deepdown_10q-ex1001.htm


    


     

    Exhibit
10.1

    


     

    


     

     

    CREDIT
AGREEMENT

     

    between

     

    DEEP
DOWN, INC.

    


    as
Borrower

     

    and

     

    WHITNEY
NATIONAL BANK

    


    as
Lender

    
 

    As
of November 11, 2008

     

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    TABLE
OF CONTENTS

     

         Page

    
      
        	
                SCHEDULES
      AND EXHIBITS

              	
                 

              	
                iv  

              
	
                SECTION
      1

              	
                DEFINITIONS
      AND TERMS.

              	
                1

              
	
                1.1

              	
                Definitions

              	
                1

              
	
                1.2

              	
                Interpretive
      Provisions

              	
                12

              
	
                1.3

              	
                Accounting
      Terms

              	
                13

              
	
                1.4

              	
                References
      to Documents

              	
                13

              
	
                1.5

              	
                Time

              	
                13

              
	 	 	 
	
                SECTION
      2

              	
                LOAN
      COMMITMENTS.

              	
                13

              
	
                2.1

              	
                Term
      Facility

              	
                13

              
	
                2.2

              	
                Revolving
      Credit Facility

              	
                13

              
	
                2.3

              	
                Loan
      Procedure.

              	
                13

              
	
                2.4

              	
                LIBOR
      Loans and Prime Rate Loans

              	
                14

              
	
                2.5

              	
                Prepayment

              	
                14

              
	
                2.6

              	
                LC
      Facility

              	
                15

              
	 	 	 
	
                SECTION
      3

              	
                TERMS
      OF PAYMENT.

              	
                16

              
	
                3.1

              	
                Notes
      and Payments

              	
                16

              
	
                3.2

              	
                Term
      Facility

              	
                17

              
	
                3.3

              	
                Revolving
      Credit Facility

              	
                17

              
	
                3.4

              	
                Order
      of Application

              	
                17

              
	
                3.5

              	
                Interest

              	
                17

              
	
                3.6

              	
                Default
      Rate

              	
                18

              
	
                3.7

              	
                Interest
      Calculations

              	
                18

              
	
                3.8

              	
                Maximum
      Rate

              	
                18

              
	
                3.9

              	
                Set
      off

              	
                18

              
	
                3.10

              	
                Debit
      Account

              	
                19

              
	 	 	 
	
                SECTION
      4

              	
                FEES.

              	
                19

              
	
                4.1

              	
                Treatment
      of Fees

              	
                19

              
	
                4.2

              	
                Letter
      of Credit Fees

              	
                19

              
	
                4.3

              	
                Unused
      Fees

              	
                19

              
	
                4.4

              	
                Closing
      Fee

              	
                19

              
	 	 	 
	
                SECTION
      5

              	
                CONDITIONS
      PRECEDENT

              	
                19

              
	
                5.1

              	
                Conditions
      to Initial Loans

              	
                19

              
	
                5.2

              	
                Conditions
      to Term Loan

              	
                19

              
	
                5.3

              	
                Conditions
      to All Loans

              	
                19

              
	
                5.4

              	
                No
      Waiver

              	
                20

              
	 	 	 
	
                SECTION
      6

              	
                SECURITY
      AND GUARANTIES

              	
                20

              
	
                6.1

              	
                Collateral

              	
                20

              
	
                6.2

              	
                Financing
      Statements

              	
                20

              
	
                6.3

              	
                Guaranties

              	
                20

              


      

       

      
        
          
          

        

        
          i

          
            

          

        

        
          
          

        

      

       

      
        	
                SECTION
      7

              	
                REPRESENTATIONS
      AND WARRANTIES

              	
                20

              
	
                7.1

              	
                Existence,
      Good Standing, and Authority to do Business

              	
                20

              
	
                7.2

              	
                Subsidiaries

              	
                20

              
	
                7.3

              	
                Authorization,
      Compliance, and No Default

              	
                20

              
	
                7.4

              	
                Enforceability

              	
                20

              
	
                7.5

              	
                Litigation

              	
                20

              
	
                7.6

              	
                Taxes

              	
                21

              
	
                7.7

              	
                Environmental
      Matters

              	
                21

              
	
                7.8

              	
                Ownership
      of Assets; Intellectual Property

              	
                21

              
	
                7.9

              	
                Liens

              	
                21

              
	
                7.10

              	
                Debt

              	
                21

              
	
                7.11

              	
                Insurance

              	
                21

              
	
                7.12

              	
                Place
      of Business; Real Property

              	
                21

              
	
                7.13

              	
                Purpose
      of Credit Facilities

              	
                21

              
	
                7.14

              	
                Transactions
      with Affiliates

              	
                21

              
	
                7.15

              	
                Financial
      Information

              	
                22

              
	
                7.16

              	
                Material
      Agreements and Funded Debt

              	
                22

              
	
                7.17

              	
                ERISA.

              	
                22

              
	 	 	 
	
                SECTION
      8

              	
                AFFIRMATIVE
      COVENANTS

              	
                22

              
	
                8.1

              	
                Items
      to be Furnished

              	
                22

              
	
                8.2

              	
                Books,
      Records, Inspections, and Field Audits

              	
                23

              
	
                8.3

              	
                Taxes

              	
                23

              
	
                8.4

              	
                Compliance
      with Laws

              	
                23

              
	
                8.5

              	
                Maintenance
      of Existence, Assets, and Business

              	
                23

              
	
                8.6

              	
                Insurance

              	
                23

              
	
                8.7

              	
                Environmental
      Laws

              	
                23

              
	
                8.8

              	
                ERISA

              	
                23

              
	
                8.9

              	
                Use
      of Proceeds

              	
                23

              
	
                8.10

              	
                Application
      of Insurance and Eminent Domain Proceeds

              	
                24

              
	
                8.11

              	
                New
      Subsidiaries

              	
                24

              
	
                8.12

              	
                Expenses

              	
                24

              
	
                8.13

              	
                Maintenance
      of Cash Management Agreement

              	
                24

              
	
                8.14

              	
                Further
      Assurances

              	
                24

              
	 	 	 
	
                SECTION
      9

              	
                NEGATIVE
      COVENANTS

              	
                26

              
	
                9.1

              	
                Debt

              	
                26

              
	
                9.2

              	
                Liens

              	
                26

              
	
                9.3

              	
                Compliance

              	
                26

              
	
                9.4

              	
                Loans
      and Investments

              	
                26

              
	
                9.5

              	
                Dividends

              	
                26

              
	
                9.6

              	
                Acquisition,
      Mergers, and Dissolutions

              	
                26

              
	
                9.7

              	
                Assignment

              	
                27

              
	
                9.8

              	
                Fiscal
      Year and Accounting Methods

              	
                27

              
	
                9.9

              	
                Sale
      of Assets

              	
                27

              
	
                9.10

              	
                New
      Businesses

              	
                27

              
	
                9.11

              	
                Transactions
      with Affiliates

              	
                27

              
	
                9.12

              	
                Payroll
      Taxes

              	
                27

              
	
                9.13

              	
                Prepayment
      of Debt

              	
                27

              


      

       

      
        
          
          

        

        
          ii

          
            

          

        

        
          
          

        

      

       

      
        	
                SECTION
      10

              	
                FINANCIAL
      COVENANTS

              	
                27

              
	
                10.1

              	
                Leverage
      Ratio

              	
                27

              
	
                10.2

              	
                Fixed
      Charge Coverage Ratio

              	
                27

              
	
                10.3

              	
                Tangible
      Net Worth

              	
                28

              
	 	 	 
	
                SECTION
      11

              	
                DEFAULT

              	
                28

              
	
                11.1

              	
                Payment
      of Obligation

              	
                28

              
	
                11.2

              	
                Covenants

              	
                28

              
	
                11.3

              	
                Debtor
      Relief

              	
                28

              
	
                11.4

              	
                Judgments

              	
                28

              
	
                11.5

              	
                Misrepresentation

              	
                28

              
	
                11.6

              	
                Default
      Under Other Agreements

              	
                28

              
	
                11.7

              	
                Validity
      and Enforceability of Loan Documents

              	
                29

              
	
                11.8

              	
                Swap
      Agreement

              	
                29

              
	
                11.9

              	
                Change
      of Management

              	
                29

              
	
                11.10

              	
                Ownership
      of Other Companies

              	
                29

              
	
                11.11

              	
                Material
      Adverse Event

              	
                29

              
	 	 	 
	
                SECTION
      12

              	
                RIGHTS
      AND REMEDIES

              	
                29

              
	
                12.1

              	
                Remedies
      Upon Default

              	
                29

              
	
                12.2

              	
                Waivers

              	
                29

              
	
                12.3

              	
                No
      Waiver

              	
                30

              
	
                12.4

              	
                Performance
      by Lender

              	
                30

              
	
                12.5

              	
                Cumulative
      Rights

              	
                30

              
	 	 	 
	
                SECTION
      13

              	
                MISCELLANEOUS

              	
                30

              
	
                13.1

              	
                Governing
      Law

              	
                30

              
	
                13.2

              	
                Invalid
      Provisions

              	
                30

              
	
                13.3

              	
                Multiple
      Counterparts and Facsimile Signatures

              	
                30

              
	
                13.4

              	
                Notice

              	
                30

              
	
                13.5

              	
                Binding
      Effect; Survival

              	
                31

              
	
                13.6

              	
                Amendments

              	
                31

              
	
                13.7

              	
                Participants

              	
                31

              
	
                13.8

              	
                Discharge
      Only Upon Payment in Full; Reinstatement in Certain
      Circumstances

              	
                31

              
	
                13.9

              	
                Waiver
      of Jury Trial

              	
                31

              
	
                13.10

              	
                Indemnity

              	
                31

              
	
                13.11

              	
                ENTIRETY

              	
                32

              
	
                13.12

              	
                Confidentiality

              	
                32

              
	
                13.13

              	
                Non-Business
      Days

              	
                32

              


      

    

     

    
      
        
        

      

      
        iii

        
          

        

      

      
        
        

      

    

     

    SCHEDULES
AND EXHIBITS

     

    
      
        	
                SCHEDULE
      1.1

              	
                Parties,
      Addresses, and Wiring Information

              
	
                SCHEDULE
      1.2

              	
                Existing
      Debt and Liens

              
	
                SCHEDULE
      3.2

              	
                Amortization
      Schedule

              
	
                SCHEDULE
      5

              	
                Conditions
      Precedent

              
	
                SCHEDULE
      7.2

              	
                Subsidiaries

              
	
                SCHEDULE
      7.5

              	
                Litigation

              
	
                SCHEDULE
      7.12

              	
                Place
      of Business

              
	
                SCHEDULE
      7.14

              	
                Transactions
      with Affiliates

              
	
                SCHEDULE
      7.16

              	
                Material
      Agreements

              
	
                SCHEDULE
      9.13

              	
                Subordinated
      Debt that May be Prepaid

              
	 
      	 
      
	
                EXHIBIT
      A-1

              	
                Term
      Note

              
	
                EXHIBIT
      A-2

              	
                Revolving
      Note

              
	
                EXHIBIT
      B

              	
                Guaranty
      (Corporate Guarantors)

              
	
                EXHIBIT
      C

              	
                Loan
      Request

              
	
                EXHIBIT
      D

              	
                Borrowing
      Base and No Default Certificate

              
	
                EXHIBIT
      E

              	
                Compliance
      Certificate

              
	
                EXHIBIT
      F

              	
                Security
      Agreement

              
	
                EXHIBIT
      G

              	
                Pledge
      Agreement

              


      

    

    
    

    
      
        
        

      

      
        iv

        
          

        

      

      
        
        

      

    

     

    CREDIT
AGREEMENT

     

    THIS
CREDIT AGREEMENT is entered into as of November 11, 2008, between DEEP DOWN,
INC., a Nevada corporation (“Borrower”),
and WHITNEY NATIONAL BANK, a national banking association (the “Lender”).

     

    RECITALS

     

    
      	
              A.

            	
               Borrower
      has requested that Lender extend credit to it in the form of a revolving
      credit facility in the maximum principal amount of up to $2,000,000 to be
      used for working capital and general corporate
  purposes.

            


    

     

    
      	
              B.

            	
               Borrower
      has requested that Lender make provision in this Agreement for a single
      advance term loan to be used to acquire the
  Properties.

            


    

     

    
      	
              C.

            	
               Lender
      has agreed to extend to Borrower the requested credit on the terms and
      conditions set out in this
Agreement:

            


    

     

    Accordingly,
Borrower and Lender agree as follow:

     

    SECTION 1 DEFINITIONS AND
TERMS.

     

    1.1  Definitions.  As
used in the Loan Documents:

     

    Affiliate
means as to any Person, any other Person that directly or indirectly
controls, or is controlled by, or is under common control with, that
Person.  For purposes of this definition (a) “control,” “controlled by,” and “under common control with”
mean possession, directly or indirectly, of power to direct (or cause the
direction of) management or policies of a Person, whether through ownership of
voting interests or other ownership interests, by contract, or otherwise, and
(b) the term “Affiliate” includes each
director or executive officer of Borrower, and each of the following as “Affiliates” of the others
(i) each Guarantor, (ii) Borrower, (iii) any corporation, partnership
or limited liability company whose primary shareholders, partners or members are
the spouse, children or other family member of any Management Shareholder, and
(iv) any trust whose primary beneficiaries are the spouse, children or
other family member of any Management Shareholder.

     

    Agreement
means this Credit Agreement, and all exhibits and schedules to this Agreement,
in each case as amended, supplemented or restated from time to
time.

