Exhibit 10.9
EXECUTION COPY
SECURITY AGREEMENT
     SECURITY AGREEMENT, dated as of January 17, 2007 (this “Agreement”) made by
HYTHIAM, INC., a Delaware corporation (the “Company”), in favor of HIGHBRIDGE
INTERNATIONAL LLC, a limited liability company organized under the laws of the
Cayman Islands, in its capacity as collateral agent (in such capacity, the
“Collateral Agent”) for the “Buyers” (as defined below) party to the Securities
Purchase Agreement, dated as of even date herewith (as amended, restated or
otherwise modified from time to time, the “Securities Purchase Agreement”).
W I T N E S S E T H:
     WHEREAS, the Company and each party listed as a “Buyer” on the Schedule of
Buyers attached thereto (collectively, the “Buyers”) are parties to the
Securities Purchase Agreement, pursuant to which the Company shall be required
to sell, and the Buyers shall purchase or have the right to purchase, the
“Notes” (as defined therein) issued pursuant thereto (as such Notes may be
amended, restated, replaced or otherwise modified from time to time in
accordance with the terms thereof, collectively, the “Notes”);
     WHEREAS, it is a condition precedent to the Buyers purchasing the Notes
pursuant to the Securities Purchase Agreement that the Company shall have
executed and delivered to the Collateral Agent this Agreement providing for the
grant to the Collateral Agent for the benefit of the Buyers of a security
interest in all personal property of the Company, and all securities,
partnership, membership or other equity interests held by the Company in any
direct or indirect subsidiaries of the Company, to secure all of the Company’s
obligations under the Securities Purchase Agreement, the Notes and the
“Transaction Documents” (as defined in the Securities Purchase Agreement) (the
“Transaction Documents”);
     WHEREAS, the Company has determined that the execution, delivery and
performance of this Agreement directly benefits, and is in the best interest of,
the Company.
     NOW, THEREFORE, in consideration of the premises and the agreements herein
and in order to induce the Buyers to perform under the Securities Purchase
Agreement, the Company agrees with the Collateral Agent, for the benefit of the
Buyers, as follows:
     SECTION 1. Definitions.
     (a) Reference is hereby made to the Securities Purchase Agreement and the
Notes for a statement of the terms thereof. All terms used in this Agreement and
the recitals hereto which are defined in the Securities Purchase Agreement, the
Notes or in Articles 8 or 9 of the Uniform Commercial Code as in effect from
time to time in the State of New York (the “Code”), and which are not otherwise
defined herein shall have the same meanings herein as set forth therein;
provided that terms used herein which are defined in the Code as in effect in
the State of New York on the date hereof shall continue to have the same meaning
notwithstanding any replacement or amendment of such statute except as the
Collateral Agent may otherwise determine.

 

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     (b) The following terms shall have the respective meanings provided for in
the Code: “Accounts”, “Cash Proceeds”, “Chattel Paper”, “Commercial Tort Claim”,
“Commodity Account”, “Commodity Contracts”, “Deposit Account”, “Documents”,
“Equipment”, “Fixtures”, “General Intangibles”, “Goods”, “Instruments”,
“Inventory”, “Investment Property”, “Letter-of-Credit Rights”, “Noncash
Proceeds”, “Payment Intangibles”, “Proceeds”, “Promissory Notes”, “Security”,
“Record”, “Security Account”, “Software”, and “Supporting Obligations”.
     (c) As used in this Agreement, the following terms shall have the
respective meanings indicated below, such meanings to be applicable equally to
both the singular and plural forms of such terms:
     “Capital Stock” means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, and (ii) with respect
to any Person that is not a corporation, any and all partnership, membership or
other equity interests of such Person.
     “Titled Collateral” means all Collateral for which the title to such
Collateral is governed by a Certificate of Title or certificate of ownership,
including, without limitation, all motor vehicles (including, without
limitation, all trucks, trailers, tractors, service vehicles, automobiles and
other mobile equipment) for which the title to such motor vehicles is governed
by a Certificate of Title or certificate of ownership.
     “Copyright Licenses” means all licenses, contracts or other agreements,
whether written or oral, naming the Company as licensee or licensor and
providing for the grant of any right to use or sell any works covered by any
copyright (including, without limitation, all Copyright Licenses set forth in
Schedule II hereto).
     “Copyrights” means all domestic and foreign copyrights, whether registered
or not, including, without limitation, all copyright rights throughout the
universe (whether now or hereafter arising) in any and all media (whether now or
hereafter developed), in and to all original works of authorship fixed in any
tangible medium of expression, acquired or used by the Company (including,
without limitation, all copyrights described in Schedule II hereto), all
applications, registrations and recordings thereof (including, without
limitation, applications, registrations and recordings in the United States
Copyright Office or in any similar office or agency of the United States or any
other country or any political subdivision thereof), and all reissues,
divisions, continuations, continuations in part and extensions or renewals
thereof.
     “Event of Default” shall have the meaning set forth in the Notes.
     “Governmental Authority” means any nation or government, any Federal,
state, city, town, municipality, county, local or other political subdivision
thereof or thereto and any department, commission, board, bureau,
instrumentality, agency or other entity exercising executive, legislative,
judicial, taxing, regulatory or administrative powers or functions of or
pertaining to government.
     “Insolvency Proceeding” means any proceeding commenced by or against any
Person under any provision of the Bankruptcy Code (Chapter 11 of Title 11 of the
United States

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Code) or under any other bankruptcy or insolvency law, assignments for the
benefit of creditors, formal or informal moratoria, compositions, or extensions
generally with creditors, or proceedings seeking reorganization, arrangement, or
other similar relief.
     “Intellectual Property” means the Copyrights, Trademarks and Patents.
     “Licenses” means the Copyright Licenses, the Trademark Licenses and the
Patent Licenses.
     “Lien” means any mortgage, lien, pledge, charge, security interest or other
encumbrance upon or in any property or assets (including accounts and contract
rights).
     “Patent Licenses” means all licenses, contracts or other agreements,
whether written or oral, naming the Company as licensee or licensor and
providing for the grant of any right to manufacture, use or sell any invention
covered by any Patent (including, without limitation, all Patent Licenses set
forth in Schedule II hereto).
     “Patents” means all domestic and foreign letters patent, design patents,
utility patents, industrial designs, inventions, trade secrets, ideas, concepts,
methods, techniques, processes, proprietary information, technology, know-how,
formulae, rights of publicity and other general intangibles of like nature, now
existing or hereafter acquired (including, without limitation, all domestic and
foreign letters patent, design patents, utility patents, industrial designs,
inventions, trade secrets, ideas, concepts, methods, techniques, processes,
proprietary information, technology, know-how and formulae described in
Schedule II hereto), all applications, registrations and recordings thereof
(including, without limitation, applications, registrations and recordings in
the United States Patent and Trademark Office, or in any similar office or
agency of the United States or any other country or any political subdivision
thereof), and all reissues, divisions, continuations, continuations in part and
extensions or renewals thereof.
     “Trademark Licenses” means all licenses, contracts or other agreements,
whether written or oral, naming the Company as licensor or licensee and
providing for the grant of any right concerning any Trademark, together with any
goodwill connected with and symbolized by any such trademark licenses, contracts
or agreements and the right to prepare for sale or lease and sell or lease any
and all Inventory now or hereafter owned by the Company and now or hereafter
covered by such licenses (including, without limitation, all Trademark Licenses
described in Schedule II hereto).
     “Trademarks” means all domestic and foreign trademarks, service marks,
collective marks, certification marks, trade names, business names, d/b/a’s,
Internet domain names, trade styles, designs, logos and other source or business
identifiers and all general intangibles of like nature, now or hereafter owned,
adopted, acquired or used by the Company (including, without limitation, all
domestic and foreign trademarks, service marks, collective marks, certification
marks, trade names, business names, d/b/a’s, Internet domain names, trade
styles, designs, logos and other source or business identifiers described in
Schedule II hereto), all applications, registrations and recordings thereof
(including, without limitation, applications, registrations and recordings in
the United States Patent and Trademark Office or in any similar

