Document:

Exhibit 10.1

 

REVOLVING CREDIT,
TERM LOAN

AND

SECURITY AGREEMENT

 

PNC BANK, NATIONAL
ASSOCIATION

(AS LENDER AND AS
AGENT)

 

WITH

 

GEOKINETICS INC.,

GEOPHYSICAL
DEVELOPMENT CORPORATION,

QUANTUM
GEOPHYSICAL, INC.,

TRACE ENERGY
SERVICES LTD.,

AND

 

TRACE ENERGY
SERVICES, INC.

(BORROWERS)

 

June 8, 2006

 

TABLE OF CONTENTS

	
  I        DEFINITIONS.

  	
   

  	
  1

  	
   

  
	
  1.1.

  	
   

  	
  Accounting Terms.

  	
   

  	
  1

  	
   

  
	
  1.2.

  	
   

  	
  General Terms.

  	
   

  	
  1

  	
   

  
	
  1.3.

  	
   

  	
  Uniform Commercial Code Terms.

  	
   

  	
  23

  	
   

  
	
  1.4.

  	
   

  	
  Certain Matters of Construction.

  	
   

  	
  24

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  II      ADVANCES, PAYMENTS.

  	
   

  	
  25

  	
   

  
	
  2.1.

  	
   

  	
  Revolving Advances.

  	
   

  	
  25

  	
   

  
	
  2.2.

  	
   

  	
  Procedure for Revolving Advances Borrowing.

  	
   

  	
  25

  	
   

  
	
  2.3.

  	
   

  	
  Disbursement of Advance Proceeds.

  	
   

  	
  27

  	
   

  
	
  2.4.

  	
   

  	
  Loans.

  	
   

  	
  28

  	
   

  
	
  2.5.

  	
   

  	
  Maximum Advances.

  	
   

  	
  28

  	
   

  
	
  2.6.

  	
   

  	
  Repayment of Advances.

  	
   

  	
  28

  	
   

  
	
  2.7.

  	
   

  	
  Repayment of Excess Advances.

  	
   

  	
  29

  	
   

  
	
  2.8.

  	
   

  	
  Statement of Account.

  	
   

  	
  29

  	
   

  
	
  2.9.

  	
   

  	
  Letters of Credit.

  	
   

  	
  29

  	
   

  
	
  2.10.

  	
   

  	
  Issuance of Letters of Credit.

  	
   

  	
  29

  	
   

  
	
  2.11.

  	
   

  	
  Requirements For Issuance of Letters of Credit.

  	
   

  	
  30

  	
   

  
	
  2.12.

  	
   

  	
  Disbursements, Reimbursement.

  	
   

  	
  31

  	
   

  
	
  2.13.

  	
   

  	
  Repayment of Participation Advances.

  	
   

  	
  32

  	
   

  
	
  2.14.

  	
   

  	
  Documentation.

  	
   

  	
  32

  	
   

  
	
  2.15.

  	
   

  	
  Determination to Honor Drawing Request.

  	
   

  	
  33

  	
   

  
	
  2.16.

  	
   

  	
  Nature of Participation and Reimbursement Obligations.

  	
   

  	
  33

  	
   

  
	
  2.17.

  	
   

  	
  Indemnity.

  	
   

  	
  34

  	
   

  
	
  2.18.

  	
   

  	
  Liability for Acts and Omissions.

  	
   

  	
  34

  	
   

  
	
  2.19.

  	
   

  	
  Additional Payments.

  	
   

  	
  36

  	
   

  
	
  2.20.

  	
   

  	
  Manner of Borrowing and Payment.

  	
   

  	
  36

  	
   

  
	
  2.21.

  	
   

  	
  Mandatory Prepayments.

  	
   

  	
  38

  	
   

  
	
  2.22.

  	
   

  	
  Use of Proceeds.

  	
   

  	
  38

  	
   

  
	
  2.23.

  	
   

  	
  Defaulting Lender.

  	
   

  	
  39

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  III     INTEREST AND FEES.

  	
   

  	
  40

  	
   

  
	
  3.1.

  	
   

  	
  Interest.

  	
   

  	
  40

  	
   

  
	
  3.2.

  	
   

  	
  Letter of Credit Fees.

  	
   

  	
  41

  	
   

  
	
  3.3.

  	
   

  	
  Closing Fee and Facility Fee.

  	
   

  	
  42

  	
   

  
	
  3.4.

  	
   

  	
  Collateral Evaluation Fee, Collateral Monitoring Fee.

  	
   

  	
  42

  	
   

  
	
  3.5.

  	
   

  	
  Computation of Interest and Fees.

  	
   

  	
  42

  	
   

  
	
  3.6.

  	
   

  	
  Maximum Charges.

  	
   

  	
  43

  	
   

  
	
  3.7.

  	
   

  	
  Increased Costs.

  	
   

  	
  43

  	
   

  
	
  3.8.

  	
   

  	
  Basis For Determining Interest Rate Inadequate or Unfair.

  	
   

  	
  44

  	
   

  
	
  3.9.

  	
   

  	
  Capital Adequacy.

  	
   

  	
  45

  	
   

  
	
  3.10.

  	
   

  	
  Gross Up for Taxes.

  	
   

  	
  45

  	
   

  
	
  3.11.

  	
   

  	
  Withholding Tax Exemption.

  	
   

  	
  46

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  IV     COLLATERAL: GENERAL TERMS

  	
   

  	
  47

  	
   

  
	
  4.1.

  	
   

  	
  Security Interest in the Collateral.

  	
   

  	
  47

  	
   

  

 

 i
 

 

 

	
  4.2.

  	
   

  	
  Perfection of Security Interest.

  	
   

  	
  47

  	
   

  
	
  4.3.

  	
   

  	
  Disposition of Collateral.

  	
   

  	
  47

  	
   

  
	
  4.4.

  	
   

  	
  Preservation of Collateral.

  	
   

  	
  48

  	
   

  
	
  4.5.

  	
   

  	
  Ownership of Collateral.

  	
   

  	
  48

  	
   

  
	
  4.6.

  	
   

  	
  Defense of Agent’s and Lenders’ Interests.

  	
   

  	
  49

  	
   

  
	
  4.7.

  	
   

  	
  Books and Records.

  	
   

  	
  49

  	
   

  
	
  4.8.

  	
   

  	
  Financial Disclosure.

  	
   

  	
  49

  	
   

  
	
  4.9.

  	
   

  	
  Compliance with Laws.

  	
   

  	
  50

  	
   

  
	
  4.10.

  	
   

  	
  Inspection of Premises.

  	
   

  	
  50

  	
   

  
	
  4.11.

  	
   

  	
  Insurance.

  	
   

  	
  50

  	
   

  
	
  4.12.

  	
   

  	
  Failure to Pay Insurance.

  	
   

  	
  51

  	
   

  
	
  4.13.

  	
   

  	
  Payment of Taxes.

  	
   

  	
  51

  	
   

  
	
  4.14.

  	
   

  	
  Payment of Leasehold Obligations.

  	
   

  	
  51

  	
   

  
	
  4.15.

  	
   

  	
  Receivables.

  	
   

  	
  51

  	
   

  
	
  4.16.

  	
   

  	
  Maintenance of Equipment.

  	
   

  	
  54

  	
   

  
	
  4.17.

  	
   

  	
  Exculpation of Liability.

  	
   

  	
  54

  	
   

  
	
  4.18.

  	
   

  	
  Environmental Matters.

  	
   

  	
  54

  	
   

  
	
  4.19.

  	
   

  	
  Financing Statements.

  	
   

  	
  57

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  V      REPRESENTATIONS AND WARRANTIES.

  	
   

  	
  57

  	
   

  
	
  5.1.

  	
   

  	
  Authority.

  	
   

  	
  57

  	
   

  
	
  5.2.

  	
   

  	
  Formation and Qualification.

  	
   

  	
  57

  	
   

  
	
  5.3.

  	
   

  	
  Survival of Representations and Warranties.

  	
   

  	
  57

  	
   

  
	
  5.4.

  	
   

  	
  Tax Returns.

  	
   

  	
  58

  	
   

  
	
  5.5.

  	
   

  	
  Financial Statements.

  	
   

  	
  58

  	
   

  
	
  5.6.

  	
   

  	
  Entity Names.

  	
   

  	
  59

  	
   

  
	
  5.7.

  	
   

  	
  O.S.H.A. and Environmental Compliance.

  	
   

  	
  59

  	
   

  
	
  5.8.

  	
   

  	
  Solvency; No Litigation, Violation, Indebtedness or Default.

  	
   

  	
  59

  	
   

  
	
  5.9.

  	
   

  	
  Patents, Trademarks, Copyrights and Licenses.

  	
   

  	
  61

  	
   

  
	
  5.10.

  	
   

  	
  Licenses and Permits.

  	
   

  	
  61

  	
   

  
	
  5.11.

  	
   

  	
  Default of Indebtedness.

  	
   

  	
  61

  	
   

  
	
  5.12.

  	
   

  	
  No Default.

  	
   

  	
  61

  	
   

  
	
  5.13.

  	
   

  	
  No Burdensome Restrictions.

  	
   

  	
  62

  	
   

  
	
  5.14.

  	
   

  	
  No Labor Disputes.

  	
   

  	
  62

  	
   

  
	
  5.15.

  	
   

  	
  Margin Regulations.

  	
   

  	
  62

  	
   

  
	
  5.16.

  	
   

  	
  Investment Company Act.

  	
   

  	
  62

  	
   

  
	
  5.17.

  	
   

  	
  Disclosure.

  	
   

  	
  62

  	
   

  
	
  5.18.

  	
   

  	
  Swaps.

  	
   

  	
  62

  	
   

  
	
  5.19.

  	
   

  	
  Conflicting Agreements.

  	
   

  	
  62

  	
   

  
	
  5.20.

  	
   

  	
  Application of Certain Laws and Regulations.

  	
   

  	
  62

  	
   

  
	
  5.21.

  	
   

  	
  Business and Property of Borrowers.

  	
   

  	
  63

  	
   

  
	
  5.22.

  	
   

  	
  Section 20 Subsidiaries.

  	
   

  	
  63

  	
   

  
	
  5.23.

  	
   

  	
  Anti-Terrorism Laws.

  	
   

  	
  63

  	
   

  
	
  5.24.

  	
   

  	
  Trading with the Enemy.

  	
   

  	
  64

  	
   

  
	
  5.25.

  	
   

  	
  Mechanic’s Liens.

  	
   

  	
  64

  	
   

  
	
  5.26.

  	
   

  	
  Restricted Subsidiaries.

  	
   

  	
  64

  	
   

  
	
  5.27.

  	
   

  	
  Delivery of Acquisition Agreement.

  	
   

  	
  64

  	
   

  

 

 ii
 

 

 

	
  5.28.

  	
   

  	
  Internal Controls and Procedures.

  	
   

  	
  64

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  VI     AFFIRMATIVE COVENANTS.

  	
   

  	
  64

  	
   

  
	
  6.1.

  	
   

  	
  Payment of Fees.

  	
   

  	
  64

  	
   

  
	
  6.2.

  	
   

  	
  Conduct of Business and Maintenance of Existence and Assets.

  	
   

  	
  65

  	
   

  
	
  6.3.

  	
   

  	
  Violations.

  	
   

  	
  65

  	
   

  
	
  6.4.

  	
   

  	
  Government Receivables.

  	
   

  	
  65

  	
   

  
	
  6.5.

  	
   

  	
  Financial Covenants.

  	
   

  	
  65

  	
   

  
	
  6.6.

  	
   

  	
  Execution of Supplemental Instruments.

  	
   

  	
  65

  	
   

  
	
  6.7.

  	
   

  	
  Payment of Indebtedness.

  	
   

  	
  66

  	
   

  
	
  6.8.

  	
   

  	
  Standards of Financial Statements.

  	
   

  	
  66

  	
   

  
	
  6.9.

  	
   

  	
  Federal Securities Laws.

  	
   

  	
  66

  	
   

  
	
  6.10.

  	
   

  	
  Mechanic’s Liens.

  	
   

  	
  66

  	
   

  
	
  6.11.

  	
   

  	
  Restricted Subsidiaries

  	
   

  	
  66

  	
   

  
	
  6.12.

  	
   

  	
  Exercise of Rights.

  	
   

  	
  66

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  VII    NEGATIVE COVENANTS.

  	
   

  	
  66

  	
   

  
	
  7.1.

  	
   

  	
  Merger, Consolidation, Acquisition and Sale of Assets.

  	
   

  	
  66

  	
   

  
	
  7.2.

  	
   

  	
  Creation of Liens.

  	
   

  	
  67

  	
   

  
	
  7.3.

  	
   

  	
  Guarantees.

  	
   

  	
  67

  	
   

  
	
  7.4.

  	
   

  	
  Investments.

  	
   

  	
  67

  	
   

  
	
  7.5.

  	
   

  	
  Loans.

  	
   

  	
  67

  	
   

  
	
  7.6.

  	
   

  	
  Capital Expenditures.

  	
   

  	
  67

  	
   

  
	
  7.7.

  	
   

  	
  Dividends.

  	
   

  	
  67

  	
   

  
	
  7.8.

  	
   

  	
  Indebtedness.

  	
   

  	
  68

  	
   

  
	
  7.9.

  	
   

  	
  Nature of Business.

  	
   

  	
  68

  	
   

  
	
  7.10.

  	
   

  	
  Transactions with Affiliates.

  	
   

  	
  68

  	
   

  
	
  7.11.

  	
   

  	
  [Reserved]

  	
   

  	
  68

  	
   

  
	
  7.12.

  	
   

  	
  Subsidiaries.

  	
   

  	
  68

  	
   

  
	
  7.13.

  	
   

  	
  Fiscal Year and Accounting Changes.

  	
   

  	
  68

  	
   

  
	
  7.14.

  	
   

  	
  Pledge of Credit.

  	
   

  	
  68

  	
   

  
	
  7.15.

  	
   

  	
  Amendment of Articles of Incorporation or By-Laws.

  	
   

  	
  68

  	
   

  
	
  7.16.

  	
   

  	
  Compliance with ERISA.

  	
   

  	
  69

  	
   

  
	
  7.17.

  	
   

  	
  Prepayment of Indebtedness.

  	
   

  	
  69

  	
   

  
	
  7.18.

  	
   

  	
  Anti-Terrorism Laws.

  	
   

  	
  69

  	
   

  
	
  7.19.

  	
   

  	
  Membership/Partnership Interests.

  	
   

  	
  70

  	
   

  
	
  7.20.

  	
   

  	
  Trading with the Enemy Act.

  	
   

  	
  70

  	
   

  
	
  7.21.

  	
   

  	
  Other Agreements.

  	
   

  	
  70

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  VIII  CONDITIONS PRECEDENT.

  	
   

  	
  70

  	
   

  
	
  8.1.

  	
   

  	
  Conditions to Initial Advances.

  	
   

  	
  70

  	
   

  
	
  8.2.

  	
   

  	
  Conditions to Each Advance.

  	
   

  	
  74

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  IX     INFORMATION AS TO BORROWERS.

  	
   

  	
  75

  	
   

  
	
  9.1.

  	
   

  	
  Disclosure of Material Matters.

  	
   

  	
  75

  	
   

  
	
  9.2.

  	
   

  	
  Schedules.

  	
   

  	
  75

  	
   

  
	
  9.3.

  	
   

  	
  Environmental Reports.

  	
   

  	
  75

  	
   

  
	
  9.4.

  	
   

  	
  Litigation.

  	
   

  	
  75

  	
   

  
	
  9.5.

  	
   

  	
  Material Occurrences.

  	
   

  	
  75

  	
   

  

 

 iii
 

 

 

	
  9.6.

  	
   

  	
  Government Receivables.

  	
   

  	
  76

  	
   

  
	
  9.7.

  	
   

  	
  Annual Financial Statements.

  	
   

  	
  76

  	
   

  
	
  9.8.

  	
   

  	
  Quarterly Financial Statements.

  	
   

  	
  76

  	
   

  
	
  9.9.

  	
   

  	
  Monthly Financial Statements.

  	
   

  	
  76

  	
   

  
	
  9.10.

  	
   

  	
  Weekly Borrowing Base Certificate.

  	
   

  	
  77

  	
   

  
	
  9.11.

  	
   

  	
  Other Reports.

  	
   

  	
  77

  	
   

  
	
  9.12.

  	
   

  	
  Additional Information.

  	
   

  	
  77

  	
   

  
	
  9.13.

  	
   

  	
  Projected Operating Budget.

  	
   

  	
  77

  	
   

  
	
  9.14.

  	
   

  	
  Variances From Operating Budget.

  	
   

  	
  77

  	
   

  
	
  9.15.

  	
   

  	
  Notice of Suits, Adverse Events.

  	
   

  	
  78

  	
   

  
	
  9.16.

  	
   

  	
  ERISA Notices and Requests.

  	
   

  	
  78

  	
   

  
	
  9.17.

  	
   

  	
  Additional Documents.

  	
   

  	
  78

  	
   

  
	
  9.18.

  	
   

  	
  SEC Information.

  	
   

  	
  78

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  X      EVENTS OF DEFAULT.

  	
   

  	
  79

  	
   

  
	
  10.1.

  	
   

  	
  Nonpayment.

  	
   

  	
  79

  	
   

  
	
  10.2.

  	
   

  	
  Breach of Representation.

  	
   

  	
  79

  	
   

  
	
  10.3.

  	
   

  	
  Financial Information.

  	
   

  	
  79

  	
   

  
	
  10.4.

  	
   

  	
  Judicial Actions.

  	
   

  	
  79

  	
   

  
	
  10.5.

  	
   

  	
  Noncompliance.

  	
   

  	
  79

  	
   

  
	
  10.6.

  	
   

  	
  Judgments.

  	
   

  	
  79

  	
   

  
	
  10.7.

  	
   

  	
  Bankruptcy.

  	
   

  	
  79

  	
   

  
	
  10.8.

  	
   

  	
  Inability to Pay.

  	
   

  	
  80

  	
   

  
	
  10.9.

  	
   

  	
  Affiliate Bankruptcy.

  	
   

  	
  80

  	
   

  
	
  10.10.

  	
   

  	
  Material Adverse Effect.

  	
   

  	
  80

  	
   

  
	
  10.11.

  	
   

  	
  Lien Priority.

  	
   

  	
  80

  	
   

  
	
  10.12.

  	
   

  	
  Permitted Capital Lease Facility Default.

  	
   

  	
  80

  	
   

  
	
  10.13.

  	
   

  	
  Cross Default.

  	
   

  	
  80

  	
   

  
	
  10.14.

  	
   

  	
  Breach of Guaranty.

  	
   

  	
  80

  	
   

  
	
  10.15.

  	
   

  	
  Change of Ownership.

  	
   

  	
  81

  	
   

  
	
  10.16.

  	
   

  	
  Invalidity.

  	
   

  	
  81

  	
   

  
	
  10.17.

  	
   

  	
  Licenses.

  	
   

  	
  81

  	
   

  
	
  10.18.

  	
   

  	
  Seizures.

  	
   

  	
  81

  	
   

  
	
  10.19.

  	
   

  	
  Operations.

  	
   

  	
  81

  	
   

  
	
  10.20.

  	
   

  	
  Pension Plans.

  	
   

  	
  81

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  XI     LENDERS’ RIGHTS AND REMEDIES AFTER
  DEFAULT.

  	
   

  	
  82

  	
   

  
	
  11.1.

  	
   

  	
  Rights and Remedies.

  	
   

  	
  82

  	
   

  
	
  11.2.

  	
   

  	
  Agent’s Discretion.

  	
   

  	
  84

  	
   

  
	
  11.3.

  	
   

  	
  Setoff.

  	
   

  	
  84

  	
   

  
	
  11.4.

  	
   

  	
  Rights and Remedies not Exclusive.

  	
   

  	
  84

  	
   

  
	
  11.5.

  	
   

  	
  Allocation of Payments After Event of Default.

  	
   

  	
  84

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  XII   WAIVERS AND JUDICIAL PROCEEDINGS.

  	
   

  	
  85

  	
   

  
	
  12.1.

  	
   

  	
  Waiver of Notice.

  	
   

  	
  85

  	
   

  
	
  12.2.

  	
   

  	
  Delay.

  	
   

  	
  85

  	
   

  
	
  12.3.

  	
   

  	
  Jury Waiver.

  	
   

  	
  85

  	
   

  
	
  12.4.

  	
   

  	
  Waiver of Rights Under Texas Deceptive Trade Practices Act.

  	
   

  	
  86

  	
   

  

 

 iv
 

 

 

	
  XIII  EFFECTIVE DATE AND TERMINATION.

  	
   

  	
  86

  	
   

  
	
  13.1.

  	
   

  	
  Term.

  	
   

  	
  86

  	
   

  
	
  13.2.

  	
   

  	
  Termination.

  	
   

  	
  86

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  XIV  REGARDING AGENT.

  	
   

  	
  87

  	
   

  
	
  14.1.

  	
   

  	
  Appointment.

  	
   

  	
  87

  	
   

  
	
  14.2.

  	
   

  	
  Nature of Duties.

  	
   

  	
  87

  	
   

  
	
  14.3.

  	
   

  	
  Lack of Reliance on Agent and Resignation.

  	
   

  	
  88

  	
   

  
	
  14.4.

  	
   

  	
  Certain Rights of Agent.

  	
   

  	
  88

  	
   

  
	
  14.5.

  	
   

  	
  Reliance.

  	
   

  	
  88

  	
   

  
	
  14.6.

  	
   

  	
  Notice of Default.

  	
   

  	
  89

  	
   

  
	
  14.7.

  	
   

  	
  Indemnification.

  	
   

  	
  89

  	
   

  
	
  14.8.

  	
   

  	
  Agent in its Individual Capacity.

  	
   

  	
  89

  	
   

  
	
  14.9.

  	
   

  	
  Delivery of Documents.

  	
   

  	
  89

  	
   

  
	
  14.10.

  	
   

  	
  Borrowers’ Undertaking to Agent.

  	
   

  	
  89

  	
   

  
	
  14.11.

  	
   

  	
  No Reliance on Agent’s Customer Identification Program.

  	
   

  	
  90

  	
   

  
	
  14.12.

  	
   

  	
  Other Agreements.

  	
   

  	
  90

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  XV   BORROWING AGENCY.

  	
   

  	
  90

  	
   

  
	
  15.1.

  	
   

  	
  Borrowing Agency Provisions.

  	
   

  	
  90

  	
   

  
	
  15.2.

  	
   

  	
  Waiver of Subrogation.

  	
   

  	
  91

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  XVI  MISCELLANEOUS.

  	
   

  	
  91

  	
   

  
	
  16.1.

  	
   

  	
  Governing Law.

  	
   

  	
  91

  	
   

  
	
  16.2.

  	
   

  	
  Entire Understanding.

  	
   

  	
  92

  	
   

  
	
  16.3.

  	
   

  	
  Successors and Assigns; Participations; New Lenders.

  	
   

  	
  94

  	
   

  
	
  16.4.

  	
   

  	
  Application of Payments.

  	
   

  	
  95

  	
   

  
	
  16.5.

  	
   

  	
  Indemnity.

  	
   

  	
  96

  	
   

  
	
  16.6.

  	
   

  	
  Notice.

  	
   

  	
  96

  	
   

  
	
  16.7.

  	
   

  	
  Survival.

  	
   

  	
  98

  	
   

  
	
  16.8.

  	
   

  	
  Severability.

  	
   

  	
  98

  	
   

  
	
  16.9.

  	
   

  	
  Expenses.

  	
   

  	
  98

  	
   

  
	
  16.10.

  	
   

  	
  Injunctive Relief.

  	
   

  	
  99

  	
   

  
	
  16.11.

  	
   

  	
  Consequential Damages.

  	
   

  	
  99

  	
   

  
	
  16.12.

  	
   

  	
  Captions.

  	
   

  	
  99

  	
   

  
	
  16.13.

  	
   

  	
  Counterparts; Facsimile Signatures.

  	
   

  	
  99

  	
   

  
	
  16.14.

  	
   

  	
  Construction.

  	
   

  	
  99

  	
   

  
	
  16.15.

  	
   

  	
  Confidentiality; Sharing Information.

  	
   

  	
  99

  	
   

  
	
  16.16.

  	
   

  	
  Publicity.

  	
   

  	
  100

  	
   

  
	
  16.17.

  	
   

  	
  Non-Applicability of Chapter 346.

  	
   

  	
  100

  	
   

  
	
  16.18.

  	
   

  	
  Certifications From Banks and Participants; US PATRIOT Act.

  	
   

  	
  100

  	
   

  

 

 v

REVOLVING
CREDIT, TERM LOAN

AND

SECURITY AGREEMENT

Revolving Credit, Term Loan and Security Agreement
dated as of June 8, 2006 among GEOKINETICS INC., a Delaware corporation (“Geokinetics”),
GEOPHYSICAL DEVELOPMENT CORPORATION, a Texas corporation (“GDC”), QUANTUM
GEOPHYSICAL, INC., a Texas corporation (“Quantum”), TRACE ENERGY SERVICES LTD.,
an entity organized under the laws of Canada (“Trace Energy (Canada)”), and
TRACE ENERGY SERVICES, INC., a Texas corporation (“Trace Energy (U.S.)”)
(Geokinetics, GDC, Quantum, Trace Energy (Canada) and Trace Energy (U.S.), each
a “Borrower,” and collectively, “Borrowers”), the financial institutions which
are now or which hereafter become a party hereto (collectively, the “Lenders”
and individually a “Lender”) and PNC BANK, NATIONAL ASSOCIATION (“PNC”), as
agent for Lenders (PNC, in such capacity, the “Agent”).

IN CONSIDERATION of the mutual covenants and
undertakings herein contained, Borrowers, Lenders and Agent hereby agree as
follows:

I               DEFINITIONS.

1.1.          Accounting
Terms.   As used in this Agreement, the Other Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement, accounting terms not defined in Section 1.2 or elsewhere in
this Agreement and accounting terms partly defined in Section 1.2 to the
extent not defined, shall have the respective meanings given to them under
GAAP; provided, however, whenever such accounting terms are used for the
purposes of determining compliance with financial covenants in this Agreement,
such accounting terms shall be defined in accordance with GAAP as applied in
preparation of the audited financial statements of Borrowers for the fiscal
year ended December 31, 2005.

1.2.          General
Terms.   For purposes of this Agreement the following terms shall have
the following meanings:

“Accountants” shall have the meaning set forth
in Section 9.7 hereof.

“Acquisition Agreement” shall mean the Stock
Purchase Agreement including all exhibits and schedules thereto dated as of July 29,
2005 between SCF-III, L.P., a Delaware limited partnership and James White, and
individual resident of Texas, as sellers 
(individually and collectively, “Seller”) and Geokinetics as buyer.

“Advance Rate” shall have the meaning set forth
in Section 2.1(a)(y)(ii) hereof.

“Advances” shall mean and include the Revolving
Advances, Letters of Credit, as well as the Term Loan.

“Affiliate” of any Person shall mean (a) any
Person which, directly or indirectly, is in control of, is controlled by, or is
under common control with such Person, or (b) any Person who is a
director, managing member, general partner or officer (i) of such Person, (ii) of
any Subsidiary of such Person or (iii) of any Person described in clause (a) above.
For purposes of 

 

this definition, control of a Person shall mean the
power, direct or indirect, (x) to vote 10% or more of the Equity Interests
having ordinary voting power for the election of directors of such Person or
other Persons performing similar functions for any such Person, or (y) to
direct or cause the direction of the management and policies of such Person
whether by ownership of Equity Interests, contract or otherwise.

“Agent” shall have the meaning set forth in the
preamble to this Agreement and shall include its successors and assigns.

“Agreement” shall mean this Revolving Credit,
Term Loan and Security Agreement, as the same may be amended, restated,
supplemented or otherwise modified from time to time.

“Alternate Base Rate” shall mean, for any day,
a rate per annum equal to the higher of (i) the Base Rate in effect on
such day and (ii) the Federal Funds Open Rate in effect on such day plus
1/2 of 1%.

“Anti-Terrorism Laws” shall mean any Applicable
Laws relating to terrorism or money laundering, including Executive Order No. 13224,
the USA PATRIOT Act, the Applicable Laws comprising or implementing the Bank
Secrecy Act, and the Applicable Laws administered by the United States Treasury
Department’s Office of Foreign Asset Control (as any of the foregoing
Applicable Laws may from time to time be amended, renewed, extended, or
replaced).

“Applicable Law” shall mean all laws, rules and
regulations applicable to the Person, conduct, transaction, covenant, Other
Document or contract in question, including all applicable common law and
equitable principles; all provisions of all applicable provincial, state,
federal and foreign constitutions, statutes, rules, regulations and orders of
any Governmental Body, and all orders, judgments and decrees of all courts and
arbitrators.

“Applicable Margins” means collectively, the
Applicable Revolving Domestic Rate Margin, the Applicable Term Loan Domestic
Rate Margin, the Applicable Revolving Eurodollar Rate Margin, and the
Applicable Term Loan Eurodollar Rate Margin.

“Applicable Revolving Domestic Rate Margin”
shall mean the per annum interest rate margin from time to time in effect
applicable to Revolving Advances, and payable in addition to the Alternate Base
Rate with respect to Domestic Rate Loans, which shall be zero percent (0.0%) as
of the Closing Date, and otherwise determined by reference to Section 3.1
of the Agreement.

“Applicable Revolving Eurodollar Rate Margin”
shall mean the per annum interest rate margin from time to time in effect
applicable to Revolving Advances, and payable in addition to the Eurodollar
Rate with respect to Eurodollar Rate Loans, which shall be two and one-quarter
percent (2.25%) as of the Closing Date, and otherwise determined by reference
to Section 3.1 of the Agreement.

“Applicable Term Loan Domestic Rate Margin”
shall mean the per annum interest rate margin from time to time in effect
applicable to the Term Loan, and payable in addition to the Alternate Base Rate
with respect to Domestic Rate Loans, which shall be three-quarters of one
percent (0.75%) as of the Closing Date, and otherwise determined by reference
to Section 3.1 of the Agreement.

 2
 

 

“Applicable Term Loan Eurodollar Rate Margin”
shall mean the per annum interest rate margin from time to time in effect
applicable to the Term Loan, and payable in addition to the Eurodollar Rate
with respect to Eurodollar Rate Loans, 
which shall be three percent (3.00%) as of the Closing Date, and
otherwise determined by reference to Section 3.1 of the Agreement.

“Authority” shall have the meaning set forth in
Section 4.19.

“Base Rate” shall mean the base commercial
lending rate of PNC as publicly announced to be in effect from time to time,
such rate to be adjusted automatically, without notice, on the effective date
of any change in such rate. This rate of interest is determined from time to
time by PNC as a means of pricing some loans to its customers and is neither
tied to any external rate of interest or index nor does it necessarily reflect
the lowest rate of interest actually charged by PNC to any particular class or
category of customers of PNC.

“Blocked Accounts” shall have the meaning set
forth in Section 4.15(h).

“Blocked Account Bank” shall have the meaning
set forth in Section 4.15(h).

“Blocked Person” shall have the meaning set forth
in Section 5.23(b) hereof.

“Books and Records” shall
have the meaning set forth in Section 4.5(b) hereof.

“Borrower” or “Borrowers” shall have the
meaning set forth in the preamble to this Agreement and shall extend to all
permitted successors and assigns of such Persons.

“Borrowers on a Consolidated Basis” shall mean
the consolidation in accordance with GAAP of the accounts or other items of the
Borrowers and their respective Subsidiaries.

“Borrowers’ Account” shall have the meaning set
forth in Section 2.8.

“Borrowing Agent” shall mean Geokinetics.

“Borrowing Base Certificate” shall mean a
certificate in substantially the form of Exhibit 1.2 duly executed by the
President, Chief Financial Officer or Controller of the Borrowing Agent and
delivered to the Agent, appropriately completed, by which such officer shall
certify to Agent the Formula Amount and calculation thereof as of the date of
such certificate.

“Business Day” shall mean any day other than
Saturday or Sunday or a legal holiday on which commercial banks are authorized
or required by law to be closed for business in East Brunswick, New Jersey and,
if the applicable Business Day relates to any Eurodollar Rate Loans, such day
must also be a day on which dealings are carried on in the London interbank
market.

“Capital Expenditures” shall mean expenditures
made or liabilities incurred for the acquisition of any fixed assets or
improvements, replacements, substitutions or additions thereto which have a
useful life of more than one year, including the total principal portion of
Capitalized Lease Obligations, which, in accordance with GAAP, would be
classified as capital expenditures.

 3
 

 

“Capitalized Lease Obligation” shall mean any
Indebtedness of any Borrower represented by obligations under a lease that is
required to be capitalized for financial reporting purposes in accordance with
GAAP.

“Canadian Advance Rate” shall have the meaning
set forth in Section 2.1(a)(y)(ii) hereof.

“Cash Balance” shall mean all cash in Blocked
Accounts or Depository Accounts.

“CERCLA” shall mean the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. §§9601 et seq.

“Change of Control” shall mean (a) during
any period of twelve consecutive calendar months, individuals who at the beginning
of such period constituted the board of directors (or individuals performing
similar functions) of Geokinetics 
(together with any new directors whose election by the board of
directors of Geokinetics or whose nomination for election by the holders of
Equity Interests of Geokinetics was approved by a vote of at least two-thirds
of the directors then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason other than death or disability to
constitute two-thirds of the directors then in office and (b) the
occurrence of any event (whether in one or more transactions) which results in
a transfer of control of any Borrower to 
any single person or single group of persons (within the meaning of the
Securities Exchange Act of 1934) who is or are not an Original Owner or (c) any
merger or consolidation of or with any Borrower or sale of all or substantially
all of the property or assets of any Borrower provided, however,
the Borrowers may enter into a merger or consolidation between and among the
Borrowers and wholly owned subsidiaries of the Borrowers, so long as Borrowers
have received Agent’s prior written consent to such merger or consolidation,
have delivered the documentation requested by Agent in its consent regarding
such merger or consolidation and if Geokinetics is a party to such merger or
consolidation, it is the surviving entity. For purposes of this definition, “control
of any Borrower” shall mean the power, direct or indirect, by contract or
otherwise (x) to vote 50% or more of the Equity Interests having ordinary
voting power for the election of directors (or the individuals performing
similar functions) of any Borrower or (y) to direct or cause the direction
of the management and policies of any Borrower.

“Change of Ownership” shall mean (a) any
single person or single group of persons (within the meaning of the Securities
Exchange Act of 1934) who are not Original Owners shall have acquired
beneficial ownership (within the meaning of Rule 13d-3 promulgated
by the SEC under the Securities Exchange Act of 1934) of 20% or more of the
Equity Interests of any Borrower having the right to vote for the election of
directors (or individuals performing similar functions) of any Borrower under
ordinary circumstances (including, for purposes of the calculation of
percentage ownership, any Equity Interests into which  any Equity Interests of any Borrower are convertible
or for which any such Equity Interests of any Borrower or of any other Person
may be exchanged and any Equity Interests issuable to such Original Owners upon
exercise of any warrants, options or similar rights which may at the time of
calculation be held by such Original Owners) or (b) any merger,
consolidation or sale of substantially all of the property or assets of any
Borrower; provided, that the sale by any Borrower of any Equity Interests of
any other Borrower  shall be deemed a
sale of substantially all of such Borrower’s assets.

 4
 

 

“Charges” shall mean all taxes, charges, fees,
imposts, levies or other assessments, including all net income, gross income,
gross receipts, sales, use, ad valorem, value added, transfer, franchise,
profits, inventory, capital stock, license, withholding, payroll, employment,
social security, unemployment, excise, severance, stamp, occupation and
property taxes, custom duties, fees, assessments, liens, claims and charges of
any kind whatsoever, together with any interest and any penalties, additions to
tax or additional amounts, imposed by any taxing or other authority, domestic
or foreign (including the Pension Benefit Guaranty Corporation or any
environmental agency or superfund), upon the Collateral, any Borrower or any of
its Affiliates.

“CIT” shall mean The CIT Group/Equipment
Financing, Inc.

“Closing Date” shall mean June 12, 2006 or
such other date as may be agreed to by the parties hereto.

“Code” shall mean the Internal Revenue Code of
1986, as the same may be amended or supplemented from time to time, and any
successor statute of similar import, and the rules and regulations
thereunder, as from time to time in effect.

“Collateral” shall mean and include:

(a)           all
Receivables;

(b)           all
Equipment;

(c)           all
General Intangibles;

(d)           all
Inventory;

(e)           all
Investment Property;

(f)            all
Subsidiary Stock;

(g)           all
of each Borrower’s right, title and interest in and to, whether now owned or
hereafter acquired and wherever located, (i) its respective goods and
other property including, but not limited to, all merchandise returned or
rejected by Customers, relating to or securing any of the Receivables; (ii) all
of each Borrower’s rights as a consignor, a consignee, an unpaid vendor,
mechanic, artisan, or other lienor, including stoppage in transit, setoff,
detinue, replevin, reclamation and repurchase; (iii) all additional
amounts due to any Borrower from any Customer relating to the Receivables; (iv) other
property, including warranty claims, relating to any goods securing the
Obligations; (v) all of each Borrower’s contract rights, rights of payment
which have been earned under a contract right, instruments (including
promissory notes), documents, chattel paper (including electronic chattel
paper), warehouse receipts, deposit accounts, letters of credit and money; (vi) all
commercial tort claims (whether now existing or hereafter arising); (vii) if
and when obtained by any Borrower, all real and personal property of third
parties in which such Borrower has been granted a lien or security interest as
security for the payment or enforcement of Receivables; (viii) all letter
of credit rights (whether or not the respective letter of credit is evidenced
by a writing); (ix) all supporting obligations; (x)  all licenses and
permits to the extent Borrowers may grant a security interest in the same in 

 5
 

 

accordance with Applicable Laws and
(xi) any other goods, personal property or real property now owned or
hereafter acquired in which any Borrower has expressly granted a security
interest or may in the future grant a security interest to Agent hereunder, or
in any amendment or supplement hereto or thereto, or under any other agreement
between Agent and any Borrower;

(h)           all
of each Borrower’s ledger sheets, ledger cards, files, correspondence, records,
books of account, business papers, computers, computer software (owned by any
Borrower or in which it has an interest), computer programs, tapes, disks and
documents relating to (a), (b), (c), (d), (e), (f), or (g) of this
Paragraph; and

(i)            all
proceeds and products of (a), (b), (c), (d), (e), (f), (g), or (h) in
whatever form, including, but not limited to: 
cash, deposit accounts (whether or not comprised solely of proceeds),
certificates of deposit, insurance proceeds (including hazard, flood and credit
insurance), negotiable instruments and other instruments for the payment of
money, chattel paper, security agreements, documents, eminent domain proceeds,
condemnation proceeds and tort claim proceeds.

“Collateral Assignment of Acquisition Agreement”
shall mean that certain Collateral Assignment of Acquisition Agreement dated as
of the Closing Date, executed by Geokinetics in favor of Agent and acknowledged
by Seller.

“Commitment Percentage” of any Lender shall
mean the percentage set forth below such Lender’s name on the signature page hereof
as same may be adjusted upon any assignment by a Lender pursuant to Section 16.3(b) hereof.

“Commitment Transfer Supplement” shall mean a
document in the form of Exhibit 16.3 hereto, properly completed and
otherwise in form and substance satisfactory to Agent by which the Purchasing
Lender purchases and assumes a portion of the obligation of Lenders to make
Advances under this Agreement.

“Compliance Certificate” shall mean a
compliance certificate to be signed by the Chief Financial Officer or
Controller of Borrowing Agent, which shall state that, based on an examination
sufficient to permit such officer to make an informed statement, no Default or
Event of Default exists, or if such is not the case, specifying such Default or
Event of Default, its nature, when it occurred, whether it is continuing and
the steps being taken by Borrowers with respect to such default and, such
certificate shall have appended thereto calculations which set forth Borrowers’
compliance with the requirements or restrictions imposed by Sections 6.5, 7.4,
7.5, 7.6, 7.7, 7.8 and 7.11.

“Consents” shall mean all filings and all
licenses, permits, consents, approvals, authorizations, qualifications and
orders of Governmental Bodies and other third parties, domestic or foreign,
necessary to carry on any Borrower’s business or necessary (including to avoid
a conflict or breach under any agreement, instrument, other document, license,
permit or other authorization) for the execution, delivery or performance of
this Agreement, the Other Documents, including any Consents required under all
applicable federal, provincial, state or other Applicable Law.

 6
 

 

“Contract Rate” shall mean, as applicable, the
Revolving Interest Rate or the Term Loan Rate.

“Controlled Group” shall mean, at any time,
each Borrower and all members of a controlled group of corporations and all
trades or businesses (whether or not incorporated) under common control and all
other entities which, together with any Borrower, are treated as a single
employer under Section 414 of the Code.

“Customer” shall mean and include the account
debtor with respect to any Receivable and/or the prospective purchaser of
goods, services or both with respect to any contract or contract right, and/or
any party who enters into or proposes to enter into any contract or other
arrangement with any Borrower, pursuant to which such Borrower is to deliver
any personal property or perform any services.

“Customs” shall have the meaning set forth in Section 2.11(b) hereof.

“Default” shall mean an event, circumstance or
condition which, with the giving of notice or passage of time or both, would
constitute an Event of Default.

“Default Rate” shall have the meaning set forth
in Section 3.1 hereof.

“Defaulting Lender” shall have the meaning set
forth in Section 2.23(a) hereof.

“Depository Accounts” shall have the meaning
set forth in Section 4.15(h) hereof.

“Documents” shall have the meaning set forth in
Section 8.1(c) hereof.

“Dollar” and the sign “$” shall mean (i) lawful
money of the United States of America or (ii) with respect to any lawful
money of Canada, the amount of such Canadian money converted to lawful money of
the United States of America calculated on the basis of Agent’s selling rate of
exchange in effect from time to time.

“Domestic Advance Rate” shall have the meaning
set forth in Section 2.1(a)(y)(i) hereof.

“Domestic Rate Loan” shall mean any Advance
that bears interest based upon the Alternate Base Rate.

“Drawing Date” shall have the meaning set forth
in Section 2.12(b) hereof.

“Early Termination Date” shall have the meaning
set forth in Section 13.1 hereof.

“Earnings Before Interest and Taxes” shall mean
for any period the sum of (i) net income (or loss) of Borrowers on a
Consolidated Basis for such period (excluding extraordinary gains) plus (ii) all
interest expense of Borrowers on a Consolidated Basis for such period, plus (iii) all
charges against income of Borrowers on a Consolidated Basis for such period for
federal, state and local taxes actually paid.

 7
 

 

“EBITDA” shall mean for any period the sum of (i) Earnings
Before Interest and Taxes for such period plus (ii) depreciation expenses
for such period, plus (iii) amortization expenses for such period.

“Eligible Canadian Receivables” shall mean and
include with respect to Trace Energy (Canada), each Receivable of Trace Energy
(Canada) arising in the Ordinary Course of Business and which Agent, in its
sole credit judgment, shall deem to be an Eligible Canadian Receivable, based
on such considerations as Agent may from time to time deem appropriate. A
Receivable shall not be deemed an Eligible Canadian Receivable unless such
Receivable is subject to Agent’s first priority perfected security interest and
no other Lien (other than Permitted Encumbrances), and is evidenced by an
invoice or other documentary evidence satisfactory to Agent. In addition, no
Receivable shall be an Eligible Canadian Receivable if any of the items listed
in parts (a) through (p) of the definition of “Eligible Domestic
Receivable” shall apply to such Receivable.