     

    Applicable
Rate means, the applicable rate for LIBOR Loans, the applicable rate for
LCs, and the applicable rate for the unused fees, in each case, is based on the
Leverage Ratio as follows:

     

    
      
        	
                Level

              	
                Leverage
      Ratio

              	
                Applicable
      Rate for LIBOR Loan

              	
                Applicable
      Rate for LC Fees

              	
                Applicable
      Rate for Unused Fees

              
	
                I

              	
                Greater
      than 1.50 to 1.00

              	
                3.00%

              	
                2.50%

              	
                0.50%

              
	
                II

              	
                Less
      than or equal 1.50 to 1.00 but greater than or equal to 1.00 to
      1.00

              	
                2.50%

              	
                2.00%

              	
                0.375%

              
	
                III

              	
                Less
      than 1.00 to 1.00

              	
                2.00%

              	
                1.50%

              	
                0.25%

              


      

    

     

    The
Applicable Rate will be determined from Borrower’s most recent Compliance
Certificate (and Current Financials) received by Lender in accordance with this
Agreement.  Until Lender receives the first Compliance Certificate
(and Current Financials), the Applicable Rate shall be the Level I Applicable
Rate.  Upon receipt of the Compliance Certificate (and Current
Financials), the Applicable Rate will be in effect from the first day of the
month following the due date for such Compliance Certificate (or the Current
Financials) until the due date for the next Compliance Certificate (or Current
Financials).  If any Compliance Certificate is (or Current Financials
are) not delivered on time, the Applicable Rate from the due date of such
Compliance Certificate (or Current Financials) until the date Borrower delivers
such items (or until the Default Rate becomes applicable) shall be the Level III
Applicable Rate.

     

    
      
        
        

      

      
        1

        
          

        

      

      
        
        

      

    

     

    Appraised Value
means with respect to the Properties, a written statement in Proper Form
independently and impartially prepared by a state-certified appraiser acceptable
to Lender which complies with Title XI of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 and 12 C.F.R. Section 34 (each as amended
and revised from time to time) of such real property’s Fair Market Sales Value
as of the date of the appraisal.  For purposes of this definition,
“Fair Market Sales Value” means the amount (not less than zero) that would be
paid in cash for the ownership of the applicable property in an arm’s-length
transaction between an informed and willing purchaser and an informed and
willing seller, neither of whom is under any compulsion to purchase or
sell.  The Fair Market Sales Value shall be determined based on the
assumption that the property is in good condition, properly maintained and
repaired, ordinary wear and tear excepted.

     

    Borrower
means Deep Down, Inc., a Nevada corporation.

     

    Borrowing
Base means, when determined, an amount equal to 80% of Eligible
Receivables, less any Reserves established by Lender and in effect at such
time.

     

    Borrowing Base
Certificate means a Borrowing Base and No Default Certificate
substantially in the form of Exhibit D,
but containing such other information as Lender may reasonably request with
respect to the amount, content, or calculation of the Borrowing Base, and which
is signed by a Responsible Officer of Borrower.

     

    Business
Day means any day other than a Saturday, Sunday or other day on which
commercial banks are authorized to close under the Laws of, or are in fact
closed in, the state where Lender’s Office is located and, if such day relates
to any LIBOR Loan, means any such day on which banks in London are open for
business and dealing in offshore dollars.

     

    Cash
Collateralize means to pledge and deposit with or deliver to Lender, as
collateral for the LC Exposure, cash or deposit account balances in an amount
equal to at least 105% of the face amount of all outstanding LCs pursuant to
documentation in form and substance satisfactory to Lender.

     

    Cash Management
Agreement means one or more treasury management, cash management, or
lockbox agreements (or a combination of such agreements) entered into by
Borrower and Lender under which amounts paid to Borrower are automatically
deposited into Borrower’s accounts and Borrower’s accounts with Lender are swept
or debited via ACH transactions and amounts are automatically repaid under the
Revolving Credit Facility, as such agreements may be amended or replaced from
time to time.

     

    Change of
Management means that (a) Ronald E. Smith ceases to be chief executive
officer of the Borrower, (b) Eugene L. Butler ceases to be an executive officer
of the Borrower, or (c) Robert E. Chamberlain, Jr. ceases to be an executive
officer of the Borrower.

     

    Closing
Date means November 11, 2008.

     

    Collateral
is defined in Section
6.1.

     

    Commitment
means Lender’s obligation and commitment under this Agreement to make Loans to
Borrower.

     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

    

     

    Company or
Companies
means, at any time, the Borrower and its Subsidiaries.

     

    Compliance
Certificate means a certificate substantially in the form of Exhibit E
signed by a Responsible Officer.

     

    Current
Financials means, when determined, the consolidated financial statements
of the Companies most recently delivered to Lender under Section
8.1.

     

    Debt means
(without duplication), for any Person, (a) all obligations required by GAAP
to be classified upon such Person’s balance sheet as liabilities,
(b) liabilities to the extent secured (or for which and to the extent the
holder of the Debt has an existing right, contingent or otherwise, to be so
secured) by any Lien existing on property owned or acquired by that Person,
(c) capital leases and other obligations that have been (or under GAAP
should be) capitalized for financial reporting purposes, (d) all guaranties,
endorsements, letters of credit, and other contingent liabilities with respect
to Debt or obligations of others, and (e) the net obligation of such Person
under any Swap Contract (which, on any date, shall be deemed to be the Swap
Termination Value as of such date).  For purposes hereof, the Debt of
any Person shall include the Debt of any partnership or joint venture (other
than a joint venture that is itself a corporation or limited liability company)
in which such Person is a general partner or a joint venturer, unless such Debt
is expressly made non-recourse to such Person.

     

    Debtor Relief
Laws means Title 11 of
the United States Code and all other applicable liquidation,
conservatorship, bankruptcy, fraudulent transfer, assignment for the benefit of
creditors, moratorium, rearrangement, receivership, insolvency, reorganization,
suspension of payments, or similar debtor relief Laws of the United States or
other applicable jurisdictions from time to time in effect and affecting the
rights of creditors generally.

     

    Deed of
Trust means each Deed of Trust in Proper Form and executed by any
Company, as debtor, for the benefit of Lender, to secure the
Obligation.

     

    Default is
defined in Section
11.

     

    Default
Rate means, from day-to-day, an annual rate of interest equal to the
lesser of (a)
LIBOR  plus
5% and (b) the Maximum Rate.

     

    Disposition
means the sale, lease, transfer, conveyance, assignment, license, or other
disposition (including any sale and leaseback transaction) of any asset by any
Person, including any sale, assignment, transfer, conveyance, or other
disposition, with or without recourse, of any notes or accounts receivable or
any rights and claims associated therewith.

     

    Dollar,
Dollars or
$
mean lawful money of the U. S.

     

    EBITDA
means consolidated net income of the Companies, plus income taxes, plus Interest Expense, plus depreciation and
amortization, plus non-cash stock-based compensation in each case to the extent
subtracted in calculating net income.

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

    

     

    Eligible
Receivables means all of the Companies’ accounts in which Lender has a
first priority perfected security interest and Lien for which the applicable
Company’s right to receive payment is absolute and not contingent upon the
satisfaction of any condition, but does not include (a) any account which is
unpaid more than 90 days from its invoice date or more than 60 days from its due
date, (b) any inter-Company or Affiliate account, (c) any “contra” account, or
any account for which a right of set off, counterclaim, dispute, objection,
complaint, defense has been asserted, (d) any account of a Governmental
Authority, (e) any account arising from a “sale on approval,” “sale or return,”
“consignment,” or subject to any other repurchase or return agreement, (f) any
account which arises from the sale or lease to, or performance of services for,
or represents an obligation of, an employee or Affiliate of any Company, (g) all
accounts which represent an obligation of an account debtor of any Company when
20% or more of such Company’s accounts from such account debtor are not Eligible
Receivables, (h) that portion of any account from an account debtor which
represents the amount by which total accounts from such account debtor exceeds
20% of the Companies’ total accounts, (i) any accounts arising from sales of
goods or services in which the performance of any Company has been bonded, (j)
any account which arises out of a contract or order which, by its terms, forbids
or makes void or unenforceable any assignment by any Company to Lender of the
account receivable arising with respect thereto, (k) any account on cash or
“COD” terms or payable by credit card, (l) any account which is a pre-billing,
bill and hold, progress billing or retention receivable, (m) any account in
which the account debtor obligated on such account is insolvent or the subject
of any bankruptcy or insolvency proceeding of any kind, (n) any account for
which there exists a discount, except regular discounts allowed in the ordinary
course of business to promote prompt payment, (o) any foreign account unless (1)
such account is supported by a letter of credit in Proper Form, or (2) the
underlying transaction giving rise to the account has been approved by Lender in
writing, (p) any account of an account debtor which has become subject (other than as a creditor or
as a purchaser) to any Debtor Relief Law, (q) any account that is payable in
currency other than
Dollars, (r) any account of an account debtor for which there is a history
(within the immediately preceding twelve months) of accounts which are unpaid
for more than 90 days from their invoice date, and (s) any account that
Lender in its sole discretion determines to be ineligible.  The amount
of Eligible Receivables owned by an account debtor to such Company shall be
reduced by the amount of all “contra accounts” and other obligations owed by
Borrower or any other Company to such account debtor.  Accounts which
are at any time Eligible Receivables, but which subsequently fail to meet any of
the foregoing requirements shall, at such time, cease to be Eligible
Receivables.

     

    Eminent Domain
Event means any Governmental Authority or any Person acting under a
Governmental Authority institutes proceedings to condemn, seize or appropriate
all or part of any asset of a Company.

     

    Eminent Domain
Proceeds means all amounts received by any Company as a result of any
Eminent Domain Event.

     

    Employee
Plan means a pension, profit-sharing, or stock bonus plan intended to
qualify under Section 401(a) of the Tax Code, maintained or contributed to
by Borrower or any ERISA Affiliate, including any multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA.

     

    Environmental
Law means any Law that relates to the pollution or protection of the
environment, the release of any materials into the environment, including those
related to Hazardous Substances, air emissions and discharges to waste or public
systems, or to health and safety.

     

    ERISA
means the Employee Retirement
Income Security Act of 1974, as amended, and its related rules,
regulations, and published interpretations.

     

    ERISA
Affiliate means any trade or business (whether or not incorporated) under
common control with Borrower within the meaning of Section 414(b) or (c) of
the Tax Code (including any multiemployer plan within the meaning of Section
4001(a)(3) of ERISA).

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

    

     

    Finance Code
means, Chapter 303 of the Texas Finance Code.

     

    Fixed Charge
Coverage Ratio means, when determined, for the most recently completed
four fiscal quarter period, the ratio of (a) EBITDA to (b) the sum of Interest Expense,
plus the amount of
principal payments made on Subordinated Debt, plus the amount of scheduled
principal payments on senior Funded Debt.

     

    Funded
Debt means, when determined, (a) all Debt of the Companies for
borrowed money (whether as a direct obligor on a promissory note, a
reimbursement obligor on a letter of credit, a guarantor, or otherwise), and
(b) all capital lease obligations of the Companies.

     

    GAAP means
generally accepted accounting principles in the U.S. set out in the opinions and
pronouncements of the of the Accounting Principles Board of the American
Institute of Certified Public Accountants and the Financial Accounting Standards
Board as in effect from time to time.

     

    Governmental
Authority means any nation or government, any state or other political
subdivision thereof, any agency, authority, instrumentality, regulatory body,
court, administrative tribunal, central bank or other entity exercising
executive, legislative, judicial, taxing, regulatory or administrative powers or
functions of, or pertaining to, government.

     

    Guarantor
means each of, and Guarantors
means all of, (a) Deep Down Inc., a Delaware corporation, ElectroWave USA, Inc.,
a Nevada corporation, Mako Technologies, LLC, a Nevada limited liability
company, and Flotation Technologies, Inc., a Maine corporation, (b) any of
Borrower’s other Subsidiaries, or (c) any other Person which signs a
Guaranty.

     

    Guaranty
means a guaranty substantially in the form of Exhibit B.

     

    Hazardous
Substance means (a) any explosive or radioactive substance or waste,
all hazardous or toxic substances, waste, or other pollutants, and any other
substance the presence of which requires removal, remediation or investigation
under any applicable Environmental Law, (b) any substance that is defined
or classified as a hazardous waste, hazardous material, pollutant, contaminant,
or toxic or hazardous substance under any applicable Environmental Law, or
(c) petroleum, petroleum distillates, petroleum products, oil,
polychlorinated biphenyls, radon gas, infectious medical wastes, and asbestos or
asbestos-containing materials.

     

    Honor Date
has the meaning given such term in Section
2.6(b)(i).

     

    ICC has
the meaning given such term in Section
2.6(e).

     

    Indemnified
Liabilities is defined in Section
13.10.

     

    Indemnitees
is defined in Section
13.10.

     

    Insurance
Proceeds means all proceeds in respect of any insurance policy maintained
by any Company under the terms of this Agreement.

     

    Interest
Expense means, for any period, total interest expense of the Companies
for such period in respect of all outstanding Debt of the Companies, whether
paid, accrued, expensed or capitalized, and includes, without limitation, all
commissions, discounts, commitment fees and other fees and charges owed in
respect of such Debt (after taking into account the costs or benefits under any
Swap Agreement), including that portion of any lease payment under a capital
lease which would be treated as interest under GAAP, and interest on Debt used
to finance working capital.

     

    Laws
means, collectively, all international, foreign, federal, state and local
statutes, treaties, rules, guidelines, regulations, ordinances, codes and
administrative or judicial precedents or authorities, including the
interpretation or administration thereof by any Governmental Authority charged
with the enforcement, interpretation or administration thereof, and all
applicable administrative orders, requests, licenses, authorizations and permits
of, and agreements with, any Governmental Authority (whether or not such orders,
requests, licenses, authorizations, permits or agreements have the force of
law).

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    LC means
each standby letter of credit issued by Lender on or after the Closing Date for
the account of Borrower under this Agreement and under an LC
Application.

     

    LC Application
means an application and agreement for the issuance or amendment of a
standby letter of credit for the account of Borrower in the form from time to
time in use by Lender.

     

    LC
Borrowing means an extension of credit under the Revolving Credit
Facility resulting from a drawing under any LC which has not been timely
reimbursed by Borrower.

     

    LC Committed
Amount means $2,000,000 which is part of, and not in addition to, the
Revolving Committed Amount.

     

    LC Credit
Extension means, with respect to any LC, the issuance, extension of the
expiry date, amendment, renewal, or increase of the amount of such
LC.

     

    LC
Exposure means, at any time and without duplication, the sum of (a) the aggregate
undrawn maximum face amount of each LC at such time, plus (b) the aggregate unpaid
obligations of Borrower to reimburse the issuer for amounts paid by the issuer
under LCs issued under Section 2.6.

     

    LC
Facility means the facility for the issuance of LCs, as described in
Section 2.6.