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office or agency of the United States, any state thereof or any other country or
any political subdivision thereof), and all reissues, extensions or renewals
thereof, together with all goodwill of the business symbolized by such marks and
all customer lists, formulae and other Records of the Company relating to the
distribution of products and services in connection with which any of such marks
are used.
     SECTION 2. Grant of Security Interest. As collateral security for all of
the “Obligations” (as defined in Section 3 hereof), the Company hereby pledges
and assigns to the Collateral Agent for the benefit of the Buyers, and grants to
the Collateral Agent for the benefit of the Buyers a continuing security
interest in, all personal property of the Company, wherever located and whether
now or hereafter existing and whether now owned or hereafter acquired, of every
kind and description, tangible or intangible (collectively, the “Collateral”),
including, without limitation, the following:
     (a) all Accounts;
     (b) all Chattel Paper (whether tangible or electronic);
     (c) the Commercial Tort Claims;
     (d) all Deposit Accounts, all cash and other property from time to time
deposited therein and the monies and property in the possession or under the
control of the Collateral Agent or Buyer or any affiliate, representative, agent
or correspondent of the Collateral Agent or Buyer;
     (e) all Documents;
     (f) all Equipment;
     (g) all Fixtures;
     (h) all General Intangibles (including, without limitation, all Payment
Intangibles);
     (i) all Goods
     (j) all Instruments (including, without limitation, Promissory Notes and
each certificated Security);
     (k) all Inventory;
     (l) all Investment Property;
     (m) all Copyrights, Patents and Trademarks, and all Licenses;
     (n) all Letter-of-Credit Rights;
     (o) all Supporting Obligations;

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     (p) all other tangible and intangible personal property of the Company
(whether or not subject to the Code), including, without limitation, all bank
and other accounts and all cash and all investments therein, all proceeds,
products, offspring, accessions, rents, profits, income, benefits, substitutions
and replacements of and to any of the property of the Company described in the
preceding clauses of this Section 2 (including, without limitation, any proceeds
of insurance thereon and all causes of action, claims and warranties now or
hereafter held by the Company in respect of any of the items listed above), and
all books, correspondence, files and other Records, including, without
limitation, all tapes, desks, cards, Software, data and computer programs in the
possession or under the control of the Company or any other Person from time to
time acting for the Company, in each case, to the extent of the Company’s rights
therein, that at any time evidence or contain information relating to any of the
property described in the preceding clauses of this Section 2 or are otherwise
necessary or helpful in the collection or realization thereof; and
     (q) all Proceeds, including all Cash Proceeds and Noncash Proceeds, and
products of any and all of the foregoing Collateral;
in each case howsoever the Company’s interest therein may arise or appear
(whether by ownership, security interest, claim or otherwise).
In addition to the foregoing, as further collateral security for all of the
“Obligations” (as defined in Section 3 hereof), the Company hereby pledges and
assigns to the Collateral Agent for the benefit of the Buyers, and grants to the
Collateral Agent for the benefit of the Buyers a continuing security interest
in, all Capital Stock held beneficially or of records by the Company in any
direct or indirect Subsidiary of the Company.
Notwithstanding anything herein to the contrary, the term “Collateral” shall not
include in the case of a Subsidiary of the Company organized under the laws of a
jurisdiction other than the United States, any of the states thereof or the
District of Columbia (a “Foreign Subsidiary”), more than 65% (or such greater
percentage that, due to a change in applicable law after the date hereof,
(i) would not reasonably be expected to cause the undistributed earnings of such
Foreign Subsidiary as determined for United States federal income tax purposes
to be treated as a deemed dividend to such Foreign Subsidiary’s United States
parent and (ii) would not reasonably be expected to cause any material adverse
tax consequences) of the issued and outstanding shares of Capital Stock entitled
to vote (within the meaning of Treas. Reg. Section 1.956-2(c)(2)) (it being
understood and agreed that the Collateral shall include 100% of the issued and
outstanding shares of Capital Stock not entitled to vote (within the meaning of
Treas. Reg. Section 1.956-2(c)(2)) or other equity interest of such Foreign
Subsidiary).
The Company agrees that the pledge of the shares of Capital Stock acquired by
the Company of any and all Persons now or hereafter existing who is a Foreign
Subsidiary may be supplemented by one or more separate pledge agreements, deeds
of pledge, share charges, or other similar agreements or instruments, executed
and delivered by the Company in favor of the Collateral Agent, which pledge
agreements will provide for the pledge of such shares of Capital Stock in
accordance with the laws of the applicable foreign jurisdiction. With respect to
such shares of Capital Stock, the Collateral Agent may, at any time and from
time to time, in its sole discretion,

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take actions in such foreign jurisdictions that will result in the perfection of
the Lien created in such shares of Capital Stock.
     SECTION 3. Security for Obligations. The security interest created hereby
in the Collateral constitutes continuing collateral security for all of the
following obligations, whether now existing or hereafter incurred (collectively,
the “Obligations”):
     (a) for so long as the Notes are outstanding, the payment by the Company,
as and when due and payable (by scheduled maturity, required prepayment,
acceleration, demand or otherwise), of all amounts from time to time owing by it
in respect of the Securities Purchase Agreement, the Notes and the other
Transaction Documents, (i) all principal of and interest on the Notes
(including, without limitation, all interest that accrues after the commencement
of any Insolvency Proceeding of the Company, whether or not the payment of such
interest is unenforceable or is not allowable due to the existence of such
Insolvency Proceeding), and (ii) all fees, commissions, expense reimbursements,
indemnifications and all other amounts due or to become due under any of the
Transaction Documents; and
     (b) for so long as the Notes are outstanding, the due performance and
observance by the Company of all of its other obligations from time to time
existing in respect of any of the Transaction Documents, including without
limitation, with respect to any conversion or redemption rights of the Buyers
under the Notes.
     SECTION 4. Representations and Warranties. The Company represents and
warrants as of the date of this Agreement as follows:
     (a) Schedule I hereto sets forth (i) the exact legal name of the Company,
and (ii) the state of incorporation, organization or formation and the
organizational identification number of the Company in such state.
     (b) There is no pending or, to its knowledge, written notice threatening
any action, suit, proceeding or claim affecting any Guarantor before any
governmental authority or any arbitrator, or any order, judgment or award issued
by any governmental authority or arbitrator, in each case, that may adversely
affect the grant by the Company, or the perfection, of the security interest
purported to be created hereby in the Collateral, or the exercise by the
Collateral Agent of any of its rights or remedies hereunder.
     (c) All Federal, state and local tax returns and other reports required by
applicable law to be filed by the Company have been filed, or extensions have
been obtained, and all taxes, assessments and other governmental charges imposed
upon the Company or any property of the Company (including, without limitation,
all federal income and social security taxes on employees’ wages) and which have
become due and payable on or prior to the date hereof have been paid, except to
the extent contested in good faith by proper proceedings which stay the
imposition of any penalty, fine or Lien resulting from the non-payment thereof
and with respect to which adequate reserves have been set aside for the payment
thereof in accordance with GAAP.
     (d) All Equipment, Fixtures, Goods and Inventory of the Company now
existing are, and all Equipment, Fixtures, Goods and Inventory of the Company
hereafter

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existing will be, located and/or based at the addresses specified therefor in
Schedule III hereto, except that the Company will give the Collateral Agent
written notice of any change in the location of any such Collateral within
20 days of such change, other than to locations set forth on Schedule III hereto
(or a new Schedule III delivered by the Company to Collateral Agent from time to
time) and with respect to which the Collateral Agent has filed financing
statements and otherwise fully perfected its Liens thereon or will take such
actions pursuant to Section 5(n). The Company’s chief place of business and
chief executive office, the place where the Company keeps its Records concerning
Accounts and all originals of all Chattel Paper are located at the addresses
specified therefor in Schedule III hereto. None of the Accounts is evidenced by
Promissory Notes or other Instruments. Set forth in Schedule IV hereto is a
complete and accurate list, as of the date of this Agreement, of (i) each
Promissory Note, Security and other Instrument owned by the Company and
(ii) each Deposit Account, Securities Account and Commodities Account of the
Company, together with the name and address of each institution at which each
such account is maintained, the account number for each such account and a
description of the purpose of each such account. Agreement. Set forth in
Schedule II hereto is a complete and correct list of each trade name used by the
Company and the name of, and each trade name used by, each person from which the
Company has acquired any substantial part of the Collateral.
     (e) The Company has delivered to the Collateral Agent complete and correct
copies of each License described in Schedule II hereto, including all schedules
and exhibits thereto, which represents all of the Licenses existing on the date
of this Agreement. Each such License sets forth the entire agreement and
understanding of the parties thereto relating to the subject matter thereof, and
there are no other agreements, arrangements or understandings, written or oral,
relating to the matters covered thereby or the rights of the Company or any of
its affiliates in respect thereof. Each material License now existing is, and
any material License entered into in the future will be, the legal, valid and
binding obligation of the parties thereto, enforceable against such parties in
accordance with its terms. No default under any material License by any such
party has occurred, nor does any defense, offset, deduction or counterclaim
exist thereunder in favor of any such party.
     (f) The Company owns and controls, or otherwise possesses adequate rights
to use, all Trademarks, Patents and Copyrights, which are the only trademarks,
patents, copyrights, inventions, trade secrets, proprietary information and
technology, know-how, formulae, rights of publicity necessary to conduct its
business in substantially the same manner as conducted as of the date hereof.
Schedule II hereto sets forth a true and complete list of all registered
copyrights, issued Patents, Trademarks, and Licenses annually owned or used by
the Company as of the date hereof. To the best knowledge of the Company, all
such Intellectual Property of the Company is subsisting and in full force and
effect, has not been adjudged invalid or unenforceable, is valid and enforceable
and has not been abandoned in whole or in part. Except as set forth (i) in
Schedule II, (ii) in the Company’s SEC Documents (as such term is defined in the
Securities Purchase Agreement) or (iii) in the customer agreements entered into
in the ordinary course of business substantially in the form of the Company’s
standard Technology License and Administrative Services Agreement, no such
Intellectual Property is the subject of any licensing or franchising agreement.
The Company has no knowledge of any conflict with the rights of others to any
such Intellectual Property and, to the best knowledge of the Company, the
Company is not now infringing or in conflict with any such rights of others in
any material