“Eligible Domestic Receivables” shall mean and
include with respect to each Borrower other than Trace Energy (Canada), each
Receivable of such Borrower arising in the Ordinary Course of Business and
which Agent, in its sole credit judgment, shall deem to be an Eligible Domestic
Receivable, based on such considerations as Agent may from time to time deem
appropriate. A Receivable shall not be deemed eligible unless such Receivable
is subject to Agent’s first priority perfected security interest and no other
Lien (other than Permitted Encumbrances), and is evidenced by an invoice or
other documentary evidence satisfactory to Agent. In addition, no Receivable
shall be an Eligible Domestic Receivable if: 

(a)           it
arises out of a sale made by any Borrower to an Affiliate of any Borrower or to
a Person controlled by an Affiliate of any Borrower;

(b)           it
is due or unpaid more than ninety (90) days after the original invoice date;

(c)           fifty
percent (50%) or more of the Receivables from such Customer are not deemed Eligible
Receivables hereunder. Such percentage may, in Agent’s sole discretion, be
increased or decreased from time to time;

(d)           any
covenant, representation or warranty contained in this Agreement with respect
to such Receivable has been breached;

(e)           the
Customer shall (i) apply for, suffer, or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property or call a meeting of its
creditors, (ii) admit in writing its inability, or be generally unable, to
pay its debts as they become due or cease operations of its present business, (iii) make
a general assignment for the benefit of creditors, (iv) commence a
voluntary case under any state or federal bankruptcy laws (as now or hereafter
in effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (vii) acquiesce to, or fail to have dismissed, any petition which
is filed against it in any involuntary case under such bankruptcy laws, or (viii) take
any action for the purpose of effecting any of the foregoing;

 8
 

 

(f)            the
sale is to a Customer outside the continental United States of America, unless
the sale is (i) on letter of credit, guaranty or acceptance terms, in each
case acceptable to Agent in its sole discretion; or (ii) made to a
Customer located in Canada of a size, industry and creditworthiness which shall
be satisfactory to Agent in its sole discretion;

(g)           the
sale to the Customer is on a bill-and-hold, guaranteed sale, sale-and-return,
sale on approval, consignment or any other repurchase or return basis or is
evidenced by chattel paper;

(h)           Agent
believes, in its sole judgment, that collection of such Receivable is insecure
or that such Receivable may not be paid by reason of the Customer’s financial
inability to pay;

(i)            the
Customer is (i) the United States of America, any state or any department,
agency or instrumentality of any of them, unless the applicable Borrower
assigns its right to payment of such Receivable to Agent pursuant to the
Assignment of Claims Act of 1940, as amended (31 U.S.C. Sub-Section 3727
et seq. and 41 U.S.C. Sub-Section 15 et seq.) or has otherwise complied
with other applicable statutes or ordinances or (ii) the government of
Canada, unless the applicable Borrower complies with the requirements of the
Financial Administration Act (Canada) as to the grant of security or
assignments with respect to such Receivable;

(j)            the
goods giving rise to such Receivable have not been delivered to and accepted by
the Customer or the services giving rise to such Receivable have not been
performed by the applicable Borrower and accepted by the Customer or the
Receivable otherwise does not represent a final sale;

(k)           the
Receivables of the Customer exceed a credit limit determined by Agent, in its
sole discretion, to the extent such Receivable exceeds such limit;

(l)            the
Receivable is subject to any offset, deduction, defense, dispute, or
counterclaim, or represents a progress billing or is otherwise contingent upon
the applicable Borrower’s completion of any further performance, the Customer
is also a creditor or supplier of a Borrower or the Receivable is contingent in
any respect or for any reason;

(m)          the
applicable Borrower has made any agreement with any Customer for any deduction
therefrom, except for discounts or allowances made in the Ordinary Course of
Business for prompt payment, all of which discounts or allowances are reflected
in the calculation of the face value of each respective invoice related
thereto;

(n)           any
return, rejection or repossession of the merchandise has occurred or the
rendition of services has been disputed;

(o)           such
Receivable is not payable to a Borrower; or

(p)           such
Receivable is not otherwise satisfactory to Agent as determined in good faith
by Agent in the exercise of its discretion in a reasonable manner.

 9
 

 

“Eligible Receivables” shall mean,
collectively, all Eligible Canadian Receivables and Eligible Domestic Receivables.

“Environmental Complaint” shall have the
meaning set forth in Section 4.18(d) hereof.

“Environmental Laws” shall mean all federal,
state, provincial, foreign and local environmental, land use, zoning, health,
chemical use, safety and sanitation laws, statutes, ordinances and codes
relating to the protection of the environment and/or governing the use,
storage, treatment, generation, transportation, processing, handling,
production or disposal of Hazardous Substances and the rules, regulations,
policies, guidelines, interpretations, decisions, orders and directives of
federal, state and local governmental agencies and authorities with respect
thereto.

“Equipment” shall mean and include as to each
Borrower all of such Borrower’s goods (other than Inventory) whether now owned
or hereafter acquired and wherever located including all equipment, machinery,
apparatus, motor vehicles, fittings, furniture, furnishings, fixtures, parts,
accessories and all replacements and substitutions therefor or accessions thereto.

“Equity Interests” of any Person shall mean any
and all shares, rights to purchase, options, warrants, general, limited or
limited liability partnership interests, member interests, participation or
other equivalents of or interest in (regardless of how designated) equity of
such Person, whether voting or nonvoting, including common stock, preferred
stock, convertible securities or any other “equity security” (as such term is
defined in Rule 3a11-1 of the General Rules and Regulations
promulgated by the SEC under the Exchange Act).

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

“Eurodollar Rate” shall mean for any Eurodollar
Rate Loan for the then current Interest Period relating thereto the interest
rate per annum determined by Agent by dividing (the resulting quotient rounded
upwards, if necessary, to the nearest 1/100th of 1% per annum) (i) the
rate of interest determined by Agent in accordance with its usual procedures
(which determination shall be conclusive absent manifest error) to be the
average of the London interbank offered rates for U.S. Dollars quoted by the
British Bankers’ Association as set forth on Moneyline Telerate (or appropriate
successor or, if British Banker’s Association or its successor ceases to
provide such quotes, a comparable replacement determined by Agent) display page 3750
(or such other display page on the Moneyline Telerate system as may
replace display page 3750) two (2) Business Days prior to the first
day of such Interest Period for an amount comparable to such Eurodollar Rate
Loan and having a borrowing date and a maturity comparable to such Interest
Period by (ii) a number equal to 1.00 minus the Reserve Percentage. The
Eurodollar Rate may also be expressed by the following formula:

Average of London
interbank offered rates quoted by BBA as shown on

Eurodollar Rate =Moneyline Telerate Service display page 3750 or
appropriate successor

1.00 - Reserve Percentage.]

 10
 

 

The Eurodollar Rate shall be adjusted with respect to
any Eurodollar Rate Loan that is outstanding on the effective date of any
change in the Reserve Percentage as of such effective date. The Agent shall
give prompt notice to the Borrowing Agent of the Eurodollar Rate as determined
or adjusted in accordance herewith, which determination shall be conclusive
absent manifest error.

“Eurodollar Rate Loan” shall mean an Advance at
any time that bears interest based on the Eurodollar Rate.

“Event of Default” shall have the meaning set
forth in Article X hereof.

“Excess Cash Flow” for any fiscal period shall
mean EBITDA of Borrowers on a Consolidated Basis for such fiscal period plus
the aggregate amount of any decrease in Working Capital of Borrowers on a
Consolidated Basis during such period minus non-financed Capital
Expenditures made by Borrowers on a Consolidated Basis during such fiscal
period minus taxes actually paid by Borrowers on a Consolidated Basis
during such fiscal period minus payments of interest and principal with
respect to Indebtedness for borrowed money (excluding principal paid with
respect to Revolving Advances) during such fiscal period minus the
aggregate amount of any increase in Working Capital  of Borrowers 
on a Consolidated Basis during such period.

“Exchange Act” shall have the mean the
Securities Exchange Act of 1934, as amended.

“Executive Order No. 13224” shall mean the
Executive Order No. 13224 on Terrorist Financing, effective September 24,
2001, as the same has been, or shall hereafter be, renewed, extended, amended
or replaced.

“Federal Funds Effective Rate” for any day
shall mean the rate per annum (based on a year of 360 days and actual days
elapsed and rounded upward to the nearest 1/100 of 1%) announced by the Federal
Reserve Bank of New York (or any successor) on such day as being the weighted
average of the rates on overnight federal funds transactions arranged by
federal funds brokers on the previous trading day, as computed and announced by
such Federal Reserve Bank (or any successor) in substantially the same manner
as such Federal Reserve Bank computes and announces the weighted average it
refers to as the “Federal Funds Effective Rate” as of the date of this
Agreement; provided, if such Federal Reserve Bank (or its successor) does not
announce such rate on any day, the “Federal Funds Effective Rate” for such day
shall be the Federal Funds Effective Rate for the last day on which such rate
was announced.

“Federal Funds Open Rate” shall mean the rate
per annum determined by the Agent in accordance with its usual procedures
(which determination shall be conclusive absent manifest error) to be the “open”
rate for federal funds transactions as of the opening of business for federal
funds transactions among members of the Federal Reserve System arranged by
federal funds brokers on such day, as quoted by Garvin Guybutler Corporation,
any successor entity thereto, or any other broker selected by the Agent, as set
forth on the applicable Telerate display page; provided, however; that if such
day is not a Business Day, the Federal Funds Open Rate for such day shall be
the “open” rate on the immediately preceding Business Day, or if no such rate
shall be quoted by a Federal funds broker at such time, such other rate as
determined by the Agent in accordance with its usual procedures.

 11
 

 

“Fixed Charge Coverage Ratio” shall mean and
include, with respect to any fiscal period, the ratio of (a) EBITDA minus
the sum of (i) all unfinanced Capital Expenditures made during such period
and (ii) all cash taxes paid during such period to (b) the sum of all
Senior Debt Payments during such period.

“Foreign Subsidiary” of any Person, shall mean
any Subsidiary of such Person that is not organized or incorporated in the
United States or any State or territory thereof.

“Formula Amount” shall have the meaning set
forth in Section 2.1(a).

“Funded Debt” shall mean, with respect to any
Person, without duplication, all Indebtedness for borrowed money evidenced by
notes, bonds, debentures, or similar evidences of Indebtedness 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 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 Capitalized 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, Indebtedness consisting of guaranties of
Funded Debt of other Persons.

“GAAP” shall mean generally accepted accounting
principles in the United States of America in effect from time to time.

“GDC” shall mean Geophysical Development
Corporation, a Texas corporation.

“GDC UK” shall mean GDC, UK, Ltd., an entity
formed under the laws of the United Kingdom.

“General Intangibles” shall mean and include as
to each Borrower all of such Borrower’s general intangibles, whether now owned
or hereafter acquired, including all payment intangibles, all choses in action,
causes of action, corporate or other business records, inventions, designs,
patents, patent applications, equipment formulations, manufacturing procedures,
quality control procedures, trademarks, trademark applications, service marks,
trade secrets, goodwill, copyrights, design rights, software, computer
information, source codes, codes, records and updates, registrations, licenses,
franchises, customer lists, tax refunds, tax refund claims, computer programs,
all claims under guaranties, security interests or other security held by or
granted to such Borrower to secure payment of any of the Receivables by a
Customer (other than to the extent covered by Receivables) all rights of
indemnification and all other intangible property of every kind and nature
(other than Receivables).

“Geokinetics” shall mean Geokinetics Inc., a
Delaware corporation.

“Governmental Acts” shall have the meaning set
forth in Section 2.17.

“Governmental Body” shall mean any nation or
government, any state or other political subdivision thereof or any entity,
authority, agency, division or department exercising the legislative, judicial,
regulatory or administrative functions of or pertaining to a government,
including, without limitation, the SEC.

 12
 

 

“Guarantor” shall mean each of Quantum Services
and any Person who may hereafter guarantee payment or performance of the whole
or any part of the Obligations and “Guarantors” means collectively all such
Persons.

“Guarantor Security Agreement” shall mean any
security agreement executed by any Guarantor in favor of Agent securing the
Guaranty of such Guarantor.

“Guaranty” shall mean any guaranty of the
obligations of Borrowers executed by a Guarantor in favor of Agent for its
benefit and for the ratable benefit of Lenders.

“Hazardous Discharge” shall have the meaning
set forth in Section 4.18(d) hereof.

“Hazardous Substance” shall mean, without
limitation, any flammable explosives, radon, radioactive materials, asbestos,
urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and
petroleum products, methane, hazardous materials, Hazardous Wastes, hazardous
or Toxic Substances or related materials as defined in CERCLA, the Hazardous
Materials Transportation Act, as amended (49 U.S.C. Sections 1801, et  seq.), RCRA, Articles 15 and 27 of the New
York State Environmental  Conservation
Law or any other applicable Environmental Law and in the regulations adopted
pursuant thereto.

“Hazardous Wastes” shall mean all waste
materials subject to regulation under CERCLA, RCRA or applicable state law, and
any other applicable provincial, Federal and state laws now in force or
hereafter enacted relating to hazardous waste disposal.

“Hedge Liabilities” shall have the meaning
provided in the definition of “Lender-Provided Interest Rate Hedge”.

“HSBC Facility” shall mean that certain $12,000,000 line of credit facility as
evidenced by the that certain Fifth Amended and Restated Credit Agreement dated
as of November 30, 2005, by and among Borrowers and HSBC Bank Canada, a
Canadian chartered Bank.

“Indebtedness” of a Person at a particular date
shall mean all obligations of such Person which in accordance with GAAP would
be classified upon a balance sheet as liabilities (except capital stock and
surplus earned or otherwise) and in any event, without limitation by reason of
enumeration, shall include all indebtedness, debt and other similar monetary
obligations of such Person whether direct or guaranteed, and all premiums, if
any, due at the required prepayment dates of such indebtedness, and  all indebtedness secured by a Lien on assets
owned by such Person, whether or not such indebtedness actually shall have been
created, assumed or incurred by such Person. Any indebtedness of such Person
resulting from the acquisition by such Person of any assets subject to any Lien
shall be deemed, for the purposes hereof, to be the equivalent of the creation,
assumption and incurring of the indebtedness secured thereby, whether or not
actually so created, assumed or incurred.

“Ineligible Security” shall mean any security
which may not be underwritten or dealt in by member banks of the Federal
Reserve System under Section 16 of the Banking Act of 1933 (12 U.S.C. Section 24,
Seventh), as amended.

 13
 

 

“Initial Adjustment Date” shall mean the later
of (i) March 1, 2007 or (ii) the first day of the month
following the date of delivery of the financial statements for the quarter
ending December 31, 2006 pursuant to Section 9.8 hereof.

“Intellectual Property” shall mean property
constituting under any Applicable Law a patent, patent application, copyright,
trademark, service mark, trade name, mask work, trade secret or license or
other right to use any of the foregoing.

“Intellectual Property Claim” shall mean the
assertion by any Person of a claim (whether asserted in writing, by action,
suit or proceeding or otherwise) that any Borrower’s ownership, use, marketing,
sale or distribution of any Inventory, Equipment, Intellectual Property or
other property or asset is violative of any ownership of or right to use any
Intellectual Property of such Person.

“Intellectual Property Security Agreement”
shall mean that certain Intellectual Property Security Agreement, dated as of
the date hereof, executed by Borrowers in favor of Agent, together with all
amendments, restatements or other modifications thereof.

“Intercreditor Agreement” shall mean an
Intercreditor Agreement among Agent, Borrowers and CIT which shall be in form
and substance satisfactory to Agent in its sole discretion.

“Interest Period” shall mean the period
provided for any Eurodollar Rate Loan pursuant to Section 2.2(b).

“Interest Rate Hedge” shall mean an interest
rate exchange, collar, cap, swap, adjustable strike cap, adjustable strike
corridor or similar agreements entered into by any Borrower or its Subsidiaries
in order to provide protection to, or minimize the impact upon, such Borrower,
any Guarantor and/or their respective Subsidiaries of increasing floating rates
of interest applicable to Indebtedness.

“Inventory” shall mean and include as to each
Borrower all of such Borrower’s now owned or hereafter acquired goods,
merchandise and other personal property, wherever located, to be furnished
under any consignment arrangement, contract of service or held for sale or
lease, all raw materials, work in process, finished goods and materials and
supplies of any kind, nature or description which are or might be used or
consumed in such Borrower’s business or used in selling or furnishing such
goods, merchandise and other personal property, and all documents of title or
other documents representing them.

“Investment Property” shall mean and include as
to each Borrower, all of such Borrower’s now owned or hereafter acquired
securities (whether certificated or uncertificated), securities entitlements,
securities accounts, commodities contracts and commodities accounts.

“Issuer” shall mean any Person who issues a
Letter of Credit and/or accepts a draft pursuant to the terms hereof.

“Leasehold Interests” shall mean all of each
Borrower’s right, title and interest in and to the premises located at the
addresses listed on Schedule 4.19.

 14

 

“Lender” and “Lenders” shall have the
meaning ascribed to such term in the preamble to this Agreement and shall
include each Person which becomes a transferee, successor or assign of any
Lender.

“Lender-Provided Interest Rate Hedge” shall
mean an Interest Rate Hedge which is provided by any Lender and with respect to
which the Agent confirms meets the following requirements: such Interest Rate
Hedge (i) is documented in a standard International Swap Dealer
Association Agreement, (ii) provides for the method of calculating the
reimbursable amount of the provider’s credit exposure in a reasonable and
customary manner, and (iii) is entered into for hedging (rather than
speculative) purposes. The liabilities of any Borrower to the provider of any
Lender-Provided Interest Rate Hedge (the “Hedge Liabilities”) shall be “Obligations”
hereunder, guaranteed obligations under any Guaranty and secured obligations
under any Guarantor Security Agreement and otherwise treated as Obligations for
purposes of each of the Other Documents. The Liens securing the Hedge
Liabilities shall be pari passu with the Liens securing all other Obligations
under this Agreement and the Other Documents.

“Letter of Credit Fees” shall have the meaning
set forth in Section 3.2.

“Letter of Credit Borrowing” shall have the
meaning set forth in Section 2.12(d).

“Letter of Credit Sublimit” shall mean
$2,000,000.00.

“Letters of Credit” shall have the meaning set
forth in Section 2.9.

“License Agreement” shall mean any agreement
between any Borrower and a Licensor pursuant to which such Borrower is
authorized to use any Intellectual Property in connection with the
manufacturing, marketing, sale or other distribution of any Inventory of such
Borrower or otherwise in connection with such Borrower’s business operations.

“Licensor” shall mean any Person from whom any
Borrower obtains the right to use (whether on an exclusive or non-exclusive
basis) any Intellectual Property in connection with such Borrower’s
manufacture, marketing, sale or other distribution of any Inventory or
otherwise in connection with such Borrower’s business operations.

“Licensor/Agent Agreement” shall mean an
agreement between Agent and a Licensor, in form and content satisfactory to
Agent, by which Agent is given the unqualified right, vis-a-vis such Licensor,
to enforce Agent’s Liens with respect to and to dispose of any Borrower’s
Inventory with the benefit of any Intellectual Property applicable thereto,
irrespective of such Borrower’s default under any License Agreement with such
Licensor.

“Lien” shall mean any mortgage, deed of trust,
pledge, hypothecation, assignment, security interest, lien (whether statutory
or otherwise), Charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the Uniform Commercial Code or comparable
law of any jurisdiction.

 15
 

 

“Lien Waiver Agreement” shall mean an agreement
which is executed in favor of Agent by a Person who owns or occupies premises
at which any Collateral may be located from time to time and by which such
Person shall waive any Lien that such Person may ever have with respect to any
of the Collateral and shall authorize Agent from time to time to enter upon the
premises to inspect or remove the Collateral from such premises or to use such
premises to store or dispose of such Inventory.

“Material Adverse Effect” shall mean a material
adverse effect on (a) the condition (financial or otherwise), results of
operations, assets, business, properties or prospects of any Borrower or any
Guarantor, (b) any Borrower’s ability to duly and punctually pay or
perform the Obligations in accordance with the terms thereof, (c) the
value of the Collateral, or Agent’s Liens on the Collateral or the priority of
any such Lien or (d) the practical realization of the benefits of Agent’s
and each Lender’s rights and remedies under this Agreement and the Other
Documents.

“Maximum Face Amount” shall mean, with respect
to any outstanding Letter of Credit, the face amount of such Letter of Credit
including all automatic increases provided for in such Letter of Credit,
whether or not any such automatic increase has become effective.

“Maximum Loan Amount” shall mean $24,000,000.00
less repayments of the Term Loan.

“Maximum Rate” shall have the meaning set forth
in Section 3.6.

“Maximum Revolving Advance Amount” shall mean
$12,000,000.00.

“Maximum Undrawn Amount” shall mean with
respect to any outstanding Letter of Credit, the amount of such Letter of
Credit that is or may become available to be drawn, including all automatic
increases provided for in such Letter of Credit, whether or not any such
automatic increase has become effective.

“Mitcham Lease” shall mean that certain Lease
Agreement dated June 30,2005 entered into by Borrowers with Mitcham
Industries. Inc.

“Multiemployer Plan” shall mean a “multiemployer
plan” as defined in Sections 3(37) and 4001(a)(3) of ERISA.

“Multiple Employer Plan” shall mean a Plan
which has two or more contributing sponsors (including any Borrower or any member
of the Controlled Group) at least two of whom are not under common control, as
such a plan is described in Section 4064 of ERISA.

“Negative Pledge” shall mean that certain
Negative. Pledge, dated as of the Closing Date, executed by Borrowers in favor
of Agent.

“Note” shall mean collectively, the Term Note
and the Revolving Credit Note.

“Obligations” shall mean and include any and
all loans, advances, debts, liabilities, obligations, covenants and duties
owing by any Borrower to Lenders or Agent or to any other direct or indirect
subsidiary or affiliate of Agent or any Lender of any kind or nature, present
or 

 16
 

 

future (including any interest or other amounts
accruing thereon after maturity, or after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or like
proceeding relating to any Borrower, whether or not a claim for post-filing or
post-petition interest or other amounts is allowed in such proceeding), whether
or not evidenced by any note, guaranty or other instrument, whether arising
under any agreement, instrument or document, (including this Agreement and the
Other Documents) whether or not for the payment of money, whether arising by
reason of an extension of credit, opening of a letter of credit, loan, equipment
lease or guarantee, under any interest or currency swap, future, option or
other similar agreement, or in any other manner, whether arising out of
overdrafts or deposit or other accounts or electronic funds transfers (whether
through automated clearing houses or otherwise) or out of the Agent’s or any
Lenders non-receipt of or inability to collect funds or otherwise not being
made whole in connection with depository transfer check or other similar
arrangements, whether direct or indirect (including those acquired by
assignment or participation), absolute or contingent, joint or several, due or
to become due, now existing or hereafter arising, contractual or tortious,
liquidated or unliquidated, regardless of how such indebtedness or liabilities
arise or by what agreement or instrument they may be evidenced or whether
evidenced by any agreement or instrument, including, but not limited to, any
and all of any Borrower’s Indebtedness and/or liabilities under this Agreement,
the Other Documents or under any other agreement between Agent or Lenders and
any Borrower and any amendments, extensions, renewals or increases and all
costs and expenses of Agent and any Lender incurred in the documentation,
negotiation, modification, enforcement, collection or otherwise in connection
with any of the foregoing, including but not limited to reasonable attorneys’
fees and expenses and all obligations of any Borrower to Agent or Lenders to
perform acts or refrain from taking any action.

“Ordinary Course of Business” shall mean with
respect to any Borrower, the ordinary course of such Borrower’s business as
conducted on the Closing Date.

“Original Owner” shall mean: (a) Maple
Leaf Partners, L.P., GeoLease Partners, L.P., Maple Leaf Offshore, Ltd.,
Blackhawk Investors, II, LLC, Steven A. Webster, William R. Ziegler, Maple
Leaf Partners I, L.P. and Valentis SP LP, with respect to Geokinetics, (b) Geokinetics,
with respect to each of GDC, Quantum and Trace Energy (Canada), (c) GDC,
with respect to GDC UK, and (d) Trace Energy (Canada), with respect to
Trace Energy (U.S.).

“Other Documents” shall mean the Note, the
Negative Pledge, the Questionnaire, the Pledge Agreement, the Collateral
Assignment of Acquisition Agreement, the Guaranty, the Guarantor Security
Agreement, the Intellectual Property Security Agreement, any Lender-Provided
Interest Rate Hedge and any and all other agreements, instruments and
documents, including guaranties, pledges, powers of attorney, consents,
interest or currency swap agreements or other similar agreements and all other
writings heretofore, now or hereafter executed by any Borrower or any Guarantor
and/or delivered to Agent or any Lender in respect of the transactions
contemplated by this Agreement.

“Out-of-Formula Loans” shall have the meaning
set forth in Section 15.2(b).

“Parent” of any Person shall mean a corporation
or other entity owning, directly or indirectly at least 50% of the shares of
stock or other ownership interests having ordinary voting 

 17
 

 

power to elect a majority of the directors of the
Person, or other Persons performing similar functions for any such Person.

“Participant” shall mean each Person who shall
be granted the right by any Lender to participate in any of the Advances and
who shall have entered into a participation agreement in form and substance
satisfactory to such Lender.

“Participation Advance” shall have the meaning
set forth in Section 2.12(d).

“Participation Commitment” shall mean each
Lender’s obligation to buy a participation of the Letters of Credit issued
hereunder.

“Payment Office” shall mean initially Two Tower
Center Boulevard, East Brunswick, New Jersey 08816; thereafter, such other
office of Agent, if any, which it may designate by notice to Borrowing Agent
and to each Lender to be the Payment Office.

“PBGC” shall mean the Pension Benefit Guaranty
Corporation established pursuant to Subtitle A of Title IV of ERISA or any
successor.

“Pension Benefit Plan” shall mean at any time (i) any
employee pension benefit plan (including a Multiple Employer Plan, but not a Multiemployer
Plan) which is covered by Title IV of ERISA or is subject to the minimum
funding standards under Section 412 of the Code and either (A) is
maintained by any member of the Controlled Group for employees of any member of
the Controlled Group; or (B) has at any time within the preceding five
years been maintained by any entity which was at such time a member of the
Controlled Group for employees of any entity which was at such time a member of
the Controlled Group and/or (ii) (A) a “pension plan” or “plan” which
is subject to the funding requirements of the Income Tax Act Canada, The
Pensions Benefits Act (Quebec), or applicable pension benefits legislation in
any other Canadian jurisdiction and is applicable to employees resident in
Canada of a Person, and (B) any other foreign pension benefit plan or
similar arrangement applicable to employees of a Person.

“Permanent Reserves” shall mean, an amount
equal to the aggregate amounts owing by any Borrower to any of its
sub-contractors or trade creditors which remain unpaid more than ninety (90)
days from the date of invoice.

“Permitted Capital Lease Facility” shall mean
the $6,000,000 Texas Equipment Lease with Quantum as lessee and CIT as lessor
to be entered into after the Closing Date for the lease of certain seismic
equipment and which is guaranteed by Geokinetics, Trace Energy (Canada) and
GDC, which shall be in form and substance satisfactory to Agent in its sole
discretion.

“Permitted Encumbrances” shall mean (a) Liens
in favor of Agent for the benefit of Agent and Lenders; (b) Liens for
taxes, assessments or other governmental charges not delinquent or being
contested in good faith and by appropriate proceedings and with respect to
which proper reserves have been taken by Borrowers; provided, that, the Lien
shall have no effect on the priority of the Liens in favor of Agent or the
value of the assets in which Agent has such a Lien and a stay of enforcement of
any such Lien shall be in effect; (c) Liens disclosed in the financial
statements referred to in Section 5.5, the existence of which Agent has
consented to in writing; (d) deposits or pledges to secure obligations
under worker’s compensation, social 

 18
 

 

security or similar laws, or under unemployment
insurance; (e) deposits or pledges to secure bids, tenders, contracts
(other than contracts for the payment of money), leases, statutory obligations,
surety and appeal bonds and other obligations of like nature arising in the
Ordinary Course of Business; (f) Liens arising by virtue of the rendition,
entry or issuance against any Borrower or any Subsidiary, or any property of
any Borrower or any Subsidiary, of any judgment, writ, order, or decree for so
long as each such Lien (1) is in existence for less than 20 consecutive
days after it first arises or is being Properly Contested and (2) is at
all times junior in priority to any Liens in favor of Agent; (g) mechanics’,
workers’, materialmen’s or other like Liens arising in the Ordinary Course of
Business with respect to obligations which are not due or which are being
contested in good faith by the applicable Borrower; (h) Liens placed upon
fixed assets hereafter acquired to secure a portion of the purchase price
thereof, provided that (x) any such lien shall not encumber any other
property of any Borrower and (y) the aggregate amount of Indebtedness
secured by such Liens incurred as a result of such purchases during any fiscal
year shall not exceed the amount provided for in Section 7.6; (j) Liens
in favor of CIT to the extent such Liens are permitted by and remain subject to
the terms of the Intercreditor Agreement and (k) Liens disclosed on
Schedule 1.2.

“Permitted Indebtedness” shall have the meaning
set forth in Section 7.8 hereof.

“Person” shall mean any individual, sole
proprietorship, partnership, corporation, business trust, joint stock company,
trust, unincorporated organization, association, limited liability company,
limited liability partnership, institution, public benefit corporation, joint
venture, entity or Governmental Body (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body
or department thereof).

“Plan” shall mean any employee benefit plan
within the meaning of Section 3(3) of ERISA (including a Pension
Benefit Plan), maintained for employees of any Borrower or any member of the
Controlled Group or any such Plan to which any Borrower or any member of the
Controlled Group is required to contribute on behalf of any of its employees.

“Pledge Agreement” shall mean, individually and
collectively, each Pledge Agreement executed by a Borrower in favor of Agent.

“PNC” shall have the meaning set forth in the
preamble to this Agreement and shall extend to all of its successors and
assigns.

“Pro Forma Balance Sheet” shall have the meaning
set forth in Section 5.5(a) hereof.

“Pro Forma Financial Statements” shall have the
meaning set forth in Section 5.5(b) hereof.

“Projections” shall have the meaning set forth
in Section 5.5(b) hereof.

“Properly Contested” shall mean, in the case of
any Indebtedness of any Person (including any taxes) that is not paid as and
when due or payable by reason of such Person’s bona fide dispute concerning its
liability to pay same or concerning the amount thereof, (i) such
Indebtedness is being properly contested in good faith by appropriate
proceedings promptly instituted and diligently conducted; (ii) such Person
has established appropriate reserves as shall 

 19
 

 

be required in conformity with GAAP; (iii) the
non-payment of such Indebtedness will not have a Material Adverse Effect and
will not result in the forfeiture of any assets of such Person; (iv) no
Lien is imposed upon any of such Person’s assets with respect to such
Indebtedness unless such Lien is at all times junior and subordinate in
priority to the Liens in favor of the Agent (except only with respect to
property taxes that have priority as a matter of applicable state law) and
enforcement of such Lien is stayed during the period prior to the final
resolution or disposition of such dispute; (v) if such Indebtedness
results from, or is determined by the entry, rendition or issuance against a
Person or any of its assets of a judgment, writ, order or decree, enforcement
of such judgment, writ, order or decree is stayed pending a timely appeal or
other judicial review; and (vi) if such contest is abandoned, settled or
determined adversely (in whole or in part) to such Person, such Person
forthwith pays such Indebtedness and all penalties, interest and other amounts
due in connection therewith.

“Purchasing Lender” shall have the meaning set
forth in Section 16.3 hereof.

“Quantum” shall mean Quantum Geophysical, Inc.,
a Texas corporation.

“Quantum Services” shall mean Quantum
Geophysical Services, Inc., a Texas corporation.

“Questionnaire” shall mean the Documentation
Information Questionnaire and the responses thereto provided by Borrowing Agent
and delivered to Agent.

“RCRA” shall mean the Resource Conservation and
Recovery Act, 42 U.S.C. §§ 6901 et seq., as same may be amended from time to
time.

“Real Property” shall mean all of each Borrower’s
right, title and interest in and to the owned and leased premises identified on
Schedule 4.19 hereto.

“Receivables” shall mean and include, as to
each Borrower, all of such Borrower’s accounts, contract rights, instruments
(including those evidencing indebtedness owed to such Borrower by its
Affiliates), documents, chattel paper (including electronic chattel paper),
general intangibles relating to accounts, drafts and acceptances, credit card
receivables and all other forms of obligations owing to such Borrower arising
out of or in connection with the sale or lease of Inventory or the rendition of
services, all supporting obligations, guarantees and other security therefor,
whether secured or unsecured, now existing or hereafter created, and whether or
not specifically sold or assigned to Agent hereunder.

“Reimbursement Obligation” shall have the
meaning set forth in Section 2.12(b)hereof.

“Release” shall have the meaning set forth in Section 5.7(c)(i) hereof.

“Reportable Event” shall mean a reportable
event described in Section 4043(c) of ERISA or the regulations
promulgated thereunder.

“Required Lenders” shall mean Lenders holding
at least fifty-one percent (51%) of the Advances and, if no Advances are
outstanding, shall mean Lenders holding fifty-one percent 

 20
 

 

(51%) of the Commitment Percentages; provided,
however, if there are fewer than three (3) Lenders, Required Lenders shall
mean all Lenders.

“Reserve Percentage” shall mean as of any day
the maximum percentage in effect on such day as prescribed by the Board of
Governors of the Federal Reserve System (or any successor) for determining the
reserve requirements (including supplemental, marginal and emergency reserve
requirements) with respect to eurocurrency funding (currently referred to as “Eurocurrency
Liabilities”.

“Restricted Subsidiary” means a Subsidiary
which, as of the Closing Date, has either (x) no material assets, (y) no
material operations or (z) no employees. As of the Closing Date, the
Restricted Subsidiaries include, without limitation, Quantum Services.

“Revolving Advances” shall mean Advances made
other than Letters of Credit and the Term Loan.

“Revolving Credit Note” shall mean the
promissory note referred to in Section 2.1(a) hereof, as it may be
increased, amended, extended or replaced from time to time.

“Revolving Interest Rate” shall mean, with
respect to Revolving Advances, an interest rate per annum equal to (a) the
lesser of (i) the sum of the Alternate Base Rate plus the Applicable
Revolving Domestic Rate Margin and (ii) the Maximum Rate, with respect to
Domestic Rate Loans, and (b) the lesser of (i) the sum of the
Eurodollar Rate plus the Applicable Revolving Eurodollar Rate Margin and (ii) the
Maximum Rate, with respect to the Eurodollar Rate Loans.

“SEC” shall mean the Securities and Exchange
Commission or any successor thereto.

“Section 20 Subsidiary” shall mean the
Subsidiary of the bank holding company controlling PNC, which Subsidiary has
been granted authority by the Federal Reserve Board to underwrite and deal in
certain Ineligible Securities.

“Securities Act” shall mean the Securities Act
of 1933, as amended.

“Senior Debt Payments” shall mean and include
all cash actually expended by any Borrower to make (a) interest payments
on any Advances hereunder, plus (b) scheduled principal payments on the
Term Loan, plus (c) payments for all fees, commissions and charges set
forth herein and with respect to any Advances, plus (d) capitalized lease
payments, plus (e) payments with respect to any other Indebtedness for
borrowed money.

“Settlement Date” shall mean the Closing Date
and thereafter Wednesday or Thursday of each week or more frequently if Agent
deems appropriate unless such day is not a Business Day in which case it shall
be the next succeeding Business Day.

“Subsidiary” of any Person shall mean a
corporation or other entity of whose Equity Interests having ordinary voting
power (other than Equity Interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors of such
corporation, 

 21
 

 

or other Persons performing similar functions for such
entity, are owned, directly or indirectly, by such Person.

“Subsidiary Stock” shall mean all of the issued
and outstanding Equity Interests of any Subsidiary owned by any Borrower (not
to exceed 65% of the Equity Interests of any Foreign Subsidiary).

“Tangible Net Worth” shall mean, at a
particular date, (a) the aggregate amount of all assets of Borrowers on a
Consolidated Basis as may be properly classified as such in accordance with
GAAP consistently applied excluding such other assets as are properly
classified as intangible assets under GAAP, less (b) the aggregate amount
of all liabilities of Borrowers on a Consolidated Basis.

“Term” shall have the meaning set forth in Section 13.1
hereof.

“Term Loan” shall mean the Advances made
pursuant to Section 2.4 hereof.

“Term Loan Rate” shall mean, with respect to
the Term Loan, an interest rate per annum equal to (a) the lesser of (i) the
sum of the Alternate Base Rate plus the Applicable Term Loan Domestic Rate
Margin and (ii) the Maximum Rate, with respect to Domestic Rate Loans and (b) the
lesser of (i) the sum of the Eurodollar Rate plus the Applicable Term Loan
Eurodollar Rate Margin and (ii) the Maximum Rate, with respect to the
Eurodollar Rate Loans.

“Term Note” shall mean the promissory note
described in Section 2.4 hereof, as it may be increased, amended, extended
or replaced from time to time.

“Termination Event” shall mean (i) a
Reportable Event with respect to any Plan or Multiemployer Plan; (ii) the
withdrawal of any Borrower or any member of the Controlled Group from a Plan or
Multiemployer Plan during a plan year in which such entity was a “substantial
employer” as defined in Section 4001(a)(2) of ERISA; (iii) the
providing of notice of intent to terminate a Plan in a distress termination
described in Section 4041(c) of ERISA; (iv) the institution by
the PBGC of proceedings to terminate a Plan or Multiemployer Plan; (v) any
event or condition (a) which might constitute grounds under Section 4042
of ERISA for the termination of, or the appointment of a trustee to administer,
any Plan or Multiemployer Plan, or (b) that may result in termination of a
Multiemployer Plan pursuant to Section 4041A of ERISA; or (vi) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of any Borrower or any member of the Controlled Group from a
Multiemployer Plan.

“Test Period” shall mean (i) as of June 30,
2006, the fiscal quarter then ending, (ii) as of September 30, 2006,
the two (2) consecutive fiscal quarters then ending, (iii) as of December 31,
2006, the three (3) consecutive fiscal quarters then ending, (iv) as
of March 31, 2007, the four (4) consecutive fiscal quarters then
ending, and (v) as of the last day of each fiscal quarter thereafter, the
four (4) consecutive fiscal quarters then ending.

“Toxic Substance”
shall mean and include any material present on the Real Property or the
Leasehold Interests which has been shown to have significant adverse effect on
human health or which is subject to regulation under the Toxic Substances
Control Act (TSCA), 15 U.S.C. §§ 2601 et seq., applicable state law, applicable
provincial laws, or any other applicable Federal, 

 22
 

 

provincial or state laws
now in force or hereafter enacted relating to toxic substances. “Toxic
Substance” includes but is not limited to asbestos, polychlorinated biphenyls
(PCBs) and lead-based paints.

“Trace Energy (Canada)”
shall mean Trace Energy Services Ltd., an entity organized under the laws of
Canada.

“Trace Energy (U.S.)”
shall mean Trace Energy Services, Inc., a Texas corporation.

“Trading with the Enemy Act” shall mean the
foreign assets control regulations of the United States Treasury Department (31
CFR, Subtitle B, Chapter V, as amended) and any enabling legislation or
executive order relating thereto.

“Transactions” shall have the meaning set forth
in Section 5.5 hereof.

“Transferee” shall have the meaning set forth
in Section 16.3(c) hereof.

“Undrawn Availability” at a particular date
shall mean an amount equal to (a) the lesser of (i) the Formula
Amount plus the Cash Balance or (ii) the Maximum Revolving Advance Amount
minus (b) the sum of (i) the outstanding amount of Advances (other
than the Term Loan) plus (ii) all amounts due and owing to any Borrower’s
trade creditors which are 60 days or more past due, plus (iii) fees and
expenses for which Borrowers are liable but which have not been paid or charged
to Borrowers’ Account.

“Uniform Commercial Code” shall have the
meaning set forth in Section 1.3 hereof.

“USA PATRIOT Act” shall mean the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, Public Law 107-56, as the same has been,
or shall hereafter be, renewed, extended, amended or replaced.

“Week” shall mean the time period commencing
with the opening of business on a Wednesday and ending on the end of business
the following Tuesday.

“Working Capital” means the result of current
assets (as determined in accordance with GAAP), minus current liabilities (as
determined in accordance with GAAP), minus cash and cash equivalents.

1.3.          Uniform
Commercial Code Terms.   All terms used herein and defined in the
Uniform Commercial Code as adopted in the State of Texas from time to time or
the Personal Property Security Act of the applicable province with respect to
Trace Energy (Canada) (the “Uniform Commercial Code”) shall have the meaning
given therein unless otherwise defined herein. Without limiting the foregoing,
the terms “accounts”, “chattel paper”, “instruments”, “general intangibles”, “payment
intangibles”, “supporting obligations”, “securities”, “investment property”, “documents”,
“deposit accounts”, “software”, “letter of credit rights”, “inventory”, “equipment”
and “fixtures”, as and when used in the description of Collateral shall have
the meanings given to such terms in Articles 8 or 9 of the Uniform Commercial
Code. To the extent the definition of any category or type of collateral is
expanded by any amendment, modification 

 23
 

 

or revision to the
Uniform Commercial Code, such expanded definition will apply automatically as
of the date of such amendment, modification or revision.

1.4.          Certain
Matters of Construction.   The terms “herein”, “hereof” and “hereunder”
and other words of similar import refer to this Agreement as a whole and not to
any particular section, paragraph or subdivision. All references herein to
Articles, Sections, Exhibits and Schedules shall be construed to refer to
Articles and Sections of, and Exhibits and Schedules to, this Agreement. Any
pronoun used shall be deemed to cover all genders. Wherever appropriate in the
context, terms used herein in the singular also include the plural and vice
versa. All references to statutes and related regulations shall include any
amendments of same and any successor statutes and regulations. Unless otherwise
provided, all references to any instruments or agreements to which Agent is a
party, including references to any of the Other Documents, shall include any
and all modifications or amendments thereto and any and all extensions or
renewals thereof. All references herein to the time of day shall mean the time
in Dallas, Texas. Whenever the words “including” or “include” shall be used,
such words shall be understood to mean “including, without limitation” or “include,
without limitation”. A Default or Event of Default shall be deemed to exist at
all times during the period commencing on the date that such Default or Event
of Default occurs to the date on which such Default or Event of Default is
waived in writing pursuant to this Agreement or, in the case of a Default, is
cured within any period of cure expressly provided for in this Agreement; and
an Event of Default shall “continue” or be “continuing” until such Event of
Default has been waived in writing by the Required Lenders. Any Lien referred
to in this Agreement or any of the Other Documents as having been created in
favor of Agent, any agreement entered into by Agent pursuant to this Agreement
or any of the Other Documents, any payment made by or to or funds received by
Agent pursuant to or as contemplated by this Agreement or any of the Other
Documents, or any act taken or omitted to be taken by Agent, shall, unless
otherwise expressly provided, be created, entered into, made or received, or
taken or omitted, for the benefit or account of Agent and Lenders. Wherever the
phrase “to the best of Borrowers’ knowledge” or words of similar import
relating to the knowledge or the awareness of any Borrower are used in this
Agreement or Other Documents, such phrase shall mean and refer to (i) the
actual knowledge of a senior officer of any Borrower or (ii) the knowledge
that a senior officer would have obtained if he had engaged in good faith and
diligent performance of his duties, including the making of such reasonably
specific inquiries as may be necessary of the employees or agents of such
Borrower and a good faith attempt to ascertain the existence or accuracy of the
matter to which such phrase relates. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or otherwise within the limitations of, another covenant shall not avoid
the occurrence of a default if such action is taken or condition exists. In
addition, all representations and warranties hereunder shall be given
independent effect so that if a particular representation or warranty proves to
be incorrect or is breached, the fact that another representation or warranty
concerning the same or similar subject matter is correct or is not breached
will not affect the incorrectness of a breach of a representation or warranty
hereunder.

