Document:

exv10w2

 

EXHIBIT 10.2

RESTATED EMPLOYMENT AGREEMENT

by and between

BAKER HUGHES INCORPORATED

and

MICHAEL E. WILEY

August 1, 2004

 

 

RESTATED EMPLOYMENT AGREEMENT

     This RESTATED EMPLOYMENT AGREEMENT (the “Restated Agreement”), is by and
between Michael E. Wiley (the “Executive”) and Baker Hughes Incorporated, a
Delaware corporation (the “Company”). The Restated Agreement is dated as of
August 1, 2004 (the “Effective Date”).

     WHEREAS, pursuant to an Employment Agreement dated July 17, 2000 (“the
2000 Employment Agreement”), the Executive became the Chief Executive Officer
(the “CEO”) of the Company on or about August 14, 2000; and

     WHEREAS, the Company and the Executive executed a Severance Agreement
dated July 17, 2000, (the “Severance Agreement”); and

     WHEREAS, the Executive also serves as a member of the Board of Directors
of the Company (the “Board”) and has been elected Chairman of the Board; and

     WHEREAS, the Executive has expressed his intent to end his service as an
officer and as a director of the Company; and

     WHEREAS, the Executive has agreed to continue his employment with the
Company as CEO and to continue as Chairman of the Board until April 30, 2005,
subject to the right of the Company, acting through the Board, to request an
earlier termination of Executive’s employment as CEO or earlier resignation as
Chairman of the Board; and

     WHEREAS, the Company is willing to provide Executive with certain benefits
in exchange for his agreement to continue as CEO and as Chairman of the Board
as stated above; and

     WHEREAS, the Company and the Executive desire to terminate and extinguish
the 2000 Employment Agreement and to terminate and extinguish the Severance
Agreement, and to enter into this new, Restated Agreement, and desire to set
forth in this Restated Agreement the terms and conditions of the Executive’s
employment commencing on August 1, 2004; and

     NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements of the parties herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:

1. Employment Period:. The Company hereby agrees to continue to employ
the Executive, and the Executive hereby agrees to continue his employment with
the Company and to serve as Chairman of the Board, on the terms and conditions
hereinafter set forth. The period of employment of the Executive by the Company
shall end on the Executive’s Date of
Termination (as defined in Section 7(b) hereof). The

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period commencing
with the execution of this Restated Agreement and ending on the Date of
Termination shall constitute “the Employment Period.”

2. Position and Duties.

     (a) The Executive shall continue during the Employment Period to serve as
the CEO and the Chairman of the Board, in which capacities the Executive shall
perform the usual and customary duties of such offices, which shall be those
normally inherent in such capacity in U.S. publicly held corporations of
similar size and character. The Executive agrees and acknowledges that, in
connection with his employment relationship with the Company, the Executive
owes fiduciary duties to the Company and will act accordingly. The Executive
further agrees that he will devote himself to assist the Board in its search
for his successor and otherwise to ensure a smooth transition. In furtherance
thereof, the Executive acknowledges and agrees that his service as CEO may be
terminated prior to April 30, 2005, but if so requested by the Board, he will
continue as a director and Chairman of the Board until April 30, 2005.

     (b) The Executive agrees that during the Employment Period he will
continue to devote substantially his full time, attention and energies to the
Company’s business and agrees to faithfully and diligently endeavor to the best
of his ability to further the best interests of the Company. Until the Date of
Termination, the Executive shall not engage in any other business activity,
whether or not such business activity is pursued for gain, profit or other
pecuniary advantage. Subject to the covenants of Section 9 herein, this shall
not be construed as preventing the Executive from investing his own assets in
such form or manner as will not require his services in the daily operations of
the affairs of the companies in which such investments are made. Further,
subject to Section 9 herein, the Executive may serve as a director of other
companies so long as such service is not injurious to the Company, so long as
such service does not present the Executive with a conflict of interest, and is
approved by the Compensation Committee of the Board.

     (c) In keeping with the Executive’s fiduciary duties to the Company, the
Executive agrees that he shall not, directly or indirectly, become involved in
any conflict of interest, or upon discovery thereof, allow such a conflict to
continue. Moreover, the Executive agrees that he shall promptly disclose to the
Board any facts which might involve any reasonable possibility of a conflict of
interest, or be perceived as such.

     (d) Circumstances in which a conflict of interest on the part of the
Executive would or might arise, and which should be reported immediately by the
Executive to the Board, include the following: (i) ownership of a material
interest in, acting in any capacity for, or accepting directly or indirectly
any payments, services or loans from a supplier, contractor, subcontractor,
customer or other entity with which the Company does business (other than
severance, employment termination or retirement benefits or payments that
Executive receives from BP Amoco PLC, Atlantic Richfield Company or Vastar
Resources, Inc. in connection with his prior employment and relationship with
those companies); (II) misuse of information or facilities to which the
Executive has
access in a manner which will be detrimental to the Company’s interest;
(iii) disclosure

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or other misuse of Confidential Information (as defined in
Section 9); (iv) acquiring or trading in, directly or indirectly, other
properties or interests connected with the design, manufacture or marketing of
products designed, manufactured or marketed by the Company; (v) the
appropriation to the Executive or the diversion to others, directly or
indirectly, of any opportunity in which it is known or could reasonably be
anticipated that the Company would be interested; and (vi) the ownership,
directly or indirectly, of a material interest in an enterprise in competition
with the Company or its dealers and distributors or acting as a director,
officer, partner, consultant, employee or agent of any enterprise which is in
competition with the Company or its dealers or distributors.

     (e) Further, the Executive covenants, warrants and represents that he
shall during the Employment Period:

     (i) Devote his full and best efforts to the fulfillment of his
employment obligations;

     (ii) Exercise the highest degree of fiduciary loyalty and care and
the highest standards and conduct in the performance of his duties; and

     (iii) Endeavor to prevent any harm, in any way, to the business or
reputation of the Company.

3. Place of Performance. In connection with the Executive’s employment by
the Company, the Executive’s principal business address shall be at the
Company’s current principal executive offices in Houston, Texas (the “Principal
Place of Employment”) or in such other place as the Executive and the Company
may agree.

4. Compensation and Related Matters.

     (a) Base Salary. During the Employment Period, the Company shall pay the
Executive his accrued annual base salary (“Base Salary”) in regular
installments in accordance with the Company’s payroll practices. The Base
Salary is One Million Fourteen Thousand Three Hundred Dollars ($1,014,300) and
it will not be increased during the Employment Period.

     (b) Bonuses. During the Employment Period, the Executive shall continue
to be eligible to participate in the Company’s Incentive Compensation Plan and
to receive a bonus (the “2004 Annual Bonus”). The amount of the 2004 Annual
Bonus will be determined by the Compensation Committee of the Board of
Directors with reference to the formal written objectives set forth for
Executive’s position of Chief Executive Officer of the Company in
the Incentive Compensation Plan. If the results for Baker Hughes
Incorporated for 2004 exceed Over Achievement, the excess portion that would
otherwise be “banked” will be paid to Executive as part of his 2004 Annual
Bonus. The 2004 Annual Bonus will be paid by March 31, 2005, unless pursuant to
Section 6 (other than 6(c)) the Company terminates Executive’s employment prior
to December 31, 2004, in which case the full Expected Value (“EV”) of
Executive’s bonus will be paid on

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the Date of Termination, or as soon
thereafter as administratively feasible. As provided in Section 8(d),
Executive shall be paid the additional sum of Three Hundred Fifty Thousand
Dollars ($350,000) (hereinafter referred to as the “2005 Annual Bonus”).

     (c) Equity-Based Compensation. In 2002, the Company issued to the
Executive Forty Thousand (40,000) restricted shares of Common Stock of the
Company. Vesting of those restricted shares that would have otherwise vested
after the termination of the Employment Period will be accelerated and vest
upon the execution of this Restated Agreement. Executive will hold and not sell
or otherwise transfer ownership of those Forty Thousand (40,000) shares prior
to the Termination Date, other than shares sold for tax purposes upon vesting.

     The terms of Executive’s current outstanding stock options will be amended
once approved by the Board in order that (1) all options currently outstanding
will immediately vest upon the Date of Termination, and (2) Executive will have
up to three years from the Termination Date, but not later than the Expiration
Date of the options, to exercise the respective option. No further option
grants will be issued to Executive beyond those that have already been issued
or approved by the Board (i.e. Executive will receive the options to be issued
in July 2004 but no new options after that time), nor shall Executive
participate in any other new grants or programs including, but not limited to,
the 2004-2006 and the 2005-2007 long-term performance plan.

     (d) Expenses. The Company shall promptly reimburse the Executive for all
reasonable business expenses incurred during the Employment Period by the
Executive in performing services hereunder, including all expenses of travel
and living expenses while away from home on business or at the request of and
in the service of the Company; provided, in each case, that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company. On or shortly after the Date of Termination, the
Executive will prepare and submit a final expense account reimbursement request
for expenses incurred prior to the Termination Date. Executive agrees in
accordance with Texas Labor Code § 61.018(c) that the Company may deduct from
any payments Executive would otherwise be entitled to receive any amounts that
Executive owes to the Company as of the Termination Date.

(e) Other Benefits. During the Employment Period, the Executive shall be entitled to
participate in all of the employee benefit plans and arrangements made
available by the Company to its other senior executive officers, subject to and
on a basis consistent with the terms, conditions and overall administration of
such plans and arrangements, and shall be entitled to all perquisites and
special benefits suitable to the character of the Chief Executive Officer,
including, but not limited to, executive life insurance, club memberships
(provided that, any memberships owned by the Company will revert to the Company
after the Date of Termination), financial planning (including tax return
preparation), an annual physical examination, security monitoring at his
residences, phone/internet access at his residences and other perquisites that
may be

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added with the approval of the Compensation Committee of the Board of
Directors of the Company, each within the limitations of the Company’s
Executive Perquisite Program. The pool of perquisite dollars that will be
available to the Executive under the Company’s Executive Perquisite Program is
Twenty Five Thousand Dollars ($25,000). Notwithstanding the foregoing, the
Company shall have the right to change, amend or discontinue any benefit plan,
program, or perquisite, so long as such changes are similarly applicable to
senior executive officers of the Company generally.

     (f) Vacation. During the Employment Period, the Executive is entitled to
accrue and use five weeks (i.e., 25 days) of vacation per annum.

     (g) Services Furnished. During the Employment Period, the Executive shall
at all times be provided with office space, stenographic assistance and such
other facilities and services as are suitable to his position and no less
favorable than those being provided to the Executive by the Company as of the
date hereof.

5. Offices. Subject to Sections 2,3 and 4 hereof, the Executive agrees to
continue to serve without additional compensation, if elected or appointed
thereto, as a director of any of the Company’s subsidiaries and as a member of
any committees of the board of directors of any such corporations, and in one
or more executive positions of any of the Company’s subsidiaries; provided,
that the Executive is indemnified for serving in any and all such capacities on
a basis no less favorable than is currently or may be provided to any other
director of the Company, any of its subsidiaries, or in connection with any
such executive position, as the case may be. This indemnity is in addition to
and not in replacement of the Company’s obligations to provide indemnity
pursuant to Section 10 hereof.

6. Termination. The Employment Period shall end on April 30, 2005, unless
Executive’s employment is terminated before then in accordance with any of the
provisions of Section 6 or 7.

     (a) Death. The Executive’s employment hereunder shall terminate upon his
death.

     (b) Disability. If as a result of the Executive’s incapacity due to
physical or mental illness, the Executive shall have been absent from the
full-time performance of his duties hereunder for the entire period of ninety
(90) days in the aggregate during any period of twelve (12) consecutive months
or it is reasonably expected that such disability will exist for more than such
period of time, and within thirty (30) days after written Notice of Termination
(as defined in Section 7) is given (which notice may be given during such
ninety (90) day period) shall not have returned to the performance of his
duties hereunder on a full-time basis, the Company may terminate the
Executive’s employment hereunder for “Disability.”

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     During any period that the Executive fails to perform his duties hereunder
as a result of incapacity due to physical or mental illness (“Disability
Period”), the Executive shall continue to receive his Base Salary at the rate
in effect at the beginning of such period as well as all other payments and
benefits set forth in Section 4 hereof, reduced by any payments made to the
Executive during the Disability Period under the disability benefit plans of
the Company then in effect or under the Social Security disability insurance
program.

     (c) Cause. The Company may terminate the Executive’s employment hereunder
for Cause. For purposes of this Restated Agreement, the Company shall have
“Cause” to terminate the Executive’s employment hereunder upon the occurrence
of any of the following events:

     (i) the Executive is convicted of an act of fraud, embezzlement,
theft or other criminal act constituting a felony;

     (ii) a material breach by the Executive of any provision of this
Restated Agreement;

     (iii) the failure by the Executive to perform any and all covenants
contained in Sections 2(c), 2(d), 2(e) and 9 of this Restated Agreement
for any
reason other than the Executive’s death, Disability or following the
Executive’s delivery of a Notice of Termination for Good Reason; or

     (iv) a material breach by the Executive of the Company’s Standards
of Ethical Conduct;

provided, that, the Executive shall have thirty (30) business days from the
date on which the Executive receives the Company’s Notice of Termination for
Cause under clause (ii), (iii) or (iv) above to remedy any such occurrence
otherwise constituting Cause under such clause (ii), (iii) or (iv).

     Cause shall not exist unless and until the Company has delivered to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than two-thirds (2/3) of the entire membership of the Board at a meeting
of the Board called and held for such purpose (after reasonable notice to the
Executive and an opportunity for the Executive, together with his counsel, to
be heard before the Board), finding that in the good faith opinion of the
Board, the Executive was guilty of the conduct set forth in this Section 6(c)
and specifying the particulars thereof in detail.

     (d) Good Reason. The Executive may terminate his employment hereunder for
“Good Reason.” Good Reason for the Executive’s termination of employment shall
mean the occurrence, without the Executive’s prior written consent, of any one
or more of the following;

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     (i) the assignment to the Executive of any duties inconsistent with
the Executive’s position (including status, office, title and reporting
requirements), authorities, duties or other responsibilities as
contemplated by Section 2 of this Restated Agreement;

     (ii) the relocation of the Principal Place of Employment to a
location more than fifty (50) miles from the Principal Place of
Employment;

     (iii) any reduction in the Executive’s Base Salary as set forth in
Section 4(a) hereof;

     (iv) a material breach by the Company of any provision of this
Restated Agreement;

provided, in any case, that the Company shall have thirty (30) business days
from the date on which the Company receives the Executive’s Notice of
Termination for Good Reason to remedy any such occurrence otherwise
constituting Good Reason.

     (e) Termination as CEO with Continuing Service as a Director and Chairman
of the Board. The Board may terminate the Executive’s service as CEO, but
request that he continue in his role as a director and Chairman of the Board
until April 30, 2005.

     (f) Subject to the continuing duty to make all payments as provided under
Section 8, either party may terminate this Restated Agreement at any time by
giving prior written notice in accordance with Section 7 below.

7. Termination Procedure.

     (a) Notice of Termination. Any termination before April 30, 2005, other
than by death (Section 6(a)), shall be communicated by written Notice of
Termination in accordance with Section 12. A “Notice of Termination” shall
indicate the specific termination provision in this Restated Agreement relied
upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination.