     

    LC Fee is
defined in Section
4.2.

     

    Lender’s
Office means Lender’s address, and, as appropriate, account as set out on
Schedule
1.1, or such other address or account as Lender may from time to time
notify Borrower.

     

    Leverage
Ratio means, as of any date of determination, the ratio of (a) the consolidated
Funded Debt of all Companies as of such date to (b) consolidated EBITDA of all
Companies for the period of the four fiscal quarters most recently
ended.

     

    LIBOR
means, when determined, the rate per annum equal to British Bankers
Association LIBOR Rate (“BBA
LIBOR”), as published by Reuters (or other commercially available source
providing quotations of BBA LIBOR as selected by Lender from time to time) at
approximately 11:00 a.m. London time two (2) Business Days before the date of
determination, for Dollar deposits (for delivery on the Loan Date) with a term
of one month (and as adjusted from time to time in the Lender’s sole discretion
for reserve requirements, deposit insurance assessment rates and other
regulatory costs).  If such rate is not available at such time for any
reason, then the rate for that interest period will be determined by such
alternate method as reasonably selected by Lender.

     

    LIBOR Loan
means a Loan bearing interest based on LIBOR.

     

    Lien means
any lien (statutory or other), mortgage, security interest, financing statement,
collateral assignment, pledge, assignment, charge, hypothecation, deposit
arrangement, or preference, priority or other security interest or preferential
arrangement of any kind or nature whatsoever (including any conditional sale or
other title retention agreement, and any financing lease having substantially
the same economic effect as any of the foregoing), or encumbrance of any kind,
and any other right of or arrangement with any creditor (whether based on common
law, constitutional provision, statute or contract) to have its claim satisfied
out of any property or assets, or their proceeds, before the claims of the
general creditors of the owner of the property or assets.

     

    
      
        
        

      

      
        6

        
          

        

      

      
        
        

      

    

     

    Litigation
means any action by or before any Governmental Authority, arbitrator, or
arbitration panel.

     

    Loan means
any amount disbursed by Lender (a) to, or on behalf of, Borrower under the Loan
Documents, whether or not such amount constitutes an original disbursement of
funds, or (b) in accordance with, and to satisfy the obligations of Borrower
under, any Loan Document.

     

    Loan Date
means for any Loan requested by a Borrower under a Loan Request, the date on
which funds are to be transferred to, or made available to,
Borrower.

     

    Loan
Documents means (a) this Agreement, certificates and requests delivered
under this Agreement, and exhibits and schedules to this Agreement, (b) the
Notes, (c) all Guaranties, (d) the Security Documents, (e) all Swap Contracts,
(f) all other agreements, documents, and instruments in favor of Lender ever
delivered in connection with or under this Agreement, and (g) all renewals,
extensions, amendments, modifications, supplements, restatements, and
replacements of, or substitutions for, any of the foregoing.

     

    Loan
Request means a request substantially in the form of Exhibit C.

     

    Management
Shareholder means each of, and Management
Shareholders means all of, Eugene L. Butler, Ronald E. Smith, and Robert
E. Chamberlain, Jr.

     

    Material Adverse
Event means any circumstance or event that, individually or collectively
with other circumstances or events, could reasonably be expected to result in
(a) impairment of the ability of any Company to perform any of its payment
or other material obligations under any Loan Document, (b) impairment of
the ability of Lender to enforce any Company’s material obligations, or Lender’
rights, under any Loan Document, (c) a material adverse effect upon the
legality, validity, binding effect or enforceability against any Company of any
Loan Document to which it is a party, (d) a material and adverse change in,
or a material adverse effect upon, the operations, business, properties,
liabilities (actual or contingent), or condition (financial or otherwise) of any
Company as represented in the initial financial statements delivered to Lender
on or about the Closing Date in respect of such Company, and (e) a material and
adverse change in, or a material adverse effect upon, the operations of the
Companies, taken as a whole (excluding general economic conditions that do not
have a disproportion of impact on the Companies taken as a whole).

     

    Material
Agreement means, for any Person, any agreement (excluding purchase orders
for material or inventory in the ordinary course of business) to which that
Person is a party by which that Person is bound, or to which any assets of that
Person may be subject, and that is not cancelable by that Person upon 30 or
fewer days’ notice without liability for further payment other than nominal penalty,
and that requires that Person to pay more than $250,000 in the aggregate during
the term of such agreement.

     

    Maximum
Amount and Maximum
Rate respectively mean the maximum non-usurious amount and the maximum
non-usurious rate of interest that, under applicable Law, Lender is permitted to
contract for, charge, take, reserve or receive on the Obligation.

     

    Moody’s
means Moody’s Investors Service, Inc. and any successor thereto.

     

    Net
Proceeds means with respect to (a) any Disposition of any asset by any
Person, the aggregate amount of cash and non-cash proceeds from such Disposition
received by, or paid to or for the account of, such Person, net of customary and
reasonable out-of-pocket costs, fees, and expenses, (b) with respect to the
issuance of equity securities, debt securities, Subordinated Debt, or similar
instruments, or the incurrence of Debt, the cash and non-cash proceeds received
from such issuance or incurrence, net of attorneys’ fees, investment banking
fees, accountants fees, underwriting discounts and commissions and other
customary fees and expenses actually incurred in connection with such issuance,
(c) Insurance Proceeds, the aggregate amount of such cash proceeds received by,
or paid to or for the account of, such Person, net of customary and reasonable
legal fees, out-of-pocket expenses, fees and expenses, and (d) Eminent
Domain Proceeds, the aggregate amount of such cash proceeds received by, or paid
to or for the account of, such Person, net of customary and reasonable legal
fees, out-of-pocket costs, fees and expenses. Non-cash proceeds include any
proceeds received by way of deferred payment of principal pursuant to a note,
installment receivable, purchase price adjustment receivable, or otherwise, but
only as and when received.

     

    
      
        
        

      

      
        7

        
          

        

      

      
        
        

      

    

     

    Net Worth
means, when determined, (a) the aggregate amount at which all assets of the
Companies would be shown on a consolidated balance sheet at such date, less (b) Total Liabilities of
the Companies.

     

    Notes
means the Term Note and Revolving Note.

     

    Obligation
means all present and future Debt, liabilities and obligations (including the
Loans, LC Borrowings, and the obligations under any Swap Contract), whether
direct or indirect (including those acquired by assumption), absolute or
contingent, due or to become due, and all renewals, increases and extensions
thereof, or any part thereof, now or in the future owed to Lender by any Company
under any Loan Document, together with all interest
accruing thereon, reasonable fees, costs and expenses payable under the Loan
Documents or in connection with the enforcement of rights under the Loan
Documents, including (a) fees and expenses under Section
8.12, and (b) interest and fees that accrue after the commencement by or
against any Company or any Affiliate thereof of any proceeding under any Debtor
Relief Law naming such Person as the debtor in such proceeding, regardless of
whether such interest and fees are allowed claims in such
proceeding.

     

    Participant
has the meaning given such term Section
13.7.

     

    Permitted
Debt means (a) the Obligation,  (b) Debt arising from endorsing
negotiable instruments for collection in the ordinary course of business, (c)
purchase money Debt and capital lease obligations incurred in the ordinary
course of business which, in the aggregate do not exceed $250,000, (d) Debt
among the Companies and guaranties by any Company of Permitted Debt, (e) Debt
existing on the Closing Date and described on Schedule 1.2,
(f) indemnities arising under agreements entered into by any Company in the
ordinary course of business, (g) trade payables, Tax liabilities and other
current liabilities incurred in the ordinary course of business, (h) any Debt
approved in writing by Lender after the Closing Date, and (i) if Borrower
requests in writing that Lender increase the amount of its Commitment or approve
additional credit extensions to Borrower and Lender declines to do so, Borrower
may obtain Funded Debt from a third party in an amount equal to or less than the
amount of the credit requested pursuant to such written request.

     

    Permitted
Investments means (a) marketable obligations backed by the full faith and
credit of the U.S. (and investments in mutual funds investing primarily in those
obligations), (b) certificates of deposit or banker’s acceptances that are fully
insured by the Federal Deposit Insurance Corporation and are issued by Lender,
(c) cash or cash equivalents, (d) eurodollar time deposits or investments
managed by Lender, (e) commercial paper and similar obligations rated “P-1”
or better by Moody’s or “A-1” or better by S&P, (f) investments in
securities purchased by any Company under repurchase obligations pursuant to
which arrangements are made with selling financial institutions (being a
financial institution having unimpaired capital and surplus of not less than
$500,000,000 and with a rating of “A-1” by S&P or “P-1” by Moody’s) for such
financial institutions to repurchase such securities within 30 days from the
date of purchase by such Company, and other similar short term investments made
in connection with the Company’s cash management practices, (g) non-cash
proceeds from Dispositions permitted under Section
9.9, (h) investments by any Company in its wholly-owned Subsidiaries
which are Guarantors, and (i) cash or cash equivalents on deposit with, or
issued by, Lender.

     

    
      
        
        

      

      
        8

        
          

        

      

      
        
        

      

    

     

    Permitted
Liens means (a) Liens securing the Obligation, (b) Liens existing on the
Closing Date and described on Schedule 1.2,
(c) Liens which secure purchase money Debt and capital lease obligations
permitted under clause (c) of the
definition of Permitted Debt, (d) easements, rights -of-way, encumbrances and
other restrictions on the use of real property which do not materially impair
the use thereof, (f) Liens for Taxes; provided that, (i) no
amounts are due and payable and no Lien has been filed or agreed to, or
(ii)  the validity or amount thereof is being contested in good faith by
lawful proceedings diligently conducted, and reserve or other provision required
by GAAP has been made, (g) judgments and attachments permitted by Section
11.4, (h) pledges or deposits made to secure payment of workers’
compensation, unemployment insurance or other forms of governmental insurance or
benefits or to participate in any fund in connection with workers’ compensation,
unemployment insurance, pensions or other social security programs, (i) rights
of offset or statutory banker’s Liens arising in the ordinary course of business
in favor of commercial banks; provided that, any such Lien shall only extend to
deposits and property in possession of such commercial bank and its Affiliates,
(j) good-faith pledges or deposits made in the ordinary course of business to
secure (i) performance of bids, tenders, trade contracts (other than for the repayment
of borrowed money) or leases, (ii) statutory obligations, or (iii) surety
or appeal bonds, or indemnity, performance or other similar bonds, which, in the
aggregate under this clause
(j), do not exceed $50,000 at any time, (k) Liens (other than for Taxes) imposed
by operation of law (including Liens of mechanics, materialmen, warehousemen,
carriers and landlords and similar Liens); provided that, (i) the
validity or amount thereof is being contested in good faith by lawful
proceedings diligently conducted, (ii) reserve or other provision required
by GAAP has been made, and (iii) within 60 days after the entry thereof,
levy and execution thereon have been (and continue to be) stayed or payment
thereof is covered in full by insurance (subject to the customary deductible),
(l) Liens which secure any Company’s obligations under any lease for equipment
used by such Company in the ordinary course of its business, and (m) Liens which
secure the Funded Debt permitted under clause (i) of the definition
of Permitted Debt.

     

    Person
means any individual, partnership, limited partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, syndicate, Governmental Authority or other entity or
organization of whatever nature.

     

    PGBC means
Pension Benefit Guaranty Corporation, or any successor thereof, established
under ERISA.

     

    Pledge
Agreement means each Pledge Agreement in substantially the form of Exhibit G,
and executed by any Company, as pledgor, and by Lender, as secured party,
granting Lender a Lien on, and security interest in, among other things, such
Person’s equity interests in any Company or its Subsidiaries.

     

    Potential
Default means the occurrence of any event or the existence of any
circumstance that would, with the giving of notice or lapse of time or both,
become a Default.

     

    Prime Rate
means for any day the fluctuating rate of interest equal to the highest rate
published from time to time in the “Money Rates” section of The Wall Street
Journal as the Prime Rate for such day (or, if such source is not available,
such alternate source as the determined by Lender).  The Prime Rate is
a reference rate and may not be the lowest or the best rate actually charged to
any customer.  Lender may price loans to its customers at, above, or
below the Prime Rate.

     

    Prime Rate
Loan means any loan which bears interest based on the Prime
Rate.

     

    Proper
Form means in form and substance satisfactory to Lender and its legal
counsel.

     

    Property
means each of (and Properties
means all of) the (a) the 4.9106 acres located at 15473 Interstate Highway No.
10 (aka East Freeway), Channelview, Texas 77530, and (b) 3.306 acres located at
15473 East Freeway, Channelview, Texas 77530.

     

    
      
        
        

      

      
        9

        
          

        

      

      
        
        

      

    

     

    Representatives
means agents, representatives, officers, directors, employees, consultants,
contractors and attorneys.

     

    Responsible
Officer means the president, chief executive officer, or chief financial
officer of Borrower.

     

    Revolving
Committed Amount means $2,000,000.

     

    Revolving Credit
Availability means, when determined, the excess of (a) the Revolving
Credit Limit over (b) the Revolving Credit Exposure.

     

    Revolving Credit
Exposure means, when determined, the sum of (a) the Revolving Principal
Amount, and (b) the LC Exposure.

     

    Revolving Credit
Facility is defined in Section 2.2.

     

    Revolving Credit
Limit means the lesser
of (a) the Revolving Committed Amount and (b) the Borrowing
Base.

     

    Revolving Credit
Termination Date means the earlier of (a) November 11,
2010, or (b) the effective date that Lender’s Commitment to make Loans under the
Revolving Credit Facility is otherwise canceled or terminated in accordance with
Section 12
of this Agreement or otherwise.

     

    Revolving
Note means a promissory note substantially in the form of Exhibit A-2,
executed by Borrower and made payable to Lender and all renewals, extensions,
modifications, amendments, supplements, restatements, and replacements of, or
substitutions for, that promissory note.

     

    Revolving
Principal Amount means, when determined, the outstanding principal
balance of the Revolving Note.

     

    S&P
means Standard & Poor’s Ratings Group (a division of The McGraw-Hill
Companies, Inc.).

     

    Security
Agreement means each Security Agreement in substantially the form of
Exhibit
F, and executed by any Company, as debtor, and by Lender, as secured
party, granting Lender a Lien on, and security interest in, among other things,
such Company’s accounts receivable, inventory, equipment, goods, general
intangibles, intellectual property, chattel paper, instruments, and
documents.