 24
 

 

II             ADVANCES,
PAYMENTS.

2.1.        Revolving Advances.

(a)           Amount of
Revolving Advances. Subject to the terms and conditions set forth in this
Agreement including Sections 2.1(b) and (c), each Lender, severally and
not jointly, will make Revolving Advances to Borrowers in aggregate amounts
outstanding at any time equal to such Lender’s Commitment Percentage of the
lesser of (x) the Maximum Revolving Advance Amount less the aggregate
Maximum Undrawn Amount of all outstanding Letters of Credit or (y) an
amount equal to the sum of:

(i)            up
to 85%, subject to the provisions of Section 2.1(c) hereof, of
Eligible Domestic Receivables (the “Domestic Advance Rate”),  plus

(ii)           up
to the lesser of (A) 85%, subject to the provisions of Section 2.1(c) hereof,
of Eligible Canadian Receivables or (B) $5,000,000 (the “Canadian Advance
Rate” and together with the Domestic Advance Rate, the “Advance Rate”), minus

(iii)          the
aggregate Maximum Undrawn Amount of all outstanding Letters of Credit, minus

(iv)          such
reserves as Agent may reasonably deem proper and necessary from time to time,
including, but not limited to, the Permanent Reserves.

The amount derived from subtracting from (x) Sections 2.1(a)(y)(i) the
amounts set forth in  (y) Section 2.1(a)(y)(ii) and
(iii) at any time and from time to time shall be referred to as the
“Formula Amount”. The Revolving Advances shall be evidenced by one or more
secured promissory notes (collectively, the “Revolving Credit Note”)
substantially in the form attached hereto as Exhibit 2.1(a).

(b)           Discretionary
Rights. The Advance Rates may be increased or decreased by Agent at any
time and from time to time in the exercise of its reasonable discretion. Each
Borrower consents to any such increases or decreases and acknowledges that decreasing
the Advance Rates or increasing or imposing reserves may limit or restrict
Advances requested by Borrowing Agent. The rights of Agent under this
subsection are subject to the provisions of Section 16.2(b).

2.2.        Procedure for Revolving Advances Borrowing.

(a)           Borrowing Agent on
behalf of any Borrower may notify Agent prior to 10:00 a.m. (Dallas, Texas
time) on a Business Day of a Borrower’s request to incur, on that day, a
Revolving Advance hereunder. Should any amount required to be paid as interest
hereunder, or as fees or other charges under this Agreement or any other
agreement with Agent or Lenders, or with respect to any other Obligation,
become due, same shall be deemed a request for a Revolving Advance as of the
date such payment is due, in the amount required to pay in full such interest,
fee, charge or Obligation under this Agreement or any other agreement with
Agent or Lenders, and such request shall be irrevocable.

 25
 

 

(b)           Notwithstanding the
provisions of subsection (a) above, in the event any Borrower desires to
obtain a Eurodollar Rate Loan, Borrowing Agent shall give Agent written notice
by no later than 10:00 a.m. (Dallas, Texas time) on the day which is three
(3) Business Days prior to the date such Eurodollar Rate Loan is to be
borrowed, specifying (i) the date of the proposed borrowing (which shall
be a Business Day), (ii) the type of borrowing and the amount on the date
of such Advance to be borrowed, which amount shall be for at least $500,000 and
if greater, in an integral multiple of $100,000 and (iii) the duration of
the first Interest Period therefor. Interest Periods for Eurodollar Rate Loans
shall be for one, two or three months; provided, if an Interest Period would
end on a day that is not a Business Day, it shall end on the next succeeding
Business Day unless such day falls in the next succeeding calendar month in
which case the Interest Period shall end on the next preceding Business Day. No
Eurodollar Rate Loan shall be made available to any Borrower during the
continuance of a Default or an Event of Default. After giving effect to each
requested Eurodollar Rate Loan, including those which are converted from a
Domestic Rate Loan under Section 2.2(d), there shall not be outstanding
more than three (3) Eurodollar Rate Loans, in the aggregate.

(c)           Each Interest Period
of a Eurodollar Rate Loan shall commence on the date such Eurodollar Rate Loan
is made and shall end on such date as Borrowing Agent may elect as set forth in
subsection (b)(iii) above provided that the exact length of each Interest
Period shall be determined in accordance with the practice of the interbank
market for offshore Dollar deposits and no Interest Period shall end after the
last day of the Term.

Borrowing Agent shall
elect the initial Interest Period applicable to a Eurodollar Rate Loan by its
notice of borrowing given to Agent pursuant to Section 2.2(b) or by
its notice of conversion given to Agent pursuant to Section 2.2(d), as the
case may be. Borrowing Agent shall elect the duration of each succeeding Interest
Period by giving irrevocable written notice to Agent of such duration not later
than 10:00 a.m. (Dallas, Texas time) on the day which is three (3) Business
Days prior to the last day of the then current Interest Period applicable to
such Eurodollar Rate Loan. If Agent does not receive timely notice of the
Interest Period elected by Borrowing Agent, Borrowing Agent shall be deemed to
have elected to convert to a Domestic Rate Loan subject to Section 2.2(d) hereinbelow.

(d)           Provided that no
Event of Default shall have occurred and be continuing, Borrowing Agent may, on
the last Business Day of the then current Interest Period applicable to any
outstanding Eurodollar Rate Loan, or on any Business Day with respect to
Domestic Rate Loans, convert any such loan into a loan of another type in the
same aggregate principal amount provided that any conversion of a Eurodollar
Rate Loan shall be made only on the last Business Day of the then current
Interest Period applicable to such Eurodollar Rate Loan. If Borrowing Agent
desires to convert a loan, Borrowing Agent shall give Agent written notice by
no later than 10:00 a.m. (Dallas, Texas time) (i) on the day which is
three (3) Business Days’ prior to the date on which such conversion is to
occur with respect to a conversion from a Domestic Rate Loan to a Eurodollar
Rate Loan, or (ii) on the day which is one (1) Business Day prior to
the date on which such conversion is to occur with respect to a conversion from
a Eurodollar Rate Loan to a Domestic Rate Loan, specifying, in each case, the
date of such conversion, the loans to be converted and if the conversion is
from a Domestic Rate Loan to any other type of loan, the duration of the first
Interest Period therefor.

 26
 

 

(e)           At its option and
upon written notice given prior to 10:00 a.m. (Dallas, Texas time) at
least three (3) Business Days’ prior to the date of such prepayment, any
Borrower may prepay the Eurodollar Rate Loans in whole at any time or in part
from time to time with accrued interest on the principal being prepaid to the
date of such repayment. Such Borrower shall specify the date of prepayment of
Advances which are Eurodollar Rate Loans and the amount of such prepayment. In
the event that any prepayment of a Eurodollar Rate Loan is required or
permitted on a date other than the last Business Day of the then current
Interest Period with respect thereto, such Borrower shall indemnify Agent and
Lenders therefor in accordance with Section 2.2(f) hereof.

(f)            Each Borrower shall
indemnify Agent and Lenders and hold Agent and Lenders harmless from and
against any and all losses or expenses that Agent and Lenders may sustain or
incur as a consequence of any prepayment, conversion of or any default by any
Borrower in the payment of the principal of or interest on any Eurodollar Rate
Loan or failure by any Borrower to complete a borrowing of, a prepayment of or
conversion of or to a Eurodollar Rate Loan after notice thereof has been given,
including, but not limited to, any interest payable by Agent or Lenders to lenders
of funds obtained by it in order to make or maintain its Eurodollar Rate Loans
hereunder. A certificate as to any additional amounts payable pursuant to the
foregoing sentence submitted by Agent or any Lender to Borrowing Agent shall be
conclusive absent manifest error.

(g)           Notwithstanding any
other provision hereof, if any Applicable Law, treaty, regulation or directive,
or any change therein or in the interpretation or application thereof, shall
make it unlawful for any Lender (for purposes of this subsection (g), the term “Lender”
shall include any Lender and the office or branch where any Lender or any
corporation or bank controlling such Lender makes or maintains any Eurodollar
Rate Loans) to make or maintain its Eurodollar Rate Loans, the obligation of
Lenders to make Eurodollar Rate Loans hereunder shall forthwith be cancelled
and Borrowers shall, if any affected Eurodollar Rate Loans are then
outstanding, promptly upon request from Agent, either pay all such affected
Eurodollar Rate Loans or convert such affected Eurodollar Rate Loans into loans
of another type. If any such payment or conversion of any Eurodollar Rate Loan
is made on a day that is not the last day of the Interest Period applicable to
such Eurodollar Rate Loan, Borrowers shall pay Agent, upon Agent’s request,
such amount or amounts as may be necessary to compensate Lenders for any loss
or expense sustained or incurred by Lenders in respect of such Eurodollar Rate
Loan as a result of such payment or conversion, including (but not limited to)
any interest or other amounts payable by Lenders to lenders of funds obtained
by Lenders in order to make or maintain such Eurodollar Rate Loan. A
certificate as to any additional amounts payable pursuant to the foregoing
sentence submitted by Lenders to Borrowing Agent shall be conclusive absent
manifest error.

2.3.          Disbursement
of Advance Proceeds.   All Advances shall be disbursed from whichever
office or other place Agent may designate from time to time and, together with
any and all other Obligations of Borrowers to Agent or Lenders, shall be
charged to Borrowers’ Account on Agent’s books. During the Term, Borrowers may
use the Revolving Advances by borrowing, prepaying and reborrowing, all in
accordance with the terms and conditions hereof. The proceeds of each Revolving
Advance requested by Borrowing Agent on behalf of any Borrower or deemed to have
been requested by any Borrower under Section 2.2 hereof shall, 

 27
 

 

with respect to requested
Revolving Advances to the extent Lenders make such Revolving Advances, be made
available to the applicable Borrower on the day so requested by way of credit
to such Borrower’s operating account at PNC, or such other bank located in the
United States as Borrowing Agent may designate following notification to Agent,
in immediately available federal funds or other immediately available funds or,
with respect to Revolving Advances deemed to have been requested by any
Borrower, be disbursed to Agent to be applied to the outstanding Obligations
giving rise to such deemed request.

2.4.        Loans.

(a)           Term Loan.   Subject
to the terms and con­ditions of this Agreement, each Lender, severally and not
jointly, will make a Term Loan to Borrowers in the sum equal to such Lender’s
Commitment Percentage of $12,000,000. The Term Loan shall be advanced on the
Closing Date and may not be reborrowed.

(b)           Amortization.   The
Term Loan shall be, with respect to principal, payable in equal monthly
installments of $200,000 each, commencing on July 1, 2006 and on the first
day of each month thereafter with the balance payable upon the expiration of
the Term, subject to acceleration upon the occurrence of an Event of Default
under this Agreement or termination of this Agreement.

(c)           Term Note.   The
Term Loan shall be evidenced by one or more secured promissory notes
(collectively, the “Term Note”) in substantially the form attached
hereto as Exhibit 2.4a.

2.5.          Maximum
Advances.   The aggregate balance of Revolving Advances outstanding at
any time shall not exceed the lesser of (a) the Maximum Revolving Advance
Amount or (b) the Formula Amount, less, in each case, the aggregate
Maximum Undrawn Amount of all issued and outstanding Letters of Credit.

2.6.        Repayment of Advances.

(a)           The Advances shall
be due and payable in full on the last day of the Term subject to earlier
prepayment as herein provided. The Term Loan shall be due and payable as
provided in Section 2.4 hereof and in the Term Note, subject to mandatory
prepayments as herein provided.

(b)           Each Borrower
recognizes that the amounts evidenced by checks, notes, drafts or any other items
of payment relating to and/or proceeds of Collateral may not be collectible by
Agent on the date received. In consideration of Agent’s agreement to
conditionally credit Borrowers’ Account as of the Business Day on which Agent
receives those items of payment, each Borrower agrees that, in computing the
charges under this Agreement, all items of payment shall be deemed applied by
Agent on account of the Obligations one (1) Business Day after (i) the
Business Day Agent receives such payments via wire transfer or electronic
depository check or (ii) in the case of payments received by Agent in any
other form, the Business Day such payment constitutes good funds in Agent’s
account. Agent is not, however, required to credit Borrowers’ Account for the
amount of any item of payment which is 

 28
 

 

unsatisfactory to Agent and Agent may charge Borrowers’ Account for the
amount of any item of payment which is returned to Agent unpaid.

(c)           All payments of
principal, interest and other amounts payable hereunder, or under any of the
Other Documents shall be made to Agent at the Payment Office not later than
1:00 p.m. (Dallas, Texas time) on the due date therefor in lawful money of
the United States of America in federal funds or other funds immediately
available to Agent. Agent shall have the right to effectuate payment on any and
all Obligations due and owing hereunder by charging Borrowers’ Account or by
making Advances as provided in Section 2.2 hereof.

(d)           Borrowers shall pay
principal, interest, and all other amounts payable hereunder, or under any
related agreement, without any deduction whatsoever, including, but not limited
to, any deduction for any setoff or counterclaim.

2.7.          Repayment
of Excess Advances.   The aggregate balance of Advances outstanding at
any time in excess of the maximum amount of Advances permitted hereunder shall
be immediately due and payable without the necessity of any demand, at the
Payment Office, whether or not a Default or Event of Default has occurred.

2.8.          Statement
of Account.   Agent shall maintain, in accordance with its customary
procedures, a loan account (“Borrowers’ Account”) in the name of Borrowers in
which shall be recorded the date and amount of each Advance made by Agent and
the date and amount of each payment in respect thereof; provided, however, the
failure by Agent to record the date and amount of any Advance shall not
adversely affect Agent or any Lender. Each month, Agent shall send to Borrowing
Agent a statement showing the accounting for the Advances made, payments made
or credited in respect thereof, and other transactions between Agent and
Borrowers during such month. The monthly statements shall be deemed correct and
binding upon Borrowers in the absence of manifest error and shall constitute an
account stated between Lenders and Borrowers unless Agent receives a written
statement of Borrowers’ specific exceptions thereto within thirty (30) days
after such statement is received by Borrowing Agent. The records of Agent with
respect to the loan account shall be conclusive evidence absent manifest error
of the amounts of Advances and other charges thereto and of payments applicable
thereto.

2.9.          Letters
of Credit.   Subject to the terms and conditions hereof, Agent shall
issue or cause the issuance of standby Letters of Credit (“Letters of Credit”)
for the account of any Borrower; provided, however, that Agent will not be
required to issue or cause to be issued any Letters of Credit to the extent
that the issuance thereof would then cause the sum of (i) the outstanding
Revolving Advances plus (ii) the Maximum Undrawn Amount of all outstanding
Letters of Credit to exceed the lesser of (x) the Maximum Revolving
Advance Amount or (y) the Formula Amount. The Maximum Undrawn Amount of
outstanding Letters of Credit shall not exceed in the aggregate at any time the
Letter of Credit Sublimit. All disbursements or payments related to Letters of
Credit shall be deemed to be Revolving Advances and shall bear interest at the
Revolving Interest Rate; Letters of Credit that have not been drawn upon shall
not bear interest.

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2.10.      Issuance of Letters of Credit.

(a)           Borrowing Agent, on
behalf of Borrowers, may request Agent to issue or cause the issuance of a
Letter of Credit by delivering to Agent at the Payment Office, prior to 10:00 a.m.
(Dallas, Texas time), at least five (5) Business Days’ prior to the
proposed date of issuance, Agent’s form of Letter of Credit Application (the “Letter
of Credit Application”) completed to the satisfaction of Agent; and, such other
certificates, documents and other papers and information as Agent may
reasonably request. Borrowing Agent, on behalf of Borrowers, also has the right
to give instructions and make agreements with respect to any application, any
applicable letter of credit and security agreement, any applicable letter of
credit reimbursement agreement and/or any other applicable agreement, any
letter of credit and the disposition of documents, disposition of any
unutilized funds, and to agree with Agent upon any amendment, extension or
renewal of any Letter of Credit.

(b)           Each Letter of
Credit shall, among other things, (i) provide for the payment of sight
drafts, other written demands for payment, or acceptances of usance drafts when
presented for honor thereunder in accordance with the terms thereof and when
accompanied by the documents described therein and (ii) have an expiry
date not later than twelve (12) months after such Letter of Credit’s date of
issuance and in no event later than the last day of the Term. Each standby
Letter of Credit shall be subject either to the Uniform Customs and Practice
for Documentary Credits (1993 Revision), International Chamber of Commerce
Publication No. 500, and any amendments or revision thereof adhered to by
the Issuer (“UCP 500”) or the International Standby Practices (ISP98-International
Chamber of Commerce Publication Number 590) (the “ISP98 Rules”), as determined
by Agent, and each trade Letter of Credit shall be subject to UCP 500.

(c)           Agent shall use its
reasonable efforts to notify Lenders of the request by Borrowing Agent for a
Letter of Credit hereunder.

2.11.      Requirements For Issuance of Letters of
Credit.

(a)           Borrowing Agent
shall authorize and direct any Issuer to name the applicable Borrower as the “Applicant”
or “Account Party” of each Letter of Credit. If Agent is not the Issuer of any
Letter of Credit, Borrowing Agent shall authorize and direct the Issuer to
deliver to Agent all instruments, documents, and other writings and property
received by the Issuer pursuant to the Letter of Credit and to accept and rely
upon Agent’s instructions and agreements with respect to all matters arising in
connection with the Letter of Credit, the application therefor or any
acceptance therefor.

(b)           In connection with
all Letters of Credit issued or caused to be issued by Agent under this
Agreement, each Borrower hereby appoints Agent, or its designee, as its
attorney, with full power and authority if an Event of Default shall have
occurred, (i) to sign and/or endorse such Borrower’s name upon any
warehouse or other receipts, letter of credit applications and acceptances, (ii) to
sign such Borrower’s name on bills of lading; (iii) to clear Inventory
through the United States of America Customs Department (“Customs”) in the name
of such Borrower or Agent or Agent’s designee, and to sign and deliver to Customs
officials powers of attorney in the name of Borrower for such purpose; and (iv) to
complete in such Borrower’s name or Agent’s, or in the name of Agent’s
designee, any order, sale or transaction, obtain the necessary documents in
connection therewith, and collect the proceeds thereof. 

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Neither Agent nor its attorneys will be liable for any
acts or omissions nor for any error of judgment or mistakes of fact or law,
except for Agent’s or its attorney’s willful misconduct. This power, being
coupled with an interest, is irrevocable as long as any Letters of Credit
remain outstanding.

2.12.      Disbursements, Reimbursement.

(a)           Immediately upon the
issuance of each Letter of Credit, each Lender shall be deemed to, and hereby
irrevocably and unconditionally agrees to, purchase from Agent a participation
in such Letter of Credit and each drawing thereunder in an amount equal to such
Lender’s Commitment Percentage of the Maximum Face Amount of such Letter of
Credit and the amount of such drawing, respectively.

(b)           In the event of any
request for a drawing under a Letter of Credit by the beneficiary or transferee
thereof, Agent will promptly notify Borrowing Agent. Provided that Borrowing
Agent shall have received such notice, the Borrowers shall reimburse (such obligation
to reimburse Agent shall sometimes be referred to as a “Reimbursement
Obligation”) Agent prior to 12:00 p.m., Dallas, Texas time on each date
that an amount is paid by Agent under any Letter of Credit (each such date, a “Drawing
Date”) in an amount equal to the amount so paid by Agent. In the event
Borrowers fail to reimburse Agent for the full amount of any drawing under any
Letter of Credit by 12:00 p.m., Dallas, Texas time, on the Drawing Date,
Agent will promptly notify each Lender thereof, and Borrowers shall be deemed
to have requested that a Domestic Rate Loan be made by the Lenders to be
disbursed on the Drawing Date under such Letter of Credit, subject to the
amount of the unutilized portion of the lesser of Maximum Revolving Advance Amount
or the Formula Amount and subject to Section 8.2 hereof. Any notice given
by Agent pursuant to this Section 2.12(b) may be oral if immediately
confirmed in writing; provided that the lack of such an immediate confirmation
shall not affect the conclusiveness or binding effect of such notice.

(c)           Each Lender shall
upon any notice pursuant to Section 2.12(b) make available to Agent
an amount in immediately available funds equal to its Commitment Percentage of
the amount of the drawing, whereupon the participating Lenders shall (subject
to Section 2.12(d)) each be deemed to have made a Domestic Rate Loan to
Borrowers in that amount. If any Lender so notified fails to make available to
Agent the amount of such Lender’s Commitment Percentage of such amount by no
later than 2:00 p.m., Dallas, Texas time on the Drawing Date, then
interest shall accrue on such Lender’s obligation to make such payment, from
the Drawing Date to the date on which such Lender makes such payment (i) at
a rate per annum equal to the Federal Funds Rate during the first three days
following the Drawing Date and (ii) at a rate per annum equal to the rate
applicable to Domestic Rate Loans on and after the fourth day following the
Drawing Date. Agent will promptly give notice of the occurrence of the Drawing
Date, but failure of Agent to give any such notice on the Drawing Date or in
sufficient time to enable any Lender to effect such payment on such date shall
not relieve such Lender from its obligation under this Section 2.12(c),
provided that such Lender shall not be obligated to pay interest as provided in
Section 2.12(c) (i) and (ii) until and commencing from the
date of receipt of notice from Agent of a drawing.

 31
 

 

(d)           With respect to any
unreimbursed drawing that is not converted into a Domestic Rate Loan to
Borrowers in whole or in part as contemplated by Section 2.12(b), because
of Borrowers’ failure to satisfy the conditions set forth in Section 8.2
(other than any notice requirements) or for any other reason, Borrowers shall
be deemed to have incurred from Agent a borrowing (each a “Letter of Credit
Borrowing”) in the amount of such drawing. Such Letter of Credit Borrowing
shall be due and payable on demand (together with interest) and shall bear
interest at the rate per annum applicable to a Domestic Rate Loan. Each Lender’s
payment to Agent pursuant to Section 2.12(c) shall be deemed to be a
payment in respect of its participation in such Letter of Credit Borrowing and
shall constitute a “Participation Advance” from such Lender in satisfaction of
its Participation Commitment under this Section 2.12.

(e)           Each Lender’s
Participation Commitment shall continue until the last to occur of any of the
following events:  (x) Agent ceases
to be obligated to issue or cause to be issued Letters of Credit hereunder; (y) no
Letter of Credit issued or created hereunder remains outstanding and
uncancelled and (z) all Persons (other than the Borrowers) have been fully
reimbursed for all payments made under or relating to Letters of Credit.

2.13.      Repayment of Participation Advances.

(a)           Upon (and only upon)
receipt by Agent for its account of immediately available funds from Borrowers (i) in
reimbursement of any payment made by the Agent under the Letter of Credit with
respect to which any Lender has made a Participation Advance to Agent, or (ii) in
payment of interest on such a payment made by Agent under such a Letter of
Credit, Agent will pay to each Lender, in the same funds as those received by
Agent, the amount of such Lender’s Commitment Percentage of such funds, except
Agent shall retain the amount of the Commitment Percentage of such funds of any
Lender that did not make a Participation Advance in respect of such payment by
Agent.

(b)           If Agent is required
at any time to return to any Borrower, or to a trustee, receiver, liquidator,
custodian, or any official in any insolvency proceeding, any portion of the
payments made by Borrowers to Agent pursuant to Section 2.13(a) in
reimbursement of a payment made under the Letter of Credit or interest or fee
thereon, each Lender shall, on demand of Agent, forthwith return to Agent the
amount of its Commitment Percentage of any amounts so returned by Agent plus
interest at the Federal Funds Effective Rate.

2.14.        Documentation.
Each Borrower agrees to be bound by the terms of the Letter of Credit
Application and by Agent’s interpretations of any Letter of Credit issued on
behalf of such Borrower and by Agent’s written regulations and customary
practices relating to letters of credit, though Agent’s interpretations may be
different from such Borrower’s own. In the event of a conflict between the
Letter of Credit Application and this Agreement, this Agreement shall govern
and control. It is understood and agreed that, except in the case of gross
negligence or willful misconduct (as determined by a court of competent
jurisdiction in a final non-appealable judgment), Agent shall not be liable for
any error, negligence and/or mistakes, whether of omission or commission (INCLUDING WITHOUT LIMITATION, WITH RESPECT TO ANY ACT
OR INACTION ARISING FROM AGENT’S NEGLIGENCE OR STRICT LIABILITY), in
following the Borrowing Agent’s or any Borrower’s instructions or those
contained in the Letters of Credit or any modifications, amendments or
supplements thereto.

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2.15.        Determination
to Honor Drawing Request. In determining whether to honor any request for
drawing under any Letter of Credit by the beneficiary thereof, Agent shall be
responsible only to determine that the documents and certificates required to
be delivered under such Letter of Credit have been delivered and that they
comply on their face with the requirements of such Letter of Credit and that
any other drawing condition appearing on the face of such Letter of Credit has
been satisfied in the manner so set forth.

2.16.      Nature of Participation and
Reimbursement Obligations. Each Lender’s obligation in accordance with this
Agreement to make the Revolving Advances or Participation Advances as a result
of a drawing under a Letter of Credit, and the obligations of Borrowers to reimburse
Agent upon a draw under a Letter of Credit, shall be absolute, unconditional
and irrevocable, and shall be performed strictly in accordance with the terms
of this Section 2.16 under all circumstances, including the following
circumstances:

(i)            any
set-off, counterclaim, recoupment, defense or other right which such Lender may
have against Agent, any Borrower or any other Person for any reason whatsoever;

(ii)           the
failure of any Borrower or any other Person to comply, in connection with a
Letter of Credit Borrowing, with the conditions set forth in this Agreement for
the making of a Revolving Advance, it being acknowledged that such conditions
are not required for the making of a Letter of Credit Borrowing and the
obligation of the Lenders to make Participation Advances under Section 2.12;

(iii)          any
lack of validity or enforceability of any Letter of Credit;

(iv)          any
claim of breach of warranty that might be made by Borrower or any Lender
against the beneficiary of a Letter of Credit, or the existence of any claim,
set-off, recoupment, counterclaim, crossclaim, defense or other right which any
Borrower or any Lender may have at any time against a beneficiary, any
successor beneficiary or any transferee of any Letter of Credit or the proceeds
thereof (or any Persons for whom any such transferee may be acting), Agent or
any Lender or any other Person, whether in connection with this Agreement, the
transactions contemplated herein or any unrelated transaction (including any
underlying transaction between any Borrower or any Subsidiaries of such
Borrower and the beneficiary for which any Letter of Credit was procured);

(v)           the
lack of power or authority of any signer of (or any defect in or forgery of any
signature or endorsement on) or the form of or lack of validity, sufficiency,
accuracy, enforceability or genuineness of any draft, demand, instrument,
certificate or other document presented under or in connection with any Letter
of Credit, or any fraud or alleged fraud in connection with any Letter of Credit,
or the transport of any property or provisions of services relating to a Letter
of Credit, in each case even if Agent or any of Agent’s Affiliates has been
notified thereof;

(vi)          payment
by Agent under any Letter of Credit against presentation of a demand, draft or
certificate or other document which does not comply with the terms of such
Letter of Credit;

 33
 

 

(vii)         the
solvency of, or any acts or omissions by, any beneficiary of any Letter of
Credit, or any other Person having a role in any transaction or obligation
relating to a Letter of Credit, or the existence, nature, quality, quantity,
condition, value or other characteristic of any property or services relating
to a Letter of Credit;

(viii)        any
failure by the Agent or any of Agent’s Affiliates to issue any Letter of Credit
in the form requested by Borrowing Agent, unless the Agent has received written
notice from Borrowing Agent of such failure within three (3) Business Days
after the Agent shall have furnished Borrowing Agent a copy of such Letter of
Credit and such error is material and no drawing has been made thereon prior to
receipt of such notice;

(ix)           any
Material Adverse Effect on any Borrower or any Guarantor;

(x)            any
breach of this Agreement or any Other Document by any party thereto;

(xi)           the
occurrence or continuance of an insolvency proceeding with respect to any
Borrower or any Guarantor;

(xii)          the
fact that a Default or Event of Default shall have occurred and be continuing;

(xiii)         the
fact that the Term shall have expired or this Agreement or the Obligations
hereunder shall have been terminated; and

(xiv)        any
other circumstance or happening whatsoever, whether or not similar to any of
the foregoing.

2.17.        Indemnity.
In addition to amounts payable as provided in Section 16.5, each Borrower
hereby agrees to protect, indemnify, defend, pay and save harmless Agent and
any of Agent’s Affiliates that have issued a Letter of Credit from and against
any and all claims, demands, liabilities, damages, taxes, penalties, interest,
judgments, settlements, losses, costs, charges and expenses (including
reasonable fees, expenses and disbursements of counsel and allocated costs of
internal counsel) which the Agent or any of Agent’s Affiliates may incur or be
subject to as a consequence, direct or indirect, of the issuance of any Letter
of Credit, other than as a result of (A) the gross negligence or willful
misconduct of the Agent as determined by a final and non-appealable judgment of
a court of competent jurisdiction or (B) the wrongful dishonor by the Agent
or any of Agent’s Affiliates of a proper demand for payment made under any
Letter of Credit (INCLUDING, WITHOUT
LIMITATION, WITH RESPECT TO ANY OTHERWISE INDEMNIFIED MATTER ARISING FROM AGENT’S
NEGLIGENCE OR STRICT LIABILITY), except if such dishonor resulted
from any act or omission, whether rightful or wrongful, of any present or
future de jure or de facto Governmental Body (all such acts or omissions herein
called “Governmental Acts”).

2.18.        Liability
for Acts and Omissions. As between Borrowers and Agent and Lenders, each
Borrower assumes all risks of the acts and omissions of, or misuse of the
Letters of Credit by, the respective beneficiaries of such Letters of Credit (INCLUDING, WITHOUT LIMITATION, ALL RISKS ATTRIBUTABLE
TO ANY ACT OR OMISSION ARISING 

 34
 

 

FROM AGENT’S OR LENDER’S NEGLIGENCE
OR STRICT LIABILITY). In furtherance and not in limitation of
the respective foregoing, Agent shall not be responsible for: (i) the
form, validity, sufficiency, accuracy, genuineness or legal effect of any
document submitted by any party in connection with the application for an
issuance of any such Letter of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or forged
(even if Agent shall have been notified thereof); (ii) the validity or
sufficiency of any instrument transferring or assigning or purporting to
transfer or assign any such Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (iii) the failure of the
beneficiary of any such Letter of Credit, or any other party to which such
Letter of Credit may be transferred, to comply fully with any conditions
required in order to draw upon such Letter of Credit or any other claim of any
Borrower against any beneficiary of such Letter of Credit, or any such
transferee, or any dispute between or among any Borrower and any beneficiary of
any Letter of Credit or any such transferee; (iv) errors, omissions, interruptions
or delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex or otherwise, whether or not they be in cipher; (v) errors
in interpretation of technical terms; (vi) any loss or delay in the
transmission or otherwise of any document required in order to make a drawing
under any such Letter of Credit or of the proceeds thereof; (vii) the
misapplication by the beneficiary of any such Letter of Credit of the proceeds
of any drawing under such Letter of Credit; or (viii) any consequences
arising from causes beyond the control of Agent, including any governmental
acts, and none of the above shall affect or impair, or prevent the vesting of,
any of Agent’s rights or powers hereunder. Nothing in the preceding sentence
shall relieve Agent from liability for Agent’s gross negligence or willful
misconduct (as determined by a court of competent jurisdiction in a final
non-appealable judgment) in connection with actions or omissions described in
such clauses (i) through (viii) of such sentence. In no event shall
Agent or Agent’s Affiliates be liable to any Borrower for any indirect,
consequential, incidental, punitive, exemplary or special damages or expenses
(including without limitation attorneys’ fees), or for any damages resulting
from any change in the value of any property relating to a Letter of Credit.

Without limiting the
generality of the foregoing, Agent and each of its Affiliates (i) may rely
on any oral or other communication believed in good faith by Agent or  such Affiliate to have been authorized or
given by or on behalf of the applicant for a Letter of Credit, (ii) may
honor any presentation if the documents presented appear on their face
substantially to comply with the terms and conditions of the relevant Letter of
Credit; (iii) may honor a previously dishonored presentation under a
Letter of Credit, whether such dishonor was pursuant to a court order, to
settle or compromise any claim of wrongful dishonor, or otherwise, and shall be
entitled to reimbursement to the same extent as if such presentation had
initially been honored, together with any interest paid by Agent or its
Affiliates; (iv) may honor any drawing that is payable upon presentation
of a statement advising negotiation or payment, upon receipt of such statement
(even if such statement indicates that a draft or other document is being
delivered separately), and shall not be liable for any failure of any such
draft or other document to arrive, or to conform in any way with the relevant
Letter of Credit; (v) may pay any paying or negotiating bank claiming that
it rightfully honored under the laws or practices of the place where such bank
is located; and (vi) may settle or adjust any claim or demand made on
Agent or its Affiliate in any way related to any order issued at the applicant’s
request to an air carrier, a letter of guarantee or of indemnity issued to a
carrier or any similar document (each an “Order”) and honor any drawing in
connection with any Letter of Credit that is the subject of such Order, 

 35
 

 

notwithstanding that any
drafts or other documents presented in connection with such Letter of Credit
fail to conform in any way with such Letter of Credit.

In furtherance and
extension and not in limitation of the specific provisions set forth above, any
action taken or omitted by Agent under or in connection with the Letters of
Credit issued by it or any documents and certificates delivered thereunder, if
taken or omitted in good faith and without gross negligence (as determined by a
court of competent jurisdiction in a final non-appealable judgment), shall not
put Agent under any resulting liability to any Borrower or any Lender.

2.19.        Additional
Payments. Any sums expended by Agent or any Lender due to any Borrower’s
failure to perform or comply with its obligations under this Agreement or any
Other Document including any Borrower’s obligations under Sections 4.2, 4.4,
4.12, 4.13, 4.14 and 6.1 hereof, may be charged to Borrowers’ Account as a
Revolving Advance and added to the Obligations.

2.20.      Manner of Borrowing and Payment.

(a)           Each borrowing of
Revolving Advances shall be advanced according to the applicable Commitment
Percentages of Lenders. The Term Loan shall be advanced according to the
Commitment Percentages of Lenders.

(b)           Each payment
(including each prepayment) by any Borrower on account of the principal of and
interest on the Revolving Advances, shall be applied to the Revolving Advances
pro rata according to the applicable Commitment Percentages of Lenders. Each
payment (including each prepayment) by any Borrower on account of the principal
of and interest on the Term Note, shall be made from or to, or applied to that
portion of the Term Loan evidenced by the Term Note pro rata according to the
Commitment Percentages of Lenders. Except as expressly provided herein, all
payments (including prepayments) to be made by any Borrower on account of
principal, interest and fees shall be made without set off or counterclaim and
shall be made to Agent on behalf of the Lenders to the Payment Office, in each
case on or prior to 1:00 p.m., Dallas, Texas time, in Dollars and in
immediately available funds.

(c)

(i)            Notwithstanding
anything to the contrary contained in Sections 2.20(a) and (b) hereof,
commencing with the first Business Day following the Closing Date, each
borrowing of Revolving Advances shall be advanced by Agent and each payment by
any Borrower on account of Revolving Advances shall be applied first to those
Revolving Advances advanced by Agent. On or before 1:00 p.m., Dallas,
Texas time, on each Settlement Date commencing with the first Settlement Date
following the Closing Date, Agent and Lenders shall make certain payments as
follows: (I) if the aggregate amount of new Revolving Advances made by
Agent during the preceding Week (if any) exceeds the aggregate amount of
repayments applied to outstanding Revolving Advances during such preceding
Week, then each Lender shall provide Agent with funds in an amount equal to its
applicable Commitment Percentage of the difference between (w) such
Revolving Advances and (x) such repayments and (II) if the aggregate
amount of repayments applied to outstanding Revolving Advances during such Week

 36
 

 

exceeds the aggregate amount of new Revolving Advances
made during such Week, then Agent shall provide each Lender with funds in an
amount equal to its applicable Commitment Percentage of the difference between (y) such
repayments and (z) such Revolving Advances.

(ii)           Each
Lender shall be entitled to earn interest at the applicable Contract Rate on
outstanding Advances which it has funded.

(iii)          Promptly
following each Settlement Date, Agent shall submit to each Lender a certificate
with respect to payments received and Advances made during the Week immediately
preceding such Settlement Date. Such certificate of Agent shall be conclusive
in the absence of manifest error.

(d)           If any Lender or
Participant (a “Benefited Lender”) shall at any time receive any payment of all
or part of its Advances, or interest thereon, or receive any Collateral in
respect thereof (whether voluntarily or involuntarily or by set-off) in a
greater proportion than any such payment to and Collateral received by any
other Lender, if any, in respect of such other Lender’s Advances, or interest
thereon, and such greater proportionate payment or receipt of Collateral is not
expressly permitted hereunder, such Benefited Lender shall purchase for cash
from the other Lenders a participation in such portion of each such other
Lender’s Advances, or shall provide such other Lender with the benefits of any
such Collateral, or the proceeds thereof, as shall be necessary to cause such
Benefited Lender to share the excess payment or benefits of such Collateral or
proceeds ratably with each of the other Lenders; provided, however, that if all
or any portion of such excess payment or benefits is thereafter recovered from
such Benefited Lender, such purchase shall be rescinded, and the purchase price
and benefits returned, to the extent of such recovery, but without interest. Each
Lender so purchasing a portion of another Lender’s Advances may exercise all
rights of payment (including rights of set-off) with respect to such portion as
fully as if such Lender were the direct holder of such portion.

(e)           Unless Agent shall
have been notified by telephone, confirmed in writing, by any Lender that such
Lender will not make the amount which would constitute its applicable
Commitment Percentage of the Advances available to Agent, Agent may (but shall
not be obligated to) assume that such Lender shall make such amount available
to Agent on the next Settlement Date and, in reliance upon such assumption,
make available to Borrowers a corresponding amount. Agent will promptly notify
Borrowing Agent of its receipt of any such notice from a Lender. If such amount
is made available to Agent on a date after such next Settlement Date, such
Lender shall pay to Agent on demand an amount equal to the product of (i) the
daily average Federal Funds Rate (computed on the basis of a year of 360 days)
during such period as quoted by Agent, times (ii) such amount, times (iii) the
number of days from and including such Settlement Date to the date on which
such amount becomes immediately available to Agent. A certificate of Agent
submitted to any Lender with respect to any amounts owing under this paragraph (e) shall
be conclusive, in the absence of manifest error. If such amount is not in fact
made available to Agent by such Lender within three (3) Business Days
after such Settlement Date, Agent shall be entitled to recover such an amount,
with interest thereon at the rate per annum then applicable to such Revolving
Advances hereunder, on demand from Borrowers; provided, however, that Agent’s
right to such recovery shall not prejudice or otherwise adversely affect
Borrowers’ rights (if any) against such Lender.

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2.21.      Mandatory Prepayments.

(a)           Subject to Section 4.3
hereof and excluding the exceptions set forth therein, when Borrower (i) sells
or otherwise disposes of any Collateral other than Inventory in the Ordinary
Course of Business, (ii) issues or sells any equity securities, capital
stock or other ownership interests, or receives any capital contributions, (iii) incurs
any Indebtedness (other than as permitted by Section 7.8 hereof),
or (iv) receives any proceeds payable in connection with (A) any
condemnation proceedings affecting any of the foregoing or any rights thereto
or any interest in or to any Collateral or (B) any damage to or taking of
any of the foregoing or any rights in any Collateral or any interest therein
arising from or otherwise relating to any exercise of the power of eminent
domain, or any conveyance in lieu of or under threat of any such taking, then
Borrower shall repay the Advances in an amount equal to the net cash proceeds
of the foregoing (i.e., gross proceeds less the reasonable costs of such sales,
issuances, contributions or other dispositions), such repayments to be made
promptly but in no event more than one (1) Business Day following receipt
of such net proceeds, and until the date of payment, such proceeds shall be
held in trust for Agent. The foregoing shall not be deemed to be implied
consent to any such sale or transaction otherwise prohibited by the terms and
conditions hereof. Such repayments shall be applied (x) first, to the
outstanding principal installments of the Term Loan in the inverse order of the
maturities thereof and (y) second, to the remaining Advances in such order
as Agent may determine, subject to Borrower’s ability to reborrow Revolving
Advances in accordance with the terms hereof.

(b)           Borrowers shall
prepay the outstanding amount of the Term Loan in an amount equal to 25% of
Excess Cash Flow for each fiscal year commencing on or after December 31,
2006, payable upon Agent’s request following delivery of the financial
statements to Agent referred to in and required by Section 9.7 for such
fiscal year but in any event not later than one hundred twenty (120) days after
the end of each such fiscal year, which amount shall be applied to the
outstanding principal installments of the Term Loan in the inverse order of the
maturities thereof. In the event that the financial statement is not so
delivered, then a calculation based upon estimated amounts shall be made by
Agent upon which calculation Borrowers shall make the prepayment required by
this Section 2.21(b), subject to adjustment (except that no amounts shall
be readvanced under the Term Loan) when the financial statement is delivered to
Agent as required hereby. The calculation made by Agent shall not be deemed a
waiver of any rights Agent or Lenders may have as a result of the failure by
Borrowers to deliver such financial statement.

2.22.      Use of Proceeds.

(a)           Borrowers shall
apply the proceeds of Advances to (i) pay fees and expenses relating to
the Transaction, (ii) repay existing Indebtedness owed to HSBC and
pursuant to the Mitcham Lease and (iii) provide for Borrowers’ working
capital needs (including Capital Expenditures permitted hereunder) and
reimburse drawings under Letters of Credit.

(b)           Without limiting the
generality of Section 2.22(a) above, neither the Borrowers,
Guarantors, nor any other Person which may in the future become party to this
Agreement or the Other Documents as a Borrower or Guarantor, intends to use nor
shall they use 

 38
 

 

any portion of the proceeds of the Advances, directly
or indirectly, for any purpose in violation of the Trading with the Enemy Act.

2.23.      Defaulting Lender.

(a)           Notwithstanding
anything to the contrary contained herein, in the event any Lender (x) has
refused (which refusal constitutes a breach by such Lender of its obligations
under this Agreement) to make available its portion of any Advance or to refund
its portion of any excess interest received as provided in Section 3.6 or (y) notifies
either Agent or Borrowing Agent that it does not intend to make available its
portion of any Advance (if the actual refusal would constitute a breach by such
Lender of its obligations under this Agreement) (each, a “Lender Default”), all
rights and obligations hereunder of such Lender (a “Defaulting Lender”) as to
which a Lender Default is in effect and of the other parties hereto shall be
modified to the extent of the express provisions of this Section 2.23
while such Lender Default remains in effect.

