Exhibit 10.28
SECURITY AGREEMENT
CALLIOPE
and
CHAD THERAPEUTICS, INC.
Dated: July 31, 2007
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1.
  General Definitions and Terms; Rules of Construction     4  
 
           
2.
  Loan Facility     5  
 
           
3.
  Repayment of the Loans     7  
 
           
4.
  Procedure for Revolving Loans     7  
 
           
5.
  Interest and Payments     7  
 
           
6.
  Security Interest     8  
 
           
7.
  Representations, Warranties and Covenants Concerning the Collateral     9  
 
           
8.
  Payment of Accounts     12  
 
           
9.
  Collection and Maintenance of Collateral     12  
 
           
10.
  Inspections and Appraisals     13  
 
           
11.
  Financial Reporting     13  
 
           
12.
  Additional Representations and Warranties     15  
 
           
13.
  Covenants     25  
 
           
14.
  Further Assurances     31  
 
           
15.
  Representations, Warranties and Covenants of Calliope     31  
 
           
16.
  Power of Attorney     33  
 
           
17.
  Term of Agreement     33  
 
           
18.
  Termination of Lien     34  
 
           
19.
  Events of Default     34  
 
           
20.
  Remedies     36  
 
           
21.
  Waivers     37  
 
           
22.
  Expenses     37  
 
           
23.
  Assignment     38  
 
           
24.
  No Waiver; Cumulative Remedies     38  
 
           
25.
  Application of Payments     38  

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26.
  Indemnity     39  
 
           
27.
  Revival     39  
 
           
28.
  Borrowing Agency Provisions     39  
 
           
29.
  Notices     40  
 
           
30.
  Governing Law, Jurisdiction and Waiver of Jury Trial     41  
 
           
31.
  Limitation of Liability     42  
 
           
32.
  Entire Understanding; Maximum Interest     42  
 
           
33.
  Severability     43  
 
           
34.
  Survival     43  
 
           
35.
  Captions     43  
 
           
36.
  Counterparts; Telecopier Signatures     43  
 
           
37.
  Construction     43  
 
           
38.
  Publicity     43  
 
           
39.
  Joinder     43  
 
           
40.
  Legends     44  

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SECURITY AGREEMENT
     This Security Agreement is made as of July 30, 2007 by and among CALLIOPE
CAPITAL CORPORATION, a Delaware company having an address at c/o United
Corporate Services, Inc. 874 Walker Road, Suite C Dover Delaware 19904
(“Calliope”) and CHAD THERAPUTICS, INC., a California corporation (the
“Parent”).
BACKGROUND
     The Parent has requested that Calliope make advances available to the
Parent; and
     Calliope has agreed to make such advances on the terms and conditions set
forth in this Agreement.
AGREEMENT
     NOW, THEREFORE, in consideration of the mutual covenants and undertakings
and the terms and conditions contained herein, the parties hereto agree as
follows:
     1. General Definitions and Terms; Rules of Construction.
     (a) General Definitions. Capitalized terms used in this Agreement shall
have the meanings assigned to them in Annex A.
     (b) Accounting Terms. Any accounting terms used in this Agreement that are
not specifically defined shall have the meanings customarily given them in
accordance with GAAP and all financial computations shall be computed, unless
specifically provided herein, in accordance with GAAP consistently applied.
     (c) Other Terms. All other terms used in this Agreement and defined in the
UCC, shall have the meaning given therein unless otherwise defined herein.
     (d) Rules of Construction. All Schedules, Addenda, Annexes and Exhibits
hereto or expressly identified to this Agreement are incorporated herein by
reference and taken together with this Agreement constitute but a single
agreement. The words “herein”, “hereof” and “hereunder” or other words of
similar import refer to this Agreement as a whole, including the Exhibits,
Addenda, Annexes and Schedules thereto, as the same may be from time to time
amended, modified, restated or supplemented, and not to any particular section,
subsection or clause contained in this Agreement. Wherever from the context it
appears appropriate, each term stated in either the singular or plural shall
include the singular and the plural, and pronouns stated in the masculine,
feminine or neuter gender shall include the masculine, the feminine and the
neuter. The term “or” is not exclusive. The term “including” (or any form
thereof) shall not be limiting or exclusive. All references to statutes and
related regulations shall include any amendments of same and any successor
statutes and regulations. All references in this Agreement or in the Schedules,
Addenda, Annexes and Exhibits to this Agreement to sections, schedules,
disclosure schedules, exhibits, and attachments shall refer to the corresponding
sections, schedules, disclosure schedules, exhibits, and attachments of or to
this Agreement. All
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references to any instruments or agreements, including references to any of this
Agreement or the Ancillary Agreements shall include any and all modifications or
amendments thereto and any and all extensions or renewals thereof.
     2. Loan Facility.
     (a) Revolving Loans.
          (i) Subject to the terms and conditions set forth herein and in the
Ancillary Agreements, Calliope may make revolving loans (the “Revolving Loans”)
to the Parent from time to time during the Term which, in the aggregate at any
time outstanding, will not exceed the lesser of (x) (I) the Capital Availability
Amount minus (II) such reserves as Calliope may reasonably in its good faith
judgment deem proper and necessary from time to time (the “Reserves”) and (y) an
amount equal to (I) the Accounts Availability plus (II) the Inventory
Availability, minus (III) the Reserves. The amount derived at any time from
Section 2(a)(i)(y)(I) plus Section 2(a)(i)(y)(II) minus 2(a)(i)(y)(III) shall be
referred to as the “Formula Amount.” The Parent shall execute and deliver to
Calliope on the Closing Date the Secured Revolving Note and the Secured
Convertible Term Note. The Parent hereby acknowledges and agrees that Calliope’s
obligation to purchase the Secured Revolving Note and the Secured Convertible
Term Note from the Parent on the Closing Date shall be contingent upon the
satisfaction (or waiver by Calliope in its sole discretion) of the items and
matters set forth in the closing checklist provided by Calliope to the Parent on
or prior to the Closing Date. The Parent hereby further acknowledges and agrees
that, immediately prior to each borrowing hereunder and immediately after giving
effect thereto, the Parent shall be deemed to have certified to Calliope that at
the time of each such proposed borrowing and also after giving effect thereto
(i) there shall exist no Event of Default, (ii) all representations, warranties
and covenants made by the Parent in connection with this Agreement and the
Ancillary Agreements are true, correct and complete and (iii) all of Parent’s
covenant requirements under this Agreement and the Ancillary Agreements have
been met. The Parent hereby agrees to provide a certificate confirming the
foregoing concurrently with each request for a borrowing hereunder.
          (ii) Notwithstanding the limitations set forth above, if requested by
Parent, Calliope retains the right to lend to Parent from time to time such
amounts in excess of such limitations as Calliope may determine in its sole
discretion. In connection with each such request by Parent, the Parent shall be
deemed to have certified, as of the time of such proposed borrowing and
immediately after giving effect thereto, to the satisfaction of all Overadvance
Conditions. For purposes hereof, “Overadvance Conditions” means (i) no Event of
Default shall exist and be continuing as of such date; (ii) all representations,
warranties and covenants made by the Parent in connection with the Security
Agreement and the Ancillary Agreements shall be true, correct and complete as of
such date; and (iii) the Parent shall have taken all action necessary to grant
Calliope “control” over all of the Parent’s ’ Deposit Accounts (the “Control
Accounts”), with any agreements establishing “control” to be in form and
substance satisfactory to Calliope. “Control” over such Control Accounts shall
be released upon the indefeasible repayment in full and termination of the
Overadvance (together with all accrued interest and fees which remain unpaid in
respect thereof). The Parent hereby agrees to provide a certificate confirming
the satisfaction of the Overadvance Conditions concurrently with the request for
same.
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          (iii) The Parent acknowledges that the exercise of Calliope’s
discretionary rights hereunder may result during the Term in increases or
decreases in the advance percentages used in determining Accounts Availability
and/or Inventory Availability and Parent hereby consents to any such increases
or decreases which may limit or restrict advances requested by the Parent.
          (iv) If any interest, fees, costs or charges payable to Calliope
hereunder are not paid when due, Parent shall thereby be deemed to have
requested, and Calliope is hereby authorized at its discretion to make and
charge to the Parent’ account, a Loan as of such date in an amount equal to such
unpaid interest, fees, costs or charges.
          (v) If Parent at any time fails to perform or observe any of the
covenants contained in this Agreement or any Ancillary Agreement, Calliope may,
but need not, perform or observe such covenant on behalf and in the name, place
and stead of Parent (or, at Calliope’s option, in Calliope’s name) and may, but
need not, take any and all other actions which Calliope may deem necessary to
cure or correct such failure (including the payment of taxes, the satisfaction
of Liens, the performance of obligations owed to Account Debtors, lessors or
other obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the endorsement
of instruments). The amount of all monies expended and all costs and expenses
(including attorneys’ fees and legal expenses) incurred by Calliope in
connection with or as a result of the performance or observance of such
agreements or the taking of such action by Calliope shall be charged to the
Parent’s account as a Revolving Loan and added to the Obligations. To facilitate
Calliope’s performance or observance of such covenants by Parent, Parent hereby
irrevocably appoints Calliope, or Calliope’s delegate, acting alone, as Parent’s
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of Parent any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by Parent.
          (vi) Calliope will account to Company Agent monthly with a statement
of all Loans and other advances, charges and payments made pursuant to this
Agreement, and such account rendered by Calliope shall be deemed final, binding
and conclusive unless Calliope is notified by Company Agent in writing to the
contrary within thirty (30) days of the date each account was rendered
specifying the item or items to which objection is made.
          (vii) During the Term, the Parent may borrow and prepay Loans in
accordance with the terms and conditions hereof.
          (viii) If any Eligible Account is not paid by the Account Debtor
within ninety (90) days after the date that such Eligible Account was invoiced
or if any Account Debtor asserts a deduction, dispute, contingency, set-off, or
counterclaim with respect to any Eligible Account, (a “Delinquent Account”), the
Parent shall(i) repay Calliope for the amount of the Loans made with respect to
such Delinquent Account or (ii) immediately replace such Delinquent Account with
an otherwise Eligible Account.
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     (b) Term Loan. Subject to the terms and conditions set forth herein and in
the Ancillary Agreements, Calliope shall make a term loan (the “Term Loan”) to
Company Agent (for the benefit of Parent) in an aggregate amount equal to
$750,000. The Term Loan shall be advanced on the Closing Date and shall be, with
respect to principal, payable in consecutive monthly installments of principal
commencing on November 1, 2007 and on the first day of each month thereafter,
subject to acceleration upon the occurrence of an Event of Default or
termination of this Agreement. The Term Loan shall be evidenced by the Secured
Convertible Term Note.
     3. Repayment of the Loans. The Parent (a) may prepay the Obligations from
time to time in accordance with the terms and provisions of the Notes (and
Section 17 hereof if such prepayment is due to a termination of this Agreement);
(b) shall repay on the Maturity Date (as defined in the Secured Convertible Term
Note) (i) the then aggregate outstanding principal balance of the Term Loan
