The
foregoing shall apply to each other Transaction Document mutatis mutandis.
 
 
24

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(b) Any provision of this Agreement which is prohibited or unenforceable shall
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof in that jurisdiction or affecting
the validity or enforceability of such provision in any other jurisdiction.
 
(c) Headings used in this Agreement are for convenience only and shall not be
used in connection with the interpretation of any provision hereof.
 
(d) The pronouns used herein shall include, when appropriate, either gender and
both singular and plural, and the grammatical construction of sentences shall
conform thereto.
 
(e) Unless the context of this Agreement or any other Transaction Document
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the terms “includes”
and  “including” are not limiting, and the term “or” has, except where otherwise
indicated, the inclusive meaning represented by the phrase “and/or.”  The words
“hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement
or any other Transaction Document refer to this Agreement or such other
Transaction Document, as the case may be, as a whole and not to any particular
provision of this Agreement or such other Transaction Document, as the case may
be.  Section, subsection, clause, schedule, and exhibit references herein are to
this Agreement unless otherwise specified.  Any reference in this Agreement or
in any other Transaction Document to any agreement, instrument, or document
shall include all alterations, amendments, changes, extensions, modifications,
renewals, replacements, substitutions, joinders, and supplements, thereto and
thereof, as applicable (subject to any restrictions on such alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, joinders, and supplements set forth herein or in the other
Transaction Documents).  Any reference herein or in any other Transaction
Document to the satisfaction or repayment in full of the Obligations shall mean
the repayment in full in cash (or cash collateralization in accordance with the
terms hereof) of all Obligations other than unasserted contingent
indemnification Obligations.  Any reference herein to any Person shall be
construed to include such Person’s successors and assigns.  Any requirement of a
writing contained herein or in any other Transaction Document shall be satisfied
by the transmission of a Record and any Record so transmitted shall constitute a
representation and warranty as to the accuracy and completeness of the
information contained therein.
 
[SIGNATURE PAGE FOLLOWS]
 

 
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IN WITNESS WHEREOF, the undersigned parties hereto have executed this Agreement
by and through their duly authorized officers, as of the day and year first
above written.
 
GRANTORS:
BLAST ENERGY SERVICES, INC.
 
 
By:
/s/ Michael L. Peterson
   
Name: Michael L. Peterson
   
Title: President
     
EAGLE DOMESTIC DRILLING OPERATIONS LLC
 
 
By:
/s/ Michael L. Peterson
   
Name: Michael L. Peterson
   
Title: President
     
BLAST AFJ, INC.
 
 
By:
/s/ Michael L. Peterson
   
Name: Michael L. Peterson
   
Title: President
   
SECURED PARTY:
XXXXXXXXX
 
 
By:
/s/ XXXXXXXXX
   
Name: XXXXXXXXX
   
Title: Authorized Signatory

[SIGNATURE PAGE TO SECURITY AGREEMENT]
 
 
 
 

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SCHEDULE 1
 

 
ORGANIZATIONAL INFORMATION
 
Legal Name
Jurisdiction of Incorporation
Identification Number in Jurisdiction of Formation
Chief Executive Officer
Blast Energy Services, Inc.*
 
Texas
800949748
Michael L. Peterson
Eagle Domestic Drilling Operations LLC
 
Texas
800179717
Michael L. Peterson
Blast AFJ, Inc.
 
Delaware
4762456
Michael L. Peterson

 
* Blast Energy Services, Inc. is the result of a merger between Blast Energy
Services, Inc. California and Blast Energy Services, Inc., Texas, which was
affected solely to re-domicile the company.
 

 
 

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SCHEDULE 2
 

 
COPYRIGHT REGISTRATIONS AND APPLICATIONS
 

 
NONE
 

 
 

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SCHEDULE 3
 

 
INTELLECTUAL PROPERTY LICENSES
 

 
NONE
 
 
 
 

 
 

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SCHEDULE 4
 

 
PATENTS AND PATENT APPLICATIONS
 

 
    Patent Applicant
Application
or Patent No.
 
Country
Issue or
Filing Date
Expiration Date
 
Title
 
Owner
Blast Energy Services, Inc.
12706712
USA
February 17 2010
Patent pending
Blasting Lateral Holes from Existing Well Bores
John Adam

 

 
 

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SCHEDULE 5
 
PLEDGED COMPANIES
 

 
Name of Pledgor
Name of Pledged Company
Number of Shares/Units
Class of Interests
Percentage of Class Owned
Certificate Nos.
Blast Energy Services, Inc.
Eagle Domestic Drilling Operations, LLC
100%of Membership Interest
Membership Interests
100%
Non-Certificated Shares
Blast Energy Services, Inc.
Blast AFJ, Inc.
90,000,000
Common Stock
100%
Non-Certificated Shares

 

 

 
 

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SCHEDULE 6
 
TRADE NAMES, TRADEMARKS, TRADEMARK APPLICATIONS, SERVICE MARKS, AND SERVICE MARK
APPLICATIONS
 

 
NONE
 

 
 

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SCHEDULE 7
 
OWNED OR LEASED REAL PROPERTY
 

 
Address
Activity & Assets
Landlord, Warehouse or Consignee
Hockley, TX  77447
Storage of AFJ Tractor  Trailer, spare engine and other down-hole equipment
Landlord
14550 Torrey Chase Blvd., Suite 330
Houston, Texas 77014
Corporate Office Location of books and records
Frontline Group
N. Sugar Valley Field
Old Van Vleck Road
Sugar Valley, TX 77480
Matagorda County
Non-operating interest in oil and gas leases held by the oil production from the
Milberger #1 unit, the Milberger #2 well and the Oxbow #1 well.
Sun Resources Texas, Inc. (operator)

 

 

 
 

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SCHEDULE 8
 

 
LIST OF UNIFORM COMMERCIAL CODE FILING JURISDICTIONS
 

 
Grantor
 
Jurisdictions
Blast Energy Services, Inc.
 
Texas and California
Eagle Domestic Drilling Operations LLC
 
Texas
Blast AFJ, Inc.
 
Delaware and Texas

 

 

 

 
 

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SCHEDULE 9
 
MOTOR VEHICLES
 

 
AFJ Semi-Tractor Trailer Rig:
 
 
2000 Volvo Diesel Tractor
 
VIN#
2006 Doonan Dropdeck Trailer
 
VIN#
Service Trailer:
 
 
2005 Load Trail Gooseneck Trailer
 
VIN#

 
 
 
 
 

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SCHEDULE 10
 

 
COMMERCIAL TORT CLAIMS
 
[include specific case caption or descriptions per Official Code Comment 5 to
Section 9-108 of the Code]
 

 
NONE