(b)           Advances shall be
incurred pro rata from Lenders (the “Non-Defaulting Lenders”) which are not
Defaulting Lenders based on their respective Commitment Percentages, and no
Commitment Percentage of any Lender or any pro rata share of any Advances
required to be advanced by any Lender shall be increased as a result of such Lender
Default. Amounts received in respect of principal of any type of Advances shall
be applied to reduce the applicable Advances of each Lender (other than any
Defaulting Lender) pro rata based on the aggregate of the outstanding Advances
of that type of all Lenders at the time of such application; provided,
that, Agent shall not be obligated to transfer to a Defaulting Lender any
payments received by Agent for the Defaulting Lender’s benefit, nor shall a
Defaulting Lender be entitled to the sharing of any payments hereunder
(including any principal, interest or fees). Amounts payable to a Defaulting
Lender shall instead be paid to or retained by Agent. Agent may hold and, in
its discretion, re-lend to a Borrower the amount of such payments received or
retained by it for the account of such Defaulting Lender.

(c)           A Defaulting Lender
shall not be entitled to give instructions to Agent or to approve, disapprove,
consent to or vote on any matters relating to this Agreement and the Other
Documents. All amendments, waivers and other modifications of this Agreement
and the Other Documents may be made without regard to a Defaulting Lender and,
for purposes of the definition of “Required Lenders”, a Defaulting Lender shall
be deemed not to be a Lender and not to have Advances outstanding.

(d)           Other than as
expressly set forth in this Section 2.23, the rights and obligations of a
Defaulting Lender (including the obligation to indemnify Agent) and the other
parties hereto shall remain unchanged. Nothing in this Section 2.23 shall
be deemed to release any Defaulting Lender from its obligations under this
Agreement and the Other Documents, shall alter such obligations, shall operate
as a waiver of any default by such Defaulting Lender hereunder, or shall
prejudice any rights which any Borrower, Agent or any Lender may have against
any Defaulting Lender as a result of any default by such Defaulting Lender
hereunder.

(e)           In the event a
Defaulting Lender retroactively cures to the satisfaction of Agent the breach
which caused a Lender to become a Defaulting Lender, such Defaulting Lender
shall no longer be a Defaulting Lender and shall be treated as a Lender under
this Agreement.

 39
 

 

III            INTEREST
AND FEES.

3.1.        Interest. Interest on Advances
shall be payable in arrears on the first day of each month with respect to
Domestic Rate Loans and, with respect to Eurodollar Rate Loans, at the end of
each Interest Period. Interest charges shall be computed on the actual
principal amount of Advances outstanding during the month at a rate per annum
equal to (i) with respect to Revolving Advances, the applicable Revolving
Interest Rate and (ii) with respect to the Term Loan, the applicable Term
Loan Rate (as applicable, the “Contract Rate”). Whenever, subsequent to the
date of this Agreement, the Alternate Base Rate is increased or decreased, the
applicable Contract Rate shall be similarly changed without notice or demand of
any kind by an amount equal to the amount of such change in the Alternate Base
Rate during the time such change or changes remain in effect. The Eurodollar
Rate shall be adjusted with respect to Eurodollar Rate Loans without notice or
demand of any kind on the effective date of any change in the Reserve
Percentage as of such effective date. Upon and after the occurrence of an Event
of Default, and during the continuation thereof (i) at the option of Agent
or at the direction of Required Lenders, the Obligations shall bear interest at
the Contract Rate plus two percent (2%) per annum (as applicable, the “Default
Rate”).

Commencing
on the Initial Adjustment Date, the Applicable Margin with respect to the
Revolving Advances and the Term Loan will be adjusted (up or down)
prospectively as determined in accordance with the foregoing table based on the
Borrowers’ most recent Financials. For purposes of this Section 3.1, “Financials”
shall mean the annual or quarterly financial statements of the Borrowers
delivered pursuant to Section 9.7 and Section 9.8 of this Agreement. Adjustments,
if any, to the Applicable Margin shall be effective on the first day of the
calendar month after the Agent has received the applicable Financials. If the
Borrowers fail to deliver the Financials to the Agent at the time required
pursuant to this Agreement, then the Applicable Margin shall be the highest
Applicable Margin set forth in the foregoing table until five days after such
Financials are so delivered. During the period from the Closing Date through
the Initial Adjustment Date, the Applicable Margin shall be determined in
accordance with the foregoing table as if the Fixed Charge Coverage Ratio were
greater than or equal to 1.50 to 1.00 but less than 2.00 to 1.00.

	
  If the Fixed Charge Coverage Ratio is:

  	
   

  	
   

  	
   

  	
  Applicable

  Revolving

  Eurodollar Rate

  Margin:

  	
   

  	
  Applicable

  Revolving

  Domestic Rate

  Margin:

  	
   

  	
  Applicable

  Term Loan

  Eurodollar Rate

  Margin:

  	
   

  	
  Applicable

  Term Loan

  Domestic Rate

  Margin:

  
	
  Less than
  1.10:1.00

  	
   

  	
  2.75%

  	
   

  	
  0.50%

  	
   

  	
  3.50%

  	
   

  	
  1.25%

  
	
  Greater than or
  equal to 1.10:1.00 and less than 1.50:1.00

  	
   

  	
  2.50%

  	
   

  	
  0.25%

  	
   

  	
  3.25%

  	
   

  	
  1.00%

  
	
  Greater than or
  equal to 1.50:1.00 and less than 2.00:1.00

  	
   

  	
  2.25%

  	
   

  	
  0.00%

  	
   

  	
  3.00%

  	
   

  	
  0.75%

  
	
  Greater than or
  equal to 2.00:1.00

  	
   

  	
  2.00%

  	
   

  	
  0.00%

  	
   

  	
  2.75%

  	
   

  	
  0.50%

  

 

 40
 

 

3.2.        Letter of Credit Fees.

(a)           Borrowers shall pay (x) to
Agent, for the ratable benefit of Lenders, fees for each Letter of Credit for
the period from and excluding the date of issuance of same to and including the
date of expiration or termination, equal to the average daily face amount of
each outstanding Letter of Credit multiplied by the Applicable Revolving
Eurodollar Rate Margin, such fees to be calculated on the basis of a 360-day
year for the actual number of days elapsed and to be payable quarterly in
arrears on the first day of each quarter and on the last day of the Term, and (y) to
the Issuer, a fronting fee of one quarter of one percent (0.25%) per annum,
together with any and all administrative, issuance, amendment, payment and
negotiation charges with respect to Letters of Credit and all fees and expenses
as agreed upon by the Issuer and the Borrowing Agent in connection with any
Letter of Credit, including in connection with the opening, amendment or
renewal of any such Letter of Credit and any acceptances created thereunder and
shall reimburse Agent for any and all fees and expenses, if any, paid by Agent
to the Issuer (all of the foregoing fees, the “Letter of Credit Fees”). All
such charges shall be deemed earned in full on the date when the same are due
and payable hereunder and shall not be subject to rebate or pro-ration upon the
termination of this Agreement for any reason. Any such charge in effect at the
time of a particular transaction shall be the charge for that transaction,
notwithstanding any subsequent change in the Issuer’s prevailing charges for
that type of transaction. All Letter of Credit Fees payable hereunder shall be
deemed earned in full on the date when the same are due and payable hereunder
and shall not be subject to rebate or pro-ration upon the termination of this
Agreement for any reason.

On demand, Borrowers will
cause cash to be deposited and maintained in an account with Agent, as cash
collateral, in an amount equal to one hundred and five percent (105%) of the
Maximum Undrawn Amount of all outstanding Letters of Credit, and each Borrower
hereby irrevocably authorizes Agent, in its discretion, on such Borrower’s
behalf and in such Borrower’s name, to open such an account and to make and
maintain deposits therein, or in an account opened by such Borrower, in the
amounts required to be made by such Borrower, out of 

 41
 

 

the proceeds of
Receivables or other Collateral or out of any other funds of such Borrower
coming into any Lender’s possession at any time. Agent will invest such cash
collateral (less applicable reserves) in such short-term money-market items as
to which Agent and such Borrower mutually agree and the net return on such
investments shall be credited to such account and constitute additional cash
collateral. No Borrower may withdraw amounts credited to any such account
except upon the occurrence of all of the following: (x) payment and performance
in full of all Obligations, (y) expiration of all Letters of Credit and (z) termination
of this Agreement.

3.3.        Closing Fee and Facility Fee.

(a)           Closing Fee. Upon
the execution of this Agreement, Borrowers shall pay to Agent for the ratable
benefit of Lenders a closing fee of $120,000.00 less that portion of the
commitment fee of $40,000.00 heretofore paid by Borrowers to Agent remaining
after application of such fee to out-of-pocket expenses, and less that portion
of the deposit of $40,000.00 heretofore paid by Borrowers to Agent remaining
after application of such fee to out-of-pocket expenses.

(b)           Facility Fee.
If, for any month during the Term, the average daily unpaid balance of the
Revolving Advances and undrawn amount of any outstanding Letters of Credit for
each day of such month does not equal the Maximum Revolving Advance Amount,
then Borrowers shall pay to Agent for the ratable benefit of Lenders a fee at a
rate equal to one-quarter of one percent (.25%) per annum on the amount by
which the Maximum Revolving Advance Amount exceeds such average daily unpaid
balance. Such fee shall be payable to Agent in arrears on the first day of each
month with respect to the previous month.

3.4.        Collateral Evaluation Fee, Collateral
Monitoring Fee.

(a)           Collateral
Evaluation Fee. Borrowers shall pay Agent a collateral evaluation fee equal
to $1,200.00 per month commencing on the first day of the month following the
Closing Date and on the first day of each month thereafter during the Term. The
collateral evaluation fee shall be deemed earned in full on the date when same
is due and payable hereunder and shall not be subject to rebate or proration
upon termination of this Agreement for any reason.

(b)           Collateral
Monitoring Fee. Borrowers shall pay to Agent on the first day of each month
following any month in which Agent performs any collateral monitoring - namely
any field examination, collateral analysis or other business analysis, the need
for which is to be determined by Agent and which monitoring is undertaken by
Agent or for Agent’s benefit - a collateral monitoring fee in an amount of at
least $750.00 per day (subject to change from time to time based on market
rates) for each person employed to perform such monitoring, plus all costs and
disbursements incurred by Agent in the performance of such examination or
analysis.

3.5.          Computation
of Interest and Fees. Interest and fees hereunder shall be computed on the
basis of a year of 360 days and for the actual number of days elapsed. If any
payment to be made hereunder becomes due and payable on a day other than a
Business Day, the due date 

 42
 

 

thereof shall be extended to the next succeeding
Business Day and interest thereon shall be payable at the applicable Contract
Rate during such extension.

3.6.          Maximum
Charges. It is the intention of the parties to comply strictly with
applicable usury laws. Accordingly, notwithstanding any provision to the
contrary in this Agreement or the Other Documents, in no event shall any
Obligations require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
Applicable Laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the “Maximum Rate”). If any
such excess interest is called for, contracted for, charged, taken, reserved or
received in connection herewith or therewith, or in any communication by Agent,
any Lender or any other Person to Borrower, any Guarantor or any other Person
liable for the Obligations, or in the event that all or part of the principal
or interest hereof or thereof shall be prepaid or accelerated, so that under
any of such circumstances or under any other circumstance whatsoever the amount
of interest contracted for, charged, taken, reserved or received on the amount
of principal actually outstanding from time to time under the Obligations shall
exceed the Maximum Rate, then in such event it is agreed that: (a) the
provisions of this paragraph shall govern and control; (b) neither
Borrower, any Guarantor nor any other Person now or hereafter liable for the
payment of any of the Obligations shall be obligated to pay the amount of such
interest to the extent it is in excess of the Maximum Rate; (c) any such
excess interest which is or has been received by Agent or any Lender,
notwithstanding this paragraph, shall be credited against the then unpaid
principal balance of the Obligations (or, if the principal amount of the
Obligations shall have been paid in full, refunded by Lenders to the party
primarily liable on the Obligation, and each Lender shall refund its pro rat
share of such interest); and (d) the provisions of this Agreement and the
Obligations, and any other communication to Borrower or any Guarantor, shall
immediately be deemed reformed and such excess interest reduced, without the
necessity of executing any other document, to the Maximum Rate. The right to
accelerate the maturity of the Obligations does not include the right to
accelerate, collect or charge unearned interest, but only such interest that
has otherwise accrued as of the date of acceleration. Without limiting the
foregoing, all calculations of the rate of interest contracted for, charged,
taken, reserved or received in connection with any of the Obligations which are
made for the purpose of determining whether such rate exceeds the Maximum Rate
shall be made to the extent permitted by Applicable Laws by amortizing,
prorating, allocating and spreading during the period of the full term of such
Obligations, including all prior and subsequent renewals and extensions hereof
or thereof, all interest at any time contracted for, charged, taken, reserved
or received by Agent or any Lender. To
the extent that either Chapter 303 or 306, or both, of the Texas Finance Code
apply in determining the Maximum Rate, Agent and Lenders hereby elect to
determine the applicable rate ceiling by using the weekly ceiling from time to
time in effect, subject to Agent’s right subsequently to change such method in
accordance with Applicable Law, as the same may be amended or modified from
time to time.

3.7.          Increased
Costs. In the event that any Applicable Law, treaty or governmental
regulation, or any change therein or in the interpretation or application
thereof, or compliance by any Lender (for purposes of this Section 3.7,
the term “Lender” shall include Agent or any Lender and any corporation or bank
controlling Agent or any Lender) and the office or branch where Agent or any
Lender (as so defined) makes or maintains any Eurodollar Rate Loans with 

 43
 

 

any request or directive (whether or not having the
force of law) from any central bank or other financial, monetary or other
authority, shall:

(a)           subject Agent or any
Lender to any tax of any kind whatsoever with respect to this Agreement or any
Other Document or change the basis of taxation of payments to Agent or any
Lender of principal, fees, interest or any other amount payable hereunder or
under any Other Documents (except for changes in the rate of tax on the overall
net income of Agent or any Lender by the jurisdiction in which it maintains its
principal office);

(b)           impose, modify or
hold applicable any reserve, special deposit, assessment or similar requirement
against assets held by, or deposits in or for the account of, advances or loans
by, or other credit extended by, any office of Agent or any Lender, including
pursuant to Regulation D of the Board of Governors of the Federal Reserve
System; or

(c)           impose on Agent or
any Lender or the London interbank Eurodollar market any other condition with
respect to this Agreement or any Other Document;

and the result of any of
the foregoing is to increase the cost to Agent or any Lender of making,
renewing or maintaining its Advances hereunder by an amount that Agent or such
Lender deems to be material or to reduce the amount of any payment (whether of
principal, interest or otherwise) in respect of any of the Advances by an
amount that Agent or such Lender deems to be material, then, in any case
Borrowers shall promptly pay Agent or such Lender, upon its demand, such
additional amount as will compensate Agent or such Lender for such additional
cost or such reduction, as the case may be, provided that the foregoing shall
not apply to increased costs which are reflected in the Eurodollar Rate, as the
case may be. Agent or such Lender shall certify the amount of such additional
cost or reduced amount to Borrowing Agent, and such certification shall be
conclusive absent manifest error.

3.8.          Basis
For Determining Interest Rate Inadequate or Unfair. In the event that Agent
or any Lender shall have determined that:

(a)           reasonable means do
not exist for ascertaining the Eurodollar Rate applicable pursuant to Section 2.2
hereof for any Interest Period; or

(b)           Dollar deposits in
the relevant amount and for the relevant maturity are not available in the
London interbank Eurodollar market, with respect to an outstanding Eurodollar
Rate Loan, a proposed Eurodollar Rate Loan, or a proposed conversion of a
Domestic Rate Loan into a Eurodollar Rate Loan, then Agent shall give Borrowing
Agent prompt written, telephonic or telegraphic notice of such determination. If
such notice is given, (i) any such requested Eurodollar Rate Loan shall be
made as a Domestic Rate Loan, unless Borrowing Agent shall notify Agent no
later than 10:00 a.m. (Dallas, Texas time) two (2) Business Days
prior to the date of such proposed borrowing, that its request for such
borrowing shall be cancelled or made as an unaffected type of Eurodollar Rate
Loan, (ii) any Domestic Rate Loan or Eurodollar Rate Loan which was to
have been converted to an affected type of Eurodollar Rate Loan shall be
continued as or converted into a Domestic Rate Loan, or, if Borrowing Agent
shall notify Agent, no later than 10:00 a.m. (Dallas, Texas time) two (2) Business
Days prior to the proposed conversion, shall be maintained as an unaffected
type of Eurodollar Rate Loan, and (iii) any 

 44
 

 

outstanding affected Eurodollar Rate Loans shall be
converted into a Domestic Rate Loan, or, if Borrowing Agent shall notify Agent,
no later than 10:00 a.m. (Dallas, Texas time) two (2) Business Days
prior to the last Business Day of the then current Interest Period applicable
to such affected Eurodollar Rate Loan, shall be converted into an unaffected
type of Eurodollar Rate Loan, on the last Business Day of the then current
Interest Period for such affected Eurodollar Rate Loans. Until such notice has
been withdrawn, Lenders shall have no obligation to make an affected type of
Eurodollar Rate Loan or maintain outstanding affected Eurodollar Rate Loans and
no Borrower shall have the right to convert a Domestic Rate Loan or an
unaffected type of Eurodollar Rate Loan into an affected type of Eurodollar
Rate Loan.

3.9.        Capital Adequacy.

(a)           In the event that
Agent or any Lender shall have determined that any Applicable Law, rule,
regulation or guideline regarding capital adequacy, or any change therein, or
any change in the interpretation or administration thereof by any Governmental
Body, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by Agent or any Lender (for purposes of
this Section 3.9, the term “Lender” shall include Agent or any Lender and
any corporation or bank controlling Agent or any Lender) and the office or branch
where Agent or any Lender (as so defined) makes or maintains any Eurodollar
Rate Loans with any request or directive regarding capital adequacy (whether or
not having the force of law) of any such authority, central bank or comparable
agency, has or would have the effect of reducing the rate of return on Agent or
any Lender’s capital as a consequence of its obligations hereunder to a level
below that which Agent or such Lender could have achieved but for such
adoption, change or compliance (taking into consideration Agent’s and each
Lender’s policies with respect to capital adequacy) by an amount deemed by
Agent or any Lender to be material, then, from time to time, Borrowers shall
pay upon demand to Agent or such Lender such additional amount or amounts as
will compensate Agent or such Lender for such reduction. In determining such
amount or amounts, Agent or such Lender may use any reasonable averaging or
attribution methods. The protection of this Section 3.9 shall be available
to Agent and each Lender regardless of any possible contention of invalidity or
inapplicability with respect to the Applicable Law, regulation or condition.

(b)           A certificate of
Agent or such Lender setting forth such amount or amounts as shall be necessary
to compensate Agent or such Lender with respect to Section 3.9(a) hereof
when delivered to Borrowing Agent shall be conclusive absent manifest error.

3.10.        Gross
Up for Taxes. If any Borrower shall be required by Applicable Law to
withhold or deduct any taxes from or in respect of any sum payable under this
Agreement or any of the Other Documents to Agent, or any Lender, assignee of
any Lender, or Participant (each, individually, a “Payee” and collectively, the
“Payees”), (a) the sum payable to such Payee or Payees, as the case may
be, shall be increased as may be necessary so that, after making all required
withholding or deductions, the applicable Payee or Payees receives an amount
equal to the sum it would have received had no such withholding or deductions
been made (the “Gross-Up Payment”), (b) such Borrower shall make such
withholding or deductions, and (c) such Borrower shall pay the full amount
withheld or deducted to the relevant taxation authority or other authority in
accordance with Applicable Law. Notwithstanding the foregoing and only with
respect to any withholdings or deductions for taxes payable pursuant to the
laws of the 

 45
 

 

United States of America or any state or jurisdiction
thereof, no Borrower shall be obligated to make any portion of the Gross-Up
Payment that is attributable to any withholding or deductions that would not
have been paid or claimed had the applicable Payee or Payees properly claimed a
complete exemption with respect thereto pursuant to Section 3.11 hereof.

3.11.      Withholding Tax Exemption.

(a)           Each Payee that is
not incorporated under the Laws of the United States of America or a state
thereof (and, upon the written request of Agent, each other Payee) agrees that
it will deliver to Borrowing Agent and Agent two (2) duly completed
appropriate valid Withholding Certificates (as defined under §1.1441-1(c)(16)
of the Income Tax Regulations (“Regulations”)) certifying its status (i.e.,
U.S. or foreign person) and, if appropriate, making a claim of reduced, or
exemption from, U.S. withholding tax on the basis of an income tax treaty or an
exemption provided by the Code. The term “Withholding Certificate” means a Form W-9;
a Form W-8BEN; a Form W-8ECI; a Form W-8IMY
and the related statements and certifications as required under §1.1441-1(e)(2) and/or
(3) of the Regulations; a statement described in §1.871-14(c)(2)(v) of
the Regulations; or any other certificates under the Code or Regulations that
certify or establish the status of a payee or beneficial owner as a U.S. or
foreign person.

(b)           Each Payee required
to deliver to Borrowing Agent and Agent a valid Withholding Certificate
pursuant to Section 3.11(a) hereof shall deliver such valid
Withholding Certificate as follows:  (A) each
Payee which is a party hereto on the Closing Date shall deliver such valid
Withholding Certificate at least five (5) Business Days prior to the first
date on which any interest or fees are payable by any Borrower hereunder for
the account of such Payee; (B) each Payee shall deliver such valid
Withholding Certificate at least five (5) Business Days before the
effective date of such assignment or participation (unless Agent in its sole
discretion shall permit such Payee to deliver such Withholding Certificate less
than five (5) Business Days before such date in which case it shall be due
on the date specified by Agent). Each Payee which so delivers a valid
Withholding Certificate further undertakes to deliver to Borrowing Agent and
Agent two (2) additional copies of such Withholding Certificate (or a
successor form) on or before the date that such Withholding Certificate expires
or becomes obsolete or after the occurrence of any event requiring a change in
the most recent Withholding Certificate so delivered by it, and such amendments
thereto or extensions or renewals thereof as may be reasonably requested by
Borrowing Agent or Agent.

(c)           Notwithstanding the
submission of a Withholding Certificate claiming a reduced rate of or exemption
from U.S. withholding tax required under Section 3.11(b) hereof,
Agent shall be entitled to withhold United States federal income taxes at the
full 30% withholding rate if in its reasonable judgment it is required to do so
under the due diligence requirements imposed upon a withholding agent under
§1.1441-7(b) of the Regulations. Further, Agent is indemnified under
§1.1461-1(e) of the Regulations against any claims and demands of
any Payee for the amount of any tax it deducts and withholds in accordance with
regulations under §1441 of the Code.

 

 46

 

IV            COLLATERAL:    GENERAL TERMS

4.1.          Security
Interest in the Collateral. To secure the prompt payment and performance to
Agent and each Lender of the Obligations, each Borrower hereby assigns, pledges and grants to
Agent for its benefit and for the ratable benefit of each Lender a continuing
security interest in and to and Lien on all of its Collateral, whether now
owned or existing or hereafter acquired or arising and wheresoever located. Each
Borrower shall mark its Books and Records as may be necessary or appropriate to
evidence, protect and perfect Agent’s security interest and shall cause its
financial statements to reflect such security interest. Each Borrower shall
promptly provide Agent with written notice of all commercial tort claims, such
notice to contain the case title together with the applicable court and a brief
description of the claim(s). Upon delivery of each such notice, such Borrower
shall be deemed to hereby grant to Agent a security interest and lien in and to
such commercial tort claims and all proceeds thereof.

4.2.          Perfection
of Security Interest. Each Borrower shall take all action that may be
necessary or desirable, or that Agent may request, so as at all times to
maintain the validity, perfection, enforceability and priority of Agent’s
security interest in and Lien on the Collateral or to enable Agent to protect,
exercise or enforce its rights hereunder and in the Collateral, including, but
not limited to, (i) immediately discharging all Liens other than Permitted
Encumbrances, (ii) obtaining Lien Waiver Agreements, (iii) delivering
to Agent, endorsed or accompanied by such instruments of assignment as Agent
may specify, and stamping or marking, in such manner as Agent may specify, any
and all chattel paper, instruments, letters of credits and advices thereof and
documents evidencing or forming a part of the Collateral, (iv) entering
into warehousing, lockbox and other custodial arrangements satisfactory to
Agent, and (v) executing and delivering financing statements, control
agreements, instruments of pledge, mortgages, notices and assignments, in each
case in form and substance satisfactory to Agent, relating to the creation,
validity, perfection, maintenance or continuation of Agent’s security interest
and Lien under the Uniform Commercial Code or other Applicable Law. By its
signature hereto, each Borrower hereby authorizes Agent to file against such
Borrower, one or more financing, continuation or amendment statements pursuant
to the Uniform Commercial Code in form and substance satisfactory to Agent
(which statements may have a description of collateral which is broader than
that set forth herein). All charges, expenses and fees Agent may incur in doing
any of the foregoing, and any local taxes relating thereto, shall be charged to
Borrowers’ Account as a Revolving Advance of a Domestic Rate Loan and added to
the Obligations, or, at Agent’s option, shall be paid to Agent for its benefit
and for the ratable benefit of Lenders immediately upon demand.

4.3.        Disposition of Collateral. Each
Borrower will safeguard and protect all Collateral for Agent’s general account
and make no disposition thereof whether by sale, lease or otherwise except (a) the
sale of Inventory in the Ordinary Course of Business and (b) the
disposition or transfer of obsolete and worn-out Equipment in the Ordinary
Course of Business during any fiscal year having an aggregate fair market value
of not more than $500,000 and only to the extent that (i) the proceeds of
any such disposition are used to acquire replacement Equipment which is subject
to Agent’s first priority security interest or (ii) the proceeds of which
are remitted to Agent to be applied pursuant to Section 2.21.

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4.4.        Preservation of Collateral. In
addition to the rights and remedies set forth in Section 11.1 hereof,
Agent: (a) may at any time take such steps as Agent deems necessary to
protect Agent’s interest in and to preserve the Collateral, including the
hiring of such security guards or the placing of other security protection
measures as Agent may deem appropriate; (b) may employ and maintain at any
of any Borrower’s premises a custodian who shall have full authority to do all
acts necessary to protect Agent’s interests in the Collateral; (c) may
lease warehouse facilities to which Agent may move all or part of the
Collateral; (d) may use any Borrower’s owned or leased lifts, hoists,
trucks and other facilities or equipment for handling or removing the
Collateral; and (e) shall have, and is hereby granted, a right of ingress
and egress to the places where the Collateral is located, and may proceed over
and through any of Borrower’s owned or leased property. Each Borrower shall
cooperate fully with all of Agent’s efforts to preserve the Collateral and will
take such actions to preserve the Collateral as Agent may direct. All of Agent’s
expenses of preserving the Collateral, including any expenses relating to the
bonding of a custodian, shall be charged to Borrowers’ Account as a Revolving
Advance and added to the Obligations.

4.5.        Ownership of Collateral.

(a)           With respect to the
Collateral, at the time the Collateral becomes subject to Agent’s security
interest:  (i) each Borrower shall
be the sole owner of and fully authorized and able to sell, transfer, pledge
and/or grant a first priority security interest in each and every item of the
its respective Collateral to Agent; and, except for Permitted Encumbrances the
Collateral shall be free and clear of all Liens and encumbrances whatsoever; (ii) each
document and agreement executed by each Borrower or delivered to Agent or any
Lender in connection with this Agreement shall be true and correct in all
respects; (iii) all signatures and endorsements of each Borrower that
appear on such documents and agreements shall be genuine and each Borrower
shall have full capacity to execute same; and (iv) except with respect to
Collateral being used by work crews of any Borrower in the ordinary course of
such Borrower’s business,  each Borrower’s
Collateral shall be located as set forth on Schedule 4.5 and shall not be
removed from such location(s) without the prior written consent of Agent
except with respect to the sale of Inventory in the Ordinary Course of Business
and Equipment to the extent permitted in Section 4.3 hereof.

(b)           (i) There is no
location at which any Borrower has any Inventory (except for Inventory in
transit) other than those locations listed on Schedule 4.5; (ii) Schedule
4.5 hereto contains a correct and complete list, as of the Closing Date, of the
legal names and addresses of each warehouse at which Inventory of any Borrower
is stored; none of the receipts received by any Borrower from any warehouse
states that the goods covered thereby are to be delivered to bearer or to the
order of a named Person or to a named Person and such named Person’s assigns; (iii) Schedule
4.5 hereto sets forth a correct and complete list as of the Closing Date of (A) each
place of business of each Borrower and (B) the chief executive office of
each Borrower; and (iv) Schedule 4.5 hereto sets forth a correct and
complete list as of the Closing Date of the location, by state and street
address, of all Real Property owned or leased by each Borrower, together with
the names and addresses of any landlords. With respect to any books and records
in connection with any Collateral or in any way relating thereto or evidencing
the Collateral (collectively, the “Books and Records”) which are located at a
leased location, such Books and

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Records shall only be located in and at such locations
for which Agent has received an executed landlord agreement in form and
substance satisfactory to Agent.

4.6.        Defense of Agent’s and Lenders’
Interests. Until (a) payment and performance in full of all of the
Obligations and (b) termination of this Agreement, Agent’s interests in
the Collateral shall continue in full force and effect. During such period no
Borrower shall, without Agent’s prior written consent, pledge, sell (except
Inventory in the Ordinary Course of Business and Equipment to the extent
permitted in Section 4.3 hereof), assign, transfer, create or suffer to
exist a Lien upon or encumber or allow or suffer to be encumbered in any way
except for Permitted Encumbrances, any part of the Collateral. Each Borrower
shall defend Agent’s interests in the Collateral against any and all Persons whatsoever.
At any time following demand by Agent for payment of all Obligations, Agent
shall have the right to take possession of the indicia of the Collateral and
the Collateral in whatever physical form contained, including:  labels, stationery, documents, instruments
and advertising materials. If Agent exercises this right to take possession of
the Collateral, Borrowers shall, upon demand, assemble it in the best manner
possible and make it available to Agent at a place reasonably convenient to
Agent. In addition, with respect to all Collateral, Agent and Lenders shall be
entitled to all of the rights and remedies set forth herein and further
provided by the Uniform Commercial Code or other Applicable Law. Each Borrower
shall, and Agent may, at its option, instruct all suppliers, carriers,
forwarders, warehousers or others receiving or holding cash, checks, Inventory,
documents or instruments in which Agent holds a security interest to deliver
same to Agent and/or subject to Agent’s order and if they shall come into any
Borrower’s possession, they, and each of them, shall be held by such Borrower
in trust as Agent’s trustee, and such Borrower will immediately deliver them to
Agent in their original form together with any necessary endorsement.

4.7.          Books
and Records. Each Borrower shall (a) keep proper books of record and
account in which full, true and correct entries will be made of all dealings or
transactions of or in relation to its business and affairs; (b) set up on
its books accruals with respect to all taxes, assessments, charges, levies and
claims; and (c) on a reasonably current basis set up on its books, from
its earnings, allowances against doubtful Receivables, advances and investments
and all other proper accruals (including by reason of enumeration, accruals for
premiums, if any, due on required payments and accruals for depreciation,
obsolescence, or amortization of properties), which should be set aside from
such earnings in connection with its business. All determinations pursuant to
this subsection shall be made in accordance with, or as required by, GAAP
consistently applied in the opinion of such independent public accountant as
shall then be regularly engaged by Borrowers.

4.8.          Financial
Disclosure. Each Borrower hereby irrevocably authorizes and directs all
accountants and auditors employed by such Borrower at any time during the Term
to exhibit and deliver to Agent and each Lender copies of any of such Borrower’s
financial statements, trial balances or other accounting records of any sort in
the accountant’s or auditor’s possession, and to disclose to Agent and each
Lender any information such accountants may have concerning such Borrower’s
financial status and business operations. Each Borrower hereby authorizes all
Governmental Bodies to furnish to Agent and each Lender copies of reports or
examinations relating to such Borrower, whether made by such Borrower or
otherwise; however, Agent and

 49
 

 

each Lender will attempt to obtain such information or
materials directly from such Borrower prior to obtaining such information or
materials from such accountants or Governmental Bodies.

4.9.        Compliance with Laws. Each
Borrower shall comply with all Applicable Laws with respect to the Collateral
or any part thereof or to the operation of such Borrower’s business the
non-compliance with which could reasonably be expected to have a Material
Adverse Effect. Each Borrower may, however, contest or dispute any Applicable
Laws in any reasonable manner, provided that any related Lien is inchoate or
stayed and sufficient reserves are established to the reasonable satisfaction
of Agent to protect Agent’s Lien on or security interest in the Collateral. The
assets of Borrowers at all times shall be maintained in accordance with the
requirements of all insurance carriers which provide insurance with respect to
the assets of Borrowers so that such insurance shall remain in full force and
effect.

4.10.        Inspection
of Premises. At all reasonable times and, unless a Default or Event of
Default shall have occurred or is continuing, during normal business hours,
Agent, each Lender and their agents shall have full access to and the right to
audit, appraise, check, inspect and make abstracts and copies from each
Borrower’s books, records, audits, correspondence and all other papers relating
to the Collateral and the operation of each Borrower’s business. Agent, any
Lender and their agents may enter upon any premises of any Borrower at any time
during business hours and at any other reasonable time, and from time to time,
for the purpose of inspecting and appraising the Collateral and any and all
records pertaining thereto and the operation of such Borrower’s business.

4.11.      Insurance. The assets and
properties of each Borrower at all times shall be maintained in accordance with
the requirements of all insurance carriers which provide insurance with respect
to the assets and properties of such Borrower so that such insurance shall
remain in full force and effect. Each Borrower shall bear the full risk of any
loss of any nature whatsoever with respect to the Collateral. At each Borrower’s
own cost and expense in amounts and with carriers acceptable to Agent, each
Borrower shall (a) keep all its insurable properties and properties in
which such Borrower has an interest insured against the hazards of fire, flood,
sprinkler leakage, those hazards covered by extended coverage insurance and
such other hazards, and for such amounts, as is customary in the case of
companies engaged in businesses similar to such Borrower’s; (b) maintain
public and, if applicable, product liability insurance against claims for
personal injury, death or property damage suffered by others; (c) maintain
all such worker’s compensation or similar insurance as may be required under
the laws of any state or jurisdiction in which such Borrower is engaged in
business; (d) furnish Agent with (i) copies of all policies and
evidence of the maintenance of such policies by the renewal thereof at least
thirty (30) days before any expiration date, and (ii) appropriate loss payable
endorsements in form and substance satisfactory to Agent, naming Agent as a
co-insured and loss payee as its interests may appear with respect to all
insurance coverage referred to in clauses (a) and (c)  above, and
providing (A) that all proceeds thereunder shall be payable to Agent, (B) no
such insurance shall be affected by any act or neglect of the insured or owner
of the property described in such policy, and (C) that such policy and
loss payable clauses may not be cancelled, amended or terminated unless at
least thirty (30) days’ prior written notice is given to Agent. In the event of
any loss thereunder, the carriers named therein hereby are directed by Agent
and the applicable Borrower to make payment for such loss to Agent and not to
such Borrower and Agent jointly. If any insurance losses are paid by check,
draft or other instrument payable to any Borrower and Agent

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jointly, Agent may endorse such Borrower’s name
thereon and do such other things as Agent may deem advisable to reduce the same
to cash. Agent is hereby authorized to adjust and compromise claims under
insurance coverage referred to in clauses (a) and (b) above. All loss
recoveries received by Agent upon any such insurance may be applied to the
Obligations, in such order as Agent in its sole discretion shall determine. Any
surplus shall be paid by Agent to Borrowers or applied as may be otherwise
required by law. Any deficiency thereon shall be paid by Borrowers to Agent, on
demand.

4.12.        Failure
to Pay Insurance. If any Borrower fails to obtain insurance as hereinabove
provided, or to keep the same in force, Agent, if Agent so elects, may obtain
such insurance and pay the premium therefor on behalf of such Borrower, and
charge Borrowers’ Account therefor as a Revolving Advance of a Domestic Rate
Loan and such expenses so paid shall be part of the Obligations.

4.13.        Payment
of Taxes. Each Borrower will pay, when due, all taxes, assessments and
other Charges lawfully levied or assessed upon such Borrower or any of the
Collateral including real and personal property taxes, assessments and charges
and all franchise, income, employment, social security benefits, withholding,
and sales taxes unless such Borrower
is contesting such taxes in good faith, by appropriate proceedings, and is maintaining
adequate reserves for such taxes in accordance with GAAP. Notwithstanding the foregoing, if a Lien securing any such
taxes is filed in any public office and such Lien is not a Permitted Lien, then
the Borrowers shall pay all taxes secured by such Lien immediately and remove
such Lien of record promptly. If any tax by any Governmental Body is or may be
imposed on or as a result of any transaction between any Borrower and Agent or
any Lender which Agent or any Lender may be required to withhold or pay or if
any taxes, assessments, or other Charges remain unpaid after the date fixed for
their payment, or if any claim shall be made which, in Agent’s or any Lender’s
opinion, may possibly create a valid Lien on the Collateral, Agent may without
notice to Borrowers pay the taxes, assessments or other Charges and each
Borrower hereby agrees to indemnify, defend and hold Agent and each Lender
harmless in respect thereof. The amount of any payment by Agent under this Section 4.13
shall be charged to Borrowers’ Account as a Revolving Advance and added to the
Obligations and, until Borrowers shall furnish Agent with an indemnity therefor
(or supply Agent with evidence satisfactory to Agent that due provision for the
payment thereof has been made), Agent may hold without interest any balance
standing to Borrowers’ credit and Agent shall retain its security interest in
and Lien on any and all Collateral held by Agent.

4.14.      Payment of Leasehold Obligations. Each
Borrower shall at all times pay, when and as due, its rental obligations under
all leases under which it is a tenant, and shall otherwise comply, in all
material respects, with all other terms of such leases and keep them in full
force and effect and, at Agent’s request will provide evidence of having done
so.

4.15.      Receivables.

(a)           Nature of
Receivables. Each of the Receivables shall be a bona fide and valid account
representing a bona fide indebtedness incurred by the Customer therein named,
for a fixed sum as set forth in the invoice relating thereto (provided
immaterial or unintentional invoice errors shall not be deemed to be a breach
hereof) with respect to an absolute sale or lease

 51
 

 

and delivery of goods upon stated terms of a Borrower,
or work, labor or services theretofore rendered by a Borrower as of the date
each Receivable is created. Same shall be due and owing in accordance with the
applicable Borrower’s standard terms of sale without dispute, setoff or
counterclaim except as may be stated on the accounts receivable schedules
delivered by Borrowers to Agent.

(b)           Solvency of
Customers. Each Customer, to the best of each Borrower’s knowledge, as of
the date each Receivable is created, is and will be solvent and able to pay all
Receivables on which the Customer is obligated in full when due or with respect
to such Customers of any Borrower who are not solvent such Borrower has set up
on its books and in its financial records bad debt reserves adequate to cover
such Receivables.

(c)           Location of
Borrowers. Each Borrower’s chief executive office is located at the
location set forth on Schedule 4.15(c). Until written notice is given to
Agent by Borrowing Agent of any other office at which any Borrower keeps its
records pertaining to Receivables, all such records shall be kept at such
executive office.

(d)           Collection of
Receivables. Until any Borrower’s authority to do so is terminated by Agent
(which notice Agent may give at any time following the occurrence of an Event
of Default or a Default or when Agent in its sole discretion deems it to be in
Lenders’ best interest to do so), each Borrower will, at such Borrower’s sole
cost and expense, but on Agent’s behalf and for Agent’s account, collect as
Agent’s property and in trust for Agent all amounts received on Receivables,
and shall not commingle such collections with any Borrower’s funds or use the
same except to pay Obligations. Each Borrower shall deposit in the Blocked
Account or, upon request by Agent, deliver to Agent, in original form and on
the date of receipt thereof, all checks, drafts, notes, money orders,
acceptances, cash and other evidences of Indebtedness.

(e)           Notification of
Assignment of Receivables. At any time, Agent shall have the right to send
notice of the assignment of, and Agent’s security interest in and Lien on, the
Receivables to any and all Customers or any third party holding or otherwise
concerned with any of the Collateral. Thereafter, Agent shall have the sole
right to collect the Receivables, take possession of the Collateral, or both. Agent’s
actual collection expenses, including, but not limited to, stationery and
postage, telephone and telegraph, secretarial and clerical expenses and the
salaries of any collection personnel used for collection, may be charged to
Borrowers’ Account and added to the Obligations.

(f)            Power of Agent
to Act on Borrowers’ Behalf. Upon the occurrence and during the
continuation of a Default or Event of Default or as otherwise provided in a
lockbox agreement between Agent and any Borrower, Agent shall have the right to
receive, endorse, assign and/or deliver in the name of Agent or any Borrower
any and all checks, drafts and other instruments for the payment of money
relating to the Receivables, and each Borrower hereby waives notice of
presentment, protest and non-payment of any instrument so endorsed. Each
Borrower hereby constitutes Agent or Agent’s designee as such Borrower’s
attorney with power (i) to endorse such Borrower’s name upon any notes,
acceptances, checks, drafts, money orders or other evidences of payment or
Collateral; (ii) to sign such Borrower’s name on any invoice or bill of
lading relating to any of the Receivables, drafts against Customers,
assignments and verifications of Receivables; (iii) to send verifications
of Receivables to any Customer; (iv) to

 52
 

 

sign such Borrower’s name on all financing statements
or any other documents or instruments deemed necessary or appropriate by Agent
to preserve, protect, or perfect Agent’s interest in the Collateral and to file
same; (v) to demand payment of the Receivables; (vi) to enforce
payment of the Receivables by legal proceedings or otherwise; (vii) to
exercise all of such Borrower’s rights and remedies with respect to the
collection of the Receivables and any other Collateral; (viii) to settle,
adjust, compromise, extend or renew the Receivables; (ix) to settle,
adjust or compromise any legal proceedings brought to collect Receivables; (x) to
prepare, file and sign such Borrower’s name on a proof of claim in bankruptcy
or similar document against any Customer; (xi) to prepare, file and sign
such Borrower’s name on any notice of Lien, assignment or satisfaction of Lien
or similar document in connection with the Receivables; and (xii) to do
all other acts and things necessary to carry out this Agreement. All acts of
said attorney or designee are hereby ratified and approved, and said attorney
or designee shall not be liable for any acts of omission or commission nor for
any error of judgment or mistake of fact or of law (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO AN ACT OR INACTION
ARISING FROM AGENT’S NEGLIGENCE OR STRICT LIABILITY), unless done
maliciously or with gross (not mere) negligence (as determined by a court of
competent jurisdiction in a final non-appealable judgment); this power being
coupled with an interest is irrevocable while any of the Obligations remain
unpaid. Agent shall have the right at any time to change the address for
delivery of mail addressed to any Borrower to such address as Agent may
designate and to receive, open and dispose of all mail addressed to any
Borrower.

