Document:

Exhibit 4.1

 

 

CREDIT AGREEMENT

Dated as of October
29, 2004

among

PIONEER DRILLING
SERVICES, LTD.

as Borrower,

THE OTHER CREDIT
PARTIES SIGNATORY HERETO,

as Credit Parties,

THE LENDERS
SIGNATORY HERETO

FROM TIME TO TIME,

as Lenders,

and

THE FROST NATIONAL BANK,

as Administrative
Agent, Agent, Lead Arranger and Lender

 

 

 

TABLE OF
CONTENTS

 

	
  1.

  	
  AMOUNT AND TERMS OF CREDIT

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  1.1

  	
  Credit
  Facilities.

  	
   

  
	
   

  	
  1.2

  	
  Letters
  of Credit

  	
   

  
	
   

  	
  1.3

  	
  Prepayments.

  	
   

  
	
   

  	
  1.4

  	
  Use of
  Proceeds

  	
   

  
	
   

  	
  1.5

  	
  Interest and
  Applicable Margins.

  	
   

  
	
   

  	
  1.6

  	
  Eligible
  Accounts

  	
   

  
	
   

  	
  1.7

  	
  Cash
  Management Systems

  	
   

  
	
   

  	
  1.8

  	
  Fees.

  	
   

  
	
   

  	
  1.9

  	
  Receipt
  of Payments

  	
   

  
	
   

  	
  1.10

  	
  Application and
  Allocation of Payments.

  	
   

  
	
   

  	
  1.11

  	
  Loan Account and Accounting

  	
   

  
	
   

  	
  1.12

  	
  Indemnity.

  	
   

  
	
   

  	
  1.13

  	
  Access

  	
   

  
	
   

  	
  1.14

  	
  Taxes.

  	
   

  
	
   

  	
  1.15

  	
  Capital
  Adequacy; Increased Costs; Illegality.

  	
   

  
	
   

  	
  1.16

  	
  Single Loan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  2.

  	
  CONDITIONS PRECEDENT

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  2.1

  	
  Conditions to the Initial
  Loans

  	
   

  
	
   

  	
  2.2

  	
  Further Conditions to
  Each Loan

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  3.

  	
  REPRESENTATIONS AND
  WARRANTIES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  3.1

  	
  Corporate Existence;
  Compliance with Law

  	
   

  
	
   

  	
  3.2

  	
  Executive
  Offices, Collateral Locations, Organizational Structure, FEIN

  	
   

  
	
   

  	
  3.3

  	
  Corporate
  Power, Authorization, Enforceable Obligations

  	
   

  
	
   

  	
  3.4

  	
  Financial
  Statements

  	
   

  
	
   

  	
  3.5

  	
  Material
  Adverse Effect

  	
   

  
	
   

  	
  3.6

  	
  Ownership of Property; Liens

  	
   

  
	
   

  	
  3.7

  	
  Labor
  Matters

  	
   

  
	
   

  	
  3.8

  	
  Ventures,
  Subsidiaries and Affiliates and Indebtedness

  	
   

  
	
   

  	
  3.9

  	
  Government Regulation

  	
   

  
	
   

  	
  3.10

  	
  Margin
  Regulations

  	
   

  
	
   

  	
  3.11

  	
  Taxes

  	
   

  
	
   

  	
  3.12

  	
  ERISA.

  	
   

  
	
   

  	
  3.13

  	
  No
  Litigation

  	
   

  
	
   

  	
  3.14

  	
  Brokers

  	
   

  
	
   

  	
  3.15

  	
  Intentionally Omitted

  	
   

  
	
   

  	
  3.16

  	
  Full
  Disclosure

  	
   

  
	
   

  	
  3.17

  	
  Environmental Matters.

  	
   

  
	
   

  	
  3.18

  	
  Insurance

  	
   

  
	
   

  	
  3.19

  	
  Intentionally
  Omitted

  	
   

  
	
   

  	
  3.20

  	
  Government
  Contracts

  	
   

  
	
   

  	
  3.21

  	
  Customer and Trade
  Relations

  	
   

  
	
   

  	
  3.22

  	
  Agreements
  and Other Documents

  	
   

  
	
   

  	
  3.23

  	
  Solvency

  	
   

  
	
   

  	
  3.24

  	
  Status of Holding Company

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  4.

  	
   

  	
  FINANCIAL STATEMENTS AND
  INFORMATION

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  4.1

  	
  Reports
  and Notices.

  	
   

  
	
   

  	
  4.2

  	
  Communication
  with Accountants

  	
   

  

 

i

 

	
  5.

  	
  AFFIRMATIVE COVENANTS

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  5.1

  	
  Maintenance of Existence
  and Conduct of Business

  	
   

  
	
   

  	
  5.2

  	
  Payment
  of Charges.

  	
   

  
	
   

  	
  5.3

  	
  Books
  and Records

  	
   

  
	
   

  	
  5.4

  	
  Insurance; Damage
  to or Destruction of Collateral.

  	
   

  
	
   

  	
  5.5

  	
  Compliance
  with Laws

  	
   

  
	
   

  	
  5.6

  	
  Supplemental Disclosure

  	
   

  
	
   

  	
  5.7

  	
  Intellectual Property

  	
   

  
	
   

  	
  5.8

  	
  Environmental
  Matters

  	
   

  
	
   

  	
  5.9

  	
  Further
  Assurances

  	
   

  
	
   

  	
  5.10

  	
  Additional Guarantors

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  6.

  	
  NEGATIVE COVENANTS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  6.1

  	
  Mergers,
  Subsidiaries, Etc.

  	
   

  
	
   

  	
  6.2

  	
  Investments; Loans and
  Advances

  	
   

  
	
   

  	
  6.3

  	
  Indebtedness.

  	
   

  
	
   

  	
  6.4

  	
  Employee Loans and
  Affiliate Transactions.

  	
   

  
	
   

  	
  6.5

  	
  Capital Structure and Business

  	
   

  
	
   

  	
  6.6

  	
  Guaranteed Indebtedness

  	
   

  
	
   

  	
  6.7

  	
  Liens

  	
   

  
	
   

  	
  6.8

  	
  Sale of Stock and Assets

  	
   

  
	
   

  	
  6.9

  	
  ERISA

  	
   

  
	
   

  	
  6.10

  	
  Financial
  Covenants

  	
   

  
	
   

  	
  6.11

  	
  Hazardous
  Materials

  	
   

  
	
   

  	
  6.12

  	
  Sale-Leasebacks

  	
   

  
	
   

  	
  6.13

  	
  Cancellation of
  Indebtedness

  	
   

  
	
   

  	
  6.14

  	
  Restricted
  Payments

  	
   

  
	
   

  	
  6.15

  	
  Change of Corporate Name or
  Location; Change of Fiscal Year

  	
   

  
	
   

  	
  6.16

  	
  No
  Impairment of Intercompany Transfers

  	
   

  
	
   

  	
  6.17

  	
  No
  Speculative Transactions

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  7.

  	
  TERM

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  7.1

  	
  Termination

  	
   

  
	
   

  	
  7.2

  	
  Survival of Obligations Upon
  Termination of Financing Arrangements

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  8.

  	
  EVENTS OF DEFAULT; RIGHTS AND
  REMEDIES

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  8.1

  	
  Events
  of Default

  	
   

  
	
   

  	
  8.2

  	
  Remedies.

  	
   

  
	
   

  	
  8.3

  	
  Waivers by Credit Parties

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  9.

  	
  ASSIGNMENT AND PARTICIPATIONS;
  APPOINTMENT OF AGENT

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  9.1

  	
  Assignment and Participations.

  	
   

  
	
   

  	
  9.2

  	
  Appointment of Agent

  	
   

  
	
   

  	
  9.3

  	
  Agent’s Reliance, Etc.

  	
   

  
	
   

  	
  9.4

  	
  Frost Bank and Affiliates

  	
   

  
	
   

  	
  9.5

  	
  Lender Credit Decision

  	
   

  
	
   

  	
  9.6

  	
  Indemnification

  	
   

  
	
   

  	
  9.7

  	
  Successor Agent

  	
   

  
	
   

  	
  9.8

  	
  Setoff and Sharing of
  Payments

  	
   

  
	
   

  	
  9.9

  	
  Advances; Payments; Non-Funding
  Lenders; Information; Actions in Concert.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  10.

  	
  SUCCESSORS AND ASSIGNS

  	
   

  
	
   

  	
   

  	
   

  
	
  10.1

  	
   

  	
  Successors and Assigns

  	
   

  

 

ii

 

 

	
  11.

  	
  MISCELLANEOUS

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  11.1

  	
  Complete Agreement; Modification
  of Agreement.

  	
   

  
	
   

  	
  11.2

  	
  Amendments and Waivers.

  	
   

  
	
   

  	
  11.3

  	
  Fees and Expenses

  	
   

  
	
   

  	
  11.4

  	
  No
  Waiver

  	
   

  
	
   

  	
  11.5

  	
  Remedies

  	
   

  
	
   

  	
  11.6

  	
  Severability

  	
   

  
	
   

  	
  11.7

  	
  Conflict of Terms

  	
   

  
	
   

  	
  11.8

  	
  Confidentiality

  	
   

  
	
   

  	
  11.9

  	
  GOVERNING LAW

  	
   

  
	
   

  	
  11.10

  	
  Notices

  	
   

  
	
   

  	
  11.11

  	
  Section Titles

  	
   

  
	
   

  	
  11.12

  	
  Counterparts

  	
   

  
	
   

  	
  11.13

  	
  WAIVER OF JURY TRIAL

  	
   

  
	
   

  	
  11.14

  	
  Intentionally Omitted

  	
   

  
	
   

  	
  11.15

  	
  Reinstatement

  	
   

  
	
   

  	
  11.16

  	
  Advice of Counsel

  	
   

  
	
   

  	
  11.17

  	
  No Strict Construction

  	
   

  
	
   

  	
  11.18

  	
  USA PATRIOT Act Notice

  	
   

  
	
   

  	
  11.19

  	
  No Oral Agreements

  	
   

  

 

iii

 

INDEX OF APPENDICES

 

	
  Annex A
  (Recitals)

  	
  -

  	
   

  	
  Definitions

  
	
  Annex B (Section
  1.2)

  	
  -

  	
   

  	
  Letters of
  Credit

  
	
  Annex C (Section
  2.1(a))

  	
  -

  	
   

  	
  Closing Checklist

  
	
  Annex D (Section
  4.1(a))

  	
  -

  	
   

  	
  Financial Statements
  — Reporting

  
	
  Annex E (Section
  4.1(b))

  	
  -

  	
   

  	
  Collateral
  Reports

  
	
  Annex F (Section
  6.10)

  	
  -

  	
   

  	
  Financial
  Covenants

  
	
  Annex G (Section
  9.9(a))

  	
  -

  	
   

  	
  Lenders’ Wire Transfer
  Information

  
	
  Annex H (Section
  11.10)

  	
  -

  	
   

  	
  Notice Addresses

  Annex I (from Annex A-

  
	
  Commitments definition)

  	
  -

  	
   

  	
  Commitments as of
  Closing Date

  
	
   

  	
   

  	
   

  	
   

  
	
  Exhibit 1.1(a)(i)

  	
  -

  	
   

  	
  Form of Notice of
  Revolving Credit Advance

  
	
  Exhibit
  1.1(a)(ii)

  	
  -

  	
   

  	
  Form
  of Revolving Note

  
	
  Exhibit 1.1(b)(i)

  	
  -

  	
   

  	
  Form of Notice of
  Acquisition Loan

  
	
  Exhibit 1.1(b)(ii)

  	
  -

  	
   

  	
  Form of Acquisition Note

  
	
  Exhibit 1.1(b)(iii)

  	
  -

  	
   

  	
  Form of Security Agreement

  
	
  Exhibit 4.1(b)

  	
  -

  	
   

  	
  Form of Borrowing Base
  Certificate

  
	
  Exhibit 9.1(a)

  	
  -

  	
   

  	
  Form of Assignment and
  Assumption Agreement

  
	
   

  	
   

  	
   

  	
   

  
	
  Schedule 1.1

  	
  -

  	
   

  	
  Agent’s Representatives

  
	
   

  	
   

  	
   

  	
   

  
	
  Disclosure Schedule 3.1

  	
  -

  	
   

  	
  Type of Entity; State
  of Organization

  
	
  Disclosure Schedule 3.2

  	
  -

  	
   

  	
  Executive Offices,
  Collateral Locations, FEIN

  
	
  Disclosure Schedule
  3.4(a)

  	
  -

  	
   

  	
  Financial Statements

  
	
  Disclosure Schedule 3.6

  	
  -

  	
   

  	
  Real Estate and Leases

  
	
  Disclosure Schedule 3.7

  	
  -

  	
   

  	
  Labor Matters

  
	
  Disclosure Schedule 3.8

  	
  -

  	
   

  	
  Ventures; Subsidiaries
  and Affiliates; Indebtedness

  
	
  Disclosure Schedule
  3.11

  	
  -

  	
   

  	
  Tax Matters

  
	
  Disclosure Schedule
  3.12

  	
  -

  	
   

  	
  ERISA Plans

  
	
  Disclosure Schedule
  3.13

  	
  -

  	
   

  	
  Litigation

  
	
  Disclosure Schedule
  3.17

  	
  -

  	
   

  	
  Hazardous Materials

  
	
  Disclosure Schedule
  3.18

  	
  -

  	
   

  	
  Insurance

  
	
  Disclosure Schedule
  3.20

  	
  -

  	
   

  	
  Government Contracts

  
	
  Disclosure Schedule
  3.22

  	
  -

  	
   

  	
  Material Agreements

  
	
  Disclosure Schedule 5.1

  	
  —

  	
   

  	
  Trade Names

  
	
  Disclosure Schedule 6.3

  	
  —

  	
   

  	
  Indebtedness

  
	
  Disclosure Schedule
  6.4(a)

  	
  —

  	
   

  	
  Transactions with
  Affiliates

  
	
  Disclosure Schedule 6.7

  	
  —

  	
   

  	
  Existing Liens

  

 

 

This CREDIT AGREEMENT (this “Agreement”), dated
as of October 29, 2004, by and among PIONEER DRILLING SERVICES,
LTD., a Texas limited partnership (“Borrower”); the other
Credit Parties signatory hereto; THE FROST NATIONAL BANK,
a national banking association (in its individual capacity, “Frost Bank”),
for itself, as Lender, as Lead Arranger, and as Agent for Lenders, and the
other Lenders signatory hereto from time to time.

 

RECITALS

 

WHEREAS, Borrower has requested that Lenders extend
revolving and term credit facilities to Borrower of up to Forty-Seven Million
Dollars ($47,000,000) in the aggregate for the following purposes:  (a) funding a portion of the purchase price of
certain drilling rigs and/or drilling rig transportation equipment and
associated equipment (“Drilling Rigs”) acquired by Borrower; (b) working
capital financing for Borrower; and (c) other purposes permitted
hereunder; and for these purposes, Lenders are willing to make certain loans
and other extensions of credit to Borrower of up to such amount upon the terms
and conditions set forth herein; and

 

WHEREAS, Borrower has agreed to secure all of its
obligations under the Loan Documents by granting to Agent, for the benefit of
Agent and Lenders, a security interest in and lien upon all of the Collateral;
and

 

WHEREAS, PIONEER DRILLING COMPANY,
a Texas corporation (“Holding Company”), is willing to guarantee all of
the obligations of Borrower to Agent and Lenders under the Loan Documents; and

 

WHEREAS, capitalized terms used in this Agreement
shall have the meanings ascribed to them in Annex A and, for purposes of
this Agreement and the other Loan Documents, the rules of construction set
forth in Annex A shall govern. 
All Annexes, Disclosure Schedules, Exhibits and other attachments
(collectively, “Appendices”) hereto, or expressly identified to this
Agreement, are incorporated herein by reference, and taken together with this
Agreement, shall constitute but a single agreement.  These Recitals shall be construed as part of
the Agreement.

 

NOW, THEREFORE, in consideration of the premises and
the mutual covenants hereinafter contained, and for other good and valuable
consideration, the parties hereto agree as follows:

 

1.     AMOUNT AND TERMS OF CREDIT

 

1.1           Credit
Facilities.

 

(a)           Revolving Credit Facility.

 

(i)            Subject to the terms and conditions
hereof, each Revolving Lender agrees to make available to Borrower from time to
time until the Revolving Commitment Termination Date its Pro Rata Share of
advances (each, a “Revolving Credit Advance”).  The Pro Rata Share of the Revolving Loan of
any Revolving Lender shall not at any time exceed its separate Revolving Loan
Commitment.  The obligations of each
Revolving Lender hereunder shall be several and not joint.  Until the Revolving Commitment Termination
Date, Borrower may from time to time borrow, repay and reborrow under this Section
1.1(a); provided, that the amount of any Revolving Credit Advance to be
made at any time shall not exceed Revolving Borrowing Availability at such
time.  Revolving Borrowing Availability
may be further reduced by Reserves imposed by Agent in its reasonable credit
judgment.  Each Revolving Credit Advance
shall be made on notice by Borrower to one of the representatives of Agent identified
in Schedule 1.1 at the address specified therein.  Any such notice must be given no later than
11:00 a.m. (San Antonio time) on the Business Day of the proposed Revolving
Credit Advance.  Each such notice
(a ”Notice of Revolving Credit Advance”) must be given in writing
(by telecopy or overnight courier) substantially in the form of Exhibit
1.1(a)(i), and shall include the information required in such Exhibit and
such other information as may be required by Agent.

 

(ii)           Except as provided in Section 1.11,
Borrower shall execute and deliver to each Revolving Lender a note to evidence
the Revolving Loan Commitment of that Revolving Lender.  Each note shall be in the principal amount of
the Revolving Loan Commitment of the applicable Revolving Lender, dated the
Closing Date and substantially in the form of Exhibit 1.1(a)(ii) (each a
“Revolving Note” and, collectively, the

 

 

“Revolving Notes”).  Each Revolving Note shall represent the
obligation of Borrower to pay the amount of Revolving Lender’s Revolving Loan
Commitment or, if less, such Revolving Lender’s Pro Rata Share of the aggregate
unpaid principal amount of all Revolving Credit Advances to Borrower together
with interest thereon as prescribed in Section 1.5.  The entire unpaid balance of the Revolving
Loan and all other non-contingent Obligations shall be immediately due and
payable in full in immediately available funds on the Revolving Commitment
Termination Date.

 

(b)           Acquisition Credit Facility.

 

(i)            Subject to the terms and conditions
hereof, each Acquisition Lender agrees to make available to Borrower on a non-revolving
basis from time to time until the Acquisition Commitment Termination Date, its
Pro Rata share of advances (each an “Acquisition Loan” and collectively,
the “Acquisition Loans”).  The Pro
Rata Share of the Acquisition Loans of any Acquisition Lender shall not at any
time exceed its separate Acquisition Facility Commitment.  The obligations of each Acquisition Lender
hereunder shall be several and not joint. 
Each Acquisition Loan shall be made on notice by Borrower to one of the
representatives of Agent identified in Schedule 1.1 at the address
specified therein.  Any such notice must
be given no later than 11:00 a.m. (San Antonio time) not less than 5 Business
Days prior to the proposed Acquisition Loan. 
Each such notice (a ”Notice of Acquisition Loan”) must be
given in writing (by telecopy or overnight courier) substantially in the form
of Exhibit 1.1(b)(i), and shall include the information required in such
Exhibit and such other information as may be required by Agent.  Each Acquisition Loan shall be evidenced by a
promissory note in the principal amount of such Acquisition Loan, substantially
in the form of Exhibit 1.1(b)(ii) (each an “Acquisition Note” and
collectively the “Acquisition Notes”) and secured by a Security Agreement
substantially in the form of Exhibit 1.1(b)(iii) granting to Agent a
valid and perfected first priority security interest in the Drilling Rig(s) to
be acquired by such Acquisition Loan, and, except as provided in Section 1.11,
Borrower shall execute and deliver each Acquisition Note to the applicable Acquisition
Lender.  Each Acquisition Note shall
represent the obligation of Borrower to pay such Acquisition Lender’s Pro Rata
Share of the unpaid principal amount of the Acquisition Loan, together with
interest thereon as prescribed in Section 1.5.

 

(ii)           Borrower shall repay the principal
amount of each Acquisition Loan in thirty-six (36) consecutive equal monthly
installments based on an amortization of the original principal amount of each
Advance Note over a period of six (6) years from the date of the Advance Note, on
the first day of each month, commencing on the first day of the month following
thirty (30) days from the date of the advance. 
The final installment of each Advance Note shall be due three (3) years
from the date of the advance of the Advance Note in the amount of the remaining
principal balance of the Advance Note.

 

(iii)          No payment with respect to the Acquisition
Loans may be reborrowed.

 

(iv)          Each payment of principal with respect
to an Acquisition Loan shall be paid to Agent for the ratable benefit of each Acquisition
Lender, ratably in proportion to each such Acquisition Lender’s respective Acquisition
Loan Commitment.

 

(c)           Reliance on Notices.  Agent shall be entitled to rely upon, and
shall be fully protected in relying upon, any Notice of Revolving Credit
Advance, Notice of Acquisition Loan or similar notice executed by an Authorized
Person and believed by Agent to be genuine. 
Agent may assume that each Person executing and delivering any notice in
accordance herewith was duly authorized, unless the responsible individual
acting thereon for Agent has actual knowledge to the contrary.

 

1.2           Letters of
Credit.  Subject to and in
accordance with the terms and conditions contained herein and in Annex B,
Borrower shall have the right to request, and Revolving Lenders agree to incur,
or purchase participations in, Letter of Credit Obligations in respect of
Borrower.

 

2

 

1.3           Prepayments.

 

(a)           Voluntary Prepayments.  Borrower may at any time voluntarily prepay
all or part of an Acquisition Loan.  In
addition, Borrower may at any time on at least 10 days’ prior written notice to
Agent terminate the Revolving Loan Commitment and the Acquisition Facility
Commitment; provided that upon such termination, all Loans and other
Obligations shall be immediately due and payable in full and all Letter of
Credit Obligations shall be cash collateralized or otherwise satisfied in
accordance with Annex B.  Upon
any such prepayment and termination of the Revolving Loan Commitment, Borrower’s
right to request Revolving Credit Advances, or request that Letter of Credit
Obligations be incurred on its behalf shall simultaneously be terminated.  Upon any such prepayment and termination of
the Acquisition Facility Commitment, Borrower’s right to request Acquisition
Loans shall simultaneously be terminated. 
Any partial prepayments of an Acquisition Loan made by Borrower shall be
applied to prepay the scheduled installments of the Acquisition Loan in inverse
order of maturity.

 

(b)           Mandatory Prepayments.

 

(i)            If at any time the outstanding
balances of the Revolving Loan exceed the lesser of (A) the Revolving Loan
Commitment Maximum Amount and (B) the Borrowing Base, Borrower shall
immediately repay the aggregate outstanding Revolving Credit Advances to the
extent required to eliminate such excess. 
If any such excess remains after repayment in full of the aggregate
outstanding  Revolving Credit Advances,
Borrower shall provide cash collateral for the Letter of Credit Obligations in
the manner set forth in Annex B to the extent required to eliminate such
excess.

 

(ii)           Immediately upon receipt by any
Credit Party of proceeds of any asset disposition (excluding proceeds of asset
dispositions permitted by Section 6.8) or any sale of Stock of any
Subsidiary of any Credit Party, Borrower shall prepay the Loans in an amount
equal to all such proceeds, net of (A) commissions and other reasonable and
customary transaction costs, fees and expenses properly attributable to such
transaction and payable by Borrower in connection therewith (in each case, paid
to non-Affiliates), (B) transfer taxes, (C) amounts payable to holders of
senior Liens (to the extent such Liens constitute Permitted Encumbrances
hereunder), if any, and (D) an appropriate reserve for income taxes in
accordance with GAAP in connection therewith; and provided that any such
prepayment shall be applied in accordance with Section 1.3(c); and
further provided that at the option of the Borrower and so long as no Default
or Event of Default shall have occurred and be continuing or would be caused
thereby, (i) Borrower may use up to $2,000,000 of such net proceeds realized in
the aggregate subsequent to the Closing Date from any such disposition or sales
to purchase assets used in Borrower’s business, in each case within three (3)
months after the consummation of the relevant sale or other disposition,
subject to satisfaction of the following conditions:  (y) in the event Borrower elects to exercise
its rights pursuant to this clause (i), Borrower shall deliver a certificate to
Agent designating the amount of such net proceeds which Borrower expects to use
during the subsequent three (3) month period and prepare the Loans in an amount
equal to all net proceeds from such sale or disposition not so designated, and
(z) within three (3) months after the relevant sale or other disposition,
Borrower shall (1) deliver a certificate to Agent certifying the amount and use
of such net proceeds actually so used and (2) deliver to Agent, for application
in accordance with this subsection, an amount equal to the remaining unused net
proceeds.

 

(c)           Application of Certain
Mandatory Prepayments. 
Any prepayments made by Borrower pursuant to Sections 1.3(b)(ii)
above shall be applied as follows: first,
to Fees and reimbursable expenses of Agent then due and payable pursuant to any
of the Loan Documents; second,
to interest then due and payable on the Acquisition Loans; third,
to prepay the scheduled principal installments of the Acquisition Loans in
inverse order of maturity, until such Acquisition Loans shall have been prepaid
in full; fourth,
to interest then due and payable on the Revolving Credit Advances; fifth,
to the outstanding principal balance of Revolving Credit Advances until the
same has been paid in full; and sixth,
to any Letter of Credit Obligations, to provide cash collateral therefor in the
manner set forth in Annex B,
until all such Letter of Credit Obligations have been fully cash collateralized
in the manner set forth in Annex B.  The Revolving Loan Commitment shall not be
permanently reduced by the amount of any such prepayments.

 

3

 

(d)           Application of Prepayments
from Insurance Proceeds.  With respect to insurance proceeds relating
to a Drilling Rig, prepayments from insurance proceeds in accordance with Section 5.4(c)
shall be applied to the scheduled installments of the Acquisition Loan which is
secured by the Collateral subject to the casualty giving rise to such insurance
proceeds, in inverse order of maturity.

 

(e)           No Implied Consent.  Nothing in this Section 1.3
shall be construed to constitute Agent’s or any Lender’s consent to any
transaction that is not  permitted by
other provisions of this Agreement or the other Loan Documents.

 

1.4           Use of Proceeds. 
Borrower shall utilize the proceeds of the Acquisition Loans solely for
the acquisition or construction of Drilling Rigs and the Revolving Loan solely
for the financing of Borrower’s ordinary working capital and general business needs.

 

1.5           Interest.

 

(a)           Borrower shall pay interest to Agent,
for the ratable benefit of Lenders in accordance with the various Loans being
made by each Lender, in arrears on each applicable Interest Payment Date, at
the following rates:  (i) with respect to
the Revolving Credit Advances, the lesser of the Prime Rate per annum or the
Maximum Lawful Rate; and (ii) with respect to the Acquisition Loans, the lesser
of Prime Rate per annum or the Maximum Lawful Rate.

 

(b)           If any payment on any Loan becomes
due and payable on a day other than a Business Day, the maturity thereof will
be extended to the next succeeding Business Day and, with respect to payments
of principal, interest thereon shall be payable at the then applicable rate
during such extension.

 

(c)           All computations of Fees calculated
on a per annum basis and interest shall be made by Agent on the basis of a 360-day
year, in each case for the actual number of days occurring in the period for
which such interest and Fees are payable. 
The Prime Rate is a floating rate determined for each day.  Each determination by Agent of an interest rate
and Fees hereunder shall be final, binding and conclusive on Borrower, absent
manifest error.

 

(d)           So long as an Event of Default has
occurred and is continuing under Section 8.1(h) or (i), or so long as
any other Default or Event of Default has occurred and is continuing and at the
election of Agent (or upon the written request of Requisite Lenders) confirmed
by written notice from Agent to Borrower, the interest rates applicable to the
Loans and the Letter of Credit Fees shall be increased by five percentage
points (5%) per annum above the rates of interest or the rate of such Fees
otherwise applicable hereunder (“Default Rate”), and all outstanding
Obligations shall bear interest at the lesser of the Default Rate applicable to
such Obligations or the Maximum Lawful Rate. Interest and Letter of Credit Fees
at the Default Rate shall accrue from the initial date of such Default or Event
of Default until that Default or Event of Default is cured or waived and shall
be payable upon demand.

 

(e)           Notwithstanding anything to the
contrary set forth in this Section 1.5, if a court of competent
jurisdiction determines in a final order that the rate of interest payable
hereunder exceeds the highest rate of interest permissible under law (the “Maximum
Lawful Rate”), then so long as the Maximum Lawful Rate would be so
exceeded, the rate of interest payable hereunder shall be equal to the Maximum
Lawful Rate; provided, however, that if at any time thereafter
the rate of interest payable hereunder is less than the Maximum Lawful Rate,

 

4

 

Borrower shall continue to pay
interest hereunder at the Maximum Lawful Rate until such time as the total
interest received by Agent, on behalf of Lenders, is equal to the total
interest that would have been received had the interest rate payable hereunder
been (but for the operation of this paragraph) the interest rate payable since
the Closing Date as otherwise provided in this Agreement. Thereafter, interest
hereunder shall be paid at the rate(s) of interest and in the manner provided
in Sections 1.5(a) through (d), unless and until the rate of interest
again exceeds the Maximum Lawful Rate, and at that time this paragraph shall
again apply.  In no event shall the total
interest received by any Lender pursuant to the terms hereof exceed the amount
that such Lender could lawfully have received had the interest due hereunder
been calculated for the full term hereof at the Maximum Lawful Rate.  If the Maximum Lawful Rate is calculated
pursuant to this paragraph, such interest shall be calculated at a daily rate
equal to the Maximum Lawful Rate divided by the number of days in the year in
which such calculation is made.  If,
notwithstanding the provisions of this Section 1.5(e), a court of
competent jurisdiction shall finally determine that a Lender has received
interest hereunder in excess of the Maximum Lawful Rate, Agent shall, to the
extent permitted by applicable law, promptly apply such excess in the order
specified in Section 1.10  and
thereafter shall refund any excess to Borrower or as a court of competent jurisdiction
may otherwise order.

 

1.6           Eligible Accounts.  All of the Accounts owned by Borrower and
reflected in the most recent Borrowing Base Certificate delivered by Borrower
to Agent shall be “Eligible Accounts” for purposes of this Agreement,
except any Account to which any of the exclusionary criteria set forth below
applies.  Agent reserves the right, at
any time and from time to time after the Closing Date, to adjust any of the
criteria set forth below, to establish new criteria and to adjust advance rates
with respect to Eligible Accounts, in its reasonable credit judgment consistent
with its criteria for other similarly situated credits, subject to the approval
of Requisite Revolving Lenders in the case of adjustments, new criteria or
changes in advance rates which have the effect of making more credit
available.  Eligible Accounts shall not
include any Account of Borrower:

 

(a)           that does not arise from the sale of
goods or the performance of services by Borrower in the ordinary course of its
business;

 

(b)           (i) upon which Borrower’s right to
receive payment is not absolute or is contingent upon the fulfillment of any
condition whatsoever or (ii) as to which Borrower is not able to bring suit or
otherwise enforce its remedies against the Account Debtor through judicial
process, or (iii) if the Account represents a progress billing consisting of an
invoice for goods sold or used or services rendered pursuant to a contract
under which the Account Debtor’s obligation to pay that invoice is subject to
Borrower’s completion of further performance under such contract or is subject
to the equitable lien of a surety bond issuer;

 

(c)           in the event that any defense,
counterclaim, setoff or dispute is asserted as to such Account;

 

(d)           that is not a true and correct statement
of bona fide indebtedness incurred in the amount of the Account for merchandise
sold to or services rendered and not rejected by the applicable Account Debtor;

 

(e)           with respect to which an invoice, has
not been sent to the applicable Account Debtor;

 

(f)            that (i) is not owned by Borrower or
(ii) is subject to any right, claim, security interest or other interest of any
other Person, other than Liens in favor of Agent, on behalf of itself and
Lenders;

 

(g)           that arises from a sale to any
director, officer, other employee or Affiliate of any Credit Party, or to any
entity that has any common officer or director with any Credit Party;

 

(h)           that is the obligation of an Account
Debtor that is the United States government or a political subdivision thereof,
or any state, county or municipality or department, agency or instrumentality
thereof unless Agent, in its sole discretion, has agreed to the contrary in
writing and Borrower, if necessary or desirable, has complied with respect to
such obligation with the Federal Assignment of Claims Act of 1940, or any
applicable state, county or municipal law restricting the assignment thereof
with respect to such obligation;

 

5

 

(i)            that is the obligation of an Account
Debtor located in a foreign country other than Canada (excluding the province
of Newfoundland, the Northwest Territories and the Territory of Nunavut) unless
payment thereof is assured by a letter of credit assigned and delivered to
Agent, satisfactory to Agent as to form, amount and issuer;

 

(j)            to the extent Borrower or any
Subsidiary thereof is liable for goods sold or services rendered by the
applicable Account Debtor to Borrower or any Subsidiary thereof but only to the
extent of the potential offset;

 

(k)           that arises with respect to goods
that are delivered on a bill-and-hold, cash-on-delivery basis or placed on
consignment, guaranteed sale or other terms by reason of which the payment by
the Account Debtor is or may be conditional;

 

(l)            that is in default; provided,
that,
without limiting the generality of the foregoing, an Account shall be deemed in
default upon the occurrence of any of the following:

 

(i)            the Account is not paid within 60
days following its original invoice date;

 

(ii)           the Account Debtor obligated upon
such Account suspends business, makes a general assignment for the benefit of
creditors or fails to pay its debts generally as they come due; or

 

(iii)          a petition is filed by or against any
Account Debtor obligated upon such Account under any bankruptcy law or any
other federal, state or foreign (including any provincial) receivership,
insolvency relief or other law or laws for the relief of debtors;

 

(m)          that is the obligation of an Account
Debtor if 20% or more of the Dollar amount of all Accounts owing by that
Account Debtor are ineligible under the other criteria set forth in this Section 1.6;

 

(n)           as to which Agent’s Lien thereon, on
behalf of itself and Lenders, is not a first priority perfected Lien;

 

(o)           as to which any of the representations
or warranties in the Loan Documents are untrue;

 

(p)           to the extent such Account is
evidenced by a judgment, Instrument or Chattel 
Paper;

 

(q)           to the extent such Account exceeds
any credit limit established by Agent, in its reasonable credit judgment,
following prior notice of such limit by Agent to Borrower;

 

(r)            to the extent that such Account,
together with all other Accounts owing to such Account Debtor and its
Affiliates as of any date of determination exceed 20% of all Eligible Accounts
provided that such ineligibility with respect to such Accounts for such reason
will only be as to such excess;

 

(s)           that is payable in any currency other
than Dollars; or

 

(t)            that is otherwise unacceptable to
Agent in its reasonable credit judgment.

 

1.7           Cash
Management Systems.  On or prior to
the Closing Date, Borrower will establish and will maintain until the
Termination Date, a cash management system acceptable to Agent in all respects
(the “Cash Management Systems”).  Agent
hereby acknowledges and agrees that Borrower’s current cash management system
is acceptable to Agent.

 

6

 

1.8           Fees.

 

(a)           Borrower shall pay to Frost Bank,
individually, the Fees specified in that certain fee letter dated as of the
date of this Agreement between Borrower and Frost Bank (the “Frost Bank Fee Letter”),
at the times specified for payment therein; provided, the Fees will be limited
such that such Fees do not result in the interest contracted for, charged or
received exceeding the Maximum Lawful Rate, and to the extent that they would,
the excess will be refunded to Borrower.

 

(b)           As additional compensation for the Acquisition
Lenders, Borrower shall pay to Agent, for the ratable benefit of such Lenders,
in arrears, on December 31, 2005 and on the last day of each calendar quarter
thereafter to and including the Acquisition Facility Termination Date, a Fee
for Borrower’s non-use of available funds in an amount equal to one-quarter of
one percent (.25%) per annum (calculated on the basis of a 360 day year for
actual days elapsed) multiplied by the difference between (x) the Acquisition
Facility Maximum Amount and (y) the average for the period of the daily closing
balances of the Acquisition Loans outstanding for the immediately preceding
three (3) month period for which the such Fee is due.

 

(c)           Borrower shall pay to Agent, for the
ratable benefit of Revolving Lenders, the Letter of Credit Fee as provided in Annex B.

 

1.9           Receipt
of Payments.  Borrower
shall make each payment under this Agreement not later than 2:00 p.m. (San
Antonio time) on the day when due in immediately available funds in Dollars as
directed by Agent in writing.  For
purposes of computing interest and Fees and determining Revolving Borrowing
Availability as of any date, all payments shall be deemed received on the
Business Day on which immediately available funds therefor are received by
Agent prior to 2:00 p.m. San Antonio time. 
Payments received after 2:00 p.m. San Antonio time on any Business Day
or on a day that is not a Business Day shall be deemed to have been received on
the following Business Day.

 

1.10         Application and Allocation
of Payments.

 

(a)           So long as no Default or Event of
Default has occurred and is continuing, (i) payments matching specific scheduled
payments then due shall be applied to those scheduled payments; (ii) voluntary
prepayments shall be applied as determined by Borrower, subject to the
provisions of Section
1.3(a); and (iii) mandatory prepayments shall be
applied as set forth in Sections
1.3(c) and 1.3(d). 
All payments and prepayments applied to a particular Loan shall be
applied ratably to the portion thereof held by each Lender as determined by its
Pro Rata Share.  As to any other payment,
and as to all payments made when a Default or Event of Default has occurred and
is continuing or following the Revolving Commitment Termination Date and/or the
Acquisition Termination Date, as applicable, Borrower hereby irrevocably waives
the right to direct the application of any and all payments received from or on
behalf of Borrower, and Borrower hereby irrevocably agrees that Agent shall
have the continuing exclusive right to apply any and all such payments against
the Obligations as Agent may deem advisable notwithstanding any previous entry
by Agent in the Loan Account or any other books and records.  In the absence of a specific determination by
Agent with respect thereto, payments shall be applied to amounts then due and
payable in the following order: (1) to Fees and Agent’s expenses reimbursable
hereunder; (2) to interest on the Loans, ratably in proportion to the interest
accrued as to each Loan; (3) to principal payments on the Loans and to provide
cash collateral for Letter of Credit Obligations in the manner described in Annex B,
ratably to the aggregate, combined principal balance of the Loans and
outstanding Letter of Credit Obligations; and (4) to all other Obligations
including expenses of Lenders to the extent reimbursable under Section 11.3.

 

(b)           Agent is authorized to, and at its sole
election may, charge to the Revolving Loan balance on behalf of Borrower and
cause to be paid all Fees, expenses, Charges, costs (including insurance
premiums in accordance with Section
5.4(a)) and interest and principal, other than
principal of the Revolving Loan, owing by Borrower under this Agreement or any
of the

 

7

 

other Loan Documents if and to the
extent Borrower fails to pay promptly any such amounts as and when due, even if
the amount of such charges would exceed Revolving Borrowing Availability at
such time.  At Agent’s option and to the
extent permitted by law, any charges so made shall constitute part of the
Revolving Loan hereunder.