together with accrued and unpaid interest, fees and charges and: (ii) all other
amounts owed Calliope under the Secured Convertible Term Note; (c) shall repay
on the expiration of the Term (i) the then aggregate outstanding principal
balance of the Revolving Loans together with accrued and unpaid interest, fees
and charges and; (ii) all other amounts owed Calliope under this Agreement and
the Ancillary Agreements; and (d) subject to Section 2(a)(ii), shall repay on
any day on which the then aggregate outstanding principal balance of the Loans
are in excess of the Formula Amount at such time, Loans in an amount equal to
such excess. Any payments of principal, interest, fees or any other amounts
payable hereunder or under any Ancillary Agreement shall be made prior to 12:00
noon (New York time) on the due date thereof in immediately available funds.
     4. Procedure for Revolving Loans. Company Agent may by written notice
request a borrowing of Revolving Loans prior to 12:00 noon (New York time) on
the Business Day of its request to incur, on the next Business Day, a Revolving
Loan. Together with each request for a Revolving Loan (or at such other
intervals as Calliope may request), Company Agent shall deliver to Calliope a
Borrowing Base Certificate in the form of Exhibit B attached hereto, which shall
be certified as true and correct by the Chief Executive Officer or Chief
Financial Officer of Company Agent together with all supporting documentation
relating thereto. All Revolving Loans shall be disbursed from whichever office
or other place Calliope may designate from time to time and shall be charged to
the Parent’s account on Calliope’s books. The proceeds of each Revolving Loan
made by Calliope shall be made available to Company Agent on the Business Day
following the Business Day so requested in accordance with the terms of this
Section 4 by way of credit to the applicable Company’s operating account
maintained with such bank as Company Agent designated to Calliope. Any and all
Obligations due and owing hereunder may be charged to the Parent’s account and
shall constitute Revolving Loans.
     5. Interest and Payments.
     (a) Interest.
          (i) Except as modified by Section 5(a)(iii) below, the Parent shall
pay interest at the Contract Rate on the unpaid principal balance of each Loan
until such time as such Loan is collected in full in good funds in dollars of
the United States of America.
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          (ii) Interest and payments shall be computed on the basis of actual
days elapsed in a year of 360 days. At Calliope’s option, Calliope may charge
the Parent’s account for said interest.
          (iii) Effective upon the occurrence of any Event of Default and for so
long as any Event of Default shall be continuing, the Contract Rate shall
automatically be increased as set forth in the Notes (such increased rate, the
“Default Rate”), and all outstanding Obligations, including unpaid interest,
shall continue to accrue interest from the date of such Event of Default at the
Default Rate applicable to such Obligations.
          (iv) In no event shall the aggregate interest payable hereunder or
under any Note exceed the maximum rate permitted under any applicable law or
regulation, as in effect from time to time (the “Maximum Legal Rate”), and if
any provision of this Agreement or any Ancillary Agreement is in contravention
of any such law or regulation, interest payable under this Agreement and each
Ancillary Agreement shall be computed on the basis of the Maximum Legal Rate (so
that such interest will not exceed the Maximum Legal Rate).
          (v) The Parent shall pay principal, interest and all other amounts
payable hereunder, or under any Ancillary Agreement, without any deduction
whatsoever, including any deduction for any set-off or counterclaim.
     (b) Payment; Certain Closing Conditions.
          (i) Payment. Upon execution of this Agreement by Parent and Calliope,
the Parent shall pay to Calliope Capital Management, LLC, the investment advisor
of Calliope (“LCM”), a non-refundable payment in an amount equal to three and
one-half percent (3.50%) of the Total Investment Amount. The foregoing payment
is referred to herein as the “LCM Payment.” Such payment shall be deemed fully
earned on the Closing Date and shall not be subject to rebate or proration for
any reason.
          (ii) Overadvance Payment. Without affecting Calliope’s rights
hereunder in the event the Loans exceed the Formula Amount (each such event, an
“Overadvance”), all such Overadvances shall bear additional interest at a rate
equal to two percent (2%) per month of the amount of such Overadvances for all
times such amounts shall be in excess of the Formula Amount. All amounts that
are incurred pursuant to this Section 5(b)(ii) shall be due and payable by the
Parent monthly, in arrears, on the first business day of each calendar month and
upon expiration of the Term.
          (iii) Expenses. The Parent shall reimburse Calliope for its expenses
(including reasonable legal fees and expenses) incurred in connection with the
entering into of this Agreement and the Ancillary Agreements, and expenses
incurred in connection with Calliope’s due diligence review of Parent and its
Subsidiaries and all related matters. Amounts required to be paid under this
Section 5(b)(iii) will be paid on the Closing Date and shall be $45,000 for such
expenses referred to in this Section 5(b)(iii).
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          6. Security Interest.
          (a) To secure the prompt payment to Calliope of the Obligations,
Parent hereby assigns, pledges and grants to Calliope a continuing security
interest in and Lien upon all of the Collateral. All of Parent’s Books and
Records relating to the Collateral shall, until delivered to or removed by
Calliope, be kept by Parent in trust for Calliope until all Obligations have
been paid in full. Each confirmatory assignment schedule or other form of
assignment hereafter executed by Parent shall be deemed to include the foregoing
grant, whether or not the same appears therein.
          (b) Parent hereby (i) authorizes Calliope to file any financing
statements, continuation statements or amendments thereto that (x) indicate the
Collateral (1) as all assets and personal property of Parent or words of similar
effect, regardless of whether any particular asset comprised in the Collateral
falls within the scope of Article 9 of the UCC of such jurisdiction, or (2) as
being of an equal or lesser scope or with greater detail, and (y) contain any
other information required by Part 5 of Article 9 of the UCC for the sufficiency
or filing office acceptance of any financing statement, continuation statement
or amendment and (ii) ratifies its authorization for Calliope to have filed any
initial financial statements, or amendments thereto if filed prior to the date
hereof. Parent acknowledges that it is not authorized to file any financing
statement or amendment or termination statement with respect to any financing
statement without the prior written consent of Calliope and agrees that it will
not do so without the prior written consent of Calliope, subject to Parent’s
rights under Section 9-509(d)(2) of the UCC.
          (c) Parent hereby grants to Calliope an irrevocable, non-exclusive
license (exercisable upon the termination of this Agreement due to an occurrence
and during the continuance of an Event of Default without payment of royalty or
other compensation to Parent) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by Parent,
and wherever the same may be located, and including in such license access to
all media in which any of the licensed items may be recorded or stored and to
all computer and automatic machinery software and programs used for the
compilation or printout thereof, and represents, promises and agrees that any
such license or sublicense is not and will not be in conflict with the
contractual or commercial rights of any third Person; provided, that such
license will terminate on the termination of this Agreement and the payment in
full of all Obligations.
     (d) Calliope acknowledges that the Existing Indebtedness is secured by a
first priority lien on the Company’s assets, which indebtedness will be paid in
its entirety contemporaneously with the funding of the Loan Facility described
above.
          7. Representations, Warranties and Covenants Concerning the
Collateral. Parent represents, warrants (each of which such representations and
warranties shall be deemed repeated upon the making of each request for a
Revolving Loan and made as of the time of each and every Revolving Loan
hereunder) and covenants as follows:
          (a) all of the Collateral (i) is owned by it free and clear of all
Liens (including any claims of infringement) except those in Calliope’s favor
and Permitted Liens and (ii) is not subject to any agreement prohibiting the
granting of a Lien or requiring notice of or consent to the granting of a Lien.
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     (b) it shall not encumber, mortgage, pledge, assign or grant any Lien in
any Collateral or any other assets to anyone other than Calliope and except for
Permitted Liens.
     (c) the Liens granted pursuant to this Agreement, upon due completion of
the filings of UCC-1 financing statements in respect of each grantor of such
Liens in the applicable filing offices of the states of organization of such
grantor and the completion of the other filings and actions listed on Schedule
7(c) (which, in the case of all filings and other documents referred to in said
Schedule, have been delivered to Calliope in duly executed form) constitute
valid perfected security interests in all of the Collateral in favor of Calliope
as security for the prompt and complete payment and performance of the
Obligations, enforceable in accordance with the terms hereof against any and all
of its creditors and purchasers and, upon payment of the Existing Indebtedness,
such security interest shall be prior to all other Liens in existence on the
date hereof.
     (d) Except as disclosed on the attached Disclosure Schedule, no effective
security agreement, mortgage, deed of trust, financing statement, equivalent
security or Lien instrument or continuation statement covering all or any part
of the Collateral is or will be on file or of record in any public office,
except those relating to Permitted Liens.
     (e) it shall not dispose of any of the Collateral whether by sale, lease or
otherwise except for the sale of Inventory in the ordinary course of business
and for the disposition or transfer in the ordinary course of business during
any fiscal year of obsolete and worn-out Equipment having an aggregate fair
market value of not more than $25,000 and only to the extent that (i) the
proceeds of any such disposition are used to acquire replacement Equipment which
is subject to Calliope’s first priority security interest or are used to repay
Loans or to pay general corporate expenses, or (ii) following the occurrence of
an Event of Default which continues to exist the proceeds of which are remitted
to Calliope to be held as cash collateral for the Obligations.
     (f) it shall defend the right, title and interest of Calliope in and to the
Collateral against the claims and demands of all Persons whomsoever, and take
such actions, including (i) all actions necessary to grant Calliope “control” of
any Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic
Chattel Paper owned by it, with any agreements establishing control to be in
form and substance satisfactory to Calliope, (ii) the prompt (but in no event
later than five (5) Business Days following Calliope’s request therefor)
delivery to Calliope of all original Instruments, Chattel Paper, negotiable
Documents and certificated Stock owned by it (in each case, accompanied by stock
powers or other instruments of transfer executed in blank), (iii) notification
of Calliope’s interest in Collateral at Calliope’s request, and (iv) the
institution of litigation against third parties as shall be prudent in order to
protect and preserve its and/or Calliope’s respective and several interests in
the Collateral.
     (g) it shall promptly, and in any event within five (5) Business Days after
the same is acquired by it, notify Calliope of any commercial tort claim (as
defined in the UCC) acquired by it and unless otherwise consented by Calliope,
it shall enter into a supplement to this Agreement granting to Calliope a Lien
in such commercial tort claim.
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     (h) it shall place notations upon its Books and Records and any of its
financial statements to disclose Calliope’s Lien in the Collateral.
     (i) if it retains possession of any Chattel Paper or Instrument with
Calliope’s consent, upon Calliope’s request such Chattel Paper and Instruments