     (b) Date of Termination. “Date of Termination” shall mean April 30, 2005,
provided that,

     (i) if the Executive’s employment is terminated by death (Section
6(a)), the Date of Termination will be the date of the Executive’s death,

     (ii) if the Executive’s employment is terminated by disability
(Section 6(b)), the Date of Termination will be thirty (30) days after
Notice of Termination is given (provided that the Executive shall not
have returned to the performance of his duties on a full-time basis
during such thirty (30) day period), and

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     (iii) if the Executive’s employment is terminated for any other
reason, the Date of Termination will be the date specified in the Notice
of Termination, but not earlier than the date such Notice is delivered
and not later than thirty (30) days following the date on which such
Notice is delivered. Notwithstanding the foregoing, if the Board
terminates the Executive’s role as CEO but requests that he continue as a
director and Chairman of the Board, the Date of Termination shall be the
date specified in the Notice of Termination as to when the Executive is
requested to resign as a director and Chairman of Board with such date
not being later than April 30, 2005.

8. Compensation upon Termination or During Disability.

     (a) Accrued Obligation Defined. For purposes of this Restated Agreement,
payment of the “Accrued Obligation” shall mean:

     (i) payment by the Company to the Executive (or his designated
beneficiary or legal representative, as applicable), when due, of all
vested benefits to which the Executive is entitled under the terms of the
employee
benefit plans in which the Executive is a participant as of the Date
of Termination, including:

	•	 	distribution of Executive’s vested
Thrift Plan account balance in accordance with the
terms of the plan, when and if Executive elects to
receive such a distribution, and

	•	 	payment of the vested amounts in
Executive’s Supplemental Retirement Plan account
according to his elections previously submitted.

     (ii) any obligation of the Company to offer Executive the
opportunity to continue health insurance coverage in accordance with the
provisions of COBRA; and

     (iii) a lump sum amount in cash equal to the Executive’s Base Salary
through the Date of Termination.

     In accordance with the terms of the Thrift Plan, the Pension Plan, and the
Supplemental Retirement Plan, the Executive forfeits any unvested amounts in
those plan accounts, and thus those unvested amounts do not constitute any part
of the Accrued Obligation and will not otherwise be paid to the Executive.

     (b) By the Company for Cause. If during the Term the Executive’s
employment is terminated by the Company pursuant to Section 6(c) hereof, the
Company shall pay to the Executive the Accrued Obligation.

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     (c) By the Executive Without Good Reason. If during the Term the
Executive terminates his employment for any reason other than Good Reason, the
Company shall pay to the Executive the Accrued Obligation. The Executive shall
not have breached this Restated Agreement if he terminates his employment for
any reason.

     (d) Death, Disability, by the Company Without Cause, by the Executive for
Good Reason, or on April 30, 2005. If during the Term the Executive’s
employment is terminated pursuant to Sections 6(a) or (b), due to Death or
Disability, respectively, or by the Company other than for Cause, or by the
Executive for Good Reason, or on April 30, 2005, then

     (i) the Company shall pay the Executive a lump sum equal to the
total of the following (minus any tax withholdings and any amounts that
may have already been paid; e.g., the 2004 Annual Bonus):

	•	 	the Accrued Obligation,
	 
	•	 	any then unpaid portion of the Base
Salary that would have otherwise been paid through April
30, 2005,
	 
	•	 	payment for any unused vacation days
that would have otherwise accrued through April 30,
2005,
	 
	•	 	the 2004 Annual Bonus,
	 
	•	 	the 2005 Annual Bonus, and
	 
	•	 	Five Hundred Thousand Dollars
($500,000) in consideration of Executive’s agreement to
remain an employee through April 30, 2005, or such
earlier date determined by the Board, and in
consideration of Executive’s agreement to terminate the
Severance Agreement.

     (ii) All options currently outstanding will immediately vest upon
the Date of Termination and Executive will have up to three years from
the Termination Date, but not later than the Expiration Date of the
options, to exercise the respective option.

The Company agrees that, if the Executive’s employment with the Company
terminates for any reason before April 30, 2005, the Executive is not required
to seek other employment or to attempt in any way to reduce any amounts payable
to the Executive by the Company pursuant to this Section 8. Further, the amount
of any payment or benefit provided for in this Restated Agreement shall not be
reduced by any compensation earned by the Executive as the result of employment
by another employer, by retirement benefits, by offset against any amount
claimed to be owed by the Executive to the Company, or otherwise.

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Payments to the Executive under this Section 8 shall be made within thirty (30)
days following the Date of Termination. Following such payment, the Company
shall have no further obligations to the Executive other than as may be
required by law or the terms of an employee benefit plan of the Company. All
such payments (other than the Accrued Obligation) are contingent upon the
Executive’s execution (or, if applicable, execution by his designated
beneficiary or legal representative) of a release substantially in the form of
Exhibit A hereto.

9. Confidential Information: Non-Competition: Non-Solicitation.

     (a) Confidential Information. The Executive shall hold in a fiduciary
capacity for the benefit of the Company all trade secrets, confidential
information, and knowledge or data relating to the Company and its businesses,
which shall have been obtained by the Executive during
the Executive’s employment by the Company and which shall not have been or
hereafter become public knowledge (other than by acts by the Executive or
representatives of the Executive in violation of this Restated Agreement)
(hereinafter being collectively referred to as “Confidential Information”). For
the avoidance of doubt, Confidential Information shall not include information
that:

     (i) was already in Executive’s possession before he became an
employee and officer of the Company; provided that the information is not
known by the Executive to be subject to another confidentiality agreement
with, or other obligation of secrecy to, the Company or any of its
subsidiaries;

     (ii) becomes generally available to the public other than as a
result of a disclosure by the Executive; or

     (iii) becomes available to the Executive on a non-confidential basis
from a source other than the Company or any of its subsidiaries or any of
their respective directors, officers, employees, agents or advisors;
provided that such source is not known by the Executive to be bound by a
confidentiality agreement with or other obligation of secrecy to the
Company or any of its subsidiaries.

The Executive shall not, without the prior written consent of the Company or as
may otherwise be required by law or legal process, communicate or divulge any
such trade secrets, information, knowledge or data to anyone other than the
Company and those designated by the Company. Any termination of the Executive’s
employment or of this Restated Agreement shall have no effect on the continuing
operation of this Section 9(a). The Executive agrees to return all Confidential
Information, including all photocopies, extracts and summaries thereof, and any
such information stored electronically on tapes, computer disks or in any other
manner to the Company at any time upon request by the Company and upon the
termination of his employment hereunder for any reason.

     (b) Non-Competition. The Company promises that during the Employment
Period and before any termination pursuant to Section 6(e), above, it will
provide Executive with access to the Company’s Confidential Information,
including Confidential

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Information that the Executive has not seen prior to the
execution of this Restated Agreement. The parties intend and agree that this
promise by the Company is binding and not illusory. To enforce the Executive’s
promises set forth in Section 9(a) above, and in exchange for and ancillary to
the Company’s promise to provide Executive with access to Confidential
Information as set forth herein, Executive promises that for a period of two
(2) years following the Date of Termination (such period following the
Employment Period, the “Restricted Period”), the Executive shall not engage in
Competition, as defined below, with the Company; provided that it shall not be
a violation of this Section 9(b) for the Executive to become the registered or
beneficial owner of up to five percent (5%) of any class of the capital stock
of a corporation registered under the Securities Exchange Act
of 1934, as amended, provided that the Executive does not actively
participate in the business of such corporation until such time as this
covenant expires.

     For purposes of this Restated Agreement, “Competition” by the Executive
means the Executive’s engaging in. or otherwise directly or indirectly being

employed by or acting as a consultant or lender to, or being a director,
officer, employee, principal, agent, stockholder. member, owner or partner of,
or permitting his name to be used in connection with the activities of any
other business or organization which competes, directly or indirectly, with the
business of the Company as the same shall be constituted at any time during his
employment with the Company.

     (c) Non-Solicitation. During the Restricted Period, the Executive agrees
that he will not, directly or indirectly, for his benefit or for the benefit of
any other person, firm or entity, do any of the following:

     (i) solicit from any customer doing business with the Company as of
the Date of Termination that is known to Executive, business of the same
or of a similar nature to the business of the Company with such customer;

     (ii) solicit from any potential customer of the Company that is
known to the Executive business of the same or of a similar nature to
that which has been the subject of a known written or oral bid, offer or
proposal by the Company, or of substantial preparation with a view to
making such a bid, proposal or offer, within six (6) months prior to such
Date of Termination;

     (iii) solicit the employment or services of any person who was known
to be employed by or was a known consultant to the Company upon the Date
of Termination, or within six (6) months prior thereto; or

     (iv) other
wise knowingly interfere with the business or accounts of
the Company.

     The Executive and the Company agree and acknowledge that the Company has a
substantial and legitimate interest in protecting the Company’s Confidential

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Information and goodwill. The Executive and the Company further agree and
acknowledge that the provisions of this Section 9 are reasonably necessary to
protect the Company’s legitimate business interests and are designed to protect
the Company’s Confidential Information and goodwill.

     The Executive agrees that the scope of the restrictions as to time,
geographic area, and scope of activity in this Section 9 are reasonably
necessary for the protection of the Company’s legitimate business interests and
are not oppressive or injurious to the public interest. The Executive agrees
that in the event of a breach or threatened breach of any of the provisions of
this Section 9 the Company shall be entitled to
injunctive relief against the Executive’s activities to the extent allowed
by law, and the Executive waives any requirement for the posting of any bond by
the Company in connection with such action. The Executive further agrees that
any breach or threatened breach of any of the provisions of Section 9(a) would
cause injury to the Company for which monetary damages alone would not be a
sufficient remedy.

     (d) Publicity. The Executive agrees that the Company may use, and hereby
grants the Company the nonexclusive and worldwide right to use, the Executive’s
name, picture, likeness, photograph, signature or any other attribute of the
Executive’s persona (all of such attributes are hereafter collectively referred
to as “Persona”) in any media for any advertising, publicity or other purpose
at any time, either during or subsequent to his employment by the Company. The
Executive agrees that such use of his Persona will not result in any invasion
or violation of any privacy or property rights the Executive may have; and the
Executive agrees that he will receive no additional compensation for the use of
his Persona. The Executive further agrees that any negatives, prints or other
material for printing or reproduction purposes prepared in connection with the
use of his Persona by the Company shall be and are the sole property of the
Company.

10. Indemnification: Legal Fees. The Company shall indemnify the
Executive to the fullest extent permitted by the laws of the Company’s state of
incorporation in effect at that time, or certificate of incorporation and
by-laws of the Company, whichever affords the greater protection to the
Executive. The Executive will be entitled to the benefit of any insurance
policies the Company may elect to maintain generally for the benefit of its
officers and directors against all costs, charges and expenses incurred in
connection with any action, suit or proceeding to which he may be made a party
by reason of being a director or officer of the Company. Executive’s
Indemnification Agreement with the Company dated December 3, 2003 shall survive
the termination of employment.

11. Successors: Binding Agreement.

     (a) Company’s Successors. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and

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agree to perform this Restated Agreement in the same manner and to
the same extent that the Company would be required to perform it if no such
succession had taken place. Failure of the Company to obtain such assumption
and agreement prior to the effectiveness of any such succession shall be a
breach of this Restated Agreement and shall entitle the Executive to
compensation from the Company in the same amount and on the same terms as he
would be entitled to hereunder if he terminated his employment for Good Reason,
except that for purposes of implementing the foregoing, the date on which
any such succession becomes effective shall be deemed the Date of Termination.
As used in this Restated Agreement, “Company” shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which executes and delivers the agreement provided for in this
Section 11 or which otherwise becomes bound by all the terms and provisions of
this Restated Agreement by operation of law.

     (b) Executive’s Successors. This Restated Agreement and all rights of the
Executive hereunder shall inure to the benefit of and be enforceable by the
Executive’s personal or legal representatives, executors, administrators,
successors, heirs, distributes, devisees and legatees. If the Executive should
die while any amounts would still be payable to him hereunder if he had
continued to live, all such amounts unless otherwise provided herein shall be
paid in accordance with the terms of this Restated Agreement to the Executive’s
devisee, legatee or other designee or, if there is no such designee, to the
Executive’s estate.

12. Notice. For the purposes of this Restated Agreement, notices, demands
and all other communications provided for in this Restated Agreement shall be
in writing and shall be deemed to have been duly given when delivered or
(unless otherwise specified) mailed by United States certified or registered
mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

Mr. Michael E. Wiley

10930 Kemwood Drive

Houston, Texas 77024

If to the Company:

Baker Hughes Incorporated

3900 Essex Lane, Suite 1200

Houston, Texas 70027

Attention: General Counsel

or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.

____/____

 HJR/MEW

- 13 -

 

13. Amendment or Modification; Waiver. No provisions of this Restated
Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing signed by the Executive and
such officer of the Company as may be specifically designated by the Board or
its compensation committee. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Restated Agreement to be performed by such other party shall
be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time. The Company has not made any promise
or entered into any agreement that is not expressed in this Restated Agreement,
and Executive is not relying upon any statement or representation of any agent
of the Company. In executing this Restated Agreement, Executive is relying
solely on his judgment and has elected not to be represented by legal counsel
in connection with this Restated Agreement. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter
hereof have been made by either party which is not set forth expressly in this
Restated Agreement.

14. Dispute Resolution. Any dispute or controversy arising under or in
connection with this Restated Agreement, the Executive’s employment by the
Company or the Executive’s compensation or benefits (a “Dispute”) shall be
settled in accordance with the procedures described in this Section 14.

     (a) First, the parties shall attempt in good faith to resolve any Dispute
promptly by negotiations between the Executive and executives or directors of
the Company who have authority to settle the Dispute. Either party may give the
other disputing party written notice of any Dispute not resolved in the normal
course of business. Within five days after the effective date of that notice,
the Executive and such executives or directors of the Company shall agree upon
a mutually acceptable time and place to meet and shall meet at that time and
place, and thereafter as often as they reasonably deem necessary, to exchange
relevant information and to attempt to resolve the Dispute. The first of those
meetings shall take place within 30 days of the effective date of the disputing
party’s notice. If the Dispute has not been resolved within 60 days of the
disputing party’s notice, or if the parties fail to agree on a time and place
for an initial meeting within five days of that notice, either party may
initiate mediation and arbitration of the Dispute as provided hereinafter. If a
negotiator intends to be accompanied at a meeting by an attorney, the other
negotiators shall be given at least three business days’ notice of that
intention and may also be accompanied by an attorney. All negotiations pursuant
to this Section 14 shall be treated as compromise and settlement negotiations
for the purposes of applicable rules of evidence and procedure.

     (b) Second, if the Dispute is not resolved through negotiation as provided
in Section 14(a), either disputing party may require the other to submit to
non-binding
mediation with the assistance of a neutral, unaffiliated mediator. If the
parties encounter difficulty in agreeing upon a neutral, they shall seek the
assistance of the American Arbitration Association in the selection process.

____/____

 HJR/MEW

- 14 -

 

     (c) Any Dispute that has not been resolved by the non-binding procedures
provided in Sections 14(a) and 14(b) within 90 days of the initiation of the
first of the procedures shall be finally settled by arbitration conducted
expeditiously in accordance with the Commercial Arbitration Rules of the
American Arbitration Association or of such similar organization as the parties
hereto may mutually agree; provided that if one party has requested the other
to participate in a non-binding procedure and the other has failed to
participate within 30 days of the written request, the requesting party may
initiate arbitration before the expiration of the period. The arbitration shall
be conducted by three independent and impartial arbitrators. Executive shall
appoint one arbitrator, the Company shall appoint a second arbitrator, and a
third arbitrator not appointed by the parties shall be appointed by the first
two arbitrators selected. The arbitration shall be held in Houston, Harris
County, Texas. Judgment may be entered on the arbitrator’s award in any court
having jurisdiction. The arbitrators shall award the prevailing party in the
arbitration its costs and expenses, including reasonable attorney’s fees,
incurred in connection with the Dispute. The arbitrators shall not award any
amount to either the Executive or the Company m excess of the compensation,
employee benefits and indemnification amounts that the Company paid or should
have paid to the Executive pursuant to this Restated Agreement.