 

1.11         Loan
Account and Accounting. 
Agent shall maintain a loan account (the “Loan Account”) on its
books to record:  all Advances,  all payments made by Borrower, and  all other debits and credits as provided in
this Agreement with respect to the Loans or any other Obligations.  All entries in the Loan Account shall be made
in accordance with Agent’s customary accounting practices as in effect from
time to time.  The balance in the Loan
Account, as recorded on Agent’s most recent printout or other written
statement, shall, absent manifest error, be presumptive evidence of the amounts
due and owing to Agent and Lenders by Borrower; provided that any
failure to so record or any error in so recording shall not limit or otherwise
affect Borrower’s duty to pay the Obligations. 
Agent shall render to Borrower a monthly accounting of transactions with
respect to the Loans setting forth the balance of the Loan Account for the
immediately preceding month.  Unless
Borrower notifies Agent in writing of any objection to any such accounting
(specifically describing the basis for such objection), within 30 days after
the date thereof, each and every such accounting shall, absent manifest error,
be deemed final, binding and conclusive on Borrower in all respects as to all
matters reflected therein.  Only those
items expressly objected to in such notice shall be deemed to be disputed by
Borrower.  Notwithstanding any provision
herein contained to the contrary, any Lender may elect (which election may be
revoked) to dispense with the issuance of Notes to that Lender and may rely on
the Loan Account as evidence of the amount of Obligations from time to time
owing to it.

 

1.12         Indemnity.

 

(a)           Each Credit Party that is a signatory
hereto shall jointly and severally indemnify and hold harmless each of Agent,
Lenders and their respective Affiliates, and each such Person’s respective
officers, directors, employees, attorneys, agents and representatives (each, an
“Indemnified Person”),
from and against any and all suits, actions, proceedings, claims, damages,
losses, liabilities and expenses (including reasonable attorneys’ fees and
disbursements and other costs of investigation or defense, including those
incurred upon any appeal) that may be instituted or asserted against or
incurred by any such Indemnified Person as the result of credit having been
extended, suspended or terminated under this Agreement and the other Loan
Documents and the administration of such credit, and in connection with or
arising out of the transactions contemplated hereunder and thereunder and any
actions or failures to act in connection therewith, including any and all
Environmental Liabilities and legal costs and expenses arising out of or
incurred in connection with disputes between or among any
parties
to any of the Loan Documents (collectively, “Indemnified Liabilities”);
provided,
that no such Credit Party shall be liable for any indemnification to an
Indemnified Person to the extent that any such suit, action, proceeding, claim,
damage, loss, liability or expense results from that  Indemnified Person’s gross negligence or
willful misconduct.  NO INDEMNIFIED
PERSON SHALL BE RESPONSIBLE OR LIABLE TO ANY OTHER PARTY TO ANY LOAN DOCUMENT,
ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OF SUCH PERSON OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT,
PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT
OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER ANY LOAN DOCUMENT
OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

 

1.13         Access.  Each Credit Party that is a party hereto
shall, during normal business hours, from time to time upon 1 Business Day’s
prior notice as frequently as Agent determines to be appropriate: (a) provide
Agent and any of its officers, employees and agents access to its properties,
facilities, advisors and employees (including officers) of each Credit Party
and to the Collateral, (b) permit Agent, and any of its officers, employees and
agents, to inspect, audit and make extracts from any Credit Party’s books and
records, and (c) permit Agent, and its officers, employees and agents, to
inspect, review, evaluate and make test verifications and counts of the
Accounts and other Collateral of any Credit Party.  If a Default or Event of Default has occurred
and is continuing or if access is necessary to preserve or protect the
Collateral as determined by the Agent, each such Credit Party shall provide
such access to Agent and to each Lender at all times and without advance
notice.  Furthermore, so long as any Event
of

 

8

 

Default has occurred and is continuing, Borrower shall provide Agent
and each Lender with access to its suppliers and customers. Each Credit Party
shall make available to Agent and its counsel, as quickly as is possible under
the circumstances, originals or copies of all books and records that Agent may
reasonably request.  Each Credit Party
shall deliver any document or instrument necessary for Agent, as it may from
time to time request, to obtain records from any service bureau or other Person
that maintains records for such Credit Party, and shall maintain duplicate
records or supporting documentation on media, including computer tapes and
discs owned by such Credit Party.  Agent
will give Lenders at least 5 days’ prior written notice of regularly scheduled
audits.  Representatives of other Lenders
may accompany Agent’s representatives on regularly scheduled audits at no
charge to Borrower.

 

1.14         Taxes.

 

(a)           Any and all payments by Borrower
hereunder or under the Notes shall be made in accordance with this Section 1.14,
free and clear of and without deduction for any and all present or future Taxes
except any Taxes imposed with respect to a Lender to which such Lender is
subject as of the date it becomes a Lender (“Excluded Taxes”).  If Borrower shall be required by law to
deduct any Taxes (other than Excluded Taxes) from or in respect of any sum
payable hereunder or under the Notes, (i) the sum payable shall be increased as
much as shall be necessary so that after making all required deductions
(including deductions applicable to additional sums payable under this Section 1.14)
Agent or Lenders, as applicable, receive an amount equal to the sum they would
have received had no such deductions been made, (ii) Borrower shall make such
deductions, and (iii) Borrower shall pay the full amount deducted to the
relevant taxing or other authority in accordance with applicable law.  Within 30 days after the date of any payment
of Taxes, Borrower shall furnish to Agent the original or a certified copy of a
receipt evidencing payment thereof. 
Agent and Lenders shall not be obligated to return or refund any amounts
received pursuant to this Section.  Each
Lender agrees that, as promptly as practicable after it becomes aware of any
circumstances referred to above which would result in any such Taxes being imposed,
the affected Lender shall, to the extent not inconsistent with such Lender’s
internal policies of general application, use reasonable commercial efforts to
minimize costs and expenses incurred by it and payable to it by Borrower
pursuant to this Section
1.14(a).

 

(b)           Each Credit Party that is a signatory
hereto shall indemnify and, within 10 days of demand therefor, pay Agent and
each Lender for the full amount of Taxes (including any Taxes imposed by any
jurisdiction on amounts payable under this Section 1.14 but excluding Excluded Taxes) paid
by Agent or such Lender, as appropriate, and any liability (including
penalties, interest and expenses) arising therefrom or with respect thereto,
whether or not such Taxes were correctly or legally asserted.  Each Lender agrees that, as promptly as
practicable after it becomes aware of any circumstances referred to above which
would result in any such Taxes being imposed, the affected Lender shall, to the
extent not inconsistent with such Lender’s internal policies of general
application, use reasonable commercial efforts to minimize costs and expenses
incurred by it and payable to it by Borrower pursuant to this Section 1.14(b).

 

(c)           Each Lender organized under the laws
of a jurisdiction outside the United States (a “Foreign Lender”)
as to which payments to be made under this Agreement or under the Notes are
exempt from United States withholding tax under an applicable statute or tax
treaty shall provide to Borrower and Agent a properly completed and executed
IRS Form W-8ECI or Form W-8BEN or other applicable form, certificate or
document prescribed by the IRS or the United States certifying as to such
Foreign Lender’s entitlement to such exemption (a “Certificate of Exemption”).  Any foreign Person that seeks to become a
Lender under this Agreement shall provide a Certificate of Exemption to
Borrower and Agent prior to becoming a Lender hereunder.  No foreign Person may become a Lender
hereunder if such Person fails to deliver a Certificate of Exemption in advance
of becoming a Lender.

 

1.15         Capital Adequacy; Increased
Costs; Illegality.

 

(a)           If any Lender shall have determined
that any law, treaty, governmental (or quasi-governmental) rule, regulation,
guideline or order regarding capital adequacy, reserve

 

9

 

requirements or similar requirements
or compliance by any Lender with any request or directive regarding capital adequacy,
reserve requirements or similar requirements (whether or not having the force
of law), in each case, adopted after the Closing Date, from any central bank or
other Governmental Authority increases or would have the effect of increasing
the amount of capital, reserves or other funds required to be maintained by
such Lender and thereby reducing the rate of return on such Lender’s capital as
a consequence of its obligations hereunder, then Borrower shall from time to
time upon demand by such Lender (with a copy of such demand to Agent) pay to
Agent, for the account of such Lender, additional amounts sufficient to
compensate such Lender for such reduction. 
A certificate as to the amount of that reduction and showing the basis
of the computation thereof submitted by such Lender to Borrower and to Agent
shall, absent manifest error, be final, conclusive and binding for all
purposes.  Each Lender agrees that, as
promptly as practicable after it becomes aware of any circumstances referred to
above which would result in any such increased cost, the affected Lender shall,
to the extent not inconsistent with such Lender’s internal policies of general
application, use reasonable commercial efforts to minimize costs and expenses
incurred by it and payable to it by Borrower pursuant to this Section 1.15(a).

 

(b)           Without duplication with respect to Section
1.15(a), if, due to either (i) the introduction of or any change in
any law or regulation (or any change in the interpretation thereof) or
(ii) the compliance with any guideline or request from any central bank or
other Governmental Authority (whether or not having the force of law), in each
case adopted after the Closing Date, there shall be any increase in the cost to
any Lender of agreeing to make or making, funding or maintaining  any Loan, then Borrower shall from time to
time, upon demand by such Lender (with a copy of such demand to Agent), pay to
Agent for the account of such Lender additional amounts sufficient to compensate
such Lender for such increased cost.  A
certificate as to the amount of such increased cost, submitted to Borrower and
to Agent by such Lender, shall be conclusive and binding on Borrower for all
purposes, absent manifest error.  Each
Lender agrees that, as promptly as practicable after it becomes aware of any
circumstances referred to above which would result in any such increased cost,
the affected Lender shall, to the extent not inconsistent with such Lender’s
internal policies of general application, use reasonable commercial efforts to
minimize costs and expenses incurred by it and payable to it by Borrower
pursuant to this Section
1.15(b).

 

(c)           Within 15 days after receipt by
Borrower of written notice and demand from any Lender (an “Affected Lender”)
for payment of additional amounts or increased costs as provided in Sections 1.14(a), 1.15(a) or
1.15(b), Borrower may, at its option, notify Agent and
such Affected Lender of its intention to replace the Affected Lender.  So long as no Default or Event of Default has
occurred and is continuing, Borrower, with the consent of Agent, may obtain, at
Borrower’s expense, a replacement Lender (“Replacement Lender”)
for the Affected Lender, which Replacement Lender must be reasonably
satisfactory to Agent.  If Borrower
obtains a Replacement Lender within 90 days following notice of its intention
to do so, the Affected Lender must sell and assign its Loans and Commitments to
such Replacement Lender for an amount equal to the principal balance of all
Loans held by the Affected Lender and all accrued interest and Fees with
respect thereto through the date of such sale; provided,
that Borrower shall have reimbursed such Affected Lender for the additional
amounts or increased costs that it is entitled to receive under this Agreement
through the date of such sale and assignment. 
Notwithstanding the foregoing, Borrower shall not have the right to
obtain a Replacement Lender if the Affected Lender rescinds its demand for
increased costs or additional amounts within 15 days following its receipt of
Borrower’s notice of intention to replace such Affected Lender.  Furthermore, if Borrower gives a notice of
intention to replace and does not so replace such Affected Lender within 90
days thereafter, Borrower’s rights under this Section 1.15(c)
shall terminate with respect to such Affected Lender and Borrower shall
promptly pay all increased costs or additional amounts demanded by such
Affected Lender pursuant to Sections
1.14(a), 1.15(a) and 1.15(b).

 

1.16         Single Loan.  All Loans to Borrower and all of the other Obligations
of Borrower arising under this Agreement and the other Loan Documents shall
constitute one general obligation of Borrower secured, until the Termination
Date, by all of the Collateral.

 

10

 

2.     CONDITIONS PRECEDENT

 

2.1           Conditions
to the Initial Loans.  No
Lender shall be obligated to make any Loan or incur any Letter of Credit
Obligations on the Closing Date, or to take, fulfill, or perform any other
action hereunder, until the following conditions have been satisfied or
provided for in a manner satisfactory to Agent, or waived in writing by Agent
and Lenders:

 

(a)           Credit Agreement; Loan
Documents.  This
Agreement or counterparts hereof shall have been duly executed by, and
delivered to, Borrower, each other Credit Party, Agent and Lenders; and Agent
shall have received such documents, instruments, agreements and legal opinions
as Agent shall reasonably request in connection with the transactions
contemplated by this Agreement and the other Loan Documents, including all
those listed in the Closing Checklist attached hereto as Annex C,
each in form and substance reasonably satisfactory to Agent.

 

(b)           Approvals.  Agent shall have received (i) satisfactory
evidence that the Credit Parties have obtained all required consents and
approvals of all Persons including all requisite Governmental Authorities, to
the execution, delivery and performance of this Agreement and the other Loan
Documents and the consummation of the Related Transactions or (ii) an officer’s
certificate in form and substance reasonably satisfactory to Agent affirming
that no such consents or approvals are required.

 

(c)           Opening Availability.  The Eligible Accounts supporting the initial
Revolving Credit Advance and the initial Letter of Credit Obligations incurred
and the amount of the Reserves to be established on the Closing Date shall be
sufficient in value, as determined by Agent, to provide Borrower with Revolving
Borrowing Availability, after giving effect to the initial Revolving Credit
Advance, the incurrence of any initial Letter of Credit Obligations and the
consummation of the Related Transactions (on a pro forma basis, with trade
payables being paid currently, and expenses and liabilities being paid in the
ordinary course of business and without acceleration of sales) of at least $3,000,000.00.

 

(d)           Payment of Fees.  Borrower shall have paid the Fees required to
be paid on the Closing Date in the respective amounts specified in Section 1.8
(including the Fees specified in the Frost Bank Fee Letter), and shall have
reimbursed Agent for all fees, costs and expenses of closing presented as of
the Closing Date.

 

(e)           Capital Structure: Other
Indebtedness. 
The capital structure of each Credit Party and the terms and conditions
of all Indebtedness of each Credit Party shall be acceptable to Agent in its
sole discretion.

 

(f)            Due Diligence.  Agent shall have completed its business and
legal due diligence, including a roll forward of its previous Collateral audit
with results reasonably satisfactory to Agent.

 

2.2           Further
Conditions to Each Loan.  Except
as otherwise expressly provided herein, no Lender shall be obligated to fund
any Advance or incur any Letter of Credit Obligation, if, as of the date
thereof:

 

(a)           any representation or warranty by any
Credit Party contained herein or in any other Loan Document is untrue or
incorrect as of such date, except to the extent that such representation or
warranty expressly relates to an earlier date and except for changes therein
expressly permitted or expressly contemplated by this Agreement, and Agent or
Requisite Revolving Lenders have determined not to make such Revolving Credit Advance,
or incur such Letter of Credit Obligation as a result of the fact that such
warranty or representation is untrue or incorrect;

 

11

 

(b)           any representation or warranty by any
Credit Party contained herein or in any other Loan Document is untrue or
incorrect as of such date, except to the extent that such representation or
warranty expressly relates to an earlier date and except for changes therein
expressly permitted or expressly contemplated by this Agreement, and Agent or
Requisite Acquisition Lenders have determined not to make such Acquisition Loan
as a result of the fact that such warranty or representation is untrue or
incorrect;

 

(c)           any event or circumstance having a
Material Adverse Effect has occurred since the date hereof as determined by the
Requisite Revolving Lenders, and Agent or Requisite Revolving Lenders have
determined not to make such Revolving Credit Advance, or incur such Letter of
Credit Obligation as a result of the fact that such event or circumstance has
occurred;

 

(d)           any event or circumstance having a
Material Adverse Effect has occurred since the date hereof as determined by the
Requisite Acquisition Lenders, and Agent or Requisite Acquisition Lenders have
determined not to make such Acquisition Loan as a result of the fact that such
event or circumstance has occurred;

 

(e)           any Default or Event of Default has
occurred and is continuing or would result after giving effect to any Revolving
Advance (or the incurrence of any Letter of Credit Obligation), and Agent or
Requisite Revolving Lenders shall have determined not to make any Revolving
Credit Advance or incur any Letter of Credit Obligation as a result of that
Default or Event of Default; or

 

(f)            any Default or Event of Default has
occurred and is continuing or would result after giving effect to any
Acquisition Loan, and Agent or Requisite Acquisition Lenders shall have
determined not to make any Acquisition Loans as a result of that Default or
Event of Default; or

 

(g)           after giving effect to any Revolving
Credit Advance (or the incurrence of any Letter of Credit Obligations), the
outstanding principal amount of the Revolving Loan would exceed the lesser of
the Borrowing Base and the Revolving Loan Commitment Maximum Amount.

 

The request and
acceptance by Borrower of the proceeds of any Advance, the incurrence of any
Letter of Credit Obligations shall be deemed to constitute, as of the date
thereof, (i) a representation and warranty by Borrower that the conditions in
this Section 2.2  have been
satisfied and (ii) a reaffirmation by Borrower of the granting and continuance
of Agent’s Liens, on behalf of itself and Lenders, pursuant to the Collateral
Documents.

 

3.     REPRESENTATIONS AND WARRANTIES

 

To induce Lenders to make the Loans and to incur
Letter of Credit Obligations, the Credit Parties executing this Agreement,
jointly and severally, make the following representations and warranties to
Agent and each Lender with respect to all Credit Parties, each and all of which
shall survive the execution and delivery of this Agreement.

 

3.1           Corporate
Existence; Compliance with Law. 
Each Credit Party (a) is a corporation, limited liability company or
limited partnership duly organized, validly existing and in good standing under
the laws of its respective jurisdiction of incorporation or organization set
forth in Disclosure Schedule (3.1); (b) is duly qualified to conduct
business and is in good standing in each other jurisdiction where its ownership
or lease of property or the conduct of its business requires such
qualification, except where the failure to be so qualified would not result in
exposure to losses, damages or liabilities in excess of $50,000; (c) has the
requisite power and authority and the legal right to own, pledge, mortgage or
otherwise encumber and operate its properties, to lease the property it
operates under lease and to conduct its business as now, heretofore and
proposed to be conducted; (d) subject to specific representations regarding
Environmental Laws, has all material licenses, permits, consents or approvals
from or by, and has made all material filings with, and has given all material
notices to, all Governmental Authorities having jurisdiction, to the extent
required for such ownership, operation and conduct; (e) is in

 

12

 

compliance with its charter and bylaws or partnership or operating
agreement, as applicable; and (f) subject to specific representations set forth
herein regarding ERISA, Environmental Laws, tax and other laws, is in
compliance with all applicable provisions of law, except where the failure to
comply, individually or in the aggregate, could not reasonably be expected to
have a Material Adverse Effect.

 

3.2           Executive
Offices, Collateral Locations, Organizational Structure, FEIN.  As of the Closing Date, the current location
of each Credit Party’s chief executive office are set forth in Disclosure
Schedule (3.2), and none of such locations has changed within 12 months
preceding the Closing Date.  Except as
specified elsewhere herein, all Collateral and records concerning the
Collateral shall be kept at such address.  As of the Closing Date, Borrower’s
organizational structure, state of organization, and organizational number (the
“Organizational Information”) are as set forth on Disclosure Schedule
(3.2), none of which has changed within 12 months preceding the Closing
Date.  In addition, Disclosure
Schedule (3.2) lists the federal employer identification number of each
Credit Party.

 

3.3           Corporate
Power, Authorization, Enforceable Obligations.  The execution, delivery and performance by
each Credit Party of the Loan Documents to which it is a party and the creation
of all Liens provided for therein: (a) are within such Person’s power; (b) have
been duly authorized by all necessary corporate, limited liability company or
limited partnership action; (c) do not contravene any provision of such Person’s
charter, bylaws or partnership or operating agreement as applicable; (d) do not
violate any law or regulation, or any order or decree of any court or
Governmental Authority; (e) do not conflict with or result in the breach or
termination of, constitute a default under or accelerate or permit the
acceleration of any performance required by, any indenture, mortgage, deed of
trust, lease, agreement or other instrument to which such Person is a party or
by which such Person or any of its property is bound; (f) do not result in the
creation or imposition of any Lien upon any of the property of such Person
other than those in favor of Agent, on behalf of itself and Lenders, pursuant
to the Loan Documents; and (g) do not require the consent or approval of any
Governmental Authority or any other Person, except those referred to in Section
2.1(b), all of which will have been duly obtained, made or complied with
prior to the Closing Date.  Each of the
Loan Documents shall be duly executed and delivered by each Credit Party that
is a party thereto and each such Loan Document shall constitute a legal, valid
and binding obligation of such Credit Party enforceable against it in
accordance with its terms.

 

3.4           Financial
Statements.  All Financial
Statements concerning Holding Company and its Subsidiaries that are referred to
below have been prepared in accordance with GAAP consistently applied
throughout the periods covered (except as disclosed therein and except, with
respect to unaudited Financial Statements, for the absence of footnotes and
normal year-end audit adjustments) and present fairly in all material respects
the financial position of the Persons covered thereby as at the dates thereof
and the results of their operations and cash flows for the periods then ended.

 

(a)           Financial Statements.  The following Financial Statements attached
hereto as Disclosure
Schedule (3.4(a)) have been delivered on the date
hereof:

 

(i)            The audited consolidated balance
sheets at March 31, 2003 and 2004 and the related statements of income and cash
flows of Holding Company and its Subsidiaries for the Fiscal Years then ended,
certified by KPMG.

 

(ii)           The unaudited balance sheet(s) at
June 30, 2004 and the related statement(s) of income and cash flows of Holding
Company and its Subsidiaries for the one (1) Fiscal Quarter then ended.

 

3.5           Material
Adverse Effect.  Between June
30, 2004 and the Closing Date, (a) no Credit Party has incurred any
obligations, contingent or noncontingent liabilities, liabilities for Charges,
long-term leases or unusual forward or long-term commitments that, alone or in
the aggregate, could reasonably be expected to have a Material Adverse Effect,
(b) no contract, lease or other agreement or instrument has been entered into
by any Credit Party or has become binding upon any Credit Party’s assets and no
law or regulation applicable to any Credit Party has been adopted that has had
or could reasonably be expected to have a Material Adverse Effect, and (c) no
Credit Party is in default and to the best of Borrower’s knowledge no third
party is in default under any material contract, lease or other agreement or
instrument, that alone or in the aggregate could reasonably be expected to have
a Material Adverse Effect.  Between June
30, 2004 and the Closing Date no event has occurred, that alone or together
with other events, could reasonably be expected to have a Material Adverse
Effect.

 

13

 

3.6           Ownership
of Property; Liens.  As of
the Closing Date, the real estate (“Real Estate”) listed in Disclosure
Schedule (3.6) constitutes all of the real property owned, leased,
subleased, or used by any Credit Party.  Subject
to the Permitted Encumbrances, each Credit Party owns good and marketable fee
simple title to all of its owned Real Estate, and valid and marketable
leasehold interests in all of its leased Real Estate, all as described on Disclosure
Schedule (3.6), and copies of all such leases or a summary of terms thereof
reasonably satisfactory to Agent have been delivered to Agent.  Disclosure Schedule (3.6) further
describes any Real Estate with respect to which any Credit Party is a lessor,
sublessor or assignor as of the Closing Date. 
Subject to the Permitted Encumbrances, each Credit Party also has good
and marketable title to, or valid leasehold interests in, all of its personal
property and assets.  As of the Closing
Date, none of the properties and assets of any Credit Party are subject to any
Liens other than Permitted Encumbrances, and there are no facts, circumstances
or conditions  known to any Credit Party
that may result in any Liens (including Liens arising under Environmental Laws)
other than Permitted Encumbrances.  Each
Credit Party has received all deeds, assignments, waivers, consents,
nondisturbance and attornment or similar agreements, bills of sale and other
documents, and has duly effected all recordings, filings and other actions
necessary to establish, protect and perfect such Credit Party’s right, title
and interest in and to all such Real Estate and other properties and
assets.  Disclosure Schedule (3.6)
also describes any purchase options, rights of first refusal or other similar
contractual rights pertaining to any Real Estate as of the Closing Date.  As of the Closing Date, no portion of any
Credit Party’s Real Estate has suffered any material damage by fire or other
casualty loss that has not heretofore been repaired and restored in all
material respects to its original condition or otherwise remedied.  As of the Closing Date, all material permits
required to have been issued or appropriate to enable the Real Estate to be
lawfully occupied and used for all of the purposes for which it is currently
occupied and used have been lawfully issued and are in full force and effect.

 

3.7           Labor Matters.  As of the Closing Date (a) no strikes or
other material labor disputes against any Credit Party are pending or, to any
Credit Party’s knowledge, threatened; (b) hours worked by and payment made to
employees of each Credit Party comply with the Fair Labor Standards Act and
each other federal, state, local or foreign law applicable to such matters; (c)
all payments due from any Credit Party for employee health and welfare
insurance have been paid or accrued as a liability on the books of such Credit
Party; (d) except as set forth in Disclosure Schedule (3.7), no Credit
Party is a party to or bound by any collective bargaining agreement, management
agreement, consulting agreement, employment agreement, bonus, restricted stock,
stock option, or stock appreciation plan or agreement or any similar plan,
agreement or arrangement (and true and complete copies of any agreements
described on Disclosure Schedule (3.7) have been delivered to Agent);
(e) there is no organizing activity involving any Credit Party pending or, to
any Credit Party’s knowledge, threatened by any labor union or group of
employees; (f) there are no representation proceedings pending or, to any
Credit Party’s knowledge, threatened with the National Labor Relations Board,
and no labor organization or group of employees of any Credit Party has made a
pending demand for recognition; and (g) except as set forth in Disclosure
Schedule (3.7), there are no material complaints or charges against any
Credit Party pending or, to the knowledge of any Credit Party, threatened to be
filed with any Governmental Authority or arbitrator based on, arising out of,
in connection with, or otherwise relating to the employment or termination of
employment by any Credit Party of any individual.

 

3.8           Ventures,
Subsidiaries and Affiliates; Indebtedness.  Except as set forth in Disclosure Schedule
(3.8), as of the Closing Date, no Credit Party has any Subsidiaries, is
engaged in any joint venture or partnership with any other Person, or is an
Affiliate of any other Person.  All
outstanding Indebtedness and Guaranteed Indebtedness of each Credit Party as of
the Closing Date (except for the Obligations) is described in Section 6.3
(including Disclosure Schedule (6.3)).

 

3.9           Government
Regulation.  No Credit Party is
an “investment company” or an “affiliated person” of, or “promoter” or “principal
underwriter” for, an “investment company,” as such terms are defined in the
Investment Company Act of 1940.  No
Credit Party is subject to regulation under the Public Utility Holding Company
Act of 1935, the Federal Power Act, or any other federal or state statute that
restricts or limits its ability to incur Indebtedness or to perform its
obligations hereunder. The making of the Loans by Lenders to Borrower, the incurrence
of the Letter of Credit Obligations on behalf of Borrower, the application of
the proceeds thereof and repayment thereof and the consummation of the Related
Transactions will not violate any provision of any such statute or any rule,
regulation or order issued by the Securities and Exchange Commission.

 

3.10         Margin
Regulations.  No Credit Party is
engaged, nor will it engage, principally or as one of its important activities,
in the business of extending credit for the purpose of “purchasing” or “carrying”
any “margin

 

14

 

stock” as such terms are defined in Regulation U of the Federal Reserve
Board as now and from time to time hereafter in effect (such securities being
referred to herein as “Margin Stock”). 
No Credit Party owns any Margin Stock, and none of the proceeds of the
Loans or other extensions of credit under this Agreement will be used, directly
or indirectly, for the purpose of purchasing or carrying any Margin Stock, for
the purpose of reducing or retiring any Indebtedness that was originally
incurred to purchase or carry any Margin Stock or for any other purpose that
might cause any of the Loans or other extensions of credit under this Agreement
to be considered a “purpose credit” within the meaning of Regulations T, U or X
of the Federal Reserve Board.  No Credit
Party will take or permit to be taken any action that might cause any Loan
Document to violate any regulation of the Federal Reserve Board.

 

3.11         Taxes.  All tax returns, reports and statements,
including information returns, required by any Governmental Authority to be
filed by any Credit Party have been filed with the appropriate Governmental
Authority and all Charges have been paid prior to the date on which any fine,
penalty, interest or late charge may be added thereto for nonpayment thereof
(or any such fine, penalty, interest, late charge or loss has been paid),  excluding Charges or other amounts being
contested in accordance with Section 5.2(b).  Proper and accurate amounts have been
withheld by each Credit Party from its respective employees for all periods in
full and complete compliance with all applicable federal, state, local and
foreign laws and such withholdings have been timely paid to the respective
Governmental Authorities.  Disclosure
Schedule (3.11) sets forth as of the Closing Date those taxable years for
which any Credit Party’s tax returns are currently being audited by the IRS or
any other applicable Governmental Authority and any assessments or threatened
assessments in connection with such audit, or otherwise currently
outstanding.  Except as described in Disclosure
Schedule (3.11), no Credit Party has executed or filed with the IRS or any
other Governmental Authority any agreement or other document extending, or
having the effect of extending, the period for assessment or collection of any
Charges.  None of the Credit Parties and
their respective predecessors are liable for any Charges: (a) under any
agreement (including any tax sharing agreements) or (b) to each Credit Party’s
knowledge, as a transferee.  As of the
Closing Date, no Credit Party has agreed or been requested to make any
adjustment under IRC Section 481(a), by reason of a change in accounting method
or otherwise, which would have a Material Adverse Effect.

 

3.12         ERISA.

 

(a)           Disclosure Schedule (3.12)
lists all Plans and separately identifies all Pension Plans, including Title IV
Plans, Multiemployer Plans, ESOPs and Welfare Plans, including all Retiree
Welfare Plans, as of the Closing Date. 
Copies of all such listed Plans, together with a copy of the latest
form.  IRS/DOL 5500-series for each such
Plan have been delivered to Agent. 
Except with respect to Multiemployer Plans, each Qualified Plan has been
determined by the IRS to qualify under Section 401 of the IRC, the trusts
created thereunder have been determined to be exempt from tax under the
provisions of Section 501 of the IRC, and nothing has occurred that would cause
the loss of such qualification or tax-exempt status.  Each Plan is in compliance with the
applicable provisions of ERISA and the IRC, including the timely filing of all
reports required under the IRC or ERISA, including the statement required by 29
CFR Section 2520.104-23.  Neither any
Credit Party nor ERISA Affiliate has failed to make any contribution or pay any
amount due as required by either Section 412 of the IRC or Section 302 of ERISA
or the terms of any such Plan.  Neither
any Credit Party nor ERISA Affiliate has engaged in a “prohibited transaction,”
as defined in Section 406 of ERISA and Section 4975 of the IRC, in connection
with any Plan, that would subject any Credit Party to a material tax on
prohibited transactions imposed by Section 502(i) of ERISA or Section 4975 of
the IRC.

 

(b)           Except as set forth in Disclosure Schedule (3.12),
as of the Closing Date: (i) no Title IV Plan has any
Unfunded Pension Liability; (ii) no ERISA Event or event described in Section
4062(e) of ERISA with respect to any Title IV Plan has occurred or is
reasonably expected to occur; (iii) there are no pending, or to the knowledge
of any Credit Party, threatened claims (other than claims for benefits in the
normal course), sanctions, actions or lawsuits, asserted or instituted against
any Plan or any Person as fiduciary or sponsor of any Plan; (iv) no Credit
Party or ERISA Affiliate has incurred or reasonably expects to incur any
liability as a result of a complete or partial withdrawal from a Multiemployer
Plan; (v) within the last five years no Title IV Plan of any Credit Party or
ERISA Affiliate has been terminated, whether or not in a “standard termination”
as

 

15

 

that term is used in Section
404(b)(1) of ERISA, nor has any Title IV Plan of any Credit Party or ERISA
Affiliate (determined at any time within the past five years) with Unfunded
Pension Liabilities been transferred outside of the “controlled group” (within
the meaning of Section 4001(a)(14) of ERISA) of any Credit Party or ERISA
Affiliate; (vi) except in the case of any ESOP, Stock of all Credit
Parties and their ERISA Affiliates makes up, in the aggregate, no more than 10%
of fair market value of the assets of any Plan measured on the basis of fair
market value as of the latest valuation date of any Plan; and (vii) no
liability under any Title IV Plan has been satisfied with the purchase of a
contract from an insurance company that is not rated AAA by the Standard &
Poor’s Corporation or an equivalent rating by another nationally recognized
rating agency.

 

3.13         No Litigation.  As of the Closing Date, no action, claim,
lawsuit, demand, investigation or proceeding is now pending or, to the
knowledge of any Credit Party, threatened against any Credit Party, before any
Governmental Authority or before any arbitrator or panel of arbitrators
(collectively, “Litigation”), (a) that challenges any Credit Party’s
right or power to enter into or perform any of its obligations under the Loan
Documents to which it is a party, or the validity or enforceability of any Loan
Document or any action taken thereunder, or (b) that has a reasonable risk of
being determined adversely to any Credit Party and that, if so determined,
could reasonably be expected to have a Material Adverse Effect.  Except as set forth on Disclosure Schedule
(3.13), as of the Closing Date there is no Litigation pending or threatened
that seeks damages in excess of $100,000 or injunctive relief against, or
alleges criminal misconduct of, any Credit Party.

 

3.14         Brokers.  No broker or finder acting on behalf of any
Credit Party or Affiliate thereof brought about the obtaining, making or
closing of the Loans or the Related Transactions, and no Credit Party or
Affiliate thereof has any obligation to any Person in respect of any finder’s
or brokerage fees in connection therewith.

 

3.15         Intentionally
Omitted.

 

3.16         Full
Disclosure.  No information
contained in this Agreement, any of the other Loan Documents, any Financial
Statements or Collateral Reports or other written reports from time to time
delivered hereunder or any written statement furnished by or on behalf of any
Credit Party to Agent or any Lender pursuant to the terms of this Agreement
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary to make the statements contained
herein or therein not misleading in light of the circumstances under which they
were made.  The Liens granted to Agent,
on behalf of itself and Lenders, pursuant to the Collateral Documents will at
all times be fully perfected first priority Liens in and to the Collateral
described therein, subject, as to priority, only to Permitted Encumbrances.

 

3.17         Environmental
Matters.

 

(a)           Except as set forth in Disclosure Schedule (3.17),
as of the Closing Date: (i) the Credit Parties are and have been in compliance
with all Environmental Laws, except for such noncompliance that would not
result in Environmental Liabilities which could reasonably be expected to
exceed $100,000; (ii) the Credit Parties have obtained, and are in compliance
with, all Environmental Permits required by Environmental Laws for the
operations of their respective businesses as presently conducted or as proposed
to be conducted, except where the failure to so obtain or comply with such
Environmental Permits would not result in Environmental Liabilities that could
reasonably be expected to exceed $100,000, and all such Environmental Permits
are valid, uncontested and in good standing; (iii) no Credit Party is involved
in operations or knows of any facts, circumstances or conditions, including any
Releases of Hazardous Materials, that are likely to result in any Environmental
Liabilities of such Credit Party which could reasonably be expected to exceed $100,000,
and no Credit Party has expressly permitted any current or former tenant or
occupant of the Real Estate to engage in any such operations; (iv) there is no
Litigation arising under or related to any Environmental Laws, Environmental
Permits or Hazardous Material that seeks damages, penalties, fines, costs or
expenses in excess of $100,000 or injunctive relief against, or that alleges
criminal misconduct by, any Credit Party; (v) no notice has been received by
any Credit Party identifying it as a “potentially responsible party” or
requesting information under CERCLA or analogous state statutes, and to the
knowledge of the Credit Parties, there are no facts,

 

16

 

circumstances or conditions that may
result in any Credit Party being identified as a “potentially responsible party”
under CERCLA or analogous state statutes; and (vi) the Credit Parties have
provided to Agent copies of all existing environmental reports, reviews and
audits and all written information pertaining to actual or potential
Environmental Liabilities, in each case relating to any Credit Party and
available to a Credit Party.

 

(b)           Each Credit Party hereby acknowledges
and agrees that Agent (i) is not now, and has not ever been, in control of any
of Credit Party’s affairs, and (ii) does not have the capacity through the provisions
of the Loan Documents or otherwise to influence any Credit Party’s compliance
with Environmental Laws or Environmental Permits.

 

3.18         Insurance.  Disclosure Schedule (3.18) lists all
insurance policies of any nature maintained, as of the Closing Date, for
current occurrences by each Credit Party, as well as a summary of the terms of
each such policy.

 

3.19         Intentionally
Omitted.

 

3.20         Government
Contracts.  Except as set forth
in Disclosure Schedule (3.20), as of the Closing Date, no Credit Party
is a party to any contract or agreement with any Governmental Authority and no
Credit Party’s Accounts are subject to the Federal Assignment of Claims Act (31
U.S.C. Section 3727) or any similar state or local law.

 

3.21         Customer
and Trade Relations.  As of the
Closing Date, there exists no actual or, to the knowledge of any Credit
Party,  threatened termination or
cancellation of, or any material adverse modification or change in:   the business relationship of any Credit
Party with any customer or group of customers whose purchases during the
preceding 12 months caused them to be ranked among the ten largest customers of
such Credit Party; or  the business
relationship of any Credit Party with any supplier material to its operations.

 

3.22         Agreements
and Other Documents.  As
of the Closing Date, each Credit Party has provided to Agent or its counsel, on
behalf of Lenders, accurate and complete copies (or summaries) of all of the
following agreements or documents to which it is subject and each of which is listed
in Disclosure Schedule (3.22): 
supply agreements and purchase agreements not terminable by such Credit
Party within 60 days following written notice issued by such Credit Party and
involving transactions in excess of $1,000,000 per annum; leases of Equipment
having a remaining term of one year or longer and requiring aggregate rental
and other payments in excess of $500,000 per annum;  licenses and permits held by the Credit
Parties, the absence of which could be reasonably likely to have a Material
Adverse Effect; instruments and documents evidencing any Indebtedness or
Guaranteed Indebtedness of such Credit Party in excess of $1,000,000 and any
Lien granted by such Credit Party with respect thereto.

 

3.23         Solvency.  Both before and after giving effect to (a)
the Loans and Letter of Credit Obligations to be made or incurred on the
Closing Date or such other date as Loans and Letter of Credit Obligations
requested hereunder are made or incurred, (b) the disbursement of the proceeds
of such Loans pursuant to the instructions of Borrower, (c) the consummation of
the other Related Transactions and (d) the payment and accrual of all
transaction costs in connection with the foregoing, each Credit Party is and
will be Solvent.

 

3.24         Status of Holding
Company.  As of
the Closing Date, Holding Company will not be engaged in any business or
incurred any Indebtedness or any other liabilities (except in connection with
its corporate formation, the Related Transactions Documents and this Agreement).

 

4.     FINANCIAL STATEMENTS  AND INFORMATION

 

4.1           Reports
and Notices.

 

(a)           Each Credit Party executing this
Agreement hereby agrees that from and after the Closing Date and until the Acquisition
Commitment Termination Date, it shall deliver to

 

17

 

Agent or to Agent and Lenders, as
required, the Financial Statements, notices and other information at the times,
to the Persons and in the manner set forth in Annex D.