     

    Security
Documents means all Security Agreements, Deeds of Trust, Pledge
Agreements, and all documents executed in connection therewith to create or
perfect a Lien on the Collateral.

     

    Subordinated
Debt means Debt which is contractually subordinated in right of payment,
collection, enforcement and lien rights to the prior payment in full of the
Obligation on terms satisfactory to Lender, and includes Debt in the form of
subordinated convertible debentures or subordinated promissory
notes.

     

    Subsidiary
of a Person means a corporation, partnership, joint venture, limited liability
company or other business entity of which a majority of the voting interests are
at the time beneficially owned, or the management of which is otherwise
controlled, directly, or indirectly through one or more intermediaries, or both,
by such Person.  Unless otherwise specified, all references in this
Agreement or the Loan Documents to a “Subsidiary” or to “Subsidiaries” shall
refer to a Subsidiary or to Subsidiaries of Borrower.

     

    Swap
Contract means, to the extent any Company and Lender or an Affiliate of
Lender is a party thereto, (a) any and all rate swap transactions, basis swaps,
credit derivative transactions, forward rate transactions, commodity swaps,
commodity options, forward commodity contracts, equity or equity index swaps or
options, bond or bond price or bond index swaps or options or forward bond or
forward bond price or forward bond index transactions, interest rate options,
forward foreign exchange transactions, cap transactions, floor transactions,
collar transactions, currency swap transactions, cross-currency rate swap
transactions, currency options, spot contracts, or any other similar
transactions or any combination of any of the foregoing (including any options
to enter into any of the foregoing), whether or not any such transaction is
governed by or subject to any master agreement, and (b) any and all transactions
of any kind, and the related confirmations, which are subject to the terms and
conditions of, or governed by, any form of master agreement published by the
International Swaps and Derivatives Association, Inc., any International Foreign
Exchange Master Agreement, or any other master agreement (any such master
agreement, together with any related schedules, a “Master
Agreement”), including any such obligations or liabilities under any
Master Agreement.

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

    

     

    Swap Termination
Value means, in respect of any one or more Swap Contracts, after taking
into account the effect of any legally enforceable netting agreement relating to
such Swap Contracts, (a) for any date on or after the date such Swap Contracts
have been closed out and termination value(s) determined in accordance
therewith, such termination value(s), and (b) for any date prior to the date
referenced in clause (a), the
amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as
determined based upon one or more mid-market or other readily available
quotations provided by any recognized dealer in such Swap Contracts (which may
include Lender or any Affiliate of Lender).

     

    Tangible Net
Worth means, when determined, the Companies’ consolidated Net Worth after
deducting capitalized interest, debt discount and expense, goodwill, patents,
trademarks, copyrights, franchises, licenses and such other assets as are
properly classified as “intangible assets”.

     

    Tax Code
means the Internal Revenue
Code of 1986, as amended, and related rules, regulations and published
interpretations.

     

    Taxes
means, for any Person, taxes, assessments or other governmental charges or
levies imposed upon that Person, its income, or any of its properties,
franchises or assets.

     

    Term Committed
Amount means $0.00.

     

    Term
Facility is defined in Section 2.1.

     

    Term Loan Closing
Date means the date in which all the conditions set out in Section
5.2 have been satisfied.

     

    Term Maturity
Date means the
earlier of (a) the
fifth anniversary of the Term Loan Closing Date, and (b) the acceleration of
maturity of the Term Facility in accordance with Section 12
of this Agreement.

     

    Term Note
means a promissory note substantially in the form of Exhibit
A-1, executed by Borrower and made payable to Lender in the original
principal amount of the Term Committed Amount, together with all renewals,
extensions, modifications, amendments, supplements, restatements and
replacements of, or substitutions for, each such promissory note.

     

    Term Principal
Amount means, when determined, the outstanding principal balance of the
Term Note.

     

    
      
        
        

      

      
        11

        
          

        

      

      
        
        

      

    

     

    Total
Liabilities means, when determined, all obligations required by GAAP to
be classified as liabilities upon the Companies’ consolidated balance sheet,
including the aggregate amount of all Debt, liabilities (including tax and other
proper accruals) and reserves of the Companies.

     

    UCC means
the Uniform Commercial Code, as adopted in Texas and as amended from time to
time.

     

    Unreimbursed
Amount is defined in Section
2.6(b)(i).

     

    U.S. means
United States of America.

     

    voting
interests of any Person means the capital stock (or other equity
interest) of such Person having ordinary voting power for the election of
directors (or other governing body).

     

    1.2  Interpretive
Provisions.

     

    (a) Terms
used but not defined in this Agreement, but which are defined in the UCC, have
the meaning given them in the UCC.

     

    (b) The
meanings of words and defined terms are equally applicable to the singular and
plural forms of the defined terms and words.  Defined terms in respect
of one gender include each other gender where
appropriate.  Derivatives of defined terms have corresponding
meanings.

     

    (c) Any
conflict or ambiguity between this Agreement and any other Loan Document is
controlled by the terms and provisions of this Agreement.

     

    (d) The
headings and captions used in this Agreement and the other Loan Documents are
for convenience only and will not be deemed to limit, amplify or modify the
terms of this Agreement or the Loan Documents.

     

    (e) Article,
Section, Exhibit and Schedule references are to the Loan Document in which such
reference appears, unless otherwise indicated.

     

    (f) In the
computation of periods of time from a specified date to a later specified date,
the word “from”
means “from
and including;” the words “to” and
“until”
each mean “to but
excluding;” and the word “through”
means “to
and including.”

     

    (g) The words
“herein,”
“hereto,”
“hereof”
and “hereunder”
and words of similar import when used in any Loan Document shall refer to such
Loan Document as a whole and not to any particular provision of such Loan
Document.

     

    (h) The term
“including”
is by way of example and not limitation.

     

    1.3  Accounting
Terms.

     

    (a) All
accounting terms not specifically or completely defined in this Agreement shall
be construed in conformity with, and all financial data (including financial
ratios and other financial calculations) required to be submitted pursuant to
this Agreement shall be prepared in conformity with, GAAP, with all accounting
principles being consistently applied from period to period and on a basis
consistent with the most recent audited consolidated financial statements of
Borrower and its Subsidiaries. All accounting and financial terms and financial
calculations (including the calculation of all financial covenants, ratios, and
related definitions) in respect of Borrower are on a consolidated basis for all
Companies, unless otherwise indicated.

     

    
      
        
        

      

      
        12

        
          

        

      

      
        
        

      

    

     

    (b) If at any
time any change in GAAP would affect the computation of any financial ratio or
requirement set out in any Loan Document, and Borrower or Lender shall so
request, Lender and Borrower shall negotiate in good faith to amend such ratio
or requirement to preserve the original intent thereof in light of such change
in GAAP (subject to the approval of Lender); provided that, until so
amended, (i) such ratio or requirement shall continue to be computed in
accordance with GAAP as in effect prior to such change and (ii) Borrower shall
provide to Lender financial statements and other documents required under this
Agreement or as reasonably requested hereunder setting forth a reconciliation
between calculations of such ratio or requirement made before and after giving
effect to such change in GAAP.

     

    1.4  References to
Documents.

     

    Unless
otherwise expressly provided in this Agreement, (a) references to corporate
formation or governance documents, contractual agreements (including this
Agreement and the Loan Documents) and other contractual instruments shall be
deemed to include all subsequent amendments, restatements, extensions,
supplements and other modifications thereto, but only to the extent that such
amendments, restatements, extensions, supplements and other modifications are
not prohibited by any Loan Document; and (b) references to any Law shall include
all statutory and regulatory provisions consolidating, amending, replacing,
supplementing or interpreting such Law.

     

    1.5  Time.  

     

    Unless
otherwise indicated, all time references (e.g., 11:00 a.m.) are to
Central time (daylight or standard, as applicable).

     

    SECTION 2 LOAN
COMMITMENTS.

     

    2.1  Term
Facility.  

     

    Subject
to the terms and conditions of this Agreement, Lender agrees to make a term loan
to Borrower in an amount equal to the Term Committed Amount in a single Loan on
the Term Loan Closing Date which, when paid or prepaid, may not be reborrowed
(the “Term
Facility”).

     

    2.2  Revolving Credit
Facility.  

     

    Subject
to the terms and conditions of this Agreement, Lender agrees to make Loans to
Borrower from time to time, on any Business Day on or after the Closing Date and
prior to the Revolving Credit Termination Date, which Borrower may borrow,
repay, and reborrow under this Agreement, provided that, (a) no such
Loan may exceed the Revolving Credit Availability, and (b) the Revolving Credit
Exposure may not at any time exceed the Revolving Credit Limit (the “Revolving Credit
Facility”).

     

    2.3  Loan
Procedure.


     

    (a) Subject
to compliance with Section 5,
Borrower may request a Loan under the Revolving Credit Facility or the Term
Facility by submitting a Loan Request to Lender.  A Loan Request is
irrevocable and binding on Borrower.  Each Loan Request must be
received by Lender no later than 12:00 noon on the proposed Loan
Date.  Each Loan under the Revolving Credit Facility is subject to the
following conditions:

     

    (i) each Loan
under the Revolving Credit Facility must occur on a Business Day no later than
the Business Day immediately preceding the Revolving Credit Termination
Date,

     

    (ii) each Loan
(unless the remaining amount under clause (iv) below is less)
must be in an amount not less
than $100,000 or a greater integral multiple of $10,000;

     

    (iii) no Loan
under the Revolving Credit Facility may exceed the Revolving Credit
Availability, and

     

    (iv) after
giving effect to any Loan under the Revolving Credit Facility, the Revolving
Credit Exposure may not exceed the Revolving Credit Limit.

     

    
      
        
        

      

      
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    (b) While a
Cash Management Agreement that sweeps or debits Borrower’s accounts and
automatically repays the Revolving Credit Facility is in effect, Borrower may
borrow, repay, and re-borrow under the Revolving Credit Facility under the terms
of the Cash Management Agreement without notice and without minimum repayment
amounts.  Borrower hereby authorizes Lender to honor all checks or
other drafts received against the accounts subject to the Cash Management
Agreement.

     

    2.4  LIBOR Loans and Prime Rate
Loans.  As long
as LIBOR is available, all loans shall be outstanding as LIBOR
Loans.  If LIBOR is not available, all loans shall be converted to and
should be outstanding as Prime Rate Loans until LIBOR is once again available
and then all loans shall be converted to LIBOR Loans.

     

    2.5  Prepayment

     

    (a) Subject
to Section
2.5(b), Borrower may voluntarily pay or prepay all or any part of the
Term Principal Amount, or the Revolving Principal Amount, without premium or
penalty, at any time, and while no Cash Management Agreement is in place,
subject to the following conditions:

     

    (i) Lender
must receive Borrower’s written or telephonic prepayment notice by
10:00 a.m. on the prepayment date;

     

    (ii) Borrower’s
prepayment notice shall (A) specify the prepayment date, (B) specify the amount
of the Loan to be prepaid, and (C) indicate whether the Revolving Principal
Amount, or Term Principal Amount is to be repaid;

     

    (iii) each
partial prepayment must be in a minimum amount of not less than (A) $100,000 or a
greater integral multiple of $10,000 or (B) if less than the minimum amount,
the outstanding balance of the Revolving Principal Amount or Term Principal
Amount, as applicable;

     

    (iv) all
accrued and unpaid interest on the portion of the Revolving Principal Amount or
Term Principal Amount prepaid must also be paid in full on the prepayment date;
and

     

    (v) each
partial prepayment of the Term Facility shall be applied to the scheduled
principal payments in the inverse order of their maturity.

     

    (b) All
prepayments under this Section
2.5 shall be without premium or penalty.

     

    (c) If the
Term Principal Amount ever exceeds the Term Committed Amount, then Borrower
shall promptly prepay the Term Principal Amount in an amount equal to the
excess, together with all accrued and unpaid interest on the principal amount
prepaid.

     

    (d) If the
Revolving Credit Exposure at any time exceeds the Revolving Credit Limit, then
Borrower shall repay the Revolving Principal Amount (or if no Revolving
Principal Amount is outstanding, Cash Collateralized the LC Exposure), in at
least the amount of that excess, together with all accrued and unpaid interest
on the principal amount so repaid.

     

    (e) On the
date such amounts are received by, or for the account of, Borrower, the
following amounts shall be paid to Lender in the form received with any
endorsement or assignment and shall be applied to the Term Principal Amount in
accordance with this Section 2.5,
(i) 100% of the Net Proceeds from the issuance of any Subordinated Debt,
and (ii) 100% of the Net Proceeds from the Disposition of any asset not
permitted by Section 9.9.  The
non-cash portion of all Net Proceeds Lender is entitled to receive under this
Section 2.5,
shall be pledged to Lender concurrently with the applicable
Disposition.

     

    
      
        
        

      

      
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    (f) Unless
otherwise specified in this Agreement, prepayments under this Section 2.5
shall be applied first to the prepayment of the outstanding Term Principal
Amount, and shall be applied to the scheduled principal payments in the inverse
order of their maturity until the Term Principal Amount is paid in
full.

     

    (g) After
proper application of all proceeds under this Section 2.5,
any remaining proceeds shall be applied (A) first, to repay the Revolving Credit
Facility, with the proceeds being applied in accordance with Section
3.4, (B) to Cash Collateralize all LC Exposure, and (C) the excess, if
any, being payable to Borrower.

     

    2.6  LC
Facility.

     

    (a) The LC
Commitment.

     

    (i) Subject
to the terms and conditions set out in this Agreement, Lender agrees,
(A) from time to time on any Business Day during the period from the
Closing Date until the Revolving Credit Termination Date, to issue LCs for the
account of Borrower, and to amend or renew LCs previously issued by it, in
accordance with subsection
(b) below, and (B) to honor drafts under the LCs; provided that, Lender shall
not be obligated to make any LC Credit Extension with respect to any LC, if, as
of the date of and after giving effect to, such LC Credit Extension, the
Revolving Credit Exposure would exceed the Revolving Credit
Limit.  Within the foregoing limits, and subject to the terms and
conditions hereof, Borrower’s ability to obtain LCs shall be fully revolving,
and accordingly Borrower may, prior to the LC Termination Date, obtain LCs to
replace LCs that have expired or that have been drawn upon and
reimbursed.