     (d) Notwithstanding the Dispute resolution provisions of this Section 14,
either party may bring an action in a court of competent jurisdiction in an
effort to enforce the provisions of this Section 14 and to seek injunctive
relief to protect the party’s rights pending resolution of a Dispute pursuant
to this Section 14, including, without limitation, the Company’s rights
pursuant to Section 9 of this Restated Agreement.

15. Governing Law. The validity, interpretation, construction and
performance of this Restated Agreement shall be governed by the laws of the
State of Texas without regard to its conflicts of law principles.

16. Miscellaneous. All references to sections of any statute shall be
deemed also to refer to any successor provisions to such sections. The
obligations of the parties under Sections 8, 9, 10 and 14 hereof shall survive
the expiration of the Term. The compensation and benefits payable to the
Executive or his beneficiary under Section 8 of this Restated Agreement shall
be in lieu of any other severance benefits to which the Executive may otherwise
be entitled upon his termination of employment under any severance plan,
program, policy or arrangement of the Company, including the Severance
Agreement which is superseded by this Restated Agreement.

17. Severability. The invalidity or unenforceability of any provision or provisions of
this Restated Agreement shall not affect the validity or enforceability of any
other provision of this Restated Agreement, which shall remain in full force
and effect. Should any one or more of the provisions of this Restated Agreement
be held to be excessive or unreasonable as to duration, geographical scope or
activity, then that provision shall be construed by limiting and reducing it so
as to be reasonable and enforceable to the extent compatible with the
applicable law.

____/____

 HJR/MEW

- 15 -

 

18. Counterparts. This Restated Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

19. Release. In consideration of the benefits and compensation which may
be awarded to the Executive pursuant to Section 8 of this Restated Agreement,
the Executive hereby agrees to execute and be bound by, as a condition
precedent to receiving said benefits and compensation, the Release attached
hereto as Exhibit A, such Release being incorporated herein by reference.

20. Entire Agreement. By mutual agreement, this Restated Agreement
constitutes a novation that serves to extinguish and replace the obligations
created by the 2000 Employment Agreement, such that the parties hereto intend
that the 2000 Employment Agreement no longer has any force or effect. The
parties agree that this Restated Agreement constitutes an agreement in writing
sufficient to satisfy Section 13 of the 2000 Employment Agreement. By mutual
agreement this Restated Agreement and Section 8(c)(iii), above, also
constitutes a novation that serves to extinguish and replace the obligations
created by the Severance Agreement, such that the parties hereto intend that
the Severance Agreement no longer has any force or effect. The parties agree
that this Restated Agreement constitutes an agreement in writing sufficient to
satisfy Section 11 of the Severance Agreement, and that no Change in Control
had occurred prior to the execution of this Restated Agreement. Accordingly,
this Restated Agreement sets forth the entire agreement of the parties hereto
in respect of the subject matter contained herein (including the obligation, if
any, to pay severance in the event of a Change in Control occurring prior to
April 30, 2005) and, as of the Effective Date, supersedes all prior agreements,
promises, covenants, arrangements, communications, representations or
warranties, whether oral or written, by any officer, employee or representative
of any party hereto; provided, that the confidentiality provisions set forth in
Section 3.D. of the Letter Agreement dated April 28, 2004, shall not be
superseded hereby.

21. Effectiveness. This Restated Agreement shall become effective upon
approval of the Board of Directors of the Company. The Company shall provide a
certified copy of the resolution evidencing such approval as soon as practical
after such approval.

     IN WITNESS WHEREOF, the parties have executed this Restated Agreement on
the date first above written.

	 	 	 	 	 	 	 
	AGREED AND ACCEPTED:	 	BAKER HUGHES INCORPORATED
	 
	By:

	 	/s/ Michael E. Wiley

MICHAEL E. WILEY
	 	By:
	 	/s/ H. John Riley, Jr.

   H. JOHN RILEY, JR.

   Lead Director

- 16 -

 

EXHIBIT A

RELEASE

     The Executive hereby irrevocably and unconditionally releases, acquits and
forever discharges the Company (as defined in Executive Restated Employment
Agreement) and its affiliated companies and their directors, officers,
employees and representatives, (collectively “Releasees”), from any and all
claims, liabilities, obligations, damages, causes of action, demands, costs,
losses and/or expenses (including attorneys’ fees) of any nature whatsoever,
whether known or unknown, including, but not limited to, rights arising out of
alleged violations of any contracts, express or implied, any covenant of good
faith and fair dealing, express or implied, or any tort, or any legal
restrictions on the Company’s right to terminate employees, or any federal,
state or other governmental statute, regulation, or ordinance, including,
without limitation, Title VII of the Civil Rights Act of 1964, and the Federal
Age Discrimination in Employment Act, which the Executive claims to have
against any of the Releasees (in each case, except as to indemnification
provided by (a) the Executive’s Employment Agreement with the Company (as
amended or superceded from time to time) and/or (b) by the Company’s bylaws and
any indemnification agreement or arrangement permitted by Section 145 of the
Delaware General Corporation Law and by directors, officers and other liability
insurance coverages to the extent the Executive would have enjoyed such
coverages had the Executive remained a director or officer of the Company). In
addition, the Executive waives all rights and benefits afforded by any state
laws which provide in substance that a general release does not extend to
claims which a person does not know or suspect to exist in his favor at the
time of executing the release which, if known by him, must have materially
affected the Executive’s settlement with the other person. The only exception
to the foregoing are claims and rights that may arise after the date of
execution of this Release.

     The Executive represents and acknowledges that in executing this Release
he does not rely and has not relied upon any representation or statement, oral
or written, not set forth herein or in the Agreement made by any of the
Releasees or by any of the Releasees’ agents, representatives or attorneys with
regard to the subject matter, basis or effect of this Release, the Agreement or
otherwise.

The Executive understands and agrees that:

	A.	 	He has had a period of 21 days within which to consider
whether he desires to execute this Agreement, that no one hurried
him into executing this Agreement during that 21-day period, and
that no one coerced him into executing this Agreement.
	 
	B.	 	He has carefully read and fully understands all of the
provisions of this Agreement, and declares that the Agreement is
written in a manner that he understands.

 

 

	C.	 	He is, through this Agreement, releasing the Releasees from
any and all claims he may have against the Releasees, and that this
Agreement constitutes a release and discharge of claims arising
under the Federal Age Discrimination in Employment Act, 29 U.S.C. §§
621-634, including the Older Workers’ Benefit Protection Act, 29
U.S.C. § 626(f).
	 
	D.	 	He declares that his agreement to all of the terms set forth
in this Release is knowing and is voluntary.
	 
	E.	 	He knowingly and voluntarily intends to be legally bound by
the terms of this Release.
	 
	F.	 	He was advised and hereby is advised in writing to consult
with an attorney of his choice concerning the legal effect of this
Release prior to executing this Release.
	 
	G.	 	He understands that rights or claims that may arise after the
date this Agreement is executed are not waived.
	 
	H.	 	He understands that, in connection with the release of any
claim of age discrimination, he has a period of seven days to revoke
his acceptance of this Release, and that he may deliver notification
of revocation by letter or facsimile addressed to the Vice President
& General Counsel of the Company, at 3900 Essex Lane, Suite 1200,
Houston, TX 77027, or (713) 439.8718. Executive understands that
this Agreement will not become effective and binding with respect to
a claim of age discrimination until after the expiration of the
revocation period. The revocation period commences when Executive
executes this Agreement and ends at 11:59 p.m. on the seventh
calendar day after execution, not counting the date on which
Executive executes this Agreement. Executive understands that if he
does not deliver a notice of revocation before the end of the
seven-day period described above, that this Agreement will become a
final, binding and enforceable release of any claim of age
discrimination. This right of revocation shall not affect the
release of any claim other than a claim of age discrimination
arising under federal law.
	 
	I.	 	He understands that nothing in this Agreement shall be
construed to prohibit Executive from filing a charge or complaint,
including a challenge to the validity of this Agreement, with the
Equal Employment Opportunity Commission or participating in any
investigation or proceeding conducted by the Equal Employment
Opportunity Commission.

AGREED AND ACCEPTED, on this 2nd day of August 2004.

	 	 	 
	
	 	/s/Michael E. Wiley
	
	 	
 
	
	 	Michael E. Wiley<PAGE>
                                                                    Exhibit 10.1

                                 LOAN AGREEMENT

            This Agreement dated as of July 29, 2004, is by and among Bank of
America, N.A. (the "Bank"), Mercury Air Group, Inc., a Delaware corporation
("Borrower 1"), Maytag Aircraft Corporation, a Colorado corporation ("Borrower
2"), Mercury Air Cargo, Inc., a California corporation ("Borrower 3"), MercFuel,
Inc., a Delaware corporation ("Borrower 4"), Hermes Aviation, Inc., a California
corporation ("Borrower 5"), and Mercury Air Center - Long Beach, Inc., a
California corporation ("Borrower 6") (Borrower 1, Borrower 2, Borrower 3,
Borrower 4, Borrower 5 and Borrower 6 are sometimes referred to collectively as
the "Borrowers" and individually as the "Borrower").

1.    DEFINITIONS

In addition to the terms which are defined elsewhere in this Agreement, the
following terms have the meanings indicated for the purposes of this Agreement:

      "Acceptable Receivable" means an account receivable which satisfies the
following requirements:

            (a) The account has resulted from the sale of goods or the
performance of services by any Borrower in the ordinary course of such
Borrower's business and without any further obligation on the part of any
Borrower to service, repair, or maintain any such goods sold other than pursuant
to any applicable warranty.

            (b) There are no conditions which must be satisfied before the
Borrowers are entitled to receive payment of the account. Accounts arising from
COD sales, consignments or guaranteed sales are not acceptable.

            (c) The debtor upon the account does not claim any defense to
payment of the account, whether well founded or otherwise.

            (d) The account balance does not include the amount of any
counterclaims or offsets which have been or may be asserted against the
Borrowers by the account debtor (including offsets for any "contra accounts"
owed by the Borrowers to the account debtor for goods purchased by the Borrowers
or for services performed for the Borrowers). To the extent any counterclaims,
offsets, or contra accounts exist in favor of the debtor, such amounts shall be
deducted from the account balance in an amount not to exceed the account balance
before deducting such amounts.

            (e) The account represents a genuine obligation of the debtor for
goods sold to and accepted by the debtor, or for services performed for and
accepted by the debtor. To the extent any credit balances exist in favor of the
debtor, such credit balances shall be deducted from the account balance.

            (f) The account balance does not include the amount of any finance
or service charges payable by the account debtor. To the extent any finance
charges or services charges are included, such amounts shall be deducted from
the account balance.

                                       1
<PAGE>

            (g) The Borrowers have sent an invoice to the debtor in the amount
of the account.

            (h) The Borrowers are not prohibited by the laws of the state where
the account debtor is located from bringing an action in the courts of that
state to enforce the debtor's obligation to pay the account. The Borrowers have
taken all appropriate actions to ensure access to the courts of the state where
the account debtor is located, including, where necessary, the filing of a
Notice of Business Activities Report or other similar filing with the applicable
state agency or the qualification by the Borrowers as a foreign corporation
authorized to transact business in such state.

            (i) The account is owned by the Borrowers free of any title defects
or any liens or interests of others except the security interest in favor of the
Bank.

            (j) The debtor upon the account is not any of the following:

                  (i) except for Mariah Fuels, an employee, affiliate, parent or
            subsidiary of any Borrower, or an entity which has common officers
            or directors with any Borrower.

                  (ii) the U.S. government or any agency or department of the
            U.S. government unless set out on Schedule 1(j)(ii) (Accepted
            Government Contracts) and the Borrowers comply within the time
            prescribed in Section 7.12 hereof, with the procedures in the
            Federal Assignment of Claims Act of 1940 (41 U.S.C. Section15) with
            respect to the obligation.

                  (iii) any state, county, city, town or municipality.

            (k) The account is not in default. An account will be considered in
default if any of the following occur:

                  (i) The account is not paid within 90 days from its invoice
            date, or 60 days from its due date, whichever occurs first;

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

                  (iii) Any petition is filed by or against the debtor obligated
            upon the account under any bankruptcy law or any other law or laws
            for the relief of debtors.

            (l) The account is not the obligation of a debtor who is in default
(as defined above) on 25% or more of the accounts upon which such debtor is
obligated.

            (m) The account does not arise from the sale of goods which remain
in any Borrower's possession or under any Borrower's control.

                                       2
<PAGE>

            (n) Except for the existing obligations as set out on Schedule 1(n),
the account is not evidenced by a promissory note or chattel paper, nor is the
account debtor obligated to any Borrower under any other obligation which is
evidenced by a promissory note.

            Unless notwithstanding (a) through (n), the account is otherwise
acceptable to the Bank.

            In addition to the foregoing limitations, the dollar amount of
      accounts included as Acceptable Receivables which are the obligations of a
      single debtor shall not exceed the concentration limit established for
      that debtor. To the extent the total of such accounts exceeds a debtor's
      concentration limit, the amount of any such excess shall be excluded. The
      concentration limit for each debtor shall be equal to 10 % of the total
      amount of the Borrowers' Acceptable Receivables at that time.

      "Administrative Borrower" shall have the meaning set forth in Section 6.1
hereof.

      "Assignment of Claims" means an Assignment of Claims Under Government
Contract, in form and substance acceptable to the Bank, with respect to each
contract under which Borrower 2 or any other Borrower provides services or goods
to an account debtor which is the United States or any department, agency, or
instrumentality of the United States.

      "Availability" means, with respect to Section 9.10 hereof, as of any date
of determination, the sum of availability of Domestic Acceptable Receivables
under the Borrowing Base plus cash maintained in accounts with the Bank.

      "Basic Fixed Charge Coverage Ratio" means the ratio of (a) the sum of
EBITDA plus lease expense and rent expense, minus income tax, minus dividends,
withdrawals, and other distributions, to (b) the sum of interest expense
(excluding capitalized debt costs classified as interest expense and already
paid), lease expense, rent expense, the current portion of long term debt,
excluding any amounts due under this Agreement, and the current portion of
capitalized lease obligations.

      "Borrowing Base" means the sum of (i) 80% of the balance due on Domestic
Acceptable Receivables plus (ii) 80% of the balance due on Foreign Acceptable
Receivables not to exceed the lesser of $6,000,000 or 25% of Domestic Acceptable
Receivables. After calculating the Borrowing Base, the Bank may, upon notice to
the Borrower, deduct such reserves as the Bank may establish from time to time
in its reasonable credit judgment, including, without limitation, reserves for
100% of outstanding letters of credit, reserves for dilution (any non-cash
reduction of accounts receivable), and the amount of estimated maximum exposure,
as determined by the Bank from time to time, under any interest rate contracts
which the Borrower enters into with the Bank (including interest rate swaps,
caps, floors, options thereon, combinations thereof, or similar contracts).