 

(b)           Each Credit Party executing this
Agreement hereby agrees that from and after the Closing Date and until the
Termination Date, it shall deliver to Agent or to Agent and Lenders, as
required, the various Collateral Reports (including Borrowing Base Certificates
in the form of Exhibit
4.1(b)) at the times, to the Persons and in the manner
set forth in Annex E.

 

4.2           Communication
with Accountants.  Each
Credit Party executing this Agreement authorizes (a) Agent and (b) so long as
an Event of Default has occurred and is continuing, each Lender, to communicate
directly with its independent certified public accountants, and authorizes and,
at Agent’s request, shall instruct those accountants and advisors to disclose
and make available to Agent and each Lender any and all Financial Statements
and other supporting financial documents, schedules and information relating to
any Credit Party (including copies of any issued management letters) with
respect to the business, financial condition and other affairs of any Credit
Party.

 

5.     AFFIRMATIVE COVENANTS

 

Each Credit Party executing this Agreement jointly and
severally agrees as to all Credit Parties that from and after the date hereof
and until the Termination Date:

 

5.1           Maintenance
of Existence and Conduct of Business.  Each Credit Party shall:  do or cause to be done all things necessary
to preserve and keep in full force and effect its corporate existence and its
rights and franchises;  continue to
conduct its business substantially as now conducted or as otherwise permitted
hereunder;  at all times maintain,
preserve and protect all of its assets and properties used or useful in the
conduct of its business, and keep the same in good repair, working order and
condition in all material respects (taking into consideration ordinary wear and
tear) and from time to time make, or cause to be made, all necessary or
appropriate repairs, replacements and improvements thereto consistent with
industry practices; and  transact
business only in such corporate and trade names as are set forth in Disclosure
Schedule (5.1).

 

5.2           Payment of
Charges.

 

(a)           Subject to Section 5.2(b),
each Credit Party shall pay and discharge or cause to be paid and discharged
promptly all Charges payable by it, including (i) Charges imposed upon it,
its income and profits, or any of its property (real, personal or mixed) and
all Charges with respect to tax, social security and unemployment withholding
with respect to its employees, (ii) lawful claims for labor, materials,
supplies and services or otherwise, and (iii) all storage or rental
charges payable to warehousemen and bailees, in each case, before any thereof
shall become past due.

 

(b)           Each Credit Party may in good faith
contest, by appropriate proceedings, the validity or amount of any Charges,
Taxes or claims described in Section 5.2(a);
provided,
that (i) adequate reserves with respect to such contest are maintained on the
books of such Credit Party, in accordance with GAAP; (ii) no Lien shall be
imposed to secure payment of such Charges (other than payments to warehousemen
and/or bailees) that is superior to any of the Liens securing payment of the
Obligations and such contest is maintained and prosecuted continuously and with
diligence and operates to suspend collection or enforcement of such Charges,
(iii) none of the Collateral  becomes
subject to forfeiture or loss as a result of such contest, (iv) such Credit
Party shall promptly pay or discharge such contested Charges, Taxes or claims
and all additional charges, interest, penalties and expenses, if any, and shall
deliver to Agent evidence reasonably acceptable to Agent of such compliance,
payment or discharge, if such contest is terminated or discontinued adversely
to such Credit Party or the conditions set forth in this Section 5.2(b)
are no longer met, and (v) Agent has not advised Borrower in writing that Agent
reasonably believes that nonpayment or nondischarge thereof could have or
result in a Material Adverse Effect.

 

18

 

5.3           Books and
Records.  Each Credit Party shall
keep adequate books and records with respect to its business activities in
which proper entries, reflecting all financial transactions, are made in
accordance with GAAP and on a basis consistent with the Financial Statements
attached as Disclosure Schedule (3.4(a)).

 

5.4           Insurance; Damage to or
Destruction of Collateral.

 

(a)           The Credit Parties shall, at their
sole cost and expense, maintain the policies of insurance described on Disclosure Schedule (3.18)
as in effect on the date hereof or otherwise in form and amounts and with
insurers reasonably acceptable to Agent. 
Such policies of insurance (or the loss payable and additional insured
endorsements delivered to Agent) shall contain provisions pursuant to which the
insurer agrees to provide 30 days prior written notice to Agent in the event of
any non-renewal, cancellation or amendment of any such insurance policy.  If any Credit Party at any time or times
hereafter shall fail to obtain or maintain any of the policies of insurance
required above or to pay all premiums relating thereto, Agent may at any time
or times thereafter obtain and maintain such policies of insurance and pay such
premiums and take any other action with respect thereto that Agent deems
advisable.  Agent shall have no
obligation to obtain insurance for any Credit Party or pay any premiums
therefor.  By doing so, Agent shall not
be deemed to have waived any Default or Event of Default arising from any
Credit Party’s failure to maintain such insurance or pay any premiums
therefor.  All sums so disbursed,
including reasonable attorneys’ fees, court costs and other charges related
thereto, shall be payable on demand by Borrower to Agent and shall be
additional Obligations hereunder secured by the Collateral.

 

(b)           Agent reserves the right at any time
upon any change in any Credit Party’s risk profile (including any change in the
product mix maintained by any Credit Party or any laws affecting the potential
liability of such Credit Party) to require additional forms and limits of
insurance to, in Agent’s opinion, adequately protect both Agent’s and Lender’s
interests in all or any portion of the Collateral and to ensure that each
Credit Party is protected by insurance in amounts and with coverage customary
for its industry.  If reasonably
requested by Agent, each Credit Party shall deliver to Agent from time to time
a report of a reputable insurance broker, reasonably satisfactory to Agent,
with respect to its insurance policies.

 

(c)           Borrower shall deliver to Agent, in
form and substance reasonably satisfactory to Agent, endorsements to (i) all “All
Risk” insurance naming Agent, on behalf of itself and Lenders, as loss payee,
and (ii) all general liability and other liability policies naming Agent, on
behalf of itself and Lenders, as additional insured.  Borrower irrevocably makes, constitutes and
appoints Agent (and all officers, employees or agents designated by Agent), so
long as any Default or Event of Default has occurred and is continuing or the
anticipated insurance proceeds exceed $500,000, as Borrower’s true and lawful
agent and attorney-in-fact for the purpose of making, settling and adjusting
claims under such “All Risk” policies of insurance, endorsing the name of Borrower
on any check or other item of payment for the proceeds of such “All Risk”
policies of insurance and for making all determinations and decisions with
respect to such “All Risk” policies of insurance.  Agent shall have no duty to exercise any
rights or powers granted to it pursuant to the foregoing power-of-attorney.  Borrower shall promptly notify Agent of any
loss, damage, or destruction to the Collateral in the amount of $500,000 or
more, whether or not covered by insurance. 
After deducting from such proceeds the expenses, if any, incurred by
Agent in the collection or handling thereof, Agent may, at its option, apply
such proceeds to the reduction of the Obligations in accordance with Section 1.3(d),
or permit or require Borrower to use such money, or any part thereof, to
replace, repair, restore or rebuild the Collateral in a diligent and
expeditious manner with materials and workmanship of substantially the same
quality as existed before the loss, damage or destruction. Notwithstanding the
foregoing, if the casualty giving rise to such insurance proceeds could not
reasonably be expected to have a Material Adverse Effect and such insurance
proceeds do not exceed $1,000,000 in the aggregate at any one time, Agent shall
permit the applicable Credit Party to replace, restore, repair or rebuild the
property; provided
that if such Credit Party has not completed or entered into binding agreements
to complete such replacement, restoration, repair or rebuilding within 180 days
of such casualty, Agent may apply such insurance proceeds to the Obligations in
accordance with Section
1.3(d).  All such
insurance proceeds that are

 

19

 

to be made available to Borrower to
replace, repair, restore or rebuild the Collateral shall be applied by Agent to
reduce the outstanding principal balance of the Revolving Loan up to such
outstanding balance (which application shall not result in a permanent
reduction of the Revolving Loan Commitment) and upon such application, Agent
shall establish a Reserve against the Borrowing Base in an amount equal to the
amount of such proceeds so applied. 
Thereafter, such funds shall be made available to such Credit Party to
provide funds to replace, repair, restore or rebuild the Collateral as follows:
(i) Borrower shall request a Revolving Credit Advance be made to such Credit
Party in the amount requested to be released; (ii) so long as the conditions
set forth in Section
2.2 have been met, Revolving Lenders shall make such
Revolving Credit Advance or Agent shall release funds from the cash collateral
account; and (iii) in the case of insurance proceeds applied against the
Revolving Loan, the Reserve established with respect to such insurance proceeds
shall be reduced by the amount of such Revolving Credit Advance.  To the extent not used to replace, repair,
restore or rebuild the Collateral, such insurance proceeds shall be applied in
accordance with Section
1.3(d); provided
that in the case of such insurance proceeds pertaining to any Credit Party
other than Borrower not used to replace, repair, restore or rebuild the
Collateral, such insurance proceeds shall be applied to the Loans owing by
Borrower.

 

5.5           Compliance
with Laws.  Each Credit Party
shall comply with all federal, state, local and foreign laws and regulations
applicable to it, including those relating to 
ERISA and labor matters and Environmental Laws and Environmental
Permits, except to the extent that the failure to comply, individually or in
the aggregate, could not reasonably be expected to have a Material Adverse
Effect.

 

5.6           Supplemental
Disclosure.  From time to time as
may be reasonably requested by Agent (which request will not be made more
frequently than once each year absent the occurrence and continuance of a
Default or an Event of Default), the Credit Parties shall supplement each
Disclosure Schedule hereto, or any representation herein or in any other Loan
Document, with respect to any matter hereafter arising that, if existing or
occurring at the date of this Agreement, would have been required to be set
forth or described in such Disclosure Schedule or as an exception to such
representation or that is necessary to correct any information in such
Disclosure Schedule or representation which has been rendered inaccurate
thereby (and, in the case of any supplements to any Disclosure Schedule, such
Disclosure Schedule shall be appropriately marked to show the changes made
therein); provided that (a) no such supplement to any such Disclosure
Schedule or representation shall amend, supplement or otherwise modify any
Disclosure Schedule or representation, or be or be deemed a waiver of any
Default or Event of Default resulting from the matters disclosed therein,
except as consented to by Agent and Requisite Lenders in writing, and
(b) no supplement shall be required or permitted as to representations and
warranties that relate solely to the Closing Date.

 

5.7           Intellectual
Property.  Each Credit Party will
conduct its business and affairs without infringement of or interference with
any Intellectual Property of any other Person in any material respect.

 

5.8           Environmental
Matters.  Each Credit Party shall
and shall cause each Person within its control to: (a) conduct its operations
and keep and maintain its Real Estate in compliance with all Environmental Laws
and Environmental Permits other than noncompliance that could not reasonably be
expected to have a Material Adverse Effect; (b) implement any and all
investigation, remediation, removal and response actions that are appropriate
or necessary to maintain the value and marketability of the Real Estate or to
otherwise comply with Environmental Laws and Environmental Permits pertaining
to the presence, generation, treatment, storage, use, disposal, transportation
or Release of any Hazardous Material on, at, in, under, above, to, from or
about any of its Real Estate; (c) notify Agent promptly after such Credit Party
becomes aware of any violation of Environmental Laws or Environmental Permits
or any Release on, at, in, under, above, to, from or about any Real Estate that
is reasonably likely to result in Environmental Liabilities in excess of $100,000;
and (d) promptly forward to Agent a copy of any order, notice, request for
information or any communication or report received by such Credit Party in
connection with any such violation or Release or any other matter relating to
any Environmental Laws or Environmental Permits that could reasonably be
expected to result in Environmental Liabilities in excess of $100,000, in each
case whether or not the Environmental Protection Agency or any Governmental
Authority has taken or threatened any action in connection with any such
violation, Release or other matter.  If
Agent at any time has a reasonable basis to believe that there may be a
violation of any Environmental Laws or Environmental Permits by any Credit
Party or any Environmental Liability arising thereunder, or a Release of
Hazardous Materials on, at, in, under, above, to,

 

20

 

from or about any of its Real Estate, that, in each case, could
reasonably be expected to have a Material Adverse Effect, then  each Credit Party shall, upon Agent’s written
request (i) cause the performance of such environmental audits including
subsurface sampling of soil and groundwater, and preparation of such
environmental reports, at Borrower’s expense, as Agent may from time to time
reasonably request, which shall be conducted by reputable environmental
consulting firms reasonably acceptable to Agent and shall be in form and
substance reasonably acceptable to Agent, and (ii) permit Agent or its
representatives to have access to all Real Estate for the purpose of conducting
such environmental audits and testing as Agent deems appropriate, including
subsurface sampling of soil and groundwater. 
Borrower shall reimburse Agent for the costs of such audits and tests
and the same will constitute a part of 
the Obligations secured hereunder.

 

5.9           Further
Assurances.  Each Credit Party
executing this Agreement agrees that it shall and shall cause each other Credit
Party to, at such Credit Party’s expense and upon request of Agent, duly
execute and deliver, or cause to be duly executed and delivered, to Agent such
further instruments and do and cause to be done such further acts as may be
necessary or proper in the reasonable opinion of Agent to carry out more
effectively the provisions and purposes of this Agreement or any other Loan
Document.

 

5.10         Additional
Guarantors.  Upon the creation
from time to time of any Subsidiary of Borrower or Holding Company, such Subsidiary shall execute and
deliver a guaranty of the Obligations in form and substance satisfactory to
Agent.

 

6.     NEGATIVE COVENANTS

 

Each Credit Party executing this Agreement jointly and
severally agrees as to all Credit Parties that from and after the date hereof
until the Termination Date:

 

6.1           Mergers, Subsidiaries,
Etc.  no Credit Party shall directly
or indirectly, by operation of law or otherwise, (a) form or acquire any
Subsidiary, or (b) merge with, consolidate with, acquire all or substantially
all of the assets or Stock of, or otherwise combine with or acquire, any
Person, unless such merger or acquisition is substantially comprised of
Drilling Rigs.

 

6.2           Investments;
Loans and Advances.  Except as
otherwise expressly permitted by this Section 6.2, no Credit Party shall
make or permit to exist any investment in, or make, accrue or permit to exist
loans or advances of money to, any Person, through the direct or indirect
lending of money, holding of securities or otherwise (an “Investment”),
except that:  (a) Borrower may hold
investments comprised of notes payable, or stock or other securities issued by
Account Debtors to Borrower pursuant to negotiated agreements with respect to
settlement of such Account Debtor’s Accounts in the ordinary course of
business, so long as the aggregate amount of such Accounts so settled by
Borrower does not exceed $500,000; (b) each Credit Party may maintain its
existing investments in its Subsidiaries as of the Closing Date; and (c)
Borrower may make investments in the following (“Eligible Cash Equivalents”)
(i) marketable direct obligations issued or unconditionally guaranteed by
the United States of America or any agency thereof maturing within one year
from the date of acquisition thereof, (ii) commercial paper maturing no
more than one year from the date of creation thereof and currently having the
highest rating obtainable from either Standard & Poor’s Ratings Group or
Moody’s Investors Service, Inc., (iii) certificates of deposit maturing no more
than one year from the date of creation thereof issued by commercial banks incorporated
under the laws of the United States of America, each having combined capital,
surplus and undivided profits of not less than $300,000,000 and having a senior
unsecured rating of “A” or better by a nationally recognized rating agency (an “A
Rated Bank”) or from any Agent or any Lender, (iv) time deposits maturing
no more than 30 days from the date of creation thereof with A Rated Banks and
(v) mutual funds that invest solely in one or more of the investments described
in clauses (i) through (iv) above, (d) other investments not exceeding $500,000
in the aggregate at any time outstanding; (e) Investments in a Credit Party or
any of their Subsidiaries that have executed and delivered a guaranty of the
Obligations in form and substance satisfactory to Agent (each such Subsidiary
being herein referred to as a “Subsidiary Guarantor”); (f) Investments,
if as a result of such Investment (i) such other Person becomes a Subsidiary
Guarantor or (ii) such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all of its properties and assets to,
a Credit Party or a Subsidiary Guarantor; (g) Investments arising in connection
with interest rate swap, cap or collar agreements, currency exchange contracts
or commodity hedging agreements, in each case entered into with any Lender in
the ordinary course of business and not for speculative purposes; (h)
Investments in stock, obligations or securities received in settlement of debts
owing

 

21

 

to a Credit Party as a result of bankruptcy or insolvency proceedings
as to debt owing to such Credit Party that arose in the ordinary course of
business of such Credit Party; (i) Investments in the form of loans among the
Credit Parties and the Subsidiary Guarantors; and (j) any security or
Investment made as a result of the receipt of non-cash consideration from an
Asset Sale permitted under Section 6.8; and (k) advances and extensions
of credit in the nature of accounts receivable arising from the sale or lease
of goods or services in the ordinary course of business.

 

6.3           Indebtedness.

 

(a)           No Credit Party shall create, incur,
assume or permit to exist any Indebtedness, except (without duplication) (i)
the Loans and the other Obligations, (ii) unfunded pension fund and other
employee benefit plan obligations and liabilities to the extent they are
permitted to remain unfunded under applicable law, (iii) existing Indebtedness
described in Disclosure
Schedule (6.3) and refinancings thereof or amendments
or modifications thereof that do not have the effect of increasing the
principal amount thereof or changing the amortization thereof (other than to
extend the same) and that are otherwise on terms and conditions no less
favorable to any Credit Party, Agent or any Lender, as determined by Agent,
than the terms of the Indebtedness being refinanced, amended or modified, (iv) other
Indebtedness in excess of $3,000,000 in the aggregate at any time outstanding, and
(v) Indebtedness consisting of intercompany loans and advances made by a Credit
Party to any other Credit Party or by any Subsidiary Guarantor to a Credit
Party, provided,
that:  (A) the obligor with respect to
such indebtedness shall have executed and delivered to the obligee a demand
note (collectively, the “Intercompany
Notes”) to evidence any such intercompany
Indebtedness, which Intercompany Notes shall be in form and substance
reasonably satisfactory to Agent and shall be pledged and delivered to Agent
pursuant to the applicable Security Agreement as additional collateral security
for the Obligations; (B) Borrower shall record all intercompany transactions on
its books and records in a manner reasonably satisfactory to Agent; (C) the
obligations of Borrower under any such Intercompany Notes shall be subordinated
to the Obligations of Borrower hereunder in a manner reasonably satisfactory to
Agent;  (D) at the time any such
intercompany loan or advance is made by Borrower and after giving effect
thereto, Borrower shall be Solvent; (E) no Default or Event of Default would
occur and be continuing after giving effect to any such proposed intercompany
loan; (F) the aggregate amount of such intercompany loans owing by Borrower to
all Subsidiary Guarantors and/or the Holding Company shall not exceed $500,000
at any one time outstanding; (G) the aggregate balance of all such intercompany
loans owing to Borrower shall not exceed $500,000 at any time; (H) the
recipient of any such intercompany loans shall be creditworthy as determined by
Agent; (I) any guarantee of Indebtedness incurred in compliance with this Section
6.3; and (J) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient funds in
the ordinary course of business; provided, however, that such Indebtedness is
extinguished within two Business Days of incurrence.

 

6.4           Employee
Loans and Affiliate Transactions.

 

(a)           Except as otherwise expressly permitted
in this Section 6.4
with respect to Affiliates, no Credit Party shall enter into or be a party to
any transaction with any other Credit Party or any Affiliate thereof except in
the ordinary course of and pursuant to the reasonable requirements of such Credit
Party’s business and upon fair and reasonable terms that are no less favorable
to such Credit Party than would be obtained in a comparable arm’s length
transaction with a Person not an Affiliate of such Credit Party.  All such transactions existing as of the date
hereof are described in Disclosure
Schedule (6.4(a)).

 

(b)           No Credit Party shall enter into any
lending or borrowing transaction with any employees of any Credit Party, except
loans to its respective employees in the ordinary course of business consistent
with past practices for travel and entertainment expenses, relocation costs,
management incentive and similar purposes and stock option financing up to a
maximum of $25,000 to any employee at any one time outstanding and up to a
maximum of $100,000 in the aggregate at any one time outstanding.

 

22

 

6.5           Capital
Structure and Business. 
No Credit Party shall (a) make any changes in any of its business
objectives, purposes or operations that could in any way adversely affect the
repayment of the Loans or any of the other Obligations or could reasonably be
expected to have or result in a Material Adverse Effect, (b) make any change in
its capital structure as described in Disclosure Schedule (3.8), including
the issuance or sale of any shares of Stock, warrants or other securities
convertible into Stock or any revision of the terms of its outstanding Stock;
provided, that Holding Company may issue or sell its Stock for cash so long as
no Change of Control occurs after giving effect thereto, or (c) amend its
charter or bylaws in a manner that would adversely affect Agent or Lenders or
such Credit Party’s duty or ability to repay the Obligations.  No Credit Party shall engage in any business
other than the businesses currently engaged in by it or businesses reasonably
related thereto.

 

6.6           Guaranteed
Indebtedness.  No Credit Party
shall create, incur, assume or permit to exist any Guaranteed Indebtedness
except (a) by endorsement of instruments or items of payment for deposit to the
account of any Credit Party, and (b) for Guaranteed Indebtedness incurred for
the benefit of any other Credit Party or any Subsidiary Guarantor if the
primary obligation is permitted by the express terms of this Agreement.

 

6.7           Liens.  No Credit Party shall create, incur, assume
or permit to exist any Lien on or with respect to its Accounts or any of its
other properties or assets (whether now owned or hereafter acquired) except for
(a) Permitted Encumbrances; (b) Liens in existence on the date hereof and
summarized on Disclosure Schedule (6.7) securing Indebtedness described
on Disclosure Schedule (6.3) and permitted refinancings, extensions and
renewals thereof, including extensions or renewals of any such Liens; provided
that the principal amount so secured is not increased and the Lien does not
attach to any other property; (c) Liens created after the date hereof by
conditional sale or other title retention agreements (including Capital Leases)
or in connection with purchase money Indebtedness with respect to Equipment and
Fixtures acquired by any Credit Party in the ordinary course of business,
involving the incurrence of an aggregate amount of purchase money Indebtedness
and Capital Lease Obligations of not more than $3,000,000 outstanding at any
one time for all such Liens (provided that such Liens attach only to the
assets subject to such purchase money debt or Capital Lease Obligations and
such Indebtedness is incurred within 20 days following such purchase and does
not exceed 100% of the purchase price of the subject assets); and (d) other
Liens securing Indebtedness which would not otherwise violate the terms of this
Agreement and so long as such Liens do not attach to any Accounts.  In addition, no Credit Party shall become a
party to any agreement, note, indenture or instrument, or take any other
action, that would prohibit the creation of a Lien on any of its properties or
other assets in favor of Agent, on behalf of itself and Lenders, as additional
collateral for the Obligations, except operating leases, purchase money
financing agreements, Capital Leases or Licenses which prohibit Liens upon the
assets that are subject thereto.

 

6.8           Sale
of Stock and Assets.  No Credit
Party shall sell, transfer, convey, assign or otherwise dispose of any of its
properties or other assets (other than cash), including the Stock of any of its
Subsidiaries (whether in a public or a private offering or otherwise) or any of
its Accounts, other than (a) the sale of Inventory in the ordinary course of
business, (b) the sale, transfer, conveyance or other disposition by a Credit
Party of Equipment or Fixtures that are obsolete or no longer used or useful in
such Credit Party’s business; (c) dispositions of Eligible Cash Equivalents;
(d) the liquidation of property or assets received in settlement of debts as a
result of foreclosure, perfection or enforcement of any Lien or debt, which
debt was owing in the ordinary course of business; (e) any transfer of
properties or assets to a Credit Party or to a Subsidiary Guarantor; (f) any
payment of money in satisfaction of Indebtedness or other obligations the
incurrence of which was not prohibited by the terms of this Agreement; (g) the
sale or discount without recourse of accounts receivable arising in the
ordinary course of business and on commercially reasonable terms in connection
with the compromise or collection thereof; and (h) dispositions resulting from
casualty or condemnation.  With respect
to any disposition of assets or other properties permitted pursuant to this Section
6.8 above, subject to Section 1.3(b), Agent agrees on
reasonable prior written notice to release its Lien on such assets or other
properties in order to permit the applicable Credit Party to effect such
disposition and shall execute and deliver to Borrower, at Borrower’s expense,
appropriate UCC-3 termination statements and other releases as reasonably
requested by Borrower.

 

6.9           ERISA.  No Credit Party shall, or shall cause or
permit any ERISA Affiliate to, cause or permit to occur an event that could
result in the imposition of a Lien under Section 412 of the IRC or Section 302
or 4068 of ERISA or cause or permit to occur an ERISA Event to the extent such
ERISA Event could reasonably be expected to have a Material Adverse Effect.

 

23

 

6.10         Financial
Covenants.  Borrower shall not
breach or fail to comply with any of the Financial Covenants.

 

6.11         Hazardous
Materials.  No Credit Party shall
cause or permit a Release of any Hazardous Material on, at, in, under, above,
to, from or about any of the Real Estate where such Release would (a) violate
in any respect, or form the basis for any Environmental Liabilities under, any
Environmental Laws or Environmental Permits or (b) otherwise adversely impact
the value or marketability of any of the Real Estate or any of the Collateral,
other than such violations or Environmental Liabilities that could not
reasonably be expected to have a Material Adverse Effect.

 

6.12         Sale-Leasebacks.  No Credit Party shall engage in any sale-leaseback,
synthetic lease or similar transaction involving any of its assets.

 

6.13         Cancellation
of Indebtedness.  No Credit Party
shall cancel any claim or debt owing to it, except for reasonable consideration
negotiated on an arm’s-length basis and in the ordinary course of its business
consistent with past practices.

 

6.14         Restricted
Payments.  No Credit Party shall
make any Restricted Payment, except (a) intercompany loans and advances
between Borrower and Guarantors to the extent permitted by Section 6.3,
(b) dividends and distributions by Subsidiaries of Borrower paid to
Borrower, (c) employee loans permitted under Section 6.4(b),
(d) payments of principal and interest of Intercompany Notes issued in
accordance with Section 6.3; (e) distributions with respect to Borrower’s
partnership interests, for the purposes of (i) providing funds to pay taxes
(including federal income taxes and franchise taxes) of the partners of
Borrower attributable to ownership of an interest in such partnership and (ii)
providing operating capital to Holding Company in an amount not exceeding $500,000
in the aggregate distributed in any one fiscal year; (f) preferred dividends
which Pioneer Company is contractually obligated to pay pursuant to agreements
in existence on the date hereof and disclosed to Lender; and (g) payments of
costs, fees and expenses associated or otherwise related to a public offering
of stock by Holding Company.

 

6.15         Change
of Corporate Name or Location; Change of Fiscal Year.  No Credit Party shall (a) change its name as
it appears in official filings in the state of its incorporation or other
organization, (b) change its chief executive office, principal place of
business, corporate offices or warehouses or locations at which Collateral is
held or stored, or the location of its records concerning the Collateral, (c)
change the type of entity that it is, (d) change its organization
identification number, if any, issued by its state of incorporation or other
organization, or (e) change its state of incorporation or organization, in each
case without at least 30 days prior written notice to Agent and after Agent’s
written acknowledgment that any reasonable action requested by Agent in
connection therewith, including to continue the perfection of any Liens in
favor of Agent, on behalf of Lenders, in any Collateral, has been completed or
taken, and provided that any such new location shall be in the
continental United States.  No Credit Party shall change its
Fiscal Year.

 

6.16         No Impairment of
Intercompany Transfers.  No Credit
Party shall directly or indirectly enter into or become bound by any agreement,
instrument, indenture or other obligation (other than this Agreement and the
other Loan Documents) that could directly or indirectly restrict, prohibit or
require the consent of any Person with respect to the payment of dividends or
distributions or the making or repayment of intercompany loans by a Subsidiary
of Borrower to Borrower.

 

6.17         No Speculative
Transactions.  No Credit
Party shall engage in any transaction involving commodity options, futures
contracts or similar transactions, except solely to hedge against fluctuations
in the prices of commodities owned or purchased by it and the values of foreign
currencies receivable or payable by it and interest swaps, caps or collars.

 

7.     TERM

 

7.1           Termination.  The financing arrangements contemplated
hereby shall be in effect until the later of (i) the Acquisition Commitment
Termination Date, (ii) the Revolving Commitment Termination Date and (iii) the
latest maturity date of the Acquisition Loans.

 

24

 

7.2           Survival
of Obligations Upon Termination of Financing Arrangements.  Except as otherwise expressly provided for in
the Loan Documents, no termination or cancellation (regardless of cause or
procedure) of any financing arrangement under this Agreement shall in any way
affect or impair the obligations, duties and liabilities of the Credit Parties
or the rights of Agent and Lenders relating to any unpaid portion of the Loans
or any other Obligations, due or not due, liquidated, contingent or unliquidated
or any transaction or event occurring prior to such termination, or any
transaction or event, the performance of which is required after the later of
(i) the Acquisition Commitment Termination Date, (ii) the Revolving Commitment
Termination Date and (iii) the latest maturity date of the Acquisition Loans.  Except as otherwise expressly provided herein
or in any other Loan Document, all undertakings, agreements, covenants,
warranties and representations of or binding upon the Credit Parties, and all
rights of Agent and each Lender, all as contained in the Loan Documents, shall
not terminate or expire, but rather shall survive any such termination or
cancellation and shall continue in full force and effect until the Termination
Date; provided, that the provisions of Section 11, the payment
obligations under Sections 1.14 and 1.15,  and the indemnities contained in the Loan
Documents shall survive the Termination Date.

 

8.     EVENTS OF DEFAULT; RIGHTS AND REMEDIES

 

8.1           Events of Default.  The occurrence of any one or more of the
following events shall constitute an “Event of Default” hereunder:

 

(a)           Borrower (i) fails to make any
payment of principal of, or interest on, or Fees owing in respect of, the Loans
or any of the other Obligations within three (3) Business Days of same being due
and payable, or (ii) fails to pay or reimburse Agent or Lenders for any expense
reimbursable hereunder or under any other Loan Document within 10 days
following Agent’s demand for such reimbursement or payment of expenses.

 

(b)           Any Credit Party fails or neglects to
perform, keep or observe any of the provisions of Sections 1.4, 1.8, 5.4(a) or
6, or any of the provisions set forth in Annex F.

 

(c)           Borrower fails or neglects to
perform, keep or observe any of the provisions of Section 4
or any provisions set forth in Annexes D or E,
respectively, and the same shall continue uncured to the satisfaction of Agent
for a period of thirty (30) days after written notice thereof has been given by
Agent to Borrower (provided that such thirty (30)-day cure period shall not
apply respecting covenants of Borrower relating to notices to be given by
Borrower).

 

(d)           Any Credit Party fails or neglects to
perform, keep or observe any other provision of this Agreement or of any of the
other Loan Documents (other than any provision embodied in or covered by any
other clause of this Section
8.1) and the same shall continue uncured to the
satisfaction of Agent for a period of thirty (30) days after written notice
thereof has been given by Agent to such Credit Party (provided that such thirty
(30)-day cure period shall not apply respecting covenants of such Credit Party
relating to notices to be given by Credit Party).

 

(e)           A default or breach occurs under any
other agreement, document or instrument to which any Credit Party is a party
that is not cured within any applicable grace period therefor, and such default
or breach (i) involves the failure to make any payment when due in respect of
any Indebtedness or Guaranteed Indebtedness (other than the Obligations) of any
Credit Party in excess of $250,000 in the aggregate (including (x) undrawn
committed or available amounts and (y) amounts owing to all creditors under any
combined or syndicated credit arrangements), or (ii) causes, or permits any
holder of such Indebtedness or Guaranteed Indebtedness or a trustee to cause,
Indebtedness or Guaranteed Indebtedness or a portion thereof in excess of $250,000
in the aggregate to become due prior to its stated maturity or prior to its
regularly scheduled dates of payment, or cash collateral to be demanded in
respect thereof, in each case, regardless of whether such default is waived, or
such right is exercised, by such holder or trustee.

 

(f)            Any information contained in any
Borrowing Base Certificate is untrue or incorrect in any respect, or any
representation or warranty herein or in any Loan Document or in

 

25

 

any written statement, report,
financial statement or certificate (other than a Borrowing Base Certificate) made
or delivered to Agent or any Lender by any Credit Party is untrue or incorrect
in any material respect as of the date when made or deemed made.

 

(g)           Assets of any Credit Party with a
fair market value of $250,000 or more are attached, seized, levied upon or
subjected to a writ or distress warrant, or come within the possession of any
receiver, trustee, custodian or assignee for the benefit of creditors of any
Credit Party and such condition continues for 30 days or more following the
date Credit Party becomes aware of or should have been aware of such occurrence.

 

(h)           A case or proceeding is commenced
against any Credit Party seeking a decree or order in respect of such Credit
Party (i) under the Bankruptcy Code or any other applicable federal, state or foreign
bankruptcy or other similar law, (ii) appointing a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) for such
Credit Party or for any substantial part of any such Credit Party’s assets, or
(iii) ordering the winding-up or liquidation of the affairs of such Credit
Party, and such case or proceeding shall remain undismissed or unstayed for 60
days or more or a decree or order granting the relief sought in such case or
proceeding is entered by a court of competent jurisdiction.

 

(i)            Any Credit Party (i) files a
petition seeking relief under the Bankruptcy Code or any other applicable
federal, state or foreign bankruptcy or other similar law, (ii) consents to or
fails to contest in a timely and appropriate manner to the institution of
proceedings thereunder or to the filing of any such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or similar official) for such Credit Party
or for any substantial part of any such Credit Party’s assets, (iii) makes an
assignment for the benefit of creditors, or (iv) takes any action in
furtherance of any of the foregoing, or (v) admits in writing its inability to,
or is generally unable to, pay its debts as such debts become due.

 

(j)            A final judgment or judgments for
the payment of money in excess of $250,000 in the aggregate at any time are
outstanding against one or more of the Credit Parties and the same are not,
within 30 days after the entry thereof, discharged or execution thereof stayed
or bonded pending appeal, or such judgments are not discharged prior to the
expiration of any such stay.

 

(k)           Any material provision of any Loan
Document for any reason ceases to be valid, binding and enforceable in accordance
with its terms (or any Credit Party shall challenge the enforceability of any
Loan Document or shall assert in writing, or engage in any action or inaction
based on any such assertion, that any provision of any of the Loan Documents
has ceased to be or otherwise is not valid, binding and enforceable in
accordance with its terms), or any Lien created under any Loan Document ceases
to be a valid and perfected first priority Lien (except as otherwise permitted
herein or therein) in any of the Collateral purported to be covered thereby.

 

(l)            Any Change of Control occurs.

 

8.2           Remedies.

 

(a)           If any Default or Event of Default
has occurred and is continuing, Agent may (and at the written request of the
Requisite Revolving Lenders shall), without notice, suspend the Revolving Loan
facility with respect to additional Advances and/or the incurrence of
additional Letter of Credit Obligations, whereupon any additional Advances and
additional Letter of Credit Obligations shall be made or incurred in Agent’s
sole discretion (or in the sole discretion of the Requisite Revolving Lenders,
if such suspension occurred at their direction) so long as such Default or
Event of Default is continuing.  If any
Default or Event of Default has occurred and is continuing, Agent may (and at
the written request of Requisite Revolving Lenders shall), without notice
except as otherwise expressly provided herein, increase the rate of interest
applicable to the Loans and the Letter of Credit Fees to the Default Rate.

 

26

 

(b)           If any Default or Event of Default
has occurred and is continuing, Agent may (and at the written request of the
Requisite Acquisition Lenders shall), without notice, suspend the Acquisition
Loan facility with respect to additional Advances, whereupon any additional
Advances shall be made or incurred in Agent’s sole discretion (or in the sole
discretion of the Requisite Acquisition Lenders, if such suspension occurred at
their direction) so long as such Default or Event of Default is
continuing.  If any Default or Event of
Default has occurred and is continuing, Agent may (and at the written request
of Requisite Acquisition Lenders shall), without notice except as otherwise
expressly provided herein, increase the rate of interest applicable to the
Loans to the Default Rate.

 

(c)           If any Event of Default has occurred
and is continuing, Agent may (and at the written request of the Requisite
Lenders shall), without notice: (i) terminate the Revolving Loan facility
with respect to further Advances or the incurrence of further Letter of Credit
Obligations; (ii) declare all or any portion of the Obligations, including
all or any portion of any Loan to be forthwith due and payable, and require
that the Letter of Credit Obligations be cash collateralized as provided in Annex B,
all without presentment, demand, protest or further notice of any kind, all of
which are expressly waived by Borrower and each other Credit Party; or
(iii) exercise any rights and remedies provided to Agent under the Loan
Documents or at law or equity, including all remedies provided under the Code; provided,
that upon the occurrence of an Event of Default specified in Sections 8.1(h) or (i),
the Revolving Loan facility shall be immediately terminated and all of the
Obligations, including the Revolving Loan and Acquisition Loan, shall become
immediately due and payable without declaration, notice or demand by any
Person.

 

(d)           If any Event of Default has occurred
and is continuing, Agent may (and at the written request of the Requisite
Lenders shall), without notice: (i) terminate the Acquisition Loan
facility with respect to further Advances; (ii) declare all or any portion
of the Obligations, including all or any portion of any Loan to be forthwith due
and payable, all without presentment, demand, protest or further notice of any
kind, all of which are expressly waived by Borrower and each other Credit
Party; or (iii) exercise any rights and remedies provided to Agent under
the Loan Documents or at law or equity, including all remedies provided under
the Code; provided,
that upon the occurrence of an Event of Default specified in Sections 8.1(h) or (i),
the Acquisition Loan facility shall be immediately terminated and all of the
Obligations, including the Acquisition Loans, shall become immediately due and
payable without declaration, notice or demand by any Person.

 

8.3           Waivers by
Credit Parties.  Except as
otherwise provided for in this Agreement or by applicable law, each Credit
Party waives: (a) presentment, demand and protest and notice of presentment,
dishonor, notice of intent to accelerate, notice of acceleration, protest,
default, nonpayment, maturity, release, compromise, settlement, extension or
renewal of any or all commercial paper, accounts, contract rights, documents,
instruments, chattel paper and guaranties at any time held by Agent on which
any Credit Party may in any way be liable, and hereby ratifies and confirms
whatever Agent may do in this regard, (b) all rights to notice and a hearing
prior to Agent’s taking possession or control of, or to Agent’s replevy,
attachment or levy upon, the Collateral or any bond or security that might be
required by any court prior to allowing Agent to exercise any of its remedies,
and (c) the benefit of all valuation, appraisal, marshaling and exemption laws.