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respect, and to the best knowledge of the Company, no other Person is now
infringing or in conflict in any material respect with any such properties,
assets and rights owned or used by the Company. The Company has not received any
notice that it is violating or has violated the trademarks, patents, copyrights,
inventions, trade secrets, proprietary information and technology, know-how,
formulae, rights of publicity or other intellectual property rights of any third
party.
     (g) The Company is and will be at all times the sole and exclusive owner
of, or otherwise has and will have adequate rights in, the Collateral free and
clear of any Liens, except for Permitted Liens. No effective financing statement
or other instrument similar in effect covering all or any part of the Collateral
is on file in any recording or filing office except such as (i) may have been
filed in favor of the Collateral Agent and/or the Buyers relating to this
Agreement or the other Security Documents and (ii) are described on
Schedule 4(g) hereto.
     (h) The exercise by the Collateral Agent of any of its rights and remedies
hereunder will not contravene any law or any contractual restriction binding on
or otherwise affecting the Company or any of its properties and will not result
in or require the creation of any Lien, upon or with respect to any of its
properties.
     (i) No authorization or approval or other action by, and no notice to or
filing with, any governmental authority or other regulatory body, is required
for (i) the grant by the Company, or the perfection, of the security interest
purported to be created hereby in the Collateral, or (ii) the exercise by the
Collateral Agent of any of its rights and remedies hereunder, except (except
(A) for the filing under the Uniform Commercial Code as in effect in the
applicable jurisdiction of the financing statements described in Schedule V
hereto (or a new Schedule V delivered by the Company to Collateral Agent from
time to time), all of which financing statements have been duly filed and are in
full force and effect or will be duly filed and in full force and effect,
(B) with respect to Deposit Accounts, and all cash and other property from time
to time deposited therein, for the execution of a control agreement with the
depository institution with which such account is maintained, as provided in
Section 5(i), (C) with respect to Commodity Contracts, for the execution of a
control agreement with the commodity intermediary with which such commodity
contract is carried, as provided in Section 5(i), (D) with respect to the
perfection of the security interest created hereby in the United States
Intellectual Property and Licenses, for the recording of the appropriate
Assignment for Security, substantially in the form of Exhibit A hereto in the
United States Patent and Trademark Office or the United States Copyright Office,
as applicable, (E) with respect to the perfection of the security interest
created hereby in foreign Intellectual Property and Licenses, for registrations
and filings in jurisdictions located outside of the United States and covering
rights in such jurisdictions relating to such foreign Intellectual Property and
Licenses, (F) with respect to the perfection of the security interest created
hereby in Titled Collateral, for the submission of an appropriate application
requesting that the Lien of the Collateral Agent be noted on the Certificate of
Title or certificate of ownership, completed and authenticated by the Company,
together with the Certificate of Title or certificate of ownership, with respect
to such Titled Collateral, to the appropriate governmental authority, (G) with
respect to the perfection of the security interest created hereby in any
Letter-of-Credit Rights, for the consent of the issuer of the applicable letter
of credit to the assignment of proceeds as provided in the Uniform Commercial
Code as in effect in the applicable jurisdiction, (H) with respect to any action
that may be

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necessary to obtain control of Collateral constituting Deposit Accounts,
Commodity Contracts, Electronic Chattel Paper, Investment Property or
Letter-of-Credit Rights, the taking of such actions, and (I) the Collateral
Agent having possession of all Documents, Chattel Paper, Instruments and cash
constituting Collateral (subclauses (A), (B), (C), (D), (E), (F), G), (H) and
(I), each a “Perfection Requirement” and collectively, the “Perfection
Requirements”).
     (j) This Agreement creates in favor of the Collateral Agent a legal, valid
and enforceable security interest in the Collateral, as security for the
Obligations. The Perfection Requirements result in the perfection of such
security interests. Such security interests are, or in the case of Collateral in
which the Company obtains rights after the date hereof, will be, perfected,
first priority security interests, subject only to Permitted Liens and the
Perfection Requirements and the financing statements described in Schedule 4(g).
Such recordings and filings and all other action necessary to perfect and
protect such security interest have been duly taken or will be taken pursuant to
Section 5(n), and, in the case of Collateral in which the Company obtains rights
after the date hereof, will be duly taken, except for the Collateral Agent’s
having possession of all Documents, Chattel Paper, Instruments and cash
constituting Collateral after the date hereof and the other actions, filings and
recordations described above, including the Perfection Requirements.
     (k) As of the date hereof, the Company holds no Commercial Tort Claims and
has no knowledge of any pending Commercial Tort Claims, except for such
Commercial Tort Claims described in Schedule VI.
     SECTION 5. Covenants as to the Collateral. So long as any of the
Obligations shall remain outstanding, unless the Collateral Agent shall
otherwise consent in writing:
     (a) Further Assurances. The Company will at its expense, at any time and
from time to time, promptly execute and deliver all further instruments and
documents and take all further action that the Collateral Agent may reasonably
request in order to: (i) perfect and protect the security interest purported to
be created hereby; (ii) enable the Collateral Agent to exercise and enforce its
rights and remedies hereunder in respect of the Collateral; or (iii) otherwise
effect the purposes of this Agreement, including, without limitation:
(A) marking conspicuously all Chattel Paper and each License and, at the request
of the Collateral Agent, each of its Records pertaining to the Collateral with a
legend, in form and substance satisfactory to the Collateral Agent, indicating
that such Chattel Paper, License or Collateral is subject to the security
interest created hereby, (B) delivering and pledging to the Collateral Agent
pursuant to the Pledge each Promissory Note, Security, Chattel Paper or other
Instrument, now or hereafter owned by the Company, duly endorsed and accompanied
by executed instruments of transfer or assignment, all in form and substance
satisfactory to the Collateral Agent, (C) executing and filing (to the extent,
if any, that the Company’s signature is required thereon) or authenticating the
filing of, such financing or continuation statements, or amendments thereto, as
may be necessary or that the Collateral Agent may reasonably request in order to
perfect and preserve the security interest purported to be created hereby,
(D) furnishing to the Collateral Agent from time to time statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral in each case as the Collateral Agent
may reasonably request, all in reasonable detail, (E) if any Collateral shall be
in the possession of a third party, notifying such Person of the Collateral
Agent’s security interest created hereby and

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obtaining a written acknowledgment from such Person that such Person holds
possession of the Collateral for the benefit of the Collateral Agent, which such
written acknowledgement shall be in form and substance reasonably satisfactory
to the Collateral Agent, (F) if at any time after the date hereof, the Company
acquires or holds any Commercial Tort Claim, promptly notifying the Collateral
Agent in a writing signed by the Company setting forth a brief description of
such Commercial Tort Claim and granting to the Collateral Agent a security
interest therein and in the proceeds thereof, which writing shall incorporate
the provisions hereof and shall be in form and substance satisfactory to the
Collateral Agent, (G) upon the acquisition after the date hereof by the Company
of any motor vehicle or other Equipment subject to a certificate of title or
ownership (other than a Motor Vehicle or Equipment that is subject to a purchase
money security interest), causing the Collateral Agent to be listed as the
lienholder on such certificate of title or ownership and delivering evidence of
the same to the Collateral Agent in accordance with Section 5(j) hereof; and
(H) taking all actions required by any earlier versions of the Uniform
Commercial Code or by other law, as applicable, in any relevant Uniform
Commercial Code jurisdiction, or by other law as applicable in any foreign
jurisdiction.
     (b) Location of Equipment and Inventory. The Company will keep the
Equipment and Inventory (i) at the locations specified therefor on Schedule III
hereto, or (ii) at such other locations set forth on Schedule III (or a new
Schedule III delivered by the Company to Collateral Agent from time to time) and
with respect to which the Collateral Agent has filed financing statements and
otherwise fully perfected its Liens thereon, or (iii) at such other locations in
the United States, provided that within 20 days following the relocation of
Equipment or Inventory to such other location or the acquisition of Equipment or
Inventory, the Company shall deliver to the Collateral Agent a new Schedule III
indicating such new locations.
     (c) Condition of Equipment. The Company will maintain or cause the
Equipment (necessary or useful to its business) to be maintained and preserved
in good condition, repair and working order, ordinary wear and tear excepted,
and will forthwith, or in the case of any loss or damage to any Equipment of the
Company within a commercially reasonable time after the occurrence thereof, make
or cause to be made all repairs, replacements and other improvements in
connection therewith which are necessary or desirable, consistent with past
practice, or which the Collateral Agent may request to such end. The Company
will promptly furnish to the Collateral Agent a statement describing in
reasonable detail any such loss or damage in excess of $250,000 per occurrence
to any Equipment.
     (d) Taxes, Etc. The Company agrees to pay promptly when due all property
and other taxes, assessments and governmental charges or levies imposed upon,
and all claims (including claims for labor, materials and supplies) against, the
Equipment and Inventory, except to the extent the validity thereof is being
contested in good faith by proper proceedings which stay the imposition of any
penalty, fine or Lien resulting from the non-payment thereof and with respect to
which adequate reserves in accordance with GAAP have been set aside for the
payment thereof.
     (e) Insurance.
          (i) The Company will, at its own expense, maintain insurance
(including, without limitation, commercial general liability and property
insurance) with respect