      "Borrowing Base Certificate" means a certificate substantially in the form
of Exhibit A.

      "Change of Control" means, with respect to any Person (other than Persons
described on Schedule 1 hereto), an event or series of events by which:

                                       3
<PAGE>

            (a) any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any
employee benefit plan of such person or its subsidiaries, any person or entity
acting in its capacity as trustee, agent or other fiduciary or administrator of
any such plan) becomes the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Securities Exchange Act of 1934, except that a person or group
shall be deemed to have "beneficial ownership" of all securities that such
person or group has the right to acquire (such right, an "option right"),
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of 25% or more of the equity securities of such
Person entitled to vote for members of the board of directors or equivalent
governing body of such Person on a fully-diluted basis (and taking into account
all such securities that such person or group has the right to acquire pursuant
to any option right); or

            (b) during any period of 12 consecutive months, a majority of the
members of the board of directors or other equivalent governing body of such
Person cease to be composed of individuals (i) who were members of that board or
equivalent governing body on the first day of such period, (ii) whose election
or nomination to that board or equivalent governing body was approved by
individuals referred to in clause (i) above constituting at the time of such
election or nomination at least a majority of that board or equivalent governing
body or (iii) whose election or nomination to that board or other equivalent
governing body was approved by individuals referred to in clauses (i) and (ii)
above constituting at the time of such election or nomination at least a
majority of that board or equivalent governing body (excluding, in the case of
both clause (ii) and clause (iii), any individual whose initial nomination for,
or assumption of office as, a member of that board or equivalent governing body
occurs as a result of an actual or threatened solicitation of proxies or
consents for the election or removal of one or more directors by any person or
group other than a solicitation for the election of one or more directors by or
on behalf of the board of directors).

      "Collateral" shall mean any and all assets and rights and interests in or
to property of the Borrowers and the Guarantors in which a Lien is granted or
purported to be granted pursuant to the Collateral Documents.

      "Collateral Documents" means all agreements, instruments and documents now
or hereafter executed and delivered in connection with this Agreement pursuant
to which liens are granted or purported to be granted to the Bank, including,
without limitation, the Pledge Agreements, the Security Agreements and the
Assignment of Claims, each in form and substance acceptable to the Bank.

      "Commitment" means the lesser of (i) the Credit Limit or (ii) the
Borrowing Base.

      "Compliance Certificate" means a certificate substantially in the form of
Exhibit B.

      "Credit Limit" means the amount of Thirty Million Dollars
($30,000,000.00).

      "Default" means any event or condition that constitutes an Event of
Default or that, with the giving of any notice, the passage of time, or both,
would be an Event of Default.

                                       4
<PAGE>

      "Domestic Acceptable Receivables" means all Acceptable Receivables other
than Foreign Acceptable Receivables.

      "EBITDA" means net income, less income or plus loss from discontinued
operations and extraordinary items, plus income taxes, plus interest expense,
plus depreciation, depletion and amortization, plus the write-down of goodwill,
plus or minus the cumulative effect of change in accounting principles, plus
non-cash compensation.

      "Event of Default" has the meaning specified in Section 11.

      "Foreign Acceptable Receivables" means any account with a billing address
outside of the United States that is otherwise an Acceptable Receivable.

      "GAAP" means generally accepted accounting principles in the United States
set forth in the opinions and pronouncements of the Accounting Principles Board
and the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or such other
principles as may be approved by a significant segment of the accounting
profession in the United States, that are applicable to the circumstances as of
the date of determination, consistently applied.

      "Guarantors" means, collectively, Mercury Acceptance Corporation, a
California corporation; Jupiter Airline Automation Services, Inc., a Florida
corporation; AEG Finance Corporation, a Delaware corporation; Excel Cargo, Inc.,
a California corporation; Vulcan Aviation, Inc., a California corporation; and
any other Person from time to time executing a Guaranty in favor of the Bank.

      "Guaranty" means the Limited Guaranty made by the Guarantors in favor of
the Bank, substantially in the form of Exhibit C.

      "IRB Obligations" means all indebtedness and other obligations of Borrower
arising in connection with the $19,000,000 California Economic Development
Financing Authority Variable Rate Demand Airport Facilities Revenue Bonds,
Series 1998 (Mercury Air Group, Inc. Project).

      "Lien" means any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge, or preference,
priority or other security interest or preferential arrangement of any kind or
nature whatsoever, choate or inchoate (including any conditional sale or other
title retention agreement, and any financing lease having substantially the same
economic effect as any of the foregoing).

      "Liquidity" means, on a consolidated basis, unencumbered, unrestricted
domestic cash and cash equivalents.

      "Loan Documents" means this Agreement, each Collateral Document, the
Guaranty, and such other documents as may be required hereunder.

                                       5
<PAGE>

      "Material Adverse Effect" means (a) a material adverse change in, or a
material adverse effect upon, the operations, business, properties, liabilities
(actual and contingent), condition (financial or otherwise) or prospects of the
Borrowers and their Subsidiaries taken as a whole; (b) a material impairment of
the ability of any Borrower or any Guarantor to perform its obligations under
any Loan Document to which it is a party; or (c) a material adverse effect upon
the legality, validity, binding effect or enforceability against any Borrower or
any Guarantor of any Loan Document.

      "Notices of Assignment of Claims" means, collectively, the Notices of
Assignment of Clams, executed by the Bank, Borrower 2 and/or such other Borrower
as may be required by the Bank, and addressed to the contracting officer and
disbursing officer with respect to each contract subject to an Assignment of
Claims.

      "Person" means any natural person, corporation, limited liability company,
trusts, joint venture, association, company, partnership, governmental authority
or other entity.

      "Pledge Agreements" means, collectively, the Pledge and Security
Agreements executed by Borrower 1 and/or such other Borrower as may be required
by Bank, pledging to Bank certain stock of the Borrowers and Guarantors,
substantially in the form of Exhibit D.

      "Prime Rate" means the rate of interest publicly announced from time to
time by the Bank as its Prime Rate. The Prime Rate is set by the Bank based on
various factors, including the Bank's costs and desired return, general economic
conditions and other factors, and is used as a referenced point for pricing some
loans. The Bank may price loans to its customers at, above, or below the Prime
Rate. Any change in the Prime Rate shall take effect at the opening of business
on the day specified in the public announcement of a change in the Bank's Prime
Rate.

      "Security Agreements" means, collectively, the Security Agreement executed
by the Borrowers in favor of the Bank, substantially in the form of Exhibit E,
and the Security Agreement executed by the Guarantors in favor of the Bank,
substantially in the form of Exhibit E.

      "Subordinated Liabilities" " means liabilities subordinated to the
Borrower's obligations to the Bank in a manner acceptable to the Bank in its
sole discretion.

      "Subsidiary" of a Person means a corporation, partnership, joint venture,
limited liability company or other business entity of which a majority of the
shares of securities or other interest having ordinary voting power for the
election of directors or other governing body (other than securities having such
power only by reason of the happening of a contingency) are at the time
beneficially owned, or the management of which is otherwise controlled,
directly, or indirectly through one or more intermediaries, or both, by such
Person. Unless otherwise specified, all references herein to a "Subsidiary" or
the "Subsidiaries" shall refer to a Subsidiary or Subsidiaries of any Borrower.

      "Tangible Net Worth" means the book value of total assets (including
leaseholds and leasehold improvements and reserves against assets but excluding
goodwill, patents, trademarks, trade names, organization expense, capitalized or
deferred research and development costs,

                                       6
<PAGE>

deferred marketing expenses, and other like intangibles, and monies due from
affiliates, officers, directors, employees, shareholders, members or managers)
less total liabilities, including but not limited to accrued and deferred income
taxes, but excluding the non-current portion of Subordinated Liabilities.

      "Total Liabilities" means the sum of current liabilities plus long term
liabilities.

2.    LINE OF CREDIT AMOUNT AND TERMS

      2.1 Line of Credit Amount.

            (a) During the availability period described below, the Bank will
provide a line of credit to the Borrowers. The amount of the line of credit (the
"Commitment") is equal to the lesser of (i) the Credit Limit or (ii) the
Borrowing Base.

            (b) This is a revolving line of credit providing for cash advances
and letters of credit. During the availability period, the Borrowers may repay
principal amounts and reborrow them.

            (c) The Borrowers agree not to permit the outstanding principal
balance of advances under the line of credit plus the outstanding amounts of any
letters of credit, including amounts drawn on letters of credit and not yet
reimbursed, to exceed the Commitment. If the Borrowers exceed this limit, the
Borrowers will pay the excess to the Bank within two (2) business days of the
Bank's demand. The Bank may apply payments received from the Borrowers under
this Paragraph to the obligations of the Borrowers to the Bank in the order and
the manner as the Bank, in its discretion, may determine.

      2.2 Availability Period. The line of credit is available between the date
of this Agreement and July 31, 2007, or such earlier date as the availability
may terminate as provided in this Agreement (the "Expiration Date").

      2.3 Conditions to Availability of Credit. In addition to the items
required to be delivered to the Bank under the paragraph entitled "Financial
Information" in the "Covenants" section of this Agreement, the Borrowers will
promptly deliver, or cause to be delivered, the following to the Bank at such
times as may be reasonably requested by the Bank:

            (a) a Borrowing Base Certificate setting forth the Acceptable
Receivables on which the requested extension of credit is to be based.

            (b) provide access to or copies of the invoices or the record of
invoices from the Borrowers' sales journal for such Acceptable Receivables and a
listing of the names and addresses of the debtors obligated thereunder.

            (c) provide access to or copies of the delivery receipts, purchase
orders, shipping instructions, bills of lading and other documentation
pertaining to such Acceptable Receivables.

                                       7
<PAGE>

            (d) provide access to or copies of the cash receipts journal
pertaining to the borrowing certificate.

      2.4 Interest Rate. Unless the Borrowers elect an optional interest rate as
described below, the interest rate is a rate per year equal to the Bank's Prime
Rate.

      2.5 Repayment Terms.

            (a) The Borrowers will pay interest on August 31, 2004, and then on
the last business day of each month thereafter until payment in full of any
principal outstanding under this line of credit.

            (b) The Borrowers will repay in full all principal and any unpaid
interest or other charges outstanding under this line of credit no later than
the Expiration Date. Any interest period for an optional interest rate (as
described below) shall expire no later than the Expiration Date.

      2.6 Optional Interest Rates. Instead of the interest rate based on the
Bank's Prime Rate, the Borrowers may elect the optional interest rates listed
below during interest periods agreed to by the Bank and the Borrowers. The
optional interest rates shall be subject to the terms and conditions described
later in this Agreement. Any principal amount bearing interest at an optional
rate under this Agreement is referred to as a "Portion." The following optional
interest rates are available:

            (a) the LIBOR Rate plus the Applicable Margin as defined below.

            (b) the IBOR Rate plus the Applicable Margin as defined below.

      2.7 Applicable Margin. The Applicable Margin shall be the following
amounts per annum, based upon the Basic Fixed Charge Coverage Ratio as set forth
in the most recent compliance certificate (or, if no compliance certificate is
required, the Borrower's most recent financial statements) received by the Bank
as required in the Covenants section; provided, however, that, until the Bank
receives the first compliance certificate or financial statement, such amounts
shall be those indicated for pricing level 1 set forth below:

<TABLE>
<CAPTION>
                                                      Applicable Margin
                                               (in percentage points per annum)
                     Basic Fixed Charge               IBOR/LIBOR Rate +
Pricing Level          Coverage Ratio
--------------------------------------------------------------------------------
<S>                  <C>                       <C>
      1               1.0:1.0 through                       2.00%
                      1.249:1.0

      2               equal to or greater                   1.75%
                      than 1.25:1.0
</TABLE>

                                       8
<PAGE>

The Applicable Margin shall be in effect from the date the most recent
compliance certificate or financial statement is received by the Bank until the
date the next compliance certificate or financial statement is received;
provided, however, that if the Borrower fails to timely deliver the next
compliance certificate or financial statement, the Applicable Margin from the
date such compliance certificate or financial statement was due until the date
such compliance certificate or financial statement is received by the Bank shall
be the highest pricing level set forth above.

      2.8 Letters of Credit.

            (a) This line of credit may be used for financing:

                  (i) commercial letters of credit with a maximum maturity of
            180 days but not to extend beyond the Expiration Date. Each
            commercial letter of credit will require drafts payable at sight.

                  (ii) standby letters of credit with a maximum maturity of 365
            days but not to extend beyond the Expiration Date. The standby
            letters of credit may include a provision providing that the
            maturity date will be automatically extended each year for an
            additional year unless the Bank gives written notice to the
            contrary.

            (b) The Borrowers agree:

                  (i) any sum drawn under a letter of credit may, at the option
            of the Bank, be added to the principal amount outstanding under this
            Agreement. The amount will bear interest and be due as described
            elsewhere in this Agreement.

                  (ii) if there is a payment default under this Agreement or the
            Bank has accelerated, to immediately prepay and make the Bank whole
            for any outstanding letters of credit.

                  (iii) the issuance of any letter of credit and any amendment
            to a letter of credit must be in form and content satisfactory to
            the Bank and in favor of a beneficiary acceptable to the Bank.

                  (iv) to sign the Bank's form Application and Agreement for
            Commercial Letter of Credit or Application and Agreement for Standby
            Letter of Credit, as applicable.

                  (v) to pay any customary issuance and/or other fees that the
            Bank notifies the Borrowers will be charged for issuing and
            processing letters of credit for the Borrowers.

                  (vi) to allow the Bank to automatically charge its checking
            account for applicable fees, discounts, and other charges.

                                       9
<PAGE>

                  (vii) to pay the Bank a non-refundable fee equal to (i) 1.75%
            per annum of the outstanding undrawn amount of each standby letter
            when the Basic Fixed Charge Coverage Ratio is at pricing level 1 as
            provided in Section 2.7, and (ii) 1.50% per annum of the outstanding
            undrawn amount of each standby letter of credit when the Basic Fixed
            Charge Coverage Ratio is at pricing level 2 as provided in Section
            2.7. This fee is payable monthly in arrears, calculated on the basis
            of the face amount outstanding on the day the fee is calculated.

3.    OPTIONAL INTEREST RATES

      3.1 Optional Rates. Each optional interest rate is a rate per year.
Interest will be paid on the last day of each interest period, and, if the
interest period is longer than one month, then on the first day of each month
during the interest period. At the end of any interest period, the interest rate
will revert to the rate based on the Prime Rate, unless the Borrowers have
designated another optional interest rate for the Portion. No Portion will be
converted to a different interest rate during the applicable interest period.
Upon the occurrence of an event of default under this Agreement, the Bank may
terminate the availability of optional interest rates for interest periods
commencing after the default occurs.

      3.2 LIBOR Rate. The election of LIBOR Rates shall be subject to the
following terms and requirements:

            (a) The interest period during which the LIBOR Rate will be in
effect will be one or two weeks or one, two, three, or six months. The first day
of the interest period must be a day other than a Saturday or a Sunday on which
the Bank is open for business in New York and London and dealing in offshore
dollars (a "LIBOR Banking Day"). The last day of the interest period and the
actual number of days during the interest period will be determined by the Bank
using the practices of the London inter-bank market.

            (b) Each LIBOR Rate Portion will be for an amount not less than One
Hundred Thousand Dollars ($100,000).

            (c) The "LIBOR Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 of one percent. (All
amounts in the calculation will be determined by the Bank as of the first day of
the interest period.)