 

9.     ASSIGNMENT AND PARTICIPATIONS; APPOINTMENT OF AGENT

 

9.1           Assignment
and Participations.

 

(a)           Subject to the terms of this Section 9.1,
any Lender may make an assignment to a Qualified Assignee of, or sale of
participations in, at any time or times, the Loan Documents, Loans, Letter of
Credit Obligations and any Commitment or any portion thereof or interest
therein, including any Lender’s rights, title, interests, remedies, powers or
duties thereunder.  Any assignment by a
Lender shall:  (i) require the
consent of Agent and the execution of an assignment and assumption agreement
(an “Assignment and Assumption Agreement”)
substantially in the form attached hereto as Exhibit 9.1(a)
and otherwise in form and substance reasonably

 

27

 

satisfactory to, and acknowledged by,
Agent; (ii) be conditioned on such assignee Lender representing to the
assigning Lender and Agent that it is purchasing the applicable Loans to be assigned
to it for its own account, for investment purposes and not with a view to the
distribution thereof; (iii) after giving effect to any such partial assignment,
the assignee Lender shall have Commitments in an amount at least equal to
$5,000,000 and the assigning Lender shall have retained Commitments in an
amount at least equal to $5,000,000; (iv) include a payment to Agent of an
assignment fee of $3,500; and (v) so long as no Event of Default has occurred
and is continuing, require the consent of Borrower, which shall not be
unreasonably withheld or delayed.  In the
case of an assignment by a Lender under this Section 9.1,
the assignee shall have, to the extent of such assignment, the same rights,
benefits and obligations as all other Lenders hereunder.  The assigning Lender shall be relieved of its
obligations hereunder with respect to its Commitments or assigned portion
thereof from and after the date of such assignment.  Borrower hereby acknowledges and agrees that
any assignment shall give rise to a direct obligation of Borrower to the
assignee and that the assignee shall be considered to be a “Lender”.  In all instances, each Lender’s liability to
make Loans hereunder shall be several and not joint and shall be limited to
such Lender’s Pro Rata Share of the applicable Commitment.  In the event Agent or any Lender assigns or
otherwise transfers all or any part of the Obligations, Agent or any such
Lender shall so notify Borrower and Borrower shall, upon the request of Agent
or such Lender, execute new Notes in exchange for the Notes, if any, being
assigned.  Notwithstanding the foregoing
provisions of this Section
9.1(a), any Lender may at any time pledge the
Obligations held by it and such Lender’s rights under this Agreement and the
other Loan Documents to a Federal Reserve Bank, and any lender that is an
investment fund may assign the Obligations held by it and such Lender’s rights
under this Agreement and the other Loan Documents to another investment fund
managed by the same investment advisor; provided,
that no such pledge to a Federal Reserve Bank shall release such Lender from
such Lender’s obligations hereunder or under any other Loan Document.

 

(b)             Any participation by a Lender of
all or any part of its Commitments shall be made with the understanding that
all amounts payable by Borrower hereunder shall be determined as if that Lender
had not sold such participation, and that the holder of any such participation
shall not be entitled to require such Lender to take or omit to take any action
hereunder except actions directly affecting (i) any reduction in the principal
amount of, or interest rate or Fees payable with respect to, any Loan in which
such holder participates, (ii) any extension of the scheduled amortization of
the principal amount of any Loan in which such holder participates or the final
maturity date thereof, and (iii) any release of all or substantially all of the
Collateral (other than in accordance with the terms of this Agreement, the
Collateral Documents or the other Loan Documents).  Solely for purposes of Sections 1.13, 1.15, 1.16
and 9.8,
Borrower acknowledges and agrees that a participation shall give rise to a
direct obligation of Borrower to the participant and the participant shall be
considered to be a “Lender”.  Except as
set forth in the preceding sentence neither Borrower nor any other Credit Party
shall have any obligation or duty to any participant.  Neither Agent nor any Lender (other than the
Lender selling a participation) shall have any duty to any participant and may
continue to deal solely with the Lender selling a participation as if no such
sale had occurred.

 

(c)             Except as expressly provided in
this Section 9.1,
no Lender shall, as between Borrower and that Lender, or Agent and that Lender,
be relieved of any of its obligations hereunder as a result of any sale,
assignment, transfer or negotiation of, or granting of participation in, all or
any part of the Loans, the Notes or other Obligations owed to such Lender.

 

(d)             Each Credit Party executing this
Agreement shall assist any Lender permitted to sell assignments or
participations under this Section
9.1 as reasonably required to enable the assigning or
selling Lender to effect any such assignment or participation, including the
execution and delivery of any and all agreements, notes and other documents and
instruments as shall be requested and the preparation of informational
materials for, and the participation of management in meetings with, potential
assignees or participants.  Each Credit
Party executing this Agreement shall certify the correctness, completeness and
accuracy of all descriptions of the Credit

 

28

 

Parties and their respective affairs
contained in any selling materials provided by it and all other information
provided by it and included in such materials.

 

(e)             A Lender may furnish any
information concerning Credit Parties in the possession of such Lender from
time to time to assignees and participants (including prospective assignees and
participants); provided that such Lender shall obtain from assignees or
participants confidentiality covenants substantially equivalent to those
contained in Section
11.8.

 

(f)            So
long as no Event of Default has occurred and is continuing, no Lender shall
assign or sell participations in any portion of its Loans or Commitments to a
potential Lender or participant, if, as of the date of the proposed assignment
or sale, the assignee Lender or participant would be subject to capital
adequacy or similar requirements under Section 1.15(a), increased costs
under Section 1.15(b), or withholding taxes in accordance with Section
1.14(a).

 

9.2           Appointment
of Agent. Frost Bank is hereby appointed to act on behalf of all
Lenders as Agent under this Agreement and the other Loan Documents.  The provisions of this Section 9.2 are
solely for the benefit of Agent and Lenders and no Credit Party nor any other
Person shall have any rights as a third party beneficiary of any of the
provisions hereof.  In performing its
functions and duties under this Agreement and the other Loan Documents, Agent
shall act solely as an agent of Lenders and does not assume and shall not be
deemed to have assumed any obligation toward or relationship of agency or trust
with or for any Credit Party or any other Person.  Agent shall have no duties or
responsibilities except for those expressly set forth in this Agreement and the
other Loan Documents.  The duties of
Agent shall be mechanical and administrative in nature and Agent shall not
have, or be deemed to have, by reason of this Agreement, any other Loan
Document or otherwise a fiduciary relationship in respect of any Lender.  Except as expressly set forth in this
Agreement and the other Loan Documents, Agent shall not have any duty to
disclose, and shall not be liable for failure to disclose, any information
relating to any Credit Party or any of their respective Subsidiaries or any
Account Debtor that is communicated to or obtained by Frost Bank or any of its
Affiliates in any capacity.  Neither
Agent nor any of its Affiliates nor any of their respective officers,
directors, employees, agents or representatives shall be liable to any Lender
for any action taken or omitted to be taken by it hereunder or under any other
Loan Document, or in connection herewith or therewith, except for damages
caused by its or their own gross negligence or willful misconduct.

 

If Agent shall request instructions from Requisite
Lenders, Requisite Revolving Lenders or all affected Lenders with respect to
any act or action (including failure to act) in connection with this Agreement
or any other Loan Document, then Agent shall be entitled to refrain from such
act or taking such action unless and until Agent shall have received
instructions from Requisite Lenders, Requisite Revolving Lenders or all
affected Lenders, as the case may be, and Agent shall not incur liability to
any Person by reason of so refraining. 
Agent shall be fully justified in failing or refusing to take any action
hereunder or under any other Loan Document (a) if such action would, in the
opinion of Agent, be contrary to law or the terms of this Agreement or any
other Loan Document, (b) if such action would, in the opinion of Agent, expose
Agent to Environmental Liabilities or (c) if Agent shall not first be indemnified
to its satisfaction against any and all liability and expense which may be
incurred by it by reason of taking or continuing to take any such action.  Without limiting the foregoing, no Lender
shall have any right of action whatsoever against Agent as a result of Agent
acting or refraining from acting hereunder or under any other Loan Document in
accordance with the instructions of Requisite Lenders, Requisite Revolving
Lenders or all affected Lenders, as applicable.

 

9.3           Agent’s Reliance,
Etc.  Neither Agent nor
any of its Affiliates nor any of their respective directors, officers, agents
or employees shall be liable for any action taken or omitted to be taken by it
or them under or in connection with this Agreement or the other Loan Documents,
except for damages caused by its or their own gross negligence or willful
misconduct.  Without limiting the
generality of the foregoing, Agent: 
(a)  may treat the payee of any
Note as the holder thereof until Agent receives written notice of the
assignment or transfer thereof signed by such payee and in form reasonably
satisfactory to Agent; (b) may consult with legal counsel, independent public
accountants and other experts selected by it and shall not be liable for any
action taken or omitted to be taken by it in good faith in accordance with the
advice of such counsel, accountants or experts; (c) makes no warranty or
representation to any Lender and shall not be responsible to any Lender for any
statements, warranties or representations made in or in connection with this
Agreement or the other Loan Documents; (d) shall not have any duty to ascertain
or to inquire as to the performance or observance of any of the terms,
covenants or conditions of

 

29

 

this Agreement or the other Loan Documents on the part of any Credit
Party or to inspect the Collateral (including the books and records) of any
Credit Party; (e) shall not be responsible to any Lender for the due execution,
legality, validity, enforceability, genuineness, sufficiency or value of this
Agreement or the other Loan Documents or any other instrument or document
furnished pursuant hereto or thereto; and (f) shall incur no liability under or
in respect of this Agreement or the other Loan Documents by acting upon any
notice, consent, certificate or other instrument or writing (which may be by
telecopy, telegram, cable or telex) believed by it to be genuine and signed or
sent by the proper party or parties.

 

9.4           Frost Bank
and Affiliates.  With
respect to its Commitments hereunder, Frost Bank shall have the same rights and
powers under this Agreement and the other Loan Documents as any other Lender
and may exercise the same as though it were not Agent; and the term “Lender” or
“Lenders” shall, unless otherwise expressly indicated, include Frost Bank in
its individual capacity.  Frost Bank and
its Affiliates may lend money to, invest in, and generally engage in any kind
of business with, any Credit Party, any of their Affiliates and any Person who
may do business with or own securities of any Credit Party or any such
Affiliate, all as if Frost Bank were not Agent and without any duty to account
therefor to Lenders.  Frost Bank and its
Affiliates may accept fees and other consideration from any Credit Party for
services in connection with this Agreement or otherwise without having to
account for the same to Lenders.

 

9.5           Lender
Credit Decision.  Each Lender
acknowledges that it has, independently and without reliance upon Agent or any
other Lender and based on the Financial Statements referred to in Section
3.4(a) and such other documents and information as it has deemed
appropriate, made its own credit and financial analysis of the Credit Parties
and its own decision to enter into this Agreement.  Each Lender also acknowledges that it will,
independently and without reliance upon Agent or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under this
Agreement.  Each Lender acknowledges the
potential conflict of interest of each other Lender as a result of Lenders
holding disproportionate interests in the Loans, and expressly consents to, and
waives any claim based upon, such conflict of interest.

 

9.6           Indemnification.  Lenders agree to indemnify Agent (to the
extent not reimbursed by Credit Parties and without limiting the obligations of
Borrower hereunder), ratably according to their respective Pro Rata Shares,
from and against any and all liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind or nature whatsoever that may be imposed on, incurred by, or asserted
against Agent in any way relating to or arising out of this Agreement or any
other Loan Document or any action taken or omitted to be taken by Agent in
connection therewith; provided, that no Lender shall be liable for any
portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from Agent’s gross
negligence or willful misconduct. 
Without limiting the foregoing, each Lender agrees to reimburse Agent
promptly upon demand for its ratable share of any out-of-pocket expenses
(including reasonable counsel fees) incurred by Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement
and each other Loan Document, to the extent that Agent is not reimbursed for
such expenses by Credit Parties.

 

9.7           Successor
Agent.  Agent may resign at any
time by giving not less than 30 days’ prior written notice thereof to Lenders
and Borrower.  Upon any such resignation,
the Requisite Lenders shall have the right to appoint a successor Agent.  If no successor Agent shall have been so appointed
by the Requisite Lenders and shall have accepted such appointment within 30
days after the resigning Agent’s giving notice of resignation, then the
resigning Agent may, on behalf of Lenders, appoint a successor Agent, which
shall be a Lender, if a Lender is willing to accept such appointment, or
otherwise shall be a commercial bank or financial institution or a subsidiary
of a commercial bank or financial institution if such commercial bank or
financial institution is organized under the laws of the United States of
America or of any State thereof and has a combined capital and surplus of at
least $300,000,000.  If no successor
Agent has been appointed pursuant to the foregoing, within 30 days after the
date such notice of resignation was given by the resigning Agent, such
resignation shall become effective and the Requisite Lenders shall thereafter
perform all the duties of Agent hereunder until such time, if any, as the
Requisite Lenders appoint a successor Agent as provided above. Any successor
Agent appointed by Requisite Lenders hereunder shall be subject to the approval
of Borrower, such approval not to be unreasonably withheld or delayed; provided
that such approval shall not be required if a Default or an Event of Default
has occurred and is continuing.

 

30

 

  Upon the
acceptance of any appointment as Agent hereunder by a successor Agent, such
successor Agent shall succeed to and become vested with all the rights, powers,
privileges and duties of the resigning Agent. 
Upon the earlier of the acceptance of any appointment as Agent hereunder
by a successor Agent or the effective date of the resigning Agent’s
resignation, the resigning Agent shall be discharged from its duties and
obligations under this Agreement and the other Loan Documents, except that any
indemnity rights or other rights in favor of such resigning Agent shall
continue.  After any resigning Agent’s
resignation hereunder, the provisions of this Section 9.7 shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
acting as Agent under this Agreement and the other Loan Documents.

 

9.8           Setoff
and Sharing of Payments.  In
addition to any rights now or hereafter granted under applicable law and not by
way of limitation of any such rights, upon the occurrence and during the
continuance of any Event of Default and subject to Section 9.9(g), each
Lender is hereby authorized at any time or from time to time, without notice to
any Credit Party or to any other Person, any such notice being hereby expressly
waived, to offset and to appropriate and to apply any and all balances held by
it at any of its offices for the account of Borrower or any Guarantor
(regardless of whether such balances are then due to Borrower or any Guarantor)
and any other properties or assets at any time held or owing by that Lender or
that holder to or for the credit or for the account of Borrower or any
Guarantor against and on account of any of the Obligations that are not paid
when due.  Any Lender exercising a right
of setoff or otherwise receiving any payment on account of the Obligations in
excess of its Pro Rata Share thereof shall purchase for cash (and the other
Lenders or holders shall sell) such participations in each such other Lender’s
or holder’s Pro Rata Share of the Obligations as would be necessary to cause
such Lender to share the amount so offset or otherwise received with each other
Lender or holder in accordance with their respective Pro Rata Shares, (other
than offset rights exercised by any Lender with respect to Sections 1.13,
1.15 or 1.16).  Borrower and each
Guarantor agrees, to the fullest extent permitted by law, that (a) any Lender
may exercise its right to offset with respect to amounts in excess of its Pro
Rata Share of the Obligations and may sell participations in such amounts so
offset to other Lenders and holders and (b) any Lender so purchasing a
participation in the Loans made or other Obligations held by other Lenders or
holders may exercise all rights of offset, bankers’ lien, counterclaim or
similar rights with respect to such participation as fully as if such Lender or
holder were a direct holder of the Loans and the other Obligations in the
amount of such participation. 
Notwithstanding the foregoing, if all or any portion of the offset
amount or payment otherwise received is thereafter recovered from the Lender
that has exercised the right of offset, the purchase of participations by that
Lender shall be rescinded and the purchase price restored without interest.

 

9.9           Advances;
Payments; Non-Funding Lenders;
Information; Actions in Concert.

 

(a)           Advances; Payments.

 

(i)            Agent shall notify Revolving
Lenders, promptly after receipt of a Notice of Revolving Advance and in any
event prior to 1:00 p.m. (San Antonio time) on the date such Notice of
Revolving Advance is received, by telecopy, telephone or other similar form of
transmission.  Each Revolving Lender
shall make the amount of such Lender’s Pro Rata Share of such Revolving Credit
Advance available to Agent in same day funds by wire transfer to Agent’s
account as set forth in Annex G not later than 3:00 p.m. (San Antonio
time) on the requested funding date. 
After receipt of such wire transfers (or, in the Agent’s sole
discretion, before receipt of such wire transfers), subject to the terms
hereof, Agent shall make the requested Revolving Credit Advance to
Borrower.  All payments by each Revolving
Lender shall be made without setoff, counterclaim or deduction of any kind.

 

(ii)           Agent shall notify Acquisition
Lenders, promptly after receipt of a Notice of Acquisition Advance and in any
event prior to 1:00 p.m. (San Antonio time) on the date such Notice of
Acquisition Advance is received, by telecopy, telephone or other similar form
of transmission.  Each Acquisition Lender
shall make the amount of such Lender’s Pro Rata Share of such Acquisition Loan available
to Agent in same day funds by wire transfer to Agent’s account as set forth in Annex
G not later than 3:00 p.m. (San Antonio time) on the requested funding
date.  After receipt of such wire
transfers (or, in the Agent’s sole discretion, before receipt of such wire
transfers), subject to the terms hereof, Agent shall make the requested
Acquisition Loan to Borrower.  All
payments by each Acquisition Lender shall be made without setoff, counterclaim
or deduction of any kind.

 

(iii)          On the 2nd Business Day of each
calendar week or more frequently at Agent’s election (each, a “Settlement
Date”), Agent shall advise each Lender by telephone, or telecopy of the
amount of such

 

31

 

Lender’s Pro Rata Share of principal,
interest and Fees paid for the benefit of Lenders with respect to each
applicable Loan.  Provided that each
Lender has funded all payments and Advances required to be made by it and
purchased all participations required to be purchased by it under this
Agreement and the other Loan Documents as of such Settlement Date, Agent shall
pay to each Lender such Lender’s Pro Rata Share of principal, interest and Fees
paid by Borrower since the previous Settlement Date  for the benefit of such Lender on the Loans
held by it.  To the extent that any
Lender (a “Non-Funding Lender”) has failed to fund all such payments and
Advances or failed to fund the purchase of all such participations, Agent shall
be entitled to set off the funding short-fall against that Non-Funding Lender’s
Pro Rata Share of all payments received from Borrower.  Such payments shall be made by wire transfer
to such Lender’s account (as specified by such Lender in Annex G or the
applicable Assignment and Assumption Agreement) not later than 1:00 p.m. (San
Antonio time) on the next Business Day following each Settlement Date.

 

(b)           Availability of Lender’s Pro Rata
Share.  Agent may assume that each
Revolving Lender will make its Pro Rata Share of each Revolving Credit Advance
available to Agent on each funding date. 
If such Pro Rata Share is not, in fact, paid to Agent by such Revolving
Lender when due, Agent will be entitled to recover such amount on demand from
such Revolving Lender without setoff, counterclaim or deduction of any
kind.  If any Revolving Lender fails to
pay the amount of its Pro Rata Share forthwith upon Agent’s demand, Agent shall
promptly notify Borrower and Borrower shall immediately repay such amount to
Agent.  Nothing in this Section 9.9(b)
or elsewhere in this Agreement or the other Loan Documents shall be deemed to
require Agent to advance funds on behalf of any Revolving Lender or to relieve
any Revolving Lender from its obligation to fulfill its Commitments hereunder
or to prejudice any rights that Borrower may have against any Revolving Lender
as a result of any default by such Revolving Lender hereunder.  To the extent that Agent advances funds to
Borrower on behalf of any Revolving Lender and is not reimbursed therefor on
the same Business Day as such Advance is made, Agent shall be entitled to
retain for its account all interest accrued on such Advance until reimbursed by
the applicable Revolving Lender.

 

(c)           Availability of Lender’s Pro Rata
Share.  Agent may assume that each
Acquisition Lender will make its Pro Rata Share of each Acquisition Loan
available to Agent on each funding date. 
If such Pro Rata Share is not, in fact, paid to Agent by such
Acquisition Lender when due, Agent will be entitled to recover such amount on
demand from such Acquisition Lender without setoff, counterclaim or deduction
of any kind.  If any Acquisition Lender
fails to pay the amount of its Pro Rata Share forthwith upon Agent’s demand,
Agent shall promptly notify Borrower and Borrower shall immediately repay such
amount to Agent.  Nothing in this Section 9.9(c)
or elsewhere in this Agreement or the other Loan Documents shall be deemed to
require Agent to advance funds on behalf of any Acquisition Lender or to
relieve any Acquisition Lender from its obligation to fulfill its Commitments
hereunder or to prejudice any rights that Borrower may have against any
Acquisition Lender as a result of any default by such Acquisition Lender
hereunder.  To the extent that Agent
advances funds to Borrower on behalf of any Acquisition Lender and is not
reimbursed therefor on the same Business Day as such Advance is made, Agent
shall be entitled to retain for its account all interest accrued on such
Advance until reimbursed by the applicable Acquisition Lender.

 

(d)           Return of Payments.

 

(i)            If Agent pays an amount to a Lender
under this Agreement in the belief or expectation that a related payment has
been or will be received by Agent from Borrower and such related payment is not
received by Agent, then Agent will be entitled to recover such amount from such
Lender on demand without setoff, counterclaim or deduction of any kind.

 

(ii)           If Agent determines at any time that
any amount received by Agent under this Agreement must be returned to Borrower
or paid to any other Person pursuant to any insolvency law or otherwise, then,
notwithstanding any other term or condition of this Agreement or any other Loan
Document, Agent will not be required to distribute any portion thereof to any
Lender.  In addition, each Lender will
repay to Agent on demand any portion of such amount that Agent has distributed
to such Lender, together with interest at such rate, if any, as Agent is
required to pay to Borrower or such other Person, without setoff, counterclaim
or deduction of any kind.

 

32

 

(e)           Non-Funding Lenders.  The failure of any Non-Funding Lender to make
any Revolving Credit Advance, Acquisition Loan or any payment required by it
hereunder shall not relieve any other Lender (each such other Revolving Lender
or Acquisition Lender, an “Other
Lender”) of its obligations to make such Advance or
purchase such participation on such date, but neither any Other Lender nor
Agent shall be responsible for the failure of any Non-Funding Lender to make an
Advance, purchase a participation or make any other payment required
hereunder.  Notwithstanding anything set
forth herein to the contrary, a Non-Funding Lender shall not have any voting or
consent rights under or with respect to any Loan Document or constitute a “Lender,”
“Revolving Lender” or “Acquisition Lender” (or be included in the
calculation of “Requisite Lenders”, “Requisite Revolving Lenders”,
“Requisite Acquisition Lenders” hereunder) for any voting or consent
rights under or with respect to any Loan Document.  At Borrower’s request, Agent or a Person
acceptable to Agent shall have the right with Agent’s consent and in Agent’s
sole discretion (but shall have no obligation) to purchase from any Non-Funding
Lender, and each Non-Funding Lender agrees that it shall, at Agent’s request,
sell and assign to Agent or such Person, all of the Commitments of that Non-Funding
Lender for an amount equal to the principal balance of all Loans held by such
Non-Funding Lender and all accrued interest and fees with respect thereto
through the date of sale, such purchase and sale to be consummated pursuant to
an executed Assignment and Assumption Agreement.

 

(f)            Dissemination of Information.  Agent shall use reasonable efforts to provide
Lenders with any notice of Default or Event of Default received by Agent from,
or delivered by Agent to, any Credit Party, with notice of any Event of Default
of which Agent has actually become aware and with notice of any action taken by
Agent following any Event of Default; provided, that Agent shall not be liable
to any Lender for any failure to do so, except to the extent that such failure
is attributable to Agent’s gross negligence or willful misconduct.  Lenders acknowledge that Borrower is required
to provide Financial Statements and Collateral Reports to Lenders in accordance
with Annexes D
and E
hereto and agree that Agent shall have no duty to provide the same to Lenders.

 

(g)           Actions in Concert.  Anything in this Agreement to the contrary
notwithstanding, each Lender hereby agrees with each other Lender that no
Lender shall take any action to protect or enforce its rights arising out of
this Agreement or the Notes Revolving Lenders and Requisite Acquisition Lenders,
it being the intent of Lenders that any such action to protect or enforce rights
under this Agreement and the Notes shall be taken in concert and at the
direction or with the consent of Agent, Requisite Revolving Lenders or
Requisite Acquisition Lenders.

 

10.  SUCCESSORS AND ASSIGNS

 

10.1         Successors and
Assigns.  This Agreement and the
other Loan Documents shall be binding on and shall inure to the benefit of each
Credit Party, Agent, Lenders and their respective successors and assigns
(including, in the case of any Credit Party, a debtor-in-possession on behalf
of such Credit Party), except as otherwise provided herein or therein.  No Credit Party may assign, transfer,
hypothecate or otherwise convey its rights, benefits, obligations or duties
hereunder or under any of the other Loan Documents without the prior express
written consent of Agent and Lenders. 
Any such purported assignment, transfer, hypothecation or other
conveyance by any Credit Party without the prior express written consent of
Agent and Lenders shall be void.  The
terms and provisions of this Agreement are for the purpose of defining the
relative rights and obligations of each Credit Party, Agent and Lenders with
respect to the transactions contemplated hereby and no Person shall be a third
party beneficiary of any of the terms and provisions of this Agreement or any
of the other Loan Documents.

 

11.  MISCELLANEOUS

 

11.1         Complete
Agreement; Modification of Agreement.  The Loan Documents constitute the complete
agreement between the parties with respect to the subject matter thereof and
may not be modified, altered or amended except as set forth in Section 11.2.  Any letter of interest, commitment letter, or
fee letter (other than the Frost Bank Fee Letter) or confidentiality agreement,
if any, between any Credit Party and Agent or any Lender or

 

33

 

any of their respective
Affiliates, predating this Agreement and relating to a financing of
substantially similar form, purpose or effect shall be superseded by this
Agreement.

 

11.2         Amendments
and Waivers.

 

(a)           Except for actions expressly
permitted to be taken by Agent, no amendment, modification, termination or
waiver of any provision of this Agreement or any other Loan Document, or any
consent to any departure by any Credit Party therefrom, shall in any event be
effective unless the same shall be in writing and signed by Agent and Borrower,
and by Requisite Lenders, Requisite Revolving Lenders, Requisite Acquisition
Lenders or all affected Lenders, as applicable. 
Except as set forth in clauses (b) and (c)
below, all such amendments, modifications, terminations or waivers requiring
the consent of any Lenders shall require the written consent of Requisite
Lenders.

 

(b)           No amendment, modification,
termination or waiver of or consent with respect to any provision of this
Agreement that increases the percentage advance rates set forth in the
definition of the Borrowing Base, or that makes less restrictive the
nondiscretionary criteria for exclusion from Eligible Accounts set forth in Sections 1.6,
shall be effective unless the same shall be in writing and signed by Agent, Requisite
Revolving Lenders and Borrower.  No
amendment, modification, termination or waiver of or consent with respect to
any provision of this Agreement that waives compliance with the conditions
precedent set forth in Section
2.2 to the making of any Loan or the incurrence of any
Letter of Credit Obligations shall be effective unless the same shall be in
writing and signed by Agent, Requisite Revolving Lenders and Borrower.  Notwithstanding anything contained in this
Agreement to the contrary, no waiver or consent with respect to any Default or
any Event of Default shall be effective for purposes of the conditions
precedent to the making of Loans or the incurrence of Letter of Credit
Obligations set forth in Section
2.2 unless the same shall be in writing and signed by
Agent, Requisite Revolving Lenders and Borrower.

 

(c)           No amendment, modification,
termination or waiver shall, unless in writing and signed by Agent and each
Lender directly affected thereby:  (i)
increase the principal amount of any Lender’s Commitment (which action shall be
deemed to directly affect all Lenders); (ii) reduce the principal of, rate of
interest on or Fees payable with respect to any Loan or Letter of Credit
Obligations of any affected Lender; (iii) extend any scheduled payment date
(other than payment dates of mandatory prepayments under Section 1.3(b)(ii))
or final maturity date of the principal amount of any Loan of any affected
Lender; (iv) waive, forgive, defer, extend or postpone any payment of interest
or Fees as to any affected Lender; (v) release any Guaranty or, except as
otherwise permitted herein or in the other Loan Documents, release, or permit
any Credit Party to sell or otherwise dispose of, any Collateral with a value exceeding
$500,000 in the aggregate (which action shall be deemed to directly affect all
Lenders); (vi) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans that shall be required for Lenders or any
of them to take any action hereunder; and (vii) amend or waive this Section 11.2
or the definitions of the terms “Requisite Lenders”, “Requisite Revolving
Lenders”, “Requisite Acquisition Lenders” insofar as such definitions affect
the substance of this Section
11.2.  Furthermore,
no amendment, modification, termination or waiver affecting the rights or
duties of Agent or L/C Issuer under this Agreement or any other Loan Document
shall be effective unless in writing and signed by Agent or L/C Issuer, as the
case may be, in addition to Lenders required hereinabove to take such
action.  Each amendment, modification,
termination or waiver shall be effective only in the specific instance and for
the specific purpose for which it was given. 
No amendment, modification, termination or waiver shall be required for
Agent to take additional Collateral pursuant to any Loan Document. No
amendment, modification, termination or waiver of any provision of any Note
shall be effective without the written concurrence of the holder of that Note.  No notice to or demand on any Credit Party in
any case shall entitle such Credit Party or any other Credit Party to any other
or further notice or demand in similar or other circumstances.  Any amendment, modification, termination,
waiver or consent effected in accordance with this Section 11.2
shall be binding upon each holder of the Notes at the time outstanding and each
future holder of the Notes.

 

34

 

(d)           If, in connection with any proposed
amendment, modification, waiver or termination (a “Proposed Change”):

 

(i)            requiring the consent of all
affected Lenders, the consent of Requisite Lenders is obtained, but the consent
of other Lenders whose consent is required is not obtained (any such Lender
whose consent is not obtained as described in this clause (i) and in clauses
(ii), (iii) and (iv) below being referred to as a “Non-Consenting Lender”),

 

(ii)           requiring the consent of Requisite
Revolving Lenders, the consent of Revolving Lenders holding 51% or more of the
aggregate Revolving Loan Commitments is obtained, but the consent of Requisite
Revolving Lenders is not obtained,

 

(iii)          requiring the consent of Requisite
Acquisition Lenders, the consent of Acquisition Lenders holding 51% or more of
the aggregate Acquisition Loan Commitments is obtained, but the consent of
Requisite Acquisition Lenders is not obtained, or

 

(iv)          requiring the consent of Requisite
Lenders, the consent of Lenders holding 51% or more of the aggregate
Commitments is obtained, but the consent of Requisite Lenders is not obtained,

 

then, so long as Agent is
not a Non-Consenting Lender, at Borrower’s request Agent, or a Person
reasonably acceptable to Agent, shall have the right with Agent’s consent and
in Agent’s sole discretion (but shall have no obligation) to purchase from such
Non-Consenting Lenders, and such Non-Consenting Lenders agree that they shall,
upon Agent’s request, sell and assign to Agent or such Person, all of the
Commitments of such Non-Consenting Lenders for an amount equal to the principal
balance of all Loans held by the Non-Consenting Lenders and all accrued
interest and Fees with respect thereto through the date of sale, such purchase
and sale to be consummated pursuant to an executed Assignment and Assumption Agreement.

 

(e)           Upon payment in full in cash and
performance of all of the Obligations (other than indemnification Obligations),
termination of the Commitments and a release of all claims against Agent and
Lenders, and so long as no suits, actions proceedings, or claims are pending or
threatened against any Indemnified Person asserting any damages, losses or
liabilities that are Indemnified Liabilities, Agent shall deliver to Borrower
termination statements, mortgage releases and other documents necessary or appropriate
to evidence the termination of the Liens securing payment of the Obligations.

 

11.3         Fees and
Expenses.  Borrower shall
reimburse (i) Agent for all fees, costs and expenses (including the
reasonable fees and expenses of all of its counsel, advisors, consultants and
auditors) and (ii) Agent (and, with respect to clauses (c) and (d)
below, all Lenders) for all fees, costs and expenses, including the reasonable
fees, costs and expenses of counsel or other advisors (including environmental
and management consultants and appraisers) incurred in connection with the
negotiation and preparation of the Loan Documents and incurred in connection
with:

 

(a)           the forwarding to Borrower or any
other Person on behalf of Borrower by Agent of the proceeds of any Loan
(including a wire transfer fee of $25 per wire transfer);

 

(b)           any amendment, modification or waiver
of, or consent with respect to, or termination of, any of the Loan Documents or
Related Transactions Documents or advice in connection with the syndication and
administration of the Loans made pursuant hereto or its rights hereunder or
thereunder;

 

(c)           any litigation, contest, dispute,
suit, proceeding or action (whether instituted by Agent, any Lender, Borrower
or any other Person and whether as a party, witness or otherwise) in any way
relating to the Collateral, any of the Loan Documents or any other agreement to
be executed or delivered in connection herewith or therewith, including any
litigation, contest, dispute, suit, case, proceeding or action, and any appeal
or review thereof, in connection with a case commenced by or against Borrower
or any other Person that may be obligated to Agent by virtue of

 

35

 

the Loan Documents, including any
such litigation, contest, dispute, suit, proceeding or action arising in
connection with any work-out or restructuring of the Loans during the pendency
of one or more Events of Default; provided
that in the case of reimbursement of counsel for Lenders other than Agent, such
reimbursement shall be limited to one counsel for all such Lenders; provided,
further, that no Person shall be entitled to reimbursement under this clause
(c) in respect of any litigation, contest, dispute, suit, proceeding or action
to the extent any of the foregoing results from such Person’s gross negligence
or willful misconduct;

 

(d)           any attempt to enforce any remedies
of Agent or any Lender against any or all of the Credit Parties or any other
Person that may be obligated to Agent or any Lender by virtue of any of the
Loan Documents, including any such attempt to enforce any such remedies in the
course of any work-out or restructuring of the Loans during the pendency of one
or more Events of Default; provided,
that in the case of reimbursement of counsel for Lenders other than Agent, such
reimbursement shall be limited to one counsel for all such Lenders and shall be
only with respect to such enforcement during the pendency of one or more Events
of Default;

 

(e)           any workout or restructuring of the Loans
during the pendency of one or more Events of Default; and

 

(f)            efforts to (i) monitor the Loans or
any of the other Obligations, (ii) evaluate, observe or assess any of the
Credit Parties or their respective affairs, and (iii) verify, protect, evaluate,
assess, appraise, collect, sell, liquidate or otherwise dispose of any of the
Collateral;

 

including, as to each of clauses
(a) through (f) above, all reasonable attorneys’ and other professional and
service providers’ fees arising from such services and other advice, assistance
or other representation, including those in connection with any appellate
proceedings, and all expenses, costs, charges and other fees incurred by such
counsel and others in connection with or relating to any of the events or actions
described in this Section 11.3, all of which shall be payable, on
demand, by Borrower to Agent.  Without
limiting the generality of the foregoing, such expenses, costs, charges and
fees may include: fees, costs and expenses of accountants, environmental
advisors, appraisers, investment bankers, management and other consultants and
paralegals; court costs and expenses; photocopying and duplication expenses;
court reporter fees, costs and expenses; long distance telephone charges; air
express charges; telegram or telecopy charges; secretarial overtime charges;
and expenses for travel, lodging and food paid or incurred in connection with
the performance of such legal or other advisory services.

 

11.4         No Waiver.  Agent’s or any Lender’s failure, at any time
or times, to require strict performance by the Credit Parties of any provision
of this Agreement or any other Loan Document shall not waive, affect or
diminish any right of Agent or such Lender thereafter to demand strict
compliance and performance herewith or therewith.  Any suspension or waiver of an Event of
Default shall not suspend, waive or affect any other Event of Default whether
the same is prior or subsequent thereto and whether the same or of a different
type.  Subject to the provisions of Section
11.2, none of the undertakings, agreements, warranties, covenants and
representations of any Credit Party contained in this Agreement or any of the
other Loan Documents and no Default or Event of Default by any Credit Party
shall be deemed to have been suspended or waived by Agent or any Lender, unless
such waiver or suspension is by an instrument in writing signed by an officer
of or other authorized employee of Agent and the applicable required Lenders
and directed to Borrower specifying such suspension or waiver.

 

11.5         Remedies.  Agent’s and Lenders’ rights and remedies
under this Agreement shall be cumulative and nonexclusive of any other rights
and remedies that Agent or any Lender may have under any other agreement,
including the other Loan Documents, by operation of law or otherwise.  Recourse to the Collateral shall not be
required.

 

11.6         Severability.  Wherever possible, each provision of this
Agreement and the other Loan Documents shall be interpreted in such a manner as
to be effective and valid under applicable law, but if any provision of this
Agreement or any other Loan Document shall be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions of this Agreement or such other Loan Document.

 

36

 

11.7         Conflict of
Terms.  Except as otherwise
provided in this Agreement or any of the other Loan Documents by specific
reference to the applicable provisions of this Agreement, if any provision
contained in this Agreement conflicts with any provision in any of the other
Loan Documents, the provision contained in this Agreement shall govern and control.

 

11.8         Confidentiality.  Agent and each Lender agree to use
commercially reasonable efforts (equivalent to the efforts Agent or such Lender
applies to maintain the confidentiality of its own confidential information) to
maintain as confidential all confidential information provided to them by the
Credit Parties and designated as confidential, except that Agent and each
Lender may disclose such information (a) to Persons employed or engaged by
Agent or such Lender; (b) to any bona fide assignee or participant or potential
assignee or participant that has agreed to comply with the covenant contained
in this Section 11.8 (and any such bona fide assignee or participant or
potential assignee or participant may disclose such information to Persons
employed or engaged by them as described in clause (a) above); (c) as
required or requested by any Governmental Authority or reasonably believed by
Agent or such Lender to be compelled by any court decree, subpoena or legal or
administrative order or process; (d) as, on the advise of Agent’s or such
Lender’s counsel, is required by law; (e) in connection with the exercise of
any right or remedy under the Loan Documents or in connection with any
Litigation to which Agent or such Lender is a party; or (f) that  ceases to be confidential through no fault of
Agent or any Lender.

 

11.9         GOVERNING LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THE LOAN DOCUMENTS AND THE OBLIGATIONS
SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE
INTERNAL LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE AND PERFORMED
IN THAT STATE AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.  EACH CREDIT PARTY HEREBY CONSENTS AND AGREES
THAT THE STATE OR FEDERAL COURTS LOCATED IN BEXAR COUNTY, CITY OF SAN ANTONIO,
SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES
BETWEEN THE CREDIT PARTIES, AGENT AND LENDERS PERTAINING TO THIS AGREEMENT OR
ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS; PROVIDED, THAT AGENT,
LENDERS AND  THE CREDIT PARTIES
ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF BEXAR COUNTY AND; PROVIDED, FURTHER THAT
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM
BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE
ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF AGENT.  EACH CREDIT PARTY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND EACH CREDIT PARTY HEREBY WAIVES ANY OBJECTION THAT SUCH CREDIT
PARTY MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
NON  CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL
OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.  EACH CREDIT PARTY HEREBY WAIVES PERSONAL
SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION
OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER PROCESS
MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO SUCH CREDIT PARTY AT
THE ADDRESS SET FORTH IN ANNEX H OF THIS AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF SUCH CREDIT PARTY’S ACTUAL
RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER
POSTAGE PREPAID.