(g)           No Liability.
Neither Agent nor any Lender shall, under any circumstances or in any event
whatsoever, have any liability for any error or omission or delay of any kind (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO AN ACT OR INACTION
ARISING FROM AGENT’S OR ANY LENDER’S NEGLIGENCE OR STRICT LIABILITY BUT NOT
AGENT’S OR ANY LENDER’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT)
occurring in the settlement, collection or payment of any of the Receivables or
any instrument received in payment thereof, or for any damage resulting
therefrom. Agent may, without notice or consent from any Borrower, sue upon or
otherwise collect, extend the time of payment of, compromise or settle for
cash, credit or upon any terms any of the Receivables or any other securities,
instruments or insurance applicable thereto and/or release any obligor thereof.
Agent is authorized and empowered to accept the return of the goods represented
by any of the Receivables, without notice to or consent by any Borrower, all
without discharging or in any way affecting any Borrower’s liability hereunder.

(h)           Establishment of
a Lockbox Account, Dominion Account. All proceeds of Collateral shall be
deposited by Borrowers into either (i) a lockbox account, dominion account
or such other “blocked account” (“Blocked Accounts”) established at a bank or
banks (each such bank, a “Blocked Account Bank”) pursuant to an arrangement
with such Blocked Account Bank as may be selected by Borrowing Agent and be
acceptable to Agent or (ii) depository accounts (“Depository Accounts”)
established at the Agent for the deposit of such proceeds. Each applicable
Borrower (other than Trace Energy (Canada)), Agent and each Blocked Account
Bank shall enter into a deposit account control agreement in form and substance
satisfactory to Agent directing such Blocked Account Bank to transfer such
funds so deposited to Agent, either to any account maintained by Agent at said
Blocked Account Bank or by wire transfer to appropriate account(s) of
Agent. Trace Energy (Canada) shall enter into a deposit account control
agreement with Agent and each Blocked Account Bank in form and substance

 53
 

 

satisfactory to Agent directing such Blocked Account
Bank, upon notice from Agent (“Notice”), to transfer such funds so deposited to
Agent, either to any account maintained by Agent at said Blocked Account Bank
or by wire transfer to appropriate account(s) of Agent. Agent may deliver
such Notice at anytime (i) upon the occurrence and during the continuation
of a Default or Event of Default or (ii) Undrawn Availability is less than
$3,000,000. All funds deposited in such Blocked Accounts shall immediately
become the property of Agent and Borrowing Agent shall obtain the agreement by
such Blocked Account Bank to waive any offset rights against the funds so deposited.
Neither Agent nor any Lender assumes any responsibility for such blocked
account arrangement, including any claim of accord and satisfaction or release
with respect to deposits accepted by any Blocked Account Bank thereunder. All
deposit accounts and investment accounts of each Borrower and its Subsidiaries
are set forth on Schedule 4.15(h).

(i)            Adjustments.
No Borrower will, without Agent’s consent, compromise or adjust any Receivables
(or extend the time for payment thereof) or accept any returns of merchandise
or grant any additional discounts, allowances or credits thereon except for
those compromises, adjustments, returns, discounts, credits and allowances as
have been heretofore customary in the business of such Borrower, provided,
however, that upon notice from Agent at any time upon the occurrence and during
the continuance of an Event of Default, no Borrower shall adjust or compromise
any Receivables under any circumstances.

4.16.        Maintenance
of Equipment. The Equipment shall be maintained in good operating condition
and repair (reasonable wear and tear excepted) and all necessary replacements
of and repairs thereto shall be made so that the value and operating efficiency
of the Equipment shall be maintained and preserved. No Borrower shall use or
operate the Equipment in violation of any law, statute, ordinance, code, rule or
regulation.

4.17.        Exculpation
of Liability. Nothing herein contained shall be construed to constitute
Agent or any Lender as any Borrower’s agent for any purpose whatsoever, nor
shall Agent or any Lender be responsible or liable for any shortage,
discrepancy, damage, loss or destruction of any part of the Collateral wherever
the same may be located and regardless of the cause thereof (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO AN ACT
OR INACTION ARISING FROM AGENT’S OR ANY LENDER’S NEGLIGENCE OR STRICT LIABILITY
BUT NOT AGENT’S OR ANY LENDER’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT).
Neither Agent nor any Lender, whether by anything herein or in any assignment
or otherwise, assume any of any Borrower’s obligations under any contract or
agreement assigned to Agent or such Lender, and neither Agent nor any Lender
shall be responsible in any way for the performance by any Borrower of any of
the terms and conditions thereof.

4.18.      Environmental Matters.

(a)           Borrowers shall
ensure that the Real Property and all operations and businesses conducted
thereon remain in compliance with all Environmental Laws and they shall not
place or permit to be placed any Hazardous Substances on any Real Property
except as permitted by Applicable Law or appropriate governmental authorities.

 54
 

 

(b)           Borrowers shall
establish and maintain a system to assure and monitor continued compliance with
all applicable Environmental Laws which system shall include periodic reviews
of such compliance.

(c)           Borrowers shall (i) employ
in connection with the use of the Real Property appropriate technology
necessary to maintain compliance with any applicable Environmental Laws and (ii) dispose
of any and all Hazardous Waste generated at the Real Property only at
facilities and with carriers that maintain valid permits under RCRA and any
other applicable Environmental Laws. Borrowers shall use their best efforts to
obtain certificates of disposal, such as hazardous waste manifest receipts,
from all treatment, transport, storage or disposal facilities or operators
employed by Borrowers in connection with the transport or disposal of any
Hazardous Waste generated at the Real Property.

(d)           In the event any
Borrower obtains, gives or receives notice of any Release or threat of Release
of a reportable quantity of any Hazardous Substances at the Real Property (any
such event being hereinafter referred to as a “Hazardous Discharge”) or
receives any notice of violation, request for information or notification that
it is potentially responsible for investigation or cleanup of environmental
conditions at the Real Property, demand letter or complaint, order, citation,
or other written notice with regard to any Hazardous Discharge or violation of
Environmental Laws affecting the Real Property or any Borrower’s interest
therein (any of the foregoing is referred to herein as an “Environmental
Complaint”) from any Person, including any state agency responsible in whole or
in part for environmental matters in the state in which the Real Property is
located or the United States Environmental Protection Agency (any such person
or entity hereinafter the “Authority”), then Borrowing Agent shall, within five
(5) Business Days, give written notice of same to Agent detailing facts
and circumstances of which any Borrower is aware giving rise to the Hazardous
Discharge or Environmental Complaint. Such information is to be provided to
allow Agent to protect its security interest in and Lien on the Real Property
and the Collateral and is not intended to create nor shall it create any
obligation upon Agent or any Lender with respect thereto.

(e)           Borrowing Agent
shall promptly forward to Agent copies of any request for information,
notification of potential liability, demand letter relating to potential
responsibility with respect to the investigation or cleanup of Hazardous
Substances at any other site owned, operated or used by any Borrower to dispose
of Hazardous Substances and shall continue to forward copies of correspondence
between any Borrower and the Authority regarding such claims to Agent until the
claim is settled. Borrowing Agent shall promptly forward to Agent copies of all
documents and reports concerning a Hazardous Discharge at the Real Property
that any Borrower is required to file under any Environmental Laws. Such
information is to be provided solely to allow Agent to protect Agent’s security
interest in and Lien on the Real Property and the Collateral.

(f)            Borrowers shall
respond promptly to any Hazardous Discharge or Environmental Complaint and take
all necessary action in order to safeguard the health of any Person and to
avoid subjecting the Collateral or Real Property to any Lien. If any Borrower
shall fail to respond promptly to any Hazardous Discharge or Environmental
Complaint or any Borrower shall fail to comply with any of the requirements of
any Environmental Laws, Agent on behalf of Lenders may, but without the
obligation to do so, for the sole purpose of protecting

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Agent’s interest in the Collateral:  (A) give such notices or (B) enter
onto the Real Property (or authorize third parties to enter onto the Real
Property) and take such actions as Agent (or such third parties as directed by
Agent) deem reasonably necessary or advisable, to clean up, remove, mitigate or
otherwise deal with any such Hazardous Discharge or Environmental Complaint. All
reasonable costs and expenses incurred by Agent and Lenders (or such third
parties) in the exercise of any such rights, including any sums paid in
connection with any judicial or administrative investigation or proceedings,
fines and penalties, together with interest thereon from the date expended at
the Default Rate for Domestic Rate Loans constituting Revolving Advances shall
be paid upon demand by Borrowers, and until paid shall be added to and become a
part of the Obligations secured by the Liens created by the terms of this
Agreement or any other agreement between Agent, any Lender and any Borrower.

(g)           Promptly upon the
written request of Agent from time to time, Borrowers shall provide Agent, at
Borrowers’ expense, with an environmental site assessment or environmental
audit report prepared by an environmental engineering firm acceptable in the
reasonable opinion of Agent, to assess with a reasonable degree of certainty
the existence of a Hazardous Discharge and the potential costs in connection
with abatement, cleanup and removal of any Hazardous Substances found on,
under, at or within the Real Property. Any report or investigation of such
Hazardous Discharge proposed and acceptable to an appropriate Authority that is
charged to oversee the clean-up of such Hazardous Discharge shall be acceptable
to Agent. If such estimates, individually or in the aggregate, exceed $100,000,
Agent shall have the right to require Borrowers to post a bond, letter of
credit or other security reasonably satisfactory to Agent to secure payment of
these costs and expenses.

(h)           Borrowers shall
defend and indemnify Agent and Lenders and hold Agent, Lenders and their
respective employees, agents, directors and officers harmless from and against
all loss, liability (INCLUDING, WITHOUT
LIMITATION, ANY STRICT LIABILITY), damage and expense, claims,
costs, fines and penalties, including attorney’s fees, suffered or incurred by
Agent or Lenders under or on account of any Environmental Laws, including the
assertion of any Lien thereunder, with respect to any Hazardous Discharge, the
presence of any Hazardous Substances affecting the Real Property, whether or
not the same originates or emerges from the Real Property or any contiguous
real estate, including any loss of value of the Real Property as a result of
the foregoing and INCLUDING, WITHOUT
LIMITATION, WITH RESPECT TO ANY ACT OR INACTION ARISING FROM AGENT’S OR ANY LENDER’S
NEGLIGENCE OR STRICT LIABILITY BUT NOT AGENT’S OR ANY LENDER’S GROSS NEGLIGENCE
OR WILLFUL MISCONDUCT. Borrowers’ obligations under this Section 4.18
shall arise upon the discovery of the presence of any Hazardous Substances at
the Real Property, whether or not any federal, state, or local environmental
agency has taken or threatened any action in connection with the presence of
any Hazardous Substances. Borrowers’ obligation and the indemnifications
hereunder shall survive the termination of this Agreement.

(i)            For purposes of Section 4.18
and 5.7, all references to Real Property shall be deemed to include all of each
Borrower’s right, title and interest in and to its owned and leased premises.

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4.19.      Financing Statements. Except as to
the financing statements filed by Agent and the financing statements described
on Schedule 1.2, no financing statement covering any of the Collateral or any
proceeds thereof is on file in any public office.

V             REPRESENTATIONS
AND WARRANTIES.

Each Borrower represents
and warrants as follows:

5.1.          Authority.
Each Borrower has full power, authority and legal right to enter into this
Agreement, the Intercreditor Agreement, and the Other Documents and to perform
all its respective Obligations hereunder and thereunder. This Agreement and the
Other Documents have been duly executed and delivered by each Borrower, and
this Agreement and the Other Documents constitute the legal, valid and binding
obligation of such Borrower enforceable in accordance with their terms, except
as such enforceability may be limited by any applicable bankruptcy, insolvency,
moratorium or similar laws affecting creditors’ rights generally. The
execution, delivery and performance of this Agreement and of the Other
Documents (a) are within such Borrower’s corporate powers, have been duly
authorized by all necessary corporate action, are not in contravention of law
or the terms of such Borrower’s by-laws, certificate of incorporation or other
applicable documents relating to such Borrower’s formation or to the conduct of
such Borrower’s business or of any material agreement or undertaking to which
such Borrower is a party or by which such Borrower is bound, (b) will not
conflict with or violate any law or regulation, or any judgment, order or
decree of any Governmental Body, (c) will not require the Consent of any
Governmental Body or any other Person, except those Consents set forth on
Schedule 5.1 hereto, all of which will have been duly obtained, made or
compiled prior to the Closing Date and which are in full force and effect and (d) will
not conflict with, nor result in any breach in any of the provisions of or
constitute a default under or result in the creation of any Lien except
Permitted Encumbrances upon any asset of such Borrower under the provisions of
any agreement, charter document, instrument, by-law or other instrument to
which such Borrower is a party or by which it or its property is a party or by
which it may be bound, including under the provisions of the Acquisition
Agreement.

5.2.        Formation and Qualification. 

(a)           Each Borrower is
duly organized and in good standing under the laws of the state or province
listed on Schedule 5.2(a) and is qualified to do business and is in good
standing in the states listed on Schedule 5.2(a) which constitute all
states in which qualification and good standing are necessary for such Borrower
to conduct its business and own its property and where the failure to so
qualify could reasonably be expected to have a Material Adverse Effect on such
Borrower. Each Borrower has delivered to Agent true and complete copies of its
certificate of incorporation and by-laws or analogous documents and will
promptly notify Agent of any amendment or changes thereto.

(b)           The only
Subsidiaries of each Borrower are listed on Schedule 5.2(b).

5.3.          Survival
of Representations and Warranties. All representations and warranties of
such Borrower contained in this Agreement and the Other Documents shall be true
at the time of such Borrower’s execution of this Agreement and the Other Documents,
and shall survive the

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execution, delivery and acceptance thereof by the
parties thereto and the closing of the transactions described therein or
related thereto.

5.4.        Tax Returns. Each Borrower’s
federal tax identification number is set forth on Schedule 5.4. Each Borrower
has filed all federal, state, provincial and local tax returns and other
reports each is required by law to file and has paid all taxes, assessments,
fees and other governmental charges that are due and payable. Federal, state
and local income tax returns of each Borrower have been examined and reported
upon by the appropriate taxing authority or closed by applicable statute and
satisfied for all fiscal years prior to and including the fiscal year ending December 31,
2001. The provision for taxes on the books of each Borrower is adequate for all
years not closed by applicable statutes, and for its current fiscal year, and
no Borrower has any knowledge of any deficiency or additional assessment in
connection therewith not provided for on its books.

5.5.        Financial Statements.

(a)           The pro forma
balance sheet of Borrowers on a Consolidated Basis (the “Pro Forma Balance
Sheet”) furnished to Agent on the Closing Date reflects the consummation of the
transactions contemplated under this Agreement (collectively, the “Transactions”)
and is accurate, complete and correct and fairly reflects the financial
condition of Borrowers on a Consolidated Basis as of the Closing Date after
giving effect to the Transactions, and has been prepared in accordance with
GAAP, consistently applied. The Pro Forma Balance Sheet has been certified as
accurate, complete and correct in all material respects by the President and
Chief Financial Officer of Borrowing Agent. All financial statements referred
to in this subsection 5.5(a), including the related schedules and notes
thereto, have been prepared, in accordance with GAAP, except as may be
disclosed in such financial statements.

(b)           The twelve-month
cash flow projections of Borrowers on a Consolidated Basis and their projected
balance sheets as of the Closing Date, copies of which are annexed hereto as Exhibit 5.5(b) (the
“Projections”) were prepared by the Chief Financial Officer of Borrowing Agent,
are based on underlying assumptions which provide a reasonable basis for the
projections contained therein and reflect Borrowers’ judgment based on present
circumstances of the most likely set of conditions and course of action for the
projected period. The cash flow Projections together with the Pro Forma Balance
Sheet, are referred to as the “Pro Forma Financial Statements”.

(c)           The consolidated and
consolidating balance sheets of Borrowers, their Subsidiaries and such other
Persons described therein (including the accounts of all Subsidiaries for the
respective periods during which a subsidiary relationship existed) as of December 31, 2005, and the related statements of income, changes in
stockholder’s equity, and changes in cash flow for the period ended on such
date, all accompanied by reports thereon containing opinions without
qualification by independent certified public accountants, copies of which have
been delivered to Agent, have been prepared in accordance with GAAP,
consistently applied (except for changes in application in which such
accountants concur and present fairly the financial position of Borrowers and
their Subsidiaries at such date and the results of their operations for such
period. Since December 31, 2005 there has been no change in the condition,
financial or otherwise, of Borrowers or their Subsidiaries as shown on the
consolidated balance sheet as of

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such date and no change in the aggregate value of
machinery, equipment and Real Property owned by Borrowers and their respective
Subsidiaries, except changes in the Ordinary Course of Business, none of which
individually or in the aggregate has been materially adverse.

5.6.          Entity
Names. No Borrower has been known by any other corporate name in the past
five years and does not sell Inventory under any other name except as set forth
on Schedule 5.6, nor has any Borrower been the surviving corporation of a
merger or consolidation or acquired all or substantially all of the assets of
any Person during the preceding five (5) years.

5.7.        O.S.H.A. and Environmental Compliance.

(a)           Each Borrower has
duly complied with, and its facilities, business, assets, property, leaseholds,
Real Property and Equipment are in compliance in all material respects with,
the provisions of the Federal Occupational Safety and Health Act, the
Environmental Protection Act, RCRA and all other Environmental Laws, and any
Canadian equivalent thereof with respect to the foregoing statutes; there have
been no outstanding citations, notices or orders of non-compliance issued to
any Borrower or relating to its business, assets, property, leaseholds or
Equipment under any such laws, rules or regulations.

(b)           Each Borrower has
been issued all required federal, state and local licenses, certificates or
permits relating to all applicable Environmental Laws.

(c)           (i) There are
no visible signs of releases, spills, discharges, leaks or disposal
(collectively referred to as “Releases”) of Hazardous Substances at, upon,
under or within any Real Property or any premises leased by any Borrower; (ii) there
are no underground storage tanks or polychlorinated biphenyls on the Real
Property or any premises leased by any Borrower; (iii) neither the Real
Property nor any premises leased by any Borrower has ever been used as a
treatment, storage or disposal facility of Hazardous Waste; and (iv) no
Hazardous Substances are present on the Real Property or any premises leased by
any Borrower, excepting such quantities as are handled in accordance with all
applicable manufacturer’s instructions and governmental regulations and in
proper storage containers and as are necessary for the operation of the
commercial business of any Borrower or of its tenants.

5.8.        Solvency; No Litigation, Violation,
Indebtedness or Default.

(a)           Before and after
giving effect to the Transactions and the funding of each Advance made pursuant
to this Agreement, each Borrower is and will be solvent, able to pay its debts
as they mature, has and will have capital sufficient to carry on its business
and all businesses in which it is about to engage, and (i) as of the
Closing Date, the fair present saleable value of its assets, calculated on a
going concern basis, is in excess of the amount of its liabilities and (ii) subsequent
to the Closing Date, the fair saleable value of its assets (calculated on a
going concern basis) will be in excess of the amount of its liabilities.

(b)           Except as disclosed
in Schedule 5.8(b), no Borrower has (i) any pending or threatened
litigation, arbitration, actions or proceedings which involve the possibility
of having a Material Adverse Effect, and (ii) any liabilities or
indebtedness for borrowed money other than the Obligations.

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(c)           No Borrower is in
violation of any applicable statute, law, rule, regulation or ordinance in any
respect which could reasonably be expected to have a Material Adverse Effect,
nor is any Borrower in violation of any order of any court, Governmental Body
or arbitration board or tribunal.

(d)           No Borrower nor any
member of the Controlled Group maintains or contributes to any Plan other than
those listed on Schedule 5.8(d) hereto. (i) No Plan has incurred any “accumulated
funding deficiency,” as defined in Section 302(a)(2) of ERISA and Section 412(a) of
the Code, whether or not waived, and each Borrower and each member of the
Controlled Group has met all applicable minimum funding requirements under Section 302
of ERISA in respect of each Plan; (ii) each Plan which is intended to be a
qualified plan under Section 401(a) of the Code as currently in
effect has been determined by the Internal Revenue Service to be qualified
under Section 401(a) of the Code and the trust related thereto is
exempt from federal income tax under Section 501(a) of the Code; (iii) neither
any Borrower nor any member of the Controlled Group has incurred any liability
to the PBGC other than for the payment of premiums, and there are no premium
payments which have become due which are unpaid; (iv) no Plan has been
terminated by the plan administrator thereof nor by the PBGC, and there is no
occurrence which would cause the PBGC to institute proceedings under Title IV
of ERISA to terminate any Plan; (v) at this time, the current value of the
assets of each Plan exceeds the present value of the accrued benefits and other
liabilities of such Plan and neither any Borrower nor any member of the
Controlled Group knows of any facts or circumstances which would materially
change the value of such assets and accrued benefits and other liabilities; (vi) neither
any Borrower nor any member of the Controlled Group has breached any of the
responsibilities, obligations or duties imposed on it by ERISA with respect to
any Plan; (vii) neither any Borrower nor any member of a Controlled Group
has incurred any liability for any excise tax arising under Section 4972
or 4980B of the Code, and no fact exists which could give rise to any such liability;
(viii) neither any Borrower nor any member of the Controlled Group nor any
fiduciary of, nor any trustee to, any Plan, has engaged in a “prohibited
transaction” described in Section 406 of the ERISA or Section 4975 of
the Code nor taken any action which would constitute or result in a Termination
Event with respect to any such Plan which is subject to ERISA; (ix) each
Borrower and each member of the Controlled Group has made all contributions due
and payable with respect to each Plan; (x) there exists no event described
in Section 4043(b) of ERISA, for which the thirty (30) day notice
period has not been waived; (xi) neither any Borrower nor any member of
the Controlled Group has any fiduciary responsibility for investments with
respect to any plan existing for the benefit of persons other than employees or
former employees of any Borrower and any member of the Controlled Group;
(xii) neither any Borrower nor any member of the Controlled Group
maintains or contributes to any Plan which provides health, accident or life
insurance benefits to former employees, their spouses or dependents, other than
in accordance with Section 4980B of the Code; (xiii) neither any
Borrower nor any member of the Controlled Group has withdrawn, completely or
partially, from any Multiemployer Plan so as to incur liability under the
Multiemployer Pension Plan Amendments Act of 1980 and there exists no fact
which would reasonably be expected to result in any such liability;
(xiv) no Plan fiduciary (as defined in Section 3(21) of ERISA) has
any liability for breach of fiduciary duty or for any failure in connection
with the administration or investment of the assets of a Plan and (xv) with
respect to any Canadian Plans: (A) all contributions (including
employee contributions made by authorized payroll deductions or other
withholdings) required to be made to the appropriate funding agency in
accordance with all

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Applicable Law and the terms of each Plan have been
made in accordance with all Applicable Law and the terms of each Plan; (B) all
liabilities under each Plan are funded, on a going concern and solvency basis,
in accordance with the terms of the respective Plans and the most recent
actuarial report filed with respect to the Plan; and  (C) to the extent required by  applicable pension benefit laws and
applicable regulatory authorities, no event has occurred and no conditions
exist with respect to any Plan that has resulted or could reasonably be
expected to result in any Plan having its registration revoked or refused for
the purposes of any administration of any relevant pension benefits regulatory
authority or being required to pay any taxes or penalties under any applicable
pension benefits or tax laws and  there
are no pending, threatened or anticipated claims involving or relating to any
of the Plans or welfare Plans (other than routine claims for benefits).

5.9.        Patents, Trademarks, Copyrights and
Licenses. All patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, copyrights, copyright
applications, design rights, tradenames, assumed names, trade secrets and
licenses owned or utilized by any Borrower are set forth on Schedule 5.9, are
valid and have been duly registered or filed with all appropriate Governmental
Bodies and constitute all of the intellectual property rights which are
necessary for the operation of its business; there is no objection to or
pending challenge to the validity of any such patent, trademark, copyright,
design rights, tradename, trade secret or license and no Borrower is aware of
any grounds for any challenge, except as set forth in Schedule 5.9 hereto. Each
patent, patent application, patent license, trademark, trademark application,
trademark license, service mark, service mark application, service mark
license, design rights, copyright, copyright application and copyright license
owned or held by any Borrower and all trade secrets used by any Borrower
consist of original material or property developed by such Borrower or was
lawfully acquired by such Borrower from the proper and lawful owner thereof. Each
of such items has been maintained so as to preserve the value thereof from the
date of creation or acquisition thereof. With respect to all software used by
any Borrower, such Borrower is in possession of all source and object codes
related to each piece of software or is the beneficiary of a source code escrow
agreement, each such source code escrow agreement being listed on Schedule 5.9
hereto.

5.10.        Licenses
and Permits. Except as set forth in Schedule 5.10, each Borrower (a) is
in compliance with and (b) has procured and is now in possession of, all
material licenses or permits required by any applicable federal, state,
provincial or local law, rule or regulation for the operation of its business
in each jurisdiction wherein it is now conducting or proposes to conduct
business and where the failure to procure such licenses or permits could have a
Material Adverse Effect.

5.11.      Default of Indebtedness. No
Borrower is in default in the payment of the principal of or interest on any
Indebtedness or under any instrument or agreement under or subject to which any
Indebtedness has been issued and no event has occurred under the provisions of
any such instrument or agreement which with or without the lapse of time or the
giving of notice, or both, constitutes or would constitute an event of default
thereunder.

5.12.      No Default. No Borrower is in
default in the payment or performance of any of its contractual obligations and
no Default has occurred.

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5.13.        No
Burdensome Restrictions. No Borrower is party to any contract or agreement
the performance of which could have a Material Adverse Effect. Each Borrower
has heretofore delivered to Agent true and complete copies of all material
contracts to which it is a party or to which it or any of its properties is
subject. No Borrower has agreed or consented to cause or permit in the future
(upon the happening of a contingency or otherwise) any of its property, whether
now owned or hereafter acquired, to be subject to a Lien which is not a
Permitted Encumbrance.

5.14.        No
Labor Disputes. No Borrower is involved in any labor dispute; there are no
strikes or walkouts or union organization of any Borrower’s employees
threatened or in existence and no labor contract is scheduled to expire during
the Term other than as set forth on Schedule 5.14 hereto.

5.15.        Margin
Regulations. No Borrower 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 stock” within the respective
meanings of each of the quoted terms under Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect. No part of the proceeds of any Advance will be used for “purchasing”
or “carrying” “margin stock” as defined in Regulation U of such Board of
Governors.

5.16.        Investment
Company Act. No Borrower is an “investment company” registered or required
to be registered under the Investment Company Act of 1940, as amended, nor is
it controlled by such a company.

5.17.        Disclosure.
No representation or warranty made by any Borrower in this Agreement, the
Acquisition Agreement, or in any financial statement, report, certificate or
any other document furnished in connection herewith contains any untrue
statement of fact or omits to state any fact necessary to make the statements
herein or therein not misleading. There is no fact known to any Borrower or
which reasonably should be known to such Borrower which such Borrower has not
disclosed to Agent in writing with respect to the transactions contemplated by
this Agreement  or the Acquisition
Agreement which could reasonably be expected to have a Material Adverse Effect.

5.18.        Swaps.
No Borrower is a party to, nor will it be a party to, any swap agreement
whereby such Borrower has agreed or will agree to swap interest rates or
currencies unless same provides that damages upon termination following an
event of default thereunder are payable on an unlimited “two-way basis” without
regard to fault on the part of either party.

5.19.      Conflicting Agreements. No
provision of any mortgage, indenture, contract, agreement, judgment, decree or
order binding on any Borrower or affecting the Collateral conflicts with, or
requires any Consent which has not already been obtained to, or would in any
way prevent the execution, delivery or performance of, the terms of this
Agreement or the Other Documents.

5.20.        Application
of Certain Laws and Regulations. Neither any Borrower nor any Affiliate of
any Borrower is subject to any law, statute, rule or regulation which
regulates the

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incurrence of any Indebtedness, including laws,
statutes, rules or regulations relative to common or interstate carriers
or to the sale of electricity, gas, steam, water, telephone, telegraph or other
public utility services.

5.21.        Business
and Property of Borrowers. Upon and after the Closing Date, Borrowers do
not propose to engage in any business other than the acquisition and processing
of high resolution seismic data for the petroleum industry in North America and
activities necessary to conduct the foregoing. On the Closing Date, each
Borrower will own all the property and possess all of the rights and Consents
necessary for the conduct of the business of such Borrower.

5.22.      Section 20 Subsidiaries. Borrowers
do not intend to use and shall not use any portion of the proceeds of the
Advances, directly or indirectly, to purchase during the underwriting period,
or for 30 days thereafter, Ineligible Securities being underwritten by a Section 20
Subsidiary.

5.23.      Anti-Terrorism Laws.

(a)           General.Neither
any Borrower nor any Affiliate of any Borrower is in violation of any
Anti-Terrorism Law or engages in or conspires to engage in any transaction  that evades or avoids, or has the purpose of
evading or avoiding, or attempts to violate, any of the prohibitions set forth
in any Anti-Terrorism Law.

(b)           Executive
Order No. 13224.Neither any Borrower nor any Affiliate of any Borrower
or their respective agents acting or benefiting in any capacity in connection
with the Advances or other transactions hereunder, is any of the following
(each a “Blocked Person”):

(i)            a
Person that is listed in the annex to, or is otherwise subject to the
provisions of, the Executive Order No. 13224;

(ii)           a
Person owned or  controlled  by, or acting for or on behalf  of, 
any  Person  that is listed in the annex to, or is
otherwise subject to the provisions of, the Executive Order No. 13224;

(iii)          a
Person or entity with which any Lender is prohibited from dealing or otherwise
engaging in any transaction by any Anti-Terrorism Law;

(iv)          a
Person or entity that commits, threatens or conspires to commit or supports “terrorism”
as defined in the Executive Order No. 13224;

(v)           a
Person or entity that is named as a “specially designated national” on the most
current list published by the U.S. Treasury Department Office of Foreign Asset
Control at its official website or any replacement website or other replacement
official publication of such list, or

(vi)          a
Person or entity who is affiliated or associated with a Person or entity listed
above.

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Neither any Borrower nor to the knowledge of any
Borrower, any of its agents acting in any capacity in connection with the
Advances or other transactions hereunder (i) conducts any business or
engages in making or receiving any contribution of funds, goods or services to
or for the benefit of any Blocked Person, or (ii) deals in, or otherwise
engages in any transaction relating to, any property or interests in
property  blocked  pursuant to the Executive Order No. 13224.

5.24.        Trading
with the Enemy. No Borrower has engaged, nor does it intend to engage, in
any business or activity prohibited by the Trading with the Enemy Act.

5.25.        Mechanic’s Liens.

No mechanic’s liens, materialman’s liens, liens
against mineral property or similar liens have been asserted by any party
arising out of or in connection with any labor performed or goods provided by
the claimant while employed by, or under contract with, any Borrower.

5.26.      Restricted Subsidiaries.

None of the Restricted Subsidiaries (a) has
assets greater than $125,000 in the aggregate, or (b) has liabilities in
excess of $500,000 in the aggregate or (c) conducts any material business.

5.27.      Delivery of Acquisition Agreement.

Agent has received complete copies of the Acquisition Agreement
(including all exhibits, schedules and disclosure letters referred to therein
or delivered pursuant thereto, if any) and all amendments thereto, waivers relating
thereto and other side letters or agreements affecting the terms thereof. None
of such documents and agreements has been amended or supplemented, nor have any
of the provisions thereof been waived, except pursuant to a written agreement
or instrument which has heretofore been delivered to Agent.

5.28.      Internal Controls and Procedures.

The Borrowers
maintain accurate Books and Records and internal accounting controls which
provide reasonable assurance that (i) all transactions to which the
Borrowers (or any of them) are a party or by which their properties are bound
are executed with management’s authorization; (ii) the reported
accountability of the Borroewers’ assets are compared with existing assets at
regular intervals; (iii) access to the Borrowers’ assets is permitted only
in accordance with management’s authorization; and (iv) all transactions
to which the Borrowers (or any of them) are a party or by which their
properties are bound are recorded as necessary to permit preparation of the
financial statements of the Borrowers in accordance with GAAP.

VI            AFFIRMATIVE
COVENANTS.

Each Borrower
shall, until payment in full of the Obligations and termination of this
Agreement:

6.1.        Payment of Fees. Pay to Agent on
demand all usual and customary fees and expenses which Agent incurs in
connection with (a) the forwarding of Advance proceeds and

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(b) the establishment and maintenance of any
Blocked Accounts or Depository Accounts as provided for in Section 4.15(h).
Agent may, without making demand, charge Borrowers’ Account for all such fees
and expenses.

6.2.        Conduct of Business and Maintenance
of Existence and Assets. (a) Conduct continuously and operate actively
its business according to good business practices and maintain all of its
properties useful or necessary in its business in good working order and
condition (reasonable wear and tear excepted and except as such properties may
be disposed of in accordance with the terms of this Agreement), including all
licenses, patents, copyrights, design rights, tradenames, trade secrets and
trademarks and take all actions necessary to enforce and protect the validity
of any intellectual property right or other right included in the Collateral; (b) keep
in full force and effect its existence and comply in all material respects with
the laws and regulations governing the conduct of its business where the
failure to do so could reasonably be expected to have a Material Adverse
Effect; and (c) make all such reports and pay all such franchise and other
taxes and license fees and do all such other acts and things as may be lawfully
required to maintain its rights, licenses, leases, powers and franchises under
the laws of the United States or any political subdivision thereof and the laws
of Canada or any political subdivision thereof.

6.3.          Violations.
Promptly notify Agent in writing of any violation of any law, statute,
regulation or ordinance of any Governmental Body, or of any agency thereof,
applicable to any Borrower which could reasonably be expected to have a
Material Adverse Effect.

6.4.        Government Receivables.

(a)           Take all steps
necessary to protect Agent’s interest in the Collateral under the Federal
Assignment of Claims Act, the Uniform Commercial Code and the Financial
Administration Act (Canada);

and all other applicable state or local statutes or
ordinances and deliver to Agent appropriately endorsed, any instrument or
chattel paper connected with any Receivable arising out of contracts between
any Borrower and the United States, any state or any department, agency or
instrumentality of any of them.

6.5.        Financial Covenants.

(a)           Tangible Net
Worth. Maintain at all times a Tangible Net Worth in an amount not less
than $20,000,000.00.

(b)           Fixed Charge
Coverage Ratio. Cause to be maintained as of the end of each Test Period, a
Fixed Charge Coverage Ratio of not less than 1.10 to 1.0.

(c)           Backlog. Maintain
at all times either (i) an amount of Undrawn Availability of greater than
$6,000,000 or (ii) a backlog of not less than $75,000,000

6.6.          Execution
of Supplemental Instruments. Execute and deliver to Agent from time to
time, upon demand, such supplemental agreements, statements, assignments and
transfers, or instructions or documents relating to the Collateral, and such
other instruments as Agent may request, in order that the full intent of this
Agreement may be carried into effect.

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6.7.        Payment of Indebtedness. Pay,
discharge or otherwise satisfy at or before maturity (subject, where
applicable, to specified grace periods and, in the case of the trade payables,
to normal payment practices) all its obligations and liabilities of whatever
nature, except when the failure to do so could not reasonably be expected to
have a Material Adverse Effect or when the amount or validity thereof is
currently being contested in good faith by appropriate proceedings and each
Borrower shall have provided for such reserves as Agent may reasonably deem
proper and necessary, subject at all times to any applicable subordination
arrangement in favor of Lenders.

6.8.          Standards
of Financial Statements. Cause all financial statements referred to in
Sections 9.7, 9.8, 9.9, 9.10, 9.11, 9.12, 9.13, and 9.14 as to which GAAP is
applicable to be complete and correct in all material respects (subject, in the
case of interim financial statements, to normal year-end audit adjustments) and
to be prepared in reasonable detail and in accordance with GAAP applied
consistently throughout the periods reflected therein (except as concurred in
by such reporting accountants or officer, as the case may be, and disclosed
therein).

6.9.          Federal
Securities Laws. Promptly notify Agent in writing if any Borrower or any of
its Subsidiaries (i) is required to file periodic reports under the
Exchange Act, (ii) registers any securities under the Exchange Act or (iii) files
a registration statement under the Securities Act.

6.10.        Mechanic’s
Liens. Promptly notify Agent of any mechanic’s liens, materialmen’s liens,
liens against mineral property or similar liens being asserted by any party
arising out of or in connection with any labor performed or goods provided by
the claimant while employed by any Borrower.

6.11.        Restricted
Subsidiaries. Take all steps reasonably necessary to cause all of the
Restricted Subsidiaries to dissolve or otherwise terminate their existence in
accordance with the laws of their respective jurisdictions promptly following
the Closing Date and, at all times prior thereto, cause such Restricted
Subsidiaries to conduct no material business activities, to incur no
obligations and to acquire no assets at any time after the Closing Date.

6.12.        Exercise
of Rights. Enforce all of its rights under the Acquisition Agreement and
any documents executed in connection therewith including, but not limited to,
all indemnification rights and pursue all remedies available to it with
diligence and in good faith in connection with the enforcement of any such
rights, unless the failure to so exercise such rights or pursue such remedies
could not reasonably be expected to have a Material Adverse Effect.

VII           NEGATIVE
COVENANTS.

No Borrower shall, until satisfaction in full of the
Obligations and termination of this Agreement:

7.1.        Merger, Consolidation, Acquisition
and Sale of Assets.

(a)           Enter into any
merger, consolidation or other reorganization with or into any other Person or
acquire all or a substantial portion of the assets or Equity Interests of any
Person or permit any other Person to consolidate with or merge with it.

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(b)           Sell, lease,
transfer or otherwise dispose of any of its properties or assets, except (i) dispositions
of Inventory and Equipment to the extent expressly permitted by Section 4.3
and (ii) any other sales or dispositions expressly permitted by this
Agreement.

7.2.        Creation of Liens. Create or
suffer to exist any Lien or transfer upon or against any of its property or
assets now owned or hereafter acquired, except Permitted Encumbrances.

7.3.        Guarantees. Become liable upon
the obligations or liabilities of any Person by assumption, endorsement or
guaranty thereof or otherwise (other than to Lenders) except (a) as
disclosed on Schedule 7.3, and (b) the endorsement of checks in the
Ordinary Course of Business.

7.4.        Investments. Purchase or acquire
obligations or Equity Interests of, or any other interest in, any Person,
except (a) obligations issued or guaranteed by the United States of
America or any agency thereof, (b) commercial paper with maturities of not
more than 270 days and a published rating of not less than A-1 or P-1
(or the equivalent rating), (c) certificates of time deposit and bankers’
acceptances having maturities of not more than 180 days and repurchase
agreements backed by United States government securities of a commercial bank
if (i) such bank has a combined capital and surplus of at least
$500,000,000, or (ii) its debt obligations, or those of a holding company
of which it is a Subsidiary, are rated not less than A (or the equivalent
rating) by a nationally recognized investment rating agency, and (d) U.S.
money market funds that invest solely in obligations issued or guaranteed by
the United States of America or an agency thereof.

7.5.          Loans.
Make advances, loans or extensions of credit to any Person, including any
Parent, Subsidiary or Affiliate except with respect to (a) the extension
of commercial trade credit in connection with the sale of Inventory in the
Ordinary Course of Business (b) loans to its employees in the Ordinary
Course of Business not to exceed the aggregate amount of $100,000 at any time
outstanding and (c) loans to other Borrowers provided that (1) such
loans shall be evidenced by a demand note (collectively, the “Intercompany
Notes”), 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 Pledge Agreement as additional collateral security for the
Obligations; (2) Borrowers shall record all intercompany transactions on
their Books and Records in a manner reasonably satisfactory to Agent;  (3) the obligations of any Borrower
under any such Intercompany Notes shall be subordinated to the Obligations of
Borrowers hereunder in a manner reasonably satisfactory to Agent; (4) at
the time any such intercompany loan or advance is made by a Borrower to any
other Borrower and after giving effect thereto, 
such Borrowers shall be solvent and (5) no Default or Event of
Default would occur and be continuing after giving effect to any such proposed
intercompany loan.

7.6.          Capital
Expenditures. Contract for, purchase or make any expenditure or commitments
for Capital Expenditures in any fiscal year in an aggregate amount for all
Borrowers in excess of $3,000,000 excluding
the Permitted Capital Lease Facility.

7.7.        Dividends. Declare, pay or make
any dividend or distribution on any shares of the common stock or preferred
stock of any Borrower (other than dividends and distributions by Subsidiaries
of  Borrower paid to Borrower and
dividends or distributions payable in its stock, or

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split-ups or reclassifications of its stock) or apply
any of its funds, property or assets to the purchase, redemption or other
retirement of any common or preferred stock, or of any options to purchase or
acquire any such shares of common or preferred stock of any Borrower.

7.8.          Indebtedness.
Create, incur, assume or suffer to exist any Indebtedness (exclusive of trade
debt) except in respect of (i) Indebtedness to Lenders; (ii) Indebtedness
incurred for the Permitted Capital Lease Facility and Capital Expenditures
permitted under Section 7.6 hereof; and (iii) Indebtedness listed on
Schedule 7.8 hereto (the foregoing being referred to herein as “Permitted
Indebtedness”).

7.9.          Nature
of Business. Substantially change the nature of the business in which it is
presently engaged, nor except as specifically permitted hereby purchase or
invest, directly or indirectly, in any assets or property other than in the
Ordinary Course of Business for assets or property which are useful in,
necessary for and are to be used in its business as presently conducted.

7.10.      Transactions with Affiliates. Unless
expressly permitted under this Agreement, directly or indirectly, purchase,
acquire or lease any property from, or sell, transfer or lease any property to,
or otherwise enter into any transaction or deal with, any Affiliate, except
transactions disclosed to the Agent, which are in the Ordinary Course of
Business, on an arm’s-length basis on terms and conditions no less favorable
than terms and conditions which would have been obtainable from a Person other
than an Affiliate.

7.11.      [Reserved].

7.12.      Subsidiaries.

(a)           Form any Subsidiary
unless (i) such Subsidiary expressly joins in this Agreement as a borrower
and becomes jointly and severally liable for the obligations of Borrowers
hereunder, under the Notes, and under any other agreement between any Borrower
and Lenders and (ii) Agent shall have received all documents, including
legal opinions, it may reasonably require to establish compliance with each of
the foregoing conditions.

(b)           Enter into any
partnership, joint venture or similar arrangement.

7.13.        Fiscal
Year and Accounting Changes. Change its fiscal year from December 31
or make any change (i) in accounting treatment and reporting practices
except as required by GAAP or (ii) in tax reporting treatment except as
required by law.

7.14.      Pledge of Credit. Now or hereafter
pledge Agent’s or any Lender’s credit on any purchases or for any purpose
whatsoever or use any portion of any Advance in or for any business other than
such Borrower’s business as conducted on the date of this Agreement.

7.15.        Amendment
of Articles of Incorporation or By-Laws. Amend, modify or waive any
material term or material provision of its Articles of Incorporation or By-Laws
unless required by law.