             LIBOR Rate =     London Inter-Bank Offered Rate
                              ------------------------------
                                (1.00 - Reserve Percentage)

      Where,

                  (i) "London Inter-Bank Offered Rate" means the average per
            annum interest rate at which U.S. dollar deposits would be offered
            for the applicable interest period by major banks in the London
            inter-bank market, as shown on the Telerate Page 3750 (or any
            successor page) at approximately 11:00 a.m. London time two (2)
            London Banking Days before the commencement of the interest period.
            If such rate does not appear on the Telerate Page 3750 (or any
            successor

                                       10
<PAGE>

            page), the rate for that interest period will be determined by such
            alternate method as reasonably selected by the Bank. A "London
            Banking Day" is a day on which the Bank's London Banking Center is
            open for business and dealing in offshore dollars.

                  (ii) "Reserve Percentage" means the total of the maximum
            reserve percentages for determining the reserves to be maintained by
            member banks of the Federal Reserve System for Eurocurrency
            Liabilities, as defined in Federal Reserve Board Regulation D,
            rounded upward to the nearest 1/100 of one percent. The percentage
            will be expressed as a decimal, and will include, but not be limited
            to, marginal, emergency, supplemental, special, and other reserve
            percentages.

            (d) The Borrowers shall irrevocably request a LIBOR Rate Portion no
later than 12:00 noon California time on the LIBOR Banking Day preceding the day
on which the London Inter-Bank Offered Rate will be set, as specified above. For
example, if there are no intervening holidays or weekend days in any of the
relevant locations, the request must be made at least three days before the
LIBOR Rate takes effect.

            (e) The Borrowers may not elect a LIBOR Rate with respect to any
principal amount which is scheduled to be repaid before the last day of the
applicable interest period.

            (f) Each prepayment of a LIBOR Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement.

            (g) The prepayment fee shall be in an amount sufficient to
compensate the Bank for any loss, cost or expense incurred by it as a result of
the prepayment, including any loss of anticipated profits and any loss or
expense arising from the liquidation or reemployment of funds obtained by it to
maintain such Portion or from fees payable to terminate the deposits from which
such funds were obtained. The Borrowers shall also pay any customary
administrative fees charged by the Bank in connection with the foregoing. For
purposes of this paragraph, the Bank shall be deemed to have funded each Portion
by a matching deposit or other borrowing in the applicable interbank market,
whether or not such Portion was in fact so funded.

            (h) The Bank will have no obligation to accept an election for a
LIBOR Rate Portion if any of the following described events has occurred and is
continuing:

                  (i) Dollar deposits in the principal amount, and for periods
            equal to the interest period, of a LIBOR Rate Portion are not
            available in the London inter-bank market; or

                  (ii) the LIBOR Rate does not accurately reflect the cost of a
            LIBOR Rate Portion.

                                       11
<PAGE>

      3.3 IBOR Rate. The election of IBOR Rates shall be subject to the
following terms and requirements:

            (a) The interest period during which the IBOR Rate will be in effect
will be no shorter than one day and no longer than one year. The last day of the
interest period will be determined by the Bank using the practices of the
offshore dollar inter-bank market.

            (b) Each IBOR Rate Portion will be for an amount not less than One
Hundred Thousand Dollars ($100,000).

            (c) The "IBOR Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 of one percent. (All
amounts in the calculation will be determined by the Bank as of the first day of
the interest period.)

                   IBOR Rate =           IBOR Base Rate
                                  ---------------------------
                                  (1.00 - Reserve Percentage)

      Where,

                  (i) "IBOR Base Rate" means the interest rate at which the
            Bank's Grand Cayman Banking Center, Grand Cayman, British West
            Indies, would offer U.S. dollar deposits for the applicable interest
            period to other major banks in the offshore dollar inter-bank
            market.

                  (ii) "Reserve Percentage" means the total of the maximum
            reserve percentages for determining the reserves to be maintained by
            member banks of the Federal Reserve System for Eurocurrency
            Liabilities, as defined in Federal Reserve Board Regulation D,
            rounded upward to the nearest 1/100 of one percent. The percentage
            will be expressed as a decimal, and will include, but not be limited
            to, marginal, emergency, supplemental, special, and other reserve
            percentages.

            (d) Each prepayment of an IBOR Rate Portion, whether voluntary, by
reason of acceleration or otherwise, will be accompanied by the amount of
accrued interest on the amount prepaid, and a prepayment fee as described below.
A "prepayment" is a payment of an amount on a date earlier than the scheduled
payment date for such amount as required by this Agreement.

            (e) The prepayment fee shall be in an amount sufficient to
compensate the Bank for any loss, cost or expense incurred by it as a result of
the prepayment, including any loss of anticipated profits and any loss or
expense arising from the liquidation or reemployment of funds obtained by it to
maintain such Portion or from fees payable to terminate the deposits from which
such funds were obtained. The Borrowers shall also pay any customary
administrative fees charged by the Bank in connection with the foregoing. For
purposes of this paragraph, the Bank shall be deemed to have funded each Portion
by a matching deposit or other borrowing in the applicable interbank market,
whether or not such Portion was in fact so funded.

                                       12
<PAGE>

            (f) The Bank will have no obligation to accept an election for an
IBOR Rate Portion if any of the following described events has occurred and is
continuing:

                  (i) Dollar deposits in the principal amount, and for periods
            equal to the interest period, of an IBOR Rate Portion are not
            available in the offshore dollar inter-bank market; or

                  (ii) the IBOR Rate does not accurately reflect the cost of an
            IBOR Rate Portion.

4.    FEES AND EXPENSES

      4.1 Fees.

            (a) Loan Fee. The Borrower agrees to pay a loan fee with respect to
the Commitment in the amount of Fifty Thousand Dollars ($50,000). This fee is
due upon the closing of this Agreement.

            (b) Unused Commitment Fee. The Borrower agrees to pay a fee on any
difference between the Commitment and the amount of credit it actually uses,
determined by the average of the daily amount of credit outstanding during the
specified period. The calculation of credit outstanding shall include the
undrawn amount of letters of credit. The fee will be calculated at 0.25% per
year. The fee is due monthly in arrears, commencing on August 31, 2004, and on
the last day of each month thereafter until the expiration of the availability
period.

      4.2 Expenses. The Borrower agrees to immediately repay the Bank for
expenses that include, but are not limited to, filing, recording and search
fees, appraisal fees, title report fees and documentation fees. Upon Borrower's
request, Bank will provide reasonable detail explaining such expenses.

      4.3 Reimbursement Costs.

            (a) The Borrower agrees to reimburse the Bank for any expenses it
incurs in the preparation of this Agreement and any agreement or instrument
required by this Agreement. Expenses include, but are not limited to, reasonable
attorneys' fees, including any allocated costs of the Bank's in-house counsel.
Upon the Borrower's request, Bank will provide reasonable detail explaining such
expenses.

            (b) The Borrower agrees to reimburse the Bank for the cost of
periodic audits (currently $750.00 per day) and appraisals of the personal
property collateral securing this Agreement, at such intervals as the Bank may
reasonably require, which shall be at least semi-annually. The audits and
appraisals may be performed by employees of the Bank or by independent
appraisers.

5.    COLLATERAL

                                       13
<PAGE>

      5.1 Personal Property of the Borrowers. The Borrowers' obligations to the
Bank under this Agreement will be secured by personal property the Borrowers now
own or will own in the future as listed below. The collateral is further defined
in Collateral Documents executed by the Borrowers.

            (a) Equipment and fixtures.

            (b) Inventory.

            (c) Receivables.

            (d) Patents, trademarks and other general intangibles, including the
stock of subsidiaries.

      5.2 Personal Property of the Guarantors. The obligations of the Guarantors
to the Bank under the Guaranty will be secured by personal property the
Guarantors now own or will own in the future as listed below. The collateral is
further defined in Collateral Documents executed by the Guarantors.

            (a) Equipment and fixtures.

            (b) Inventory.

            (c) Receivables.

            (d) Patents, trademarks and other general intangibles.

6.    DISBURSEMENTS, PAYMENTS AND COSTS

      6.1 Request for Credit; Borrower 1 as Agent for Borrowers.

      Each request for an extension of credit will be made in writing in a
manner acceptable to the Bank, or by another means acceptable to the Bank. Each
Borrower hereby irrevocably appoints Borrower 1 as the borrowing agent and
attorney-in-fact for all Borrowers (the "Administrative Borrower") which
appointment shall remain in full force and effect unless and until the Bank
shall have received prior written notice signed by each Borrower that such
appointment has been revoked and that another Borrower has been appointed the
Administrative Borrower. Each Borrower hereby irrevocably appoints and
authorizes the Administrative Borrower (i) to provide Bank with all notices with
respect to advances and letters of credit obtained for the benefit of any
Borrower and all other notices and instructions under this Agreement and (ii) to
take such action as the Administrative Borrower deems appropriate on its behalf
to obtain advances and letters of credit and to exercise such other powers as
are reasonably incidental thereto to carry out the purposes of this Agreement.
It is understood that the delegation of these administrative duties to the
Administrative Borrower is done solely as an accommodation to Borrowers in order
to utilize the collective borrowing powers of Borrowers in the most efficient
and economical manner and at their request, and the Bank shall not incur
liability to any Borrower as a result hereof.

                                       14
<PAGE>

      6.2 Disbursements and Payments.

            (a) Each payment by the Borrowers will be made in U.S. Dollars and
immediately available funds by direct debit to a deposit account as specified
below.

            (b) Each disbursement by the Bank will be made in U.S. Dollars and
each payment by the Borrowers will be evidenced by records kept by the Bank. In
addition, the Bank may, at its discretion, require the Borrowers to sign one or
more promissory notes, in accordance with the terms of this Agreement.

      6.3 Telephone and Telefax Authorization.

            (a) The Bank may honor telephone or telefax instructions for
advances or repayments or for the designation of optional interest rates and
telefax requests for the issuance of letters of credit given, or purported to be
given, by any one of the individuals authorized to sign loan agreements on
behalf of any of the Borrowers, or any other individual designated by any one of
such authorized signers.

            (b) Advances will be deposited in and repayments will be withdrawn
from account number 14593-24112, owned by the Administrative Borrower, or such
other accounts with the Bank as designated in writing by the Administrative
Borrower.

            (c) The Borrowers will indemnify and hold the Bank harmless from all
liability, loss, and costs in connection with any act resulting from telephone
or telefax instructions the Bank reasonably believes are made by any individual
authorized by the Borrowers to give such instructions; provided that such
indemnity shall not be available if such liability, loss and costs is the result
of the Bank's gross negligence or wilful misconduct. This paragraph will survive
this Agreement's termination, and will benefit the Bank and its officers,
employees, and agents.

      6.4 Direct Debit (Pre-Billing).

            (a) The Borrowers agree that the Bank will debit deposit account
number 14593-24112 owned by the Administrative Borrower, or such other of the
Borrowers' accounts with the Bank as designated in writing by the Administrative
Borrower (the "Designated Account") on the date each payment of principal and
interest and any fees from the Borrowers becomes due (the "Due Date").

            (b) Approximately 10 days prior to each Due Date, the Bank will mail
to the Administrative Borrower a statement of the amounts that will be due on
that Due Date (the "Billed Amount"). The calculation will be made on the
assumption that no new extensions of credit or payments will be made between the
date of the billing statement and the Due Date, and that there will be no
changes in the applicable interest rate.

            (c) The Bank will debit the Designated Account for the Billed
Amount, regardless of the actual amount due on that date (the "Accrued Amount").
If the Billed Amount

                                       15
<PAGE>

debited to the Designated Account differs from the Accrued Amount, the
discrepancy will be treated as follows:

                  (i) If the Billed Amount is less than the Accrued Amount, the
            Billed Amount for the following Due Date will be increased by the
            amount of the discrepancy. The Borrowers will not be in default by
            reason of any such discrepancy.

                  (ii) If the Billed Amount is more than the Accrued Amount, the
            Billed Amount for the following Due Date will be decreased by the
            amount of the discrepancy.

      Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank will
not pay the Borrowers interest on any overpayment.

            (d) The Borrowers will maintain sufficient funds in the Designated
Account to cover each debit. If there are insufficient funds in the Designated
Account on the date the Bank enters any debit authorized by this Agreement, the
Bank may reverse the debit.

      6.5 Banking Days. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday, Sunday or other day on which commercial
banks are authorized to close, or are in fact closed, in the state where the
Bank's lending office is located, and, if such day relates to amounts bearing
interest at an offshore rate (if any), means any such day on which dealings in
dollar deposits are conducted among banks in the offshore dollar interbank
market. All payments and disbursements which would be due on a day which is not
a banking day will be due on the next banking day. All payments received on a
day which is not a banking day will be applied to the credit on the next banking
day.

      6.6 Taxes. If any payments to the Bank under this Agreement are made from
outside the United States, the Borrowers will not deduct any foreign taxes from
any payments it makes to the Bank. If any such taxes are imposed on any payments
made by the Borrowers (including payments under this paragraph), the Borrowers
will pay the taxes and will also pay to the Bank, at the time interest is paid,
any additional amount which the Bank specifies as necessary to preserve the
after-tax yield the Bank would have received if such taxes had not been imposed.
The Borrowers will confirm that it has paid the taxes by giving the Bank
official tax receipts (or notarized copies) within thirty (30) days after the
due date.

      6.7 Additional Costs. The Borrowers will pay the Bank, on demand, for the
Bank's costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:

            (a) any reserve or deposit requirements; and

                                       16
<PAGE>

            (b) any capital requirements relating to the Bank's assets and
commitments for credit.

      6.8 Interest Calculation. Except as otherwise stated in this Agreement,
all interest and fees, if any, will be computed on the basis of a 360-day year
and the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used. Installments of principal which are not paid
when due under this Agreement shall continue to bear interest until paid.

      6.9 Default Rate. Upon the occurrence of any default under this Agreement,
all amounts outstanding under this Agreement, including any interest, fees or
costs which are not paid when due, will at the option of the Bank bear interest
at a rate which is 4.0 percentage point(s) higher than the rate of interest
otherwise provided under this Agreement. This may result in compounding of
interest. This will not constitute a waiver of any default.

      6.10 Overdrafts. At the Bank's sole option in each instance, the Bank may
do one of the following:

            (a) The Bank may make advances under this Agreement to prevent or
cover an overdraft on any account of any Borrower with the Bank. Each such
advance will accrue interest from the date of the advance or the date on which
the account is overdrawn, whichever occurs first, at the interest rate described
in this Agreement. The Bank may make such advances even if the advances may
cause any credit limit under this Agreement to be exceeded.

            (b) The Bank may reduce the amount of credit otherwise available
under this Agreement by the amount of any overdraft on any account of any
Borrower with the Bank provided that the amount of credit shall be restored upon
restitution by Borrower.

      This paragraph shall not be deemed to authorize the Borrowers to create
overdrafts on any of the Borrowers' accounts with the Bank.

      6.11 Payments in Kind. If the Bank requires delivery in kind of the
proceeds of collection of the Borrowers' accounts receivable, such proceeds
shall be credited to interest, principal, and other sums owed to the Bank under
this Agreement in the order and proportion determined by the Bank in its sole
discretion. All such credits will be conditioned upon collection and any
returned items may, at the Bank's option, be charged to the Borrowers.

7.    CONDITIONS

      The Bank must receive the following items, in form and content acceptable
to the Bank, before it is required to extend any credit to the Borrowers under
this Agreement:

      7.1 Authorizations. Evidence that the execution, delivery and performance
by each Borrower and each Guarantor of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.