 

11.10       Notices.  Except as otherwise provided herein, whenever
it is provided herein that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties by any other parties, or whenever any of the parties desires to
give or serve upon any other parties any communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be deemed to have been
validly served, given or delivered (a) upon the earlier of actual receipt and 3
Business Days after deposit in the United States Mail, registered or certified

 

37

 

mail, return receipt requested, with proper postage prepaid, (b) upon
transmission, when sent by telecopy or other similar facsimile transmission
(with such telecopy or facsimile promptly confirmed by delivery of a copy by
personal delivery or United States Mail as otherwise provided in this Section
11.10); (c) 1 Business Day after deposit with a reputable overnight
courier with all charges prepaid or (d) when delivered, if hand-delivered by
messenger, all of which shall be addressed to the party to be notified and sent
to the address or facsimile number indicated in Annex H or to such other
address (or facsimile number) as may be substituted by notice given as herein
provided.  The giving of any notice
required hereunder may be waived in writing by the party entitled to receive
such notice.  Failure or delay in
delivering copies of any notice, demand, request, consent, approval,
declaration or other communication to any Person (other than Borrower or Agent)
designated in Annex H to receive copies shall in no way adversely affect
the effectiveness of such notice, demand, request, consent, approval,
declaration or other communication.

 

11.11       Section Titles.  The Section titles and Table of Contents
contained in this Agreement are and shall be without substantive meaning or
content of any kind whatsoever and are not a part of the agreement between the
parties hereto.

 

11.12       Counterparts.  This Agreement may be executed in any number
of separate counterparts, each of which shall collectively and separately
constitute one agreement.

 

11.13       WAIVER OF
JURY TRIAL.  BECAUSE DISPUTES ARISING IN CONNECTION WITH
COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN
EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL
LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE PARTIES DESIRE THAT THEIR
DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.  THEREFORE, TO ACHIEVE THE BEST COMBINATION OF
THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO
RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE, AMONG
AGENT, LENDERS AND ANY CREDIT PARTY ARISING OUT OF, CONNECTED WITH, RELATED TO,
OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH,
THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED
THERETO.

 

11.14       Intentionally Omitted.  .

 

11.15       Reinstatement.  This Agreement shall remain in full force and
effect and continue to be effective should any petition be filed by or against
Borrower for liquidation or reorganization, should Borrower become insolvent or
make an assignment for the benefit of any creditor or creditors or should a
receiver or trustee be appointed for all or any significant part of Borrower’s
assets, and shall continue to be effective or to be reinstated, as the case may
be, if at any time payment and performance of the Obligations, or any part
thereof, is, pursuant to applicable law, rescinded or reduced in amount, or
must otherwise be restored or returned by any obligee of the Obligations,
whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all
as though such payment or performance had not been made.  In the event that any payment, or any part
thereof, is rescinded, reduced, restored or returned, the Obligations shall be
reinstated and deemed reduced only by such amount paid and not so rescinded,
reduced, restored or returned.

 

11.16       Advice of
Counsel.  Each of the parties
represents to each other party hereto that it has discussed this Agreement and,
specifically, the provisions of Sections 11.9 and 11.13, with its
counsel.

 

11.17       No Strict
Construction.  The parties hereto
have participated jointly in the negotiation and drafting of this
Agreement.  In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the parties hereto and no presumption or burden of
proof shall arise favoring or disfavoring any party by virtue of the authorship
of any provisions of this Agreement.

 

11.18       USA PATRIOT
Act Notice.  Each Lender
that is subject to the Act (as hereinafter defined) and Agent (for itself and
not on behalf of any Lender) hereby notifies Borrower that pursuant to the
requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into
law October 26, 2001)) (the “Act”), it is required to obtain,

 

38

 

verify and record information that identifies Borrower, which
information includes the name and address of Borrower and other information
that will allow such Lender or Agent, as applicable, to identify Borrower in
accordance with the Act.

 

11.19       No Oral
Agreements.  The written Loan
Agreement together with the other Loan Documents represents the final agreement
between the parties and may not be contracted by evidence of prior,
contemporaneous or subsequent oral agreements of parties.  The are no unwritten oral agreements between
the parties.

 

NOTICE TO COMPLY
WITH STATE LAW

 

For the purpose of this Notice, the term “WRITTEN
AGREEMENT” shall include the document set forth above, together with each and
every other document relating to and/or securing the same loan transaction,
regardless of the date of execution.

 

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

 

THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

 

[Balance of Page Intentionally Left Blank]

 

[Signature(s) on Following Page(s)]

 

39

 

IN WITNESS WHEREOF, this Agreement has been duly
executed as of the date first written above.

 

	
   

  	
  BORROWER:

  	
   

  
	
   

  	
   

  
	
   

  	
  PIONEER DRILLING SERVICES, LTD.,
  a Texas limited

  partnership

  
	
   

  	
   

  
	
   

  	
  By:

  	
  PDC Mgmt. Co., a Texas
  corporation, General Partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Wm. Stacy Locke,
  President and Chief Executive

  Officer

  
	
   

  	
   

  
	
   

  	
  LENDERS:

  
	
   

  	
   

  
	
   

  	
  THE FROST NATIONAL BANK,  a national banking

  association, as Agent and Lender

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  ZIONS FIRST NATIONAL BANK,  a national banking

  association, as Lender

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  BANK OF SCOTLAND,  a Scottish banking corporation

  acting through its New York Branch, as Lender

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
								

 

Signature
Page

 

 

The following Persons are signatories to this
Agreement in their capacity as Credit Parties and Guarantors and not as
Borrowers.

 

	
   

  	
  HOLDING COMPANY:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PIONEER DRILLING COMPANY,
  a Texas corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Wm. Stacy Locke, President
  and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PDC MGMT. CO.,
  a Texas corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Wm. Stacy Locke,
  President and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  PDC INVESTMENT CORP.,
  a Delaware corporation

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Wm. Stacy Locke,
  President and Chief Executive Officer

  
				

 

 

ANNEX A

 

(Recitals)

 

to

 

CREDIT
AGREEMENT

 

DEFINITIONS

 

Capitalized terms used in the Loan Documents shall
have (unless otherwise provided elsewhere in the Loan Documents) the following
respective meanings and all references to Sections, Exhibits, Schedules or
Annexes in the following definitions shall refer to Sections, Exhibits,
Schedules or Annexes of or to the Agreement:

 

“Account Debtor” means any Person who may
become obligated to any Credit Party under, with respect to, or on account of,
an Account, Chattel Paper or General Intangibles (including a payment
intangible).

 

“Accounts” means all “accounts,” as such term
is defined in the Code, now owned or hereafter acquired by any Credit Party,
including (a) all accounts receivable, other receivables, book debts and other
forms of obligations (other than forms of obligations evidenced by Chattel
Paper or Instruments), (including any such obligations that may be
characterized as an account or contract right under the Code), (b) all of each
Credit Party’s rights in, to and under all purchase orders or receipts for
goods or services, (c) all of each Credit Party’s rights to any goods
represented by any of the foregoing (including unpaid sellers’ rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods), (d) all rights to payment due to any
Credit Party for property sold, leased, licensed, assigned or otherwise
disposed of, under a policy of insurance issued or to be issued, for a
secondary obligation incurred or to be incurred, for energy provided or to be
provided, for the use or hire of a vessel under a charter or other contract,
arising out of the use of a credit card or charge card, or for services
rendered or to be rendered by such Credit Party or in connection with any other
transaction (whether or not yet earned by performance on the part of such
Credit Party), (e) all healthcare insurance receivables, and (f) all collateral
security of any kind, now or hereafter in existence, given by any Account
Debtor or other Person with respect to any of the foregoing.

 

“Advance” means any Revolving Credit Advance or
Acquisition Loan, as the context may require.

 

“Acquisition Commitment Termination Date” means
the earliest of (a) October 29, 2006, (b) the date of termination of Lenders’
obligations to make Acquisition Loans or permit existing Loans to remain
outstanding pursuant to Section 8.2(b), and (c) the date of indefeasible
prepayment in full by Borrower of the Loans and Borrower’s termination of the
Acquisition Facility Commitment pursuant to Section 1.3(a).

 

“Acquisition Facility Commitment” means (a) as
to any Acquisition Lender, the commitment of such Lender to make its Pro Rata
Share of the Acquisition Loans as set forth on Annex I to the
Agreement or in the most recent Assignment and Assumption Agreement executed by
such Lender, and (b) as to all Lenders with an Acquisition Facility Commitment,
the aggregate commitment of all Lenders to make the Acquisition Loans, which
aggregate commitment shall be Forty Million and No/100 Dollars ($40,000,000) on
the Closing Date, as such amount may be adjusted, if at all, from time to time
in accordance with the Agreement.

 

“Acquisition Facility Maximum Amount” means, as
of any date of determination, an amount equal to the Acquisition Facility
Commitment of all Lenders as of that date.

 

“Acquisition Lenders” means those Lenders
having Acquisition Facility Commitments.

 

“Acquisition Loan” has the meaning assigned to
it in Section 1.1(b)(i).

 

“Acquisition Note” has the meaning assigned to
it in Section 1.1(b)(i).

 

“Acquisition” means the acquisition by Borrower
of a Drilling Rig or Drilling Rigs.

 

A-1

 

“Affiliate” means, with respect to any Person,
(a) each Person that, directly or indirectly, owns or controls, whether
beneficially, or as a trustee, guardian or other fiduciary, 33% or more of the
Stock having ordinary voting power in the election of directors of such Person,
(b) each Person that controls, is controlled by or is under common control with
such Person, and (c) each of such Person’s officers, directors, joint venturers
and partners.  For the purposes of this
definition, “control” of a Person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management or
policies, whether through the ownership of voting securities, by contract or
otherwise; provided, however, that the term “Affiliate”
shall specifically exclude Agent and each Lender.

 

“Agent” means Frost Bank in its capacity as
Agent for Lenders or its successor appointed pursuant to Section 9.7.

 

“Agreement” means the Credit Agreement by and
among Borrower, the other Credit Parties party thereto, Frost Bank, as Agent
and Lender and the other Lenders from time to time party thereto, as the same
may be amended, supplemented, restated or otherwise modified from time to time.

 

“Appendices” has the meaning ascribed to it in
the recitals to the Agreement.

 

“Assignment and Assumption Agreement” has the
meaning ascribed to it in Section 9.1(a).

 

“Authorized Person” means either the Chief
Executive Officer or Chief Financial Officer of Borrower.

 

“Bankruptcy Code” means the provisions of Title
11 of the United States Code, 11 U.S.C. §§ 101 et seq.

 

“Borrower” has the meaning ascribed thereto in
the preamble to the Agreement.

 

“Borrowing Base” means, as of any date of
determination by Agent, from time to time, an amount equal to the sum at such
time of seventy-five percent (75%)  of the book value
of Borrower’s Eligible Accounts at such time, less any Reserves established by
Agent at such time.

 

“Borrowing Base Certificate” means a
certificate to be executed and delivered from time to time by Borrower in the
form attached to the Agreement as Exhibit 4.1(b).

 

“Business Day” means any day that is not a
Saturday, a Sunday or a day on which banks are required or permitted to be
closed in the State of Texas.

 

“Capital Lease” means, with respect to any
Person, any lease of any property (whether real, personal or mixed) by such
Person as lessee that, in accordance with GAAP, would be required to be
classified and accounted for as a capital lease on a balance sheet of such
Person.

 

“Capital Lease Obligation” means, with respect
to any Capital Lease of any Person, the amount of the obligation of the lessee
thereunder that, in accordance with GAAP, would appear on a balance sheet of
such lessee in respect of such Capital Lease.

 

“Cash Collateral Account” has the meaning
ascribed to it Annex B.

 

“Cash Equivalents” has the meaning ascribed to
it in Annex B.

 

“Cash Management Systems” has the meaning
ascribed to it in Section 1.7.

 

“Change of Control” means any event,
transaction or occurrence as a result of which (a) Holding Company ceases to
own and control all of the economic and voting rights associated with all of
the outstanding capital Stock of Borrower or (b) Borrower ceases to own and
control all of the economic and voting rights associated with all of the
outstanding capital Stock of any of its Subsidiaries, or (c) an event,
transaction or occurrence that results in a change in the ownership of at least
forty percent (40%) of all classes of the outstanding capital Stock of Holding
Company on a fully diluted basis.

 

A-2

 

“Charges” means all federal, state, county,
city, municipal, local, foreign or other governmental taxes (including taxes
owed to the PBGC at the time due and payable), levies, assessments, charges,
liens, claims or encumbrances upon or relating to (a) the Collateral, (b) the
Obligations, (c) the employees, payroll, income or gross receipts of any Credit
Party, (d) any Credit Party’s ownership or use of any properties or other
assets, or (e) any other aspect of any Credit Party’s business.

 

“Chattel Paper” means any “chattel paper,” as
such term is defined in the Code, including electronic chattel paper, now owned
or hereafter acquired by any Credit Party, wherever located.

 

“Closing Date” means October 29, 2004.

 

“Closing Checklist” means the schedule,
including all appendices, exhibits or schedules thereto, listing certain
documents and information to be delivered in connection with the Agreement, the
other Loan Documents and the transactions contemplated thereunder,
substantially in the form attached hereto as Annex C.

 

“Code” means the Uniform Commercial Code as the
same may, from time to time, be enacted and in effect in the State of Texas; provided,
that to the extent that the Code is used to define any term herein or in any
Loan Document and such term is defined differently in different Articles or
Divisions of the Code, the definition of such term contained in Article or
Division 9 shall govern; provided further, that in the event that, by
reason of mandatory provisions of law, any or all of the attachment, perfection
or priority of, or remedies with respect to, Agent’s or any Lender’s Lien on
any Collateral is governed by the Uniform Commercial Code as enacted and in
effect in a jurisdiction other than the State of Texas, the term “Code”
shall mean the Uniform Commercial Code as enacted and in effect in such other
jurisdiction solely for purposes of the provisions thereof relating to such
attachment, perfection, priority or remedies and for purposes of definitions
related to such provisions.

 

“Collateral” means the property covered by the
Security Agreement, and the other Collateral Documents and any other property,
real or personal, tangible or intangible, now existing or hereafter acquired,
that may at any time be or become subject to a security interest or Lien in
favor of Agent, on behalf of itself and Lenders, to secure the Obligations.

 

“Collateral Documents” means the Security
Agreement, the Guaranties, and all similar agreements entered into guaranteeing
payment of, or granting a Lien upon property as security for payment of, the
Obligations.

 

“Collateral Reports” means the reports with
respect to the Collateral referred to in Annex E.

 

“Commitments” means (a) as to any Lender, the
aggregate of such Lender’s Revolving Loan Commitment and Acquisition Facility Commitment
as set forth on Annex I to the Agreement or in the most recent
Assignment and Assumption Agreement executed by such Lender and (b) as to all
Lenders, the aggregate of all Lenders’ Revolving Loan Commitments and Acquisition
Facility Commitments, which aggregate commitment shall be Forty-Seven Million
and No/100 Dollars ($47,000,000) on the Closing Date, as to each of clauses
(a) and (b), as such Commitments may be reduced, amortized or adjusted from
time to time in accordance with the Agreement.

 

“Compliance Certificate” has the meaning
ascribed to it in Annex D.

 

“Contracts” means all “contracts,” as such term
is defined in the Code, now owned or hereafter acquired by any Credit Party, in
any event, including all contracts, undertakings, or agreements (other than
rights evidenced by Chattel Paper, Documents or Instruments) in or under which
any Credit Party may now or hereafter have any right, title or interest,
including any agreement relating to the terms of payment or the terms of
performance of any Account.

 

“Copyright License” means any and all rights
now owned or hereafter acquired by any Credit Party under any written agreement
granting any right to use any Copyright or Copyright registration.

 

“Copyrights” means all of the following now
owned or hereafter adopted or acquired by any Credit Party: (a) all copyrights
and General Intangibles of like nature (whether registered or unregistered),
all registrations and

 

A-3

 

recordings thereof, and all applications in connection
therewith, including all registrations, recordings and applications in the
United States Copyright Office or in any similar office or agency of the United
States, any state or territory thereof, or any other country or any political
subdivision thereof, and (b) all reissues, extensions or renewals thereof.

 

“Credit Parties” means Holding Company and
Borrower.

 

“Debt/Capitalization Ratio” means with respect
to any Person, on a consolidated basis, the ratio of (a) Funded Debt, to (b)
the sum of Funded Debt plus Tangible Net Worth.

 

“Default” means any event that, with the
passage of time or notice or both, would, unless cured or waived, become an
Event of Default.

 

“Default Rate” has the meaning ascribed to it in
Section 1.5(d).

 

“Deposit Accounts” means all “deposit accounts”
as such term in defined in the Code, now or hereafter held in the name of any
Credit Party.

 

“Disclosure Schedules” means the Schedules
prepared by Borrower and denominated as Disclosure Schedules (3.1) through
(6.7) in the Index to the Agreement.

 

“Documents” means any “documents,” as such term
is defined in the Code, now owned or hereafter acquired by any Credit Party,
wherever located.

 

“Dollars” or “$” means lawful currency
of the United States of America.

 

“Drilling Rigs” has the meaning ascribed
thereto in the Recitals.

 

“EBITDA” means, with respect to any Person for
any fiscal period, without duplication, an amount equal to (a) consolidated net
income of such Person for such period, determined in accordance with GAAP, minus
(b) the sum during such period of (i) income tax credits, (ii) interest income,
(iii) gain from extraordinary items for such period, (iv) any aggregate net
gain (but not any aggregate net loss) during such period arising from the sale,
exchange or other disposition of capital assets by such Person (including any
fixed assets, whether tangible or intangible, all inventory sold in conjunction
with the disposition of fixed assets and all securities), and (v) any other non-cash
gains that have been added in determining consolidated net income, in each case
to the extent included in the calculation of consolidated net income of such
Person for such period in accordance with GAAP, but without duplication, plus
(c) the sum during such period of (i) any provision for income taxes, (ii)
Interest Expense, (iii) loss from extraordinary items for such period, (iv) the
amount of non-cash charges (including depreciation and amortization) for such
period, (v) amortized debt discount for such period, and (vi) the amount of any
deduction to consolidated net income as the result of any grant to any members
of the management of such Person of any Stock, in each case to the extent
included in the calculation of consolidated net income of such Person for such
period in accordance with GAAP, but without duplication.  For purposes of this definition, the
following items shall be excluded in determining consolidated net income of a
Person: (1) the income (or deficit) of any other Person accrued prior to the
date it became a Subsidiary of, or was merged or consolidated into, such Person
or any of such Person’s Subsidiaries; (2) the income (or deficit) of any other
Person (other than a Subsidiary) in which such Person has an ownership
interest, except to the extent any such income has actually been received by
such Person in the form of cash dividends or distributions; (3) the
undistributed earnings of any Subsidiary of such Person to the extent that the
declaration or payment of dividends or similar distributions by such Subsidiary
is not at the time permitted by the terms of any contractual obligation or
requirement of law applicable to such Subsidiary; (4) any restoration to income
of any contingency reserve, except to the extent that provision for such
reserve was made out of income accrued during such period; (5) any write-up of
any asset; (6) any net gain from the collection of the proceeds of life
insurance policies; (7) any net gain arising from the acquisition of any
securities, or the extinguishment, under GAAP, of any Indebtedness, of such
Person, (8) in the case of a successor to such Person by consolidation or
merger or as a transferee of its assets, any earnings of such successor prior
to such consolidation, merger or transfer of

 

A-4

 

assets, and (9) any deferred credit representing the
excess of equity in any Subsidiary of such Person at the date of acquisition of
such Subsidiary over the cost to such Person of the investment in such Subsidiary.

 

“Eligible Accounts” has the meaning ascribed to
it in Section 1.6 of the Agreement.

 

“Environmental Laws” means all applicable
federal, state, local and foreign laws, statutes, ordinances, codes, rules,
standards and regulations, now or hereafter in effect, and any applicable
judicial or administrative interpretation thereof, including any applicable
judicial or administrative order, consent decree, order or judgment, imposing
liability or standards of conduct for or relating to the regulation and protection
of human health, safety, the environment and natural resources (including
ambient air, surface water, groundwater, wetlands, land surface or subsurface
strata, wildlife, aquatic species and vegetation).  Environmental Laws include the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. §§
9601 et seq.) (“CERCLA”); the Hazardous Materials Transportation
Authorization Act of 1994 (49 U.S.C. §§ 5101 et seq.); the Federal
Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. §§ 136 et seq.);
the Solid Waste Disposal Act (42 U.S.C. §§ 6901 et seq.); the Toxic
Substance Control Act (15 U.S.C. §§ 2601 et seq.); the Clean Air Act (42
U.S.C. §§ 7401 et seq.); the Federal Water Pollution Control Act (33
U.S.C. §§ 1251 et seq.); the Occupational Safety and Health Act (29
U.S.C. §§ 651 et seq.); and the Safe Drinking Water Act (42 U.S.C.
§§ 300(f) et seq.), and any and all regulations promulgated
thereunder, and all analogous state, local and foreign counterparts or equivalents
and any transfer of ownership notification or approval statutes.

 

“Environmental Liabilities” means, with respect
to any Person, all liabilities, obligations, responsibilities, response,
remedial and removal costs, investigation and feasibility study costs, capital
costs, operation and maintenance costs, losses, damages, punitive damages,
property damages, natural resource damages, consequential damages, treble
damages, costs and expenses (including all reasonable fees, disbursements and
expenses of counsel, experts and consultants), fines, penalties, sanctions and
interest incurred as a result of or related to any claim, suit, action,
investigation, proceeding or demand by any Person, whether based in contract,
tort, implied or express warranty, strict liability, criminal or civil statute
or common law, including any arising under or related to any Environmental
Laws, Environmental Permits, or in connection with any Release or threatened
Release or presence of a Hazardous Material whether on, at, in, under, from or
about or in the vicinity of any real or personal property.

 

“Environmental Permits” means all permits,
licenses, authorizations, certificates, approvals or registrations required by
any Governmental Authority under any Environmental Laws.

 

“Equipment” means all “equipment,” as such term
is defined in the Code, now owned or hereafter acquired by any Credit Party,
wherever located and, in any event, including all such Credit Party’s machinery
and equipment, including processing equipment, conveyors, machine tools, data
processing and computer equipment, including embedded software and peripheral
equipment and all engineering, processing and manufacturing equipment, office
machinery, furniture, materials handling equipment, tools, attachments, accessories,
automotive equipment, trailers, trucks, forklifts, molds, dies, stamps, motor
vehicles, rolling stock and other equipment of every kind and nature, trade
fixtures and fixtures not forming a part of real property, together with all
additions and accessions thereto, replacements therefor, all parts therefor,
all substitutes for any of the foregoing, fuel therefor, and all manuals,
drawings, instructions, warranties and rights with respect thereto, and all
products and proceeds thereof and condemnation awards and insurance proceeds
with respect thereto.

 

“ERISA” means the Employee Retirement Income
Security Act of 1974, as amended from time to time, and any regulations
promulgated thereunder.

 

“ERISA Affiliate” means, with respect to any
Credit Party, any trade or business (whether or not incorporated) that,
together with such Credit Party, are treated as a single employer within the
meaning of Sections 414(b), (c), (m) or (o) of the IRC.

 

“ERISA Event” means, with respect to any Credit
Party or any ERISA Affiliate, (a) any event described in Section 4043(c) of
ERISA with respect to a Title IV Plan; (b) the withdrawal of any Credit Party
or ERISA Affiliate from a Title IV Plan subject to Section 4063 of ERISA during
a plan year in which it was a substantial employer, as defined in Section
4001(a)(2) of ERISA; (c) the complete or partial withdrawal of any Credit Party
or any ERISA Affiliate from any Multiemployer Plan; (d) the filing of a notice
of intent to terminate a Title IV Plan or the

 

A-5

 

treatment of a plan amendment as a termination under
Section 4041 of ERISA; (e) the institution of proceedings to terminate a Title
IV Plan or Multiemployer Plan by the PBGC; (f) the failure by any Credit Party
or ERISA Affiliate to make when due required contributions to a Multiemployer
Plan or Title IV Plan unless such failure is cured within 30 days; (g) any
other event or condition that might reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Title IV Plan or Multiemployer Plan or for the
imposition of liability under Section 4069 or 4212(c) of ERISA; (h) the
termination of a Multiemployer Plan under Section 4041A of ERISA or the
reorganization or insolvency of a Multiemployer Plan under Section 4241 or 4245
of ERISA; or (i) the loss of a Qualified Plan’s qualification or tax
exempt status; or (j) the termination of a Plan described in Section 4064 of
ERISA.

 

“ESOP” means a Plan that is intended to satisfy
the requirements of Section 4975(e)(7) of the IRC.

 

“Event of Default” has the meaning ascribed to
it in Section 8.1.

 

“Fair Labor Standards Act” means the Fair Labor
Standards Act, 29 U.S.C. §201 et seq.

 

“Federal Funds Rate” means, for any day, a
floating rate equal to the weighted average of the rates on overnight federal
funds transactions among members of the Federal Reserve System, as determined
by Agent in its sole discretion, which determination shall be final, binding
and conclusive (absent manifest error).

 

“Federal Reserve Board” means the Board of
Governors of the Federal Reserve System.

 

“Fees” means any and all fees payable to Agent
or any Lender pursuant to the Agreement or any of the other Loan Documents.

 

“Financial Covenants” means the financial
covenants set forth in Annex F.

 

“Financial Statements” means the consolidated
income statements, statements of cash flows and balance sheets of Borrower
delivered in accordance with Section 3.4 and Annex D.

 

“Fiscal Month” means any of the monthly
accounting periods of Borrower.

 

“Fiscal Quarter” means any of the quarterly
accounting periods of Borrower, ending on June 30, September 30, December 31
and March 31 of each year.

 

“Fiscal Year” means any of the annual accounting
periods of Borrower ending on March 31 of each year.

 

“Fixed Charges” means, with respect to any
Person for any fiscal period, (a) the aggregate of all Interest Expense paid or
accrued during such period, without duplication, plus (b) scheduled payments of
principal with respect to Indebtedness during such period, plus (c) cash taxes
paid during such period.

 

“Fixed Charge Coverage Ratio” means, with
respect to any Person for any fiscal period, the ratio of (a) EBITDA less
Maintenance Capital Expenditures to (b) Fixed Charges.

 

“Fixtures” means all “fixtures” as such term is
defined in the Code, now owned or hereafter acquired by any Credit Party.

 

“Frost Bank” means The Frost National Bank, a
national banking association.

 

“Frost Bank Fee Letter” means that certain
letter, dated of even date herewith, between Frost Bank and Borrower with
respect to certain Fees to be paid from time to time by Borrower to Frost Bank.

 

“Funded Debt” means, with respect to any
Person, without duplication, all Indebtedness for borrowed money evidenced by
notes, bonds, debentures, or similar evidences of Indebtedness and that by its
terms matures more than one year from, or is directly or indirectly renewable
or extendible at such Person’s option under a

 

A-6

 

revolving credit or similar agreement obligating the
lender or lenders to extend credit over a period of more than one year from the
date of creation thereof, and specifically including Capital Lease Obligations,
current maturities of long-term debt, revolving credit and short-term debt
extendible beyond one year at the option of the debtor, and also including, in
the case of Borrower, the Obligations and, without duplication, Guaranteed
Indebtedness consisting of guaranties of Funded Debt of other Persons.

 

“GAAP” means generally accepted accounting
principles in the United States of America, consistently applied, as such term
is further defined in Annex F to the Agreement.

 

“General Intangibles” means “general intangibles,”
as such term is defined in the Code, now owned or hereafter acquired by any
Credit Party, including all right, title and interest that such Credit Party
may now or hereafter have in or under any Contract, all payment intangibles,
customer lists, Licenses, Copyrights, Trademarks, Patents, and all applications
therefor and reissues, extensions or renewals thereof, rights in Intellectual
Property, interests in partnerships, joint ventures and other business
associations, licenses, permits, copyrights, trade secrets, proprietary or
confidential information, inventions (whether or not patented or patentable),
technical information, procedures, designs, knowledge, know-how, software, data
bases, data, skill, expertise, experience, processes, models, drawings,
materials and records, goodwill (including the goodwill associated with any
Trademark or Trademark License), all rights and claims in or under insurance
policies (including insurance for fire, damage, loss and casualty, whether
covering personal property, real property, tangible rights or intangible
rights, all liability, life, key man and business interruption insurance, and
all unearned premiums), uncertificated securities, chooses in action, deposit,
checking and other bank accounts, rights to receive tax refunds and other
payments, rights to receive dividends, distributions, cash, Instruments and
other property in respect of or in exchange for pledged Stock and Investment
Property, rights of indemnification, all books and records, correspondence,
credit files, invoices and other papers, including without limitation all
tapes, cards, computer runs and other papers and documents in the possession or
under the control of such Credit Party or any computer bureau or service
company from time to time acting for such Credit Party.

 

“Goods” means any “goods” as defined in the
Code, now owned or hereafter acquired by any Credit Party, wherever located,
including embedded software to the extent included in “goods” as defined in the
Code, manufactured homes, standing timber that is cut and removed for sale and
unborn young of animals.

 

“Governmental Authority” means any nation or
government, any state or other political subdivision thereof, and any agency,
department or other entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government.

 

“Guaranteed Indebtedness” means, as to any
Person, any obligation of such Person guaranteeing or otherwise supporting any
Indebtedness, lease, dividend, or other obligation (“primary obligation”)
of any other Person (the “primary obligor”) in any manner, including any
obligation or arrangement of such Person to (a) purchase or repurchase any
such primary obligation, (b) advance or supply funds (i) for the purchase
or payment of any such primary obligation or (ii) to maintain working
capital or equity capital of the primary obligor or otherwise to maintain the
net worth or solvency or any balance sheet condition of the primary obligor,
(c) purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the primary
obligor to make payment of such primary obligation, (d) protect the beneficiary
of such arrangement from loss with respect to the primary obligation (other
than product warranties given in the ordinary course of business) or
(e) indemnify the owner of such primary obligation against loss in respect
thereof.  The amount of any Guaranteed
Indebtedness at any time shall be deemed to be an amount equal to the lesser at
such time of (x) the stated or determinable amount of the primary obligation in
respect of which such Guaranteed Indebtedness is incurred and (y) the maximum
amount for which such Person may be liable pursuant to the terms of the instrument
embodying such Guaranteed Indebtedness, or, if not stated or determinable, the
maximum reasonably anticipated liability (assuming full performance) in respect
thereof.

 

“Guaranties” means, collectively, the Holding
Company Guaranty, each Subsidiary Guaranty and any other guaranty executed by
any Guarantor in favor of Agent and Lenders in respect of the Obligations.

 

“Guarantors” means Holding Company, PDC Mgmt.
Co., a Texas corporation, PDC Investment Corp., a Delaware corporation, each
Subsidiary of Borrower and Holding Company, and each other Person, if any, that

 

A-7

 

executes a guaranty or other similar agreement in
favor of Agent, for itself and the ratable benefit of Lenders, in connection
with the transactions contemplated by the Agreement and the other Loan
Documents.

 

“Hazardous Material” means any substance,
material or waste that is regulated by, or forms the basis of liability now or
hereafter under, any Environmental Laws, including any material or substance
that is (a) defined as a “solid waste,” “hazardous waste,” “hazardous material,”
“hazardous substance,” “extremely hazardous waste,”  “restricted hazardous waste,” “pollutant,” “contaminant,”
“hazardous constituent,” “special waste,” “toxic substance” or other similar
term or phrase under any Environmental Laws, or (b) petroleum or any fraction
or by-product thereof, asbestos, polychlorinated biphenyls (PCB’s), or any
radioactive substance.

 

“Holding Company” has the meaning ascribed
thereto in the recitals to the Agreement.

 

“Holding Company Guaranty” means the guaranty
of even date herewith executed by Holding Company in favor of Agent and
Lenders.

 

“Indebtedness” means, with respect to any
Person, without duplication (a) all indebtedness of such Person for borrowed
money or for the deferred purchase price of property payment for which is
deferred 6 months or more, but excluding obligations to trade creditors
incurred in the ordinary course of business that are unsecured and not overdue
by more than 6 months unless being contested in good faith, (b) all
reimbursement and other obligations with respect to letters of credit, bankers’
acceptances and surety bonds, whether or not matured, (c) all obligations
evidenced by notes, bonds, debentures or similar instruments, (d) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), (e)
all Capital Lease Obligations and the present value (discounted at the Prime Rate
as in effect on the Closing Date) of future rental payments under all synthetic
leases, (f) all obligations of such Person under commodity purchase or option
agreements or other commodity price hedging arrangements, in each case whether
contingent or matured, (g) all obligations of such Person under any foreign
exchange contract, currency swap agreement, interest rate swap, cap or collar
agreement or other similar agreement or arrangement designed to alter the risks
of that Person arising from fluctuations in currency values or interest rates,
in each case whether contingent or matured, (h) all Indebtedness referred to
above secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien upon or in property
or other assets (including accounts and contract rights) owned by such Person,
even though such Person has not assumed or become liable for the payment of
such Indebtedness, (i) all indebtedness incurred to finance unpaid insurance
premiums, provided, however, that recourse with respect to such indebtedness is
limited to the insurance policies with respect to which premiums have been
financed, and (j) the Obligations.

 

“Indemnified Liabilities” has the meaning
ascribed to it in Section 1.12.

 

“Indemnified Person” has the meaning ascribed
to it in Section 1.12.

 

“Instruments” means all “instruments,” as such
term is defined in the Code, now owned or hereafter acquired by any Credit
Party, wherever located, and, in any event, including all certificated
securities, all certificates of deposit, and all promissory notes and other
evidences of indebtedness, other than instruments that constitute, or are a
part of a group of writings that constitute, Chattel Paper.

 

“Intellectual Property” means any and all
Licenses, Patents, Copyrights, Trademarks, and the goodwill associated with
such Trademarks.

 

“Intercompany Notes” has the meaning ascribed
to it in Section 6.3.

 

“Interest Expense” means, with respect to any
Person for any fiscal period, interest expense (whether cash or non-cash) of
such Person determined in accordance with GAAP for the relevant period ended on
such date, including interest expense with respect to any Funded Debt of such
Person and interest expense for the relevant period that has been capitalized
on the balance sheet of such Person.

 

A-8

 

“Interest Payment Date” means the first
Business Day of each month to occur while such Loan is outstanding; provided,
(x) the date upon which all of the Commitments have been terminated and the
Loans have been paid in full shall be deemed to be an “Interest Payment Date”
with respect to any interest that has then accrued under the Agreement, (y) the
Acquisition Commitment Termination Date shall be deemed to be an “Interest
Payment Date” with respect to Acquisition Loans and (z) the Revolving
Commitment Termination Date shall be deemed to be an “Interest Payment Date”
with respect to Revolving Loans.

 

“Inventory” means any “inventory,” as such term
is defined in the Code, now owned or hereafter acquired by any Credit Party,
wherever located, and in any event including inventory, merchandise, goods and
other personal property that are held by or on behalf of any Credit Party for
sale or lease or are furnished or are to be furnished under a contract of
service, or that constitute raw materials, work in process, finished goods,
returned goods, supplies or materials of any kind, nature or description used
or consumed or to be used or consumed in such Credit Party’s business or in the
processing, production, packaging, promotion, delivery or shipping of the same,
including all supplies and embedded software.

 

“Investment Property” means all “investment
property” as such term is defined in the Code now owned or hereafter acquired
by any Credit Party, wherever located, including (i) all securities, whether
certificated or uncertificated, including stocks, bonds, interests in limited
liability companies, partnership interests, treasuries, certificates of
deposit, and mutual fund shares; (ii) all securities entitlements of any Credit
Party,  including the rights of such
Credit Party to any securities account and the financial assets held by a
securities intermediary in such securities account and any free credit balance
or other money owing by any securities intermediary with respect to that
account; (iii) all securities accounts of any Credit Party; (iv) all commodity
contracts of any Credit Party; and (v) all commodity accounts held by any
Credit Party.

 

“IRC” means the Internal Revenue Code of 1986,
as amended, and all regulations promulgated thereunder.

 

“IRS” means the Internal Revenue Service.

 

“L/C Issuer” has the meaning ascribed to it in Annex
B.

 

“L/C Sublimit” has the meaning ascribed to in
it Annex B.

 

“Lenders” means Frost Bank, the other Lenders
named on the signature pages of the Agreement, and, if any such Lender shall
decide to assign all or any portion of the Obligations, such term shall include
any assignee of such Lender.

 

“Letter of Credit Fee” has the meaning ascribed
to it in Annex B.

 

“Letter of Credit Obligations” means all
outstanding obligations incurred by Agent and Lenders at the request of
Borrower, whether direct or indirect, contingent or otherwise, due or not due,
in connection with the issuance of Letters of Credit by Agent or another L/C
Issuer or the purchase of a participation as set forth in Annex B with
respect to any Letter of Credit.  The
amount of such Letter of Credit Obligations shall equal the maximum amount that
may be payable by Agent or Lenders thereupon or pursuant thereto.

 

“Letters of Credit” means documentary or
standby letters of credit issued for the account of Borrower by any L/C Issuer,
and bankers’ acceptances issued by Borrower, for which Agent and Lenders have
incurred Letter of Credit Obligations.

 

“Letter-of Credit Rights” means “letter-of-credit
rights” as such term is defined in the Code, now owned or hereafter acquired by
any Credit Party, including rights to payment or performance under a letter of
credit, whether or not such Credit Party, as beneficiary, has demanded or is
entitled to demand payment or performance.

 

“License” means any Copyright License, Patent
License, Trademark License or other license of rights or interests now held or
hereafter acquired by any Credit Party.

 

A-9

 

“Lien” means any mortgage or deed of trust,
pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim,
security interest, easement or encumbrance, or preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
(including any lease or title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security
interest under the Code or comparable law of any jurisdiction).

 

“Litigation” has the meaning ascribed to it in Section
3.13.

 

“Loan Account” has the meaning ascribed to it
in Section 1.11.

 

“Loan Documents” means the Agreement, the
Notes, the Collateral Documents,  and all
other agreements, instruments, documents and certificates identified in the
Closing Checklist executed and delivered to, or in favor of, Agent or any
Lenders and including all other pledges, powers of attorney, consents,
assignments, contracts, notices, and all other written matter whether
heretofore, now or hereafter executed by or on behalf of any Credit Party, or
any employee of any Credit Party, and delivered to Agent or any Lender in
connection with the Agreement or the transactions contemplated thereby.  Any reference in the Agreement or any other
Loan Document to a Loan Document shall include all appendices, exhibits or
schedules thereto, and all amendments, restatements, supplements or other
modifications thereto, and shall refer to the Agreement or such Loan Document
as the same may be in effect at any and all times such reference becomes
operative.

 

“Loans” means the Revolving Loan and the Acquisition
Loans.

 

“Maintenance Capital Expenditures” means, with
respect to any Person, all expenditures (by the expenditure of cash or the
incurrence of Indebtedness) by such Person, during any measuring period, necessary
to keep the Borrower’s fixed assets or improvements or replacements,
substitutions or additions thereto in their current operating condition.  For purposes of calculating the Financial
Covenants, such expenditures shall not be less than the greater of (a) actual
expenditures or (b) $350.00 per Drilling Rig per revenue day as referenced in
Borrower’s Financial Statements.

 

“Margin Stock” has the meaning ascribed to it
in Section 3.10.