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to the Equipment and Inventory in such amounts, against such risks, in such form
and with responsible and reputable insurance companies or associations as is
required by any governmental authority having jurisdiction with respect thereto
or as is carried generally in accordance with sound business practice by
companies in similar businesses similarly situated and in any event, in amount,
adequacy and scope reasonably satisfactory to the Collateral Agent. To the
extent requested by the Collateral Agent at any time and from time to time, each
such policy for liability insurance shall provide for all losses to be paid on
behalf of the Collateral Agent and the Company as their respective interests may
appear, and each policy for property damage insurance shall provide for all
losses to be adjusted with, and paid directly to, the Collateral Agent. To the
extent requested by the Collateral Agent at any time and from time to time, each
such policy shall in addition (A) name the Collateral Agent as an additional
insured party thereunder (without any representation or warranty by or
obligation upon the Collateral Agent) as their interests may appear, (B) contain
an agreement by the insurer that any loss thereunder shall be payable to the
Collateral Agent on its own account notwithstanding any action, inaction or
breach of representation or warranty by the Company, (C) provide that there
shall be no recourse against the Collateral Agent for payment of premiums or
other amounts with respect thereto, and (D) provide that at least 30 days’ prior
written notice of cancellation, lapse, expiration or other adverse change shall
be given to the Collateral Agent by the insurer. The Company will, if so
requested by the Collateral Agent, deliver to the Collateral Agent original or
duplicate policies of such insurance and, as often as the Collateral Agent may
reasonably request, a report of a reputable insurance broker with respect to
such insurance. The Company will also, at the request of the Collateral Agent,
execute and deliver instruments of assignment of such insurance policies and
cause the respective insurers to acknowledge notice of such assignment.
          (ii) Reimbursement under any liability insurance maintained by the
Company pursuant to this Section 5(e) may be paid directly to the Person who
shall have incurred liability covered by such insurance. In the case of any loss
involving damage to Equipment or Inventory, any proceeds of insurance maintained
by the Company pursuant to this Section 5(e) shall be paid to the Collateral
Agent (except as to which paragraph (iii) of this Section 5(e) is not
applicable), the Company will make or cause to be made the necessary repairs to
or replacements of such Equipment or Inventory, and any proceeds of insurance
maintained by the Company pursuant to this Section 5(e) shall be paid by the
Collateral Agent to the Company as reimbursement for the costs of such repairs
or replacements.
          (iii) Following and during the continuance of an Event of Default, all
insurance payments in respect of such Equipment or Inventory shall be paid to
the Collateral Agent and applied as specified in Section 7(b) hereof.
     (f) Provisions Concerning the Accounts and the Licenses.
          (i) The Company will (A) give the Collateral Agent at least 30 days’
prior written notice of any change in the Company’s name, identity or
organizational structure, (B) maintain its jurisdiction of incorporation,
organization or formation as set forth in Schedule I hereto, (C) immediately
notify the Collateral Agent upon obtaining an organizational identification
number, if on the date hereof the Company did not have such identification
number, and (D) keep adequate records concerning the Accounts and Chattel Paper
and permit

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representatives of the Collateral Agent during normal business hours on
reasonable notice to the Company, to inspect and make abstracts from such
Records and Chattel Paper.
          (ii) The Company will, except as otherwise provided in this subsection
(f), continue to collect, at its own expense, all amounts due or to become due
under the Accounts. In connection with such collections, the Company may (and,
at the Collateral Agent’s direction, will) take such action as the Company or
the Collateral Agent may deem necessary or advisable to enforce collection or
performance of the Accounts; provided, however, that the Collateral Agent shall
have the right at any time, upon the occurrence and during the continuance of an
Event of Default, to notify the account debtors or obligors under any Accounts
of the assignment of such Accounts to the Collateral Agent and to direct such
account debtors or obligors to make payment of all amounts due or to become due
to the Company thereunder directly to the Collateral Agent or its designated
agent and, upon such notification and at the expense of the Company and to the
extent permitted by law, to enforce collection of any such Accounts and to
adjust, settle or compromise the amount or payment thereof, in the same manner
and to the same extent as the Company might have done. After receipt by the
Company of a notice from the Collateral Agent that the Collateral Agent has
notified, intends to notify, or has enforced or intends to enforce the Company’s
rights against the account debtors or obligors under any Accounts as referred to
in the proviso to the immediately preceding sentence, (A) all amounts and
proceeds (including Instruments) received by the Company in respect of the
Accounts shall be received in trust for the benefit of the Collateral Agent
hereunder, shall be segregated from other funds of the Company and shall be
forthwith paid over to the Collateral Agent in the same form as so received
(with any necessary endorsement) to be applied as specified in Section 7(b)
hereof, and (B) the Company will not adjust, settle or compromise the amount or
payment of any Account or release wholly or partly any account debtor or obligor
thereof or allow any credit or discount thereon. In addition, upon the
occurrence and during the continuance of an Event of Default, the Collateral
Agent may (in its sole and absolute discretion) direct any or all of the banks
and financial institutions with which the Company either maintains a Deposit
Account or a lockbox or deposits the proceeds of any Accounts to send
immediately to the Collateral Agent by wire transfer (to such account as the
Collateral Agent shall specify, or in such other manner as the Collateral Agent
shall direct) all or a portion of such securities, cash, investments and other
items held by such institution. Any such securities, cash, investments and other
items so received by the Collateral Agent shall be applied as specified in
accordance with Section 7(b) hereof.
          (iii) Upon the occurrence and during the continuance of any breach or
default under any material License referred to in Schedule II hereto by any
party thereto other than the Company, the Company will, promptly after obtaining
knowledge thereof, give the Collateral Agent written notice of the nature and
duration thereof, specifying what action, if any, it has taken and proposes to
take with respect thereto and thereafter will take reasonable steps to protect
and preserve its rights and remedies in respect of such breach or default, or
will obtain or acquire an appropriate substitute License.
          (iv) The Company will, at its expense, promptly deliver to the
Collateral Agent a copy of each notice or other communication received by it by
which any other party to any material License referred to in Schedule II hereto
purports to exercise any of its

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rights or affect any of its obligations thereunder, together with a copy of any
reply by the Company thereto.
          (v) The Company will exercise promptly and diligently each and every
right which it may have under each material License (other than any right of
termination) and will duly perform and observe in all respects all of its
obligations under each material License and will take all action reasonably
necessary to maintain such Licenses in full force and effect. The Company will
not, without the prior written consent of the Collateral Agent, cancel,
terminate, amend or otherwise modify in any respect, or waive any provision of,
any material License referred to in Schedule II hereto.
     (g) Transfers and Other Liens.
          (i) The Company will not sell, assign (by operation of law or
otherwise), lease, license, exchange or otherwise transfer or dispose of any of
the Collateral, except (A) Inventory in the ordinary course of business, and
(B) worn out or obsolete assets, not necessary to the business.
          (ii) The Company will not create, suffer to exist or grant any Lien
upon or with respect to any Collateral other than a Permitted Lien.
     (h) Intellectual Property.
          (i) If applicable, the Company shall, upon the Collateral Agent’s
written request, duly execute and deliver the applicable Assignment for Security
in the form attached hereto as Exhibit A. The Company (either itself or through
licensees) will, and will cause each licensee thereof to, take all action
necessary to maintain all of the Intellectual Property in full force and effect,
including, without limitation, using the proper statutory notices and markings
and using the Trademarks on each applicable trademark class of goods in order to
so maintain the Trademarks in full force and free from any claim of abandonment
for non-use, and the Company will not (nor permit any licensee thereof to) do
any act or knowingly omit to do any act whereby any Intellectual Property may
become invalidated; provided, however, that so long as no Event of Default has
occurred and is continuing, the Company shall have no obligation to use or to
maintain any Intellectual Property (A) that relates solely to any product or
work, that has been, or is in the process of being, discontinued, abandoned or
terminated, (B) that is being replaced with Intellectual Property substantially
similar to the Intellectual Property that may be abandoned or otherwise become
invalid, so long as the failure to use or maintain such Intellectual Property
does not materially adversely affect the validity of such replacement
Intellectual Property and so long as such replacement Intellectual Property is
subject to the Lien created by this Agreement or (C) that is substantially the
same as another Intellectual Property that is in full force, so long the failure
to use or maintain such Intellectual Property does not materially adversely
affect the validity of such replacement Intellectual Property and so long as
such other Intellectual Property is subject to the Lien and security interest
created by this Agreement. The Company will cause to be taken all necessary
steps in any proceeding before the United States Patent and Trademark Office and
the United States Copyright Office or any similar office or agency in any other
country or political subdivision thereof to maintain each registration of the
Intellectual Property (other than the Intellectual Property described in the
proviso to the immediately preceding sentence), including,