                                       17
<PAGE>

      7.2 Governing Documents. A copy of the Borrowers' and the Guarantors'
organizational documents.

      7.3 Security Agreements. Signed original Collateral Documents.

      7.4 Perfection and Evidence of Priority. Financing statements and fixture
filings (and any collateral in which the Bank requires a possessory security
interest), together with evidence that the security interests and liens in favor
of the Bank are valid, enforceable, and prior to all others' rights and
interests, except for purchase money equipment liens.

      7.5 Insurance. Evidence of insurance coverage, as required in the
"Covenants" section of this Agreement.

      7.6 Guaranties. Guaranty signed by each Guarantor.

      7.7 Landlord's Waiver. For any personal property collateral located at
5456 McConnell Avenue, Los Angeles, California 90066, an agreement for the
removal of the collateral upon default, signed by the owner of the real property
and the holder of any mortgage or deed of trust on the real property.

      7.8 Legal Opinions. A written opinion from legal counsel to the Borrowers
and the Guarantors, covering such matters as the Bank may require. The legal
counsel and the terms of the opinion must be acceptable to the Bank.

      7.9 Good Standing. Certificates of good standing for each Borrower and
each Guarantor from its state of formation and from any other state in which
such entity is required to qualify to conduct its business.

      7.10 Payment of Fees. Payment of all accrued and unpaid expenses incurred
by the Bank as required by the paragraph entitled "Reimbursement Costs."

      7.11 Other Items. Any other items that the Bank reasonably requires.

      7.12 Conditions Subsequent. As further consideration for the Bank's
Commitment to extend credit to the Borrowers under this Agreement, the Bank must
receive the following items, in form and content acceptable to the Bank, within
the time periods set forth below. The Borrowers acknowledge that their failure
to deliver to the Bank the items set forth below within the prescribed time
periods shall result in such government receivables being excluded from the
Borrowing Base as not being Acceptable Receivables.

            (a) Government Contracts. Within 120 days from the closing date, the
Notices of Assignment of Claims, duly executed and acknowledged by all parties
thereto.

            (b) Additional Landlord Waivers. Within 90 days of the closing date,
as required by the Bank, for any personal property located on real property
(other than as provided in Section 7.7) which is subject to a mortgage or a deed
of trust or which is not owned by the

                                       18
<PAGE>

Borrower, an agreement for removal of the collateral signed by the owner of the
real property and the holder of any mortgage or deed of trust on the property.

8.    REPRESENTATIONS AND WARRANTIES

      When the Borrowers sign this Agreement, and until the Bank is repaid in
full, the Borrowers make the following representations and warranties. Each
request for an extension of credit constitutes a renewal of these
representations and warranties as of the date of the request:

      8.1 Organization of Borrower. Each Borrower is a corporation duly formed
and existing under the laws of the state where organized.

      8.2 Authorization. This Agreement, and any instrument or agreement
required hereunder, are within each Borrower's powers, have been duly
authorized, and do not conflict with any of its organizational papers.

      8.3 Enforceable Agreement. This Agreement is a legal, valid and binding
agreement of each Borrower, enforceable against each Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.

      8.4 Good Standing. In each state in which each Borrower does business, it
is properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes, except to the extent that the failure to do so could
not reasonably be expected to have a Material Adverse Effect.

      8.5 No Conflicts. This Agreement does not conflict with any law,
agreement, or obligation by which any Borrower is bound.

      8.6 Financial Information. All financial and other information that has
been or will be supplied to the Bank is, to the best of Borrower's knowledge,
sufficiently complete to give the Bank accurate knowledge of the Borrowers' (and
any Guarantor's) financial condition, including all material contingent
liabilities. Since the date of the most recent financial statement provided to
the Bank, there has been no material adverse change in the business condition
(financial or otherwise), operations, properties or prospects of any Borrower
(or any Guarantor).

      8.7 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against any Borrower which, if lost, would impair such Borrower's
financial condition or ability to repay the loan, except as disclosed in
Schedule 8.7 hereto.

      8.8 Collateral. All collateral required in this Agreement is owned by the
grantor of the security interest free of any title defects or any Liens or
interests of others, except those which have been approved by the Bank as
disclosed in Schedule 8.8 hereto.

      8.9 Permits, Franchises. Each Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent

                                       19
<PAGE>

rights and fictitious name rights necessary to enable it to conduct the business
in which it is now engaged.

      8.10 Other Obligations. No Borrower is in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation, except as disclosed in Schedule
8.10 hereto.

      8.11 Tax Matters. No Borrower has any knowledge of any pending assessments
or adjustments of its income tax for any year and all taxes due have been paid,
except as disclosed in Schedule 8.11.

      8.12 No Event of Default. There is no event which is, or with notice or
lapse of time or both would be, a default under this Agreement.

      8.13 Insurance. Each Borrower has obtained, and maintained in effect, the
insurance coverage required in the "Covenants" section of this Agreement.

      8.14 ERISA Plans.

            (a) Each Plan (other than a multiemployer plan) is in compliance in
all material respects with the applicable provisions of ERISA, the Code and
other federal or state law. Each Plan has received a favorable determination
letter from the IRS and to the best knowledge of the Borrower, nothing has
occurred which would cause the loss of such qualification. The Borrower has
fulfilled its obligations, if any, under the minimum funding standards of ERISA
and the Code with respect to each Plan, and has not incurred any liability with
respect to any Plan under Title IV of ERISA.

            (b) There are no claims, lawsuits or actions (including by any
governmental authority), and there has been no prohibited transaction or
violation of the fiduciary responsibility rules, with respect to any Plan which
has resulted or could reasonably be expected to result in a Material Adverse
Effect.

            (c) With respect to any Plan subject to Title IV of ERISA:

                  (i) No reportable event has occurred under Section 4043(c) of
            ERISA for which the PBGC requires 30-day notice.

                  (ii) No action by any Borrower or any ERISA Affiliate to
            terminate or withdraw from any Plan has been taken and no notice of
            intent to terminate a Plan has been filed under Section 4041 of
            ERISA.

                  (iii) No termination proceeding has been commenced with
            respect to a Plan under Section 4042 of ERISA, and no event has
            occurred or condition exists which might constitute grounds for the
            commencement of such a proceeding.

            (d) The following terms have the meanings indicated for purposes of
this Agreement:

                                       20
<PAGE>

                  (i) "Code" means the Internal Revenue Code of 1986, as amended
            from time to time.

                  (ii) "ERISA" means the Employee Retirement Income Security Act
            of 1974, as amended from time to time.

                  (iii) "ERISA Affiliate" means any trade or business (whether
            or not incorporated) under common control with any Borrower within
            the meaning of Section 414(b) or (c) of the Code.

                  (iv) "PBGC" means the Pension Benefit Guaranty Corporation.

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

      8.15 Location of Borrower. Each Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed on Schedule 8.15 hereto.

9.    COVENANTS

      The Borrower agrees, so long as credit is available under this Agreement
and until the Bank is repaid in full:

      9.1 Use of Proceeds. To use the proceeds of the line of credit only for
working capital and any lawful corporate purpose.

      9.2 Financial Information. To provide the following financial information
and statements in form and content acceptable to the Bank, and such additional
information as requested by the Bank from time to time:

            (a) Within 120 days of the fiscal year end of Borrower 1, its annual
financial statements. These financial statements must be audited (with an
unqualified opinion) by a Certified Public Accountant acceptable to the Bank.
These statements shall be prepared on a consolidated and consolidating basis.

            (b) Within 45 days of the period's end (excluding the last period in
each fiscal year), the quarterly financial statements of Borrower 1. These
financial statements may be prepared by Borrower 1 and shall be prepared on a
consolidated and consolidating basis. These financial statements shall include a
schedule of principal debt payments, a schedule of financed and non-financed
capital expenditures, and a cash flow schedule.

            (c) Copies of the Form 10-K Annual Report, Form 10-Q Quarterly
Report and Form 8-K Current Report for Borrower 1 within 30 days after the date
of filing with the Securities and Exchange Commission.

                                       21
<PAGE>

            (d) Within the periods provided in (a) and (b) above, a Compliance
Certificate of the Borrowers signed by an authorized financial officer of the
Administrative Borrower setting forth (i) the information and computations (in
sufficient detail) to establish that the Borrowers are in compliance with all
financial covenants at the end of the period covered by the financial statements
then being furnished and (ii) whether there existed as of the date of such
financial statements and whether there exists as of the date of the certificate,
any default under this Agreement and, if any such default exists, specifying the
nature thereof and the action the Borrowers are taking and propose to take with
respect thereto.

            (e) A Borrowing Base Certificate setting forth the amount of
Acceptable Receivables as of the last day of each month within twenty (20) days
after month end and, upon the Bank's reasonable request, copies of the invoices
or the record of invoices from the Borrower's sales journal for such Acceptable
Receivables, provide access to or copies of the delivery receipts, purchase
orders, shipping instructions, bills of lading and other documentation
pertaining to such Acceptable Receivables, and copies of the cash receipts
journal pertaining to the Borrowing Base Certificate.

            (f) A detailed aging by invoice and a summary aging by account
debtor of the Borrowers' receivables within twenty (20) days after the end of
each month.

            (g) A summary aging by vendor of accounts payable within twenty (20)
days after the end of each month from the Borrowers.

            (h) A listing of the names and addresses of all debtors obligated
upon the Borrowers' accounts receivable within twenty (20) days after the end of
each fiscal year.

            (i) Promptly upon the Bank's reasonable request, such other books,
records, financial and other statements, lists of property and accounts,
budgets, forecasts or reports as to the Borrowers and as to each Guarantor as
the Bank may request.

      9.3 Tangible Net Worth. To maintain on a consolidated basis Tangible Net
Worth equal to at least Twenty Four Million Dollars ($ 24,000,000), increasing
at the end of each fiscal year, commencing with the fiscal year ending June 30,
2005, by an amount equal to Two Million Dollars ($2,000,000) per fiscal year.
Compliance with this covenant will be calculated quarterly, beginning with the
quarter ending June 30, 2004.

      9.4 Debt to Worth. To maintain on a consolidated basis a ratio of Total
Liabilities (excluding the non-current portion of Subordinated Liabilities) to
Tangible Net Worth not exceeding 2.75:1.0 through the quarter ending December
31, 2005 and 2.50: 1.0 effective with the quarter ending March 31, 2006 and each
quarter thereafter. Compliance with this covenant will be calculated quarterly,
beginning with the quarter ending September 30, 2004.

      9.5 Basic Fixed Charge Coverage Ratio. To maintain on a consolidated basis
a Basic Fixed Charge Coverage Ratio of at least 1.00:1.0 through the quarter
ending December 31, 2005 and 1.10:1:0 effective with the quarter ending March
31, 2006 and each quarter thereafter. Compliance with this covenant will be
calculated quarterly, beginning with the quarter ending September 30, 2004. This
ratio will be calculated at the end of each reporting period for which

                                       22
<PAGE>

the Bank requires financial statements, using the results on a cumulative basis
for fiscal year 2005. Calculation methodology will change to a rolling four
quarter basis commencing with the first quarter of fiscal year 2006 and
thereafter. The current portion of long term liabilities will be measured as of
the last day of the calculation period and for the purpose of the calculation of
the Basic Fixed Change Coverage Ratio shall be determined in accordance with the
following: (a) for the reporting period ending September 30, 2004, the current
portion of long term liabilities will be defined as those long term liabilities,
excluding any amounts due and payable in accordance with the terms of this
Agreement, that are due and payable on or before December 31, 2004; (b) for the
reporting period ending December 31, 2004, the current portion of long term
liabilities will be defined as those long term liabilities, excluding amounts
due and payable in accordance with this Agreement, that are due and payable on
or before June 30, 2005; (c) for the reporting period ending March 31, 2005, the
current portion of the long term liabilities shall be defined as those long term
liabilities, excluding amounts due and payable in accordance with this
Agreement, that are due and payable on or before December 31, 2005; and (d) for
all reporting periods after March 31, 2005, the current portion of the long term
liabilities shall be defined as those long term liabilities, excluding amounts
due and payable in accordance with the terms of this Agreement, that are defined
as the current portion of long term debt in accordance with GAAP.

      9.6 Capital Expenditures. Not to spend or incur obligations (including the
total amount of any capital leases) to acquire fixed assets for more than Three
Million Five Hundred Thousand Dollars ($3,500,000) at fiscal year end 2005 and
Three Million Dollars ($3,000,000) at fiscal year end 2006 and each year
thereafter on a consolidated basis. Compliance with this covenant will be
determined annually, commencing with the fiscal year ending June 30, 2005.

      9.7 Liquidity. To maintain on a consolidated basis Liquidity of not less
than Five Million Dollars ($5,000,000) through the quarter ending December 31,
2005 and Two Million Five Hundred Thousand Dollars ($2,500,000) at all times
thereafter. If Borrower maintains a Basic Fixed Charge Coverage Ratio of at
least 1.25:1.0 for three (3) consecutive fiscal quarters, the requirement for
compliance with this covenant shall be suspended; provided, however if such
ratio is not subsequently met during any fiscal quarter, this covenant shall be
automatically reinstated.

      9.8 Other Debts. Not to have outstanding or incur any direct or contingent
liabilities (other than those to the Bank and excluding operating leases), or
become liable for the liabilities of others, without the Bank's written consent,
which consent shall not be unreasonably withheld. This does not prohibit:

            (a) Acquiring goods, supplies, merchandise, or services on normal
            trade credit.

            (b) Endorsing negotiable instruments received in the usual course of
            business.

            (c) Obtaining surety bonds in the usual course of business.

            (d) Liabilities in existence on the date of this Agreement disclosed
            in writing to the Bank.

                                       23
<PAGE>

            (e) Additional debts which do not exceed a total principal amount of
            One Million Dollars ($1,000,000) outstanding at any one time.

      9.9 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property the Borrower now or later owns,
except:

            (a) Liens pursuant to any Loan Document;

            (b) Liens existing on the date hereof and listed on Schedule 9.9
hereto and any renewals or extensions thereof, provided that the property
covered thereby is not increased and any renewal or extension of the obligations
secured or benefited thereby is permitted under this Agreement;

            (c) Liens for taxes not yet due or which are being contested in good
faith and by appropriate proceedings diligently conducted, if adequate reserves
with respect thereto are maintained on the books of the applicable Person in
accordance with GAAP;

            (d) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of business which
are not overdue for a period of more than 30 days or which are being contested
in good faith and by appropriate proceedings diligently conducted, if adequate
reserves with respect thereto are maintained on the books of the applicable
Person in accordance with GAAP;

            (e) pledges or deposits in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other social
security legislation, other than any Lien imposed by ERISA;

            (f) deposits to secure the performance of bids, trade contracts and
leases (other than Indebtedness), statutory obligations, surety bonds (other
than bonds related to judgments or litigation), performance bonds and other
obligations of a like nature incurred in the ordinary course of business;

            (g) easements, rights-of-way, restrictions and other similar
encumbrances affecting real property which, in the aggregate, are not
substantial in amount, and which do not in any case materially detract from the
value of the property subject thereto or materially interfere with the ordinary
conduct of the business of the applicable Person;

            (h) Liens securing judgments for the payment of money not
constituting an Event of Default under Section 11.6 or securing appeal or other
surety bonds relating to such judgments; and

            (i) liens securing indebtedness permitted under Section 9.8(e);
provided that (i) such Liens do not at any time encumber any property other than
the property financed by such indebtedness and (ii) the indebtedness secured
thereby does not exceed the cost or fair market value, whichever is lower, of
the property being acquired on the date of acquisition.