     

    (ii) Lender
shall be under no obligation to issue any LC if:

     

    (A) the
expiry date of such requested LC would occur after the Revolving Credit
Termination Date, unless Lender has approved such expiry date;

     

    (B) the
issuance of such LC would violate one or more policies of Lender;
or

     

    (C) it is
denominated in a currency other than Dollars.

     

    (iii) Lender
shall be under no obligation to amend any LC if (A) Lender would have no
obligation at such time to issue such LC in its amended form under the terms of
this Agreement, or (B) the beneficiary of such LC does not accept the proposed
amendment to such LC.

     

    (b) Drawings and
Reimbursements.

     

    (i) Upon
receipt from the beneficiary of any LC of any notice of a drawing under such LC,
Lender shall notify Borrower thereof.  Not later than 12:00 noon on
the date of any payment by Lender under an LC (each such date, an “Honor
Date”), Borrower shall reimburse Lender in an amount equal to the amount
of such drawing.  If Borrower fails to so reimburse Lender by such
time, Borrower shall be deemed to have requested a Loan under the Revolving
Credit Facility to be disbursed on the Honor Date in an amount equal to the
amount of the unreimbursed drawing (the “Unreimbursed
Amount”), without regard to any minimum Loan amount or to the conditions
set out in Section 5.  Any
notice given by Lender pursuant to this Section 2.6(b)(i)
may be given by telephone if immediately confirmed in writing; provided that, the lack of
such an immediate confirmation shall not affect the conclusiveness or binding
effect of such notice.

     

    
      
        
        

      

      
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    (ii) With
respect to any Unreimbursed Amount that is deemed to be fully refinanced by a
Loan under the Revolving Credit Facility at a time when, after giving effect to
such Loan, the Revolving Credit Exposure would exceed the Revolving Credit Limit
(or a Potential Default or a Default exists), Borrower shall be deemed to have
incurred from Lender an LC Borrowing in the amount of the Unreimbursed Amount
that is not so refinanced, which LC Borrowing shall be deemed to be an
overadvance and shall be due and payable on demand (together with interest) and
shall bear interest at the Default Rate.

     

    (c) Obligations
Absolute. The obligation of
Borrower to reimburse Lender for each drawing under each LC and to repay each LC
Borrowing shall be absolute, unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement under all circumstances,
Borrower shall promptly examine a copy of each LC and each amendment thereto
that is delivered to it and, in the event of any claim of noncompliance with
Borrower’s instructions or other irregularity, Borrower will immediately notify
Lender.  Borrower shall be conclusively deemed to have waived any such
claim against Lender and its correspondents unless such notice is
given.

     

    (d) Cash
Collateral.  Upon the request of Lender, (i) if Lender has
honored any full or partial drawing request under any LC and such drawing has
resulted in an LC Borrowing which constitutes an overadvance, (ii) Lender has
approved the issuance of an LC with an expiry date which expires after the LC
Termination Date, or (iii) if, as of the LC Termination Date, any LC for
any reason remains outstanding and partially or wholly undrawn, Borrower shall
immediately Cash Collateralize the then outstanding LC Exposure (in an amount
equal to the excess of the Revolving Credit Exposure over the Revolving Credit
Limit, determined as of the date of such LC Borrowing or the LC Termination
Date, as the case may be).  Borrower hereby grants to Lender, a
security interest in and Lien upon all such cash, deposit accounts and all
balances therein and all proceeds of the foregoing cash collateral shall be
maintained in blocked, non-interest bearing deposit accounts at
Lender.

     

    (e) Applicability of ISP98 and
UCP. Unless
otherwise expressly agreed by Lender and Borrower when an LC is issued, (i) the
rules of the “International Standby Practices 1998” published by the Institute
of International Banking Law & Practice (or such later version thereof as
may be in effect at the time of issuance) shall apply to each standby LC, and
(ii) the rules of the Uniform Customs and Practice for Documentary Credits,
as most recently published by the International Chamber of Commerce (the “ICC”) at
the time of issuance shall apply to each commercial LC.

     

    (f) Conflict with LC
Application.  In the event of any conflict between the terms
hereof and the terms of any LC Application, the terms hereof shall
control.

     

    SECTION 3 TERMS OF
PAYMENT.

     

    3.1  Notes and
Payments.

     

    (a) The Loan
under the Term Facility shall be evidenced by the Term Note.  The
Loans under the Revolving Credit Facility shall be evidenced by the Revolving
Note.

     

    
      
        
        

      

      
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    (b) Borrower
must make each payment on the Obligation, without offset, counterclaim or
deduction to Lender’s Office, in funds that will be available for immediate use
by Lender by 12:00 noon on the day due.  Payments received after
such time (and payments received on a day which is not a Business Day) will be
deemed received on the next Business Day but interest shall continue to accrue
during such period.

     

    3.2  Term
Facility.

     

    (a) Accrued
and unpaid interest on the Loan made under the Term Facility is due and payable
monthly in arrears beginning on the first day of the first calendar month after
the Term Loan Closing Date and continuing on the first day of each month
thereafter.

     

    (b) Principal
payments on the Loan made under the Term Facility are due and payable monthly
beginning on the first day of the first month after the Term Loan Closing Date,
and continuing on the first day of each month thereafter in the respective
amounts set out on Schedule 3.2.

     

    (c) All
outstanding principal and all accrued and unpaid interest in respect of the Term
Facility is due and payable on the Term Maturity Date.

     

    3.3  Revolving Credit
Facility.

     

    (a) Accrued
and unpaid interest on the Revolving Principal Amount is due and payable monthly
in arrears beginning December 1, 2008, and continuing on the first day of each
month thereafter through the Revolving Credit Termination Date.

     

    (b) The
Revolving Principal Amount and all accrued and unpaid interest thereon is due
and payable on the Revolving Credit Termination Date.

     

    3.4  Order of
Application.

     

    (a) All
payments and prepayments shall be applied as specified in this Agreement and, if
not specified, shall be applied in the following order: (i) to all fees,
expenses, late charges, collection costs, and other charges, costs and expenses
for which Lender has not been paid or reimbursed under the Loan Documents, (ii)
accrued and unpaid interest on the Notes in the order Lender elects,
(iii) to the remaining outstanding principal balance of the Notes in the
order Lender elects, and (iv) to the remaining Obligation in the order and
manner Lender deems appropriate in its sole discretion.

     

    (b) All
proceeds from the exercise of any rights shall be applied at Lender’s discretion
among principal, interest, fees, expenses, late charges, collection costs, and
other charges, costs and expenses, for which Lender has not been paid or
reimbursed under the Loan Documents.

     

    3.5  Interest.  Except
as otherwise provided in this Agreement,

     

    (a) Loans
under this Agreement shall accrue interest at an annual rate equal to the lesser of (i) (A) for LIBOR
Loans, the sum of LIBOR plus the Applicable Rate, and (B) for Prime Rate Loans,
the Prime Rate, and (ii) the Maximum Rate.

     

    (b) Each
change in LIBOR, the Prime Rate, or the Maximum Rate is effective has of the
date of such change without notice to Borrower or any other
Person.  Generally, LIBOR shall be set for each month on the first day
of such month.

     

    
      
        
        

      

      
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    3.6  Default
Rate.  To
the extent permitted by Law, while a Default exists, the Obligation shall accrue
interest at the lesser
of (a) the Default Rate and (b) the Maximum Rate, until all
past due amounts are paid (whether payment is made before or after entry of a
judgment or the Default is otherwise cured or waived).  Subject to
Section 3.8,
if a Default exists, Lender may, in its sole discretion, to the extent permitted
by Law, add accrued and unpaid interest to the outstanding principal amount of
all Loans and such amount will accrue interest until paid at the applicable
interest rate.

     

    3.7  Interest
Calculations.  Interest
on Loans and on the amount of all fees and other amounts due under the Loan
Documents will be calculated on the basis of actual number of days elapsed
(including the first day but excluding the last day), but computed as if each
calendar year consisted of 360 days (unless computation would result in an
interest rate in excess of the Maximum Rate, in which event the computation is
made on the basis of a year of 365 or 366 days, as the case may
be).  All interest rate determinations and calculations by Lender are
conclusive and binding, absent manifest error.

     

    3.8  Maximum
Rate.  It
is the intention of the parties to comply with applicable usury
laws.  The parties agree that the total amount of interest contracted
for, charged, collected or received by Lender under this Agreement shall not
exceed the Maximum Rate.  To the extent, if any, that Chapter 303 of
the Texas Finance Code (the “Finance
Code”) is relevant to Lender for purposes of determining the Maximum
Rate, the parties elect to determine the Maximum Rate under the Finance Code
pursuant to the “weekly ceiling” from time to time in effect, as referred to and
defined in § 303.001-303.016 of the Finance Code; subject, however, to any right
Lender subsequently may have under applicable law to change the method of
determining the Maximum Rate.  Notwithstanding any contrary provisions
contained herein, (a) the Maximum Rate shall be calculated on the basis of the
actual number of days elapsed over a year of 365 or 366 days, as the case may
be; (b) in determining whether the interest hereunder exceeds interest at the
Maximum Rate, the total amount of interest shall be spread throughout the entire
term of this Agreement until its payment in full; (c) if at any time the
interest rate chargeable under this Agreement would exceed the Maximum Rate,
thereby causing the interest payable under this Agreement to be limited to the
Maximum Rate, then any subsequent reductions in the interest rate(s) shall not
reduce the rate of interest charged under this Agreement below the Maximum Rate
until the total amount of interest accrued from and after the date of this
Agreement equals the amount of interest which would have accrued if the interest
rate(s) had at all times been in effect; (d) if Lender ever charges or receives
anything of value which is deemed to be interest under applicable Texas law, and
if the occurrence of any event, including acceleration of maturity of
obligations owing to Lender, should cause such interest to exceed the maximum
lawful amount, any amount which exceeds interest at the Maximum Rate shall be
applied to the reduction of the unpaid principal balance of all Loans under this
Agreement or any other indebtedness owed to Lender by Borrower, and if this
Agreement and such other indebtedness are paid in full, any remaining excess
shall be paid to the applicable Borrower; and (e) Chapter 346 of the Finance
Code shall not be applicable to this Agreement or the indebtedness outstanding
hereunder.

     

    3.9  Set off.  While
a Default exists, Lender (and each of its Affiliates) is hereby authorized at
any time and from time to time, to the fullest extent permitted by Law, to set
off and apply (a) any and all deposits (general or special, time or demand,
provisional or final) at any time held by Lender (or its Affiliates) and (b) any
other Debt at any time owing by Lender (or any of its Affiliates) to or for the
credit or the account of any Company, against the Obligation even if Lender has
not made demand under this Agreement and the Obligation is
unmatured.  Lender agrees to promptly notify the applicable Company
after any such set off and application is made; provided that, the failure to
give such notice shall not affect the validity of such set off and
application.  The rights of Lender under this Section 3.9
are in addition to other rights and remedies (including other rights of set off)
that Lender may have.

     

    
      
        
        

      

      
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    3.10  Debit
Account.  Borrower
agrees that the interest and principal payments and any fees will be deducted
automatically on the due date from such of Borrower’s accounts with Lender as
designated in writing by Borrower.  This authorization shall not
affect the obligation of Borrower to pay such sums when due, without notice, if
there are insufficient funds in such account to make such payment in full on the
due date thereof, or if Lender fails to debit such account.

     

    SECTION 4 FEES.

     

    4.1  Treatment of
Fees.  To
the extent permitted by Law, the fees described in this Section 4
(a) do not constitute compensation for the use, detention, or forbearance
of money, (b) are in addition to, and not in lieu of, interest and expenses
otherwise described in this Agreement or in any other Loan Document,
(c) are non-refundable, (d) accrue interest, if not paid when due, at
the Default Rate, and (e) are calculated on the basis of actual number of
days elapsed (including the first day but excluding the last day), but computed
as if each calendar year consisted of 360 days (unless computation would result
in an interest rate in excess of the Maximum Rate, in which event the
computation is made on the basis of a year of 365 or 366 days, as the case may
be).  The fees described in this Section 4
are in all events subject to the provisions of Section 3.8.

     

    4.2  Letter of Credit
Fees.  Borrower
shall pay to Lender, a letter of credit fee (the “LC Fee”)
for each LC in an amount equal to (a) the Applicable Rate multiplied by (b) the
maximum daily amount available to be drawn under such LC.  LC Fees
shall be (a) computed on a quarterly basis in advance and (b) due and payable on
the first Business Day of each April, July, October and January, commencing with
the first such date to occur after the issuance of such LC, on the Revolving
Credit Termination Date, and thereafter on demand.  In addition,
Borrower shall pay to Lender an issuance fee equal to $500, and all other
applicable fees customarily charged by its letter of credit
department.

     

    4.3  Unused
Fees.  Borrower
shall pay to Lender, a fee in an amount equal to (a) the Applicable Rate
multiplied by (b) the actual daily amount by which the Revolving Committed
Amount exceeds the Revolving Credit Exposure, which fee shall be due and payable
quarterly in arrears, on the first day of each April, July, October and January
(beginning January 1, 2009) until the Revolving Credit Termination
Date.

     

    4.4  Closing
Fee.  On
the Closing Date, Borrower shall pay to Lender for its own account an upfront
closing fee in the amount of $10,000 for the Revolving Credit
Facility.  Such fee shall be fully earned when paid and shall not be
refundable for any reason whatsoever.

     

    SECTION 5 CONDITIONS
PRECEDENT.

     

    5.1  Conditions to Initial
Loans.  This
Agreement will become effective once all parties have executed and delivered
this Agreement. Lender will not be obligated to make the initial Loan or issue
the initial LC until (i) Lender has received all of the items described on Schedule 5,
each in Proper Form, (ii) Lender has received a field audit in proper
form, and (iii) Borrower has established with Lender an operating account
acceptable to Borrower and Lender.

     

    5.2  Conditions to Term
Loan.  Lender
shall not be obligated to make the Loan under the Term Facility until (a) Lender
has received appropriate credit approval to make such Loan, (b) Borrower and
Lender have executed an amendment to this Agreement implementing the terms of
Lender’s approval for the Term Facility, and (c) Lender has received for each
Property (with each in Proper Form) an environmental site assessment, a title
commitment and survey, and an appraisal.