shall be marked with the following legend: “This writing and obligations
evidenced or secured hereby are subject to the security interest of Calliope ”
Notwithstanding the foregoing, upon the reasonable request of Calliope, such
Chattel Paper and Instruments shall be delivered to Calliope.
     (j) it shall perform in a reasonable time all other steps requested by
Calliope to create and maintain in Calliope’s favor a valid perfected first Lien
in all Collateral subject only to Permitted Liens.
     (k) it shall notify Calliope promptly and in any event within three
(3) Business Days after obtaining knowledge thereof (i) of any event or
circumstance that, to its knowledge, would cause Calliope to consider any then
existing Account and/or Inventory as no longer constituting an Eligible Account
or Eligible Inventory, as the case may be; (ii) of any material delay in its
performance of any of its obligations to any Account Debtor; (iii) of any
assertion by any Account Debtor of any material claims, offsets or
counterclaims; (iv) of any allowances, credits and/or monies granted by it to
any Account Debtor; (v) of all material adverse information relating to the
financial condition of an Account Debtor; (vi) of any material return of goods;
and (vii) of any loss, damage or destruction of any of the Collateral.
     (l) all Eligible Accounts (i) represent complete bona fide transactions
which require no further act under any circumstances on its part to make such
Accounts payable by the Account Debtors, (ii) are not subject to any present,
future contingent offsets or counterclaims, and (iii) do not represent bill and
hold sales, consignment sales, guaranteed sales, sale or return or other similar
understandings or obligations of any Affiliate or Subsidiary of Parent. It has
not made, nor will it make, any agreement with any Account Debtor for any
extension of time for the payment of any Account, any compromise or settlement
for less than the full amount thereof, any release of any Account Debtor from
liability therefor, or any deduction therefrom except a discount or allowance
for prompt or early payment allowed by it in the ordinary course of its business
consistent with historical practice and as previously disclosed to Calliope in
writing.
     (m) it shall keep and maintain its Equipment in good operating condition,
except for ordinary wear and tear, and shall make all necessary repairs and
replacements thereof so that the value and operating efficiency shall at all
times be maintained and preserved. It shall not permit any such items to become
a Fixture to real estate or accessions to other personal property.
     (n) it shall maintain and keep all of its Books and Records concerning the
Collateral at its executive offices listed in Schedule 12(aa).
     (o) it shall maintain and keep the tangible Collateral at the addresses
listed in Schedule 12(aa), provided, that it may change such locations or open a
new location, provided that it provides Calliope at least thirty (30) days prior
written notice of such changes or new location and (ii) prior to such change or
opening of a new location where Collateral having a
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value of more than $50,000 will be located, it executes and delivers to Calliope
such agreements deemed reasonably necessary or prudent by Calliope, including
landlord agreements, mortgagee agreements and warehouse agreements, each in form
and substance satisfactory to Calliope, to adequately protect and maintain
Calliope’s security interest in such Collateral.
     (p) Schedule 7(p) lists all banks and other financial institutions at which
it maintains deposits and/or other accounts, and such Schedule correctly
identifies the name, address and telephone number of each such depository, the
name in which the account is held, a description of the purpose of the account,
and the complete account number. It shall not establish any depository or other
bank account with any financial institution (other than the accounts set forth
on Schedule 7(p)) without Calliope’s prior written consent.
     (q) All Inventory manufactured by it in the United States of America shall
be produced in accordance with the requirements of the Federal Fair Labor
Standards Act of 1938, as amended and all rules, regulations and orders related
thereto or promulgated thereunder.
     8. Payment of Accounts.
     (a) Parent will irrevocably direct all of its present and future Account
Debtors and other Persons obligated to make payments constituting Collateral to
make such payments directly to the lockboxes maintained by Parent (the
“Lockboxes”) with North Fork Bank or such other financial institution accepted
by Calliope in writing as may be selected by Parent (the “Lockbox Bank”)
pursuant to the terms of the certain agreements among Parent, Calliope and/or
the Lockbox Bank dated as of July ___, 2007. On or prior to the Closing Date,
Parent shall and shall cause the Lockbox Bank to enter into all such
documentation acceptable to Calliope pursuant to which, among other things, the
Lockbox Bank agrees to: (a) sweep the Lockbox on a daily basis and deposit all
checks received therein to an account designated by Calliope in writing and
(b) comply only with the instructions or other directions of Calliope concerning
the Lockbox. All of Parent’s invoices, account statements and other written or
oral communications directing, instructing, demanding or requesting payment of
any Account of Parent or any other amount constituting Collateral shall
conspicuously direct that all payments be made to the Lockbox or such other
address as Calliope may direct in writing. If, notwithstanding the instructions
to Account Debtors, Parent receives any payments, Parent shall immediately remit
such payments to Calliope in their original form with all necessary
endorsements. Until so remitted, Parent shall hold all such payments in trust
for and as the property of Calliope and shall not commingle such payments with
any of its other funds or property.
     (b) At Calliope’s election, following the occurrence of an Event of Default
which is continuing, Calliope may notify Parent’s Account Debtors of Calliope’s
security interest in the Accounts, collect them directly and charge the
collection costs and expenses thereof to Company’s and the Eligible Subsidiaries
joint and several account.
     9. Collection and Maintenance of Collateral.
     (a) Calliope may verify Parent’s Accounts from time to time, but not more
often than once every three (3) months, unless an Event of Default has occurred
and is
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continuing or Calliope believes that such verification is necessary to preserve
or protect the Collateral, utilizing an audit control company or any other agent
of Calliope.
     (b) Proceeds of Accounts received by Calliope will be deemed received on
the Business Day after Calliope’s receipt of such proceeds in good funds in
dollars of the United States of America to an account designated by Calliope.
Any amount received by Calliope after 12:00 noon (New York time) on any Business
Day shall be deemed received on the next Business Day.
     (c) As Calliope receives the proceeds of Accounts of Parent, it shall
(i) apply such proceeds, as required, to amounts outstanding under the Notes,
and (ii) remit all such remaining proceeds (net of interest, fees and other
amounts then due and owing to Calliope hereunder) to Company Agent (for the
benefit of the applicable Parent) upon request (but no more often than twice a
week). Notwithstanding the foregoing, following the occurrence and during the
continuance of an Event of Default, Calliope, at its option, may (a) apply such
proceeds to the Obligations in such order as Calliope shall elect, (b) hold all
such proceeds as cash collateral for the Obligations and Parent hereby grants to
Calliope a security interest in such cash collateral amounts as security for the
Obligations and/or (c) do any combination of the foregoing.
     10. Inspections and Appraisals. Upon not less than one business day’s
notice, Calliope, and/or any agent of Calliope shall have the right during
normal business hours to (a) have access to, visit, inspect, review, evaluate
and make physical verification and appraisals of Parent’s properties and the
Collateral, (b) inspect, audit and copy (or take originals if necessary) and
make extracts from Parent’s Books and Records, including management letters
prepared by the Accountants, and (c) discuss with Parent’s directors, principal
officers, and independent accountants, Parent’s business, assets, liabilities,
financial condition, results of operations and business prospects. Parent will
deliver to Calliope any instrument necessary for Calliope to obtain records from
any service bureau maintaining records for Parent. If any internally prepared
financial information, including that required under this Section is
unsatisfactory in any manner to Calliope, Calliope may request that the
Accountants review the same.
     11. Financial Reporting. Company Agent will deliver, or cause to be
delivered, to Calliope each of the following, which shall be in form and detail
acceptable to Calliope:
     (a) As soon as available, and in any event within ninety (90) days after
the end of each fiscal year of the Parent, Parent’s audited financial statements
with a report of independent certified public accountants of recognized standing
selected by the Parent and acceptable to Calliope (it being understood that the
Parent’s current auditors, Rose Snyder & Jacobs shall be deemed acceptable to
Calliope) (the “Accountants”), which annual financial statements shall be
without qualification and shall include each of the Parent’s and each of its
consolidated Subsidiaries’ balance sheet as at the end of such fiscal year and
the related statements of each of the Parent’s and each of its consolidated
Subsidiaries’ income, retained earnings and cash flows for the fiscal year then
ended, prepared on a consolidating and consolidated basis to include the Parent
and each consolidated Subsidiary of the Parent, all in reasonable detail and
prepared in accordance with GAAP, together with (i) if and when
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available, copies of any management letters prepared by the Accountants; and
(ii) a certificate of the Parent’s President, Chief Executive Officer or Chief
Financial Officer stating that such financial statements have been prepared in
accordance with GAAP and whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder and, if so, stating in
reasonable detail the facts with respect thereto;
     (b) As soon as available and in any event within forty five (45) days after
the end of each fiscal quarter of the Parent, an unaudited/internal balance
sheet and statements of income, retained earnings and cash flows of the Parent
as at the end of and for such quarter and for the year to date period then
ended, prepared on a consolidating and consolidated basis to include the Parent
and each consolidated Subsidiary of the Parent, in reasonable detail and stating
in comparative form the figures for the corresponding date and periods in the
previous year, all prepared in accordance with GAAP, subject to year-end
adjustments and accompanied by a certificate of the Parent’s President, Chief
Executive Officer or Chief Financial Officer, stating (i) that such financial
statements have been prepared in accordance with GAAP, subject to year-end audit
adjustments, and (ii) whether or not such officer has knowledge of the
occurrence of any Default or Event of Default hereunder not theretofore reported
and remedied and, if so, stating in reasonable detail the facts with respect
thereto;
     (c) As soon as available and in any event within twenty five (25) days
after the end of each calendar month, an unaudited/internal balance sheet and
statements of income, retained earnings and cash flows of the Parent and its
consolidated Subsidiaries as at the end of and for such month and for the year
to date period then ended, prepared on a consolidating and consolidated basis to
include the Parent and each consolidated Subsidiary of the Parent, in reasonable
detail and stating in comparative form the figures for the corresponding date
and periods in the previous year, all prepared in accordance with GAAP, subject
to year-end adjustments and accompanied by a certificate of the Parent’s
President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with GAAP, subject to
year-end audit adjustments, and (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto;
     (d) Within twenty five (25) days after the end of each month (or more
frequently if Calliope so requests), agings of Parent’s Accounts, unaudited
trial balances and their accounts payable and a calculation of Parent’s
Accounts, Eligible Accounts, Inventory and/or Eligible Inventory, provided,