 

“Material Adverse Effect” means a material
adverse effect on (a) the business, assets, operations, prospects or financial
or other condition of any Credit Party, (b) Borrower’s ability to pay any of
the Loans or any of the other Obligations in accordance with the terms of the
Agreement, (c) any Guarantor’s ability to honor its obligations under its
Guaranty, (d) the Collateral or Agent’s Liens, on behalf of itself and Lenders,
on the Collateral or the priority of such Liens, or (e) Agent’s or any Lender’s
rights and remedies under the Agreement and the other Loan Documents.  Without limiting the generality of the
foregoing, any event or occurrence adverse to one or more Credit Parties which
results or could reasonably be expected to result in costs and/or liabilities
in excess of $1,500,000 shall constitute a Material Adverse Effect.

 

“Multiemployer Plan” means a “multiemployer
plan” as defined in Section 4001(a)(3) of ERISA, and to which any Credit Party
or ERISA Affiliate is making, is obligated to make or has made or been
obligated to make, contributions on behalf of participants who are or were
employed by any of them.

 

“Net Worth” means, with respect to any Person
as of any date of determination, the book value of the assets of such Person, minus
the sum of (a) without duplication with respect to clause (b), reserves
applicable thereto, and (b) all of such Person’s liabilities on a
consolidated basis (including accrued and deferred income taxes), all as
determined in accordance with GAAP.

 

“Non-Funding Lender” has the meaning ascribed
to it in Section 9.9(a)(iii).

 

“Notes” means, collectively, the Revolving
Notes and the Acquisition Notes.

 

“Notice of Revolving Credit Advance” has the
meaning ascribed to it in Section 1.1(a)(i).

 

A-10

 

“Notice of Acquisition Loan” has the meaning
ascribed to it in Section 1.1(b)(i).

 

“Obligations” means all loans, advances, debts,
liabilities and obligations, for the performance of covenants, tasks or duties
or for payment of monetary amounts (whether or not such performance is then
required or contingent, or such amounts are liquidated or determinable) owing
by any Credit Party to Agent or any Lender, and all covenants and duties
regarding such amounts, of any kind or nature, present or future, whether or
not evidenced by any note, agreement or other instrument, arising under the
Agreement or any of the other Loan Documents. 
This term includes all principal, interest (including all interest that
accrues after the commencement of any case or proceeding by or against any
Credit Party in bankruptcy, whether or not allowed in such case or proceeding),
Fees, Charges, expenses, attorneys’ fees and any other sum chargeable to any
Credit Party under the Agreement or any of the other Loan Documents.

 

“Operating Leverage Ratio” means, with respect
to any Person, on a consolidated basis, the ratio of (a) Funded Debt as of any
date of determination, to (b) the sum of EBITDA less Maintenance Capital
Expenditures for the twelve months ending on that date of determination.

 

“Patent License” means rights under any written
agreement now owned or hereafter acquired by any Credit Party granting any
right with respect to any invention on which a Patent is in existence.

 

“Patents” means all of the following in which
any Credit Party now holds or hereafter acquires any interest: (a) all letters
patent of the United States or any other country, all registrations and
recordings thereof, and all applications for letters patent of the United
States or of any other country, including registrations, recordings and
applications in the United States Patent and Trademark Office or in any similar
office or agency of the United States, any State or any other country, and (b)
all reissues, continuations, continuations-in-part or extensions thereof.

 

“PBGC” means the Pension Benefit Guaranty
Corporation.

 

“Pension Plan” means a Plan described in
Section 3(2) of ERISA.

 

“Permitted Encumbrances” means the following
encumbrances: (a) Liens for taxes or assessments or other governmental Charges
not yet delinquent or which are being contested in accordance with Section
5.2(b); (b) pledges or deposits of money securing statutory obligations
under workmen’s compensation, unemployment insurance, social security or public
liability laws or similar legislation (excluding Liens under ERISA); (c)
pledges or deposits of money securing bids, tenders, contracts (other than
contracts for the payment of money), performance bonds, statutory obligations
or leases to which any Credit Party is a party as lessee, made in the ordinary
course of business; (d) landlords’, workers’, mechanics’  or similar liens for amounts not yet
delinquent or that are being contested in good faith arising in the ordinary course
of business, so long as such Liens attach only to Equipment, Fixtures and/or
Real Estate; (e) carriers’, warehousemen’s, suppliers’ or other similar
possessory liens arising in the ordinary course of business and securing
liabilities in an outstanding aggregate amount not in excess of $100,000 at any
time, so long as such Liens attach only to Inventory; (f) deposits securing, or
in lieu of, surety, appeal or customs bonds in proceedings to which any Credit
Party is a party; (g) any attachment or judgment lien not constituting an Event
of Default under Section 8.1(j); (h) zoning restrictions, easements,
licenses, rights-of-way, or other restrictions on the use of any Real Estate or
other minor irregularities in title (including leasehold title) thereto, so
long as the same do not materially impair the use, value, or marketability of
such Real Estate; (i) presently existing or hereafter created Liens in favor of
Agent, on behalf of Lenders; (j) Liens expressly permitted under clauses (b)
and (c) of Section 6.7 of the Agreement; (k) statutory Liens which
arise out of operation of law and are not voluntarily granted; (l) any interest
or title of a lessor or a sublessor under any operating lease, or restrictions
or encumbrances that the interest or title of such lessor or sublessor may be
subject to (including, without limitation, ground leases or other prior leases
of the demised premises, mortgages, mechanics’ liens, builders’ liens, tax
liens, and easements) that, individually or in the aggregate, are not interfering
in any material respect with Borrower’s business; and (m) Liens in favor of
collecting or payor banks having a right of setoff, revocation, refund or
chargeback with respect to money or instruments on deposit with or in
possession of such bank.

 

“Person” means any individual, sole
proprietorship, partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public
benefit corporation, other entity

 

A-11

 

or government (whether federal, state, county, city,
municipal, local, foreign, or otherwise, including any instrumentality,
division, agency, body or department thereof).

 

“Plan” means, at any time, an “employee benefit
plan,” as defined in Section 3(3) of ERISA, that any Credit Party or ERISA
Affiliate maintains, contributes to or has an obligation to contribute to on
behalf of participants who are or were employed by any Credit Party.

 

“Prime Rate” means the prime rate of interest charged
by Frost Bank as established from time to time. 
The Prime Rate is a reference rate and does not necessarily represent
the lowest or best rate actually charged to any customer.

 

“Proceeds” means “proceeds,” as such term is
defined in the Code, including (a) any and all proceeds of any insurance,
indemnity, warranty or guaranty payable to any Credit Party from time to time
with respect to any of the Collateral, (b) any and all payments (in any form
whatsoever) made or due and payable to any Credit Party from time to time in
connection with any requisition, confiscation, condemnation, seizure or
forfeiture of all or any part of the Collateral by any Governmental Authority
(or any Person acting under color of governmental authority), (c) any claim of any
Credit Party against third parties (i) for past, present or future infringement
of any Patent or Patent License, or  (ii)
for past, present or future infringement or dilution of any Copyright,
Copyright License, Trademark or Trademark License, or for injury to the
goodwill associated with any Trademark or Trademark License, (d) any recoveries
by any Credit Party against third parties with respect to any litigation or
dispute concerning any of the Collateral including claims arising out of the
loss or nonconformity of, interference with the use of, defects in, or
infringement of rights in, or damage to, Collateral, (e) all amounts
collected on, or distributed on account of, other Collateral, including
dividends, interest, distributions and Instruments with respect to Investment
Property and pledged Stock, and (f) any and all other amounts, rights to
payment or other property acquired upon the sale, lease, license, exchange or
other disposition of Collateral and all rights arising out of Collateral.

 

“Pro Rata Share” means with respect to all
matters relating to any Lender (a) with respect to the Revolving Loan, the
percentage obtained by dividing (i) the Revolving Loan Commitment of that
Lender by (ii) the aggregate Revolving Loan Commitments of all Lenders, (b)
with respect to the Acquisition Facility, the percentage obtained by dividing
(i) the Acquisition Facility Commitment of that Lender by (ii) the aggregate Acquisition
Facility Commitments of all Lenders, as any such percentages may be adjusted by
assignments permitted pursuant to Section 9.1, (c) with respect to all
Loans, the percentage obtained by dividing (i) the aggregate Commitments of
that Lender by (ii) the aggregate Commitments of all Lenders, and (d) with
respect to all Loans on and after the Revolving Commitment Termination Date or
the Acquisition Commitment Termination Date, as applicable, the percentage
obtained by dividing (i) the aggregate outstanding principal balance of the
Loans held by that Lender, by (ii) the outstanding principal balance of the
Loans held by all Lenders.

 

“Qualified Plan” means a Pension Plan that is
intended to be tax-qualified under Section 401(a) of the IRC.

 

“Qualified Assignee” means (a) any Lender, any
Affiliate of any Lender and, with respect to any Lender that is an investment
fund that invests in commercial loans, any other investment fund that invests
in commercial loans and that is managed or advised by the same investment
advisor as such Lender or by an Affiliate of such investment advisor, and (b)
any commercial bank, savings and loan association or savings bank or any other
entity which is an “accredited investor” (as defined in Regulation D under the
Securities Act) which extends credit or buys loans as one of its businesses,
including insurance companies, mutual funds, lease financing companies and
commercial finance companies, in each case, which has a rating of BBB or higher
from S&P and a rating of Baa2 or higher from Moody’s at the date that it
becomes a Lender and which, through its applicable lending office, is capable
of lending to Borrower without the imposition of any withholding or similar
taxes; provided that no Person determined by Agent to be acting in the capacity
of a vulture fund or distressed debt purchaser shall be a Qualified Assignee and
no Person or Affiliate of such Person (other than a Person that is already a
Lender) holding Subordinated Debt or Stock issued by any Credit Party shall be
a Qualified Assignee.

 

“Real Estate” has the meaning ascribed to it in
Section 3.6.

 

“Related Transactions” means the initial
borrowing under the Revolving Loan and the Acquisition Facility on the Closing
Date, the payment of all fees, costs and expenses associated with all of the
foregoing and the execution and delivery of all of the Related Transactions
Documents.

 

A-12

 

“Related Transactions Documents” means the Loan
Documents and all other agreements or instruments executed in connection with
the Related Transactions.

 

“Release” means any release, threatened
release, spill, emission, leaking, pumping, pouring, emitting, emptying,
escape, injection, deposit, disposal, discharge, dispersal, dumping, leaching
or migration of Hazardous Material in the indoor or outdoor environment,
including the movement of Hazardous Material through or in the air, soil,
surface water, ground water or property.

 

“Requisite Lenders” means Lenders having
(a) more than 66 2/3% of the Commitments of all Lenders, or (b) if the
Commitments have been terminated, more than 66 2/3% of the aggregate
outstanding amount of the Loans.

 

“Requisite Acquisition Lenders” means Lenders
having (a) more than 66 2/3% of the Acquisition Loan Commitments of all
Lenders, or (b) if the Acquisition Loan Commitments have been terminated, more
than 66 2/3% of the aggregate outstanding amount of the Acquisition Loans.

 

“Requisite Revolving Lenders” means Lenders
having (a) more than 66 2/3% of the Revolving Loan Commitments of all
Lenders, or (b) if the Revolving Loan Commitments have been terminated, more
than 66 2/3% of the aggregate outstanding amount of the Revolving Loan.

 

“Reserves” means, with respect to the Borrowing
Base of Borrower (a) reserves established pursuant to Section 5.4(c),
and (b) such other reserves against Eligible Accounts or Revolving Borrowing
Availability of Borrower that Agent may, in its reasonable credit judgment,
establish from time to time.  Without
limiting the generality of the foregoing, Reserves established to ensure the
payment of accrued Interest Expenses or Indebtedness shall be deemed to be a
reasonable exercise of Agent’s credit judgment.

 

“Restricted Payment” means, with respect to any
Credit Party (a) the declaration or payment of any dividend or the
incurrence of any liability to make any other payment or distribution of cash
or other property or assets in respect of such Credit Party’s Stock; (b) any
payment on account of the purchase, redemption, defeasance, sinking fund or
other retirement of such Credit Party’s Stock or any other payment or
distribution made in respect thereof, either directly or indirectly; (c) any
payment or prepayment of principal of, premium, if any, or interest, fees or
other charges on or with respect to, and any redemption, purchase, retirement,
defeasance, sinking fund or similar payment made before same is due and any
claim for rescission with respect to, any Subordinated Debt; (d) any payment
made to redeem, purchase, repurchase or retire, or to obtain the surrender of,
any outstanding warrants, options or other rights to acquire Stock of such
Credit Party now or hereafter outstanding; (e) any payment of a claim for the
rescission of the purchase or sale of, or for material damages arising from the
purchase or sale of, any shares of such Credit Party’s Stock or of a claim for
reimbursement, indemnification or contribution arising out of or related to any
such claim for damages or rescission; (f) any payment, loan, contribution, or
other transfer of funds or other property to any Stockholder of such Credit
Party other than payment of compensation in the ordinary course of business to
Stockholders who are employees or directors of such Credit Party; (g) any
payment of management fees (or other fees of a similar nature) by such Credit
Party to any Stockholder of such Credit Party or its Affiliates (h) the
declaration or payment of any distributions on any partnership interests of
such Credit Party; and (i) any other distributions with respect to any payment
on account of the purchase, redemption, or other acquisition or retirement of
any of partnership interests of such Credit Party.

 

“Retiree Welfare Plan” means, at any time, a
Welfare Plan that provides for continuing coverage or benefits for any
participant or any beneficiary of a participant after such participant’s
termination of employment, other than continuation coverage provided pursuant
to Section 4980B of the IRC and at the sole expense of the participant or the
beneficiary of the participant.

 

“Revolving Borrowing Availability” means as of
any date of determination the lesser of (i) the Revolving Loan Maximum Amount and
(ii) the Borrowing Base, in each case, less the sum of the Revolving
Loan then outstanding.

 

“Revolving Commitment Termination Date” means
the earliest of (a) October 28, 2005, (b) the date of termination of Lenders’
obligations to make Advances and to incur Letter of Credit Obligations or
permit existing

 

A-13

 

Loans to remain outstanding pursuant to Section
8.2(a), and (c) the date of indefeasible prepayment in full by Borrower of
the Loans and the cancellation and return (or stand-by guarantee) of all
Letters of Credit or the cash collateralization of all Letter of Credit
Obligations pursuant to Annex B, and the permanent reduction of the
Commitments to zero dollars ($0).

 

“Revolving Credit Advance” has the meaning
ascribed to it in Section 1.1(a)(i).

 

“Revolving Lenders” means, as of any date of
determination, Lenders having a Revolving Loan Commitment.

 

“Revolving Loan” means, at any time, the sum of
(i) the aggregate amount of Revolving Credit Advances outstanding to Borrower plus
(ii) the aggregate Letter of Credit Obligations incurred and outstanding on
behalf of Borrower.  Unless the context
otherwise requires, references to the outstanding principal balance of the Revolving
Loan shall include the outstanding balance of Letter of Credit Obligations.

 

“Revolving Loan Maximum Amount” means, as of
any date of determination, an amount equal to the Revolving Loan Commitment of
all Lenders as of that date.

 

“Revolving Loan Commitment” means (a) as to any
Revolving Lender, the aggregate commitment of such Revolving Lender to make
Revolving Credit Advances or incur Letter of Credit Obligations as set forth on
Annex I to the Agreement or in the most recent Assignment and Assumption
Agreement executed by such Revolving Lender and (b) as to all Revolving
Lenders, the aggregate commitment of all Revolving Lenders to make Revolving
Credit Advances or incur Letter of Credit Obligations, which aggregate
commitment shall be Seven Million and No/100 Dollars ($7,000,000) on the
Closing Date, as such amount may be adjusted, if at all, from time to time in
accordance with the Agreement.

 

“Revolving Note” has the meaning ascribed to it
in Section 1.1(a)(ii).

 

“Security Agreement” means the Security
Agreement of even date and each Security Agreement executed in connection with
an Acquisition Loan entered into by and among Agent, on behalf of itself and
Lenders, and each Credit Party that is a signatory thereto.

 

“Software” means all “software” as such term is
defined in the Code, now owned or hereafter acquired by any Credit Party, other
than software embedded in any category of Goods, including all computer
programs and all supporting information provided in connection with a
transaction related to any program.

 

“Solvent” means, with respect to any Person on
a particular date, that on such date (a) the fair value of the property of such
Person is greater than the total amount of liabilities, including contingent
liabilities, of such Person; (b) the present fair salable value of the assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured; (c) such Person does not intend to, and does not believe that it will,
incur debts or liabilities beyond such Person’s ability to pay as such debts
and liabilities mature; and (d) such Person is not engaged in a business or
transaction, and is not about to engage in a business or transaction, for which
such Person’s property would constitute an unreasonably small capital.  The amount of contingent liabilities (such as
litigation, guaranties and pension plan liabilities) at any time shall be
computed as the amount that, in light of all the facts and circumstances
existing at the time, represents the amount that can be reasonably be expected
to become an actual or matured liability.

 

“Stock” means all shares, options, warrants,
general or limited partnership interests, membership interests or other
equivalents (regardless of how designated) of or in a corporation, partnership,
limited liability company or equivalent entity whether voting or nonvoting,
including common stock, preferred stock or any other “equity security” (as such
term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated
by the Securities and Exchange Commission under the Securities Exchange Act of
1934).

 

“Stockholder” means, with respect to any
Person, each holder of Stock of such Person.

 

A-14

 

“Subordinated Debt” means any Indebtedness of
any Credit Party subordinated to the Obligations in a manner and form
satisfactory to Agent and Lenders in their sole discretion, as to right and
time of payment and as to any other rights and remedies thereunder.

 

“Subsidiary” means, with respect to any Person,
(a) any corporation of which an aggregate of more than 50% of the outstanding
Stock having ordinary voting power to elect a majority of the board of
directors of such corporation (irrespective of whether, at the time, Stock of
any other class or classes of such corporation shall have or might have voting
power by reason of the happening of any contingency) is at the time, directly
or indirectly, owned legally or beneficially by such Person or one or more
Subsidiaries of such Person, or with respect to which any such Person has the
right to vote or designate the vote of 50% or more of such Stock whether by
proxy, agreement, operation of law or otherwise, and (b) any partnership or
limited liability company in which such Person and/or one or more Subsidiaries
of such Person shall have an interest (whether in the form of voting or
participation in profits or capital contribution) of more than 50% or of which
any such Person is a general partner or may exercise the powers of a general
partner.  Unless the context otherwise
requires, each reference to a Subsidiary shall be a reference to a Subsidiary
of the Borrower.

 

“Supporting Obligations” means all “supporting
obligations” as such term is defined in the Code, including letters of credit
and guaranties issued in support of Accounts, Chattel Paper, Documents, General
Intangibles, Instruments, or Investment Property.

 

“Tangible Net Worth” means, with respect to any
Person at any date, the Net Worth of such Person at such date, excluding,
however, from the determination of the total assets at such date, (a)
all goodwill, capitalized organizational expenses, capitalized research and
development expenses, trademarks, trade names, copyrights, patents, patent
applications, licenses and rights in any thereof, and other intangible items,
(b) all unamortized debt discount and expense, (c) treasury Stock, and (d) any
write-up in the book value of any asset resulting from a revaluation thereof.

 

“Taxes” means taxes, levies, imposts,
deductions, Charges or withholdings, and all liabilities with respect thereto,
excluding taxes imposed on or measured by the net income of Agent or a Lender imposed
by the jurisdictions under the laws of which Agent and Lenders are organized or
conduct business or any political subdivision thereof.

 

“Termination Date” means the date on which
(a) the Loans have been indefeasibly repaid in full, (b) all other
Obligations under the Agreement and the other Loan Documents have been
completely discharged, (c) all Letter of Credit Obligations have been cash
collateralized, cancelled or backed by standby letters of credit in accordance
with Annex B, and (d) Borrower shall not have any further right to
borrow any monies under the Agreement.

 

“Title IV Plan” means a Pension Plan (other
than a Multiemployer Plan), that is covered by Title IV of ERISA, and that any
Credit Party or ERISA Affiliate maintains, contributes to or has an obligation
to contribute to on behalf of participants who are or were employed by any of
them.

 

“Trademark License” means rights under any
written agreement now owned or hereafter acquired by any Credit Party granting
any right to use any Trademark.

 

“Trademarks” means all of the following now
owned or hereafter adopted or acquired by any Credit Party: (a) all trademarks,
trade names, corporate names, business names, trade styles, service marks,
logos, other source or business identifiers, prints and labels on which any of
the foregoing have appeared or appear, designs and general intangibles of like
nature (whether registered or unregistered), all registrations and recordings
thereof, and all applications in connection therewith, including registrations,
recordings and applications in the United States Patent and Trademark Office or
in any similar office or agency of the United States, any state or territory
thereof, or any other country or any political subdivision thereof; (b) all
reissues, extensions or renewals thereof; and (c) all goodwill associated with
or symbolized by any of the foregoing.

 

A-15

 

“Unfunded Pension Liability” means, at any
time, the aggregate amount, if any, of the sum of (a) the amount by which the
present value of all accrued benefits under each Title IV Plan exceeds the fair
market value of all assets of such Title IV Plan allocable to such benefits in
accordance with Title IV of ERISA, all determined as of the most recent
valuation date for each such Title IV Plan using the actuarial assumptions for
funding purposes in effect under such Title IV Plan, and (b) for a period of 5
years following a transaction which might reasonably be expected to be covered
by Section 4069 of ERISA, the liabilities (whether or not accrued) that could
be avoided by any Credit Party or any ERISA Affiliate as a result of such
transaction.

 

“Welfare Plan” means a Plan described in
Section 3(i) of ERISA.

 

All other undefined terms contained in any of the Loan
Documents shall, unless the context indicates otherwise, have the meanings provided
for by the Code to the extent the same are used or defined therein; in the
event that any term is defined differently in different Articles or Divisions
of the Code, the definition contained in Article or Division 9 shall control.  Unless otherwise specified, references in the
Agreement or any of the Appendices to a Section, subsection or clause refer to
such Section, subsection or clause as contained in the Agreement.  The words “herein,” “hereof” and “hereunder”
and other words of similar import refer to the Agreement as a whole, including
all Annexes, Exhibits and Schedules, as the same may from time to time be
amended, restated, modified or supplemented, and not to any particular section,
subsection or clause contained in the Agreement or any such Annex, Exhibit or
Schedule.

 

Wherever from the context it appears appropriate, each
term stated in either the singular or plural shall include the singular and the
plural, and pronouns stated in the masculine, feminine or neuter gender shall
include the masculine, feminine and neuter genders.  The words “including”, “includes” and “include”
shall be deemed to be followed by the words “without limitation”; the word “or”
is not exclusive; references to Persons include their respective successors and
assigns (to the extent and only to the extent permitted by the Loan Documents)
or, in the case of governmental Persons, Persons succeeding to the relevant
functions of such Persons; and all references to statutes and related
regulations shall include any amendments of the same and any successor statutes
and regulations.  Whenever any provision
in any Loan Document refers to the knowledge (or an analogous phrase) of any
Credit Party, such words are intended to signify that such Credit Party has
actual knowledge or awareness of a particular fact or circumstance or that such
Credit Party, if it had exercised reasonable diligence, would have known or
been aware of such fact or circumstance.

 

A-16

 

ANNEX B (Section
1.2)

to

CREDIT
AGREEMENT

 

LETTERS
OF CREDIT

 

(a)           Issuance.
Subject to the terms and conditions of the Agreement, Agent and Revolving
Lenders agree to incur, from time to time prior to the Revolving Commitment
Termination Date, upon the request of Borrower and for Borrower’s account,
Letter of Credit Obligations by causing Letters of Credit to be issued by Frost
Bank or a Subsidiary thereof or a bank or other legally authorized Person
selected by or acceptable to Agent in its sole discretion (each, an “L/C
Issuer”) for Borrower’s account and guaranteed by Agent; provided,
that if the L/C Issuer is a Revolving Lender, then such Letters of Credit shall
not be guaranteed by Agent but rather each Revolving Lender shall, subject to
the terms and conditions hereinafter set forth, purchase (or be deemed to have
purchased) risk participations in all such Letters of Credit issued with the
written consent of Agent, as more fully described in paragraph (b)(ii) below.  The aggregate amount of all such Letter of
Credit Obligations shall not at any time exceed the least of (i) Seven Million
and No/100 Dollars ($7,000,000) (the “L/C Sublimit”), and (ii) the Revolving
Loan Commitment Maximum Amount less the aggregate outstanding principal balance
of the Revolving Credit Advances, and (iii) the Borrowing Base less the
aggregate outstanding principal balance of the Revolving Credit Advances.  No such Letter of Credit shall have an expiry
date that is more than one year following the date of issuance thereof, unless
otherwise determined by Agent in its sole discretion, and neither Agent nor
Revolving Lenders shall be under any obligation to incur Letter of Credit
Obligations in respect of, or purchase risk participations in, any Letter of
Credit having an expiry date that is later than the Commitment Termination
Date.

 

(b)  Advances
Automatic; Participations.  (i)  In the event that Agent or any Revolving
Lender shall make any payment on or pursuant to any Letter of Credit
Obligation, such payment shall then be deemed automatically to constitute a
Revolving Credit Advance under Section 1.1(a) of the Agreement
regardless of whether a Default or Event of Default has occurred and is
continuing and notwithstanding Borrower’s failure to satisfy the conditions
precedent set forth in Section 2, and each Revolving Lender shall be
obligated to pay its Pro Rata Share thereof in accordance with the
Agreement.  The failure of any Revolving
Lender to make available to Agent for Agent’s own account its Pro Rata Share of
any such Revolving Credit Advance or payment by Agent under or in respect of a
Letter of Credit shall not relieve any other Revolving Lender of its obligation
hereunder to make available to Agent its Pro Rata Share thereof, but no
Revolving Lender shall be responsible for the failure of any other Revolving
Lender to make available such other Revolving Lender’s Pro Rata Share of any
such payment.

 

(ii)  If it shall be illegal or unlawful for
Borrower to incur Revolving Credit Advances as contemplated by paragraph (b)(i)
above because of an Event of Default described in Sections 8.1(h) or (i)
or otherwise or if it shall be illegal or unlawful for any Revolving Lender to
be deemed to have assumed a ratable share of the reimbursement obligations owed
to an L/C Issuer, or if the L/C Issuer is a Revolving Lender, then (i)
immediately and without further action whatsoever, each Revolving Lender shall
be deemed to have irrevocably and unconditionally purchased from Agent (or such
L/C Issuer, as the case may be) an undivided interest and participation equal
to such Revolving Lender’s Pro Rata Share (based on the Revolving Loan
Commitments) of the Letter of Credit Obligations in respect of all Letters of
Credit then outstanding and (ii) thereafter, immediately upon issuance of any
Letter of Credit, each Revolving Lender shall be deemed to have irrevocably and
unconditionally purchased from Agent (or such L/C Issuer, as the case may be)
an undivided interest and participation in such Revolving Lender’s Pro Rata
Share (based on the Revolving Loan Commitments) of the Letter of Credit
Obligations with respect to such Letter of Credit on the date of such
issuance.  Each Revolving Lender shall
fund its participation in all payments or disbursements made under the Letters
of Credit in the same manner as provided in the Agreement with respect to
Revolving Credit Advances.

 

(c)           Cash
Collateral.  (i) If Borrower is
required to provide cash collateral for any Letter of Credit Obligations
pursuant to the Agreement prior to the Revolving Commitment Termination Date,
Borrower will pay to Agent for the ratable benefit of itself and Revolving
Lenders cash or cash equivalents acceptable to Agent (“Cash Equivalents”)
in an amount equal to 100% of the maximum amount then available to be drawn
under each applicable Letter of Credit outstanding.  Such funds or Cash Equivalents shall be held
by Agent in a cash collateral account (the “Cash Collateral Account”)
maintained at a bank or financial institution acceptable to Agent.  The Cash

 

B-1

 

Collateral Account shall be in the name of Borrower
and shall be pledged to, and subject to the control of, Agent, for the benefit
of Agent and Lenders, in a manner satisfactory to Agent.  Borrower hereby pledges and grants to Agent,
on behalf of itself and Lenders, a security interest in all such funds and Cash
Equivalents held in the Cash Collateral Account from time to time and all
proceeds thereof, as security for the payment of all amounts due in respect of
the Letter of Credit Obligations, whether or not then due.  The Agreement, including this Annex B,
shall constitute a security agreement under applicable law

 

(ii)           If
any Letter of Credit Obligations, whether or not then due and payable, shall
for any reason be outstanding on the Revolving Commitment Termination Date,
Borrower shall either (A) provide cash collateral therefor in the manner
described above, or (B) cause all such Letters of Credit and guaranties
thereof, if any, to be canceled and returned, or (C) deliver a stand-by letter
(or letters) of credit in guarantee of such Letter of Credit Obligations, which
stand-by letter (or letters) of credit shall be of like tenor and duration
(plus 30 additional days) as, and in an amount equal to 100% of the aggregate
maximum amount then available to be drawn under, the Letters of Credit to which
such outstanding Letter of Credit Obligations relate and shall be issued by a
Person, and shall be subject to such terms and conditions, as are be
satisfactory to Agent in its sole discretion.

 

(iii)          From
time to time after funds are deposited in the Cash Collateral Account by
Borrower, whether before or after the Commitment Termination Date, Agent may
apply such funds or Cash Equivalents then held in the Cash Collateral Account
to the payment of any amounts, and in such order as Agent may elect, as shall
be or shall become due and payable by Borrower to Agent and Lenders with
respect to such Letter of Credit Obligations of Borrower.

 

(iv)          Neither
Borrower nor any Person claiming on behalf of or through Borrower shall have
any right to withdraw any of the funds or Cash Equivalents held in the Cash
Collateral Account.  Interest earned on
deposits in the Cash Collateral Account shall be for the account of Borrower.

 

(d)           Fees
and Expenses.  Borrower agrees to pay
to Agent for the benefit of Revolving Lenders, as compensation to such Lenders
for Letter of Credit Obligations incurred hereunder, (i) all costs and expenses
incurred by Agent or any Lender on account of such Letter of Credit
Obligations, and (ii) for each month during which any Letter of Credit
Obligation shall remain outstanding, a fee (the “Letter of Credit Fee”)
in an amount equal to one and one-half percent (1.5%) per annum multiplied by
the maximum amount available from time to time to be drawn under the applicable
Letter of Credit.  Such fee shall be paid
to Agent for the benefit of the Revolving Lenders on the date of issuance of
any Letter of Credit.  In addition,
Borrower shall pay to any L/C Issuer, on demand, such fees (including all per annum
fees), charges and expenses of such L/C Issuer in respect of the issuance,
negotiation, acceptance, amendment, transfer and payment of such Letter of
Credit or otherwise payable pursuant to the application and related
documentation under which such Letter of Credit is issued.

 

(e)           Request
for Incurrence of Letter of Credit Obligations.  Borrower shall give Agent at least 2 Business
Days’ prior written notice requesting the incurrence of any Letter of Credit
Obligation.  The notice shall be
accompanied by the form of the Letter of Credit (which shall be acceptable to
the L/C Issuer).  Notwithstanding
anything contained herein to the contrary, Letter of Credit applications by
Borrower and approvals by Agent and the L/C Issuer may be made and transmitted
pursuant to electronic codes and security measures mutually agreed upon and
established by and among Borrower, Agent and the L/C Issuer.

 

(f)            Obligation
Absolute.  The obligation of Borrower
to reimburse Agent and Revolving Lenders for payments made with respect to any
Letter of Credit Obligation shall be absolute, unconditional and irrevocable,
without necessity of presentment, demand, protest or other formalities, and the
obligations of each Revolving Lender to make payments to Agent with respect to
Letters of Credit shall be unconditional and irrevocable.  Such obligations of Borrower and Revolving
Lenders shall be paid strictly in accordance with the terms hereof under all
circumstances including the following:

 

(i)            any
lack of validity or enforceability of any Letter of Credit or the Agreement or
the other Loan Documents or any other agreement;

 

(ii)           the
existence of any claim, setoff, defense or other right that Borrower or any of
its Affiliates or any Lender may at any time have against a beneficiary or any
transferee of any Letter of Credit

 

B-2

 

(or any Persons or entities for whom any such
transferee may be acting), Agent, any Lender, or any other Person, whether in
connection with the Agreement, the Letter of Credit, the transactions
contemplated herein or therein or any unrelated transaction (including any
underlying transaction between Borrower or any of its Affiliates and the
beneficiary for which the Letter of Credit was procured);

 

(iii)          any
draft, demand, certificate or any other document presented under any Letter of
Credit proving to be forged, fraudulent, invalid or insufficient in any respect
or any statement therein being untrue or inaccurate in any respect;

 

(iv)          payment
by Agent (except as otherwise expressly provided in paragraph (g)(ii)(C) below)
or any L/C Issuer under any Letter of Credit or guaranty thereof against
presentation of a demand, draft or certificate or other document that does not
comply with the terms of such Letter of Credit or such guaranty;

 

(v)           any
other circumstance or event whatsoever, that is similar to any of the
foregoing; or

 

(vi)          the
fact that a Default or an Event of Default has occurred and is continuing.

 

(g)           Indemnification;
Nature of Lenders’ Duties. 
(i) In addition to amounts payable as elsewhere provided in the
Agreement, Borrower hereby agrees to pay and to protect, indemnify, and save
harmless Agent and each Lender from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including reasonable
attorneys’ fees and allocated costs of internal counsel) that Agent or any
Lender may incur or be subject to as a consequence, direct or indirect, of (A)
the issuance of any Letter of Credit or guaranty thereof, or (B) the failure
of Agent or any Lender seeking indemnification or of any L/C Issuer to honor a
demand for payment under any Letter of Credit or guaranty thereof as a result
of any act or omission, whether rightful or wrongful, of any present or future
de jure or de facto government or Governmental Authority, in each case other
than to the extent solely as a result of the gross negligence or willful
misconduct of Agent or such Lender (as finally determined by a court of
competent jurisdiction).

 

(ii)           As
between Agent and any Lender and Borrower, Borrower assumes all risks of the
acts and omissions of, or misuse of any Letter of Credit by beneficiaries of
any Letter of Credit.  In furtherance and
not in limitation of the foregoing, to the fullest extent permitted by law
neither Agent nor any Lender shall be responsible for:  (A) the form, validity, sufficiency,
accuracy, genuineness or legal effect of any document issued by any party in
connection with the application for and issuance of any Letter of Credit, even
if it should in fact prove to be in any or all respects invalid, insufficient,
inaccurate, fraudulent or forged; (B) the validity or sufficiency of any
instrument transferring or assigning or purporting to transfer or assign any
Letter of Credit or the rights or benefits thereunder or proceeds thereof, in
whole or in part, that may prove to be invalid or ineffective for any reason;
(C) failure of the beneficiary of any Letter of Credit to comply fully
with conditions required in order to demand payment under such Letter of
Credit; provided, that in the case of any payment by Agent under any
Letter of Credit or guaranty thereof, Agent shall be liable to the extent such
payment was made solely as a result of its gross negligence or willful
misconduct (as finally determined by a court of competent jurisdiction) in
determining that the demand for payment under such Letter of Credit or guaranty
thereof complies on its face with any applicable requirements for a demand for
payment under such Letter of Credit or guaranty thereof; (D) errors, omissions,
interruptions or delays in transmission or delivery of any messages, by mail,
cable, telegraph, telex or otherwise, whether or not they may be in cipher; (E)
errors in interpretation of technical terms; (F) any loss or delay in the
transmission or otherwise of any document required in order to make a payment
under any Letter of Credit or guaranty thereof or of the proceeds thereof; (G)
the credit of the proceeds of any drawing under any Letter of Credit or
guaranty thereof; and (H) any consequences arising from causes beyond the
control of Agent or any Lender. None of the above shall affect, impair, or
prevent the vesting of any of Agent’s or any Lender’s rights or powers
hereunder or under the Agreement.

 

(iii)          Nothing
contained herein shall be deemed to limit or to expand any waivers, covenants
or indemnities made by Borrower in favor of any L/C Issuer in any letter of
credit application, reimbursement agreement or similar document, instrument or
agreement between Borrower and such L/C Issuer.

 

(iv)          All
Letter of Credit applications shall be executed an Authorized Officer.

 

B-3

 

ANNEX D (Section
4.1(a))

to

CREDIT
AGREEMENT

 

FINANCIAL
STATEMENTS — REPORTING

 

Borrower shall deliver or cause to be delivered to
Agent or to Agent and Lenders, as indicated, the following:

 

(a)           Monthly
Financials.  To Agent and Lenders,
within 45 days after the end of each Fiscal Month, financial information
regarding Holding Company and its Subsidiaries, certified by the President
and/or Chief Financial Officer of Holding Company, consisting of consolidated
unaudited balance sheets as of the close of such Fiscal Month and the related
statements of income and cash flows for that portion of the Fiscal Year ending
as of the close of such Fiscal Month. 
Such financial information shall be accompanied by the certification of
the Chief Financial Officer of Holding Company that (i) such financial
information presents fairly in accordance with GAAP (subject to normal year-end
adjustments and the absence of footnotes) the financial position and results of
operations of Holding Company and its Subsidiaries, on a consolidated basis, in
each case as at the end of such Fiscal Month and for that portion of the Fiscal
Year then ended and (ii) any other information presented is true, correct and
complete in all material respects and that there was no Default or Event of
Default in existence as of such time or, if a Default or Event of Default shall
have occurred and be continuing, describing the nature thereof and all efforts
undertaken to cure such Default or Event of Default.  Agent and Lenders hereby acknowledge and
agree that the “Management Report” submitted with the monthly financial
statements shall be sufficient to satisfy the certification requirements set
forth above.

 

(b)           Quarterly
Financials.  To Agent and Lenders,
within 60 days after the end of each Fiscal Quarter, (A) a statement in
reasonable detail (each, a “Compliance Certificate”) showing the
calculations used in determining compliance with each Financial Covenant that
is tested on a quarterly basis, and (B) the certification of the Chief
Financial Officer of Holding Company that (i) such financial information
presents fairly in accordance with GAAP (subject to normal year-end adjustments
and the absence of all footnotes) the financial position and results of
operations of Holding Company and its Subsidiaries, on a consolidated basis and
(ii) any other information presented is true, correct and complete in all
material respects and that there was no Default or Event of Default in
existence as of such time or, if a Default or Event of Default shall have
occurred and be continuing, describing the nature thereof and all efforts
undertaken to cure such Default or Event of Default.  Agent and Lenders hereby acknowledge and
agree that the certification of the Chief Financial Officer of Holding Company
to the SEC shall be sufficient to satisfy the certification requirements set
forth above.