     

    5.3  Conditions to All
Loans.  Lender
will not be obligated to make any Loan unless on the applicable Loan Date (and
after giving effect to the requested Loan):  (a) Lender has timely
received a Loan Request, (b) all of the representations and warranties of the
Companies in the Loan Documents are true and correct in all material respects
(except to the extent that the representations and warranties speak to a
specific date), (c) Lender has received and continues to maintain evidence of
insurance as set out in Section 8.6
(including certificates and endorsements), (d) no Material Adverse Event
exists, and (e) no Default or Potential Default exists or will result from such
funding, issuance, amendment or renewal.  Each Loan Request delivered
to Lender constitutes the representation and warranty by the Companies that the
statements in clauses (b),
(c), (d),
and (e) above
are true and correct in all material respects.

     

    
      
        
        

      

      
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    5.4  No Waiver.  Each
condition precedent in this Agreement (including matters listed on Schedule 5)
is material to the transactions contemplated by this Agreement, and time is of
the essence with respect to each condition precedent.  Lender may make
any Loan without all conditions being satisfied, but such Loan shall not be
deemed a waiver of any condition precedent for any subsequent Loan.

     

    SECTION 6 SECURITY AND
GUARANTIES.

     

    6.1  Collateral.  The
complete payment and performance of the Obligation shall be secured by all of
the items and types of property described as “Collateral” in the Security
Agreement, and as “Mortgaged Property” in the Deed of Trust (collectively, the
“Collateral”).  Each
Company shall execute all applicable Security Documents necessary to pledge all
of the Collateral it owns.

     

    6.2  Financing
Statements.  Each
Company hereby authorizes Lender to file in Proper Form, if requested, financing
statements, continuation statements, or termination statements, or take other
action reasonably requested by Lender relating to the Collateral, including any
Lien search required by Lender.

     

    6.3  Guaranties.  Each
Guarantor shall guaranty the complete payment and performance of the Obligation
by executing and delivering a Guaranty to Lender on the Closing
Date.  Each other Company (other than Borrower) shall execute and
deliver to Lender a Guaranty in Proper Form within 30 days after such Company is
created or acquired.

     

    SECTION 7 REPRESENTATIONS AND
WARRANTIES.  Each
Company represents and warrants to Lender as follows:

     

    7.1  Existence, Good Standing,
and Authority to do Business.  Borrower
is a corporation, duly organized and validly existing and in good standing under
the Laws of the jurisdiction in which it is organized.  Each other
Company is duly organized, validly existing, and in good standing under the Laws
of the jurisdiction in which it is organized.  In each state in which
each Company does business and the nature and extent thereof requires it to be
duly qualified to transact business in such state, it is properly licensed, in
good standing, and, where required, in compliance with fictitious name
statutes.

     

    7.2  Subsidiaries.  Schedule 7.2
lists the name, address, entity type and jurisdiction of organization of each
Company, the number of issued and outstanding shares (or other equity interests)
of such Company and Borrower’s (or other Company’s) percentage ownership of each
other Company.

     

    7.3  Authorization, Compliance,
and No Default.  The
execution and delivery by each Company of the Loan Documents to which it is a
party and each Company’s performance of its obligations under the Loan Documents
are within such Company’s organizational powers, have been duly authorized, do
not violate any of its organizational documents, and do not violate any Law or
Material Agreement by which such Company is bound.

     

    7.4  Enforceability.  Each
Loan Document has been executed and delivered by each Company which is a party
to it, and the Loan Documents are enforceable against each Company in accordance
with their respective terms, except as enforceability may be limited by
applicable Debtor Relief Laws and general principles of equity.

     

    7.5  Litigation.  Except
as disclosed on Schedule 7.5,
no Company is subject to, or aware of the threat of, any Litigation involving
any Company which, (a) purports to affect or pertain to this Agreement, any
other Loan Document, or any of the transactions contemplated by the Loan
Documents, or (b) if determined adversely to any Company could reasonably be
expected to result in a Material Adverse Event.

     

    
      
        
        

      

      
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    7.6  Taxes.  All
Tax returns of each Company required to be filed have been timely filed (or
extensions have been granted) and all Taxes imposed upon any Company that are
due and payable have been paid before delinquency, other than Taxes which are
being contested in good faith by lawful proceedings diligently conducted,
against which reserve or other provision required by GAAP has been
made.

     

    7.7  Environmental
Matters.  No
facility of any Company is used for, or to the knowledge of any Company has been
used for, storage, treatment, or disposal of any Hazardous Substance in
violation of any applicable Environmental Law, other than violations that
individually or collectively would not constitute a Material Adverse
Event.  Except for the items disclosed to Lender in writing prior to
the Closing Date, no Company knows of any environmental condition or
circumstance adversely affecting its assets, properties, or operations that
could reasonably be expected to result in a Material Adverse Event.

     

    7.8  Ownership of Assets;
Intellectual Property.  Each
Company has (a) indefeasible title to its real property, (b) a vested
leasehold interest in all of its leased property, and (c) good and
marketable title to its personal property, all as reflected on the Current
Financials (except for property that has been disposed of as permitted by Section 9.9).  Each
Company is conducting its business without infringement or claim of infringement
of any license, patent, copyright, service mark, trademark, trade name, trade
secret or other intellectual property right of others, other than any infringements
or claims that, if successfully asserted against or determined adversely to any
Company, could not, individually or collectively, reasonably be expected to
result in a Material Adverse Event.

     

    7.9  Liens.  No
Lien exists on any asset of any Company, other than Permitted
Liens.

     

    
      
        
          7.10   
Debt.  No
Company is an obligor on any Debt, other than Permitted
Debt.

        

      

    

     

    7.11   
Insurance.  The
Companies maintain the insurance required under Section
8.6.

     

    7.12   
Place of Business; Real
Property.  The
location of each Company’s place of business or chief executive office is set
out on Schedule 7.12.  The
books and records of each Company are located at its place of business or chief
executive office.  Except for the locations set out on Schedule
7.12, Borrower has no ownership, leasehold, or other interest in real
estate.

     

    
      7.13   
Purpose of Credit
Facilities.

    

     

    (a) Borrower
will use the proceeds of the Revolving Credit Facility for its working capital
and general corporate purposes.

     

    (b) Borrower
will use the proceeds of the Term Facility to acquire the
Properties.

     

    (c) No part
of the proceeds of any Loan will be used, directly or indirectly, for a purpose
that violates any Law, including the provisions of Regulation U.

     

    7.14   
Transactions with
Affiliates.  Except
as disclosed on Schedule 7.14,
no Company is a party to a material agreement or transaction with any of its
Affiliates (excluding other Companies), other than transactions in
the ordinary course of business and upon fair and reasonable terms not
materially less favorable than it could obtain or could become entitled to in an
arm’s-length transaction with a Person that was not its Affiliate.

     

    
      
        
        

      

      
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    7.15   
Financial
Information.  Each
material fact or condition relating to the Loan Documents or the Companies’
financial condition, business, property, or prospects has been disclosed to
Lender in writing.  All financial and other information supplied to
Lender is sufficiently complete to give Lender accurate knowledge of each
Company's financial condition, including all material contingent
liabilities.  Since the date of the most recent financial statement
provided to Lender, there has been no material adverse change in the business
condition (financial or otherwise), operations or properties of the
Companies.

     

    7.16   
Material Agreements and
Funded Debt.  No
Company is a party to any Material Agreement, other than the Loan Documents
and the Material Agreements described on attached Schedule 7.16.  No
Company has breached or is in default under any Material Agreement or Funded
Debt obligation.

     

    
      7.17   
ERISA.

    

     

    (a) Each
Employee Plan (i) (other than a multiemployer plan) is in compliance in all
material respects with the applicable provisions of ERISA, the Tax Code and
other federal or state law, and (ii) has received a favorable determination
letter from the IRS and to the best knowledge of Borrower, nothing has occurred
which would cause the loss of such qualification.

     

    (b) Borrower
has fulfilled its material obligations, if any, under the minimum funding
standards of ERISA and the Tax Code with respect to each Employee Plan, and has
not incurred any liability with respect to any Employee Plan under Title IV of
ERISA.

     

    (c) There is
no Litigation (including by any Governmental Authority), and there has been no
prohibited transaction or violation of the fiduciary responsibility rules, with
respect to any Employee Plan which is or could reasonably be expected to be a
Material Adverse Event.

     

    (d) With
respect to any Employee Plan subject to Title IV of ERISA: (i) no
reportable event has occurred under Section 4043(c) of ERISA for which the PBGC
requires 30 day notice, (ii) no action by Borrower or any ERISA Affiliate
to terminate or withdraw from any Employee Plan has been taken and no notice of
intent to terminate a Employee Plan has been filed under Section 4041 of ERISA,
and (iii) no termination proceeding has been commenced with respect to a
Employee Plan under Section 4042 of ERISA, and, to the best knowledge of
Borrower, no event has occurred or condition exists which might constitute
grounds for the commencement of such a proceeding.

     

    SECTION 8 AFFIRMATIVE
COVENANTS.  So
long as Lender is committed to make any Loan under this Agreement, and
thereafter until the Obligation is paid in full, each Company agrees as
follows:

     

    8.1  Items to be
Furnished.  Borrower
shall cause the following to be furnished to Lender:

     

    (a) Promptly
after preparation, and no later than 90 days after the last day of each fiscal
year of Borrower beginning with the fiscal year ending December 31, 2008,
audited financial statements (including statements of operations, stockholders’
equity, and cash flows and a balance sheet) showing the consolidated financial
condition and results of operations of the Companies as of, and for the year
ended on, that last day, setting out, in each case, in comparative form the
figures for the previous fiscal year and accompanied by:

     

    (i) the
opinion of a firm of independent certified public accountants satisfactory to
Lender, based on an audit using generally accepted auditing standards, that the
financial statements were prepared in accordance with GAAP and present fairly,
in all material respects, the consolidated financial condition and results of
operations of Companies, and

     

    
      
        
        

      

      
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    (ii) a
Compliance Certificate with respect to such financial statements to be delivered
under this clause (a),
calculating and certifying as to the Companies’ compliance with the financial
covenants under this Agreement.

     

    (b) Promptly
after preparation, and no later than 45 days after the last day of each March,
June, September and December unaudited financial statements (including
statements of operations, stockholders’ equity, and cash flows and a balance
sheet) showing the consolidated financial condition and results of operations of
the Companies for the prior quarter and for the period from the beginning of the
current fiscal year to the last day of that quarter, accompanied by a Compliance
Certificate, with respect to such financial statements to be delivered under
this clause (b),
calculating and certifying as to the Companies’ compliance with the financial
covenants under this Agreement and certifying that no Default or Potential
Default exists.

     

    (c) Within 20
days after the end of each month, a Borrowing Base Certificate (with supporting
information, including supporting schedules, accounts payable and accounts
receivable agings and other information as Lender reasonably requests, in each
case to be delivered concurrently therewith) certifying as to the Borrower’s
Borrowing Base.

     

    (d) Notice,
promptly after any Company receives notice of, or otherwise becomes aware of,
(i) the institution of any Litigation involving any Company for which the
monetary amount at issue is greater than $250,000, individually, or $250,000 in
the aggregate, (ii) any liability or alleged liability under any
Environmental Law arising out of, or directly affecting, the properties or
operations of such Company, (iii) any substantial dispute with any Governmental
Authority, (iv) the incurrence of any material contingent Debt other than
performance guaranties in respect of contracts entered into by any Company in
the ordinary course of its business, and (v) a Default or Potential Default,
specifying the nature thereof and what action each Company has taken, is taking,
or proposes to take.

     

    (e) Promptly
after preparation, but no later than 10 days after the date of filing, a
completed tax return of Borrower, together with a certificate of Responsible
Officer of Borrower certifying as to the dividends or distributions declared or
made in respect of the calendar year covered by such tax return.

     

    (f) To the
extent it is not part of the Borrower’s consolidated tax return, promptly after
preparation, but no later than 10 days after the date of filing, a completed tax
return of each Guarantor.

     

    (g) Concurrently
with the occurrence of (i) such change, notify Lender of any change in the name,
legal structure, place of business, or chief executive office of any Company, or
(ii) any acquisition or creation of a Subsidiary by any Company, notify Lender
that any Person has become a Subsidiary of such Company.

     

    (h) Promptly
upon reasonable request by Lender, information and documents not otherwise
required to be furnished under the Loan Documents respecting the business
affairs, assets and liabilities of the Companies.

     

    8.2  Books, Records, Inspections,
and Field Audits.  Each
Company shall maintain books, records, and accounts necessary to prepare the
financial statements required by Section 8.1.  Upon
reasonable notice (not less than 2 Business Days), each Company shall allow
Lender (or its Representatives) during business hours or at other reasonable
times to inspect each Company’s properties and examine, audit, and make copies
of books and records.  If any of the Companies’ properties, books or
records are in the possession of a third party, the applicable Company shall
authorize that third party to permit Lender or its Representatives to have
access to perform inspections or audits and to respond to Lender's requests for
information concerning such properties, books and records.  Lender may
discuss, from time to time, any of the Companies’ affairs, conditions and
finances with its directors, officers, and certified public
accountants.  Each Company shall permit Lender to perform (or engage
an third party to perform) a field audit of Borrower’s operations, inventory,
accounts receivables, accounts payable, and other assets once each year; provided that while a Default
exists, Lender may perform (or engage an third party to perform) a field audit
at any time.

     

    
      
        
        

      

      
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    8.3  Taxes.  Each
Company will promptly pay when due any and all Taxes, other than Taxes which are
being contested in good faith by lawful proceedings diligently conducted,
against which reserve or other provision required by GAAP has been made, and in
respect of which levy and execution of any Lien are stayed.

     

    8.4  Compliance with
Laws.  Each
Company shall comply in all material respects of the requirements of all Laws
(including fictitious or trade name statutes) and all orders, writs, injunctions
and decrees applicable to it or its business or property, except in such
instances in which (a) such requirement is deemed contested in good faith by
lawful proceedings diligently conducted, against which reserve or other
provision required by GAAP has been made, and (b) the failure to comply would
not result in a Material Adverse Event.