however, that if Calliope shall request the foregoing information more often
than as set forth in the immediately preceding clause, Parent shall have fifteen
(15) days from each such request to comply with Calliope’s demand; and
     (e) Promptly after (i) the filing thereof, copies of the Parent’s most
recent registration statements and annual, quarterly, monthly or other regular
reports which the Parent files with the Securities and Exchange Commission (the
“SEC”), and (ii) the issuance thereof, copies of such financial statements,
reports and proxy statements as the Parent shall send to its stockholders.
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     (f) The Parent shall deliver, or cause the applicable Subsidiary of the
Parent to deliver, such other information as the Purchaser shall reasonably
request.
     12. Additional Representations and Warranties. Subject to the attached
Disclosure Schedule, Parent hereby represents and warrants to Calliope as
follows:
     (a) Organization, Good Standing and Qualification. It and each of its
Subsidiaries is a corporation, partnership or limited liability company, as the
case may be, duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization. It and each of its Subsidiaries has
the corporate, limited liability company or partnership, as the case may be,
power and authority to own and operate its properties and assets and, insofar as
it is or shall be a party thereto, to (i) execute and deliver this Agreement and
the Ancillary Agreements, (ii) to issue and sell the Notes and the shares of
Common Stock issuable upon conversion of the Secured Convertible Term Note (the
“Note Shares”), (iii) to issue and sell the Warrants and the shares of Common
Stock issuable upon exercise of the Warrants (the “Warrant Shares”), and to
(iv) carry out the provisions of this Agreement and the Ancillary Agreements and
to carry on its business as presently conducted. It and each of its Subsidiaries
is duly qualified and is authorized to do business and is in good standing as a
foreign corporation, partnership or limited liability company, as the case may
be, in all jurisdictions in which the nature or location of its activities and
of its properties (both owned and leased) makes such qualification necessary,
except for those jurisdictions in which failure to do so has not had, or could
not reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect.
     (b) Subsidiaries. The Parent has no Subsidiaries.
     (c) Capitalization; Voting Rights.
          (i) The authorized capital stock of the Parent, as of the date hereof
consists of 50,000,000 shares, of which 40,000,000 are shares of Common Stock,
par value $0.01 per share, 10,179,759 shares of which are issued and
outstanding, and 1,000,000 are shares of preferred stock, par value $0.01 per
share of which 0 shares of preferred stock are issued and outstanding.
          (ii) Except as disclosed on the Disclosure Schedule, other than:
(i) the shares reserved for issuance under the Parent’s stock option plans; and
(ii) shares which may be issued pursuant to this Agreement and the Ancillary
Agreements, there are no outstanding options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Parent of any of its securities. Except as
disclosed on the Disclosure Schedule, neither the offer, issuance or sale of any
of the Notes or the Warrants or the issuance of any of the Note Shares or the
Warrant Shares, nor the consummation of any transaction contemplated hereby will
result in a change in the price or number of any securities of the Parent
outstanding, under anti-dilution or other similar provisions contained in or
affecting any such securities.
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          (iii) All issued and outstanding shares of the Parent’s Common Stock:
(i) have been duly authorized and validly issued and are fully paid and
non-assessable; and (ii) were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
          (iv) The rights, preferences, privileges and restrictions of the
shares of the Common Stock are as stated in the Parent’s Articles of
Incorporation (the “Charter”). The Note Shares and the Warrant Shares have been
duly and validly reserved for issuance. When issued in compliance with the
provisions of this Agreement and the Parent’s Charter, the Securities will be
validly issued, fully paid and nonassessable, and will be free of any liens or
encumbrances; provided, however, that the Securities may be subject to
restrictions on transfer under state and/or federal securities laws as set forth
herein or as otherwise required by such laws at the time a transfer is proposed.
     (d) Authorization; Binding Obligations. All corporate, partnership or
limited liability company, as the case may be, action on its and its
Subsidiaries’ part (including their respective officers and directors) necessary
for the authorization of this Agreement and the Ancillary Agreements, the
performance of all of its and its Subsidiaries’ obligations hereunder and under
the Ancillary Agreements on the Closing Date and, the authorization, issuance
and delivery of the Notes and the Warrant has been taken or will be taken prior
to the Closing Date. This Agreement and the Ancillary Agreements, when executed
and delivered and to the extent it is a party thereto, will be its and its
Subsidiaries’ valid and binding obligations enforceable against each such Person
in accordance with their terms, except:
          (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting enforcement of
creditors’ rights; and
          (ii) general principles of equity that restrict the availability of
equitable or legal remedies.
The issuance of the Notes and the subsequent conversion of the Secured
Convertible Term Note into Note Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly waived
or complied with. The issuance of the Warrants and the subsequent exercise of
the Warrants for Warrant Shares are not and will not be subject to any
preemptive rights or rights of first refusal that have not been properly waived
or complied with.
     (e) Liabilities; Solvency. (i) it has no liabilities, except current
liabilities incurred in the ordinary course of business and liabilities
disclosed in any Exchange Act Filings.
          (ii) Both before and after giving effect to (a) the Loans incurred on
the Closing Date or such other date as Loans requested hereunder are made or
incurred, (b) the disbursement of the proceeds of, or the assumption of the
liability in respect of, such Loans pursuant to the instructions or agreement of
Parent and (c) the payment and accrual of all transaction costs in connection
with the foregoing, Parent and each Subsidiary of Parent, is and will be,
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     (f) Agreements; Action. Except as set forth on the Disclosure Schedule or
as disclosed in any Exchange Act Filings:
          (i) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which it is a
party or to its knowledge by which it is bound which may involve:
(i) obligations (contingent or otherwise) of, or payments to, it in excess of
$50,000 (other than obligations of, or payments to, it arising from purchase or
sale agreements entered into in the ordinary course of business); or (ii) the
transfer or license of any patent, copyright, trade secret or other proprietary
right to or from it (other than licenses arising from the purchase of “off the
shelf” or other standard products); or (iii) provisions restricting the
development, manufacture or distribution of its ’ products or services; or (iv)
indemnification by it with respect to infringements of proprietary rights.
          (ii) Since March 31, 2007 (the “Balance Sheet Date”) it has not:
(i) declared or paid any dividends, or authorized or made any distribution upon
or with respect to any class or series of its capital stock; (ii) incurred any
indebtedness for money borrowed or any other liabilities (other than ordinary
course obligations) individually in excess of $50,000 or, in the case of
indebtedness and/or liabilities individually less than $50,000, in excess of
$100,000 in the aggregate; (iii) made any loans or advances to any Person not in
excess, individually or in the aggregate, of $100,000, other than ordinary
advances for travel expenses; or (iv) sold, exchanged or otherwise disposed of
any of its assets or rights, other than the sale of its Inventory in the
ordinary course of business.
          (iii) For the purposes of subsections (i) and (ii) of this
Section 12(f), all indebtedness, liabilities, agreements, understandings,
instruments, contracts and proposed transactions involving the same Person
(including Persons it or any of its applicable Subsidiaries has reason to
believe are affiliated therewith or with any Subsidiary thereof) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
          (iv) the Parent maintains disclosure controls and procedures
(“Disclosure Controls”) designed to ensure that information required to be
disclosed by the Parent in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the rules and forms of the SEC.
          (v) The Parent makes and keeps books, records, and accounts, that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of its assets. It maintains internal control over financial
reporting (“Financial Reporting Controls”) designed by, or under the supervision
of, its principal executive and principal financial officers, and effected by
its board of directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with GAAP, including
that:
                    (1) transactions are executed in accordance with
management’s general or specific authorization;
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                    (2) unauthorized acquisition, use, or disposition of the
Parent’s assets that could have a material effect on the financial statements
are prevented or timely detected;
                    (3) transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that its
receipts and expenditures are being made only in accordance with authorizations
of the Parent’s management and board of directors;
                    (4) transactions are recorded as necessary to maintain
accountability for assets; and
                    (5) the recorded accountability for assets is compared with
the existing assets at reasonable intervals, and appropriate action is taken
with respect to any differences.
          (vi) There is no weakness in any of its Disclosure Controls or
Financial Reporting Controls that is required to be disclosed in any of the
Exchange Act Filings, except as so disclosed.
     (g) Obligations to Related Parties. Except as set forth on the Disclosure
Schedule, it has no obligations to their respective officers, directors,
stockholders or employees other than:
          (i) for payment of salary for services rendered and for bonus
payments;
          (ii) reimbursement for reasonable expenses incurred on its or its
Subsidiaries’ behalf;
          (iii) for other standard employee benefits made generally available to
all employees (including stock option agreements outstanding under any stock
option plan approved by its and its Subsidiaries’ Board of Directors, as
applicable); and
          (iv) obligations listed in its Exchange Act Filings.
Except as described above or set forth on the Disclosure Schedule, none of its
officers, directors or, to the best of its knowledge, key employees or
stockholders, any of its Subsidiaries or any members of their immediate
families, are indebted to it , individually or in the aggregate, in excess of
$50,000 or have any direct or indirect ownership interest in any Person with
which it is affiliated or with which it has a business relationship, or any
Person which competes with it , other than passive investments in publicly
traded companies (representing less than one percent (1%) of such company) which
may compete with it . Except as described above, none of its officers, directors
or stockholders, or any member of their immediate families, is, directly or
indirectly, interested in any material contract with it and no agreements,
understandings or proposed transactions are contemplated between it and any such
Person. Except as set forth on Schedule 12(g), it is not a guarantor nor
indemnitor of any indebtedness of any other Person.
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     (h) Changes. Since the Balance Sheet Date, except as disclosed in any
Schedule to this Agreement or to any of the Ancillary Agreements, there has not
been:
          (i) any change in its ’ business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects, which,
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;
          (ii) any resignation or termination of any of its or its Subsidiaries’
officers, key employees or groups of employees;
          (iii) any material change, except in the ordinary course of business,