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without limitation, filing of renewals, affidavits of use, affidavits of
incontestability and opposition, interference and cancellation proceedings and
payment of maintenance fees, filing fees, taxes or other governmental fees. If
any Intellectual Property (other than Intellectual Property described in the
proviso to the first sentence of subsection (i) of this clause (h)) is
infringed, misappropriated, diluted or otherwise violated in any material
respect by a third party, the Company shall (x) upon learning of such
infringement, misappropriation, dilution or other violation, promptly notify the
Collateral Agent and (y) to the extent the Company shall deem appropriate under
the circumstances, promptly sue for infringement, misappropriation, dilution or
other violation, seek injunctive relief where appropriate and recover any and
all damages for such infringement, misappropriation, dilution or other
violation, or take such other actions as the Company shall deem appropriate
under the circumstances to protect such Intellectual Property. The Company shall
furnish to the Collateral Agent from time to time upon its request statements
and schedules further identifying and describing the Intellectual Property and
Licenses and such other reports in connection with the Intellectual Property and
Licenses as the Collateral Agent may reasonably request, all in reasonable
detail and promptly upon request of the Collateral Agent, following receipt by
the Collateral Agent of any such statements, schedules or reports, the Company
shall modify this Agreement by amending Schedule II hereto, as the case may be,
to include any Intellectual Property and License, as the case may be, which
becomes part of the Collateral under this Agreement and shall execute and
authenticate such documents and do such acts as shall be necessary or, in the
reasonable judgment of the Collateral Agent, desirable to subject such
Intellectual Property and Licenses to the Lien and security interest created by
this Agreement. Notwithstanding anything herein to the contrary, upon the
occurrence and during the continuance of an Event of Default, the Company may
abandon or otherwise permit any Intellectual Property to become invalid without
the prior written consent of the Collateral Agent, and if any Intellectual
Property is infringed, misappropriated, diluted or otherwise violated in any
material respect by a third party, the Company will take such action as the
Collateral Agent shall deem appropriate under the circumstances to protect such
Intellectual Property.
          (ii) In no event shall the Company, either itself or through any
agent, employee, licensee or designee, file an application for the registration
of any Trademark or Copyright or the issuance of any Patent with the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable, or in any similar office or agency of the United States or any
country or any political subdivision thereof unless it gives the Collateral
Agent prior written notice thereof. Upon request of the Collateral Agent, the
Company shall execute, authenticate and deliver any and all assignments,
agreements, instruments, documents and papers as the Collateral Agent may
reasonably request to evidence the Collateral Agent’s security interest
hereunder in such Intellectual Property and the General Intangibles of the
Company relating thereto or represented thereby, and the Company hereby appoints
the Collateral Agent its attorney-in-fact to execute and/or authenticate and
file all such writings for the foregoing purposes, all acts of such attorney
being hereby ratified and confirmed, and such power (being coupled with an
interest) shall be irrevocable until the indefeasible payment in full in cash of
all of the Obligations in full.
     (i) Deposit, Commodities and Securities Accounts. Upon the Collateral
Agent’s written request and subject to Section 10(f) of the Note, the Company
shall cause each bank and other financial institution with an account referred
to in Schedule IV hereto to execute and deliver to the Collateral Agent a
control agreement, in form and substance reasonably

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satisfactory to the Collateral Agent, duly executed by the Company and such bank
or financial institution, or enter into other arrangements in form and substance
satisfactory to the Collateral Agent, pursuant to which such institution shall
irrevocably agree, inter alia, that (i) it will comply at any time with the
instructions originated by the Collateral Agent to such bank or financial
institution directing the disposition of cash, Commodity Contracts, securities,
Investment Property and other items from time to time credited to such account,
without further consent of the Company, which instructions the Collateral Agent
will not give to such bank or other financial institution in the absence of a
continuing Event of Default under Sections 3(a)(i), 3(a)(ii), 3(a)(iii) and
3(a)(iv) of the Note, (ii) all Commodity Contracts, securities, Investment
Property and other items of the Company deposited with such institution shall be
subject to a perfected, first priority security interest in favor of the
Collateral Agent, (iii) any right of set off (other than recoupment of standard
fees), banker’s Lien or other similar Lien, security interest or encumbrance
shall be fully waived as against the Collateral Agent, and (iv) upon receipt of
written notice from the Collateral Agent during the continuance of an Event of
Default, such bank or financial institution shall immediately send to the
Collateral Agent by wire transfer (to such account as the Collateral Agent shall
specify, or in such other manner as the Collateral Agent shall direct) all such
cash (not to exceed, in any event, the Obligations), the value of any Commodity
Contracts, securities, Investment Property and other items held by it. Without
the prior written consent of the Collateral Agent, the Company shall not make or
maintain any Deposit Account, Commodity Account or Securities Account except for
the accounts set forth in Schedule IV hereto. The provisions of this paragraph
5(i) shall not apply to (i) Deposit Accounts for which the Collateral Agent is
the depositary and (ii) Deposit Accounts specially and exclusively used for
payroll, payroll taxes and other employee wage and benefit payments to or for
the benefit of the Company’s salaried or hourly employees.
     (j) Titled Collateral. At the request of the Collateral Agent’s written
request, the Company shall (i) cause all Collateral, now owned or hereafter
acquired by the Company, which under applicable law are required to be
registered, to be properly registered in the name of the Company, (ii) cause all
Titled Collateral, to be properly titled in the name of the Company, and if
requested by the Collateral Agent, with the Collateral Agent’s Lien noted
thereon and (iii) if requested by the Collateral Agent, promptly deliver to the
Collateral Agent (or its custodian) originals of such Certificates of Title or
certificates of ownership for such Titled Collateral, with the Collateral
Agent’s Lien noted thereon, and take such other actions as may be reasonably
required by the Collateral Agent.
     (k) Control. The Company hereby agrees to take any or all action that may
be necessary or that the Collateral Agent may reasonably request in order for
the Collateral Agent to obtain control in accordance with Sections 9-105 – 9-107
of the Code with respect to the following Collateral: (i) Electronic Chattel
Paper, (ii) Investment Property, and (iii) Letter-of-Credit Rights.
     (l) Inspection and Reporting. The Company shall permit the Collateral
Agent, or any agent or representatives thereof or such professionals or other
Persons as the Collateral Agent may designate, during normal business hours,
after reasonable notice in the absence of an Event of Default, and charge such
costs for one visit per year to the Company therefor, (i) to examine and make
copies of and abstracts from the Company’s records and books of account, (ii) to
visit and inspect its properties, (iii) to verify materials, leases,
Instruments,