     

    8.5  Maintenance of Existence,
Assets, and Business.  Except
as otherwise permitted by Section 9.6,
each Company will (a) maintain its existence and good standing in its state
of organization and its authority to transact business and good standing in all
other jurisdictions where the nature and extent of its business and properties
require due qualification and good standing, (b) maintain all licenses,
permits and franchises necessary for its business where failure to do so is a
Material Adverse Event, and (c) keep all of its assets that are useful in
and necessary to its business in good working order and condition (ordinary wear
and tear excepted) and make all necessary repairs and replacements.

     

    8.6  Insurance.  Each
Company shall maintain insurance with responsible and reputable insurance
companies or associations concerning its property and business against
casualties and contingencies and of the types and amounts customarily maintained
by similar businesses (including coverage for contractual liability and product
liability).  Each policy shall provide for at least 30 days prior
notice to Lender of any cancellation thereof, and insurance policies covering
the tangible property comprising the Collateral.  Upon Lender’s
request, Borrower shall deliver to Lender a certificate of insurance listing all
insurance in force.

     

    8.7  Environmental
Laws.  Each
Company shall (a) conduct its business so as to comply with (i) all
applicable Environmental Laws, and (ii) the requirements of any purchase
agreement under which it acquired any Property, (b) promptly take corrective
action to remedy any violation of any Environmental Law, and (c) immediately
notify Lender of any claims or demands in excess of $100,000 by any Governmental
Authority or Person with respect to any Environmental Law or Hazardous
Substance.

     

    8.8  ERISA.  Promptly
during each year (a) pay contributions adequate to meet at least the minimum
funding standards under ERISA with respect to each and every Employee Plan, (b)
file each annual report required to be filed pursuant to ERISA in connection
with each Employee Plan for each year, and (c) notify Lender within 10 days of
the occurrence of any reportable event under Section 4043(c) of ERISA that might
constitute grounds for termination of any capital Employee Plan by the Pension
Benefit Guaranty Corporation or for the appointment by the appropriate United
States District Court of a trustee to administer any Employee Plan.

     

    8.9  Use of
Proceeds.  Borrower
shall use the proceeds of any Loan or LC only for the purposes represented in
this Agreement.

     

    
      
        
        

      

      
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    8.10   
Application of Insurance and
Eminent Domain Proceeds.

     

    (a) Lender
and each Company agree (i) that all Insurance Proceeds shall be paid by the
insurers directly to Lender (as loss payee or additional insured), and (ii) to
cause all Eminent Domain Proceeds to be paid by the condemning Governmental
Authority directly to Lender.

     

    (b) If any
Insurance Proceeds or Eminent Domain Proceeds are paid to any Company, such
Insurance Proceeds or Eminent Domain Proceeds shall be received only in trust
for Lender, shall be segregated from other funds of the Companies and shall
promptly be paid over to Lender in the same form as received (with any necessary
endorsement).

     

    (c) Notwithstanding
anything to the contrary in this Section 8.10,
reimbursement under any liability insurance maintained by any Company may be
paid directly to the Person who incurred the liability, cost, or expense covered
by such insurance.

     

    (d) Any
Eminent Domain Proceeds arising from the Properties or Insurance Proceeds
arising from losses incurred by Borrower shall be applied first to the Term
Facility and second, to the Revolving Credit Facility, and third to Cash
Collateralize LC Exposure, with the excess, if any, payable to
Borrower.

     

    (e) Notwithstanding
anything in this Agreement to the contrary, Borrower may retain the first
$100,000 of Insurance Proceeds or Eminent Domain Proceeds paid to Borrower under
this Agreement and use such proceeds to repair or replace damaged property or
for working capital purposes.

     

    8.11   
New
Subsidiaries.  Each
Company shall promptly cause each newly created or acquired Subsidiary to comply
with Section
6.

     

    8.12   
Expenses.  Borrower
shall promptly pay upon demand (a) all reasonable costs, fees and expenses
paid or incurred by Lender (including those incurred under Section 6) in
connection with the negotiation, preparation, delivery and execution of any Loan
Document, and any related or subsequent amendment, waiver, or consent (including
in each case, the reasonable fees and expenses of Lender’s counsel),
(b) all due diligence, closing, and post-closing costs including filing
fees, recording costs, lien searches, corporate due diligence, third-party
expenses, appraisals (if required), title insurance (if required), environmental
surveys, annual field audits, and other related due diligence, closing and
post-closing costs and expenses, and (c) all costs, fees and expenses of
Lender incurred in connection with the enforcement of the Loan Documents or the
exercise of any rights arising under the Loan Documents or the negotiation,
workout, or restructure and any action taken in connection with any Debtor
Relief Laws (including in each case, the reasonable fees and expenses of
Lender’s counsel), all of which shall be a part of the Obligation and shall
accrue interest, if not paid upon demand, at the Default Rate until
repaid.

     

    8.13   
Maintenance of Cash
Management Agreement.  Borrower
shall at all times maintain a Cash Management Agreement established in
compliance with Section 5.1
(or an alternate treasury management arrangement acceptable to
Lender).

     

    8.14   
Further
Assurances.  Each
Company shall take such action as Lender may reasonably request to carry out the
intent of this Agreement and the terms of the Loan Documents (including to
perfect and protect its security interests and Liens or comply with applicable
Laws), including executing, acknowledging, authorizing, delivering or recording
or filing additional instruments or documents or obtaining and delivering new or
updated surveys, appraisals, title commitments, or environmental site
assessments.  Because Borrower agrees that Lender’s remedies at Law
for failure of Borrower to comply with the provisions of this Section
8.14 would be inadequate and that failure would not be adequately
compensable in damages, Borrower agrees that the covenants of this Section 8.14
may be specifically enforced.

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    SECTION 9  NEGATIVE
COVENANTS.  So
long as Lender is committed to make any Loan or issue any LC under this
Agreement, and thereafter until the Obligation is paid in full, each Company
agrees as follows:

     

    9.1  Debt.  No
Company may create, incur, or permit any Debt except Permitted
Debt.  The Funded Debt permitted under clause (i) of the defined
term “Permitted Debt”, shall be pari passu in right of payment with the
Obligation, and the Liens which secure such Funded Debt shall be pari passu in
right of priority with the Liens which secure the Obligation.

     

    9.2  Liens.  No
Company shall create, incur, or permit any Lien upon any of its assets, except Permitted
Liens.  No Company shall enter into any agreement (other than the Loan
Documents) prohibiting the creation or assumption of any Lien upon its assets or
revenues or prohibiting or restricting the ability of any Company to amend or
otherwise modify this Agreement or any other Loan Document.

     

    9.3  Compliance.  No
Company may violate the provisions of any Laws applicable to it, any agreement
to which it is a party, or the provisions of its organizational documents, if
such violations individually or collectively would constitute a Material Adverse
Event.  No Company will modify, repeal, replace or amend any provision
of its organizational or governing documents in any manner which would be
adverse to the interests of Lender.

     

    9.4  Loans and
Investments.

     

    (a) No
Company may extend credit to any other Person, other than (i) existing
extensions of credit disclosed to Lender in writing, (ii) extensions of credit
among the Companies which have recourse liability for the Obligation, (iii)
extensions of credit in the nature of accounts receivable or notes receivable
arising from the sale or lease of goods or services in the ordinary course of
business to Persons which are not Affiliates, (iv) demand deposit accounts
maintained in the ordinary course of business, (v) expense accounts for
employees in the ordinary course of business which do not, in the aggregate, at
any time exceed $50,000, (vi) extensions of credit that do not exceed an
aggregate amount of $20,000 outstanding at any one time, and (vii) Permitted
Investments.

     

    (b) No
Company may make any investment in, or purchase or commit to purchase any equity
interests in, any other Person, other than Permitted Investments.

     

    9.5  Dividends.  No
Company may (a) declare or make any dividend or other distribution (other than (i) dividends
or distributions declared or made by such Company wholly in the form of its
capital stock, (ii) dividends or distributions by a Company to Borrower,
and (iii) [Borrower may from time to time make cash distributions to its
shareholders if no Default exists prior to or after giving effect to any such
distribution,] (b) retire, redeem, purchase, withdraw, or otherwise acquire any
equity interests in such Company (including the purchase of warrants or other
options to acquire such interests), or (c) declare or make any distribution of
assets to the holders of its equity interests (in that capacity), whether in
cash, assets, or in its obligations.  No Company may enter into or
permit to exist any arrangement or agreement (other than this Agreement)
that prohibits it from paying dividends or making other
distributions.

     

    9.6  Acquisition, Mergers, and
Dissolutions.

     

    (a) Except as
provided in this Section
9.6, no Company may (whether in one transaction or a series of
transactions) (i) acquire all or any substantial portion of the stock issued by,
equity interest in, voting interest in, or assets of, any other Person, (ii)
merge or consolidate with any other Person, (iii) liquidate, wind up or dissolve
(or suffer any liquidation or dissolution), (iv) suspend operations, or (v)
acquire any Subsidiaries.

     

    
      
        
        

      

      
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    (b) Any
Company may merge or consolidate with, or acquire stock issued by, equity
interest in, or assets of, another Company (and, in the case of such merger or
consolidation or, in the case of the conveyance or distribution of all of such
assets, the non-surviving or selling entity, as the case may be, may be
liquidated, wound up or dissolved); provided that, if the
surviving entity is a Guarantor it shall comply with Section 6
and if Borrower is a party to such merger or consolidation, Borrower must be the
surviving entity.

     

    9.7  Assignment.  No
Company may assign or transfer any of its rights, duties or obligations under
any of the Loan Documents.

     

    9.8  Fiscal Year and Accounting
Methods.  No
Company may change its fiscal year or its method of accounting (other than immaterial changes
in methods or as required by GAAP).

     

    9.9  Sale of
Assets.  No
Company may make any Disposition or enter into any agreement to make any
Disposition, except (a) Dispositions in the ordinary course of business, (b)
Dispositions of  (i) obsolete or worn out assets, (ii) assets which
are no longer needed in such Company’s business, (iii) inventory in the ordinary
course of business, or (iv) delinquent accounts receivable in the ordinary
course of business for purposes of collection; provided that, all of the
consideration of each such Disposition is cash, and (c) to the extent permitted
by Section
9.6.

     

    9.10   
New
Businesses.  No
Company may engage in any business except the business in which it is engaged as
of the Closing Date.

     

    9.11   
Transactions with
Affiliates.  Except
as disclosed on Schedule 7.14,
no Company may enter into any Material Agreement or any material transaction
with any of its Affiliates, provided that, any Company
may enter into a Material Agreement or any material transaction with any of its
Affiliates if (a) such transaction is in the ordinary course of business, and
(b) is on fair and reasonable terms not materially less favorable to such
Company than such Company could obtain in an arms’ length transaction with a
Person that was not an Affiliate.

     

    9.12 Payroll
Taxes

     

    .  No
Company may use any portion of the proceeds of any Loan to pay the wages of
employees, unless a timely payment to or deposit with the appropriate
Governmental Authority of all amounts of Tax required to be deducted and
withheld with respect to such wages is also made.

     

    9.13   
Prepayment of
Debt.  No
Company may voluntarily prepay principal of, or interest on, any Debt, other than the Obligation, if
a Default or Potential Default exists or would result after giving effect to
such payment.  No Company may prepay, repurchase, redeem or defease
Subordinated Debt (other than Subordinated Debt listed on Schedule
9.13) prior to the irrevocable payment and performance in full of the
Obligation without the prior written consent of Lender.

     

    SECTION
10 FINANCIAL
COVENANTS.  So
long as Lender is committed to make any Loan or issue any LC under this
Agreement, and thereafter until the Obligation is paid in full, the Companies
agree as follows:

     

    10.1  Leverage
Ratio.  The
Leverage Ratio may not at any time be greater than 2.50 to 1.00.  The
foregoing covenant shall be calculated and tested quarterly, as of the last day
of each quarter, beginning with the quarter ending March 31, 2009.

     

    10.2  Fixed Charge Coverage
Ratio.  The
Fixed Charge Coverage Ratio may not at any time be less than 1.50 to
1.00.  The foregoing covenant shall be calculated and tested
quarterly, as of the last day of each quarter, beginning with the quarter ending
March 31, 2009.

     

    
      
        
        

      

      
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    10.3  Tangible Net
Worth.  The
Tangible Net Worth may not at any time be less than an amount equal to
the sum of
(a) $20,000,000 , plus (b) 50% of the
Companies’ net income, if positive, after provision for Taxes, for each whole or
partial fiscal year completed after the Closing Date.  The foregoing
Tangible Net Worth covenant shall be calculated and tested quarterly as of the
last day of each quarter, beginning March 31, 2009.

     

    For the
three quarters ending March 31, 2009, the Leverage Ratio and the Fixed Charge
Coverage Ratio shall be calculated by multiplying their respective constituent
components for such periods by 4/3.  For the quarter ending June 30,
2009, and each quarter thereafter, the Leverage Ratio and the Fixed Charge
Coverage Ratio shall be calculated for the four immediately preceding
quarters.

     

    SECTION
11 DEFAULT

     

    .  The
term “Default” means the occurrence of any one or more of the following
events:

     

    11.1  Payment of
Obligation.  The
failure of any Company to pay any part of the Obligation within 2 days after the
date when it becomes due and payable under the Loan Documents.

     

    11.2  Covenants.  The
failure of any Company to punctually and properly perform, observe and comply
with:

     

    (a) Any
covenant, agreement, or condition contained in (i) Sections 6.1,
6.3, 8.2, 8.6, 8.8, 8.9, or 8.10 and
such failure continues for 10 days or (ii) Sections 9
and 10,
or

     

    (b) Any other
covenant, agreement, or condition contained in any Loan Document, (other than
the covenants to pay the Obligation as set out in Section
11.1 above, the covenants in clause (a) preceding and as set out below in
this Section
11), and such failure continues for 30 days.