in its ’ contingent obligations by way of guaranty, endorsement, indemnity,
warranty or otherwise;
          (iv) any damage, destruction or loss, whether or not covered by
insurance, which has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect;
          (v) any waiver by it of a valuable right or of a material debt owed to
it;
          (vi) any direct or indirect material loans made by it to any of its ’
stockholders, employees, officers or directors, other than advances made in the
ordinary course of business;
          (vii) any material change in any compensation arrangement or agreement
with any employee, officer, director or stockholder;
          (viii) any declaration or payment of any dividend or other
distribution of its ’ assets;
          (ix) any labor organization activity related to it ;
          (x) any debt, obligation or liability incurred, assumed or guaranteed
by it , except those for immaterial amounts and for current liabilities incurred
in the ordinary course of business;
          (xi) any sale, assignment or transfer of any Intellectual Property or
other intangible assets;
          (xii) any change in any material agreement to which it is a party or
by which either it is bound which, either individually or in the aggregate, has
had, or could reasonably be expected to have, individually or in the aggregate,
a Material Adverse Effect;
          (xiii) any other event or condition of any character that, either
individually or in the aggregate, has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect; or
          (xiv) any arrangement or commitment by it to do any of the acts
described in subsection (i) through (xiii) of this Section 12(h).
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     (i) Title to Properties and Assets; Liens, Etc. Except as set forth on the
Disclosure Schedule, it and each of its Subsidiaries has good and marketable
title to their respective properties and assets, and good title to its leasehold
interests, in each case subject to no Lien, other than Permitted Liens.
All facilities, Equipment, Fixtures, vehicles and other properties owned, leased
or used by it are in good operating condition and repair and are reasonably fit
and usable for the purposes for which they are being used. Except as set forth
on the Disclosure Schedule, it and each of its Subsidiaries is in compliance
with all material terms of each lease to which it is a party or is otherwise
bound.
     (j) Intellectual Property.
          (i) It and each of its Subsidiaries owns or possesses sufficient legal
rights to all Intellectual Property necessary for their respective businesses as
now conducted and, to its knowledge as presently proposed to be conducted,
without any known infringement of the rights of others. There are no outstanding
options, licenses or agreements of any kind relating to its Intellectual
Property, nor is it bound by or a party to any options, licenses or agreements
of any kind with respect to the Intellectual Property of any other Person other
than such licenses or agreements arising from the purchase of “off the shelf” or
standard products.
          (ii) It has not received any communications alleging that it has
violated any of the Intellectual Property or other proprietary rights of any
other Person, nor is it aware of any basis therefor.
          (iii) It does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by it , except for inventions, trade secrets or
proprietary information that have been rightfully assigned to it .
     (k) Compliance with Other Instruments. It is not in violation or default of
(x) any term of its Charter or Bylaws, or (y) any provision of any indebtedness,
mortgage, indenture, contract, agreement or instrument to which it is party or
by which it is bound or of any judgment, decree, order or writ, which violation
or default, in the case of this clause (y), has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect. The execution, delivery and performance of and compliance with this
Agreement and the Ancillary Agreements to which it is a party, and the issuance
of the Notes and the other Securities each pursuant hereto and thereto, will
not, with or without the passage of time or giving of notice, result in any such
material violation, or be in conflict with or constitute a default under any
such term or provision, or result in the creation of any Lien upon any of its
properties or assets or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to it ,
their businesses or operations or any of their assets or properties.
     (l) Litigation. Except as set forth on the Disclosure Schedule, there is no
action, suit, proceeding or investigation pending or, to its knowledge, overtly
threatened against it that prevents it from entering into this Agreement or the
Ancillary Agreements, or from
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consummating the transactions contemplated hereby or thereby, or which has had,
or could reasonably be expected to have, either individually or in the
aggregate, a Material Adverse Effect, or could result in any change in its ’
current equity ownership, nor is it aware that there is any basis to assert any
of the foregoing. It is nota party to or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by it
currently pending or which it intends to initiate.
     (m) Tax Returns and Payments. It and each of its Subsidiaries has timely
filed all tax returns (federal, state and local) required to be filed by it. All
taxes shown to be due and payable on such returns, any assessments imposed, and
all other taxes due and payable by it and each of its Subsidiaries on or before
the Closing Date, have been paid or will be paid prior to the time they become
delinquent. Except as set forth on the Disclosure Schedule, it has not been
advised:
          (i) that any of its returns, federal, state or other, have been or are
being audited as of the date hereof; or
          (ii) of any adjustment, deficiency, assessment or court decision in
respect of its federal, state or other taxes.
It has no knowledge of any liability of any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.
     (n) Employees. Except as set forth on the Disclosure Schedule, it has no
collective bargaining agreements with any of its employees. There is no labor
union organizing activity pending or, to its knowledge, threatened with respect
to it. Except as disclosed in the Exchange Act Filings or on the Disclosure
Schedule, it is not a party to or bound by any currently effective employment
contract, deferred compensation arrangement, bonus plan, incentive plan, profit
sharing plan, retirement agreement or other employee compensation plan or
agreement. To its knowledge, none of its ’ employees, nor any consultant with
whom it has contracted, is in violation of any term of any employment contract,
proprietary information agreement or any other agreement relating to the right
of any such individual to be employed by, or to contract with, it because of the
nature of the business to be conducted by it; and to its knowledge the continued
employment by it and its Subsidiaries of their present employees, and the
performance of its and its Subsidiaries contracts with its independent
contractors, will not result in any such violation. It is not aware that any of
its’ employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency that would interfere with
their duties to it . It has not received any notice alleging that any such
violation has occurred. Except for employees who have a current effective
employment agreement with it, none of its ’ employees has been granted the right
to continued employment by it or to any material compensation following
termination of employment with it . Except as set forth on Schedule 12(n), it is
not aware that any officer, key employee or group of employees intends to
terminate his, her or their employment with it , as applicable, nor does it have
a present intention to terminate the employment of any officer, key employee or
group of employees.
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     (o) Registration Rights and Voting Rights. Except as set forth on the
Disclosure Schedule and except as disclosed in Exchange Act Filings, it is not
presently under any obligation, and it has not granted any rights, to register
any of its ’ presently outstanding securities or any of its securities that may
hereafter be issued. Except as set forth on the Disclosure Schedule and except
as disclosed in Exchange Act Filings, to its knowledge, none of its ’
stockholders has entered into any agreement with respect to its ’ voting of
equity securities.
     (p) Compliance with Laws; Permits. It is not in violation of the
Sarbanes-Oxley Act of 2002 or any SEC related regulation or rule or any rule of
the Principal Market promulgated thereunder or any other applicable statute,
rule, regulation, order or restriction of any domestic or foreign government or
any instrumentality or agency thereof in respect of the conduct of its business
or the ownership of its properties which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect. No governmental orders, permissions, consents, approvals or
authorizations are required to be obtained and no registrations or declarations
are required to be filed in connection with the execution and delivery of this
Agreement or any Ancillary Agreement and the issuance of any of the Securities,
except such as have been duly and validly obtained or filed, or with respect to
any filings that must be made after the Closing Date, as will be filed in a
timely manner. It and each of its Subsidiaries has all material franchises,
permits, licenses and any similar authority necessary for the conduct of its
business as now being conducted by it, the lack of which could, either
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
     (q) Environmental and Safety Laws. It is not in violation of any applicable
statute, law or regulation relating to the environment or occupational health
and safety, and to its knowledge, no material expenditures are or will be
required in order to comply with any such existing statute, law or regulation.
Except as set forth on the Disclosure Schedule, no Hazardous Materials (as
defined below) are used or have been used, stored, or disposed of by it or, to
its knowledge, by any other Person on any property owned, leased or used by it .
For the purposes of the preceding sentence, “Hazardous Materials” shall mean:
          (i) materials which are listed or otherwise defined as “hazardous” or
“toxic” under any applicable local, state, federal and/or foreign laws and
regulations that govern the existence and/or remedy of contamination on
property, the protection of the environment from contamination, the control of
hazardous wastes, or other activities involving hazardous substances, including
building materials; and
          (ii) any petroleum products or nuclear materials.
     (r) Valid Offering. Assuming the accuracy of the representations and
warranties of Calliope contained in this Agreement, the offer and issuance of
the Securities will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”), and will have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.
     (s) Full Disclosure. It and each of its Subsidiaries has provided Calliope
with all information requested by Calliope in connection with Calliope’s
decision to enter into this
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Agreement, including all information Parent and its Subsidiaries believe is
reasonably necessary to make such investment decision. Neither this Agreement,
the Ancillary Agreements nor the exhibits and schedules hereto and thereto nor
any other document delivered by it to Calliope or its attorneys or agents in
connection herewith or therewith or with the transactions contemplated hereby or
thereby, contain any untrue statement of a material fact nor omit to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances in which they are made, not misleading.
Any financial projections and other estimates provided to Calliope by it were
based on its and its Subsidiaries’ experience in the industry and on assumptions
of fact and opinion as to future events which it , at the date of the issuance
of such projections or estimates, believed to be reasonable.
     (t) Insurance. It and each of its Subsidiaries has general commercial,
product liability, fire and casualty insurance policies with coverages which it
believes are customary for companies similarly situated to it and its
Subsidiaries in the same or similar business.
     (u) SEC Reports and Financial Statements. Except as set forth on the
Disclosure Schedule, it and each of its Subsidiaries has filed all proxy
statements, reports and other documents required to be filed by it under the
Exchange Act. The Parent has furnished Calliope with copies of: (i) its Annual
Report on Form 10-K for its fiscal years ended March 31, 2007; and (ii) its