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Accounts, Inventory and other assets of the Company from time to time, and
(iv) to conduct audits, physical counts, appraisals and/or valuations,
examinations at the locations of the Company. The Company shall also permit the
Collateral Agent, or any agent or representatives thereof or such professionals
or other Persons as the Collateral Agent may designate to discuss the Company’s
affairs, finances and accounts with any of its directors, officers, managerial
employees, independent accountants or any of its other representatives.
     (m) Future Subsidiaries. Future Subsidiaries. If the Company shall
hereafter create or acquire (i) any Subsidiary with assets in excess of
$1,000,000, simultaneously with the creation or acquisition of such Subsidiary,
or (ii) if any Subsidiary so created or acquired shall subsequently acquire
obtain assets such that the total assets of such Subsidiary exceed $1,000,000,
then within 5 Business Days, the Company shall (x) execute and deliver to the
Collateral Agent, a pledge agreement, in form and substance satisfactory to the
Collateral Agent, pursuant to which the Company shall pledge the securities,
partnership, membership or other equity interests of such Subsidiary to the
Collateral Agent as additional collateral for the payment and performance of the
Obligations, together with (A) certificates, if any, evidencing all of the
securities, partnership, membership or other equity interests of such
Subsidiary, (B) undated stock powers or other appropriate instruments of
assignment executed in blank with signature guaranteed, (C) such opinion of
counsel and such approving certificate of such Subsidiary as the Collateral
Agent may reasonably request in respect of complying with any legend on any such
certificate or any other matter relating to such shares and (D) such other
agreements, instruments, approvals, legal opinions or other documents requested
by the Collateral Agent, (y) cause such Subsidiary to duly execute and deliver a
guaranty of the Obligations in favor of the Collateral Agent in form and
substance reasonably acceptable to the Collateral Agent, and (z) shall duly
execute and/or deliver such opinions of counsel and other documents, in form and
substance reasonably acceptable to the Collateral Agent, as the Collateral Agent
shall reasonably request with respect thereto, provided that the Company that
acquires a subsidiary on or within two days after the Closing Date shall have 10
Business Days in which to satisfy the requirements of this Section 5(m).
     SECTION 6. Additional Provisions Concerning the Collateral.
     (a) To the maximum extent permitted by applicable law, and for the purpose
of taking any action that the Collateral Agent may deem necessary or advisable
to accomplish the purposes of this Agreement, the Company hereby (i) authorizes
the Collateral Agent to execute any such agreements, instruments or other
documents in the Company’s name and to file such agreements, instruments or
other documents in the Company’s name and in any appropriate filing office,
(ii) authorizes the Collateral Agent at any time and from time to time to file,
one or more financing or continuation statements, and amendments thereto,
relating to the Collateral (including, without limitation, any such financing
statements that (A) describe the Collateral as “all assets” or “all personal
property” (or words of similar effect) or that describe or identify the
Collateral by type or in any other manner as the Collateral Agent may determine
regardless of whether any particular asset of the Company falls within the scope
of Article 9 of the Uniform Commercial Code or whether any particular asset of
the Company constitutes part of the Collateral, and (B) contain any other
information required by Part 5 of Article 9 of the Code for the sufficiency or
filing office acceptance of any financing statement, continuation statement or
amendment, including, without limitation, whether the Company is an
organization, the type of

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organization and any organizational identification number issued to the Company
) and (iii) ratifies such authorization to the extent that the Collateral Agent
has filed any such financing or continuation statements, or amendments thereto,
prior to the date hereof. A photocopy or other reproduction of this Agreement or
any financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
     (b) The Company hereby irrevocably appoints the Collateral Agent as its
attorney-in-fact and proxy, with full authority in the place and stead of the
Company and in the name of the Company or otherwise, from time to time in the
Collateral Agent’s discretion, so long as an Event of Default shall have
occurred and is continuing, to take any action and to execute any instrument
which the Collateral Agent may reasonably deem necessary or advisable to
accomplish the purposes of this Agreement (subject to the rights of the Company
under Section 5 hereof), including, without limitation, (i) to obtain and adjust
insurance required to be paid to the Collateral Agent pursuant to Section 5(e)
hereof, (ii) to ask, demand, collect, sue for, recover, compound, receive and
give acquittance and receipts for moneys due and to become due under or in
respect of any Collateral, (iii) to receive, endorse, and collect any drafts or
other instruments, documents and chattel paper in connection with clause (i) or
(ii) above, (iv) to file any claims or take any action or institute any
proceedings which the Collateral Agent may deem necessary or desirable for the
collection of any Collateral or otherwise to enforce the rights of the
Collateral Agent and the Buyers with respect to any Collateral, and (v) to
execute assignments, licenses and other documents to enforce the rights of the
Collateral Agent and the Buyers with respect to any Collateral. This power is
coupled with an interest and is irrevocable until all of the Obligations are
indefeasibly paid in full in cash.
     (c) For the purpose of enabling the Collateral Agent to exercise rights and
remedies hereunder, at such time as the Collateral Agent shall be lawfully
entitled to exercise such rights and remedies, and for no other purpose, the
Company hereby grants to the Collateral Agent, to the extent assignable, an
irrevocable, non-exclusive license (exercisable without payment of royalty or
other compensation to the Company) to use, assign, license or sublicense any
Intellectual Property now owned or hereafter acquired by the Company, wherever
the same may be located, including in such license reasonable access to all
media in which any of the licensed items may be recorded or stored and to all
computer programs used for the compilation or printout thereof. Notwithstanding
anything contained herein to the contrary, but subject to the provisions of the
Securities Purchase Agreement that limit the right of the Company to dispose of
its property, and Section 5(g) and Section 5(h) hereof, so long as no Event of
Default shall have occurred and be continuing, the Company may exploit, use,
enjoy, protect, license, sublicense, assign, sell, dispose of or take other
actions with respect to the Intellectual Property in the ordinary course of its
business. In furtherance of the foregoing, unless an Event of Default shall have
occurred and be continuing, the Collateral Agent shall from time to time, upon
the request of the Company, execute and deliver any instruments, certificates or
other documents, in the form so requested, which the Company shall have
certified are appropriate (in the Company’s judgment) to allow it to take any
action permitted above (including relinquishment of the license provided
pursuant to this clause (c) as to any Intellectual Property). Further, upon the
indefeasible payment in full in cash of all of the Obligations, the Collateral
Agent (subject to Section 10(e) hereof) shall release and reassign to the
Company all of the Collateral Agent’s right, title and interest in and to the
Intellectual Property, and the Licenses, all without recourse, representation or
warranty whatsoever. The exercise of rights and remedies hereunder by the

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Collateral Agent shall not terminate the rights of the holders of any licenses
or sublicenses theretofore granted by the Company in accordance with the second
sentence of this clause (c). The Company hereby releases the Collateral Agent
from any claims, causes of action and demands at any time arising out of or with
respect to any actions taken or omitted to be taken by the Collateral Agent
under the powers of attorney granted herein other than actions taken or omitted
to be taken through the Collateral Agent’s gross negligence or willful
misconduct, as determined by a final determination of a court of competent
jurisdiction.
     (d) If the Company fails to perform any agreement or obligation contained
herein, the Collateral Agent may itself perform, or cause performance of, such
agreement or obligation, in the name of the Company or the Collateral Agent, and
the expenses of the Collateral Agent incurred in connection therewith shall be
payable by the Company pursuant to Section 8 hereof and shall be secured by the
Collateral.
     (e) The powers conferred on the Collateral Agent hereunder are solely to
protect its interest in the Collateral and shall not impose any duty upon it to
exercise any such powers. Except for the safe custody of any Collateral in its
possession and the accounting for moneys actually received by it hereunder, the
Collateral Agent shall have no duty as to any Collateral or as to the taking of
any necessary steps to preserve rights against prior parties or any other rights
pertaining to any Collateral.
     (f) Anything herein to the contrary notwithstanding (i) the Company shall
remain liable under the Licenses and otherwise with respect to any of the
Collateral to the extent set forth therein to perform all of its obligations
thereunder to the same extent as if this Agreement had not been executed,
(ii) the exercise by the Collateral Agent of any of its rights hereunder shall
not release the Company from any of its obligations under the Licenses or
otherwise in respect of the Collateral, and (iii) the Collateral Agent shall not
have any obligation or liability by reason of this Agreement under the Licenses
or with respect to any of the other Collateral, nor shall the Collateral Agent
be obligated to perform any of the obligations or duties of the Company
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder.
     SECTION 7. Remedies Upon Event of Default. If any Event of Default shall
have occurred and be continuing:
     (a) The Collateral Agent may exercise in respect of the Collateral, in
addition to any other rights and remedies provided for herein or otherwise
available to it, all of the rights and remedies of a secured party upon default
under the Code (whether or not the Code applies to the affected Collateral), and
also may (i) take absolute control of the Collateral, including, without
limitation, transfer into the Collateral Agent’s name or into the name of its
nominee or nominees (to the extent the Collateral Agent has not theretofore done
so) and thereafter receive, for the benefit of the Collateral Agent, all
payments made thereon, give all consents, waivers and ratifications in respect
thereof and otherwise act with respect thereto as though it were the outright
owner thereof, (ii) require the Company to, and the Company hereby agrees that
it will at its expense and upon request of the Collateral Agent forthwith,
assemble all or part of its respective Collateral as directed by the Collateral
Agent and make it available to the Collateral Agent at a place or places to be
designated by the Collateral Agent that is reasonably convenient