     

    11.3  Debtor
Relief.  Any
Company (a) voluntarily seeks, consents to, or acquiesces in the benefit of
any Debtor Relief Law, other
than a voluntary liquidation or dissolution permitted by Section 9.6,
(b) becomes a party to or is made the subject of any proceeding provided
for by any Debtor Relief Law (other than as a creditor or
claimant), and (i) the petition is not controverted within 10 days and is
not dismissed within 60 days, or (ii) an order for relief is entered under
Title 11 of the United States
Code, (c) makes an assignment for the benefit of creditors, or
(d) fails (or admits in writing its inability) to pay its debts generally
as they become due.

     

    11.4  Judgments.  Any
Company fails, within 30 days after entry, to pay, bond or otherwise discharge
any (a) a final non-appealable judgment or arbitration award for the payment of
money in the amount exceeding $250,000 (individually or in the aggregate and net
of applicable insurance if the insurer has accepted coverage) or (b) one or more
non-monetary judgments that could be, or could reasonably be expected to be,
individually or in the aggregate, a Material Adverse Event, and, in either case
enforcement of such judgment or award is not stayed.

     

    11.5  Misrepresentation.  Any
representation or warranty made to Lender by any Company or contained in any
Loan Document at any time proves to have been incorrect in any material respect
when made.

     

    11.6  Default Under Other
Agreements.

     

    (a) Except
for trade payables in the ordinary course of business, any Company fails to pay
when due (after any applicable grace period) any Debt which (individually or in
the aggregate) exceeds $100,000, or any default exists under any agreement which
permits any Person to cause any Debt which (individually or in the aggregate)
exceeds $100,000 to become due and payable by any Company before its stated
maturity.

     

    
      
        
        

      

      
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    (b) Any
Company breaches or defaults under any material term, condition, provision,
representation or warranty contained in any Material Agreement, including any
agreement with Lender (other than the Loan Documents), and such Company fails
for 10 Business Days to commence and thereafter diligently pursue a
cure.

     

    11.7  Validity and Enforceability
of Loan Documents.  Except
in accordance with its terms, any Loan Document at any time after its execution
and delivery (a) ceases to be in effect in any material respect or is declared
by a Governmental Authority to be null and void, or (b) its validity or
enforceability is contested by a Company or a Company denies that it has any
further liability or obligations under any Loan Document.

     

    11.8  Swap
Agreement.  Notwithstanding
Section
11.2(b) above, any Company breaches any provision of any Swap Agreement
and the breach is not cured or waived within any applicable grace
period.

     

    11.9  Change of
Management.  (a)
A Change of Management occurs or (b) an agreement, letter of intent, or
agreement in principle is executed which by its terms will result in a Change of
Management.

     

    11.10   
Ownership of Other
Companies.  Borrower
fails to own, beneficially and of record, with power to vote, 66 2/3% of the
issued and outstanding shares of capital stock, partnership interests or other
equity interests of any Subsidiary that has executed a Loan Document (except as
a result of a transaction permitted by this Agreement).

     

    11.11   
Material Adverse
Event.  A
Material Adverse Event exists.

     

    SECTION
12 RIGHTS AND
REMEDIES.

     

    12.1  Remedies Upon
Default.

     

    (a) If a
Default exists under Section 11.3,
the Commitment under this Agreement automatically terminates and the unpaid
balance of the Obligation automatically becomes due and payable without any
action of any kind.

     

    (b) If a
Default exists, Lender may do any one or more of the
following:  (i) if the maturity of the Obligation has not already
been accelerated under Section 12.1(a),
declare the unpaid balance of the Obligation immediately due and payable and to
the extent permitted by applicable Law, the Obligation shall accrue interest at
the Default Rate; (ii) terminate the Commitment; (iii) reduce any
claim to judgment; (iv) exercise the rights of set-off or banker’s Lien
under Section 3.9
to the extent of the full amount of the Obligation; (v) require Borrower to Cash
Collateralize all LC Exposure; and (vi) exercise any and all other legal or
equitable rights afforded by the Loan Documents, the Laws of the State of Texas,
or any other applicable jurisdiction.

     

    12.2  Waivers.  To
the extent permitted by Law, each Company waives presentment and demand for
payment, protest, notice of intention to accelerate, notice of acceleration and
notice of protest and nonpayment, and agrees that its liability with respect to
all or any part of the Obligation is not affected by any renewal or extension in
the time of payment of all or any part of the Obligation, by any indulgence, or
by any release or change in any security for the payment of all or any part of
the Obligation.

     

    
      
        
        

      

      
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    12.3  No Waiver.  No
waiver of any Default shall be deemed to be a waiver of any other then-existing
or subsequent Default.  No delay or omission by Lender in exercising
any right under the Loan Documents will impair that right or be construed as a
waiver thereof or any acquiescence therein, nor will any single or partial
exercise of any right preclude other or further exercise thereof or the exercise
of any other right.  The acceptance by Lender of any partial payment
shall not be deemed to be a waiver of any Default then existing.

     

    12.4  Performance by
Lender.  If
any covenant, duty or agreement of any Company is not performed in accordance
with the terms of the Loan Documents, Lender may, but is not obligated to,
perform or attempt to perform that covenant, duty or agreement on behalf of that
Company (and any amount expended by Lender in its performance or attempted
performance is payable on demand, becomes part of the Obligation, and bears
interest at the Default Rate from the date of Lender’s expenditure until
paid).

     

    12.5  Cumulative
Rights.  All
rights available to Lender under the Loan Documents are cumulative of, and in
addition to, all other rights granted at law or in equity, whether or not the
Obligation is due and payable and whether or not Lender has instituted any suit
for collection, foreclosure, or other action  in connection with the
Loan Documents.

     

    SECTION
13 MISCELLANEOUS.

     

    13.1  Governing
Law.  Each
Loan Document (other than the Deed of Trust) must be construed, and its
performance enforced, under Texas law.

     

    13.2  Invalid
Provisions.  If
any provision of this Agreement or the other Loan Documents is held to be
illegal, invalid or unenforceable, (a) the legality, validity and enforceability
of the remaining provisions of this Agreement and the other Loan Documents shall
not be affected or impaired thereby and (b) the parties shall engage in
good faith negotiations to replace the illegal, invalid or unenforceable
provisions with valid provisions the economic effect of which comes as close as
possible to that of the illegal, invalid or unenforceable
provisions.  The invalidity of a provision in a particular
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

     

    13.3  Multiple Counterparts and
Facsimile Signatures.  Each
Loan Document may be executed in any number of counterparts with the same effect
as if all signatories had signed the same document.  All counterparts
must be construed together to constitute one and the same
instrument.  Loan Documents may be transmitted and signed by facsimile
or portable document format (PDF) and shall have the same effect as
manually-signed originals and shall be binding on all Companies and
Lender.

     

    13.4  Notice.  Unless
otherwise provided in this Agreement, all notices or consents required under
this Agreement shall be personally delivered or sent by first class mail,
postage prepaid, or by overnight courier, or sent by
facsimile.  Notices and other communications shall be effective (a) if
mailed, upon the earlier of receipt or 5 days after properly addressed, sealed
and deposited in the U.S. mail, first class, postage prepaid, return receipt
requested, (b) if faxed, when transmitted, or (c) if hand-delivered, by courier
or otherwise (including telegram, lettergram or mailgram), when
delivered.  Until changed by notice pursuant to this Agreement, the
addresses and facsimile numbers for each party is set out on Schedule 1.  Lender
shall be entitled to rely and act upon any notices (including telephonic Loan
Requests) purportedly given by or on behalf of Borrower even if (i) such notices
were not made in a manner specified in this Section, were incomplete or were not
preceded or followed by any other form of notice specified in this Section, or
(ii) the terms of the notice, as understood by the recipient, varied from any
confirmation of the notice.  Borrower shall indemnify Lender and its
Affiliates and representatives from all losses, costs, expenses and liabilities
resulting from the reliance by such Person on each notice purportedly given by
or on behalf of Borrower except to the extent of the Lender’s and its Affiliates
gross negligence or willful misconduct relating to reliance and action upon any
such notices.  All telephonic notices to and other communications with
Lender may be recorded by Lender, and each of the parties to this Agreement
hereby consents to such recording.

     

    
      
        
        

      

      
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    13.5  Binding Effect;
Survival.  This
Agreement is binding upon, and inures to the benefit of, the parties hereto and
their respective successors and permitted assigns.  Unless otherwise
provided, all covenants, agreements, indemnities, representations and warranties
made in any of the Loan Documents survive and continue in effect as long as the
Commitment is in effect or the Obligation is outstanding.

     

    13.6  Amendments.  The
Loan Documents may be amended, modified, supplemented or be the subject of a
waiver only by a writing executed by Lender and Borrower.

     

    13.7  Participants.  Lender
may, at any time, sell to one or more Persons (each a “Participant”)
participating interests in the Obligation; provided that,
(a) Lender remains the holder of the Principal Amount, (b) Lender’s
obligations under this Agreement remain unchanged and Lender remains solely
responsible for the performance of those obligations, and (c) each Company
continues to deal solely and directly with Lender regarding the Loan
Documents.  Lender may furnish any information concerning the
Companies in its possession from time to time to assignees and Participants
(including prospective assignees and Participants), provided that, to the extent
applicable, such information is subject to the terms of Section
13.12 hereof.

     

    13.8  Discharge Only Upon Payment
in Full; Reinstatement in Certain Circumstances.  Each
Company’s obligations under the Loan Documents remain in full force and effect
until the aggregate Commitment is terminated and the Obligation is paid in full
(except for provisions under the Loan Documents which by their terms expressly
survive payment of the Obligation and termination of the Loan
Documents).  If at any time any payment of the principal of or
interest on any Note or any other amount payable by any Company or any other
obligor on the Obligation under any Loan Document is rescinded or must be
restored or returned upon the insolvency, bankruptcy or reorganization of
Borrower or otherwise, the obligations of each Company under the Loan Documents
with respect to that payment shall be reinstated as though the payment had been
due but not made at that time.

     

    13.9  Waiver of Jury
Trial.  Borrower
and Lender irrevocably and voluntarily waive any right they may have to a trial
by jury in respect of any claim.  This provision is a material
inducement for the parties entering into this Agreement and the other Loan
Documents.

     

    13.10   
Indemnity.  Whether
or not the transactions contemplated by this Agreement are consummated,
Borrower, jointly and severally, shall indemnify and hold harmless Lender and
its Affiliates and representatives (collectively the “Indemnitees”)
from and against any and all liabilities, obligations, losses, damages,
penalties, claims, demands, actions, judgments, suits, costs, expenses and
disbursements (including reasonable fees and expenses of counsel) of any kind or
nature whatsoever which may at any time be imposed on, incurred by or asserted
against any such Indemnitee in any way relating to or arising out of or in
connection with (i) the execution, delivery, enforcement, performance or
administration of any Loan Document or any other agreement, letter or instrument
delivered in connection with the transactions contemplated thereby or the
consummation of the transactions contemplated thereby, (ii) any use or
proposed use of the proceeds therefrom, (iii) any actual or alleged presence or
release of Hazardous Substance on or from any property currently or formerly
owned or operated by Borrower, any Subsidiary or any other Company, or any
liability in respect of any Environmental Law related in any way to Borrower, or
any other Company, or (iv) any actual or prospective Litigation, claim,
or investigation relating to any of the foregoing, whether based on contract,
tort or any other theory (including any investigation of, preparation for, or
defense of any pending or threatened claim, investigation, litigation or
proceeding) and regardless of whether any Indemnitee is a party thereto (all the
foregoing, collectively, the “Indemnified
Liabilities”), IN ALL
CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE
NEGLIGENCE OF THE INDEMNITEE; provided that, such indemnity
shall not, as to any Indemnitee, be available to the extent that such
liabilities, obligations, losses, damages, penalties, claims, demands, actions,
judgments, suits, costs, expenses or disbursements are determined by a court of
competent jurisdiction by final and nonappealable judgment to have resulted from
the gross negligence or willful misconduct of such Indemnitee.  All
amounts due under this Section shall
be payable within 10 Business Days after demand.  The agreements in
this Section shall survive the termination of the Commitment and the repayment,
satisfaction or discharge of the Obligation.

     

    
      
        
        

      

      
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    13.11   
ENTIRETY.  THE
LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BY THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS
AMONG THE PARTIES. 

     

    13.12   
Confidentiality.  Lender
may not disclose to any Person any material non-public information that is now
or in the future required to be furnished to Lender under the express terms of
this Agreement or any other Loan Document (“Confidential
Information”) without the consent of the Borrower, other than (a)
Lender’s Affiliates and their officers, directors, employees, agents, attorneys,
and advisors, (b) prospective assignees or Participants, field auditors,
appraisers and valuation consultants, or other third parties engaged to assist
Lender in connection with its monitoring or evaluation of
the  Borrower’s collateral, credit quality, or  financial
covenant compliance, (c) as required by any Laws or judicial process, (d) in
connection with any Litigation to which the Lender or any of its Affiliates may
be a party with notice to the Borrower, (e) in connection with any right or
remedy under any Loan Document or (f) as such information has become generally
available to the public other than by virtue of a breach of this clause by the
Lender or any other Person to whom the Lender has provided such information as
permitted by this Section; provided that, to the extent
practicable and permitted by applicable Laws, the Lender shall notify the
Borrower of any disclosure under clause (c) and shall
reasonably cooperate with the Borrower to the extent the Borrower seeks to
obtain confidential treatment of such Confidential Information.

     

    13.13   
Non-Business
Days.  Any
payment or action that is due under any Loan Document on a non-Business Day may
be delayed until the next-succeeding Business Day.

     

    [Signatures
appear on following page.]

     

    
      
        
        

      

      
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    EXECUTED
as of the day and year set out in the Preamble.

     

    
      
        	 	
                BORROWER:

                
                   

                  DEEP
      DOWN, INC.,

                  a
      Nevada corporation

                

              	 
	 	 	 	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Eugene
      L. Buter            	 
	 	 	Eugene
      L. Butler	 
	 	 	Chief
      Financial Officer	 
	 	 	 	 


      

    

     

    


      
        	 	

                LENDER:

                


                WHITNEY
      NATIONAL BANK,

                a
      national banking association

              	 
	 	 	 	 
	
                 

              	
                By:
      

              	/s/ Paul
      W. Cole            	 
	 	 	Paul
      W. Cole	 
	 	 	Vice
      President	 
	 	 	 	 


      

    

                                                           

     

     

     

     

     

     

     

     

     

     

    33