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7.16.      Compliance with ERISA. (i) (x) Maintain,
or permit any member of the Controlled Group to maintain, or (y) become
obligated to contribute, or permit any member of the Controlled Group to become
obligated to contribute, to any Plan, other than those Plans disclosed on
Schedule 5.8(d), (ii) engage, or permit any member of the Controlled Group
to engage, in any non-exempt “prohibited transaction”, as that term is defined
in section 406 of ERISA and Section 4975 of the Code, (iii) incur, or
permit any member of the Controlled Group to incur, any “accumulated funding
deficiency”, as that term is defined in Section 302 of ERISA or Section 412
of the Code, (iv) terminate, or permit any member of the Controlled Group
to terminate, any Plan where such event could result in any liability of any
Borrower or any member of the Controlled Group or the imposition of a lien on
the property of any Borrower or any member of the Controlled Group pursuant to Section 4068
of ERISA, (v) assume, or permit any member of the Controlled Group to
assume, any obligation to contribute to any Multiemployer Plan not disclosed on
Schedule 5.8(d), (vi) incur, or permit any member of the Controlled Group
to incur, any withdrawal liability to any Multiemployer Plan; (vii) fail
promptly to notify Agent of the occurrence of any Termination Event, (viii) fail
to comply, or permit a member of the Controlled Group to fail to comply, with
the requirements of ERISA or the Code or other Applicable Laws in respect of
any Plan, (ix) fail to meet, or permit any member of the Controlled Group
to fail to meet, all minimum funding requirements under ERISA or the Code or
postpone or delay or allow any member of the Controlled Group to postpone or
delay any funding requirement with respect of any Plan and (x) with
respect to Canadian Plans, fail to make contributions (including employee
contributions made by authorized payroll deductions or other withholdings)
required to be made to the appropriate funding agency in accordance with all
Applicable Law and the terms of each Plan, in accordance with all Applicable
Law and the terms of each Plan or permit any liabilities under each Plan to be
fully funded, on a going concern and solvency basis, in accordance with the
terms of the respective Plans, and the most recent actuarial report filed with
respect to the Plan, and to the extent required by applicable pension benefit
laws and applicable regulatory authorities, or permit any Plan to have its
registration revoked or refused for the purposes of any administration of any
relevant pension benefits regulatory authority or have to pay any taxes or
penalties under any applicable pension benefits or tax laws.

7.17.      Prepayment of Indebtedness. At any
time, (i) directly or indirectly, prepay, repurchase, redeem, retire or
otherwise acquire any subordinated Indebtedness, (ii) use the proceeds of
any Indebtedness to prepay, repurchase, redeem, retire or otherwise acquire any
other Indebtedness (including subordinated Indebtedness), (iii) make or
receive any payments whatsoever with respect to any Intercompany Note without
the prior written consent of Agent, except,  that, a Borrower may
make or receive payments in satisfaction of such Intercompany Note in the form
of the Equity Interests of the debtor with respect to such Intercompany Note
and (iv) upon the occurrence and during the continuation of a Default or
Event of Default or if a Default or Event of Default would result from such
payment or transaction, or if Undrawn Availability shall be less than
$6,000,000 after giving effect to such prepayment or transaction, prepay,
repurchase, redeem, retire or otherwise acquire any Indebtedness of any
Borrower.

7.18.        Anti-Terrorism
Laws. No Borrower shall, until satisfaction in full of the Obligations and
termination of this Agreement, nor shall it permit any Affiliate or agent to:

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(a)           Conduct any business
or engage in any transaction or dealing with any Blocked Person, including the
making or receiving any contribution of funds, goods or services to or for the
benefit of any Blocked Person.

(b)           Deal in, or
otherwise engage in any transaction relating to, any property or interests in
property blocked pursuant to the Executive Order No. 13224.

(c)           Engage in or
conspire to engage in any transaction that evades or avoids, or has the purpose
of evading or avoiding, or attempts to violate, any of the prohibitions set
forth in the Executive Order No. 13224, the USA PATRIOT Act or any other
Anti-Terrorism Law. Borrower shall deliver to Lenders any certification or
other evidence requested from time to time by any Lender in its sole
discretion, confirming Borrower’s compliance with this Section.

7.19.        Membership/Partnership
Interests. Elect to treat or permit any of its Subsidiaries to (x) treat
its limited liability company membership interests or partnership interests, as
the case may be, as securities as contemplated by the definition of “security”
in Section 8-102(15) and by Section 8-103 of Article 8
of Uniform Commercial Code or (y) certificate its limited liability
company membership interests or partnership interests, as the case may be.

7.20.      Trading with the Enemy Act. Engage
in any business or activity in violation of the Trading with the Enemy Act.

7.21.      Other Agreements. Enter into any
material amendment, waiver or modification of the Acquisition Agreement or any
related agreements.

VIII         CONDITIONS
PRECEDENT.

8.1.        Conditions to Initial Advances. The
agreement of Lenders to make the initial Advances requested to be made on the
Closing Date is subject to the satisfaction, or waiver by Agent, immediately
prior to or concurrently with the making of such Advances, of the following
conditions precedent:

(a)           Notes. Agent
shall have received the Notes duly executed and delivered by an authorized
officer of each Borrower;

(b)           Filings,
Registrations and Recordings. Each document (including any Uniform
Commercial Code financing statement) required by this Agreement, any related
agreement or under law or reasonably requested by the Agent to be filed,
registered or recorded in order to create, in favor of Agent, a perfected
security interest in or lien upon the Collateral shall have been properly filed,
registered or recorded in each jurisdiction in which the filing, registration
or recordation thereof is so required  or
requested, and Agent shall have received an acknowledgment copy, or other
evidence satisfactory to it, of each such filing, registration or recordation
and satisfactory evidence of the payment of any necessary fee, tax or expense
relating thereto;

(c)           Company
Proceedings of Borrowers. Agent shall have received a copy of the
resolutions in form and substance reasonably satisfactory to Agent, of the
board of directors, management committee, or managing member, as applicable, of
each Borrower authorizing

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(i) the execution, delivery and performance of
this Agreement, the Notes, the Permitted Capital Lease Facility, and any
related agreements, (collectively the “Documents”) and (ii) the granting
by each Borrower of the security interests in and liens upon the Collateral in
each case certified by the Secretary or an Assistant Secretary of each Borrower
as of the Closing Date; and, such certificate shall state that the resolutions
thereby certified have not been amended, modified, revoked or rescinded as of
the date of such certificate;

(d)           Incumbency
Certificates of Borrowers. Agent shall have received a certificate of the
Secretary or an Assistant Secretary of each Borrower, dated the Closing Date,
as to the incumbency and signature of the officers of each Borrower executing
this Agreement, the Other Documents, any certificate or other documents to be
delivered by it pursuant hereto, together with evidence of the incumbency of
such Secretary or Assistant Secretary;

(e)           Company
Proceedings of each Guarantor. Agent shall have received a copy of the
resolutions in form and substance reasonably satisfactory to Agent, of the
board of directors, management committee, or managing member, as applicable of
each Guarantor authorizing the execution, delivery and performance of the
Guaranty, the Permitted Capital Lease Facility and each Other Document to which
it is a party certified by the Secretary or an Assistant Secretary of each
Guarantor as of the Closing Date; and, such certificate shall state that the
resolutions thereby certified have not been amended, modified, revoked or
rescinded as of the date of such certificate;

(f)            Incumbency
Certificates of each Guarantor. Agent shall have received a certificate of
the Secretary or an Assistant Secretary of each Guarantor, dated the Closing
Date, as to the incumbency and signature of the officers of each Guarantor
executing this Agreement, any certificate or other documents to be delivered by
it pursuant hereto, together with evidence of the incumbency of such Secretary
or Assistant Secretary;

(g)           Certificates.
Agent shall have received a copy of the Articles or Certificate of
Incorporation or analogous document of each Borrower and each Guarantor and all
amendments thereto, certified by the Secretary of State or other appropriate
official of its jurisdiction of incorporation or organization together with
copies of the By-Laws or analogous document of each Borrower and each Guarantor
and all agreements of each Borrower’s and each Guarantor’s shareholders or
members, as applicable, certified as accurate and complete by the Secretary of
each Borrower and each Guarantor;

(h)           Good Standing
Certificates. Agent shall have received good standing certificates or
similar document for each Borrower and each Guarantor dated not more than ten (10) days
prior to the Closing Date, issued by the Secretary of State or other
appropriate official of each Borrower’s and each Guarantor’s jurisdiction of
incorporation or organization and each jurisdiction where the conduct of each
Borrower’s and each Guarantor’s business activities or the ownership of its
properties necessitates qualification;

(i)            Legal Opinion.
Agent shall have received the executed legal opinion of Borrowers’ and
Guarantors’ counsel in form and substance satisfactory to Agent which shall
cover such matters incident to the transactions contemplated by this Agreement,
the Notes, the Other Documents and related agreements as Agent may reasonably
require and each Borrower

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and each Guarantor hereby authorizes and directs such
counsel to deliver such opinions to Agent and Lenders;

(j)            No Litigation.
(i) No litigation, investigation or proceeding before or by any arbitrator
or Governmental Body shall be continuing or threatened against any Borrower or
against the officers or directors of any Borrower (A) in connection with
this Agreement, the Other Documents or any of the transactions contemplated
thereby and which, in the reasonable opinion of Agent, is deemed material or (B) which
could, in the reasonable opinion of Agent, have a Material Adverse Effect; and (ii) no
injunction, writ, restraining order or other order of any nature materially
adverse to any Borrower or the conduct of its business or inconsistent with the
due consummation of the Transactions shall have been issued by any Governmental
Body;

(k)           Financial
Condition Certificates. Agent shall have received an executed Financial
Condition Certificate in the form of Exhibit 8.1(k).

(l)            Collateral
Examination. Agent shall have completed Collateral examinations, audits and
received appraisals, the results of which shall be satisfactory in form and
substance to Lenders, of the Receivables, Inventory, General Intangibles, Real
Property, Leasehold Interest and Equipment of each Borrower and all Books and
Records in connection therewith;

(m)          Fees. Agent
shall have received all fees payable to Agent and Lenders on or prior to the
Closing Date hereunder, including pursuant to Article III hereof and
received payment of all expenses reimbursable to Agent pursuant to this
Agreement;

(n)           Pro Forma
Financial Statements. Agent shall have received a copy of the Pro Forma
Financial Statements which shall be satisfactory in all respects to Lenders;

(o)           Insurance. Agent
shall have received in form and substance satisfactory to Agent, certified
copies of Borrowers’ casualty insurance policies, together with loss payable
endorsements on Agent’s standard form of loss payee endorsement naming Agent as
loss payee, and certified copies of Borrowers’ liability insurance policies,
together with endorsements naming Agent as a co-insured;

(p)           Payment
Instructions. Agent shall have received written instructions from Borrowing
Agent directing the application of proceeds of the initial Advances made
pursuant to this Agreement;

(q)           Blocked Accounts.
Agent shall have received duly executed agreements establishing the Blocked
Accounts or Depository Accounts with financial institutions acceptable to Agent
for the collection or servicing of the Receivables and proceeds of the
Collateral;

(r)            Consents. Agent
shall have received any and all Consents necessary to permit the effectuation
of the transactions contemplated by this Agreement and the Other Documents; and,
Agent shall have received such Consents and waivers of such third parties as
might assert claims with respect to the Collateral, as Agent and its counsel
shall deem necessary;

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(s)           No Adverse
Material Change. (i) since December 31, 2005 there shall not have
occurred any event, condition or state of facts which could reasonably be
expected to have a Material Adverse Effect and (ii) no representations
made or information supplied to Agent or Lenders shall have been proven to be
inaccurate or misleading in any material respect;

(t)            Leasehold
Agreements.Agent shall have received all required landlord, mortgagee or
warehouseman agreements satisfactory to Agent with respect to any premises
leased by Borrowers at which Collateral and Books and Records are located;

(u)           Financial
Statements. Agent shall have received the Borrowers’ financial statements (i) described
in Section 9.7 hereof for the Borrowers’ fiscal year ending in 2005
and  (ii) described in Section 9.8
hereof for the Borrowers’ fiscal quarter ending March 31, 2006;

(v)           Contract Review.
Agent shall have reviewed all material contracts of Borrowers including leases,
union contracts, labor contracts, vendor supply contracts, customer agreements,
license agreements and distributorship agreements and such contracts and
agreements shall be satisfactory in all respects to Agent;

(w)          Closing
Certificate. Agent shall have received a closing certificate signed by the
Chief Financial Officer of each Borrower dated as of the date hereof, stating
that (i) all representations and warranties set forth in this Agreement
and the Other Documents are true and correct on and as of such date, (ii) Borrowers
are on such date in compliance with all the terms and provisions set forth in
this Agreement and the Other Documents and (iii) on such date no Default
or Event of Default has occurred or is continuing;

(x)            Borrowing Base.
Agent shall have received an executed Borrowing Base Certificate dated as of
the Closing Date in form and substance satisfactory to Agent;

(y)           Undrawn Availability.
After giving effect to the initial Advances hereunder, Borrowers shall have
Undrawn Availability of at least $6,000,000.00;

(z)            Compliance with
Laws. Agent shall be reasonably satisfied that each Borrower is in
compliance with all pertinent federal, state, local, provincial, foreign or
territorial regulations, including those with respect to the Federal
Occupational Safety and Health Act, the Environmental Protection Act, ERISA and
the Trading with the Enemy Act and any Canadian equivalent thereof.

(aa)         Reasonable
Assurances. Agent shall have received and be satisfied with an analysis by
Agent’s counsel of the applicability of mechanic’s liens and/or liens against
mineral property in the Borrowers’ industry as they relate to subcontractors,
accounts payable risks and reservations from borrowing base.

(bb)         Field Examination.
Agent shall have received a satisfactory asset-based field examination to be
completed by examiners selected by Agent.

(cc)         Existing Financing. (i) Each of the HSBC Facility
and the Mitcham Lease shall be terminated, (ii) all loans and obligations
of the Borrowers with respect thereto shall be paid or satisfied in full
utilizing the proceeds of the initial Revolving Loans to be made under

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this Agreement, and (iii) all liens and security
interests in favor of HSBC or Mitcham in connection therewith shall be
terminated and/or released upon such payment.

(dd)         Guarantees and
Other Documents. Agent shall have received (i) the executed
Guarantees, (ii) the executed Guarantor Security Agreements, (iii) the
executed Pledge Agreements, and (iv) the executed Other Documents, all in
form and substance satisfactory to Agent.

(ee)         Payoff of Debt and
Release of Liens. Borrowers shall have paid in full all existing debts and
obligations, except those listed on Schedule 7.8, and Agent shall have received
evidence of these payoffs in form and substance satisfactory to Agent. All
liens against Borrowers shall have been released, except those listed on
Schedule 1.2.

(ff)           Other. All
corporate and other proceedings, all background and reference checks,
examinations and other investigations, and all documents, instruments and other
legal matters in connection with this Agreement and the Other Documents
(including, but not limited to, those relating to the corporate and capital
structures of Borrowers) shall be satisfactory in form and substance to Agent
and its counsel.

8.2.          Conditions
to Each Advance.The agreement of Lenders to make any Advance requested to be
made on any date (including the initial Advance), is subject to the
satisfaction of the following conditions precedent as of the date such Advance
is made:

(a)           Representations
and Warranties. Each of the representations and warranties made by any
Borrower in or pursuant to this Agreement, the Other Documents and any related
agreements to which it is a party, and each of the representations and
warranties contained in any certificate, document or financial or other
statement furnished at any time under or in connection with this Agreement, the
Other Documents or any related agreement shall be true and correct in all
material respects on and as of such date as if made on and as of such date;

(b)           No Default. No
Event of Default or Default shall have occurred and be continuing on such date,
or would exist after giving effect to the Advances requested to be made, on
such date; provided, however that Agent, in its sole discretion, may continue
to make Advances notwithstanding the existence of an Event of Default or
Default and that any Advances so made shall not be deemed a waiver of any such
Event of Default or Default; and

(c)           Maximum Advances.
In the case of any type of Advance requested to be made, after giving effect
thereto, the aggregate amount of such type of Advance shall not exceed the
maximum amount of such type of Advance permitted under this Agreement.

Each request for an Advance by any Borrower hereunder
shall constitute a representation and warranty by each Borrower as of the date
of such Advance that the conditions contained in this subsection shall have
been satisfied.

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IX            INFORMATION
AS TO BORROWERS.

Each Borrower shall, or (except with respect to Section 9.12)
shall cause Borrowing Agent on its behalf to, until satisfaction in full of the
Obligations and the termination of this Agreement:

9.1.          Disclosure
of Material Matters. Immediately upon learning thereof, report to Agent all
matters materially affecting the value, enforceability or collectability of any
portion of the Collateral, including any Borrower’s reclamation or repossession
of, or the return to any Borrower of, a material amount of goods or claims or
disputes asserted by any Customer or other obligor.

9.2.          Schedules.
Deliver to Agent on or before the fifteenth (15th) day of each month as and for
the prior month (a) accounts receivable ageings and reconciliations to the
general ledger, (b) accounts payable schedules inclusive of
reconciliations to the general ledger, inclusive of all subcontractor balances
and (c) Inventory reports. In addition, each Borrower will deliver to
Agent at such intervals as Agent may require: 
(i) confirmatory assignment schedules, (ii) copies of Customer’s
invoices, (iii) evidence of shipment or delivery, if applicable, and (iv) such
further schedules, documents and/or information regarding the Collateral as
Agent may require including trial balances and test verifications. Agent shall
have the right to confirm and verify all Receivables by any manner and through
any medium it considers advisable and do whatever it may deem reason­ably
necessary to protect its interests hereunder. The items to be provided under
this Section are to be in form satisfactory to Agent and executed by each
Borrower and delivered to Agent from time to time solely for Agent’s
convenience in main­taining records of the Collateral, and any Borrower’s
failure to deliver any of such items to Agent shall not affect, terminate,
modify or otherwise limit Agent’s Lien with respect to the Collateral.

9.3.          Environmental
Reports. Furnish Agent, concurrently with the delivery of the financial
statements referred to in Sections 9.7 and 9.8, with a certification in the
Compliance Certificate, stating, to the best of his knowledge, that each
Borrower is in compliance in all material respects with all federal, state and
local Environmental Laws. To the extent any Borrower is not in compliance with
the foregoing laws, the certificate shall set forth with specificity all areas
of non-compliance and the proposed action such Borrower will implement in order
to achieve full compliance.

9.4.          Litigation.
Promptly notify Agent in writing of any claim, litigation, suit or
administrative proceeding affecting any Borrower or any Guarantor, whether or
not the claim is covered by insurance, and of any litigation, suit or
administrative proceeding, which in any such case affects the Collateral or
which could reasonably be expected to have a Material Adverse Effect.

9.5.        Material Occurrences. Promptly
notify Agent in writing upon the occurrence of (a) any Event of Default or
Default; (b) any event which with the giving of notice or lapse of time,
or both, would constitute an event of default; (c) any event, development
or circumstance whereby any financial statements or other reports furnished to
Agent fail in any material respect to present fairly, in accordance with GAAP
consistently applied, the financial condition or

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operating results of any Borrower as of the date of
such statements; (d) any accumulated retirement plan funding deficiency
which, if such deficiency continued for two plan years and was not corrected as
provided in Section 4971 of the Code, could subject any Borrower to a tax
imposed by Section 4971 of the Code or any accumulated retirement plan
funding deficiency which could subject any Borrower to a tax imposed by
Applicable Law with respect to a Canadian Plan; (e) each and every default
by any Borrower which might result in the acceleration of the maturity of any
Indebtedness, including the names and addresses of the holders of such
Indebtedness with respect to which there is a default existing or with respect
to which the maturity has been or could be accelerated, and the amount of such
Indebtedness; and (f) any other development in the business or affairs of
any Borrower or any Guarantor which could reasonably be expected to have a
Material Adverse Effect; in each case describing the nature thereof and the
action Borrowers propose to take with respect thereto.

9.6.        Government Receivables. Notify
Agent promptly, but in any event within five (5) Business Days, if any of
its Receivables arise out of contracts between any Borrower and the United
States, any state, or any department, agency or instrumentality of any of them.

9.7.          Annual
Financial Statements. Furnish Agent within one hundred twenty (120) days
after the end of each fiscal year of Borrowers, financial statements of Borrowers
on a consolidating and consolidated basis including, but not limited to,
statements of income and stockholders’ equity and cash flow from the beginning
of the current fiscal year to the end of such fiscal year and the balance sheet
as at the end of such fiscal year, all prepared in accordance with GAAP applied
on a basis consistent with prior practices, and in reasonable detail and
reported upon without qualification by an independent certified public
accounting firm selected by Borrowers and satisfactory to Agent (the “Accountants”).
The report of the Accountants shall be accompanied by a statement of the
Accountants certifying that (i) they have caused this Agreement to be
reviewed, (ii) in making the examination upon which such report was based
either no information came to their attention which to their knowledge
constituted an Event of Default or a Default under this Agreement or any
related agreement or, if such information came to their attention, specifying
any such Default or Event of Default, its nature, when it occurred and whether
it is continuing, and such report shall contain or have appended thereto
calculations which set forth Borrowers’ compliance with the requirements or
restrictions imposed by Sections 6.5, 7.4, 7.5, 7.6, 7.7, 7.8 and 7.11 hereof. In
addition, the reports shall be accompanied by a Compliance Certificate.

9.8.        Quarterly Financial Statements. Furnish
Agent within forty-five (45) days after the end of each fiscal quarter, an
unaudited balance sheet of Borrowers on a consolidated and consolidating basis
and unaudited statements of income and stockholders’ equity and cash flow of
Borrowers on a consolidated and consolidating basis reflecting results of
operations from the beginning of the fiscal year to the end of such quarter and
for such quarter, prepared on a basis consistent with prior practices and
complete and correct in all material respects, subject to normal and recurring
year end adjustments that individually and in the aggregate are not material to
Borrowers’ business. The reports shall be accompanied by a Compliance
Certificate.

9.9.        Monthly Financial Statements. Furnish
Agent within (i) forty-five (45) days after the end of each month for the
months of December, March, June and September and (ii) thirty
(30) days after the end of each month for each other month, an unaudited
balance sheet of

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Borrowers on a consolidated and consolidating basis
and unaudited statements of income and stockholders’ equity and cash flow of
Borrowers on a consolidated and consolidating basis reflecting results of
operations from the beginning of the fiscal year to the end of such month and
for such month, prepared on a basis consistent with prior practices and
complete and correct in all material respects, subject to normal and recurring
year end adjustments that individually and in the aggregate are not material to
Borrowers’ business. The reports shall be accompanied by a Compliance
Certificate and shall contain a backlog report that includes projects per
Customer and a summary of all material variances from budgets submitted by
Borrowers pursuant to Section 9.13 and, at Agent’s request, a discussion
and analysis by management with respect to such variances.

9.10.      Borrowing Base Certificate. Deliver
to Agent on or before the last Business Day of 
(i) each month, if Undrawn Availability is at least $6,000,000 at
such time or (ii) each week, if Undrawn Availability is below $6,000,0000
at such time, as and for the prior month or week, as applicable, a Borrowing
Base Certificate in form and substance satisfactory to Agent (which shall be
calculated as of the last day of the prior month or prior week, as applicable
and which shall not be binding upon Agent or restrictive of Agent’s rights
under this Agreement), including reporting of sales, collections and credits.

9.11.        Other
Reports. Furnish Agent as soon as available, but in any event within ten (10) days
after the issuance thereof, with copies of such financial statements, reports
and returns as each Borrower shall send to its stockholders.

9.12.      Additional Information. Furnish
Agent with such additional information as Agent shall reasonably request in
order to enable Agent to determine whether the terms, covenants, provisions and
conditions of this Agreement and the Notes have been complied with by Borrowers
including, without the necessity of any request by Agent, (a) copies of
all environmental audits and reviews, (b) at least thirty (30) days prior
thereto, notice of any Borrower’s opening of any new office or place of
business or any Borrower’s closing of any existing office or place of business,
and (c) promptly upon any Borrower’s learning thereof, notice of any labor
dispute to which any Borrower may become a party, any strikes or walkouts
relating to any of its plants or other facilities, and the expiration of any
labor contract to which any Borrower is a party or by which any Borrower is
bound.

9.13.      Projected Operating Budget. Furnish
Agent, within thirty (30) days after the end of each fiscal year of Borrowers,
commencing with fiscal year 2006, a month by month projected operating budget
and cash flow of Borrowers on a consolidated and consolidating basis, approved
by the board of directors of Borrowers, for the following fiscal year
(including (i) an income statement for each month, (ii) a balance
sheet as at the end of each month, (iii) cash flow statements for each
month and (iv) key assumptions, including capital spending plans), such
projections to be accompanied by a certificate signed by the President or Chief
Financial Officer of each Borrower to the effect that such projections have
been prepared on the basis of sound financial planning practice consistent with
past budgets and financial statements and that such officer has no reason to
question the reasonableness of any material assumptions on which such
projections were prepared.

9.14.      [Reserved].

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9.15.        Notice
of Suits, Adverse Events. Furnish Agent with prompt written notice of (i) any
lapse or other termination of any Consent issued to any Borrower by any
Governmental Body or any other Person that is material to the operation of any
Borrower’s business, (ii) any refusal by any Governmental Body or any
other Person to renew or extend any such Consent; and (iii) copies of any
periodic or special reports filed by any Borrower or any Guarantor with any
Governmental Body or Person, if such reports indicate any material change in
the business, operations, affairs or condition of any Borrower or any
Guarantor, or if copies thereof are requested by Lender, and (iv) copies
of any material notices and other communications from any Governmental Body or
Person which specifically relate to any Borrower or any Guarantor.

9.16.        ERISA
Notices and Requests. Furnish Agent with immediate written notice in the
event that (i) any Borrower or any member of the Controlled Group knows or
has reason to know that a Termination Event has occurred, together with a
written statement describing such Termination Event and the action, if any,
which such Borrower or any member of the Controlled Group has taken, is taking,
or proposes to take with respect thereto and, when known, any action taken or
threatened by the Internal Revenue Service, Department of Labor or PBGC with
respect thereto, (ii) any  Borrower
or any member of the Controlled Group knows or has reason to know that a
prohibited transaction (as defined in Sections 406 of ERISA and 4975 of the
Code) has occurred together with a written statement describing such
transaction and the action which such Borrower or any member of the Controlled
Group has taken, is taking or proposes to take with respect thereto, (iii) a
funding waiver request has been filed with respect to any Plan together with
all communications received by any Borrower or any member of the Controlled
Group with respect to such request, (iv) any increase in the benefits of
any existing Plan or the establish­ment of any new Plan or the commence­ment of
contributions to any Plan to which any Borrower or any member of the Controlled
Group was not previously contributing shall occur, (v) any Borrower or any
member of the Controlled Group shall receive from the PBGC a notice of
intention to terminate a Plan or to have a trustee appointed to administer a
Plan, together with copies of each such notice, (vi) any Borrower or any
member of the Controlled Group shall receive any favorable or unfavorable
determination letter from the Internal Revenue Service regarding the qualifica­tion
of a Plan under Section 401(a) of the Code, together with copies of
each such letter; (vii) any Borrower or any member of the Controlled Group
shall receive a notice regarding the imposition of withdrawal liability,
together with copies of each such notice; (viii) any Borrower or any
member of the Controlled Group shall fail to make a required installment or any
other required payment under Section 412 of the Code on or before the due
date for such install­ment or payment; (ix) any Borrower or any member of
the Controlled Group knows that (a) a Multiemployer Plan has been
terminated, (b) the administrator or plan sponsor of a Multiemployer Plan
intends to terminate a Multiemployer Plan, or (c) the PBGC has instituted
or will institute proceedings under Section 4042 of ERISA to terminate a
Multiemployer Plan.

9.17.        Additional
Documents. Execute and deliver to Agent, upon request, such documents and
agreements as Agent may, from time to time, reasonably request to carry out the
purposes, terms or conditions of this Agreement.

9.18.        SEC
Information. Promptly upon their becoming available, copies of: (i) all
financial statements, reports, notices and proxy statements made publicly
available by any Borrower to its security holders; (ii) all regular and
periodic reports and all registration

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statements and prospectuses, if any, filed by any
Borrower with any securities exchange or with the SEC or any governmental or
private regulatory authority; and (iii) all press releases and other
statements made available by any Borrower to the public concerning material
changes or developments in the business of any such Person.

X             EVENTS
OF DEFAULT.

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

10.1.      Nonpayment. Failure by any Borrower
to pay any principal or interest on the Obligations when due, whether at
maturity or by reason of acceleration pursuant to the terms of this Agreement
or by notice of intention to prepay, or by required prepayment or failure to
pay any other liabilities or make any other payment, fee or charge provided for
herein (including the failure to make any Gross-Up Payment) when due or in any
Other Document;

10.2.      Breach of Representation. Any
representation or warranty made or deemed made by any Borrower or any Guarantor
in this Agreement, any Other Document or any related agreement or in any
certificate, document or financial or other statement furnished at any time in
connection herewith or therewith shall prove to have been misleading in any
material respect on the date when made or deemed to have been made;

10.3.      Financial Information. Failure by
any Borrower to (i) furnish financial information when due or when
requested or (ii) permit the inspection of its books or records;

10.4.        Judicial
Actions. Issuance of a notice of Lien, levy, assessment, injunction or
attachment against any Borrower’s Inventory or Receivables or against a
material portion of any Borrower’s other property;

10.5.        Noncompliance.
Except as otherwise provided for in Sections 10.1, 10.3 and 10.5(ii), (i) failure
or neglect of any Borrower or any Guarantor to perform, keep or observe any
term, provision, condition, covenant herein contained, or contained in any
Other Document or any other agreement or arrangement, now or hereafter entered
into between any Borrower or any Guarantor, and Agent or any Lender, or (ii) failure
or neglect of any Borrower to perform, keep or observe any term, provision,
condition or covenant, contained in Sections 4.6, 4.7, 4.9, 4.14, 6.1, 6.3,
6.4, 9.4 or 9.6 hereof which is not cured within ten (10) days from the
occurrence of such failure or neglect;

10.6.      Judgments. Any judgment or
judgments are rendered against any Borrower or any Guarantor for an aggregate
amount in excess of $250,000 or against all Borrowers or Guarantors for an
aggregate amount in excess of $500,000 and (i) enforcement proceedings
shall have been commenced by a creditor upon such judgment, (ii) there
shall be any period of thirty (30) consecutive days during which a stay of
enforcement of such judgment, by reason of a pending appeal or otherwise, shall
not be in effect, or (iii) any such judgment results in the creation of a
Lien upon any of the Collateral (other than a Permitted Encumbrance);

10.7.      Bankruptcy. Any Borrower or any
Guarantor shall (i) apply for, consent to or suffer the appointment of, or
the taking of possession by, a receiver, custodian, trustee, liquidator

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or similar fiduciary of itself or of all or a
substantial part of its property, (ii) make a general assignment for the
benefit of creditors, (iii) commence a voluntary case under any state or
federal bankruptcy laws (as now or hereafter in effect), (iv) be
adjudicated a bankrupt or insolvent, (v) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vi) acquiesce
to, or fail to have dismissed, within sixty (60) days, any petition filed
against it in any involuntary case under such bankruptcy laws, or (vii) take
any action for the purpose of effecting any of the foregoing;

10.8.        Inability
to Pay. Any Borrower or any Guarantor shall admit in writing its inability,
or be generally unable, to pay its debts as they become due or cease operations
of its present business;

10.9.        Affiliate
Bankruptcy. Any Affiliate or any Subsidiary of any Borrower, or any
Guarantor, shall (i) apply for, consent to or suffer the appointment of,
or the taking of possession by, a receiver, custodian, trustee, liquidator or
similar fiduciary of itself or of all or a substantial part of its property, (ii) admit
in writing its inability, or be generally unable, to pay its debts as they
become due or cease operations of its present business, (iii) make a
general assignment for the benefit of creditors, (iv) commence a voluntary
case under any state or federal bankruptcy laws (as now or hereafter in
effect), (v) be adjudicated a bankrupt or insolvent, (vi) file a
petition seeking to take advantage of any other law providing for the relief of
debtors, (vii) acquiesce to, or fail to have dismissed, within sixty (60)
days, any petition filed against it in any involuntary case under such
bankruptcy laws, or (viii) take any action for the purpose of effecting
any of the foregoing;

10.10.    Material Adverse Effect. Any change
in any Borrower’s or any Guarantor’s results of operations or condition
(financial or otherwise) which in Agent’s opinion has a Material Adverse
Effect;

10.11.    Lien Priority. Any Lien created
hereunder or provided for hereby or under any related agreement for any reason
ceases to be or is not a valid and perfected Lien having a first priority
interest;

10.12.      Permitted
Capital Lease Facility Default. An event of default has occurred under the
Permitted Capital Lease Facility or the Intercreditor Agreement, which default
shall not have been cured or waived within any applicable grace period;

10.13.    Cross Default. A default of the
obligations of any Borrower under any other agreement to which it is a party
shall occur which materially adversely affects its condition, affairs or
prospects (financial or otherwise) which default is not cured within any
applicable grace period;

10.14.    Breach of Guaranty. Termination or
breach of any Guaranty or Guaranty Security Agreement or similar agreement
executed and delivered to Agent in connection with the Obligations of any
Borrower, or if any Guarantor attempts to terminate, challenges the validity
of, or its liability under, any such Guaranty or Guaranty Security Agreement or
similar agreement;

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10.15.    Change of Ownership. Any Change of Ownership or Change of Control
shall occur;

10.16.    Invalidity. Any material provision of
this Agreement or any Other Document shall, for any reason, cease to be valid
and binding on Borrower or any Guarantor, or any Borrower or any Guarantor
shall so claim in writing to Agent or any Lender;

10.17.    Licenses. (i) Any Governmental
Body shall (A) revoke, terminate, suspend or adversely modify any license,
permit, patent trademark or tradename of any Borrower or any Guarantor, or (B) commence
proceedings to suspend, revoke, terminate or adversely modify any such license,
permit, trademark, tradename or patent and such proceedings shall not be
dismissed or discharged within sixty (60) days, or (C) schedule or conduct
a hearing on the renewal of any license, permit, trademark, tradename or patent
necessary for the continuation of any Borrower’s or any Guarantor’s business
and the staff of such Governmental Body issues a report recommending the
termination, revocation, suspension or material, adverse modification of such
license, permit, trademark, tradename or patent; (ii) any agreement which
is necessary or material to the operation of any Borrower’s or any Guarantor’s
business shall be revoked or terminated and not replaced by a substitute
acceptable to Agent within thirty (30) days after the date of such revocation
or termination, and such revocation or termination and non-replacement would
reasonably be expected to have a Material Adverse Effect;

10.18.    Seizures. Any portion of the
Collateral shall be seized or taken by a Governmental Body, or any Borrower or
any Guarantor or the title and rights of any Borrower, any Guarantor or any
owner which is the owner of any material portion of the Collateral shall have
become the subject matter of claim, litigation, suit or other proceeding which
might, in the opinion of Agent, upon final determination, result in impairment
or loss of the security provided by this Agreement or the Other Documents;

10.19.    Operations. The business operations
of any Borrower or any Guarantor are interrupted at any time for more than five
(5) consecutive days, unless such Borrower shall (i) be entitled to
receive for such period of interruption, proceeds of any business interruption
insurance sufficient to assure that its per diem cash needs during such period
is at least equal to its average per diem cash needs for the consecutive three
month period immediately preceding
the initial date of interruption and (ii) receive any such proceeds in the
amount described in clause (i) preceding not later than thirty (30) days
following the initial date of any such interruption; provided, however, that
notwithstanding the provisions of clauses (i) and (ii) of this
section, an Event of Default shall be deemed to have occurred if such Borrower
shall be receiving the proceeds of any business interruption insurance for a
period of thirty (30) consecutive days; or

10.20.    Pension Plans. An event or condition specified in Sections
7.16 or 9.16 hereof shall occur or exist with respect to any Plan and, as a
result of such event or condition, together with all other such events or
conditions, any Borrower or any member of the Controlled Group shall incur, or
in the opinion of Agent be reasonably likely to incur, a liability to a Plan
(including any Canadian Plan) or the PBGC (or both) which, in the reasonable
judgment of Agent, would have a Material Adverse Effect.

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XI            LENDERS’
RIGHTS AND REMEDIES AFTER DEFAULT.

11.1.      Rights and Remedies.

(a)           Upon the occurrence
of (i) an Event of Default pursuant to Section 10.7 all Obligations
shall be immediately due and payable and this Agreement and the obligation of
Lenders to make Advances shall be deemed terminated; and, (ii) any of the
other Events of Default and at any time thereafter (such default not having
previously been cured), at the option of Required Lenders all Obligations shall
be immediately due and payable and Lenders shall have the right to terminate
this Agreement and to terminate the obligation of Lenders to make Advances and (iii) a
filing of a petition against any Borrower in any involuntary case under any
state or federal bankruptcy laws, all Obligations shall be immediately due and
payable and the obligation of Lenders to make Advances hereunder shall be
terminated other than as may be required by an appropriate order of the
bankruptcy court having jurisdiction over such Borrower. Upon the occurrence of
any Event of Default, Agent shall have the right to exercise any and all rights
and remedies provided for herein, under the Other Documents, under the Uniform
Commercial Code and at law or equity generally, including the right to
foreclose the security interests granted herein and to realize upon any
Collateral by any available judicial procedure and/or to take possession of and
sell any or all of the Collateral with or without judicial process. Agent may
enter any of any Borrower’s premises or other premises without legal process
and without incurring liability to any Borrower therefor, and Agent may
thereupon, or at any time thereafter, in its discretion without notice or
demand, take the Collateral and remove the same to such place as Agent may deem
advisable and Agent may require Borrowers to make the Collateral available to
Agent at a convenient place. With or without having the Collateral at the time
or place of sale, Agent may sell the Collateral, or any part thereof, at public
or private sale, at any time or place, in one or more sales, at such price or
prices, and upon such terms, either for cash, credit or future delivery, as
Agent may elect. Except as to that part of the Collateral which is perishable
or threatens to decline speedily in value or is of a type customarily sold on a
recognized market, Agent shall give Borrowers reasonable notification of such
sale or sales, it being agreed that in all events written notice mailed to
Borrowing Agent at least ten (10) days prior to such sale or sales is
reasonable notification. At any public sale Agent or any Lender may bid for and
become the purchaser, and Agent, any Lender or any other purchaser at any such
sale thereafter shall hold the Collateral sold absolutely free from any claim
or right of whatsoever kind, including any equity of redemption and all such claims,
rights and equities are hereby expressly waived and released by each Borrower. In
connection with the exercise of the foregoing remedies, including the sale of
Inventory, Agent is granted a perpetual nonrevocable, royalty free,
nonexclusive license and Agent is granted permission to use all of each
Borrower’s (a) trademarks, trade styles, trade names, patents, patent
applications, copyrights, service marks, licenses, franchises and other
proprietary rights which are used or useful in connection with Inventory for
the purpose of marketing, advertising for sale and selling or otherwise
disposing of such Inventory and (b) Equipment for the purpose of
completing any unfinished job, contract, project or assignment as deemed
necessary by Agent. The cash proceeds realized from the sale of any Collateral
shall be applied to the Obligations in the order set forth in Section 11.5
hereof. Noncash proceeds will only be applied to the Obligations as they are
converted into cash. If any deficiency shall arise, Borrowers shall remain
liable to Agent and Lenders therefor.

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(b)           To the extent that
Applicable Law imposes duties on the Agent to exercise remedies in a
commercially reasonable manner, each Borrower 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 Customers or other Persons obligated on Collateral or to remove Liens
on or any adverse claims against Collateral, (iv) to exercise collection
remedies against Customers 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 any Borrower, 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. Each Borrower acknowledges that the purpose of this Section 11.1(b) 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 11.1(b). Without limitation upon the foregoing,
nothing contained in this Section 11.1(b) shall be construed to grant
any rights to any Borrower or to impose any duties on Agent that would not have
been granted or imposed by this Agreement or by Applicable Law in the absence
of this Section 11.1(b).

(c)           With respect to
Trace Energy (Canada) and any Collateral held or owned by it, upon the
occurrence of and during the continuance of any Event of Default, Agent may
appoint or reappoint by instrument in writing, any Person or Persons, whether
an officer or officers or an employee or employees of Agent or not, to be an
interim receiver, receiver or receivers (hereinafter called a “Receiver”,
which term when used herein shall include a receiver and manager) of Collateral
(including any interest, income or profits therefrom) and may remove any
Receiver so appointed and appoint another in his/her/its stead. Any such
Receiver shall, so far as concerns responsibility for his/her/its acts, be
deemed the agent of Trace Energy (Canada) and not Agent and Agent shall not be
in any way responsible for any misconduct, negligence or non-feasance on the
part of any such Receiver or his/her/its servants, agents or employees. Subject
to the provisions of the instrument appointing him/her/it, any such Receiver
shall have power to take possession of Collateral, to preserve Collateral or
its value, to carry on or concur in carrying on all or any part of the business
of Trace Energy (Canada) and to sell, lease, licence or

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otherwise dispose of or concur in selling, leasing,
licensing or otherwise disposing of Collateral. To facilitate the foregoing
powers, any such Receiver may, to the exclusion of all others, including Agent,
enter upon, use and occupy all premises owned or occupied by Agent wherein
Collateral may be situate, maintain Collateral upon such premises, borrow money
on a secured or unsecured basis and use Collateral directly in carrying on the
business of Trace Energy (Canada) or as security for loans or advances to
enable the Receiver to carry on the business or Trace Energy (Canada) or
otherwise, as such Receiver shall, in its discretion, determine. Except as may
be otherwise directed by Agent, all money received from time to time by such
Receiver in carrying out his/her/its appointment shall be received in trust for
and be paid over to Agent. Every such Receiver may, in the discretion of Agent,
be vested with all or any of the rights and powers of Agent.

11.2.        Agent’s
Discretion. Agent shall have the right in its sole discretion to determine
which rights, Liens, security interests or remedies Agent may at any time
pursue, relinquish, subordinate, or modify or to take any other action with
respect thereto and such determination will not in any way modify or affect any
of Agent’s or Lenders’ rights hereunder.

11.3.      Setoff. Subject to Section 14.12,
in addition to any other rights which Agent or any Lender may have under
Applicable Law, upon the occurrence of an Event of Default hereunder, Agent and
such Lender shall have a right, immediately and without notice of any kind, to
apply any Borrower’s property held by Agent and such Lender to reduce the
Obligations.

11.4.      Rights and Remedies not Exclusive. The
enumeration of the foregoing rights and remedies is not intended to be
exhaustive and the exercise of any rights or remedy shall not preclude the
exercise of any other right or remedies provided for herein or otherwise
provided by law, all of which shall be cumulative and not alternative.

11.5.      Allocation of Payments After Event of
Default. Notwithstanding any other provisions of this Agreement to the
contrary, after the occurrence and during the continuance of an Event of
Default, all amounts collected or received by the Agent on account of the Obligations
or any other amounts outstanding under any of the Other Documents or in respect
of the Collateral may, at Agent’s discretion, be paid over or delivered as
follows:

FIRST, to the payment of all reasonable out-of-pocket
costs and expenses (including reasonable attorneys’ fees) of the Agent in
connection with enforcing its rights and the rights of the Lenders under this
Agreement and the Other Documents and any protective advances made by the Agent
with respect to the Collateral under or pursuant to the terms of this Document;

SECOND, to payment of any fees owed to the Agent;

THIRD, to the payment of all reasonable out-of-pocket
costs and expenses (including reasonable attorneys’ fees) of each of the
Lenders in connection with enforcing its rights under this Agreement and the
Other Documents or otherwise with respect to the Obligations owing to such
Lender;

FOURTH, to the payment of all of the Obligations
consisting of accrued fees and interest;

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FIFTH, to the payment of the outstanding principal
amount of the Obligations (including the payment or cash collateralization of
any outstanding Letters of Credit);

SIXTH, to all other Obligations and other obligations
which shall have become due and payable under the Other Documents or otherwise
and not repaid pursuant to clauses “FIRST” through “FIFTH” above; and

SEVENTH, to the payment of the surplus, if any, to
whoever may be lawfully entitled to receive such surplus.