Quarterly Reports on Form 10-Q for its fiscal quarters ended September 30, 2006
and December 31, 2006, and the Form 8-K filings which it has made during the
last twelve months (collectively, the “SEC Reports”). Except as set forth on the
Disclosure Schedule, each SEC Report was, at the time of its filing, in
substantial compliance with the requirements of its respective form and none of
the SEC Reports, nor the financial statements (and the notes thereto) included
in the SEC Reports, as of their respective filing dates, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. Such financial
statements have been prepared in accordance with GAAP applied on a consistent
basis during the periods involved (except (i) as may be otherwise indicated in
such financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed) and fairly present in all material respects the financial condition,
the results of operations and cash flows of the Parent and its Subsidiaries, on
a consolidated basis, as of, and for, the periods presented in each such SEC
Report.
     (v) Listing. The Parent’s Common Stock is listed or quoted, as applicable,
on the Principal Market and satisfies all requirements for the continuation of
such listing or quotation, as applicable, and the Parent shall do all things
necessary for the continuation of such listing or quotation, as applicable. The
Parent has not received any notice that its Common Stock will be delisted from,
or no longer quoted on, as applicable, the Principal Market or that its Common
Stock does not meet all requirements for such listing or quotation, as
applicable.
     (w) No Integrated Offering. Neither it, nor any of its Affiliates, nor any
Person acting on its or their behalf, has directly or indirectly made any offers
or sales of any security or solicited any offers to buy any security under
circumstances that would cause the offering of the Securities pursuant to this
Agreement or any Ancillary Agreement to be integrated with prior offerings by it
for purposes of the Securities Act which would prevent it
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from issuing the Securities pursuant to Rule 506 under the Securities Act, or
any applicable exchange-related stockholder approval provisions, nor will it or
any of its Affiliates or Subsidiaries take any action or steps that would cause
the offering of the Securities to be integrated with other offerings.
     (x) Stop Transfer. The Securities are restricted securities as of the date
of this Agreement. It will not issue any stop transfer order or other order
impeding the sale and delivery of any of the Securities at such time as the
Securities are registered for public sale or an exemption from registration is
available, except as required by state and federal securities laws.
     (y) Dilution. It specifically acknowledges that the Parent’s obligation to
issue the shares of Common Stock upon conversion of the Secured Convertible Term
Note and exercise of the Warrants is binding upon the Parent and enforceable
regardless of the dilution such issuance may have on the ownership interests of
other shareholders of the Parent.
     (z) Patriot Act. It certifies that, to the best of its knowledge, it has
not been designated, nor is or shall be owned or controlled, by a “suspected
terrorist” as defined in Executive Order 13224. It hereby acknowledges that
Calliope seeks to comply with all applicable laws concerning money laundering
and related activities. In furtherance of those efforts, it hereby represents,
warrants and covenants that: (i) none of the cash or property that it will pay
or will contribute to Calliope has been or shall be derived from, or related to,
any activity that is deemed criminal under United States law; and (ii) no
contribution or payment by it to Calliope, to the extent that they are within
its or any such Subsidiary’s control shall cause Calliope to be in violation of
the United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001. It shall promptly
notify Calliope if any of these representations, warranties and covenants ceases
to be true and accurate regarding it . It shall provide Calliope with any
additional information regarding it and each Subsidiary thereof that Calliope
deems necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities. It understands and agrees
that if at any time it is discovered that any of the foregoing representations,
warranties and covenants are incorrect, or if otherwise required by applicable
law or regulation related to money laundering or similar activities, Calliope
may undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of
Calliope’s investment in it. It further understands that Calliope may release
confidential information about it and its Subsidiaries and, if applicable, any
underlying beneficial owners, to proper authorities if Calliope, in its sole
discretion, determines that it is in the best interests of Calliope in light of
relevant rules and regulations under the laws set forth in subsection
(ii) above.
     (aa) Company Name; Locations of Offices, Records and Collateral. The
Disclosure Schedule sets forth Parent’s name as it appears in official filings
in the state of its organization, the type of entity of Parent, the
organizational identification number issued by Parent’s state of organization or
a statement that no such number has been issued, Parent’s state of organization,
and the location of Parent’s chief executive office, corporate offices,
warehouses, other locations of Collateral and locations where records with
respect to Collateral are kept (including in each case the county of such
locations) and, except as set forth in such Disclosure Schedule, such locations
have not changed during the preceding twelve months. As
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of the Closing Date, during the prior five years, except as set forth in the
Disclosure Schedule, no Company has been known as or conducted business in any
other name (including trade names). Parent has only one state of organization.
     (bb) ERISA. Based upon the Employee Retirement Income Security Act of 1974
(“ERISA”), and the regulations and published interpretations thereunder: (i) it
has not engaged in any Prohibited Transactions (as defined in Section 406 of
ERISA and Section 4975 of the Code); (ii) it and each of its Subsidiaries has
met all applicable minimum funding requirements under Section 302 of ERISA in
respect of its plans; (iii) it has no knowledge of any event or occurrence which
would cause the Pension Benefit Guaranty Corporation to institute proceedings
under Title IV of ERISA to terminate any employee benefit plan(s); (iv) it has
no fiduciary responsibility for investments with respect to any plan existing
for the benefit of persons other than its or such Subsidiary’s employees; and
(v) it has not withdrawn, completely or partially, from any multi-employer
pension plan so as to incur liability under the Multiemployer Pension Plan
Amendments Act of 1980.
     13. Covenants. Parent, hereby covenants and agrees with Calliope as
follows:
     (a) Stop-Orders. The Parent shall advise Calliope, promptly after it
receives notice of issuance by the SEC, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Parent, or of the suspension of
the qualification of the Common Stock of the Parent for offering or sale in any
jurisdiction, or the initiation of any proceeding for any such purpose.
     (b) Listing. The Parent shall promptly secure the listing or quotation, as
applicable, of the shares of Common Stock issuable upon conversion of the
Secured Convertible Term Note and exercise of the Warrants on the Principal
Market upon which shares of Common Stock are listed or quoted, as applicable,
(subject to official notice of issuance) and shall maintain such listing or
quotation, as applicable, so long as any other shares of Common Stock shall be
so listed or quoted, as applicable. The Parent shall maintain the listing or
quotation, as applicable, of its Common Stock on the Principal Market, and will
comply in all material respects with the Parent’s reporting, filing and other
obligations under the rules of the American Stock Exchange.
     (c) Market Regulations. It shall notify the SEC, the American Stock
Exchange and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall take
all other necessary action and proceedings as may be required and permitted by
applicable law, rule and regulation, for the legal and valid issuance of the
Securities to Calliope and promptly provide copies thereof to Calliope.
     (d) Reporting Requirements. It shall timely file with the SEC all reports
required to be filed pursuant to the Exchange Act and refrain from terminating
its status as an issuer required by the Exchange Act to file reports thereunder
even if the Exchange Act or the rules or regulations thereunder would permit
such termination.
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     (e) Use of Funds. It shall use the proceeds of the Loans[(i) to repay in
full the Existing Indebtedness and (ii) for general working capital purposes
only.
     (f) Access to Facilities. It shall permit any representatives designated by
Calliope (or any successor of Calliope), upon reasonable notice and during
normal business hours, at Parent’s expense and accompanied by a representative
of Parent (provided that no such prior notice shall be required to be given and
no such representative shall be required to accompany Calliope in the event
Calliope reasonably believes such access is necessary to preserve or protect the
Collateral or following the occurrence and during the continuance of an Event of
Default), toCalliopeCalliopeCalliope:
          (i) visit and inspect any of its or any such Subsidiary’s properties;
          (ii) examine its or any such Subsidiary’s corporate and financial
records (unless such examination is not permitted by federal, state or local law
or by contract) and make copies thereof or extracts therefrom; and
          (iii) discuss its or any such Subsidiary’s affairs, finances and
accounts with its or any such Subsidiary’s directors, officers and Accountants.
Notwithstanding the foregoing, it shall not provide any material, non-public
information to Calliope unless Calliope signs a confidentiality agreement and
otherwise complies with Regulation FD, under the federal securities laws.
     (g) Taxes. It shall, and shall cause each of its Subsidiaries to, promptly
pay and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes, assessments and governmental charges or levies imposed upon it and
its Subsidiaries’ income, profits, property or business, as the case may be;
provided, however, that any such tax, assessment, charge or levy need not be
paid currently if (i) the validity thereof shall currently and diligently be
contested in good faith by appropriate proceedings, (ii) such tax, assessment,
charge or levy shall have no effect on the Lien priority of Calliope in the
Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall have
set aside on its and/or such Subsidiary’s books adequate reserves with respect
thereto in accordance with GAAP; and provided, further, that it shall, and shall
cause each of its Subsidiaries to, pay all such taxes, assessments, charges or
levies forthwith upon the commencement of proceedings to foreclose any lien
which may have attached as security therefor.
     (h) Insurance. (i) It shall bear the full risk of loss from any loss of any
nature whatsoever with respect to the Collateral and it and each of its
Subsidiaries will, , bear the full risk of loss from any loss of any nature
whatsoever with respect to the assets pledged to Calliope as security for the
Obligations. Furthermore, it will insure or cause the Collateral to be insured
in Calliope’ name as an additional insured and lender loss payee, with an
appropriate loss payable endorsement in form and substance satisfactory to
Calliope, against loss or damage by fire, flood, sprinkler leakage, theft,
burglary, pilferage, loss in transit and other risks customarily insured against
by Parent in similar business similarly situated as it and its Subsidiaries
including but not limited to workers compensation, public and product liability
and business interruption, and such other hazards as Calliope shall specify in
amounts and under insurance policies and
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bonds by insurers acceptable to Calliope and all premiums thereon shall be paid
by Parent and the policies delivered to Calliope. If any Parent fails to obtain
the insurance and in such amounts of coverage as otherwise required pursuant to
this Section (h), Calliope may procure such insurance and the cost thereof shall
be promptly reimbursed by the Parent, , and shall constitute Obligations.
          (ii) Parent’s insurance coverage shall be impaired or invalidated by
any act or neglect of Parent and the insurer will provide Calliope with no less