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to both parties, and the Collateral Agent may enter into and occupy any premises
owned or leased by the Company where the Collateral or any part thereof is
located or assembled for a reasonable period in order to effectuate the
Collateral Agent’s rights and remedies hereunder or under law, without
obligation to the Company in respect of such occupation, and (iii) without
notice except as specified below and without any obligation to prepare or
process the Collateral for sale, (A) sell the Collateral or any part thereof in
one or more parcels at public or private sale, at any of the Collateral Agent’s
offices or elsewhere, for cash, on credit or for future delivery, and at such
price or prices and upon such other terms as the Collateral Agent may deem
commercially reasonable and/or (B) lease, license or dispose of the Collateral
or any part thereof upon such terms as the Collateral Agent may deem
commercially reasonable. The Company agrees that, to the extent notice of sale
or any other disposition of its respective Collateral shall be required by law,
at least ten (10) days’ notice to the Company of the time and place of any
public sale or the time after which any private sale or other disposition of its
respective Collateral is to be made shall constitute reasonable notification.
The Collateral Agent shall not be obligated to make any sale or other
disposition of any Collateral regardless of notice of sale having been given.
The Collateral Agent may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was so adjourned. The
Company hereby waives any claims against the Collateral Agent and the Buyers
arising by reason of the fact that the price at which its respective Collateral
may have been sold at a private sale was less than the price which might have
been obtained at a public sale or was less than the aggregate amount of the
Obligations, even if the Collateral Agent accepts the first offer received and
does not offer such Collateral to more than one offeree, and waives all rights
that the Company may have to require that all or any part of such Collateral be
marshaled upon any sale (public or private) thereof. The Company hereby
acknowledges that (i) any such sale of its respective Collateral by the
Collateral Agent shall be made without warranty, (ii) the Collateral Agent may
specifically disclaim any warranties of title, possession, quiet enjoyment or
the like, and (iii) such actions set forth in clauses (i) and (ii) above shall
not adversely affect the commercial reasonableness of any such sale of
Collateral. In addition to the foregoing, (1) upon written notice to the Company
from the Collateral Agent after and during the continuance of an Event of
Default, the Company shall cease any use of the Intellectual Property or any
trademark, patent or copyright similar thereto for any purpose described in such
notice; (2) the Collateral Agent may, at any time and from time to time after
and during the continuance of an Event of Default, upon 10 days’ prior notice to
the Company, license, whether general, special or otherwise, and whether on an
exclusive or non-exclusive basis, any of the Intellectual Property, throughout
the universe for such term or terms, on such conditions, and in such manner, as
the Collateral Agent shall in its sole discretion determine; and (3) the
Collateral Agent may, at any time, pursuant to the authority granted in
Section 6 hereof (such authority being effective upon the occurrence and during
the continuance of an Event of Default), execute and deliver on behalf of the
Company, one or more instruments of assignment of the Intellectual Property (or
any application or registration thereof), in form suitable for filing, recording
or registration in any country.
     (b) Any cash held by the Collateral Agent as Collateral and all Cash
Proceeds received by the Collateral Agent in respect of any sale of or
collection from, or other realization upon, all or any part of the Collateral
shall be applied (after payment of any amounts payable to the Collateral Agent
pursuant to Section 8 hereof) by the Collateral Agent against, all or any part
of the Obligations in such order as the Collateral Agent shall elect, consistent
with the provisions

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of the Securities Purchase Agreement. Any surplus of such cash or Cash Proceeds
held by the Collateral Agent and remaining after the indefeasible payment in
full in cash of all of the Obligations shall be paid over to whomsoever shall be
lawfully entitled to receive the same or as a court of competent jurisdiction
shall direct.
     (c) In the event that the proceeds of any such sale, collection or
realization are insufficient to pay all amounts to which the Collateral Agent
and the Buyers are legally entitled, the Company shall be liable for the
deficiency, together with interest thereon at the highest rate specified in the
Notes for interest on overdue principal thereof or such other rate as shall be
fixed by applicable law, together with the costs of collection and the
reasonable fees, costs, expenses and other client charges of any attorneys
employed by the Collateral Agent to collect such deficiency.
     (d) The Company hereby acknowledges that if the Collateral Agent complies
with any applicable state, provincial, or federal law requirements in connection
with a disposition of the Collateral, such compliance will not adversely affect
the commercial reasonableness of any sale or other disposition of the
Collateral.
     (e) The Collateral Agent shall not be required to marshal any present or
future collateral security (including, but not limited to, this Agreement and
the Collateral) for, or other assurances of payment of, the Obligations or any
of them or to resort to such collateral security or other assurances of payment
in any particular order, and all of the Collateral Agent’s rights hereunder and
in respect of such collateral security and other assurances of payment shall be
cumulative and in addition to all other rights, however existing or arising. To
the extent that the Company lawfully may, the Company hereby agrees that it will
not invoke any law relating to the marshaling of collateral which might cause
delay in or impede the enforcement of the Collateral Agent’s rights under this
Agreement or under any other instrument creating or evidencing any of the
Obligations or under which any of the Obligations is outstanding or by which any
of the Obligations is secured or payment thereof is otherwise assured, and, to
the extent that it lawfully may, the Company hereby irrevocably waives the
benefits of all such laws.
     SECTION 8. Indemnity and Expenses.
     (a) The Company agrees to defend, protect, indemnify and hold the
Collateral Agent and each of the Buyers, jointly and severally, harmless from
and against any and all claims, damages, losses, liabilities, obligations,
penalties, fees, costs and expenses (including, without limitation, reasonable
legal fees, costs, expenses, and disbursements of such Person’s counsel) to the
extent that they arise out of or otherwise result from this Agreement
(including, without limitation, enforcement of this Agreement), except to the
extent resulting from such Person’s gross negligence or willful misconduct, as
determined by a final judgment of a court of competent jurisdiction.
     (b) The Company agrees to pay to the Collateral Agent upon demand the
amount of any and all costs and expenses, including the reasonable fees, costs,
expenses and disbursements of counsel for the Collateral Agent and of any
experts and agents (including, without limitation, any collateral trustee which
may act as agent of the Collateral Agent), which the Collateral Agent may incur
in connection with (i) the preparation, negotiation, execution,

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delivery, recordation, administration, amendment, waiver or other modification
or termination of this Agreement, (ii) the custody, preservation, use or
operation of, or the sale of, collection from, or other realization upon, any
Collateral, (iii) the exercise or enforcement of any of the rights of the
Collateral Agent hereunder, or (iv) the failure by the Company to perform or
observe any of the provisions hereof.
     SECTION 9. Notices, Etc. All notices and other communications provided for
hereunder shall be in writing and shall be mailed (by certified mail, postage
prepaid and return receipt requested), telecopied, e-mailed or delivered if to
the Company at its address below and if to the Collateral Agent to it, at its
address specified on the signature pages below; or as to any such Person, at
such other address as shall be designated by such Person in a written notice to
all other parties hereto complying as to delivery with the terms of this
Section 9. All such notices and other communications shall be effective (a) if
sent by certified mail, return receipt requested, when received or three days
after deposited in the mails, whichever occurs first, (b) if telecopied or
e-mailed, when transmitted (during normal business hours) and confirmation is
received, and otherwise, the day after the notice or communication was
transmitted and confirmation is received, or (c) if delivered in person, upon
delivery.
SECTION 10. Miscellaneous.
     (a) No amendment of any provision of this Agreement shall be effective
unless it is in writing and signed by the Company and the Collateral Agent, and
no waiver of any provision of this Agreement, and no consent to any departure by
the Company therefrom, shall be effective unless it is in writing and signed by
the Company and the Collateral Agent, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
     (b) No failure on the part of the Collateral Agent to exercise, and no
delay in exercising, any right hereunder or under any of the other Transaction
Documents shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or the
exercise of any other right. The rights and remedies of the Collateral Agent or
any Buyer provided herein and in the other Transaction Documents are cumulative
and are in addition to, and not exclusive of, any rights or remedies provided by
law. The rights of the Collateral Agent or any Buyer under any of the other
Transaction Documents against any party thereto are not conditional or
contingent on any attempt by such Person to exercise any of its rights under any
of the other Transaction Documents against such party or against any other
Person, including but not limited to, the Company.
     (c) Any provision of this Agreement that is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining portions
hereof or thereof or affecting the validity or enforceability of such provision
in any other jurisdiction.
     (d) This Agreement shall create a continuing security interest in the
Collateral and shall (i) remain in full force and effect until the indefeasible
payment in full in cash of the Obligations, and (ii) be binding on the Company
and all other Persons who become bound as debtor to this Agreement in accordance
with Section 9-203(d) of the Code and shall inure,