In carrying out the foregoing, (i) amounts
received shall be applied in the numerical order provided until exhausted prior
to application to the next succeeding category; (ii) each of the Lenders
shall receive (so long as it is not a Defaulting Lender) an amount equal to its
pro rata share (based on the proportion that the then outstanding Advances held
by such Lender bears to the aggregate then outstanding Advances) of amounts
available to be applied pursuant to clauses “FOURTH”, “FIFTH” and “SIXTH”
above; and (iii) to the extent that any amounts available for distribution
pursuant to clause “FIFTH” above are attributable to the issued but undrawn
amount of outstanding Letters of Credit, such amounts shall be held by the
Agent in a cash collateral account and applied (A) first, to reimburse the
Issuer from time to time for any drawings under such Letters of Credit and (B) then,
following the expiration of all Letters of Credit, to all other obligations of
the types described in clauses “FIFTH” and “SIXTH” above in the manner provided
in this Section 11.5.

XII          WAIVERS
AND JUDICIAL PROCEEDINGS.

12.1.      Waiver of Notice. Each Borrower
hereby waives notice of intent to accelerate, notice of acceleration, notice of
non-payment of any of the Receivables, demand, presentment, protest and notice
thereof with respect to any and all instruments, notice of acceptance hereof,
notice of intent to accelerate, notice of acceleration, notice of loans or
advances made, credit extended, Collateral received or delivered, or any other
action taken in reliance hereon, and all other demands and notices of any
description, except such as are expressly provided for herein.

12.2.      Delay. No delay or omission on
Agent’s or any Lender’s part in exercising any right, remedy or option shall
operate as a waiver of such or any other right, remedy or option or of any
Default or Event of Default.

12.3.      Jury Waiver. EACH PARTY TO THIS
AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM,
DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING UNDER THIS AGREEMENT OR ANY
OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT OR
ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER
NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE AND EACH PARTY HEREBY CONSENTS THAT ANY SUCH

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CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE
DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE
AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS
WRITTEN EVIDENCE OF THE CONSENTS OF THE PARTIES HERETO TO THE WAIVER OF THEIR
RIGHT TO TRIAL BY JURY.

12.4.      Waiver of Rights Under Texas Deceptive
Trade Practices Act. BORROWERS HEREBY WAIVE THEIR RIGHTS UNDER THE
DECEPTIVE TRADE PRACTICES—CONSUMER PROTECTION ACT, SECTION 17.41 ET SEQ.,
TEXAS BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL
RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF BORROWERS’ OWN
SELECTION, BORROWERS VOLUNTARILY CONSENT TO THIS WAIVER. BORROWERS EXPRESSLY
WARRANT AND REPRESENT THAT BORROWERS (A) RE NOT IN A SIGNIFICANTLY
DISPARATE BARGAINING POSITION RELATIVE TO AGENT AND/OR ANY LENDER, AND (B) HAVE
BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT.

XIII         EFFECTIVE
DATE AND TERMINATION.

13.1.        Term.
This Agreement, which shall inure to the benefit of and shall be binding upon
the respective successors and permitted assigns of each Borrower, Agent and
each Lender, shall become effective on the date hereof and shall continue in
full force and effect until June __, 2009 (the “Term”) unless sooner
terminated as herein provided. Borrowers may terminate this Agreement at any
time upon ninety (90) days’ prior written notice upon payment in full of the
Obligations. In the event the Obligations are prepaid in full prior to the last
day of the Term (the date of such prepayment hereinafter referred to as the “Early
Termination Date”), Borrowers shall pay to Agent for the benefit of Lenders an
early termination fee in an amount equal to (x) $360,000.00 if the Early
Termination Date occurs on or after the Closing Date to and including the date
immediately preceding the first anniversary of the Closing Date, (y) $240,000.00
if the Early Termination Date occurs on or after the first anniversary of the
Closing Date to and including the date immediately preceding the second
anniversary of the Closing Date, and (z) $120,000.00 if the Early
Termination Date occurs on or after the second anniversary of the Closing Date
to and including the date immediately preceding the third anniversary of the
Closing Date; provided, however, that if the Early Termination
Date occurs within 180 days of the last day of the Term, Borrowers shall not
have to pay the early termination fee.

13.2.        Termination.
The termination of the Agreement shall not affect any Borrower’s, Agent’s or
any Lender’s rights, or any of the Obligations having their inception prior to
the effective date of such termination, and the provisions hereof shall
continue to be fully operative until all transactions entered into, rights or
interests created or Obligations have been fully and indefeasibly paid,
disposed of, concluded or liquidated. The security interests, Liens and rights
granted to Agent and Lenders hereunder and the financing statements filed
hereunder shall continue in full force and effect, notwithstanding the
termination of this Agreement or the fact that Borrowers’ Account may from time
to time be temporarily in a zero or credit position, until all of the
Obligations of each Borrower have been indefeasibly paid and performed in full
after

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the termination of this Agreement or each Borrower has
furnished Agent and Lenders with an indemnification satisfactory to Agent and
Lenders with respect thereto. Accordingly, each Borrower waives any rights
which it may have under the Uniform Commercial Code to demand the filing of
termination statements with respect to the Collateral, and Agent shall not be
required to send such termination statements to each Borrower, or to file them
with any filing office, unless and until this Agreement shall have been
terminated in accordance with its terms and all Obligations have been
indefeasibly paid in full in immediately available funds. All representations,
warranties, covenants, waivers and agreements contained herein shall survive
termination hereof until all Obligations are indefeasibly paid and performed in
full.

XIV         REGARDING
AGENT.

14.1.      Appointment. Each Lender hereby
designates PNC to act as Agent for such Lender under this Agreement and the
Other Documents. Each Lender hereby irrevocably authorizes Agent to take such
action on its behalf under the provisions of this Agreement and the Other
Documents and to exercise such powers and to perform such duties hereunder and
thereunder as are specifically delegated to or required of Agent by the terms
hereof and thereof and such other powers as are reasonably incidental thereto
and Agent shall hold all Collateral, payments of principal and interest, fees
(except the fees set forth in Sections 3.3(a) and 3.4), charges and
collections (without giving effect to any collection days) received pursuant to
this Agreement, for the ratable benefit of Lenders. Agent may perform any of
its duties hereunder by or through its agents or employees. As to any matters
not expressly provided for by this Agreement (including collection of the Note)
Agent shall not be required to exercise any discretion or take any action, but
shall be required to act or to refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instructions of the
Required Lenders, and such instructions shall be binding; provided, however,
that Agent shall not be required to take any action which exposes Agent to
liability or which is contrary to this Agreement or the Other Documents or
Applicable Law unless Agent is furnished with an indemnification reasonably
satisfactory to Agent with respect thereto.

14.2.      Nature of Duties. Agent shall have
no duties or responsibilities except those expressly set forth in this
Agreement and the Other Documents. Neither Agent nor any of its officers,
directors, employees or agents shall be (i) liable for any action taken or
omitted by them as such hereunder or in connection herewith, unless caused by
their gross (not mere) negligence or willful misconduct (as determined by a
court of competent jurisdiction in a final non-appealable judgment), or (ii) responsible
in any manner for any recitals, statements, representations or warranties made
by any Borrower or any officer thereof contained in this Agreement, or in any
of the Other Documents or in any certificate, report, statement or other
document referred to or provided for in, or received by Agent under or in
connection with, this Agreement or any of the Other Documents or for the value,
validity, effectiveness, genuineness, due execution, enforceability or
sufficiency of this Agreement, or any of the Other Documents or for any failure
of any Borrower to perform its obligations hereunder. Agent shall not be under
any obligation to any Lender to ascertain or to inquire as to the observance or
performance of any of the agreements contained in, or conditions of, this
Agreement or any of the Other Documents, or to inspect the properties, books or
records of any Borrower. The duties of Agent as respects the Advances to Borrowers
shall be mechanical and administrative in nature; Agent shall not have by
reason of this Agreement a fiduciary relationship in respect of any Lender; and

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nothing in this Agreement, expressed or implied, is
intended to or shall be so construed as to impose upon Agent any obligations in
respect of this Agreement except as expressly set forth herein.

14.3.      Lack of Reliance on Agent and
Resignation. Independently and without reliance upon Agent or any other
Lender, each Lender has made and shall continue to make (i) its own
independent investigation of the financial condition and affairs of each
Borrower and any Guarantor in connection with the making and the continuance of
the Advances hereunder and the taking or not taking of any action in connection
herewith, and (ii) its own appraisal of the creditworthiness of each
Borrower and any Guarantor. Agent shall have no duty or responsibility, either
initially or on a continuing basis, to provide any Lender with any credit or
other information with respect thereto, whether coming into its possession
before making of the Advances or at any time or times thereafter except as
shall be provided by any Borrower pursuant to the terms hereof. Agent shall not
be responsible to any Lender for any recitals, statements, information,
representations or warranties herein or in any agreement, document, certificate
or a statement delivered in connection with or for the execution,
effectiveness, genuineness, validity, enforceability, collectability or
sufficiency of this Agreement or any Other Document, or of the financial
condition of any Borrower or any Guarantor, or be required to make any inquiry
concerning either the performance or observance of any of the terms, provisions
or conditions of this Agreement, the Note, the Other Documents or the financial
condition of any Borrower, or the existence of any Event of Default or any
Default.

Agent may resign on sixty (60) days’ written notice to
each of Lenders and Borrowing Agent and upon such resignation, the Required
Lenders will promptly designate a successor Agent reasonably satisfactory to
Borrowers.

Any such successor Agent shall succeed to the rights,
powers and duties of Agent, and the term “Agent” shall mean such successor
agent effective upon its appointment, and the former Agent’s rights, powers and
duties as Agent shall be terminated, without any other or further act or deed
on the part of such former Agent. After any Agent’s resignation as Agent, the
provisions of this Article XIV shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.

14.4.        Certain
Rights of Agent. If Agent shall request instructions from Lenders with
respect to any act or action (including failure to act) in connection with this
Agreement or any Other Document, Agent shall be entitled to refrain from such
act or taking such action unless and until Agent shall have received
instructions from the Required Lenders; and Agent shall not incur liability to
any Person by reason of so refraining. Without limiting the foregoing, Lenders
shall not have any right of action whatsoever against Agent as a result of its
acting or refraining from acting hereunder in accordance with the instructions
of the Required Lenders.

14.5.      Reliance. Agent shall be entitled
to rely, and shall be fully protected in relying, upon any note, writing,
resolution, notice, statement, certificate, telex, teletype or telecopier
message, cablegram, order or other document or telephone message believed by it
to be genuine and correct and to have been signed, sent or made by the proper
person or entity, and, with respect to all legal matters pertaining to this
Agreement and the Other Documents and its duties hereunder, upon advice of
counsel selected by it. Agent may employ agents and attorneys-in-

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fact and shall not be liable for the default or
misconduct of any such agents or attorneys-in-fact selected by Agent with
reasonable care.

14.6.      Notice of Default. Agent shall not
be deemed to have knowledge or notice of the occurrence of any Default or Event
of Default hereunder or under the Other Documents, unless Agent has received
notice from a Lender or Borrowing Agent referring to this Agreement or the
Other Documents, describing such Default or Event of Default and stating that
such notice is a “NOTICE OF DEFAULT”. In the event that Agent receives such a
notice, Agent shall give notice thereof to Lenders. Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders; provided, that, unless and until Agent shall
have received such directions, Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default
or Event of Default as it shall deem advisable in the best interests of
Lenders.

14.7.      Indemnification. To the extent
Agent is not reimbursed and indemnified by Borrowers, each Lender will
reimburse and indemnify Agent in proportion to its respective portion of the
Advances (or, if no Advances are outstanding, according to its Commitment
Percentage), from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by or
asserted against Agent in performing its duties hereunder, or in any way
relating to or arising out of this Agreement or any Other Document (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO ANY
OTHERWISE INDEMNIFIED MATTER ARISING FROM AGENT’S NEGLIGENCE OR STRICT
LIABILITY BUT NOT AGENT’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT);
provided that, Lenders shall not be liable for any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting from Agent’s gross (not mere) negligence or
willful misconduct (as determined by a court of competent jurisdiction in a
final non-appealable judgment).

14.8.      Agent in its Individual Capacity. With
respect to the obligation of Agent to lend under this Agreement, the Advances
made by it shall have the same rights and powers hereunder as any other Lender
and as if it were not performing the duties as Agent specified herein; and the
term “Lender” or any similar term shall, unless the context clearly otherwise
indicates, include Agent in its individual capacity as a Lender. Agent may
engage in business with any Borrower as if it were not performing the duties
specified herein, and may accept fees and other consideration from any Borrower
for services in connection with this Agreement or otherwise without having to
account for the same to Lenders.

14.9.      Delivery of Documents. To the
extent Agent receives financial statements required under Sections 9.7, 9.8,
9.9, 9.13 and 9.14 or Borrowing Base Certificates from any Borrower pursuant to
the terms of this Agreement which any Borrower is not obligated to deliver to
each Lender, Agent will promptly furnish such documents and information to
Lenders.

14.10.    Borrowers’ Undertaking to Agent. Without
prejudice to their respective obligations to Lenders under the other provisions
of this Agreement, each Borrower hereby undertakes with Agent to pay to Agent
from time to time on demand all amounts from time to time due and payable by it
for the account of Agent or Lenders or any of them pursuant to this

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Agreement to the extent not already paid. Any payment
made pursuant to any such demand shall pro tanto satisfy the relevant Borrower’s
obligations to make payments for the account of Lenders or the relevant one or
more of them pursuant to this Agreement.

14.11.      No
Reliance on Agent’s Customer Identification Program. Each Lender
acknowledges and agrees that neither such Lender, nor any of its Affiliates,
participants or assignees, may rely on the Agent to carry out such Lender’s,
Affiliate’s, participant’s or assignee’s customer identification program, or
other obligations required or imposed under or pursuant to the USA PATRIOT Act
or the regulations thereunder, including the regulations contained in 31 CFR 103.121
(as hereafter amended or replaced, the “CIP Regulations”), or any other
Anti-Terrorism Law, including any programs involving any of the following items
relating to or in connection with any Borrower, its Affiliates or its agents,
this Agreement, the Other Documents or the transactions hereunder or
contemplated hereby: (1) any identity verification procedures, (2) any
record-keeping, (3) comparisons with government lists, (4) customer
notices or (5) other procedures required under the CIP Regulations or such
other laws.

14.12.    Other Agreements. Each of the Lenders
agrees that it shall not, without the express consent of Agent, and that it
shall, to the extent it is lawfully entitled to do so, upon the request of
Agent, set off against the Obligations, any amounts owing by such Lender to any
Borrower or any deposit accounts of any Borrower now or hereafter maintained
with such Lender. Anything in this Agreement to the contrary notwithstanding,
each of the Lenders further agrees that it shall not, unless specifically
requested to do so by Agent, take any action to protect or enforce its rights
arising out of this Agreement or the Other Documents, it being the intent of
Lenders that any such action to protect or enforce rights under this Agreement
and the Other Documents shall be taken in concert and at the direction or with
the consent of Agent or Required Lenders.

XV          BORROWING
AGENCY.

15.1.      Borrowing Agency Provisions.

(a)           Each Borrower hereby
irrevocably designates Borrowing Agent to be its attorney and agent and in such
capacity to borrow, sign and endorse notes, and execute and deliver all
instruments, documents, writings and further assurances now or hereafter
required hereunder, on behalf of such Borrower or Borrowers, and hereby
authorizes Agent to pay over or credit all loan proceeds hereunder in
accordance with the request of Borrowing Agent.

(b)           The handling of this
credit facility as a co-borrowing facility with a borrowing agent in the manner
set forth in this Agreement is solely as an accommodation to Borrowers and at
their request. Neither Agent nor any Lender shall incur liability to Borrowers
as a result thereof. To induce Agent and Lenders to do so and in consideration
thereof, each Borrower hereby indemnifies Agent and each Lender and holds Agent
and each Lender harmless from and against any and all liabilities, expenses,
losses, damages and claims of damage or injury asserted against Agent or any
Lender by any Person arising from or incurred by reason of the handling of the
financing arrangements of Borrowers as provided herein, reliance by Agent or
any Lender on any request or instruction from Borrowing Agent or any other
action taken by Agent or any Lender with respect to this Section 15.1
except due to willful misconduct or gross

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(not mere) negligence by the indemnified party (as
determined by a court of competent jurisdiction in a final and non-appealable
judgment).

(c)           All Obligations
shall be joint and several, and each Borrower shall make payment upon the
maturity of the Obligations by acceleration or otherwise, and such obligation
and liability on the part of each Borrower shall in no way be affected by any
extensions, renewals and forbearance granted to Agent or any Lender to any
Borrower, failure of Agent or any Lender to give any Borrower notice of
borrowing or any other notice, any failure of Agent or any Lender to pursue or
preserve its rights against any Borrower, the release by Agent or any Lender of
any Collateral now or thereafter acquired from any Borrower, and such agreement
by each Borrower to pay upon any notice issued pursuant thereto is
unconditional and unaffected by prior recourse by Agent or any Lender to the
other Borrowers or any Collateral for such Borrower’s Obligations or the lack
thereof. Each Borrower waives all suretyship defenses.

15.2.      Waiver of Subrogation. Each
Borrower expressly waives any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution of any other claim which such Borrower may
now or hereafter have against the other Borrowers or other Person directly or
contingently liable for the Obligations hereunder, or against or with respect
to the other Borrowers’ property (including, without limitation, any property
which is Collateral for the Obligations), arising from the existence or
performance of this Agreement, until termination of this Agreement and
repayment in full of the Obligations.

XVI         MISCELLANEOUS.

16.1.      Governing Law. This Agreement shall
be governed by and construed in accordance with the laws of the State of Texas
applied to contracts to be performed wholly within the State of Texas. Any
judicial proceeding brought by or against any Borrower with respect to any of
the Obligations, this Agreement, the Other Documents or any related agreement
may be brought in any court of competent jurisdiction in the State of Texas,
United States of America, and, by execution and delivery of this Agreement,
each Borrower accepts for itself and in connection with its properties,
generally and unconditionally, the non-exclusive jurisdiction of the aforesaid
courts, and irrevocably agrees to be bound by any judgment rendered thereby in
connection with this Agreement. Each Borrower hereby waives personal service of
any and all process upon it and consents that all such service of process may be
made by registered mail (return receipt requested) directed to Borrowing Agent
at its address set forth in Section 16.6 and service so made shall be
deemed completed five (5) days after the same shall have been so deposited
in the mails of the United States of America, or, at the Agent’s option, by
service upon Borrowing Agent which each Borrower irrevocably appoints as such
Borrower’s Agent for the purpose of accepting service within the State of Texas.
Nothing herein shall affect the right to serve process in any manner permitted
by law or shall limit the right of Agent or any Lender to bring proceedings
against any Borrower in the courts of any other jurisdiction. Each Borrower
waives any objection to jurisdiction and venue of any action instituted hereunder
and shall not assert any defense based on lack of jurisdiction or venue or
based upon forum non conveniens. Each Borrower waives the right to remove any
judicial proceeding brought against such Borrower in any state court to any
federal court. Any judicial proceeding by any Borrower against Agent or any
Lender involving, directly or indirectly, any matter or claim in any way

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arising out of, related to or connected with this
Agreement or any related agreement, shall be brought only in a federal or state
court located in the County of Dallas, State of Texas.

16.2.      Entire Understanding.

(a)           THIS AGREEMENT AND THE DOCUMENTS EXECUTED CONCURRENTLY HEREWITH CONTAIN
THE ENTIRE UNDERSTANDING AMONG BORROWER, AGENT AND EACH LENDER AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES AND SUPERSEDES ALL PRIOR AGREEMENTS AND
UNDERSTANDINGS, IF ANY, RELATING TO THE SUBJECT MATTER HEREOF. THERE ARE NO
UNWRITTEN AGREEMENTS AMONG THE PARTIES. Any promises, representations,
warranties or guarantees not herein contained and hereinafter made shall have
no force and effect unless in writing, signed by each Borrower’s, Agent’s and
each Lender’s respective officers. Neither this Agreement nor any portion or
provisions hereof may be changed, modified, amended, waived, supplemented,
discharged, cancelled or terminated orally or by any course of dealing, or in
any manner other than by an agreement in writing, signed by the party to be
charged. Each Borrower acknowledges that it has been advised by counsel in
connection with the execution of this Agreement and Other Documents and is not
relying upon oral representations or statements inconsistent with the terms and
provisions of this Agreement.

(b)           The Required
Lenders, Agent with the consent in writing of the Required Lenders, and
Borrowers may, subject to the provisions of this Section 16.2 (b), from
time to time enter into written supplemental agreements to this Agreement or
the Other Documents executed by Borrowers, for the purpose of adding or
deleting any provisions or otherwise changing, varying or waiving in any manner
the rights of Lenders, Agent or Borrowers thereunder or the conditions,
provisions or terms thereof of waiving any Event of Default thereunder, but only
to the extent specified in such written agreements; provided, however, that no
such supplemental agreement shall, without the consent of all Lenders:

(i)            increase
the Commitment Percentage, the maximum dollar commitment of any Lender or the
Maximum Loan Amount.

(ii)           extend
the maturity of any Note or the due date for any amount payable hereunder, or
decrease the rate of interest or reduce any fee payable by Borrowers to Lenders
pursuant to this Agreement.

(iii)          alter
the definition of the term Required Lenders or alter, amend or modify this Section 16.2(b).

(iv)          release
any Collateral during any calendar year (other than in accordance with the
provisions of this Agreement) having an aggregate value in excess of
$1,000,000.

(v)           change
the rights and duties of Agent.

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(vi)          permit
any Revolving Advance to be made if after giving effect thereto the total of
Revolving Advances outstanding hereunder would exceed the Formula Amount for
more than sixty (30) consecutive Business Days or exceed one hundred and five percent
(105%) of the Formula Amount.

(vii)         increase
the Advance Rates above the Advance Rates in effect on the Closing Date.

(viii)        release
any Guarantor.

Any such supplemental agreement shall apply equally to
each Lender and shall be binding upon Borrowers, Lenders and Agent and all
future holders of the Obligations. In the case of any waiver, Borrowers, Agent
and Lenders shall be restored to their former positions and rights, and any
Event of Default waived shall be deemed to be cured and not continuing, but no
waiver of a specific Event of Default shall extend to any subsequent Event of
Default (whether or not the subsequent Event of Default is the same as the
Event of Default which was waived), or impair any right consequent thereon.

In the event that Agent requests the consent of a
Lender pursuant to this Section 16.2 and such Lender shall not respond or
reply to Agent in writing within five (5) days of delivery of such
request, such Lender shall be deemed to have consented to the matter that was
the subject of the request. In the event that Agent requests the consent of a
Lender pursuant to this Section 16.2 and such consent is denied, then PNC
may, at its option, require such Lender to assign its interest in the Advances
to PNC or to another Lender or to any other Person designated by the Agent (the
“Designated Lender”), for a price equal to (i) the then outstanding
principal amount thereof plus (ii) accrued and unpaid interest and fees
(but not including any fees payable with respect to the termination of this
Agreement before the expiration of the Term) then due such Lender, which
interest and fees shall be paid when collected from Borrowers. In the event PNC
elects to require any Lender to assign its interest to PNC or to the Designated
Lender, PNC will so notify such Lender in writing within forty five (45) days
following such Lender’s denial, and such Lender will assign its interest to PNC
or the Designated Lender no later than five (5) days following receipt of
such notice pursuant to a Commitment Transfer Supplement executed by such
Lender, PNC or the Designated Lender, as appropriate, and Agent.

Notwithstanding (a) the existence of a Default or
an Event of Default, (b) that any of the other applicable conditions
precedent set forth in Section 8.2 hereof have not been satisfied or (c) any
other provision of this Agreement, Agent may at its discretion and without the
consent of the Required Lenders, voluntarily permit the outstanding Revolving
Advances at any time to exceed an amount equal to the Formula Amount by up to
ten percent (10%) for up to thirty (30) consecutive Business Days (the “Out-of-Formula
Loans”). If Agent is willing in its sole and absolute discretion to make such
Out-of-Formula Loans, such Out-of-Formula Loans shall be payable on demand and
shall bear interest at the Default Rate; provided that, if Lenders do make
Out-of-Formula Loans, neither Agent nor Lenders shall be deemed thereby to have
changed the limits of Section 2.1(a). For purposes of this paragraph, the
discretion granted to Agent hereunder shall not preclude involuntary
overadvances that may result from time to time due to the fact that the Formula
Amount was unintentionally exceeded for any reason, including, but not limited
to, Collateral previously deemed to be “Eligible Receivables,” becomes
ineligible,

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collections of Receivables applied to reduce
outstanding Revolving Advances are thereafter returned for insufficient funds
or overadvances are made to protect or preserve the Collateral. In the event
Agent involuntarily permits the outstanding Revolving Advances to exceed the
Formula Amount by more than ten percent (10%), Agent shall use its efforts to
have Borrowers decrease such excess in as expeditious a manner as is
practicable under the circumstances and not inconsistent with the reason for
such excess. Revolving Advances made after Agent has determined the existence
of involuntary overadvances shall be deemed to be involuntary overadvances and
shall be decreased in accordance with the preceding sentence.

In addition to (and not in substitution of) the
discretionary Revolving Advances permitted above in this Section 16.2, the
Agent is hereby authorized by Borrowers and the Lenders, from time to time in
the Agent’s sole discretion, (A) after the occurrence and during the
continuation of a Default or an Event of Default, or (B) at any time that
any of the other applicable conditions precedent set forth in Section 8.2
hereof have not been satisfied, to make Revolving Advances to Borrowers on
behalf of the Lenders which the Agent, in its reasonable business judgment,
deems necessary or desirable (a) to preserve or protect the Collateral, or
any portion thereof, (b) to enhance the likelihood of, or maximize the
amount of, repayment of the Advances and other Obligations, or (c) to pay
any other amount chargeable to Borrowers pursuant to the terms of this
Agreement; provided, that at any time after giving effect to any such Revolving
Advances the outstanding Revolving Advances do not exceed one hundred and ten
percent (110%) of the Formula Amount.

16.3.      Successors and Assigns; Participations;
New Lenders.

(a)           This Agreement shall
be binding upon and inure to the benefit of Borrowers, Agent, each Lender, all
future holders of the Obligations and their respective successors and assigns,
except that no Borrower may assign or transfer any of its rights or obligations
under this Agreement without the prior written consent of Agent and each
Lender.

(b)           Each Borrower
acknowledges that in the regular course of commercial banking business one or
more Lenders may at any time and from time to time sell participating interests
in the Advances to other financial institutions (each such transferee or
purchaser of a participating interest, a “Participant”). Each Participant may
exercise all rights of payment (including rights of set-off) with respect to
the portion of such Advances held by it or other Obligations payable hereunder
as fully as if such Participant were the direct holder thereof provided that
Borrowers shall not be required to pay to any Participant more than the amount
which it would have been required to pay to Lender which granted an interest in
its Advances or other Obligations payable hereunder to such Participant had
such Lender retained such interest in the Advances hereunder or other
Obligations payable hereunder and in no event shall Borrowers be required to
pay any such amount arising from the same circumstances and with respect to the
same Advances or other Obligations payable hereunder to both such Lender and
such Participant. Each Borrower hereby grants to any Participant a continuing
security interest in any deposits, moneys or other property actually or
constructively held by such Participant as security for the Participant’s
interest in the Advances.

(c)           Any Lender may with
the consent of Agent which shall not be unreasonably withheld or delayed sell,
assign or transfer all or any part of its rights under this

 94
 

 

Agreement and the Other Documents to one or more
additional banks or financial institutions and one or more additional banks or
financial institutions may commit to make Advances hereunder (each a “Purchasing
Lender”, and together with each Participant, each a “Transferee” and
collectively the “Transferees”), in minimum amounts of not less than
$5,000,000, pursuant to a Commitment Transfer Supplement, executed by a
Purchasing Lender, the transferor Lender, and Agent and delivered to Agent for
recording. Upon such execution, delivery, acceptance and recording, from and
after the transfer effective date determined pursuant to such Commitment
Transfer Supplement, (i) Purchasing Lender thereunder shall be a party
hereto and, to the extent provided in such Commitment Transfer Supplement, have
the rights and obligations of a Lender thereunder with a Commitment Percentage
as set forth therein, and (ii) the transferor Lender thereunder shall, to
the extent provided in such Commitment Transfer Supplement, be released from
its obligations under this Agreement, the Commitment Transfer Supplement
creating a novation for that purpose. Such Commitment Transfer Supplement shall
be deemed to amend this Agreement to the extent, and only to the extent,
necessary to reflect the addition of such Purchasing Lender and the resulting
adjustment of the Commitment Percentages arising from the purchase by such
Purchasing Lender of all or a portion of the rights and obligations of such
transferor Lender under this Agreement and the Other Documents. Each Borrower
hereby consents to the addition of such Purchasing Lender and the resulting
adjustment of the Commitment Percentages arising from the purchase by such
Purchasing Lender of all or a portion of the rights and obligations of such
transferor Lender under this Agreement and the Other Documents. Borrowers shall
execute and deliver such further documents and do such further acts and things
in order to effectuate the foregoing.

(d)           Agent shall maintain
at its address a copy of each Commitment Transfer Supplement delivered to it
and a register (the “Register”) for the recordation of the names and addresses
of each Lender and the outstanding principal, accrued and unpaid interest and
other fees due hereunder. The entries in the Register shall be conclusive, in
the absence of manifest error, and Borrowers, Agent and Lenders may treat each
Person whose name is recorded in the Register as the owner of the Advance
recorded therein for the purposes of this Agreement. The Register shall be
available for inspection by Borrowers or any Lender at any reasonable time and
from time to time upon reasonable prior notice. Agent shall receive a fee in
the amount of $3,500 payable by the applicable Purchasing Lender upon the
effective date of each transfer or assignment to such Purchasing Lender.

(e)           Each Borrower
authorizes each Lender to disclose to any Transferee and any prospective
Transferee any and all financial information in such Lender’s possession
concerning such Borrower which has been delivered to such Lender by or on
behalf of such Borrower pursuant to this Agreement or in connection with such
Lender’s credit evaluation of such Borrower.

16.4.        Application
of Payments. Agent shall have the continuing and exclusive right to apply
or reverse and re-apply any payment and any and all proceeds of Collateral to
any portion of the Obligations. To the extent that any Borrower makes a payment
or Agent or any Lender receives any payment or proceeds of the Collateral for
any Borrower’s benefit, which are subsequently invalidated, declared to be
fraudulent or preferential, set aside or required to be repaid to a trustee, debtor
in possession, receiver, custodian or any other party under any bankruptcy law,
common law or equitable cause, then, to such extent, the Obligations or part

 95
 

 

thereof intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by Agent or such
Lender.

16.5.      Indemnity. Each Borrower shall
indemnify and defend Agent, each Lender and each of their respective officers,
directors, Affiliates, attorneys, employees and agents from and against any and
all liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses and disbursements of any kind or nature whatsoever
(including fees and disbursements of counsel) which may be imposed on, incurred
by, or asserted against Agent or any Lender in any claim, litigation,
proceeding or investigation instituted or conducted by any Governmental Body or
instrumentality or any other Person with respect to any aspect of, or any
transaction contemplated by, or referred to in, or any matter related to, this
Agreement or the Other Documents, whether or not Agent or any Lender is a party
thereto, except to the extent that any of the foregoing arises out of the
willful misconduct of the party being indemnified (as determined by a court of
competent jurisdiction in a final and non-appealable judgment). WITHOUT LIMITING THE FOREGOING, (i) IT IS THE
INTENTION OF BORROWERS, AND BORROWERS AGREE, THAT THE INDEMNITY PROVISIONS AND
EXCULPATORY PROVISIONS CONTAINED IN THIS AGREEMENT SHALL APPLY WITH RESPECT TO
LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS,
SETTLEMENTS, SUITS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND WHATSOEVER
(INCLUDING, WITHOUT LIMITATION, FEES AND DISBURSEMENTS OF COUNSEL), WHICH IN
WHOLE OR IN PART ARE CAUSED BY OR ARISE OUT OF THE NEGLIGENCE OF ANY PARTY
TO BE INDEMNIFIED, AND (ii) this indemnity shall extend to any
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses and disbursements of any kind or nature whatsoever
(including fees and disbursements of counsel) asserted against or incurred by
any of the indemnitees described above in this Section 16.5 by any Person
under any Environmental Laws or similar laws by reason of any Borrower’s or any
other Person’s failure to comply with laws applicable to solid or hazardous
waste materials, including Hazardous Substances and Hazardous Waste, or other
Toxic Substances. Additionally, if any taxes (excluding taxes imposed upon or
measured solely by the net income of Agent and Lenders, but including any
intangibles taxes, stamp tax, recording tax or franchise tax) shall be payable
by Agent, Lenders or Borrowers on account of the execution or delivery of this
Agreement, or the execution, delivery, issuance or recording of any of the
Other Documents, or the creation or repayment of any of the Obligations
hereunder, by reason of any Applicable Law now or hereafter in effect,
Borrowers will pay (or will promptly reimburse Agent and Lenders for payment
of) all such taxes, including interest and penalties thereon, and will
indemnify and hold the indemnitees described above in this Section 16.5
harmless from and against all liability in connection therewith.

16.6.      Notice. Any notice or request
hereunder may be given to Borrowing Agent or any Borrower or to Agent or any
Lender at their respective addresses set forth below or at such other address
as may hereafter be specified in a notice designated as a notice of change of
address under this Section. Any notice, request, demand, direction or other
communication (for purposes of this Section 16.6 only, a “Notice”) to be
given to or made upon any party hereto under any provision of this Loan
Agreement shall be given or made by telephone or in writing (which includes by
means of electronic transmission (i.e., “e-mail”) or facsimile transmission or
by setting forth such Notice on a site on the World Wide Web (a “Website
Posting”) if Notice of

 96
 

 

such Website Posting (including the information
necessary to access such site) has previously been delivered to the applicable
parties hereto by another means set forth in this Section 16.6) in
accordance with this Section 16.6. Any such Notice must be delivered to
the applicable parties hereto at the addresses and numbers set forth under
their respective names on Section 16.6 hereof or in accordance with any
subsequent unrevoked Notice from any such party that is given in accordance
with this Section 16.6. Any Notice shall be effective:

(a)           In the case of
hand-delivery, when delivered;

(b)           If given by mail,
four days after such Notice is deposited with the United States Postal Service,
with first-class postage prepaid, return receipt requested;

(c)           In the case of a
telephonic Notice, when a party is contacted by telephone, if delivery of such
telephonic Notice is confirmed no later than the next Business Day by hand
delivery, a facsimile or electronic transmission, a Website Posting or an
overnight courier delivery of a confirmatory Notice (received at or before noon
on such next Business Day);

(d)           In the case of a
facsimile transmission, when sent to the applicable party’s facsimile machine’s
telephone number, if the party sending such Notice receives confirmation of the
delivery thereof from its own facsimile machine;

(e)           In the case of
electronic transmission, when actually received;

(f)            In the case of a
Website Posting, upon delivery of a Notice of such posting (including the
information necessary to access such site) by another means set forth in this Section 16.6;
and

(g)           If given by any
other means (including by overnight courier), when actually received.

Any Lender giving a Notice to Borrowing Agent or any
Borrower shall concurrently send a copy thereof to the Agent, and the Agent
shall promptly notify the other Lenders of its receipt of such Notice.

(A)          If to Agent or PNC at:

                PNC
Bank, National Association

                2100 Ross Avenue, Suite 1850

                Dallas, TX 75201

                Attention:              Relationship
Manager (Geokinetics)

 

                with a copy to

 

                PNC Bank, National Association

                Two Tower Center Boulevard

                East Brunswick, New Jersey 08816

                Attention:              Josephine
Griffin

 97
 

 

                Telephone:            (732)
220-4388

                Facsimile:               (732)
220-4394

 

                with an additional copy to:

 

                Patton Boggs
LLP

                2001 Ross Avenue, Suite 3000

                Dallas, Texas 75201

                Attention:              Michelle
W. Suarez

                Telephone:            (214)
758-1500

                Facsimile:               (214) 758-1550

 

(B)           If to a Lender other than Agent, as
specified on the signature pages hereof

 

(C)           If to Borrowing Agent or any
Borrower:

 

                Geokinetics Inc.

                One Riverway, Suite 2100

                Houston, Texas 77056

                Attention:              Thomas
J. Concannon

                Telephone:            (713)
840-3313

                Facsimile:               (713)
850-7330

 

                with a copy to:

 

                Chamberlain,
Hrdlicka, White, Williams & Martin

                1200 Smith Street, 14th Floor

                Houston, Texas 77002

                Attention:              James
J. Spring, III

                Telephone:            (713)
658-1818

                Facsimile:               (713) 658-2553

 

16.7.      Survival. The obligations of
Borrowers under Sections 2.2(f), 3.7, 3.8, 3.9, 4.18(h), and 16.5 and the
obligations of Lenders under Section 14.7, shall survive termination of
this Agreement and the Other Documents and payment in full of the Obligations.

16.8.      Severability. If any part of this
Agreement is contrary to, prohibited by, or deemed invalid under Applicable
Laws or regulations, such provision shall be inapplicable and deemed omitted to
the extent so contrary, prohibited or invalid, but the remainder hereof shall
not be invalidated thereby and shall be given effect so far as possible.

16.9.        Expenses.
All costs and expenses including, without limitation, all search, audit,
appraisal, recording, professional and filing fees and expenses and reasonable
attorneys’ fees (including the allocated costs of in-house counsel) and all
other expenses and disbursements incurred by Agent on its behalf or on behalf
of Lenders and Lenders (a) in all efforts made to enforce payment of any
Obligation or effect collection of any Collateral, or (b) in connection
with the entering into, documenting, negotiating, structuring, reviewing and
closing this

 98
 

 

Agreement and the modification, amendment,
administration, monitoring, and enforcement of this Agreement or any consents
or waivers hereunder and all related agreements, documents and instruments, or (c) in
instituting, monitoring, maintaining, preserving, enforcing and foreclosing on
Agent’s security interest in or Lien on any of the Collateral, or monitoring,
maintaining, preserving or enforcing any of Agent’s or any Lender’s rights
hereunder and under all related agreements, documents and instruments, whether
through judicial proceedings or otherwise, or (d) in defending or
prosecuting any actions or proceedings arising out of or relating to Agent’s or
any Lender’s transactions with any Borrower, or (e) in connection with any
advice given to Agent or any Lender with respect to its rights and obligations
under this Agreement and all related agreements, documents and instruments, may
be charged to Borrowers’ Account and shall be part of the Obligations.

16.10.    Injunctive Relief. Each Borrower
recognizes that, in the event any Borrower fails to perform, observe or
discharge any of its obligations or liabilities under this Agreement, or
threatens to fail to perform, observe or discharge such obligations or
liabilities, any remedy at law may prove to be inadequate relief to Lenders;
therefore, Agent, if Agent so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
that actual damages are not an adequate remedy.

16.11.      Consequential
Damages. Neither Agent nor any Lender, nor any agent or attorney for any of
them, shall be liable to any Borrower or any Guarantor (or any Affiliate of any
such Person) for indirect, punitive, exemplary or consequential damages arising
from any breach of contract, tort or other wrong relating to the establishment,
administration or collection of the Obligations or as a result of any
transaction contemplated under this Agreement or any Other Document.

16.12.    Captions. The captions at various
places in this Agreement are intended for convenience only and do not
constitute and shall not be interpreted as part of this Agreement.

16.13.      Counterparts;
Facsimile Signatures. This Agreement may be executed in any number of and
by different parties hereto on separate counterparts, all of which, when so
executed, shall be deemed an original, but all such counterparts shall
constitute one and the same agreement. Any signature delivered by a party by
facsimile transmission shall be deemed to be an original signature hereto.

16.14.    Construction. The parties acknowledge
that each party and its counsel have reviewed this Agreement and that the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of this Agreement or any amendments, schedules or exhibits thereto.

16.15.    Confidentiality; Sharing Information.

Agent, each Lender and each Transferee shall hold all
non-public information obtained by Agent, such Lender or such Transferee
pursuant to the requirements of this Agreement in accordance with Agent’s, such
Lender’s and such Transferee’s customary procedures for handling confidential
information of this nature; provided, however, Agent, each Lender and each
Transferee may disclose such confidential information (a) to its
examiners, Affiliates,

 99
 

 

outside auditors, counsel and other professional
advisors, (b) to Agent, any Lender or to any prospective Transferees, and (c) as
required or requested by any Governmental Body or representative thereof or
pursuant to legal process; provided, further that (i) unless specifically
prohibited by Applicable Law or court order, Agent, each Lender and each
Transferee shall use its reasonable best efforts prior to disclosure thereof,
to notify the applicable Borrower of the applicable request for disclosure of
such non-public information (A) by a Governmental Body or representative
thereof (other than any such request in connection with an examination of the
financial condition of a Lender or a Transferee by such Governmental Body) or (B) pursuant
to legal process and (ii) in no event shall Agent, any Lender or any
Transferee be obligated to return any materials furnished by any Borrower other
than those documents and instruments in possession of Agent or any Lender in
order to perfect its Lien on the Collateral once the Obligations have been paid
in full and this Agreement has been terminated. Each Borrower acknowledges that
from time to time financial advisory, investment banking and other services may
be offered or provided to such Borrower or one or more of its Affiliates (in
connection with this Agreement or otherwise) by any Lender or by one or more
Subsidiaries or Affiliates of such Lender and each Borrower hereby authorizes
each Lender to share any information delivered to such Lender by such Borrower
and its Subsidiaries pursuant to this Agreement, or in connection with the
decision of such Lender to enter into this Agreement, to any such Subsidiary or
Affiliate of such Lender, it being understood that any such Subsidiary or
Affiliate of any Lender receiving such information shall be bound by the
provisions of this Section 16.15 as if it were a Lender hereunder. Such
authorization shall survive the repayment of the other Obligations and the
termination of this Agreement.

16.16.    Publicity. Each Borrower and each
Lender hereby authorizes Agent to make appropriate announcements of the
financial arrangement entered into among Borrowers, Agent and Lenders,
including announcements which are commonly known as tombstones, in such
publications and to such selected parties as Agent shall in its sole and
absolute discretion deem appropriate.

16.17.    Non-Applicability of Chapter 346.

Borrowers, Agent and each Lender hereby agree that,
except for the opt-out provisions of Section 346.004 thereof, the
provisions of Chapter 346 of the Texas Finance Code (regulating certain
revolving credit loans and revolving tri-party accounts) shall not apply to
this Agreement or any of the Other Documents.