than thirty (30) days notice prior of cancellation;
          (iii) Calliope, in connection with its status as a lender loss payee,
will be assigned at all times to a first lien position until such time as all
Calliope Obligations have been indefeasibly satisfied in full.
     (i) Intellectual Property. It shall, and shall cause each of its
Subsidiaries to, maintain in full force and effect its corporate existence,
rights and franchises and all licenses and other rights to use Intellectual
Property owned or possessed by it and reasonably deemed to be necessary to the
conduct of its business.
     (j) Properties. It shall, and shall cause each of its Subsidiaries to, keep
its properties in good repair, working order and condition, reasonable wear and
tear excepted, and from time to time make all needful and proper repairs,
renewals, replacements, additions and improvements thereto; and it shall, and
shall cause each of its Subsidiaries to, at all times comply with each provision
of all leases to which it is a party or under which it occupies property if the
breach of such provision could reasonably be expected to have a Material Adverse
Effect.
     (k) Confidentiality. It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of Calliope, unless expressly agreed to by Calliope or unless and until
such disclosure is required by law, applicable regulation or comment of the SEC
Staff, and then only to the extent of such requirement. Notwithstanding the
foregoing, Parent and its Subsidiaries may disclose Calliope’s identity and the
terms of this Agreement and the Ancillary Agreements to its current and
prospective debt and equity financing sources. Calliope shall be permitted to
discuss, distribute or otherwise transfer any non-public information of the
Parent in Calliope’s possession now or in the future to potential or actual (i)
direct or indirect investors in Calliope and (ii) third party assignees or
transferees of all or a portion of the obligations of Parent and/or any of its
respective Subsidiaries hereunder and under the Ancillary Agreement, to the
extent that such investor or assignee or transferee enters into a
confidentiality agreement for the benefit of the Parent in such form as may be
necessary to addresses the Parent’s Regulation FD requirements.
     (l) Required Approvals. It shall not, and shall not permit any of its
Subsidiaries to, without the prior written consent of Calliope, (i) create,
incur, assume or suffer to exist any indebtedness (exclusive of trade debt)
whether secured or unsecured other than Parent’s indebtedness to Calliope and as
set forth on the Disclosure Schedule attached hereto and made a part hereof;
(ii) cancel any debt owing to it in excess of $50,000 in the aggregate during
any 12 month period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any other
Person, except the
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endorsement of negotiable instruments by it or its Subsidiaries for deposit or
collection or similar transactions in the ordinary course of business;
(iv) directly or indirectly declare, pay or make any dividend or distribution on
any class of its Stock or apply any of its funds, property or assets to the
purchase, redemption or other retirement of any of its or its Subsidiaries’
Stock, or issue any preferred stock; (v) purchase or hold beneficially any Stock
or other securities or evidences of indebtedness of, make or permit to exist any
loans or advances to, or make any investment or acquire any interest whatsoever
in, any other Person, including any partnership or joint venture, except
(x) travel advances, (y) loans to its and its Subsidiaries’ officers and
employees not exceeding at any one time an aggregate of $10,000, and (z) loans
to its existing Subsidiaries so long as such Subsidiaries are designated as
either a co-borrower hereunder or has entered into such guaranty and security
documentation required by Calliope, including, without limitation, to grant to
Calliope a first priority perfected security interest in substantially all of
such Subsidiary’s assets to secure the Obligations; (vi) create or permit to
exist any Subsidiary, other than any Subsidiary in existence on the date hereof
and listed in the Disclosure Schedule unless such new Subsidiary is a
wholly-owned Subsidiary and is designated by Calliope as either a co-borrower or
guarantor hereunder and such Subsidiary shall have entered into all such
documentation required by Calliope, including, without limitation, to grant to
Calliope a first priority perfected security interest in substantially all of
such Subsidiary’s assets to secure the Obligations; (vii) directly or
indirectly, prepay any indebtedness (other than to Calliope and in the ordinary
course of business), or repurchase, redeem, retire or otherwise acquire any
indebtedness (other than to Calliope and in the ordinary course of business)
except to make scheduled payments of principal and interest thereof;
(viii) enter into any merger, consolidation or other reorganization with or into
any other Person or acquire all or a portion of the assets or Stock of any
Person or permit any other Person to consolidate with or merge with it, unless
(1) Parent is the surviving entity of such merger or consolidation, (2) no Event
of Default shall exist immediately prior to and after giving effect to such
merger or consolidation, (3) Parent shall have provided Calliope copies of all
documentation relating to such merger or consolidation and (4) Parent shall have
provided Calliope with at least thirty (30) days’ prior written notice of such
merger or consolidation; (ix) materially change the nature of the business in
which it is presently engaged; (x) become subject to (including, without
limitation, by way of amendment to or modification of) any agreement or
instrument which by its terms would (under any circumstances) restrict its ’
right to perform the provisions of this Agreement or any of the Ancillary
Agreements; (xi) change its fiscal year or make any changes in accounting
treatment and reporting practices without prior written notice to Calliope
except as required by GAAP or in the tax reporting treatment or except as
required by law; (xii) enter into any transaction with any employee, director or
Affiliate, except in the ordinary course on arms-length terms; (xiii) bill
Accounts under any name except the present name of Parent; or (xiv) sell, lease,
transfer or otherwise dispose of any of its properties or assets, or any of the
properties or assets of its Subsidiaries, except for (1) sales, leases, transfer
or dispositions by Parent to any other Company, (2) the sale of Inventory in the
ordinary course of business, (3) sales permitted under Section 7(e) hereof and
(4) the disposition or transfer in the ordinary course of business during any
fiscal year of obsolete and worn-out Equipment and only to the extent that
(x) the proceeds of any such disposition are used to acquire replacement
Equipment which is subject to Calliope’s first priority security interest or are
used to repay Loans or to pay general corporate expenses, or (y) following the
occurrence of an Event of Default which continues to exist, the proceeds of
which are remitted to Calliope to be held as cash collateral for the
Obligations.
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     (m) Reissuance of Securities. The Parent shall reissue certificates
representing the Securities without the legends set forth in Section 39 below at
such time as:
          (i) the holder thereof is permitted to dispose of such Securities
pursuant to Rule 144(k) under the Securities Act; or
          (ii) upon resale subject to an effective registration statement after
such Securities are registered under the Securities Act.
The Parent agrees to cooperate with Calliope in connection with all resales
pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to
allow such resales provided the Parent and its counsel receive reasonably
requested representations from Calliope and broker, if any.
     (n) Opinion. On the Closing Date, it shall deliver to Calliope an opinion
acceptable to Calliope from Parent’s legal counsel. Parent will provide, at the
Parent’s expense, such other legal opinions in the future as are reasonably
necessary for the resale and conversion of the Secured Convertible Term Note and
the exercise of the Warrants.
     (o) Legal Name, etc. It shall not, without providing Calliope with 30 days
prior written notice, change (i) its name as it appears in the official filings
in the state of its organization, (ii) the type of legal entity it is, (iii) its
organization identification number, if any, issued by its state of organization,
(iv) its state of organization or (v) amend its certificate of incorporation,
by-laws or other organizational document.
     (p) Compliance with Laws. The operation of each of its and each of its
Subsidiaries’ business is and shall continue to be in compliance in all material
respects with all applicable federal, state and local laws, rules and
ordinances, including to all laws, rules, regulations and orders relating to
taxes, payment and withholding of payroll taxes, employer and employee
contributions and similar items, securities, employee retirement and welfare
benefits, employee health and safety and environmental matters.
     (q) Notices. It and each of its Subsidiaries shall promptly inform Calliope
in writing of: (i) the commencement of all proceedings and investigations by or
before and/or the receipt of any notices from, any governmental or
nongovernmental body and all actions and proceedings in any court or before any
arbitrator against or in any way concerning any event which could reasonably be
expected to have singly or in the aggregate, a Material Adverse Effect; (ii) any
change which has had, or could reasonably be expected to have, a Material
Adverse Effect; (iii) any Event of Default or Default; and (iv) any default or
any event which with the passage of time or giving of notice or both would
constitute a default under any agreement for the payment of money to which it is
a party or by which it or any of its or any such Subsidiary’s properties may be
bound the breach of which would have a Material Adverse Effect.
     (r) Margin Stock. It shall not permit any of the proceeds of the Loans made
hereunder to be used directly or indirectly to “purchase” or “carry” “margin
stock” or to repay indebtedness incurred to “purchase” or “carry” “margin stock”
within the respective meanings of
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each of the quoted terms under Regulation U of the Board of Governors of the
Federal Reserve System as now and from time to time hereafter in effect.
     (s) Offering Restrictions. Except as previously disclosed in the SEC
Reports or in the Exchange Act Filings, or stock or stock options granted to its
employees or directors, it shall not, prior to the full repayment of the Notes
(together with all accrued and unpaid interest and fees related thereto) and
termination of this Agreement the full exercise by Calliope of the Warrants,
(x) enter into any equity line of credit agreement or similar agreement with a
floorless pricing feature or (y) issue, or enter into any agreement to issue,
any securities with a floorless variable/floating conversion and/or pricing
feature which are or could be (by conversion or registration) free-trading
securities (i.e. common stock subject to a registration statement).
     (t) Authorization and Reservation of Shares. The Parent shall at all times
have authorized and reserved a sufficient number of shares of Common Stock to
provide for the full conversion of the Secured Convertible Term Note and the
full exercise of the Warrants.
     (u) FIRPTA. It is not a “United States real property holding corporation”
as such term is defined in Section 897(c)(2) of the Code and Treasury
Regulation Section 1.897-2 promulgated thereunder and it and each of its
Subsidiaries shall at no time take any action or otherwise acquire any interest
in any asset or property to the extent the effect of which shall cause it and/or
such Subsidiary, as the case may be, to be a “United States real property
holding corporation” as such term is defined in Section 897(c)(2) of the Code
and Treasury Regulation Section 1.897-2 promulgated thereunder.
     (v) Investor Relations/Public Relations. The Parent hereby agrees to
incorporate into its annual budget an amount of funds reasonably necessary to
maintain a comprehensive investor relations and public relations program (an
“IR/PR Program”), which IR/PR Program shall incorporate elements customarily
utilized by companies of similar size and in a similar industry as the Parent
and its Subsidiaries.
     (w) Financing Right of First Refusal.
          (i) Parent hereby grants to Calliope a right of first refusal to
provide any Additional Financing (as defined below) to be issued by Parent and/