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together with all rights and remedies of the Collateral Agent and the Buyers
hereunder, to the benefit of the Collateral Agent and the Buyers and their
respective permitted successors, transferees and assigns. Without limiting the
generality of clause (ii) of the immediately preceding sentence, without notice
to the Company, the Collateral Agent and the Buyers may assign or otherwise
transfer their rights and obligations under this Agreement and any of the other
Transaction Documents, to any other Person and such other Person shall thereupon
become vested with all of the benefits in respect thereof granted to the
Collateral Agent and the Buyers herein or otherwise. Upon any such assignment or
transfer, all references in this Agreement to the Collateral Agent or any such
Buyer shall mean the assignee of the Collateral Agent or such Buyer. None of the
rights or obligations of the Company hereunder may be assigned or otherwise
transferred without the prior written consent of the Collateral Agent, and any
such assignment or transfer without the consent of the Collateral Agent shall be
null and void.
     (e) Upon the indefeasible payment in full in cash of the Obligations,
(i) this Agreement and the security interests created hereby shall terminate and
all rights to the Collateral shall revert to the Company, and (ii) the
Collateral Agent will, upon the Company’s request and at the Company’s expense,
(A) return to the Company such of the Collateral as shall not have been sold or
otherwise disposed of or applied pursuant to the terms hereof, and (B) execute
and deliver to the Company such documents as the Company shall reasonably
request to evidence such termination, all without any representation, warranty
or recourse whatsoever.
     (f) THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCEPT AS REQUIRED BY
MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THAT THE VALIDITY AND
PERFECTION OR THE PERFECTION AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF
THE SECURITY INTEREST CREATED HEREBY, OR REMEDIES HEREUNDER, IN RESPECT OF ANY
PARTICULAR COLLATERAL ARE GOVERNED BY THE LAW OF A JURISDICTION OTHER THAN THE
STATE OF NEW YORK.
     (g) ANY LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR
ANY DOCUMENT RELATED HERETO MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW
YORK IN THE COUNTY OF NEW YORK OR THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF NEW YORK, AND APPELLATE COURTS THEREOF, AND, BY EXECUTION AND
DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF AND IN RESPECT
OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE NON-EXCLUSIVE JURISDICTION
OF THE AFORESAID COURTS. THE COMPANY HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION, SUIT OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND CONSENTS TO
THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE
COURT.

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     (h) THE COMPANY AND (BY ITS ACCEPTANCE OF THE BENEFITS OF THIS AGREEMENT)
THE COLLATERAL AGENT WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF
ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR ANY OF THE OTHER TRANSACTION DOCUMENTS, OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, ORAL OR WRITTEN STATEMENT OR OTHER ACTION OF THE PARTIES
HERETO.
     (i) The Company irrevocably consents to the service of process of any of
the aforesaid courts in any such action, suit or proceeding by the mailing of
copies thereof by registered or certified mail (or any substantially similar
form of mail), postage prepaid, to the Company at its address provided herein,
such service to become effective 10 days after such mailing.
     (j) Nothing contained herein shall affect the right of the Collateral Agent
to serve process in any other manner permitted by law or commence legal
proceedings or otherwise proceed against the Company or any property of the
Company in any other jurisdiction.
     (k) The Company irrevocably and unconditionally waives any right it may
have to claim or recover in any legal action, suit or proceeding referred to in
this Section any special, exemplary, punitive or consequential damages.
     (l) Section headings herein are included for convenience of reference only
and shall not constitute a part of this Agreement for any other purpose.
     (m) This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which shall be deemed
to be an original, but all of which taken together constitute one in the same
Agreement.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

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     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed
and delivered by its officer thereunto duly authorized, as of the date first
above written.

                  HYTHIAM, INC.    
 
                By:   /s/ Chuck Timpe                   Name: Chuck Timpe      
  Title: Chief Financial Officer
 
           
 
      Address:   11150 Santa Monica Boulevard
 
          Suite 1500
 
          Los Angeles, California 90025  
 
      Facsimile:   (310) 444-5300

ACCEPTED BY:
HIGHBRIDGE INTERNATIONAL LLC,
as Collateral Agent
By: HIGHBRIDGE CAPITAL MANAGEMENT, LLC

         
By:
  /s/ Adam J. Chill
 
Name: Adam J. Chill
Title: Managing Director    

      Address:   c/o Highbridge Capital Management, LLC
9 West 57th Street, 27th Floor
New York, New York 10019

     Facsimile:   (212) 751-0755

Security Agreement

 

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SCHEDULE I
LEGAL NAME; ORGANIZATIONAL IDENTIFICATION NUMBER;
STATE OF ORGANIZATION

                                      Federal         Company’s Name   State of
Organization     Employer I.D.     Organizational I.D.  
 
                       

Sched. I-1

 

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SCHEDULE II
INTELLECTUAL PROPERTY
Trademarks

                                      Application or       Registration    
Company   Country   Trademark   Registration No.   Filing Date   Date  
Assignees
 
                       

Patents
Copyrights

 

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SCHEDULE III
LOCATIONS

                                                              Inventory,  
Company’s Name   Chief Executive Office     Chief Place of Business     Books
and Records     Equipment, Etc.  
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         

 

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SCHEDULE IV
PROMISSORY NOTES, SECURITIES, DEPOSIT ACCOUNTS,
SECURITIES ACCOUNTS AND COMMODITIES ACCOUNTS
Securities

                                              Number of             Certificate
  Company   Name of Issuer     Shares     Class     No.(s)  
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         
 
                                                         

Deposit Accounts

                              Name and Address of               Company  
Institution     Purpose of the Account     Account No.  
 
                                           
 
                                           
 
                                           
 
                                           
 
                                           
 
                                           

 

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SCHEDULE V
FINANCING STATEMENTS

      Company   Jurisdiction For Filing Financing Statements

 

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SCHEDULE VI
COMMERCIAL TORT CLAIMS

 

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EXHIBIT A
ASSIGNMENT FOR SECURITY
[TRADEMARKS] [PATENTS] [COPYRIGHTS]
     WHEREAS,                                                              (the
“Assignor” ) [has adopted, used and is using, and holds all right, title and
interest in and to, the trademarks and service marks listed on the annexed
Schedule 1A, which trademarks and service marks are registered or applied for in
the United States Patent and Trademark Office (the “Trademarks”)] [holds all
right, title and interest in the letter patents, design patents and utility
patents listed on the annexed Schedule 1A, which patents are issued or applied
for in the United States Patent and Trademark Office (the “Patents”)] [holds all
right, title and interest in the copyrights listed on the annexed Schedule 1A,
which copyrights are registered in the United States Copyright Office (the
“Copyrights”)];
     WHEREAS, the Assignor has entered into a Security Agreement, dated as of
January ___, 2007 (as amended, restated, supplemented or as otherwise modified
or replaced from time to time, the “Security Agreement”), in favor Highbridge
International LLC as collateral agent for certain purchasers (the “Assignee”);
     WHEREAS, pursuant to the Security Agreement, the Assignor has assigned to
the Assignee and granted to the Assignee for the benefit of the Buyers (as
defined in the Security Agreement) a continuing security interest in all right,
title and interest of the Assignor in, to and under the [Trademarks, together
with, among other things, the good-will of the business symbolized by the
Trademarks] [Patents] [Copyrights] and the applications and registrations
thereof, and all proceeds thereof, including, without limitation, any and all
causes of action which may exist by reason of infringement thereof and any and
all damages arising from past, present and future violations thereof (the
“[Trademark] [Patent] [Copyright] Collateral”), to secure the payment,
performance and observance of the “Obligations” (as defined in the Security
Agreement);
     NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Assignor does hereby pledge,
convey, sell, assign, transfer and set over unto the Assignee and grants to the
Assignee for the benefit of the Buyers a continuing security interest in the
[Trademark] [Patent] [Copyright] Collateral to secure the prompt payment,
performance and for the benefit of the Buyers observance of the Obligations.
     The Assignor does hereby further acknowledge and affirm that the rights and
remedies of the Assignee with respect to the [Trademark] [Patent] [Copyright]
Collateral are more fully set forth in the Security Agreement, the terms and
provisions of which are hereby incorporated herein by reference as if fully set
forth herein.

 

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     IN WITNESS WHEREOF, the Assignor has caused this Assignment to be duly
executed by its officer thereunto duly authorized as of                     ,
20___

            [COMPANY]
      By:           Name:           Title:        

Assignment for Security

 

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STATE OF                     
ss.:
COUNTY OF                     
     On this ___ day of                     , 20___, before me personally came
                    , to me known to be the person who executed the foregoing
instrument, and who, being duly sworn by me, did depose and say that s/he is the
                      of                                        
                       , a                                           , and that
s/he executed the foregoing instrument in the firm name of                   
                                            , an d that s/he had authority to
sign the same, and s/he acknowledged to me that he executed the same as the act
and deed of said firm for the uses and purposes therein mentioned.
                                                            

 

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SCHEDULE 1A TO ASSIGNMENT FOR SECURITY
[Trademarks and Trademark Applications]
[Patent and Patent Applications]
[Copyright and Copyright Applications]
Owned by                                                             

 

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Schedule 4(g)
Effective Financing Statements