 

(c)           Annual
Financials.  To Agent and Lenders,
within 120 days after the end of each Fiscal Year, audited Financial Statements
for Holding Company and its Subsidiaries on a consolidated and audited basis,
consisting of balance sheets and statements of income and retained earnings and
cash flows, setting forth in comparative form in each case the figures for the
previous Fiscal Year, which Financial Statements shall be prepared in
accordance with GAAP and certified without qualification, by an independent
certified public accounting firm of national standing or otherwise acceptable
to Agent.  Such Financial Statements
shall be accompanied by a (i) Compliance Certificate, and (ii) the
certification of the Chief Executive Officer or Chief Financial Officer of Holding
Company that all such Financial Statements present fairly in accordance with
GAAP the financial position, results of operations and statements of cash flows
of Borrower and its Subsidiaries on a consolidated basis, as at the end of such
Fiscal Year and for the period then ended, and that there was no Default or
Event of Default in existence as of such time or, if a Default or Event of
Default has occurred and is continuing, describing the nature thereof and all
efforts undertaken to cure such Default or Event of Default.  Agent and Lenders hereby acknowledge and
agree that the certification of the Chief Financial Officer of Holding Company
to the SEC shall be sufficient to satisfy the certification requirements set
forth above.

 

(d)           Intentionally
Omitted.

 

(e)           Default
Notices.  To Agent and Lenders, as
soon as practicable, and in any event within 5 Business Days after an executive
officer of Borrower has actual knowledge of the existence of any Default, Event
of

 

D-1

 

Default or other event that has had a Material Adverse
Effect, telephonic or telecopied notice specifying the nature of such Default
or Event of Default or other event, including the anticipated effect thereof,
which notice, if given telephonically, shall be promptly confirmed in writing
on the next Business Day.

 

(f)            SEC
Filings and Press Releases.  To Agent
and Lenders, promptly upon their becoming available, copies of:  (i) all Financial Statements, reports,
notices and proxy statements made publicly available by any Credit Party to its
security holders; (ii) all regular and periodic reports and all registration
statements and prospectuses, if any, filed by any Credit Party with any
securities exchange or with the Securities and Exchange Commission or any governmental
or private regulatory authority; and (iii) all press releases and other
statements made available by any Credit Party to the public concerning material
changes or developments in the business of any such Person.

 

(g)           Supplemental
Schedules.  To Agent, supplemental
disclosures, if any, required by Section 5.6.

 

(h)           Litigation.  To Agent in writing, promptly upon learning
thereof, notice of any Litigation commenced or threatened against any Credit
Party that (i) seeks damages in excess of $250,000 that are not covered by
insurance, (ii) seeks injunctive relief, (iii) is asserted or instituted
against any Plan, its fiduciaries or its assets or against any Credit Party or
ERISA Affiliate in connection with any Plan, (iv) alleges criminal misconduct
by any Credit Party, (v) alleges the violation of any law regarding, or seeks
remedies in connection with, any Environmental Liabilities; or (vi) involves
any product recall.

 

(i)            Insurance
Notices.  To Agent, disclosure of
losses or casualties required by Section 5.4.

 

(j)            Other
Documents.  To Agent and Lenders,
such other financial and other information respecting any Credit Party’s
business or financial condition as Agent or any Lender shall, from time to
time, reasonably request.

 

(k)           Budget.  By March 1st of each year, an annual budget
for the subsequent Fiscal Year.

 

D-2

 

ANNEX E (Section
4.1(b))

to

CREDIT
AGREEMENT

 

COLLATERAL
REPORTS

 

Borrower shall deliver or cause to be delivered the
following:

 

(a)           To
Agent, upon its request, and in any event no less frequently than 45 days after
the end of each Fiscal Month (together with a copy of all or any part of the
following reports requested by any Lender in writing after the Closing Date),
each of the following reports, each of which shall be prepared by the Borrower
as of the last day of the immediately preceding Fiscal Month or the date 2 days
prior to the date of any such request:

 

(i)            a
Borrowing Base Certificate with respect to Borrower, accompanied by such supporting
detail and documentation as shall be requested by Agent in its reasonable
discretion;

 

(ii)           a
Rig Schedule/Utilization Report, in each case accompanied by such supporting
detail and documentation as shall be requested by Agent in its reasonable discretion;
and

 

(iii)          with
respect to Borrower, a monthly trial balance showing Accounts outstanding aged
from invoice date as follows:  1 to 30
days, 31 to 60 days, 61 to 90 days and 91 days or more, accompanied by such
supporting detail and documentation as shall be requested by Agent in its
reasonable discretion.

 

(b)           Borrower,
at its own expense, shall deliver to Agent such appraisals of its assets as
Agent may request at any time after the occurrence and during the continuance
of a Default or an Event of Default, such appraisals to be conducted by an
appraiser, and in form and substance reasonably satisfactory to Agent; and

 

(c)           Such
other reports, statements and reconciliations with respect to the Borrowing
Base or Collateral or Obligations of any or all Credit Parties as Agent shall
from time to time request in its reasonable discretion.

 

E-1

 

ANNEX F (Section
6.10)

to

CREDIT
AGREEMENT

 

FINANCIAL
COVENANTS

 

Borrower, Holding Company and the Subsidiaries shall
not breach or fail to comply with any of the following financial covenants
beginning with the Fiscal Quarter ending December 31, 2004, each of which shall
be calculated in accordance with GAAP consistently applied:

 

(a)           Debt/Capitalization Ratio.  Holding Company and its Subsidiaries shall
have, on a consolidated basis, at the end of each Fiscal Quarter, a Debt/Capitalization
Ratio of not more than .30 to 1.00.

 

(b)           Fixed
Charge Coverage Ratio.  Holding
Company and its Subsidiaries shall have, on a consolidated basis, at the end of
each Fiscal Quarter, a Fixed Charge Coverage Ratio for the 12-month period then
ended of not less than 1.50 to 1.00.

 

(c)           Operating
Leverage Ratio.  Holding Company and
its Subsidiaries shall have, on a consolidated basis, at the end of each Fiscal
Quarter, an Operating Leverage Ratio as of the last day of such Fiscal Quarter
for the 12-month period then ended, of not more than 3.00 to 1.00.

 

F-1

 

EXHIBIT 1.1(a)(ii)

TO

CREDIT
AGREEMENT

 

FORM
OF REVOLVING NOTE

 

 

San Antonio, Texas

 

$                              

 

FOR VALUE RECEIVED, the undersigned, PIONEER DRILLING SERVICES, LTD., a Texas limited partnership
(“Borrower”), HEREBY PROMISES TO PAY to the order of THE FROST NATIONAL BANK, a national banking association (“Lender”),
at the offices of THE FROST NATIONAL BANK, a national banking association, as
Agent for Lenders (“Agent”), at its address at 100 W. Houston Street,
San Antonio, Texas 78205, or at such other place as Agent may designate from
time to time in writing, in lawful money of the United States of America and in
immediately available funds, the amount of                                 
DOLLARS AND          CENTS ($                                          )
or, if less, the aggregate unpaid amount of all Revolving Credit Advances made
to the undersigned under the “Credit Agreement” (as hereinafter defined).  All capitalized terms used but not otherwise
defined herein have the meanings given to them in the Credit Agreement or in Annex
A thereto.

 

This Revolving Note is one of the Revolving Notes
issued pursuant to that certain Credit Agreement dated as of October 29, 2004,
by and among Borrower, the other Persons named therein as Credit Parties,
Agent, Lender and the other Persons signatory thereto from time to time as
Lenders (including all annexes, exhibits and schedules thereto, and as from
time to time amended, restated, supplemented or otherwise modified, the “Credit
Agreement”), and is entitled to the benefit and security of the Credit
Agreement, the Security Agreements and all of the other Loan Documents referred
to therein.  Reference is hereby made to
the Credit Agreement for a statement of all of the terms and conditions under
which the Loans evidenced hereby are made and are to be repaid.  The date and amount of each Revolving Credit
Advance made by Lenders to Borrower, the rates of interest applicable thereto
and each payment made on account of the principal thereof, shall be recorded by
Agent on its books; provided that the failure of Agent to make any such
recordation shall not affect the obligations of Borrower to make a payment when
due of any amount owing under the Credit Agreement or this Note in respect of
the Revolving Credit Advances made by Lender to Borrower.

 

Interest on the outstanding principal amount of this
Revolving Note shall be payable on the first Business Day of each month until
such principal amount is paid in full at such interest rates, and pursuant to
such calculations, as are specified in the Credit Agreement.  The Borrower shall pay the principal of and
accrued and unpaid interest on this Revolving Note on                                             ,
20       and shall make such mandatory
prepayments as are required to be made under the terms of Section 1.3(b) of the
Credit Agreement.  If any payment on this
Revolving Note becomes due and payable on a day other than a Business Day, the
maturity thereof shall be extended to the next succeeding Business Day and,
with respect to payments of principal, interest thereon shall be payable at the
then applicable rate during such extension.

 

Upon and after the occurrence of any Event of Default,
this Revolving Note may, as provided in the Credit Agreement, and without
demand, notice or legal process of any kind, be declared, and immediately shall
become, due and payable.

 

Time is of the essence of this Revolving Note.  Demand, presentment, protest and notice of
nonpayment and protest, notice of intent to accelerate and notice of
acceleration are hereby waived by Borrower.

 

Except as provided in the Credit Agreement, this
Revolving Note may not be assigned by Lender to any Person.

 

THIS REVOLVING NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN THAT STATE.

 

 

	
   

  	
  PIONEER DRILLING SERVICES, LTD.,
  a Texas limited partnership

  
	
   

  	
   

  
	
   

  	
  By:

  	
  PDC Mgmt. Co., a Texas
  corporation, General Partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Wm. Stacy Locke,
  President and Chief Executive

  Officer

  

 

 

EXHIBIT 1.1(b)(ii)

TO

CREDIT
AGREEMENT

 

FORM
OF ACQUISITION NOTE

 

San Antonio, Texas

$                                    

 

FOR VALUE RECEIVED, the undersigned, PIONEER DRILLING SERVICES, LTD., a Texas limited partnership
(“Borrower”), HEREBY PROMISES TO PAY to the order of                                       
(“Lender”) at the offices of THE FROST NATIONAL BANK, a national banking
association, as Agent for Lenders (“Agent”), at its address at 100 W.
Houston Street, San Antonio, Texas 78205, or at such other place as Agent may
designate from time to time in writing, in lawful money of the United States of
America and in immediately available funds, the amount of                                                     
DOLLARS AND            CENTS
($      ,      ,      ).  All capitalized terms used but not otherwise
defined herein have the meanings given to them in the “Credit Agreement” (as
hereinafter defined) or in Annex A thereto.

 

This Acquisition Note is one of the Acquisition Notes
issued pursuant to that certain Credit Agreement dated as of October 29, 2004
by and among Borrower, the other Persons named therein as Credit Parties,
Agent, Lender and the other Persons signatory thereto from time to time as
Lenders (including all annexes, exhibits and schedules thereto and as from time
to time amended, restated, supplemented or otherwise modified, the “Credit
Agreement”), and is entitled to the benefit and security of the Credit
Agreement, the Security Agreements and all of the other Loan Documents referred
to therein.  Reference is hereby made to
the Credit Agreement for a statement of all of the terms and conditions under
which the Loans evidenced hereby are made and are to be repaid.  The principal balance of the Acquisition
Loan, the rates of interest applicable thereto and the date and amount of each
payment made on account of the principal thereof, shall be recorded by Agent on
its books; provided that the failure of Agent to make any such recordation
shall not affect the obligations of Borrower to make a payment when due of any
amount owing under the Credit Agreement or this Acquisition Note.

 

Interest on the outstanding principal amount of this
Acquisition Note shall be payable on the first Business Day of each month until
such principal amount is paid in full at such interest rates, and pursuant to
such calculations, as are specified in the Credit Agreement.  The Borrower shall pay the principal of this
Acquisition Note in equal monthly installments of $                                  
each on the first day of each month during the term of the Acquisition Loan
evidenced hereby, commencing                               ,
20       until                                   ,
20      , when the entire amount hereof,
principal and interest then remaining unpaid, shall be then due and
payable.  In addition to the foregoing,
the Borrower shall make such mandatory prepayments as are required to be made
under the terms of Section 1.3(b) of the Credit Agreement.

 

If any payment on this Acquisition Note becomes due
and payable on a day other than a Business Day, the maturity thereof shall be
extended to the next succeeding Business Day and, with respect to payments of
principal, interest thereon shall be payable at the then applicable rate during
such extension.

 

Upon and after the occurrence of any Event of Default,
this Acquisition Note may, as provided in the Credit Agreement, and without
demand, notice or legal process of any kind, be declared, and immediately shall
become, due and payable.

 

Time is of the essence of this Acquisition Note.  Demand, presentment, protest and notice of
nonpayment and protest, notice of intent to accelerate and notice of
acceleration are hereby waived by Borrower.

 

Except as provided in the Credit Agreement, this Acquisition
Note may not be assigned by Lender to any Person.

 

 

THIS ACQUISITION NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS APPLICABLE TO
CONTRACTS MADE AND PERFORMED IN THAT STATE.

 

	
   

  	
  PIONEER DRILLING SERVICES, LTD.,
  a Texas limited partnership

  
	
   

  	
   

  
	
   

  	
  By:

  	
  PDC Mgmt. Co., a Texas
  corporation, General Partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Wm. Stacy Locke,
  President and Chief Executive

  Officer

  

 

 

EXHIBIT 1.1(b)(iii)

TO

CREDIT
AGREEMENT

 

FORM
OF SECURITY AGREEMENT

 

SECURITY AGREEMENT, dated as of October 29, 2004,
between PIONEER DRILLING SERVICES, LTD., a Texas
limited partnership (“Grantor”), and THE FROST
NATIONAL BANK, a national banking association corporation,
individually and in its capacity as Agent for Lenders.

 

W I T N E S S E T H:

 

WHEREAS, pursuant to that certain Credit Agreement
dated as of the date hereof by and among Grantor, Agent and Lenders (including
all annexes, exhibits and schedules thereto, as from time to time amended,
restated, supplemented or otherwise modified, the “Credit Agreement”),
Lenders have agreed to make the Loans and to incur Letter of Credit Obligations
on behalf of Grantor;

 

WHEREAS, in order to induce Agent and Lenders to enter
into the Credit Agreement and the other Loan Documents and to induce Lenders to
make the Loans and to incur Letter of Credit Obligations as provided for in the
Credit Agreement, Grantor has agreed to grant a continuing Lien on the
Collateral (as hereinafter defined) to secure the Obligations;

 

NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:

 

1.             DEFINED
TERMS.

 

1.1           All
capitalized terms used but not otherwise defined herein have the meanings given
to them in the Credit Agreement or in Annex A thereto.  All other terms contained in this Security
Agreement, unless the context indicates otherwise, have the meanings provided
for by the Code to the extent the same are used or defined therein.

 

1.2           “Uniform
Commercial Code jurisdiction” means the State of Texas.

 

2.             GRANT
OF LIEN.

 

2.1           To
secure the prompt and complete payment, performance and observance of all of
the Obligations, Grantor hereby grants, assigns, conveys, mortgages, pledges,
hypothecates and transfers to Agent, for itself and the benefit of Lenders, a
Lien upon all of its right, title and interest in, to and under the following personal
property, whether now owned by or owing to, or hereafter acquired by or arising
in favor of Grantor (including under any trade names, styles or derivations
thereof), and whether owned or consigned by or to, or leased from or to,
Grantor, and regardless of where located (all of which being hereinafter
collectively referred to as the “Collateral”):

 

(a)           all Accounts (including all
Documents, Contracts and General Intangibles related to the Accounts); and

 

(b)           to the extent not otherwise included,
all the Inventory, Equipment and Fixtures consisting of drilling rigs
including, without limitation, those drilling rigs more particularly described
on Exhibit A attached hereto, together with the drilling rig’s
substructure, engine, braking system, drill pipe and drill collars; other
related equipment; parts (including spare parts) of any of the foregoing; all
replacements, accessories, additions, substitutions and accessions to all of
the foregoing.

 

F-2

 

2.2           In
addition, to secure the prompt and complete payment, performance and observance
of the Obligations and in order to induce Agent and Lenders as aforesaid,
Grantor hereby grants to Agent, for itself and the benefit of Lenders, a right
of setoff against the property of Grantor held by Agent or any Lender,
consisting of property described above in Section 2(a) now or hereafter
in the possession or custody of or in transit to Agent or any Lender, for any
purpose, including safekeeping, collection or pledge, for the account of
Grantor, or as to which Grantor may have any right or power.

 

3.             AGENT’S
AND LENDERS’ RIGHTS; LIMITATIONS ON AGENT’S AND LENDERS’ OBLIGATIONS.

 

3.1           It
is expressly agreed by Grantor that, anything herein to the contrary
notwithstanding, Grantor shall remain liable under each of its Contracts and
each of its Licenses to observe and perform all the conditions and obligations
to be observed and performed by it 
thereunder.  Neither Agent nor any
Lender shall have any obligation or liability under any Contract or License by
reason of or arising out of this Security Agreement or the granting herein of a
Lien thereon or the receipt by Agent or any Lender of any payment relating to
any Contract or License pursuant hereto. 
Neither Agent nor any Lender shall be required or obligated in any manner
to perform or fulfill any of the obligations of Grantor under or pursuant to
any Contract or License, or to make any payment, or to make any inquiry as to
the nature or the sufficiency of any payment received by it or the sufficiency
of any performance by any party under any Contract or License, or to present or
file any claims, or to take any action to collect or enforce any performance or
the payment of any amounts which may have been assigned to it or to which it
may be entitled at any time or times.

 

3.2           Agent
may at any time after an Event of Default has occurred and be continuing (or if
any rights of set-off (other than set-offs against an Account arising under the
Contract giving rise to the same Account) or contra accounts may be asserted
with respect to the following), without prior notice to Grantor, notify Account
Debtors and other Persons obligated on the Collateral that Agent has a security
interest therein, and that payments shall be made directly to Agent, for itself
and the benefit of Lenders.  In such
event and upon the request of Agent, Grantor shall so notify Account Debtors
and other Persons obligated on Collateral. 
Once any such notice has been given to any Account Debtor or other
Person obligated on the Collateral, the affected Grantor shall not give any
contrary instructions to such Account Debtor or other Person without Agent’s
prior written consent.

 

3.3           Agent
may at any time in Agent’s own name, in the name of a nominee of Agent or in
the name of Grantor communicate (by mail, telephone, facsimile or otherwise)
with Account Debtors, parties to Contracts and obligors in respect of
Instruments to verify with such Persons, to Agent’s satisfaction, the
existence, amount, terms of, and any other matter relating to, Accounts,
payment intangibles, Instruments or Chattel Paper.  If a Default or Event of Default shall have
occurred and be continuing, Grantor, at its own expense, shall cause the
independent certified public accountants then engaged by Grantor to prepare and
deliver to Agent and each Lender at any time and from time to time promptly
upon Agent’s request the following reports with respect to Grantor: (i) a
reconciliation of all Accounts; (ii) an aging of all Accounts; (iii) trial
balances; and (iv) a test verification of such Accounts as Agent may request.

 

4.             REPRESENTATIONS
AND WARRANTIES.  GRANTOR REPRESENTS
AND WARRANTS THAT:

 

4.1           Grantor
has rights in and the power to transfer each item of the Collateral upon which
it purports to grant a Lien hereunder free and clear of any and all Liens other
than Permitted Encumbrances.

 

4.2           No
effective security agreement, financing statement, equivalent security or Lien
instrument or continuation statement covering all or any part of the Collateral
is on file or of record in any public office, except such as may have been filed
(i) by Grantor in favor of Agent pursuant to this Security Agreement or the
other Loan Documents, and (ii)  in
connection with any other Permitted Encumbrances.

 

4.3           This
Security Agreement is effective to create a valid and continuing Lien on and,
upon the filing of the appropriate financing statements listed on Schedule I
hereto, a perfected Lien in favor of Agent, for itself and the benefit of
Lenders, on the Collateral with respect to which a Lien may be perfected by
filing pursuant to the Code.  Such Lien
is prior to all other Liens, except Permitted Encumbrances that would be prior
to Liens in

 

2

 

favor
of Agent for the benefit of Agent and Lenders as a matter of law, and is
enforceable as such as against any and all creditors of and purchasers from
Grantor other than purchasers and lessees of Inventory in the ordinary course
of business.  All action by Grantor
necessary or desirable to protect and perfect such Lien on each item of the
Collateral has been duly taken or will be taken at the request of Agent.

 

4.4   Grantor’s name as it appears in official
filings in the state of its incorporation or other organization, the type of
entity of Grantor (including corporation, partnership, limited partnership or
limited liability company), organizational identification number issued by
Grantor’s state of incorporation or organization or a statement that no such
number has been issued, Grantor’s state of organization or incorporation, the
location of Grantor’s chief executive office, principal place of business,
offices, all warehouses and premises where Collateral is stored or located, and
the locations of its books and records concerning the Collateral are set forth
on Schedule II hereto.  Grantor
has only one state of incorporation or organization.

 

4.5           With
respect to the Accounts, except as specifically disclosed on the most recent
Collateral Report delivered to Agent (i) they represent bona fide rendering of
services to Account Debtors in the ordinary course of Grantor’s business and
are not evidenced by a judgment, Instrument or Chattel Paper; (ii) there are no
setoffs, claims or disputes existing or asserted with respect thereto and
Grantor has not made any agreement with any Account Debtor for any extension of
time for the payment thereof, any compromise or settlement for less than the
full amount thereof, any release of any Account Debtor from liability therefor,
or any deduction therefrom, except extensions, compromises, discounts or
allowances allowed by Grantor in the ordinary course of Grantor’s business;
(iii) to Grantor’s knowledge, there are no facts, events or occurrences which
in any way impair the validity or enforceability thereof or could reasonably be
expected to reduce the amount payable thereunder as shown on Grantor’s books
and records and any invoices, statements and Collateral Reports delivered to
Agent and Lenders with respect thereto; (iv) Grantor has not received any
notice of proceedings or actions which are threatened or pending against any
Account Debtor which might result in any adverse change in such Account Debtor’s
financial condition; and (v) Grantor has no knowledge that any Account Debtor
is unable generally to pay its debts as they become due.  Further with respect to the Accounts (y) the
amounts shown on all invoices, statements and Collateral Reports which may be
delivered to the Agent with respect thereto are actually and absolutely owing
to Grantor as indicated thereon and are not in any way contingent;; and (z) to
Grantor’s knowledge, all Account Debtors have the capacity to contract.

 

4.6           With
respect to any Inventory scheduled or listed on the most recent Collateral
Report delivered to Agent pursuant to the terms of this Security Agreement or
the Credit Agreement, (i) such Inventory is located at one of Grantor’s
locations set forth on Schedule II hereto, (ii) no Inventory is now, or
shall at any time or times hereafter be stored at any other location without
Agent’s prior consent, and if Agent gives such consent, Grantor will
concurrently therewith obtain, to the extent required by the Credit Agreement,
bailee, landlord and mortgagee agreements, (iii) Grantor has good, indefeasible
and merchantable title to such Inventory and such Inventory is not subject to
any Lien or security interest or document whatsoever except for the Lien
granted to Agent, for the benefit of Agent and Lenders, and except for
Permitted Encumbrances, (iv) except as specifically disclosed in the most
recent Collateral Report delivered to Agent, such Inventory is of good and
merchantable quality, free from any defects, (v) such Inventory is not subject
to any licensing, patent, royalty, trademark, trade name or copyright
agreements with any third parties which would require any consent of any third
party upon sale or disposition of that Inventory or the payment of any monies
to any third party upon such sale or other disposition, and (vi) the completion
of manufacture, sale or other disposition of such Inventory by Agent following
an Event of Default shall not require the consent of any Person and shall not
constitute a breach or default under any contract or agreement to which Grantor
is a party or to which such property is subject.

 

4.7           All
motor vehicles owned by Grantor are listed on Schedule III hereto, by
model, model year and vehicle identification number (“VIN”).

 

5.             COVENANTS.  GRANTOR COVENANTS AND AGREES WITH AGENT, FOR
THE BENEFIT OF AGENT AND LENDERS, THAT FROM AND AFTER THE DATE OF THIS SECURITY
AGREEMENT AND UNTIL THE TERMINATION DATE:

 

3

 

5.1           Further
Assurances; Pledge of Instruments; Chattel Paper.

 

(a)           At any time and from time to time,
upon the written request of Agent and at the sole expense of Grantor, Grantor
shall promptly and duly execute and deliver any and all such further
instruments and documents and take such further actions as Agent may deem
desirable to obtain the full benefits of this Security Agreement and of the
rights and powers herein granted, including (A) using its best efforts to
secure all consents and approvals necessary or appropriate for the assignment
to or for the benefit of Agent of any License or Contract held by Grantor and
to enforce the security interests granted hereunder; and (B) filing any
financing or continuation statements under the Code with respect to the Liens
granted hereunder or under any other Loan Document as to those jurisdictions
that are not Uniform Commercial Code jurisdictions.

 

(b)           Unless Agent shall otherwise consent
in writing (which consent may be revoked), Grantor shall deliver to Agent all
Collateral consisting of negotiable Documents, certificated securities, Chattel
Paper and Instruments (in each case, accompanied by stock powers, allonges or
other instruments of transfer executed in blank) promptly after such Credit
Party receives the same.

 

(c)           Grantor shall, in accordance with the
terms of the Credit Agreement and receipt of a specific request from Agent,
obtain or use its best efforts to obtain waivers or subordinations of Liens
from landlords and mortgagees, and each Credit Party shall in all instances
obtain signed acknowledgements of Agent’s Liens from bailees having possession
of Grantor’s Goods that they hold for the benefit of Agent.

 

(d)           Intentionally Omitted.

 

(e)           Intentionally Omitted.

 

(f)            Intentionally Omitted.

 

(g)           Grantor shall take all steps
necessary to grant the Agent control of all electronic chattel paper in
accordance with the Code and all “transferable records” as defined in each of
the Uniform Electronic Transactions Act and the Electronic Signatures in Global
and National Commerce Act, in each case that are part of or otherwise pertain
to the Collateral.

 

(h)           Grantor hereby irrevocably authorizes
the Agent at any time and from time to time to file in any filing office in any
Uniform Commercial Code jurisdiction any initial financing statements and
amendments thereto that (a) indicate the Collateral as required by Article 9 of
the Code, and (b) contain any other information required by part 5 of Article 9
of the Code for the sufficiency or filing office acceptance of any financing
statement or amendment, including (i) whether Grantor is an organization, the
type of organization and any organization identification number issued to
Grantor, and (ii) in the case of a financing statement filed as a fixture
filing or indicating Collateral as as-extracted collateral or timber to be cut,
a sufficient description of real property to which the Collateral relates.  Grantor agrees to furnish any such
information to the Agent promptly upon request. 
Grantor also ratifies its authorization for the Agent to have filed in
any Uniform Commercial Code jurisdiction any initial financing statements or
amendments thereto if filed prior to the date hereof.

 

(i)            Grantor shall promptly, and in any
event within two (2) Business Days after the same is acquired by it, notify
Agent of any commercial tort claim (as defined in the Code) acquired by it and
associated or otherwise related to, directly or indirectly, with the
Collateral, and unless otherwise consented by Agent, Grantor shall enter into a
supplement to this Security Agreement, granting to Agent a Lien in such
commercial tort claim.

 

5.2           Maintenance
of Records.  Grantor shall keep and
maintain, at its own cost and expense, satisfactory and complete records of the
Collateral, including a record of any and all payments received and any and all
credits granted with respect to the Collateral and all other dealings with the
Collateral.

 

4

 

5.3           Intentionally
Omitted.

 

5.4           Indemnification.  In any suit, proceeding or action brought by
Agent or any Lender relating to any Collateral for any sum owing with respect
thereto or to enforce any rights or claims with respect thereto, Grantor will
save, indemnify and keep Agent and Lenders harmless from and against all
expense (including reasonable attorneys’ fees and expenses), loss or damage
suffered by reason of any defense, setoff, counterclaim, recoupment or
reduction of liability whatsoever of the Account Debtor or other Person
obligated on the Collateral, arising out of a breach by Grantor of any
obligation thereunder or arising out of any other agreement, indebtedness or
liability at any time owing to, or in favor of, such obligor or its successors
from Grantor, except in the case of Agent or any Lender, to the extent such
expense, loss, or damage is attributable solely to the gross negligence or
willful misconduct of Agent or such Lender as finally determined by a court of
competent jurisdiction.  All such obligations
of Grantor shall be and remain enforceable against and only against Grantor and
shall not be enforceable against Agent or any Lender.

 

5.5           Compliance
with Terms of Accounts, etc.  In all
material respects, Grantor will perform and comply with all obligations in
respect of the Collateral and all other agreements to which it is a party or by
which it is bound relating to the Collateral.

 

5.6           Limitation
on Liens on Collateral.  Grantor will
not create, permit or suffer to exist, and will defend the Collateral against,
and take such other action as is necessary to remove, any Lien on the
Collateral except Permitted Encumbrances, and will defend the right, title and
interest of Agent and Lenders in and to any of Grantor’s rights under the
Collateral against the claims and demands of all Persons whomsoever.

 

5.7           Limitations
on Disposition.  Grantor will not
sell, license, lease, transfer or otherwise dispose of any of the Collateral,
or attempt or contract to do so except as permitted by the Credit Agreement.

 

5.8           Further
Identification of Collateral. 
Grantor will, if so requested by Agent, furnish to Agent, as often as
Agent requests, statements and schedules further identifying and describing the
Collateral and such other reports in connection with the Collateral as Agent
may reasonably request, all in such detail as Agent may specify.

 

5.9           Notices.  Grantor will advise Agent promptly, in
reasonable detail, (i) of any Lien (other than Permitted Encumbrances) or
claim made or asserted against any of the Collateral, and (ii) of the
occurrence of any other event which would have a material adverse effect on the
aggregate value of the Collateral or on the Liens created hereunder or under
any other Loan Document.

 

5.10         Intentionally
Omitted.

 

5.11         No
Reincorporation.  Without limiting
the prohibitions on mergers involving the Grantor contained in the Credit
Agreement, Grantor shall not reincorporate or reorganize itself under the laws
of any jurisdiction other than the jurisdiction in which it is incorporated or
organized as of the date hereof without the prior written consent of Agent.

 

5.12         Terminations;
Amendments Not Authorized.  Grantor
acknowledges that it is not authorized to file any financing statement or
amendment or termination statement with respect to any financing statement
without the prior written consent of Agent and agrees that it will not do so
without the prior written consent of Agent, subject to Grantor’s rights under
Section 9.509(d)(2) of the Code.

 

5.13         Authorized
Terminations.  Agent will promptly
deliver to Grantor for filing or authorize Grantor to prepare and file
termination statements and releases in accordance with Section 11.2(e) of the
Credit Agreement.

 

5

 

6.             AGENT’S
APPOINTMENT AS ATTORNEY-IN-FACT.

 

On the Closing Date Grantor shall execute and deliver
to Agent a power of attorney (the “Power of Attorney”) substantially in
the form attached hereto as Exhibit B. 
The power of attorney granted pursuant to the Power of Attorney is a power
coupled with an interest and shall be irrevocable until the Termination
Date.  The powers conferred on Agent, for
the benefit of Agent and Lenders, under the Power of Attorney are solely to
protect Agent’s interests (for the benefit of Agent and Lenders) in the
Collateral and shall not impose any duty upon Agent or any Lender to exercise
any such powers.  Agent agrees that (a)
except for the powers granted in clause (h) of the Power of Attorney, it shall
not exercise any power or authority granted 
under the Power of Attorney unless an Event of Default has occurred and
is continuing, and (b) Agent shall account for any moneys received by Agent in
respect of any foreclosure on or disposition of Collateral pursuant to the
Power of Attorney provided that none of Agent nor any Lender shall have
any duty as to any Collateral, and Agent and Lenders shall be accountable only
for amounts they actually receive as a result of the exercise of such
powers.  NONE OF AGENT, LENDERS OR THEIR
RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
REPRESENTATIVES SHALL BE RESPONSIBLE TO GRANTOR FOR ANY ACT OR FAILURE TO ACT
UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT  IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO
THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY DETERMINED BY A
COURT OF COMPETENT JURISDICTION, NOR FOR ANY PUNITIVE, EXEMPLARY, INDIRECT OR
CONSEQUENTIAL DAMAGES.

 

7.             REMEDIES;
RIGHTS UPON DEFAULT.

 

7.1           In
addition to all other rights and remedies granted to it under this Security
Agreement, the Credit Agreement, the other Loan Documents and under any other
instrument or agreement securing, evidencing or relating to any of the
Obligations, if any Event of Default shall have occurred and be continuing,
Agent may exercise all rights and remedies of a secured party under the
Code.  Without limiting the generality of
the foregoing, Grantor expressly agrees that in any such event Agent, without
demand of performance or other demand, advertisement or notice of any kind
(except the notice specified below of time and place of public or private sale)
to or upon Grantor or any other Person (all and each of which demands,
advertisements and notices are hereby expressly waived to the maximum extent
permitted by the Code and other applicable law), may forthwith enter upon the
premises of Grantor where any Collateral is located through self-help, without
judicial process, without first obtaining a final judgment or giving Grantor or
any other Person notice and opportunity for a hearing on Agent’s claim or
action and may collect, receive, assemble, process, appropriate and realize
upon the Collateral, or any part thereof, and may forthwith sell, lease,
license, assign, give an option or options to purchase, or sell or otherwise
dispose of and deliver said Collateral (or contract to do so), or any part
thereof, in one or more parcels at a public or private sale or sales, at any
exchange at such prices as it may deem acceptable, for cash or on credit or for
future delivery without assumption of any credit risk.  Agent or any Lender shall have the right upon
any such public sale or sales and, to the extent permitted by law, upon any
such private sale or sales, to purchase for the benefit of Agent and Lenders,
the whole or any part of said Collateral so sold, free of any right or equity
of redemption, which equity of redemption Grantor hereby releases.  Such sales may be adjourned and continued
from time to time with or without notice. 
Agent shall have the right to conduct such sales on Grantor’s premises
or elsewhere and shall have the right to use Grantor’s premises without charge
for such time or times as Agent deems necessary or advisable.

 

If any Event of Default shall have occurred and be
continued, Grantor further agrees, at Agent’s request, to assemble the
Collateral and make it available to Agent at a place or places designated by
Agent which are reasonably convenient to Agent and Grantor, whether at Grantor’s
premises or elsewhere.  Until Agent is
able to effect a sale, lease, or other disposition of Collateral, Agent shall
have the right, so long as an Event of Default has occurred and is continuing
to hold or use Collateral, or any part thereof, to the extent that it deems
appropriate for the purpose of preserving Collateral or its value or for any
other purpose deemed appropriate by Agent. 
Agent shall have no obligation to Grantor to maintain or preserve the
rights of Grantor as against third parties with respect to Collateral while
Collateral is in the possession of Agent. 
Agent may, if it so elects, so long as an Event of Default has occurred
and is continuing, seek the appointment of a receiver or keeper to take
possession of Collateral and to enforce any of Agent’s remedies (for the
benefit of Agent and Lenders), with respect to such appointment without prior
notice or hearing as to such appointment. 
Agent shall apply the net proceeds of any such collection, recovery,
receipt, appropriation, realization or sale to the Obligations as provided in
the Credit Agreement, and only after so paying over such net proceeds, and
after the payment by Agent of any other amount required by any provision of

 

6

 

law,
need Agent account for the surplus, if any, to Grantor.  To the maximum extent permitted by applicable
law, Grantor waives all claims, damages, and demands against Agent or any
Lender arising out of the repossession, retention or sale of the Collateral
except such as arise solely out of the gross negligence or willful misconduct
of Agent or such Lender as finally determined by a court of competent
jurisdiction.  Grantor agrees that ten
(10) days prior notice by Agent of the time and place of any public sale or of
the time after which a private sale may take place is reasonable notification
of such matters.  Grantor shall remain
liable for any deficiency if the proceeds of any sale or disposition of the
Collateral are insufficient to pay all Obligations, including any attorneys’
fees or other expenses incurred by Agent or any Lender to collect such
deficiency.

 

7.2           Except
as otherwise specifically provided herein, Grantor hereby waives presentment,
demand, protest or any notice (to the maximum extent permitted by applicable
law) of any kind in connection with this Security Agreement or any Collateral.

 

7.3   To the extent that applicable law imposes
duties on the Agent to exercise remedies in a commercially reasonable manner,
Grantor acknowledges and agrees that it is not commercially unreasonable for
the Agent (i) to fail to incur expenses reasonably deemed significant by the
Agent to prepare Collateral for disposition or otherwise to complete raw
material or work in process into finished goods or other finished products for
disposition, (ii) to fail to obtain third party consents for access to
Collateral to be disposed of, or to obtain or, if not required by other law, to
fail to obtain governmental or third party consents for the collection or
disposition of Collateral to be collected or disposed of, (iii) to fail to
exercise collection remedies against Account Debtors or other Persons obligated
on Collateral or to remove Liens on or any adverse claims against Collateral,
(iv) to exercise collection remedies against Account Debtors and other Persons
obligated on Collateral directly or through the use of collection agencies and
other collection specialists, (v) to advertise dispositions of Collateral
through publications or media of general circulation, whether or not the
Collateral is of a specialized nature, (vi) to contact other Persons, whether
or not in the same business as the Grantor, for expressions of interest in
acquiring all or any portion of such Collateral, (vii) to hire one or more
professional auctioneers to assist in the disposition of Collateral, whether or
not the Collateral is of a specialized nature, (viii) to dispose of Collateral
by utilizing internet sites that provide for the auction of assets of the types
included in the Collateral or that have the reasonable capacity of doing so, or
that match buyers and sellers of assets, (ix) to dispose of assets in wholesale
rather than retail markets, (x) to disclaim disposition warranties, such as
title, possession or quiet enjoyment, (xi) to purchase insurance or credit
enhancements to insure the Agent against risks of loss, collection or
disposition of Collateral or to provide to the Agent a guaranteed return from
the collection or disposition of Collateral, or (xii) to the extent deemed
appropriate by the Agent, to obtain the services of other brokers, investment
bankers, consultants and other professionals to assist the Agent in the
collection or disposition of any of the Collateral.  Grantor acknowledges that the purpose of this
Section 7.3 is to provide non-exhaustive indications of what actions or
omissions by the Agent would not be commercially unreasonable in the Agent’s
exercise of remedies against the Collateral and that other actions or omissions
by the Agent shall not be deemed commercially unreasonable solely on account of
not being indicated in this Section 7.3. 
Without limitation upon the foregoing, nothing contained in this Section
7.3 shall be construed to grant any rights to Grantor or to impose any
duties on Agent that would not have been granted or imposed by this Security
Agreement or by applicable law in the absence of this Section 7.3.

 

7.4   Neither the Agent nor the Lenders shall be
required to make any demand upon, or pursue or exhaust any of their rights or
remedies against, Grantor, any other obligor, guarantor, pledgor or any other
Person with respect to the payment of the Obligations or to pursue or exhaust
any of their rights or remedies with respect to any Collateral therefor or any
direct or indirect guarantee thereof. 
Neither the Agent nor the Lenders shall be required to marshal the Collateral
or any guarantee of the Obligations or to resort to the Collateral or any such
guarantee in any particular order, and all of its and their rights hereunder or
under any other Loan Document shall be cumulative.  To the extent it may lawfully do so, Grantor
absolutely and irrevocably waives and relinquishes the benefit and advantage
of, and covenants not to assert against the Agent or any Lender, any valuation,
stay, appraisement, extension, redemption or similar laws and any and all
rights or defenses it may have as a surety now or hereafter existing which, but
for this provision, might be applicable to the sale of any Collateral made
under the judgment, order or decree of any court, or privately under the power
of sale conferred by this Security Agreement, or otherwise.