                                       24
<PAGE>

      9.10 Cash Dividends and Stock Repurchases. Exclusive of dividends and
stock repurchases by and between any of the Borrowers to this Agreement,
Borrowers shall not do any of the following in an amount in excess of Four
Million Six Hundred Thousand Dollars ($4,600,000) during any fiscal year
("Annual Limit"): (a) declare or pay any cash dividends on any of the Borrowers'
issued and outstanding stock; (b) repurchase any of the Borrowers' previously
issued and outstanding stock for cash; or (c) create any sinking fund(s) in
relation to the transactions noted in (a) or (b) above. Provided, however, in
each case, except for any dividends or stock repurchases by and between
Borrowers to this Agreement, transactions described herein up to the Annual
Limit are permitted only so long as no Default shall exist or would result
therefrom, and the Borrowers shall have Availability of at least Five Million
Dollars ($5,000,000) before the transaction(s) and after giving effect to such
transaction(s) for at least thirty (30) consecutive days.

      9.11 Loans and Investments. Not to have any existing, or make any new,
loans or other extensions of credit to, or investments in, any individual or
entity, or make any capital contributions or other transfers of assets to, any
individual or entity, except for:

            (a) existing investments in the Borrower's current subsidiaries.

            (b) extensions of credit in the nature of accounts receivable or
notes receivable arising from the sale or lease of goods or services in the
ordinary course of business to non-affiliated entities.

            (c) investments in any of the following:

                  (i) certificates of deposit;

                  (ii) U.S. treasury bills and other obligations of the federal
            government.

      9.12 Notices to Bank. To promptly notify the Bank in writing of:

            (a) except for existing lawsuits set forth on Schedule 9.12(a), any
new lawsuit over Five Hundred Thousand ($500,000) in excess of any insurance
coverage against any Borrower (or any Guarantor).

            (b) any substantial dispute between any Borrower (or any Guarantor
and any government authority, in excess of One Million Dollars ($1,000,000) in
the aggregate.

            (c) any event of default under this Agreement, or any event which,
with notice or lapse of time or both, would constitute an event of default.

            (d) any material adverse change in any Borrower's (or any
guarantor's) business condition (financial or otherwise), operations, properties
or prospects, or ability to repay the credit.

            (e) any change in any Borrower's name, legal structure, principal
place of business, or chief executive office if the Borrower has more than one
place of business.

                                       25
<PAGE>

            (f) excluding contingent liabilities in existence prior to closing
set forth on Schedule 9.12(f), any actual contingent liabilities of any Borrower
(or any Guarantor), and any such contingent liabilities which are reasonably
foreseeable, where such liabilities are in excess of Five Hundred Thousand
Dollars ($500,000) in the aggregate, in excess of any insurance coverage.

      9.13 Books and Records. To maintain adequate books and records.

      9.14 Audits. To allow the Bank and its agents to inspect any Borrower's
properties and examine, audit, and make copies of books and records at any
reasonable time upon at least 24 hours prior notice unless the Borrower is in
default. If any Borrower's properties, books or records are in the possession of
a third party, such Borrower authorizes that third party to permit the Bank or
its agents to have access to perform inspections or audits and to respond to the
Bank's requests for information concerning such properties, books and records.

      9.15 Compliance with Laws. To comply with the laws (including any
fictitious name statute), regulations, and orders of any government body with
authority over the Borrowers' businesses, except where the failure to be in such
compliance would not have a Material Adverse Effect upon the Borrowers.

      9.16 Preservation of Rights. To maintain and preserve all rights,
privileges, and franchises each Borrower now has, except where the failure to
maintain or preserve such rights would not have a Material Adverse Effect upon
the Borrowers.

      9.17 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep each Borrower's properties in good working condition,
except for ordinary wear and tear.

      9.18 Perfection of Liens. To help the Bank perfect and protect its
security interests and liens, and reimburse it for related costs it incurs to
protect its security interests and liens.

      9.19 Cooperation. To take any action reasonably requested by the Bank to
carry out the intent of this Agreement.

      9.20 Insurance.

            (a) Insurance Covering Collateral. To maintain all risk property
damage insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be and include a replacement cost
endorsement in an amount acceptable to the Bank. The insurance must be issued by
an insurance company acceptable to the Bank and must include a lender's loss
payable endorsement in favor of the Bank in a form acceptable to the Bank.

            (b) General Business Insurance. To maintain insurance satisfactory
to the Bank as to amount, nature and carrier covering property damage (including
loss of use and occupancy) to any of the Borrowers' properties, public liability
insurance including coverage for contractual liability, product liability and
workers' compensation, and any other insurance which is usual for the Borrowers'
businesses.

                                       26
<PAGE>

            (c) Evidence of Insurance. Upon the request of the Bank, to deliver
to the Bank a copy of each insurance policy, or, if permitted by the Bank, a
certificate of insurance listing all insurance in force.

      9.21 Additional Negative Covenants. Not to, without the Bank's written
consent:

            (a) engage in any business activities substantially different from
each Borrower's present business.

            (b) liquidate or dissolve any Borrower's business having a tangible
net worth in excess of One Million Dollars ($1,000,000).

            (c) except as set forth in Schedule 9.21(c), enter into any
consolidation, merger, or other combination, or become a partner in a
partnership, a member of a joint venture, or a member of a limited liability
company.

            (d) sell, assign, lease, transfer or otherwise dispose of any assets
in excess of Five Hundred Thousand Dollars ($500,000) for less than fair market
value, or enter into any agreement to do so.

            (e) sell, assign, lease, transfer or otherwise dispose of all or any
substantial part of any Borrower's business or any Borrower's assets.

            (f) enter into any sale and leaseback agreement covering any of its
fixed assets in excess of Five Hundred Thousand Dollars ($500,000) in the
aggregate.

            (g) acquire or purchase a business or its assets.

            (h) voluntarily suspend its business for more than 7 days in any 30
day period.

      9.22 ERISA Plans. Promptly during each year, to pay contributions adequate
to meet at least the minimum funding standards under ERISA with respect to each
and every Plan; file each annual report required to be filed pursuant to ERISA
in connection with each Plan for each year; and notify the Bank within ten (10)
days of the occurrence of any Reportable Event that might constitute grounds for
termination of any capital Plan by the Pension Benefit Guaranty Corporation or
for the appointment by the appropriate United States District Court of a trustee
to administer any Plan. "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended from time to time. Capitalized terms in this paragraph
shall have the meanings defined within ERISA.

      9.23 Guaranties. Within 30 days after any Person becomes a wholly-owned
domestic Subsidiary, cause such Subsidiary to (a) become a Guarantor by
executing and delivering to Bank a counterpart of the Guaranty or such other
document as Bank shall deem appropriate for such purpose, and (b) deliver to
Bank such Collateral Documents as Bank may require in form acceptable to Bank.

                                       27
<PAGE>

      9.24 Bank as Principal Depository. To maintain the Bank as its principal
depository bank, including for the maintenance of business, cash management,
operating and administrative deposit accounts.

10.   HAZARDOUS SUBSTANCES

      10.1 Indemnity Regarding Hazardous Substances. The Borrowers will
indemnify and hold harmless the Bank from any loss or liability the Bank incurs
in connection with or as a result of this Agreement, which directly or
indirectly arises out of the use, generation, manufacture, production, storage,
release, threatened release, discharge, disposal or presence of a hazardous
substance. This indemnity will apply whether the hazardous substance is on,
under or about any Borrower's property or operations or property leased to any
Borrower. The indemnity includes but is not limited to attorneys' fees
(including the reasonable estimate of the allocated cost of in-house counsel and
staff). The indemnity extends to the Bank, its parent, subsidiaries and all of
their directors, officers, employees, agents, successors, attorneys and assigns.

      10.2 Site Visits, Observations and Testing. The Bank and its agents and
representatives will have the right at any reasonable time, after giving
reasonable notice to the Borrowers, to enter and visit any locations where the
collateral securing this Agreement (the "Collateral") is located for the
purposes of observing the Collateral, taking and removing environmental samples,
and conducting tests. The Bank will make reasonable efforts during any site
visit, observation or testing conducted pursuant to this paragraph to avoid
interfering with the Borrowers' use of the Collateral. The Bank is under no duty
to observe the Collateral or to conduct tests, and any such acts by the Bank
will be solely for the purposes of protecting the Bank's security and preserving
the Bank's rights under this Agreement. No site visit, observation or testing or
any report or findings made as a result thereof ("Environmental Report") (i)
will result in a waiver of any default of the Borrowers; (ii) impose any
liability on the Bank; or (iii) be a representation or warranty of any kind
regarding the Collateral (including its condition or value or compliance with
any laws) or the Environmental Report (including its accuracy or completeness).
In the event the Bank has a duty or obligation under applicable laws,
regulations or other requirements to disclose an Environmental Report to the
Borrowers or any other party, the Borrowers authorize the Bank to make such a
disclosure. The Borrowers further understand and agree that any Environmental
Report or other information regarding a site visit, observation or testing that
is disclosed to the Borrowers by the Bank or its agents and representatives is
to be evaluated (including any reporting or other disclosure obligations of the
Borrowers) by the Borrowers without advice or assistance from the Bank.

      10.3 Definition of Hazardous Substances. "Hazardous substances" means any
substance, material or waste that is or becomes designated or regulated as
"toxic," "hazardous," "pollutant," or "contaminant" or a similar designation or
regulation under any federal, state or local law (whether under common law,
statute, regulation or otherwise) or judicial or administrative interpretation
of such, including without limitation petroleum or natural gas. This indemnity
will survive repayment of the Borrowers' obligations to the Bank.

11.   DEFAULT

                                       28
<PAGE>

      If any of the following events (each an "Event of Default") occurs, the
Bank may do one or more of the following: declare the Borrowers in default, stop
making any additional credit available to the Borrowers, and require the
Borrowers to repay its entire debt immediately and without prior notice. If an
event of default occurs under the paragraph entitled "Bankruptcy," below, with
respect to any Borrower, then the entire debt outstanding under this Agreement
will automatically be due immediately.

      11.1 Failure to Pay. The Borrowers fail to pay (i) any amount of principal
and interest payable hereunder when due, or (ii) any fees or other amounts
payable hereunder within five (5) days after the same becomes due.

      11.2 Lien Priority. The Bank fails to have an enforceable first lien
(except for liens permitted under this Agreement and any prior liens to which
the Bank has consented in writing) on or security interest in any material
property given as security for this Agreement (or any guaranty).

      11.3 False Information. Any Borrower or any Guarantor or any party
pledging collateral to the Bank (each an "Obligor") has given the Bank
materially false or misleading information or representations.

      11.4 Bankruptcy. Any Borrower (or any Obligor) files a bankruptcy
petition, a bankruptcy petition is filed against any Borrower (or any Obligor)
or any Borrower (or any Obligor) makes a general assignment for the benefit of
creditors. The default will be deemed cured if any bankruptcy petition filed
against any Borrower (or any Obligor) is dismissed within a period of forty-five
(45) days.

      11.5 Receivers. A receiver or similar official is appointed for a
substantial portion of any Borrower's (or any Obligor's) business, or the
business is terminated.

      11.6 Judgments. Any judgments or arbitration awards are entered against
any Borrower (or any Obligor), or any Borrower (or any Obligor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Seven Hundred Fifty Thousand Dollars ($750,000) or more in
excess of any insurance coverage and is not released, vacated or fully bonded
within 60 calendar days.

      11.7 Government Action. Any government authority takes action that the
Bank in good faith believes materially adversely affects any Borrower's (or any
Obligor's) financial condition or ability to repay.

      11.8 Material Adverse Change. A change occurs that has a Material Adverse
Effect on Borrowers' (or Obligors') business condition (financial or otherwise),
operations, properties or prospects, or ability to repay the credit.

      11.9 Cross-default. Any default occurs under any agreement in connection
with any credit in excess of Three Hundred Thousand Dollars ($300,000) any
Borrower (or any Obligor) has obtained from anyone else, including, without
limitation, the IRB Obligations, or which any

                                       29
<PAGE>

Borrower (or any Obligor) has guaranteed and such default has not been cured
within any applicable cure period.

      11.10 Default under Related Documents. Any default occurs under any
guaranty, subordination agreement, security agreement, deed of trust, mortgage,
or other document required by or delivered in connection with this Agreement or
any such document is no longer in effect, or any guarantor purports to revoke or
disavow the guaranty and any applicable cure period has expired.

      11.11 Other Bank Agreements. Any Borrower (or any Obligor) fails to meet
the conditions of, or fails to perform any obligation under any other agreement
any Borrower (or any Obligor) has with the Bank or any affiliate of the Bank,
unless remedied by the Borrower within any applicable cure period or waived by
the Bank.

      11.12 ERISA Plans. Any one or more of the following events occurs with
respect to a Plan of any Borrower subject to Title IV of ERISA, provided such
event or events could reasonably be expected, in the judgment of the Bank, to
subject any Borrower to any tax, penalty or liability (or any combination of the
foregoing) which, in the aggregate, could have a Material Adverse Effect on the
financial condition of any Borrower:

            (a) A reportable event shall occur under Section 4043(c) of ERISA
with respect to a Plan.

            (b) Any Plan termination (or commencement of proceedings to
terminate a Plan) or the full or partial withdrawal from a Plan by any Borrower
or any ERISA Affiliate.

      11.13 Other Breach Under Agreement. Any Borrower fails to meet the
conditions of, or fails to perform any material obligation under, any term of
this Agreement not specifically referred to in this Article. This includes any
failure by any Borrower to comply with any financial covenants set forth in this
Agreement, whether such failure is evidenced by financial statements delivered
to the Bank or is otherwise known to the Borrowers or the Bank; provided,
however, that Borrower shall have five (5) business days notice to cure any
defaults under Sections 9.12 and/or 9.20.

      11.14 Change of Control. There shall occur a Change of Control.

12.   ENFORCING THIS AGREEMENT; MISCELLANEOUS

      12.1 GAAP. Except as otherwise stated in this Agreement, all financial
statements provided to the Bank and the financial statements used to calculate
the status of compliance with financial covenants shall be prepared in
accordance with GAAP on a consistent basis. Any interim period financial
statements will include, in the opinion of management, all adjustments
consisting of normal recurring adjustments and accruals necessary for a fair
presentation of the financial results for the interim period presented and of
the financial position of the Borrower as of the end of the interim period.

      12.2 California Law. This Agreement is governed by California law.

                                       30
<PAGE>

      12.3 Successors and Assigns. This Agreement is binding on the Borrowers'
and the Bank's successors and assignees. The Borrowers agree that they may not
assign this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrowers with actual or potential participants or assignees; provided
that such actual or potential participants or assignees shall agree to treat all
financial information exchanged as confidential. If a participation is sold or
the loan is assigned, the purchaser will have the right of set-off against the
Borrowers.

      12.4 Arbitration and Waiver of Jury Trial.

            (a) This paragraph concerns the resolution of any controversies or
claims between the Borrowers and the Bank, whether arising in contract, tort or
by statute, including but not limited to controversies or claims that arise out
of or relate to: (i) this Agreement (including any renewals, extensions or
modifications); or (ii) any document related to this Agreement, including,
without limitation, any Collateral Documents (collectively a "Claim").