16.18.    Certifications From Banks and
Participants; US PATRIOT Act. Each Lender or assignee or participant of a
Lender that is not incorporated under the Laws of the United States of America
or a state thereof (and is not excepted from the certification requirement
contained in Section 313 of the USA PATRIOT Act and the applicable
regulations because it is both (i) an affiliate of a depository
institution or foreign bank that maintains a physical presence in the
United States or foreign country, and (ii) subject to supervision by a
banking authority regulating such affiliated depository institution or foreign
bank) shall deliver to the Agent the certification, or, if applicable,
recertification, certifying that such Lender is not a “shell” and certifying to
other matters as required by Section 313 of the USA PATRIOT Act and the
applicable regulations: (1) within 10 days after the Closing Date, and (2) as
such other times as are required under the USA PATRIOT Act.

 100

 

Each of the parties has signed this Agreement as of
the day and year first above written.

	
  ATTEST:

  	
   

  	
  GEOKINETICS INC.,

  
	
   

  	
   

  	
  as Borrowing Agent and as a Borrower

  
	
   

  	
   

  	
   

  
	
  /s/ Michael A. Schott

  	
   

  	
  By:

  	
  /s/ Thomas J. Concannon

  
	
   

  	
   

  	
  Name:

  	
  Thomas J. Concannon

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  GEOPHYSICAL DEVELOPMENT CORPORATION,

  
	
   

  	
   

  	
  as a Borrower

  
	
   

  	
   

  	
   

  
	
  /s/ Michael A. Schott

  	
   

  	
  By:

  	
  /s/ Thomas J. Concannon

  
	
   

  	
   

  	
  Name:

  	
  Thomas J. Concannon

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  QUANTUM GEOPHYSICAL, INC.,

  
	
   

  	
   

  	
  as a Borrower

  
	
   

  	
   

  	
   

  
	
  /s/ Michael A. Schott

  	
   

  	
  By:

  	
  /s/ Thomas J. Concannon

  
	
   

  	
   

  	
  Name:

  	
  Thomas J. Concannon

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  TRACE ENERGY SERVICES LTD.,

  
	
   

  	
   

  	
  as a Borrower

  
	
   

  	
   

  	
   

  
	
  /s/ Michael A. Schott

  	
   

  	
  By:

  	
  /s/ Thomas J. Concannon

  
	
   

  	
   

  	
  Name:

  	
  Thomas J. Concannon

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  	
   

  
	
  ATTEST:

  	
   

  	
  TRACE ENERGY SERVICES, INC.,

  
	
   

  	
   

  	
  as a Borrower

  
	
   

  	
   

  	
   

  
	
  /s/ Michael A. Schott

  	
   

  	
  By:

  	
  /s/ Thomas J. Concannon

  
	
   

  	
   

  	
  Name:

  	
  Thomas J. Concannon

  
	
   

  	
   

  	
  Title:

  	
  Vice President

  

 

 

 

	
  

  	
  PNC BANK, NATIONAL ASSOCIATION,

  
	
   

  	
  as Lender and as Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Terrance O. McKinney

  
	
   

  	
   

  	
  Terrance O. McKinney

  
	
   

  	
   

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
  Commitment Percentage: 100%

  

 

 

 

	
  STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

On this           
day of                             ,
2006, before me personally came                                                         ,
to me known, who, being by me duly sworn, did depose and say that s/he is the                                     
of                                               ,
the corporation described in and which executed the foregoing instrument; and
that s/he signed her/his name thereto by order of the board of directors of
said corporation.

	
  

  	
   

  
	
   

  	
  Notary Public

  

 

	
  STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

On this           
day of                             ,
2006, before me personally came                                                         ,
to me known, who, being by me duly sworn, did depose and say that s/he is the                                     
of                                               ,
the corporation described in and which executed the foregoing instrument; and
that s/he signed her/his name thereto by order of the board of directors of
said corporation.

	
  

  	
   

  
	
   

  	
  Notary Public

  

 

	
  STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

On this           
day of                             ,
2006, before me personally came                                                         ,
to me known, who, being by me duly sworn, did depose and say that s/he is the                                     
of                                               ,
the corporation described in and which executed the foregoing instrument; and
that s/he signed her/his name thereto by order of the board of directors of
said corporation.

	
  

  	
   

  
	
   

  	
  Notary Public

  

 

 

 

	
  STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

On this           
day of                             ,
2006, before me personally came                                                         ,
to me known, who, being by me duly sworn, did depose and say that s/he is the                                     
of                                               ,
the corporation described in and which executed the foregoing instrument; and
that s/he signed her/his name thereto by order of the board of directors of
said corporation.

	
  

  	
   

  
	
   

  	
  Notary Public

  

 

	
  STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

On this           
day of                             ,
2006, before me personally came                                                         ,
to me known, who, being by me duly sworn, did depose and say that s/he is the                                     
of                                               ,
the corporation described in and which executed the foregoing instrument; and
that s/he signed her/his name thereto by order of the board of directors of
said corporation.

	
  

  	
   

  
	
   

  	
  Notary Public

  

 

	
  STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

On this           
day of                             ,
2006, before me personally came                                                             ,
to me known, who, being by me duly sworn, did depose and say that s/he is the                                     
of PNC BANK, NATIONAL ASSOCIATION, and that s/he was authorized to sign her/his
name thereto.

	
  

  	
   

  
	
   

  	
  Notary Public

  

 

 

LIST OF EXHIBITS
AND SCHEDULES

	
  Exhibits

  	
   

  
	
   

  	
   

  
	
  Exhibit 1.2

  	
  Borrowing Base Certificate

  
	
  Exhibit 2.1(a)

  	
  Revolving Credit Note

  
	
  Exhibit 2.4(a)

  	
  Term Note

  
	
  Exhibit 5.5(b)

  	
  Financial Projections

  
	
  Exhibit 8.1(k)

  	
  Financial Condition Certificate

  
	
  Exhibit 16.3

  	
  Commitment Transfer Supplement

  
	
   

  	
   

  
	
  Schedules

  	
   

  
	
   

  	
   

  
	
  Schedule 1.2

  	
  Permitted Encumbrances

  
	
  Schedule 4.5

  	
  Equipment and Inventory Locations

  
	
  Schedule 4.15(c)

  	
  Chief Executive Office Locations

  
	
  Schedule 4.15(h)

  	
  Deposit and Investment Accounts

  
	
  Schedule 4.19

  	
  Real Property

  
	
  Schedule 5.1

  	
  Consents

  
	
  Schedule 5.2(a)

  	
  States of Qualification and Good Standing

  
	
  Schedule 5.2(b)

  	
  Subsidiaries

  
	
  Schedule 5.4

  	
  Federal Tax Identification Number

  
	
  Schedule 5.6

  	
  Prior Names

  
	
  Schedule 5.7

  	
  Environmental

  
	
  Schedule 5.8(b)

  	
  Litigation

  
	
  Schedule 5.8(d)

  	
  Plans

  
	
  Schedule 5.9

  	
  Intellectual Property, Source Code Escrow Agreements

  
	
  Schedule 5.10

  	
  Licenses and Permits

  
	
  Schedule 5.14

  	
  Labor Disputes

  
	
  Schedule 7.3

  	
  Guarantees

  
	
  Schedule 7.8

  	
  Permitted IndebtednessExhibit No. 10.29

SECURITY AGREEMENT

This SECURITY AGREEMENT is made as of February 16,
2006 between the lenders listed on the signature page hereto (hereinafter,
collectively, the “Secured Parties”)
and Access Pharmaceuticals, Inc., a Delaware corporation with its chief
executive office located at 2600 Stemmons Freeway, Suite 176, Dallas,
Texas 75207, Attention:  President  (the “Debtor”).

W I T N E S S E T
H:

WHEREAS, on the date hereof, the Debtor has issued in favor
of each of the Secured Parties, promissory notes (each a “Note”
and collectively the “Notes”), in the aggregate principal amount of Five
Million Dollars ($5,000,000); such Notes have been issued pursuant to the terms
of a Convertible Note and Warrant Purchase Agreement (the “Purchase
Agreement”) of even date herewith between the
Debtor and the Secured Parties; and

WHEREAS,
it is a condition precedent to the Secured Parties’ making any loans under
Purchase Agreement and the Notes or
otherwise extending credit to the Debtor that the Debtor execute and deliver to
the Lenders this Security Agreement;

NOW, THEREFORE, in consideration of the
premises and to induce the Secured Parties to extend the loans to the Debtor
pursuant to the Notes, the Debtor hereby agrees with the Secured Parties as
follows:

1.             Defined Terms.

(a)           Unless otherwise
defined herein, terms, which are defined in the Note  and used herein, shall have the meanings
ascribed to such terms in the Note.

(b)           The following terms
which are defined in Article 9 are used herein as so defined:  Accessions, Accounts, Chattel Paper,
Commercial Tort Claims, Deposit Accounts, Documents, Equipment, General
Intangibles, Goods, Instruments, Inventory, Investment Property, Letters of
Credit, Letter-of-Credit Rights, Payment Intangibles, Proceeds, Promissory
Notes, Software and Supporting Obligations.

(c)           The following terms
shall have the following meanings:

“Article 9” means Article 9 of
the Code as in effect from time to time.

“Code” means the Uniform Commercial Code
as from time to time in effect in the State of New York, including,
specifically, Article 9.

“Collateral” shall have the meaning
assigned to it in Section 2 of this Security Agreement.

 1
 

 

“Contracts” means the separate contracts
between the Debtor and third parties (including without limitation its
customers), as the same may from time to time be amended, supplemented or
otherwise modified, including, without limitation, (a) all rights of the
Debtor to receive moneys due and to become due to it thereunder or in
connection therewith, (b) all rights of the Debtor to damages arising out
of, or for, breach or default in respect thereof and (c) all rights of the
Debtor to perform and to exercise all remedies thereunder; but excluding any
contracts, the assignment or hypothecation of which, for collateral purposes,
would result in a default or require, or cause, a forfeiture or permit a
revocation of material rights under such contract.

“Copyrights” means (a) all
copyrights of the United States or any other country, (b) all copyright
registrations filed in the United States or in any other country, and (c) all
Proceeds thereof.

“Copyright License” means any Contract
providing for the grant by Debtor of any right to use any Copyright.

“Customer Contracts” means Contracts
between the Debtor and its customers.

“Encumbrance” or “Encumbrances” means any security
interest, mortgage, pledge, lien, claim, charge, encumbrance, title retention
agreement, lessor’s interest under a financing lease or any analogous
arrangements in any of properties or assets of Debtor, intended as, or having
the effect of, security.

“Event of Default” as defined in each
Note.

“Governmental Authority” means any
Federal, state, local or foreign court, commission or tribunal, or
governmental, administrative or regulatory agency, department, authority,
instrumentality or other body.

“Material Adverse Effect” means a
material adverse effect on the condition (financial or otherwise), assets,
liabilities, business, results of operations or prospects of the Debtor, taken
as a whole.

“Obligations” means all principal,
interest, fees, charges, collateral protection expenses, enforcement costs and
other sums (in each case whether pre-or-post petition) due or to become due and
payable by Debtor to any of the Secured Parties under the Notes, this Agreement
or the Purchase Agreement.

“Patents” means (a) all patents of
the United States and all reissues and extensions thereof, (b) all
applications for patents of the United States and all divisions, continuations
and continuations-in-part thereof or any other country, and (c) all
Proceeds thereof.

“Patent License” means any Contract
providing for the grant by Debtor of any right to manufacture, use or sell any
invention covered by a Patent.

 2
 

 

“Permitted Encumbrances” means any of
the following Encumbrances that exist or that the Debtor may create or incur or
suffer to be created or incurred or to exist : (i) liens to secure taxes,
assessments and other government charges in respect of obligations not overdue
or liens on properties to secure claims for labor, material or supplies in
respect of obligations not overdue; (ii)  deposits or pledges made in
connection with, or to secure payment of, workmen’s compensation, unemployment
insurance, old age pensions or other social security obligations; (iii)  liens
of carriers, warehousemen, mechanics and materialmen, and other like liens on
properties in existence less than 180 days from the date of creation thereof in
respect of obligations not overdue; (iv) encumbrances on real estate
consisting of easements, rights of way, zoning restrictions, restrictions on
the use of real property and defects and irregularities in the title thereto,
landlord’s or lessor’s liens under leases to which the Debtor is a party, and
other minor liens or encumbrances none of which in the opinion of the Debtor
interferes materially with the use of the property affected in the ordinary
conduct of business of the Debtor, which defects do not individually or in the
aggregate have a Material Adverse Effect; (v)  purchase money
security interests in or purchase money mortgages on real or personal property
to secure purchase money indebtedness, incurred in connection with the
acquisition of such property, which security interests or mortgages cover only
the real or personal property so acquired or (vi) security interests in
the sale and lease back of real and personal property, the aggregate value of
which does not exceed $500,000 during the term of the Note (such aggregate
value limitation to include any encumbrances on the assets of any subsidiary of
the Company pursuant to Section 5(e)(vi) of the Note).

“Person” means an individual,
partnership, corporation, limited liability company, business trust, joint
stock company, trust, unincorporated association, joint venture or other entity
of whatever nature, whether public or private.

“Requirement of Law” means any
requirement of law, rule, regulation or guideline of any Governmental
Authority.

“Security Agreement” means this Security
Agreement, as amended, supplemented, restated or otherwise modified from time
to time.

“Software License” means any agreement,
written or oral, providing for the grant by Debtor of any right to use any
Software.

“Source Code”
means all source code and all updates, releases and/or new versions of the
Software.

“Trademarks” means (a) all
trademarks, trade names, corporate names, company names, business names,
fictitious business names, trade styles, service marks, logos and other source
or business identifiers and the goodwill associated therewith, now existing or
hereafter adopted or acquired, all registrations and recordings thereof, and
all applications in connection therewith, whether registered in the United
States Patent and Trademark Office or in any similar office or agency of the
United States, any State thereof or any 

 3
 

 

other country or any
political subdivision thereof or otherwise, (b) all renewals thereof, and (c) all
Proceeds thereof, including the goodwill of the business connected with the use
of and symbolized by the Trademarks.

“Trademark License” means any Contract
providing for the grant by Debtor of any right to use any Trademark.

2.             Grant of Security Interest.

(a)           As collateral
security for the prompt and complete payment and performance when due of the
Obligations, the Debtor hereby grants to the Secured Parties a security
interest in all properties, assets and rights of the Debtor now owned or at any
time hereafter acquired by the Debtor or in which the Debtor now has or at any
time in the future may acquire any right, title or interest, wherever located
or situated and however defined or classified under Article 9, including,
without limitation, all of the property described in clause (b) below  (collectively, the “Collateral”).

(b)           Without limitation
of the foregoing, the Collateral includes all of Debtor’s right, title and
interest in the following at all times:

	
  (i)

  	
   

  	
  all Accounts;

  
	
  (ii)

  	
   

  	
  all Chattel Paper;

  
	
  (iii)

  	
   

  	
  all Commercial Tort
  Claims;

  
	
  (iv)

  	
   

  	
  all Contracts;

  
	
  (v)

  	
   

  	
  all Copyrights;

  
	
  (vi)

  	
   

  	
  all Copyright Licenses;

  
	
  (vii)

  	
   

  	
  all Deposit Accounts;

  
	
  (viii)

  	
   

  	
  all Documents;

  
	
  (ix)

  	
   

  	
  all Equipment;

  
	
  (x)

  	
   

  	
  all General
  Intangibles;

  
	
  (xi)

  	
   

  	
  all Goods;

  
	
  (xii)

  	
   

  	
  all Instruments;

  
	
  (xiii)

  	
   

  	
  all Inventory;

  

 

 4
 

 

 

	
  (xiv)

  	
   

  	
  all Investment
  Property;

  
	
  (xv)

  	
   

  	
  all Letter-of-Credit
  Rights

  
	
  (xvi)

  	
   

  	
  all Letters of Credit;

  
	
  (xvii)

  	
   

  	
  all Patents;

  
	
  (xviii)

  	
   

  	
  all Patent Licenses;

  
	
  (xix)

  	
   

  	
  all Payment
  Intangibles;

  
	
  (xx)

  	
   

  	
  all Promissory Notes;

  
	
  (xxi)

  	
   

  	
  all Software
  (including, without limitation, any Source Code thereto, all Software
  Licenses and any Patents or Copyrights associated therewith);

  
	
  (xxii)

  	
   

  	
  all Supporting
  Obligations;

  
	
  (xxiii)

  	
   

  	
  all Trademarks;

  
	
  (xxiv)

  	
   

  	
  all Trademark Licenses;

  
	
  (xxv)

  	
   

  	
  all Proceeds, all
  Accessions and additions thereto and all substitutions and replacements
  therefor and products of any and all of the foregoing.

  

 

3.             Rights of Secured Parties; Limitations on Secured
Parties’ Obligations.

(a)           Debtor Remains
Liable under Accounts and Contracts. Anything herein to the contrary
notwithstanding, the Debtor shall remain liable under each of the Accounts and
Contracts to observe and perform all the conditions and obligations to be
observed and performed by it thereunder, all in accordance with the terms of
any agreement giving rise to each such Account and in accordance with and
pursuant to the terms and provisions of each such Contract. None of the Secured
Parties shall have any obligation or liability under any Account (or any
agreement giving rise thereto) or under any Contract by reason of or arising
out of this Security Agreement or the receipt by any Secured Party of any
payment relating to such Account or Contract pursuant hereto, nor shall any
Secured Party be obligated in any manner to perform any of the obligations of
the Debtor under or pursuant to any Account (or any agreement giving rise
thereto) or under or pursuant to any Contract, to make any payment, to make any
inquiry as to the nature or the sufficiency of any payment received by it or as
to the sufficiency of any performance by any party under any Account (or any
agreement giving rise thereto) or under any Contract, to present or file any
claim, to take any action to enforce any performance or to 

 5
 

 

collect the
payment of any amounts which may have been assigned to it or to which it may be
entitled at any time or times.

(b)           Notice to Account
Debtors and Contracting Parties. At any time after the occurrence of an
Event of Default, upon the request of any Secured Party, the Debtor shall
notify account debtors on the Accounts and parties to the Contracts that the
Accounts and the Contracts have been assigned to the Secured Parties, and that
payments in respect thereof shall be made directly to them. Upon the occurrence
of an Event of Default, the Secured Parties, may in its own name or in the name
of others communicate with account debtors on the Accounts and parties to the
Contracts to verify with them to the Secured Parties’ reasonable satisfaction
the existence, amount and terms of any Accounts or Contracts.

4.             Representations and Warranties. The Debtor hereby
represents and warrants to the Secured Parties that (a) it is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, (b) it has the corporate power and
authority to own or hold under lease the Collateral, to transact the business
it transacts and proposes to transact, to execute and deliver this Security
Agreement and to perform the provisions hereof, (c) this Security
Agreement has been duly authorized by all necessary corporate action on the
part of the Debtor and constitutes a legal, valid and binding obligation of the
Debtor enforceable against the Debtor in accordance with its terms, except as
such enforceability may be limited by (i) applicable bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other similar
laws affecting the enforcement of creditors’ rights generally and (ii) general
principles of equity (regardless of whether such enforceability is considered
in a proceeding in equity or at law), (d) the execution, delivery and
performance by the Debtor of this Security Agreement will not (i) to the
knowledge of the Debtor, contravene, result in any breach of, or constitute a
default under, or result in the creation of any lien (other than those provided
for in this Security Agreement) in respect of any property of the Debtor under,
any indenture, mortgage, deed of trust, loan, purchase or credit agreement,
lease, the Debtor’s articles of incorporation or bylaws, or any other material
agreement or instrument to which the Debtor is a party or by which the Debtor
or any of its properties may be bound or affected; (ii) conflict with or
result in a breach of any of the terms, conditions or provisions of any order,
judgment, decree, or ruling of any court, arbitrator or Governmental Authority
applicable to the Debtor, or (iii) to the knowledge of the Debtor, violate
any provision of any statute or other rule or regulation of any
Governmental Authority applicable to the Debtor, (e) except for the
Encumbrances granted pursuant to this Security Agreement and  Permitted Encumbrances, the Debtor owns each
item of the Collateral free and clear of any and all Encumbrances or claims of
others,  and (f)  except in
connection with Permitted Encumbrances, no security agreement, financing
statement or other public notice with respect to all or any part of the
Collateral is on file or of record in any public office, except such as may
have been filed in favor of the Secured Parties.

5.             Covenants. The Debtor covenants and agrees with the
Secured Parties that, from and after the date of this Security Agreement until
the Obligations are paid in full:

(a)           Further
Documentation; Pledge of Instruments and Chattel Paper. Upon the occurrence
of an Event of Default, and upon the written request of the Secured Parties, 

 6
 

 

and at the sole
expense of the Debtor, the Debtor will promptly and duly execute and deliver
such further instruments and documents and take such further action as the
Secured Parties may reasonably request for the purpose of obtaining or
preserving the full benefits of this Security Agreement and of the rights and
powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in
effect in any jurisdiction with respect to the Encumbrances created hereby. The
Debtor also hereby authorizes the Secured Parties to file any such financing or
continuation statement. A carbon, photographic or other reproduction of this
Security Agreement shall be sufficient as a financing statement for filing in
any jurisdiction. If any amount payable under or in connection with any of the
Collateral shall be or become evidenced by any Instrument or Chattel Paper,
such Instrument or Chattel Paper shall be delivered to the Secured Parties (if
requested by the Secured Parties), duly endorsed in a manner satisfactory to
the Secured Parties  to be held as
Collateral pursuant to this Security Agreement.

(b)           Indemnification.
Following the occurrence of any Event of Default, in any suit, proceeding or
action brought by any Secured Party under any Account or Contract for any sum
owing thereunder, or to enforce any provisions of any Account or Contract, the
Debtor will save, indemnify and keep the Secured Parties harmless from and against
all expense, loss or damage suffered by reason of any defense, setoff,
counterclaim, recoupment or reduction or liability whatsoever of the account
debtor or obligor thereunder, arising out of a breach by the Debtor of any
obligation thereunder or arising out of any other agreement, indebtedness or
liability at any time owing to or in favor of such account debtor or obligor or
its successors from the Debtor.

(c)           Maintenance of
Records. The Debtor will keep and maintain at its own cost and expense satisfactory
and complete records of the Collateral, including, without limitation, a record
of all payments received and all credits granted with respect to the Accounts. The
Debtor will mark its books and records pertaining to the Collateral to evidence
this Security Agreement and the security interests granted hereby. The Secured
Parties shall have a security interest in all of the Debtor’s books and records
pertaining to the Collateral, and the Debtor shall make any such books and
records available to the Secured Parties or to their representatives during
normal business hours for their review at the request of the Secured Parties
upon reasonable prior notice.

(d)           Right of
Inspection. The Secured Parties shall at all times but no more than once
every six (6) months and upon reasonable prior notice have full and free
access during normal business hours to all the books, correspondence and
records of the Debtor, and the Secured Parties or their respective
representatives may examine the same, take extracts therefrom and make
photocopies thereof, and the Debtor agrees to render to the Secured Parties, at
the Debtor’s cost and expense, such clerical and other assistance as may be
reasonably requested with regard thereto. The Secured Parties and their
representatives shall at any reasonable time, but no more than once every six (6) months,
and upon reasonable prior notice also have the right to enter into and upon any
premises where any of the Inventory or Equipment is located for the purpose of
inspecting the same, observing its use or otherwise protecting its
interests-therein.

 7
 

 

(e)           Compliance with
Laws, etc. The Debtor will comply in all material respects with all
Requirements of Law applicable to the Collateral or any part thereof or to the
operation of the Debtor’s business; provided, however, that the Debtor may
contest any Requirement of Law in any reasonable manner which shall not, in the
opinion of the Secured Parties, adversely affect the Secured Parties’ rights or
the priority of its Encumbrances on the Collateral.

(f)            Compliance with
Terms of Contracts, etc. The Debtor will perform and comply in all material
respects with all its obligations under the Contracts and all its other
contractual obligations relating to the Collateral except where such nonperformance
and noncompliance could not reasonably be expected to have a Material Adverse
Effect.

(g)           Payment of
Obligations. The Debtor will pay promptly when due all taxes, assessments
and governmental charges or levies imposed upon the Collateral or in respect of
its income or profits therefrom, as well as all claims of any kind (including,
without limitation, claims for labor, materials and supplies) against or with
respect to the Collateral, except that no such charge need be paid if (i) the
validity thereof is being contested in good faith by appropriate proceedings, (ii) such
proceedings do not involve any material danger of the sale, forfeiture or loss
of any of the Collateral or any interest therein and (iii) such charge is
adequately reserved against on the Debtor’s books in accordance with generally
accepted accounting principles.

(h)           Limitation on
Encumbrances on Collateral. The Debtor will not create, incur or permit to
exist, will defend the Collateral against, and will take such other action as
is necessary to remove, any Encumbrance or claim on or to the Collateral, other
than the Encumbrances created hereby or Permitted Encumbrances, and will defend
the right, title and interest of the Secured Parties in and to any of the
Collateral against other claims and demands of all Persons whomsoever.

(i)            Limitations on
Dispositions of Collateral. The Debtor will not sell, transfer, lease or
otherwise dispose of any of the Collateral, or attempt, offer or contract to do
so except for (x) sales of Inventory in the ordinary course of its
business and (y) so long as no Event of Default has occurred, the
disposition in the ordinary course of business of property not material to the
conduct of its business.

(j)            Limitations on
Modifications, Waivers, Extensions of Contracts and Agreements Giving Rise to
Accounts. The Debtor will not (i) amend, modify, terminate or waive
any provision of any Contract or any agreement giving rise to an Account in any
manner which could reasonably be expected to materially adversely affect the
value of all Contracts and Accounts as Collateral when examined in the
aggregate or (ii) fail to exercise promptly and diligently each and every
material right which it may have under each Contract and each agreement giving
rise to an Account where such failure could reasonably be expected to have a
Material Adverse Effect on the value of all Contracts and Accounts when
examined in the aggregate.

 8

 

(k)           Maintenance of
Equipment. The Debtor will maintain each item of Equipment in good
operating condition, ordinary wear and tear and immaterial impairments of value
and damage by the elements excepted, and will provide all maintenance, service
and repairs necessary for such purpose except where the failure to maintain
such Equipment could not reasonably be expected to have a Material Adverse
Effect.

(l)            Further
Identification of Collateral. The Debtor will furnish to the Secured
Parties from time to time, but no more than once per year, statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Secured Parties may reasonably
request, all in reasonable detail.

(m)          Notices. The
Debtor will advise the Secured Parties promptly, in reasonable detail, (i) of
any Encumbrance (other than Encumbrances created hereby or Permitted
Encumbrances) on, or claim asserted against, any of the Collateral, (ii) of
any notice sent by a Secured Party of the occurrence of an Event of Default
under such Secured Party’s Note and (iii) of the occurrence of any other
event which could reasonably be expected to have a Material Adverse Effect on
the aggregate value of the Collateral or on the Encumbrances created hereunder.

(o)           Changes in
Locations, Name, etc. The Debtor shall provide Secured Parties with at
least thirty (30) days prior written notice in the event of either (i) a
change the location of its chief executive office/chief place of business or
jurisdiction of incorporation or remove its books and records from such
location, or (ii) change its name, identity or corporate structure to such
an extent that any financing statement filed by the Secured Parties in
connection with this Security Agreement would become seriously misleading.

(p)           Patents,
Copyrights, Software, Trademarks and General Intangibles.

(i)            Whenever Debtor shall file an
application for the registration of any Patent, Software or Trademark with the
United States Patent and Trademark Office or any Copyright or Software with the
United States Copyright Office or any similar office or agency in any other
country or any political subdivision thereof, Debtor shall report such filing
to the Secured Parties within five (5) business days after the last day of
the fiscal quarter in which such filing occurs.

(ii)           The Debtor shall execute and deliver
any and all agreements, instruments, documents, and papers as the Secured
Parties may reasonably request to evidence the Secured Parties’ security interest
in any Patent, Copyright, Software, General Intangible or Trademark and the
goodwill of Debtor relating thereto or represented thereby, and Debtor hereby
constitutes the each of the Secured Parties as its attorney-in-fact to execute
and file all such writings for the foregoing purposes, all acts of such
attorney being hereby ratified and confirmed; such power being coupled with an
interest is irrevocable until the Obligations are paid in full.

 9
 

 

(iii)          The Debtor will take all reasonable
and necessary steps, including, without limitation, in any proceeding before
the United States Patent and Trademark Office, or any similar office or agency
in any other country or any political subdivision thereof, to maintain and
pursue each application (and to obtain the relevant registration) and to
maintain each registration of any registered Patents, Copyrights, Software,
General Intangibles or Trademarks, including, without limitation, filing of
applications for renewal, affidavits of use and affidavits of incontestability.

(iv)          In the event that any material Patent,
Copyright, Software, General Intangible or Trademark included in the Collateral
is infringed, misappropriated or diluted by a third party, Debtor shall
promptly notify the Secured Parties after it learns thereof and shall, unless
Debtor shall reasonably determine that such Patent, Copyright, Software,
General Intangible or Trademark is of negligible economic value to Debtor,
promptly sue for infringement, misappropriation or dilution, to seek injunctive
relief where appropriate and to recover any and all damages for such
infringement, misappropriation or dilution, or take such other actions as
Debtor shall reasonably deem appropriate under the circumstances to protect
such Patent, Copyright, Software, General Intangible or Trademark.

(q)           Commercial Tort
Claims. The Debtor shall promptly notify the Secured Parties in writing
upon incurring or otherwise obtaining a Commercial Tort Claim against any third
party, and upon request of the Secured Parties, promptly enter into an
amendment to this Security Agreement and do such other acts or things deemed
appropriate by the Secured Parties to give the Secured Parties a security
interest in any such Commercial Tort Claim.

6.             Secured
Parties’ Appointment as Attorney-in-Fact.

(a)           Powers. During
the existence of an Event of Default, the Debtor hereby irrevocably constitutes
and appoints each of the Secured Parties with full power of substitution, as
its true and lawful attorney-in-fact with full irrevocable power and authority
in the place and stead of Debtor and in the name of Debtor or in its own name,
from time to time in the Secured Parties’ discretion, for the purpose of
carrying out the terms of this Security Agreement, to take any and all
appropriate action and to execute any and all documents and instruments which
may be necessary or desirable to accomplish the purposes of this Security
Agreement, and, without limiting the generality of the foregoing, Debtor hereby
gives each of the Secured Parties the power and right, on behalf of Debtor,
without notice to or assent by Debtor, to do the following:  to pay or discharge taxes and Encumbrances
(other than Permitted Encumbrances) levied or placed on the Collateral, to
effect any repairs or any insurance called for by the terms of this Security
Agreement  and to pay all or any part of
the premiums therefor and the costs thereof; and during the existence of an
Event of Default and only upon written instruction of the Secured Parties, (A) to
direct any party liable for any payment under any of the Collateral to make
payment of any and all moneys due or to become due thereunder directly to the
Secured Parties or as the Secured Parties shall direct; (B) to ask or
demand for, collect, receive payment of and receipt for, any and all moneys,
claims and other 

 10
 

 

amounts due or to
become due at any time in respect of or arising out of any Collateral; (C) to
sign and endorse any invoices, freight or express bills, bills of lading,
storage or warehouse receipts, drafts against debtors, assignments,
verifications, notices and other documents in connection with any of the
Collateral; (D) to commence and prosecute any suits, actions or
proceedings at law or in equity in any court of competent jurisdiction to
collect the Collateral or any thereof and to enforce any other right in respect
of any Collateral; (E) to defend any suit, action or proceeding brought
against Debtor with respect to any Collateral; (F) to settle, compromise
or adjust any suit, action or proceeding described in clause (E) above
and, in connection therewith, to give such discharges or releases as the
Secured Parties may deem appropriate; (G) to assign any Patent, Copyright,
Software, General Intangible or Trademark (along with the goodwill of the
business to which any such Trademark pertains), throughout the world for such
term or terms, on such conditions, and in such manner, as the Secured Parties
shall determine; and (H) generally, to sell, transfer, pledge and make any
agreement with respect to or otherwise deal with any of the Collateral as fully
and completely as though the Secured Parties were the absolute owner thereof
for all purposes, and to do, at the Secured Parties’ option and Debtor’s
expense, at any time, or from time to time, all acts and things which the Secured
Parties deem necessary to protect, preserve or realize upon the Collateral and
the Secured Parties’ Encumbrances thereon and to effect the intent of this
Security Agreement, all as fully and effectively as Debtor might do. The Debtor
hereby ratifies all that said attorneys shall lawfully do or cause to be done
by virtue hereof. This power of attorney is a power coupled with an interest
and shall be irrevocable.

(b)           Other Powers.
The Debtor also authorizes the Secured Parties, at any time and from time to
time, to execute, in connection with the sale provided for in Section 9
hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.

(c)           No Duty on
Secured Parties’ Part. The powers conferred on the Secured Parties
hereunder are solely to protect Secured Parties’ interests in the Collateral
and shall not impose any duty upon the Secured Parties to exercise any such
powers. The Secured Parties shall be accountable only for amounts that it
actually receives as a result of the exercise of such powers, and none of them
nor any of their officers, directors, or employees shall be responsible to
Debtor for any act or failure to act hereunder, except for its own gross
negligence or willful misconduct.

7.             Performance by
Secured Party of Debtor’s Obligations. If Debtor fails to
perform or comply with any of its agreements contained herein and the Secured
Parties shall itself perform or comply, or otherwise cause performance or
compliance, with such agreement, the reasonable expenses of the Secured Parties
incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum equal to 12%, shall be payable by Debtor
to the Secured Parties on demand and shall constitute Obligations secured
hereby.

8.             Proceeds.
In addition to the rights of the Secured Parties specified in Section 3
with respect to payments of Accounts, it is agreed that during the existence of
an Event of 

 11
 

 

Default (a) all
Proceeds received by the Debtor consisting of cash, checks and other near-cash
items shall be held by the Debtor in trust for the Secured Parties, segregated
from other funds of the Debtor, and shall, forthwith upon receipt by the
Debtor, be turned over to the Secured Parties in the exact form received by the
Debtor (duly endorsed by the Debtor to the Secured Parties), and (b) any
and all such Proceeds received by the Secured Parties (whether from the Debtor
or otherwise) may, in the sole discretion of the Secured Parties, be held by
the Secured Parties as collateral security for, and/or then or at any time
thereafter may be applied by the Secured Parties, pro ratably against, the
Obligations or in such order as the Secured Parties may elect. Any balance of
such Proceeds remaining after the Obligations shall have been paid in full,
shall be paid over to the Debtor or to whomsoever may be lawfully entitled to
receive the same.

9.             Remedies.
Upon the occurrence of an Event of Default, the Required Secured Parties
may exercise, in addition to all other rights and remedies granted to it in
this Security Agreement and in any other instrument or agreement securing,
evidencing or relating to the Obligations, all rights and remedies of a secured
party under the Code. Without limiting the generality of the foregoing, the
Secured Parties, during the existence of an Event of Default and without
further demand of performance or other demand, presentment, protest,
advertisement or notice of any kind (except any notice required by law referred
to below) to or upon Debtor or any other Person (all and each of which demands,
defenses, advertisements and notices are hereby waived), may in such
circumstances forthwith collect, receive, appropriate and realize upon the
Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give
option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels at public or private sale or sales, at any exchange, broker’s
board or office of any of the Secured Parties or elsewhere upon such terms and
conditions as it may deem advisable and at such prices as it may deem best, for
cash or on credit or for future delivery without assumption of any credit risk.
Each purchaser at any such sale shall hold the Collateral sold absolutely free
from any claim or right on the part of the Debtor, and Debtor hereby waives (to
the extent permitted by law) all rights of redemption, stay, or appraisal that
it now has or may at any time in the future have under any rule of law or
statute now existing or hereafter enacted. Each of the Secured Parties 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 the whole or any part
of the Collateral so sold, free of any right or equity of redemption in Debtor,
which right or equity is hereby waived or released, and in connection herewith
to credit bid the Obligations with the proceeds that would otherwise be payable
to such Secured Party. The  Secured
Parties shall not be obligated to make any sale of Collateral regardless of
notice of sale having been given. The Secured Parties may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. To the extent permitted by law, Debtor
hereby waives any claims against the Secured Parties arising because the price
at which any Collateral may have been sold at a private sale was less than the
price that might have been obtained at a public sale. The Debtor further
agrees, at the Secured Parties’ request to assemble the Collateral and make it
available to the Secured Parties at places, which the Secured Parties shall
reasonably select, whether at Debtor’s premises or elsewhere. The Secured
Parties shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale, after deducting all reasonable costs and
expenses of every kind incurred therein or incidental to the care or
safekeeping of any of the Collateral or in any way 

 12
 

 

relating to the
Collateral or the rights of the Secured Parties hereunder, including, without
limitation, reasonable attorneys’ fees and disbursements, to the payment in
whole or in part of the Obligations, in such order as the Secured Parties may
elect, and only after such application and after the payment by Secured Parties
of any other amount required by any provision of law, including, without
limitation, any provision of the Code, need the Secured Parties account for the
surplus, if any, to Debtor. To the extent permitted by applicable law, Debtor
waives all claims, damages and demands it may acquire against any Secured Party
arising out of the exercise by any Secured Party of any of its rights hereunder.
If any notice of a proposed sale or other disposition of Collateral shall be
required by law, such notice shall be deemed reasonable and proper if given at
least ten (10) days before such sale or other disposition. The Debtor
shall remain liable for any deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay the obligations and the
fees and disbursements of any attorneys employed by any Secured Party to
collect such deficiency. Debtor hereby agrees that any sale or other
disposition of the Collateral conducted in conformity with reasonable
commercial practices of banks, insurance companies, or other financial
institutions in the city and state where any Secured Party is located in
disposing of property similar to the Collateral shall be deemed to be
commercially reasonable.

10.           Limitation
on Duties Regarding Preservation of Collateral. The Secured
Parties’ sole duty with respect to the custody, safekeeping and physical
preservation of the Collateral in its possession, under Article 9 or
otherwise, shall be to deal with it in the same manner as any Secured Party
deals with similar property for its own account. None of the Secured Parties
nor any of  their respective directors,
officers, agents or employees shall be liable for failure to demand, collect or
realize upon all or any part of the Collateral or for any delay in doing so or
shall be under any obligation to sell or otherwise dispose of any Collateral
upon the request of Debtor or otherwise.

11.           Powers
coupled with an Interest. All authorizations and agencies herein
contained with respect to the Collateral are irrevocable and powers coupled
with an interest.

12.           Severability.
Any provision of this Security Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. All covenants and other
agreements contained in this Security Agreement by or on behalf of any of the parties
hereto bind and inure to the benefit of their respective successors and
assigns  whether so expressed or not.

13.           Paragraph
Headings. The paragraph headings used in this Security Agreement
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof. This
Security Agreement may be executed in any number of counterparts, each of which
shall be an original but all of which together shall constitute one instrument.
Each counterpart may consist of a number of copies hereof, each signed by less
than all, but together signed by all, of the parties hereto.

 13
 

 

14.           No
Waiver; Cumulative Remedies. The Secured Parties shall not, by
any act (except by a written instrument), delay, indulgence, omission or
otherwise, be deemed to have waived any right or remedy hereunder or to have
acquiesced in any default or in any breach of any of the terms and conditions
hereof. No failure to exercise, nor any delay in exercising, on the part of any
of the Secured Parties, any right, power or privilege hereunder shall operate
as a waiver thereof. No single or partial exercise of any right, power or
privilege hereunder shall preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. A waiver by any Secured Party
of any right or remedy hereunder on any one occasion shall not be construed as
a bar to any right or remedy that the Secured Parties would otherwise have on
any future occasion. The rights and remedies herein provided are cumulative,
may be exercised singly or concurrently and are not exclusive of any rights or
remedies provided by law. THIS SECURITY AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED
BY, THE LAW OF THE STATE OF NEW YORK EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE
LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A
JURISDICTION OTHER THAN SUCH STATE.

15.           Jurisdiction; Venue; Service of
Process. This Agreement shall be subject to the exclusive
jurisdiction of the Federal District Court, Southern District of New York and
if such court does not have proper jurisdiction, the State Courts of New York
County, New York. The parties to this Agreement agree that any breach of any
term or condition of this Agreement shall be deemed to be a breach occurring in
the State of New York by virtue of a failure to perform an act required to be
performed in the State of New York and irrevocably and expressly agree to
submit to the jurisdiction of the Federal District Court, Southern District of
New York and if such court does not have proper jurisdiction, the State Courts
of New York County, New York for the purpose of resolving any disputes among
the parties relating to this Agreement or the transactions contemplated hereby.
The parties irrevocably waive, to the fullest extent permitted by law, any
objection which they may now or hereafter have to the laying of venue of any
suit, action or proceeding arising out of or relating to this Agreement, or any
judgment entered by any court in respect hereof brought in New York County, New
York, and further irrevocably waive any claim that any suit, action or
proceeding brought in Federal District Court, Southern District of New York and
if such court does not have proper jurisdiction, the State Courts of New York
County, New York has been brought in an inconvenient forum. Each of the parties
hereto consents to process being served in any such suit, action or proceeding,
by mailing a copy thereof to such party at the address in effect for notices to
it under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing in this Section 15
shall affect or limit any right to serve process in any other manner permitted
by law.

16.           Notices.
Notices hereunder shall be given to the Debtor and each Secured Party in
the manner set forth in the Purchase Agreement of even date herewith between
the Debtor and each of the Secured Parties and at the addresses set forth
therein.

17.           Termination.
Upon the repayment in full of all Obligations, this Security Agreement
shall terminate, the Secured Parties shall deliver any release of the
Encumbrances created under this Security Agreement that Debtor may reasonably
request (at the cost of the Debtor), and the Secured Parties shall return to
the Debtor all Collateral then in its possession, 

 14
 

 

custody, or control, and
this Security Agreement shall terminate without further action by the Party and
be of no further force and effect.

[intentionally
left blank - signature page follows]

 15
 

 

IN
WITNESS WHEREOF, the parties hereto have caused this Security
Agreement to be duly executed and delivered as of the date first above written.

	
   

  	
   

  	
  ACCESS PHARMACEUTICALS, INC.

  
	
   

  	
   

  	
  By: 

  	
  /s/ Rosemary
  Mazanet

  	
   

  
	
   

  	
   

  	
  Name: Rosemary Mazanet

  	
   

  
	
   

  	
   

  	
  Title: Acting CEO

  	
   

  

 16
 

 

OMNIBUS
SIGNATURE PAGE TO

ACCESS PHARMACEUTICALS, INC.

SECURITY AGREEMENT

The undersigned,
as a Secured Party, hereby executes and delivers the Security Agreement to
which this signature page is attached, which, together with all
counterparts of the Security Agreement and signature pages of the other
parties named in said Security Agreement, shall constitute one and the same
document in accordance with the terms of the Security Agreement.

	
  

  	
   

  	
   

  
	
   

  	
  Print Name:

  	
   

  	
  SCO Capital
  Partners LLC

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
  /s/ Steven H.
  Rouhandeh

  	
   

  
	
   

  	
  Name:

  	
   

  	
  Steven H.
  Rouhandeh

  	
   

  
	
   

  	
  Title:

  	
   

  	
  Chairman

  	
   

  

 

 17

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