 

8.             GRANT
OF LICENSE TO USE INTELLECTUAL PROPERTY. 
FOR THE PURPOSE OF ENABLING AGENT TO EXERCISE RIGHTS AND REMEDIES UNDER SECTION
7 HEREOF

 

7

 

(INCLUDING, WITHOUT LIMITING THE TERMS OF SECTION 7
HEREOF, IN ORDER TO TAKE POSSESSION OF, HOLD, PRESERVE, PROCESS, ASSEMBLE,
PREPARE FOR SALE, MARKET FOR SALE, SELL OR OTHERWISE DISPOSE OF COLLATERAL) AT
SUCH TIME AS AGENT SHALL BE LAWFULLY ENTITLED TO EXERCISE SUCH RIGHTS AND
REMEDIES, GRANTOR HEREBY GRANTS TO AGENT, FOR THE BENEFIT OF AGENT AND LENDERS,
AN IRREVOCABLE, NONEXCLUSIVE LICENSE (EXERCISABLE WITHOUT PAYMENT OF ROYALTY OR
OTHER COMPENSATION TO GRANTOR) TO USE, LICENSE OR SUBLICENSE ANY INTELLECTUAL
PROPERTY NOW OWNED OR HEREAFTER ACQUIRED BY GRANTOR, AND WHEREVER THE SAME MAY
BE LOCATED, AND INCLUDING IN SUCH LICENSE ACCESS TO ALL MEDIA IN WHICH ANY OF
THE LICENSED ITEMS MAY BE RECORDED OR STORED AND TO ALL COMPUTER SOFTWARE AND
PROGRAMS USED FOR THE COMPILATION OR PRINTOUT THEREOF.

 

9.             LIMITATION
ON AGENT’S AND LENDERS’ DUTY IN RESPECT OF COLLATERAL.  AGENT AND EACH LENDER SHALL USE REASONABLE
CARE WITH RESPECT TO THE COLLATERAL IN ITS POSSESSION OR UNDER ITS
CONTROL.  NEITHER AGENT NOR ANY LENDER
SHALL HAVE ANY OTHER DUTY AS TO ANY COLLATERAL IN ITS POSSESSION OR CONTROL OR
IN THE POSSESSION OR CONTROL OF ANY AGENT OR NOMINEE OF AGENT OR SUCH LENDER,
OR ANY INCOME THEREON OR AS TO THE PRESERVATION OF RIGHTS AGAINST PRIOR PARTIES
OR ANY OTHER RIGHTS PERTAINING THERETO.

 

10.          REINSTATEMENT.  THIS SECURITY AGREEMENT SHALL REMAIN IN FULL
FORCE AND EFFECT AND CONTINUE TO BE EFFECTIVE SHOULD ANY PETITION BE FILED BY
OR AGAINST GRANTOR FOR LIQUIDATION OR REORGANIZATION, SHOULD GRANTOR BECOME
INSOLVENT OR MAKE AN ASSIGNMENT FOR THE BENEFIT OF ANY CREDITOR OR CREDITORS OR
SHOULD A RECEIVER OR TRUSTEE BE APPOINTED FOR ALL OR ANY SIGNIFICANT PART OF
GRANTOR’S ASSETS, AND SHALL CONTINUE TO BE EFFECTIVE OR BE REINSTATED, AS THE
CASE MAY BE, IF AT ANY TIME PAYMENT AND PERFORMANCE OF THE OBLIGATIONS, OR ANY
PART THEREOF, IS, PURSUANT TO APPLICABLE LAW, RESCINDED OR REDUCED IN AMOUNT,
OR MUST OTHERWISE BE RESTORED OR RETURNED BY ANY OBLIGEE OF THE OBLIGATIONS,
WHETHER AS A “VOIDABLE PREFERENCE,” “FRAUDULENT CONVEYANCE,” OR OTHERWISE, ALL
AS THOUGH SUCH PAYMENT OR PERFORMANCE HAD NOT BEEN MADE.  IN THE EVENT THAT ANY PAYMENT, OR ANY PART
THEREOF, IS RESCINDED, REDUCED, RESTORED OR RETURNED, THE OBLIGATIONS SHALL BE
REINSTATED AND DEEMED REDUCED ONLY BY SUCH AMOUNT PAID AND NOT SO RESCINDED,
REDUCED, RESTORED OR RETURNED.

 

11.          NOTICES.  EXCEPT AS OTHERWISE PROVIDED HEREIN, WHENEVER
IT IS PROVIDED HEREIN THAT ANY NOTICE, DEMAND, REQUEST, CONSENT, APPROVAL,
DECLARATION OR OTHER COMMUNICATION SHALL OR MAY BE GIVEN TO OR SERVED UPON ANY
OF THE PARTIES BY ANY OTHER PARTY, OR WHENEVER ANY OF THE PARTIES DESIRES TO
GIVE AND SERVE UPON ANY OTHER PARTY ANY COMMUNICATION WITH RESPECT TO THIS
SECURITY AGREEMENT, EACH SUCH NOTICE, DEMAND, REQUEST, CONSENT, APPROVAL,
DECLARATION OR OTHER COMMUNICATION SHALL BE IN WRITING AND SHALL BE GIVEN IN
THE MANNER, AND DEEMED RECEIVED, AS PROVIDED FOR IN THE CREDIT AGREEMENT.

 

12.          SEVERABILITY.  WHENEVER POSSIBLE, EACH PROVISION OF THIS
SECURITY AGREEMENT SHALL BE INTERPRETED IN A MANNER AS TO BE EFFECTIVE AND
VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS SECURITY AGREEMENT
SHALL BE PROHIBITED BY OR INVALID UNDER APPLICABLE LAW, SUCH PROVISION SHALL BE
INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY WITHOUT
INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF
THIS SECURITY AGREEMENT.  THIS SECURITY
AGREEMENT IS TO BE READ, CONSTRUED AND APPLIED TOGETHER WITH THE CREDIT
AGREEMENT AND THE OTHER LOAN DOCUMENTS WHICH, TAKEN TOGETHER, SET FORTH THE
COMPLETE UNDERSTANDING AND AGREEMENT

 

8

 

OF AGENT, LENDERS AND GRANTOR WITH RESPECT TO THE MATTERS
REFERRED TO HEREIN AND THEREIN.

 

13.          NO
WAIVER; CUMULATIVE REMEDIES.  NEITHER
AGENT NOR ANY LENDER SHALL BY ANY ACT, DELAY, OMISSION OR OTHERWISE BE DEEMED
TO HAVE WAIVED ANY OF ITS RIGHTS OR REMEDIES HEREUNDER, AND NO WAIVER SHALL BE
VALID UNLESS IN WRITING, SIGNED BY AGENT AND THEN ONLY TO THE EXTENT THEREIN
SET FORTH.  A WAIVER BY AGENT OF ANY
RIGHT OR REMEDY HEREUNDER ON ANY ONE OCCASION SHALL NOT BE CONSTRUED AS A BAR
TO ANY RIGHT OR REMEDY WHICH AGENT WOULD OTHERWISE HAVE HAD ON ANY FUTURE
OCCASION.  NO FAILURE TO EXERCISE NOR ANY
DELAY IN EXERCISING ON THE PART OF AGENT OR ANY LENDER, ANY RIGHT, POWER OR
PRIVILEGE HEREUNDER, SHALL OPERATE AS A WAIVER THEREOF, NOR SHALL ANY SINGLE OR
PARTIAL EXERCISE OF ANY RIGHT, POWER OR PRIVILEGE HEREUNDER PRECLUDE ANY OTHER
OR FUTURE EXERCISE THEREOF OR THE EXERCISE OF ANY OTHER RIGHT, POWER OR
PRIVILEGE.  THE RIGHTS AND REMEDIES
HEREUNDER PROVIDED ARE CUMULATIVE AND MAY BE EXERCISED SINGLY OR CONCURRENTLY, AND
ARE NOT EXCLUSIVE OF ANY RIGHTS AND REMEDIES PROVIDED BY LAW.  NONE OF THE TERMS OR PROVISIONS OF THIS
SECURITY AGREEMENT MAY BE WAIVED, ALTERED, MODIFIED OR AMENDED EXCEPT BY AN
INSTRUMENT IN WRITING, DULY EXECUTED BY AGENT AND GRANTOR.

 

14.          LIMITATION
BY LAW.  ALL RIGHTS, REMEDIES AND
POWERS PROVIDED IN THIS SECURITY AGREEMENT MAY BE EXERCISED ONLY TO THE EXTENT
THAT THE EXERCISE THEREOF DOES NOT VIOLATE ANY APPLICABLE PROVISION OF LAW, AND
ALL THE PROVISIONS OF THIS SECURITY AGREEMENT ARE INTENDED TO BE SUBJECT TO ALL
APPLICABLE MANDATORY PROVISIONS OF LAW THAT MAY BE CONTROLLING AND TO BE
LIMITED TO THE EXTENT NECESSARY SO THAT THEY SHALL NOT RENDER THIS SECURITY
AGREEMENT INVALID, UNENFORCEABLE, IN WHOLE OR IN PART, OR NOT ENTITLED TO BE
RECORDED, REGISTERED OR FILED UNDER THE PROVISIONS OF ANY APPLICABLE LAW.

 

15.          TERMINATION
OF THIS SECURITY AGREEMENT.  SUBJECT
TO SECTION 10 HEREOF, THIS SECURITY AGREEMENT SHALL TERMINATE UPON THE
TERMINATION DATE.

 

16.          SUCCESSORS
AND ASSIGNS.  THIS SECURITY AGREEMENT
AND ALL OBLIGATIONS OF GRANTOR HEREUNDER SHALL BE BINDING UPON THE SUCCESSORS
AND ASSIGNS OF GRANTOR (INCLUDING ANY DEBTOR-IN-POSSESSION ON BEHALF OF
GRANTOR) AND SHALL, TOGETHER WITH THE RIGHTS AND REMEDIES OF AGENT, FOR THE
BENEFIT OF AGENT AND LENDERS, HEREUNDER, INURE TO THE BENEFIT OF AGENT AND
LENDERS, ALL FUTURE HOLDERS OF ANY INSTRUMENT EVIDENCING ANY OF THE OBLIGATIONS
AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. 
NO SALES OF PARTICIPATIONS, OTHER SALES, ASSIGNMENTS, TRANSFERS OR OTHER
DISPOSITIONS OF ANY AGREEMENT GOVERNING OR INSTRUMENT EVIDENCING THE
OBLIGATIONS OR ANY PORTION THEREOF OR INTEREST THEREIN SHALL IN ANY MANNER
IMPAIR THE LIEN GRANTED TO AGENT, FOR THE BENEFIT OF AGENT AND LENDERS,
HEREUNDER.   GRANTOR MAY NOT ASSIGN,
SELL, HYPOTHECATE OR OTHERWISE TRANSFER ANY INTEREST IN OR OBLIGATION UNDER
THIS SECURITY AGREEMENT.

 

17.          COUNTERPARTS.  THIS SECURITY AGREEMENT MAY BE AUTHENTICATED
IN ANY NUMBER OF SEPARATE COUNTERPARTS, EACH OF WHICH SHALL COLLECTIVELY AND
SEPARATELY CONSTITUTE ONE AND THE SAME AGREEMENT.  THIS SECURITY AGREEMENT MAY BE AUTHENTICATED
BY MANUAL SIGNATURE, FACSIMILE OR, IF APPROVED IN WRITING BY AGENT, ELECTRONIC
MEANS, ALL OF WHICH SHALL BE EQUALLY VALID.

 

18.          GOVERNING
LAW.  EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED IN ANY OF THE LOAN DOCUMENTS, IN ALL RESPECTS, INCLUDING ALL MATTERS
OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS SECURITY AGREEMENT AND THE
OBLIGATIONS ARISING HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED
IN

 

9

 

ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE
TO CONTRACTS MADE AND PERFORMED IN THAT STATE, AND ANY APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA.  GRANTOR HEREBY
CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN BEXAR COUNTY,
CITY OF SAN ANTONIO, TEXAS, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN GRANTOR, AGENT AND LENDERS PERTAINING
TO THIS SECURITY AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY MATTER ARISING
OUT OF OR RELATING TO THIS SECURITY AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS, PROVIDED, THAT AGENT, LENDERS AND GRANTOR ACKNOWLEDGE THAT
ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE
OF BEXAR COUNTY, AND, PROVIDED, FURTHER, NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE AGENT FROM BRINGING SUIT OR
TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE
COLLATERAL OR ANY OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT
OR OTHER COURT ORDER IN FAVOR OF AGENT. 
GRANTOR EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION
IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND GRANTOR HEREBY WAIVES
ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM  NON  CONVENIENS AND HEREBY CONSENTS
TO THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY
SUCH COURT.  GRANTOR HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINTS AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO GRANTOR AT THE
ADDRESS SET FORTH ON ANNEX I TO THE CREDIT AGREEMENT AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

 

19.          WAIVER
OF JURY TRIAL.  BECAUSE DISPUTES
ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND
ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH
APPLICABLE STATE AND FEDERAL LAWS TO APPLY (RATHER THAN ARBITRATION RULES), THE
PARTIES DESIRE THAT DISPUTES ARISING HEREUNDER OR RELATING HERETO BE RESOLVED
BY A JUDGE APPLYING SUCH APPLICABLE LAWS. 
THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE
JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL
BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG AGENT, LENDERS, AND
GRANTOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS SECURITY AGREEMENT OR ANY OF
THE OTHER LOAN DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO.

 

20.          SECTION
TITLES.  THE SECTION TITLES CONTAINED
IN THIS SECURITY AGREEMENT ARE AND SHALL BE WITHOUT SUBSTANTIVE MEANING OR
CONTENT OF ANY KIND WHATSOEVER AND ARE NOT A PART OF THE AGREEMENT BETWEEN THE
PARTIES HERETO.

 

21.          NO
STRICT CONSTRUCTION.  THE PARTIES
HERETO HAVE PARTICIPATED JOINTLY IN THE NEGOTIATION AND DRAFTING OF THIS
SECURITY AGREEMENT.  IN THE EVENT AN
AMBIGUITY OR QUESTION OF INTENT OR INTERPRETATION ARISES, THIS SECURITY
AGREEMENT SHALL BE CONSTRUED AS IF DRAFTED JOINTLY BY THE PARTIES HERETO AND NO
PRESUMPTION OR BURDEN OF PROOF SHALL ARISE FAVORING OR DISFAVORING ANY PARTY BY
VIRTUE OF THE AUTHORSHIP OF ANY PROVISIONS OF THIS SECURITY AGREEMENT.

 

10

 

22.          ADVICE
OF COUNSEL.  EACH OF THE PARTIES
REPRESENTS TO EACH OTHER PARTY HERETO THAT IT HAS DISCUSSED THIS SECURITY
AGREEMENT AND, SPECIFICALLY, THE PROVISIONS OF SECTION 18 AND SECTION
19, WITH ITS COUNSEL.

 

23.        BENEFIT
OF LENDERS.  ALL LIENS GRANTED OR
CONTEMPLATED HEREBY SHALL BE FOR THE BENEFIT OF AGENT, INDIVIDUALLY, AND
LENDERS, AND ALL PROCEEDS OR PAYMENTS REALIZED FROM COLLATERAL IN ACCORDANCE
HEREWITH SHALL BE APPLIED TO THE OBLIGATIONS IN ACCORDANCE WITH THE TERMS OF
THE CREDIT AGREEMENT.

 

IN WITNESS
WHEREOF, each of the parties hereto has caused this Security Agreement to be
executed and delivered by its duly authorized officer as of the date first set
forth above.

 

	
   

  	
  GRANTOR:

  	
   

  
	
   

  	
   

  
	
   

  	
  PIONEER DRILLING SERVICES, LTD.,
  a Texas limited

  partnership

  
	
   

  	
   

  
	
   

  	
  By:

  	
  PDC Mgmt. Co., a Texas
  corporation, General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Wm. Stacy Locke,
  President and Chief Executive

  Officer

  
	
   

  	
   

  
	
   

  	
  AGENT:

  	
   

  
	
   

  	
   

  
	
   

  	
  THE FROST NATIONAL BANK,  a national banking

  association, as Agent and Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
							

 

11

 

EXHIBIT B

to

SECURITY
AGREEMENT

 

POWER
OF ATTORNEY

 

This Power of Attorney is executed and delivered by PIONEER DRILLING SERVICES, LTD., a Texas limited partnership
(“Grantor”) to THE FROST NATIONAL BANK,
a national banking association (hereinafter referred to as “Attorney”),
as Agent for the benefit of Agent and Lenders, under a Credit Agreement and a
Security Agreement, both dated as of October 29, 2004, and other related
documents (the “Loan Documents”). 
No person to whom this Power of Attorney is presented, as authority for
Attorney to take any action or actions contemplated hereby, shall be required
to inquire into or seek confirmation from Grantor as to the authority of
Attorney to take any action described below, or as to the existence of or
fulfillment of any condition to this Power of Attorney, which is intended to
grant to Attorney unconditionally the authority to take and perform the actions
contemplated herein, and Grantor irrevocable waives any right to commence any
suit or action, in law or equity, against any person or entity which acts in
reliance upon or acknowledges the authority granted under this Power of
Attorney.  The power of attorney granted
hereby is coupled with an interest, and may not be revoked or canceled by
Grantor without Attorney’s written consent.

 

Grantor hereby irrevocably constitutes and appoints
Attorney (and all officers, employees or agents designated by Attorney), with
full power of substitution, as Grantor’s true and lawful attorney-in-fact with
full irrevocable power and authority in the place and stead of Grantor and in
the name of Grantor or in its own name, from time to time in Attorney’s
discretion, to take any and all appropriate action and to execute and deliver
any and all documents and instruments which may be necessary or desirable to
accomplish the purposes of the Loan Documents and, without limiting the
generality of the foregoing, Grantor hereby grants to Attorney the power and
right, on behalf of Grantor, without notice to or assent by Grantor, and at any
time, to do the following: (a) change the mailing address of Grantor, open a
post office box on behalf of Grantor, open mail for Grantor, and ask, demand,
collect, give acquittances and receipts for, take possession of, endorse any
invoices, freight or express bills, bills of lading, storage or warehouse
receipts, drafts against debtors, assignments, verifications, and notices in
connection with any property of Grantor; (b) effect any repairs to any asset of
Grantor, or continue to obtain any insurance and pay all or any part of the
premiums therefor and costs thereof, and make, settle and adjust all claims
under such policies of insurance, and make all determinations and decisions
with respect to such policies; (c) pay or discharge any taxes, liens, security
interests, or other encumbrances levied or placed on or threatened against
Grantor or its property; (d) defend any suit, action or proceeding brought
against Grantor if Grantor does not defend such suit, action or proceeding or
if Attorney believes that Grantor is not pursuing such defense in a manner that
will maximize the recovery to Attorney, and settle, compromise or adjust any
suit, action, or proceeding described above and, in connection therewith, give
such discharges or releases as Attorney may deem appropriate; (e) file or
prosecute any claim, litigation, suit or proceeding in any court of competent
jurisdiction or before any arbitrator, or take any other action otherwise
deemed appropriate by Attorney for the purpose of collecting any and all such
moneys due to Grantor whenever payable and to enforce any other right in
respect of Grantor’s property; (f) cause the certified public accountants then
engaged by Grantor to prepare and deliver to Attorney at any time and from time
to time, promptly upon Attorney’s request, the following reports: (a) a
reconciliation of all accounts; (2) an aging of all accounts; (3) trial
balances; (4) test verifications of such accounts as Attorney may request; and
(5) the results of each physical verification of inventory; (g) communicate in
its own name with any party to any Contract with regard to the assignment of
the right, title and interest of such Grantor in and under the Contracts and
other matters relating thereto; (h) to file such financing statements with
respect to the Security Agreement, with or without Grantor’s signature, or to
file a photocopy of the Security Agreement in substitution for a financing
statement, as the Agent may deem appropriate and to execute in Grantor’s name
such financing statements and amendments thereto and continuation statements
which may require the Grantor’s signature; and (i) execute, in connection with
sale provided for in any Loan Document, any endorsements, assignments or other
instruments of conveyance or transfer with respect to the Collateral and to
otherwise direct such sale or resale, all as though Attorney were the absolute
owner of the property of Grantor for all purposes, and to do, at Attorney’s
option and Grantor’s expense, at any time or from time to time, all acts and
other things that Attorney reasonably deems necessary to perfect, preserve, or
realize upon Grantor’s property or assets and Attorney’s Liens thereon, all as
fully and effectively as Grantor might

 

12

 

do.  Grantor
hereby ratifies, to the extent permitted by law, all that said Attorney shall
lawfully do or cause to be done by virtue hereof.

 

IN WITNESS WHEREOF, this Power of Attorney is executed
by Grantor and Grantor has caused its seal to be affixed pursuant to the
authority of its board of directors this       
day of                                       ,
2004.

 

	
   

  	
  GRANTOR:

  
	
   

  	
   

  	
   

  
	
   

  	
  PIONEER DRILLING SERVICES, LTD.,
  a Texas limited partnership

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  PDC Mgmt. Co., a Texas corporation,
  General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
  Wm. Stacy Locke,
  President and Chief Executive

  Officer

  
					

 

NOTARY
PUBLIC CERTIFICATE

 

On this           
day of                             ,
2004, Wm. Stacy Locke who is personally known to me appeared before me in his
capacity as the President and Chief Executive Officer of PIONEER DRILLING
SERVICES, LTD. (“Grantor”) and executed on behalf of Grantor the Power
of Attorney in favor of THE FROST NATIONAL BANK to which this Certificate is
attached.

 

	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Notary Public

  

 

13Exhibit 10.1

 

FIFTH AMENDMENT TO CREDIT AND SECURITY
AGREEMENT

 

THIS
FIFTH AMENDMENT (the “Amendment”), dated
as of October 8,2004, is entered into between Packaging Receivables Company, LLC, a Delaware limited liability
company (the “Borrower”), Packaging Credit Company, LLC, a Delaware limited
liability company (the “Servicer”), Blue Ridge Asset Funding Corporation (“Blue Ridge”), as a Lender and Wachovia Bank National
Association (“Wachovia”), as Agent and a Lender;

 

WITNESSETH:

 

WHEREAS, the Borrower, the Servicer, Blue Ridge and Wachovia have heretofore
executed and delivered
a Credit and Security Agreement, dated as of November 29, 2000 (as amended, supplemented or otherwise modified through
the date hereof, the “Credit Agreement”),

 

WHEREAS,
the parties hereto desire to amend the Credit Agreement as provided herein;

 

NOW,
THEREFORE, for good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the parties hereto hereby agree that the Credit Agreement
shall be and is hereby amended as follows:

 

Section 1.           Sections l.2(c) and (d) of the Credit
Agreement are hereby amended in their entirety and as so amended shall read
as follows:

 

(c)        While it is the intent of Blue Ridge to fund each requested Advance through the issuance of Commercial
Paper Notes, the parties acknowledge that if Blue Ridge is unable, or determines
that it is undesirable, to issue Commercial Paper Notes to fund all or any portion the Loans, or is unable to repay such Commercial Paper Notes upon the maturity thereof,
Blue Ridge may put all or any portion of its Loans to the Liquidity Banks at any time pursuant to the Liquidity Agreement to
finance or refinance the necessary
portion of its Loans through a Liquidity Funding to the extent available. The Liquidity
Fundings may be Alternate Base Rate
Loans or Eurodollar Loans, or a combination thereof, selected by the Borrower in accordance with Article II. Regardless of whether a Liquidity Funding constitutes
an assignment of a Loan or the sale of one or more participations therein, each Liquidity Bank participating in
a Liquidity Funding shall have the rights of a “Lender” hereunder with the same
force and effect as if it had directly made a Loan to the Borrower in the amount
of its Liquidity Funding.

 

(d)        Nothing herein shall be deemed to commit Blue Ridge to
make Loans.

 

 

Section 2.           Section l.3(a) of the Credit Agreement
is hereby amended in its entirety and as so amended shall read as follows:

 

(a)        (i)            Borrower shall
pay CP Costs with respect to the principal balance of Blue Ridge’s Loans from time to time outstanding. Each Loan of Blue Ridge that is funded
substantially with Pooled Commercial Paper will accrue CP Costs each day
on a pro rata basis, based upon the percentage share that the principal in respect of such Loan represents in relation to
all assets held by Blue Ridge and
funded substantially with related Pooled Commercial Paper. The Agent will notify the Borrower promptly after the commencement of any period during which
CP Costs are calculated pursuant to the last sentence of the definition thereof,
and will attempt to give prior notice if reasonably practicable under the circumstances.

 

(ii)        Not later than the 3rd Business Day immediately preceding each Reporting Date, Blue Ridge shall
calculate the aggregate amount of
CP Costs applicable to its CP Rate Loans for the Settlement Period then most recently ended and shall notify Borrower
of such aggregate amount.

 

Section 3.           Section 1.4(a) of the Credit Agreement
is hereby amended in its entirety and as so amended shall read as follows:

 

On each Settlement Date, Borrower
shall pay to the Agent (for the benefit of Blue Ridge) an aggregate amount equal
to all accrued and unpaid
CP Costs (to the extent allocated to the Borrower in accordance with Section 1.3(a)(i)) in respect of the principal
associated with all CP Rate Loans for the Settement Period then most recently
ended in accordance with Article II. The principal
on each CP Rate Loan shall be payable on and after the Termination Date as
and when Collections are received.

 

Section 4.           Section l.4(d) of the Credit Agreement
is hereby amended in its entirety and as so amended shall read as follows:

 

(d)        The Borrower promises to pay all accrued and unpaid interest on each Loan (other than a CP
Rate Loan) on its applicable Interest Payment Date.

 

Section 5.           The first six paragraphs of Section 2.2
of the Credit Agreement are hereby amended in their entirety and as so amended
shall read as follows:

 

Section 2.2.       Selection of Interest Periods for Eurodollar
Loans. Prior to the occurrence of an Event of Default,
the

 

2

 

Borrower or the Servicer in its
Borrowing Request may request Interest Periods for Eurodollar Loans from
time to time to apply to each Lender’s
Eurodollar Loans; provided, however, that (i) at least one Interest Period
shall mature on each Settlement Date, and (ii)
no Interest Period which began prior to the Scheduled Termination Date shall extend beyond the Scheduled
Termination Date.

 

While the Agent will use reasonable
efforts to accommodate the Borrower’s
or the Servicer’s requests for Interest Periods prior to an Event of Default, the Agent shall have the right to subdivide any requested
Eurodollar Loan into one or more Eurodollar Loans of different Interest Periods,
as the case may be, or, if the requested period
is not feasible, to suggest an alternative Interest Period, provided that not less than $1,000,000 of principal
may be allocated to any Period of any Lender, and no Alternate Base Rate
Loan may have a principal amount of less than $1,000,000.

 

The Borrower (or the Servicer
on the Borrower’s behalf) may not
request an Interest Period for a Eurodollar Loan unless it shall have given the Agent written notice of its desire therefor
not later than 12:00 noon (New York City time) at least 3 Business Days prior
to the first day of the desired Interest
Period. Accordingly, all Liquidity Fundings shall initially be Alternate
Base Rate Loans.

 

Unless the Agent
shall have received written notice by 12:00 noon  (New York City time) on the third Business Day prior to the last day of
an Interest Period that the Borrower intends to reduce the aggregate principal amount
of the Eurodollar Loans outstanding from the Liquidity Banks, each of the Liquidity Banks shall be entitled to assume that the Borrower desires to
refinance its maturing Eurodollar
Loans on the last day of such Interest Period with Eurodollar Loans with
an Interest Period of one month.

 

The Agent acknowledges and agrees
that a Borrowing Request shall
not be required in connection with the refinancing on the last day of an
Interest Period of maturing Eurodollar Loans.

 

Section 6.           Section 3.2 of the Credit Agreement is
hereby amended in its entirety and as so amended shall read as follows:

 

Section 3.2.       Allocations and Distributions.

 

(a)           [Reserved]

 

3

 

(b)          Termination Date.
On each day on and after the Termination Date, the Servicer shall set aside and hold in trust solely for the account
of the Agent, for the benefit of the
Agent and the Lenders, (or delivered to the Collection Account as required pursuant to Section 7.1(i)
hereof) the Percentage Share of all Collections received on such day and such Collections
shall be remitted as follows on each Settlement Date and on each other Business
Day specified by the Agent:

 

(i)            first, to the Lenders
(ratably, based on their Ratable
Share) until all Loans of, and interest due but not already paid to, the Lenders
have been paid in full;

 

(ii)           second, to the Lenders
until all other amounts owed to the Lenders have been paid in full;

 

(iii)          third, to the Agent
until all amounts owed to the Agent have been paid in full;

 

(iv)          fourth, to any other
Person to whom any amounts
are owed under the Transaction Documents until all such amounts have been
paid in full;

 

(v)           fifth, to the Servicer
until all amounts owed to the Servicer under the Agreement have been paid
in full; and

 

(vi)          sixth, to the Borrower
(or as otherwise required by applicable law).

 

Section 7.           The first paragraph of Section 4.3 of
the Credit Agreement is hereby amended in its entirety and as so amended
shall read as follows:

 

Section 4.3.           Funding Losses. In the event that any Lender shall actually incur any actual loss or
expense (including any actual loss or expense incurred by reason of the liquidation
or reemployment of deposits or other funds acquired by such Lender to make any Loan or any Liquidity Funding, as
applicable, or maintain any Loan
or Liquidity Funding, as applicable) as a result of (i) any payment of principal
with respect to such Lender’s Loan being made on any day other than a Settlement
Date scheduled last day of an applicable
Interest Period with respect thereto (it being understood that the foregoing
shall not apply to any Alternate Base

 

4

 

Rate Loans), or
(ii) any Loan not being made in accordance with a request therefor under Section 2.1, then, upon
written notice from the Agent to the Borrower and the Servicer, the Borrower
shall pay to the Servicer and the Servicer shall pay to the Agent for the account of such Lender the amount of such actual
loss or expense. Such written notice
(which notice shall set forth in reasonable detail the basis to the loss or expense and shall include the methodology for calculating, and the calculation
of, the amount of such actual loss
or expense, in reasonable detail) shall, in the absence of demonstrable error or unreasonable assumption, methodology or allocations, be conclusive and
binding upon the Borrower and the Servicer.

 

Section 8.           The defined term “CP Rate” is
hereby deleted in its entirety.

 

Section 9.           The defined terms “CP Rate Loan” and “CP Tranche Period” are
hereby amended in their entirety and as so amended shall read as follows:

 

“CP Rate Loan” means a Loan made by Blue Ridge funded
with Pooled Commercial Paper.

 

“CP Tranche Period” shall mean the period to maturity of any
Pooled Commercial Paper.

 

Section 10.         The following new defined terms are hereby
added to Annex A of the Credit Agreement
in correct alphabetical order:

 

“CP Costs” means,
for each day, the sum of (i) discount or interest accrued on Pooled Commercial Paper
on such day, plus (ii) any and all accrued
commissions in respect of placement agents and Commercial Paper dealers, and issuing
and paying agent fees incurred, in
respect of such Pooled Commercial Paper for such day, plus (iii) other costs associated with funding small or odd-lot amounts
with respect to all receivable purchase facilities which are funded by Pooled Commercial Paper for such day,
minus (iv) any accrual of income
net of expenses received on such day from investment of collections received
under all receivable purchase or financing
facilities funded substantially with Pooled Commercial Paper, minus (v) any payment
received on such day related to the prepayment of any investment of Blue
Ridge pursuant to the terms of any receivable
purchase or financing facilities funded substantially with Pooled Commercial
Paper. In addition to the foregoing costs, if Borrower shall request any Advance
during any period of time determined by
the Agent in its sole discretion to result in incrementally higher CP Costs applicable to such Advance, the principal associated with any such
Advance shall,

 

5

 

during such period, be deemed
to be funded by Blue Ridge in a special pool (which may include capital associated
with other receivable purchase
or financing facilities) for purposes of determining such additional CP Costs applicable only to such special
pool and charged each day during such period against such principal.

 

“Interest Rate” means a Eurodollar Rate (Reserve Adjusted),
an Alternate Base Rate or the Default Rate.

 

“Pooled Commercial Paper” means Commercial Paper Notes of Blue Ridge
subject to any particular pooling arrangement by Blue Ridge, but excluding Commercial Paper Notes issued by Blue Ridge
for a tenor and in an amount specifically requested by any Person in connection with any agreement effected
by Blue Ridge.

 

Section 11.         Exhibit 2.1 to the Credit Agreement is hereby
amended and restated in its entirety and as so amended shall read as Exhibit
2.1 attached hereto.

 

Section 12.         The parties hereto acknowledge that notwithstanding
the amendments herein, Loans previously funded by Blue Ridge with Commercial
Paper Notes that are allocated specifically
to such funding have Tranche Periods ending on October 8, 2004. On October 8, 2004, the Borrower will pay the discount payable
on such Commercial Paper Notes, whereupon such Loans will become subject to the
provisions of this Amendment. The first Settlement Date with respect to Loans for
which CP Costs are payable is the 17th Business Day in November, 2004.

 

Section 13.         This Amendment shall become effective on
the date the Agent has received counterparts
hereof executed by the Borrower, the Servicer, Blue Ridge and Wachovia and consented
to in writing by the Performance Guarantor.

 

Section 14.         This Amendment may be executed in any number
of counterparts and by the different parties on separate counterparts and
each such counterpart shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Amendment.

 

Section 15.         Except as specifically provided above, the
Credit Agreement and the other Transaction
Documents shall remain in full force and effect and are hereby ratified and confirmed in all respects. The execution, delivery,
and effectiveness of this Amendment shall not operate as a waiver of any right, power, or remedy of the Agent or the
Lender under the Credit Agreement
or any of the other Transaction Documents, nor constitute a waiver or modification of any provision of any of the other
Transaction Documents. All defined terms used herein and not defined herein
shall have the same meaning herein as in the Credit Agreement. The Borrower agrees
to pay on demand all costs and expenses (including reasonable fees and expenses
of counsel and for rating agency review) of or incurred by the Agent and each

 

6

 

Purchaser Agent in connection with the negotiation, preparation, execution
and delivery of this Amendment.

 

Section 16.         THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE
CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF
NEW YORK, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICTS OF LAW.

 

7

 

IN
WITNESS WHEREOF, the parties have caused this Amendment to be executed and delivered by their duly authorized officers as
of the date first above written.

 

 

	
   

  	
  PACKAGING RECEIVABLES
  COMPANY,LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Darla
  J. Olivier

  
	
   

  	
   

  	
  Name Printed:

  	
  Darla J. Olivier

  
	
   

  	
   

  	
  Title: 

  	
  Executive
  Director, Tax &

  Assistant Secretary

  
	
   

  	
   

  
	
   

  	
  BLUE RIDGE
  ASSET FUNDING CORPORATION

  
	
   

  	
   

  
	
   

  	
  By:

  	
  WACHOVIA CAPITAL
  MARKETS, LLC

  ATTORNEY-IN-FACT

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
  /s/ Douglas
  R. Wilson, Sr.

  
	
   

  	
   

  	
  Name Printed:

  	
  DOUGLAS R.
  WILSON, SR.

  
	
   

  	
   

  	
  Title:

  	
  VICE PRESIDENT

  
	
   

  	
   

  
	
   

  	
  PACKAGING CREDIT COMPANY, LLC.

  as Servicer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Darla
  J. Olivier

  
	
   

  	
   

  	
  Name Printed:

  	
  Darla J. Olivier

  
	
   

  	
   

  	
  Title: 

  	
  Executive
  Director, Tax &

  Assistant Secretary

  
	
   

  	
   

  
	
   

  	
  WACHOVIA BANK NATIONAL ASSOCIATION,

  as Agent and a Lender

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Kenny Karpowicz

  
	
   

  	
  Name Printed:

  	
  Kenny Karpowicz

  
	
   

  	
  Title:

  	
  Vice President

  
												

 

8

 

                Consented to as of the
date first above written:

 

 

	
   

  	
  PACKAGING CORPORATION OF AMERICA

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Pamela
  A. Barnes

  
	
   

  	
  Name Printed:

  	
  Pamela A.
  Barnes

  
	
   

  	
  Title:

  	
  Treasurer

  
					

 

9

 

EXHIBIT 2.1

 

FORM OF BORROWING REQUEST

 

Packaging Receivables
Company, LLC

BORROWING REQUEST

For Borrowing On
__________

 

Wachovia Bank, N.A., as Agent

191 Peachtree Street, N.E., GA-423

Atlanta, Georgia 30303

 

Attention: Elizabeth R. Wagner, Fax No. (404)
332-5152

 

Ladies and Gentlemen:

 

Reference is made to the Credit and Security Agreement dated as of November
29, 2000 (as amended,
supplemented or otherwise modified from time to time, the “Credit Agreement”)
among Packaging Receivables Company, LLC (the “Borrower”),
Packaging Credit Company, LLC, as
initial Servicer, Blue Ridge Asset Funding Corporation, and Wachovia Bank N.A.,
individually and as Agent. Capitalized
terms defined in the Credit Agreement are used herein with the same meanings.

 

I.                                         The [Servicer, on behalf of the]
Borrower hereby certifies, represents and warrants to the Agent
and the Lenders that on and as of the Borrowing Date (as hereinafter defined):

 

(a)           all applicable conditions precedent set forth in Article V
of the Credit Agreement have been satisfied;

 

(b)           each of its representations and warranties contained in Section
6.1 of the Credit Agreement will be true and correct, in all material respects,
as if made on and as of the Borrowing Date;

 

(c)           no event will have occurred and is continuing, or would result
from the requested Purchase, that constitutes an Event of Default or Unmatured
Default;

 

(d)           the Termination Date has not occurred; and

 

(e)           after giving effect to the Loans comprising the Advance requested
below, Blue Ridge’s and the
Liquidity Banks’ Loans at anyone time outstanding will not exceed the Allocation
Limit.

 

 

III.                                 The [Servicer, on behalf of the]
Borrower hereby requests that Blue Ridge (or the Liquidity Banks) make an Advance on ______________,
______________(the “Borrowing Date”)
as follows:

 

Aggregate Amount of Advance: $____________

 

IV.           Please disburse
the proceeds of the Loans as follows:

 

[Apply $____________
to payment of principal and interest of existing Loans due on the Borrowing Date]. [Apply $____________
to payment of fees due on the Borrowing Date]. [Wire transfer $____________ to account no.___________ at ___________ Bank, in [city, state], ABA No.____________, Reference:____________].

 

IN WITNESS WHEREOF, the [Servicer, on behalf of the]
Borrower has caused this Borrowing Request to be executed and delivered as of this _________ day of _________, ________.

 

 

	
   

  	
  [____________________, as Servicer,
  on

  
	
   

  	
  behalf of:] Packaging Receivables

  Company, LLC, as Borrower

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
					

 

2

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00073-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00073-of-00352.parquet"}]]