            (b) At the request of the Borrowers or the Bank, any Claim shall be
resolved by binding arbitration in accordance with the Federal Arbitration Act
(Title 9, U. S. Code) (the "Act"). The Act will apply even though this Agreement
provides that it is governed by the law of a specified state.

            (c) Arbitration proceedings will be determined in accordance with
the Act, the applicable rules and procedures for the arbitration of disputes of
JAMS or any successor thereof ("JAMS"), and the terms of this paragraph. In the
event of any inconsistency, the terms of this paragraph shall control.

            (d) The arbitration shall be administered by JAMS and conducted in
any U. S. state where real or tangible personal property collateral for this
credit is located or if there is no such collateral, in California. All Claims
shall be determined by one arbitrator; however, if Claims exceed Five Million
Dollars ($5,000,000), upon the request of any party, the Claims shall be decided
by three arbitrators. All arbitration hearings shall commence within ninety (90)
days of the demand for arbitration and close within ninety (90) days of
commencement and the award of the arbitrator(s) shall be issued within thirty
(30) days of the close of the hearing. However, the arbitrator(s), upon a
showing of good cause, may extend the commencement of the hearing for up to an
additional sixty (60) days. The arbitrator(s) shall provide a concise written
statement of reasons for the award. The arbitration award may be submitted to
any court having jurisdiction to be confirmed and enforced.

            (e) The arbitrator(s) will have the authority to decide whether any
Claim is barred by the statute of limitations and, if so, to dismiss the
arbitration on that basis. For purposes of the application of the statute of
limitations, the service on JAMS under applicable JAMS rules of a notice of
Claim is the equivalent of the filing of a lawsuit. Any dispute concerning this
arbitration provision or whether a Claim is arbitrable shall be determined by
the arbitrator(s). The arbitrator(s) shall have the power to award legal fees
pursuant to the terms of this Agreement.

                                       31
<PAGE>

            (f) This paragraph does not limit the right of the Borrowers or the
Bank to: (i) exercise self-help remedies, such as but not limited to, setoff;
(ii) initiate judicial or nonjudicial foreclosure against any real or personal
property collateral; (iii) exercise any judicial or power of sale rights, or
(iv) act in a court of law to obtain an interim remedy, such as but not limited
to, injunctive relief, writ of possession or appointment of a receiver, or
additional or supplementary remedies.

            (g) The procedure described above will not apply if the Claim, at
the time of the proposed submission to arbitration, arises from or relates to an
obligation to the Bank secured by real property. In this case, both the
Borrowers and the Bank must consent to submission of the Claim to arbitration.
If both parties do not consent to arbitration, the Claim will be resolved as
follows: The Borrowers and the Bank will designate a referee (or a panel of
referees) selected under the auspices of JAMS in the same manner as arbitrators
are selected in JAMS administered proceedings. The designated referee(s) will be
appointed by a court as provided in California Code of Civil Procedure Section
638 and the following related sections. The referee (or the presiding referee of
the panel) will be an active attorney or a retired judge. The award that results
from the decision of the referee(s) will be entered as a judgment in the court
that appointed the referee, in accordance with the provisions of California Code
of Civil Procedure Sections 644 and 645.

            (h) The filing of a court action is not intended to constitute a
waiver of the right of any Borrower or the Bank, including the suing party,
thereafter to require submittal of the Claim to arbitration.

            (i) By agreeing to binding arbitration, the parties irrevocably and
voluntarily waive any right they may have to a trial by jury in respect of any
Claim. Furthermore, without intending in any way to limit this agreement to
arbitrate, to the extent any Claim is not arbitrated, the parties irrevocably
and voluntarily waive any right they may have to a trial by jury in respect of
such Claim. This provision is a material inducement for the parties entering
into this Agreement.

      12.5 Severability; Waivers. If any part of this Agreement is not
enforceable, the rest of the Agreement may be enforced. The Bank retains all
rights, even if it makes a loan after default. If the Bank waives a default, it
may enforce a later default. Any consent or waiver under this Agreement must be
in writing.

      12.6 Administration Costs. The Borrowers shall pay the Bank for all
reasonable costs incurred by the Bank in connection with administering this
Agreement. Upon the Borrower's request, the Bank will provide reasonable detail
explaining such costs.

      12.7 Attorneys' Fees. The Borrowers shall reimburse the Bank for any
reasonable costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and in
connection with any amendment, waiver, "workout" or restructuring under this
Agreement. In the event of a lawsuit or arbitration proceeding, the prevailing
party is entitled to recover costs and reasonable attorneys' fees incurred in
connection

                                       32
<PAGE>

with the lawsuit or arbitration proceeding, as determined by the court or
arbitrator. In the event that any case is commenced by or against any Borrower
under the Bankruptcy Code (Title 11, United States Code) or any similar or
successor statute, the Bank is entitled to recover costs and reasonable
attorneys' fees incurred by the Bank related to the preservation, protection, or
enforcement of any rights of the Bank in such a case. As used in this paragraph,
"attorneys' fees" includes the allocated costs of the Bank's in-house counsel.

      12.8 Joint and Several Liability.

            (a) Each Borrower agrees that it is jointly and severally liable to
the Bank for the payment of all obligations arising under this Agreement, and
that such liability is independent of the obligations of the other Borrower(s).
Each obligation, promise, covenant, representation and warranty in this
Agreement shall be deemed to have been made by, and be binding upon, each
Borrower, unless this Agreement expressly provides otherwise. The Bank may bring
an action against any Borrower, whether an action is brought against the other
Borrower(s).

            (b) Each Borrower agrees that any release which may be given by the
Bank to the other Borrower(s) or any guarantor will not release such Borrower
from its obligations under this Agreement.

            (c) Each Borrower waives any right to assert against the Bank any
defense, setoff, counterclaim, or claims which such Borrower may have against
the other Borrower(s) or any other party liable to the Bank for the obligations
of the Borrowers under this Agreement.

            (d) Each Borrower waives any defense by reason of any other
Borrower's or any other person's defense, disability, or release from liability.
The Bank can exercise its rights against each Borrower even if any other
Borrower or any other person no longer is liable because of a statute of
limitations or for other reasons.

            (e) Each Borrower agrees that it is solely responsible for keeping
itself informed as to the financial condition of the other Borrower(s) and of
all circumstances which bear upon the risk of nonpayment. Each Borrower waives
any right it may have to require the Bank to disclose to such Borrower any
information which the Bank may now or hereafter acquire concerning the financial
condition of the other Borrower(s).

            (f) Each Borrower waives all rights to notices of default or
nonperformance by any other Borrower under this Agreement. Each Borrower further
waives all rights to notices of the existence or the creation of new
indebtedness by any other Borrower and all rights to any other notices to any
party liable on any of the credit extended under this Agreement.

            (g) The Borrowers represent and warrant to the Bank that each will
derive benefit, directly and indirectly, from the collective administration and
availability of credit under this Agreement. The Borrowers agree that the Bank
will not be required to inquire as to the disposition by any Borrower of funds
disbursed in accordance with the terms of this Agreement.

                                       33
<PAGE>

            (h) Until all obligations of the Borrowers to the Bank under this
Agreement have been paid in full and any commitments of the Bank or facilities
provided by the Bank under this Agreement have been terminated, each Borrower
(a) waives any right of subrogation, reimbursement, indemnification and
contribution (contractual, statutory or otherwise), including without
limitation, any claim or right of subrogation under the Bankruptcy Code (Title
11, United States Code) or any successor statute, which such Borrower may now or
hereafter have against any other Borrower with respect to the indebtedness
incurred under this Agreement; (b) waives any right to enforce any remedy which
the Bank now has or may hereafter have against any other Borrower, and waives
any benefit of, and any right to participate in, any security now or hereafter
held by the Bank.

            (i) Each Borrower waives any right to require the Bank to proceed
against any other Borrower or any other person; proceed against or exhaust any
security; or pursue any other remedy. Further, each Borrower consents to the
taking of, or failure to take, any action which might in any manner or to any
extent vary the risks of the Borrower under this Agreement or which, but for
this provision, might operate as a discharge of the Borrower.

      12.9 One Agreement. This Agreement and any related security or other
agreements required by this Agreement, collectively:

            (a) represent the sum of the understandings and agreements between
the Bank and the Borrowers concerning this credit;

            (b) replace any prior oral or written agreements between the Bank
and the Borrowers concerning this credit; and

            (c) are intended by the Bank and the Borrowers as the final,
complete and exclusive statement of the terms agreed to by them.

      In the event of any conflict between this Agreement and any other
agreements required by this Agreement, this Agreement will prevail.

      12.10 Disposition of Schedules, Reports, Etc. Delivered by Borrowers.
Subject to Section 12.13, the Bank will not be obligated to return any
schedules, invoices, statements, budgets, forecasts, reports or other papers
delivered by the Borrowers. The Bank will destroy or otherwise dispose of such
materials at such time as the Bank, in its discretion, deems appropriate.

      12.11 Returned Merchandise. Until the Bank exercises its rights to collect
the accounts receivable as provided under any security agreement required under
this Agreement, the Borrowers may continue their present policies for returned
merchandise and adjustments. Credit adjustments with respect to returned
merchandise shall be made immediately upon receipt of the merchandise by any
Borrower or upon such other disposition of the merchandise by the debtor in
accordance with such Borrower's instructions. If a credit adjustment is made
with respect to any Acceptable Receivable, the amount of such adjustment shall
no longer be included in the amount of such Acceptable Receivable in computing
the Borrowing Base.

                                       34
<PAGE>

      12.12 Verification of Receivables. The Bank may at any time, either orally
or in writing, request confirmation from any debtor of the current amount and
status of the accounts receivable upon which such debtor is obligated.

      12.13 Confidentiality. The Bank shall use any confidential non-public
information concerning the Borrower that is furnished to it by or on behalf of
the Borrower in connection with the Loan Documents (collectively, "Confidential
Information") solely for the purpose of evaluating and providing products and
services to them and administering and enforcing the Loan Documents, and it will
hold the Confidential Information in confidence. Notwithstanding the foregoing,
the Bank may disclose Confidential Information (a) to its affiliates or any of
its or its affiliates' directors, officers, employees, advisors, or
representatives (collectively, the "Representatives") whom it determines need to
know such information for the purposes set forth in this Section; (b) to any
bank or financial institution or other entity to which the Bank has assigned or
desires to assign an interest or participation in the Loan Documents or the
Obligations, provided that any such foregoing recipient of such Confidential
Information agrees to keep such Confidential Information confidential as
specified herein; (c) to any governmental agency or regulatory body having or
claiming to have authority to regulate or oversee any aspect of the Bank's
business or that of its Representatives in connection with the exercise of such
authority or claimed authority; (d) to the extent necessary or appropriate to
effect or preserve the Bank's or any of its Affiliates' security (if any) for
any Obligation or to enforce any right or remedy or in connection with any
claims asserted by or against the Bank or any of its Representatives; and (e)
pursuant to any subpoena or any similar legal process. For purposes hereof, the
term "Confidential Information" shall not include information that (x) is in the
Bank's possession prior to its being provided by or on behalf of the Borrower,
provided that such information is not known by the Bank to be subject to another
confidentiality agreement with, or other legal or contractual obligation of
confidentiality to, the Borrower, (y) is or becomes publicly available (other
than through a breach hereof by the Bank), or (z) becomes available to the Bank
on a nonconfidential basis, provided that the source of such information was not
known by the Bank to be bound by a confidentiality agreement or other legal or
contractual obligation of confidentiality with respect to such information.

      12.14 Indemnification. Each Borrower will indemnify and hold the Bank
harmless from any loss, liability, damages, judgments, and costs of any kind
relating to or arising directly or indirectly out of (a) this Agreement or any
document required hereunder, (b) any credit extended or committed by the Bank to
the Borrowers hereunder, (c) any claim, whether well-founded or otherwise, that
there has been a failure to comply with any law regulating any Borrower's sales
or leases to or performance of services for debtors obligated upon any
Borrower's accounts receivable and disclosures in connection therewith, and (d)
any litigation or proceeding related to or arising out of this Agreement, any
such document, any such credit, or any such claim; provided, however, such
indemnity shall not be available to the extent such losses, damages, judgments
and costs are determined by a court of competent jurisdiction by final and
non-appealable judgment to have resulted from the gross negligence or wilful
misconduct by the Bank. This indemnity includes but is not limited to attorneys'
fees (including the allocated cost of in-house counsel). This indemnity extends
to the Bank, its parent, subsidiaries and all of their directors, officers,
employees, agents, successors, attorneys, and assigns. This indemnity will

                                       35
<PAGE>

survive repayment of the Borrowers' obligations to the Bank. All sums due to the
Bank hereunder shall be obligations of the Borrowers, due and payable
immediately without demand.

      12.15 Notices. Unless otherwise provided in this Agreement or in another
agreement between the Bank and the Borrower, all notices required under this
Agreement shall be personally delivered or sent by first class mail, postage
prepaid, or by overnight courier, to the addresses on the signature page of this
Agreement, or sent by facsimile to the fax numbers listed on the signature page,
or to such other addresses as the Bank and Administrative Borrower may specify
from time to time in writing. Notices and other communications sent by (a) first
class mail shall be deemed delivered on the earlier of actual receipt or on the
fourth business day after deposit in the U.S. mail, postage prepaid, (b)
overnight courier shall be deemed delivered on the next business day, and (c)
telecopy shall be deemed delivered when transmitted.

      12.16 Headings. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.

      12.17 Counterparts. This Agreement may be executed in as many counterparts
as necessary or convenient, and by the different parties on separate
counterparts each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same agreement.

                  [Remainder of Page Intentionally Left Blank]

                                       36
<PAGE>

      This Agreement is executed as of the date stated at the top of the first
page.

<TABLE>
<S>                                      <C>
Bank of America, N.A.                    Mercury Air Group, Inc.

By:  /s/ Frances R. Martinez
Typed Name: Frances R. Martinez          By:  /s/ Joseph A. Czyzyk
Title:  Vice President                   Typed Name:  Joseph A. Czyzyk
                                         Title:  Chief Executive Officer

Address where notices to the Bank are
to be sent:

2049 Century Park East, Suite 200        Mercury Air Cargo, Inc.
Los Angeles, CA 90067
Facsimile: (310) 785-6100                By:  /s/ Joseph A. Czyzyk
                                         Typed Name:  Joseph A. Czyzyk
                                         Title:  Chief Executive Officer

                                         MercFuel, Inc.

                                         By:  /s/ Joseph A. Czyzyk
                                         Typed Name: Joseph A. Czyzyk
                                         Title:  Chief Executive Officer

                                         Maytag Aircraft Corporation

                                         By:  /s/ Joseph A. Czyzyk
                                         Typed Name:  Joseph A. Czyzyk
                                         Title:  Chief Executive Officer

                                          Hermes Aviation, Inc.

                                         By:  /s/ Joseph A. Czyzyk
                                         Typed Name:  Joseph A. Czyzyk
                                         Title:  Chief Executive Officer
</TABLE>

                                       37
<PAGE>

<TABLE>
<S>                                      <C>
                                         Mercury Air Center-Long Beach, Inc.

                                         By:  /s/ Joseph A. Czyzyk
                                         Typed Name:  Joseph A. Czyzyk
                                         Title:  Chief Executive Officer

                                         Address where notices to the Borrowers
                                         are to be sent:

                                         5456 McConnell Avenue
                                         Los Angeles, California 90066

                                         Facsimile: (310) 827-0650
</TABLE>

                                       38

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