(the “Additional Financing Parties”), subject to the following terms and
conditions. From and after the date hereof, prior to the incurrence of any
additional indebtedness and/or the sale or issuance of any equity interests of
the Additional Financing Parties (an “Additional Financing”), Company Agent
shall notify Calliope of such Additional Financing. In connection therewith,
Company Agent shall submit a fully executed term sheet (a “Proposed Term Sheet”)
to Calliope setting forth the terms, conditions and pricing of any such
Additional Financing (such financing to be negotiated on “arm’s length” terms
and the terms thereof to be negotiated in good faith) proposed to be entered
into by the Additional Financing Parties. Calliope shall have the right, but not
the obligation, to deliver to Company Agent its own proposed term sheet (the
“Calliope Term Sheet”) setting forth the terms and conditions upon which
Calliope would be willing to provide such Additional Financing to the Additional
Financing Parties. The Calliope Term Sheet shall contain terms no less favorable
to the Additional Financing Parties than those outlined in Proposed Term Sheet.
Calliope shall deliver to Company Agent the Calliope Term Sheet within ten
Business Days of
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receipt of each such Proposed Term Sheet. If the provisions of the Calliope Term
Sheet are at least as favorable to the Additional Financing Parties as the
provisions of the Proposed Term Sheet, the Additional Financing Parties shall
enter into and consummate the Additional Financing transaction outlined in the
Calliope Term Sheet.
          (ii) It shall not, and shall not permit its Subsidiaries to, agree,
directly or indirectly, to any restriction with any Person which limits the
ability of Calliope to consummate an Additional Financing with it .
     14. Further Assurances. At any time and from time to time, upon the written
request of Calliope and at the sole expense of Parent, Parent shall promptly and
duly execute and deliver any and all such further instruments and documents and
take such further action as Calliope may request (a) to obtain the full benefits
of this Agreement and the Ancillary Agreements, (b) to protect, preserve and
maintain Calliope’s rights in the Collateral and under this Agreement or any
Ancillary Agreement, and/or (c) to enable Calliope to exercise all or any of the
rights and powers herein granted or any Ancillary Agreement.
     15. Representations, Warranties and Covenants of Calliope. Calliope hereby
represents, warrants and covenants to Parent as follows:
     (a) Requisite Power and Authority. Calliope has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Ancillary Agreements and to carry out their provisions. All
corporate action on Calliope’s part required for the lawful execution and
delivery of this Agreement and the Ancillary Agreements have been or will be
effectively taken prior to the Closing Date. Upon their execution and delivery,
this Agreement and the Ancillary Agreements shall be valid and binding
obligations of Calliope, enforceable in accordance with their terms, except
(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application affecting enforcement of creditors’ rights,
and (b) as limited by general principles of equity that restrict the
availability of equitable and legal remedies.
     (b) Investment Representations. Calliope understands that the Securities
are being offered pursuant to an exemption from registration contained in the
Securities Act based in part upon Calliope’s representations contained in this
Agreement, including, without limitation, that Calliope is an “accredited
investor” within the meaning of Regulation D under the Securities Act. Calliope
has received or has had full access to all the information it considers
necessary or appropriate to make an informed investment decision with respect to
the Notes to be issued to it under this Agreement and the Securities acquired by
it upon the conversion of the Secured Convertible Term Note and the exercise of
the Warrants.
     (c) Calliope Bears Economic Risk. Calliope has substantial experience in
evaluating and investing in private placement transactions of securities in
companies similar to the Parent so that it is capable of evaluating the merits
and risks of its investment in the Parent and has the capacity to protect its
own interests. Calliope must bear the economic risk of this investment until the
Securities are sold pursuant to (i) an effective registration statement under
the Securities Act, or (ii) an exemption from registration is available.
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     (d) Investment for Own Account. The Securities are being issued to Calliope
for its own account for investment only, and not as a nominee or agent and not
with a view towards or for resale in connection with their distribution.
     (e) Calliope Can Protect Its Interest. Calliope represents that by reason
of its, or of its management’s, business and financial experience, Calliope has
the capacity to evaluate the merits and risks of its investment in the Notes,
and the Securities and to protect its own interests in connection with the
transactions contemplated in this Agreement, and the Ancillary Agreements.
Further, Calliope is aware of no publication of any advertisement in connection
with the transactions contemplated in the Agreement or the Ancillary Agreements.
     (f) Accredited Investor. Calliope represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.
     (g) Shorting. Neither Calliope nor any of its Affiliates or investment
partners has, will, or will cause any Person, to directly engage in “short
sales” of the Parent’s Common Stock as long as any amount under any Note shall
remain outstanding.
     (h) Patriot Act. Calliope certifies that, to the best of Calliope’s
knowledge, Calliope has not been designated, and is not owned or controlled, by
a “suspected terrorist” as defined in Executive Order 13224. Calliope seeks to
comply with all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, Calliope hereby represents,
warrants and covenants that: (i) none of the cash or property that Calliope will
use to make the Loans has been or shall be derived from, or related to, any
activity that is deemed criminal under United States law; and (ii) no
disbursement by Calliope to Parent to the extent within Calliope’s control,
shall cause Calliope to be in violation of the United States Bank Secrecy Act,
the United States International Money Laundering Control Act of 1986 or the
United States International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001. Calliope shall promptly notify the Company Agent if any
of these representations ceases to be true and accurate regarding Calliope.
Calliope agrees to provide the Company any additional information regarding
Calliope that the Company deems necessary or convenient to ensure compliance
with all applicable laws concerning money laundering and similar activities.
Calliope understands and agrees that if at any time it is discovered that any of
the foregoing representations are incorrect, or if otherwise required by
applicable law or regulation related to money laundering similar activities,
Calliope may undertake appropriate actions to ensure compliance with applicable
law or regulation, including but not limited to segregation and/or redemption of
Calliope’s investment in the Parent. Calliope further understands that the
Parent may release information about Calliope and, if applicable, any underlying
beneficial owners, to proper authorities if the Parent, in its sole discretion,
determines that it is in the best interests of the Parent in light of relevant
rules and regulations under the laws set forth in subsection (ii) above.
     (i) Limitation on Acquisition of Common Stock. Notwithstanding anything to
the contrary contained in this Agreement, any Ancillary Agreement, or any
document, instrument or agreement entered into in connection with any other
transaction entered into by and between Calliope and Parent (and/or Subsidiaries
or Affiliates of Parent), Calliope shall not acquire stock in the Parent
(including, without limitation, pursuant to a contract to purchase, by
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exercising an option or warrant, by converting any other security or instrument,
by acquiring or exercising any other right to acquire, shares of stock or other
security convertible into shares of stock in the Parent, or otherwise, and such
options, warrants, conversion or other rights shall not be exercisable) to the
extent such stock acquisition would cause any interest (including any original
issue discount) payable by Parent to Calliope not to qualify as portfolio
interest, within the meaning of Section 881(c)(2) of the Internal Revenue Code
of 1986, as amended (the “Code”) by reason of Section 881(c)(3) of the Code,
taking into account the constructive ownership rules under Section 871(h)(3)(C)
of the Code (the “Stock Acquisition Limitation”). The Stock Acquisition
Limitation shall automatically become null and void without any notice to Parent
upon the earlier to occur of either (a) the Parent’s delivery to Calliope of a
Notice of Redemption (as defined in the Secured Convertible Term Note) or
(b) the existence of an Event of Default at a time when the average closing
price of the Common Stock as reported by Bloomberg, L.P. on the Principal Market
for the immediately preceding five trading days is greater than or equal to 150%
of the Fixed Conversion Price (as defined in the Secured Convertible Term Note).
     16. Power of Attorney. Parent hereby appoints Calliope, or any other Person
whom Calliope may designate as Parent’s attorney with effect after the
occurrence and during the continuance of an Event of Default, with power to:
(a)(i) execute any security related documentation on Parent’s behalf and to
supply any omitted information and correct patent errors in any documents
executed by Parent or on Parent’s behalf; (ii) to file financing statements
against Parent covering the Collateral (and, in connection with the filing of
any such financing statements, describe the Collateral as “all assets and all
personal property, whether now owned and/or hereafter acquired” (or any
substantially similar variation thereof)); (iii) sign Parent’s name on any
invoice or bill of lading relating to any Accounts, drafts against Account
Debtors, schedules and assignments of Accounts, notices of assignment, financing
statements and other public records, verifications of Account and notices to or
from Account Debtors; and (iv) to do all other things Calliope deems necessary
to carry out the terms of Section 6 of this Security Agreement and (b) upon the
occurrence and during the continuance of an Event of Default; (v) endorse
Parent’s name on any checks, notes, acceptances, money orders, drafts or other
forms of payment or security that may come into Calliope’ possession;
(vi) verify the validity, amount or any other matter relating to any Account by
mail, telephone, telegraph or otherwise with Account Debtors; (vii) do all other
things necessary to carry out this Agreement, any Ancillary Agreement and all
related documents; and (viii) notify the post office authorities to change the
address for delivery of Parent’s mail to an address designated by Calliope, and
to receive, open and dispose of all mail addressed to Parent. Parent hereby
ratifies and approves all acts of the attorney. Neither Calliope, nor the
attorney will be liable for any acts or omissions or for any error of judgment
or mistake of fact or law, except for gross negligence or willful misconduct.
This power, being coupled with an interest, is irrevocable so long as Calliope
has a security interest and until the Obligations have been fully satisfied.
     17. Term of Agreement. Calliope’s agreement to make Loans and extend
financial accommodations under and in accordance with the terms of this
Agreement or any Ancillary Agreement shall continue in full force and effect
until the expiration of the Term. At Calliope’s election following the
occurrence of an Event of Default, Calliope may terminate this Agreement. The
termination of the Agreement shall not affect any of Calliope’s rights hereunder
or any Ancillary Agreement and the provisions hereof and thereof shall continue
to be fully
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operative until all transactions entered into, rights or interests created and
the Obligations have been irrevocably disposed of, concluded or liquidated.
Notwithstanding the foregoing, Calliope shall release its security interests at
any time after twenty (20) days notice upon irrevocable payment to it of all
Obligations if Parent shall have (i) provided Calliope with an executed release
of any and all claims which Parent may have or thereafter have under this
Agreement and all Ancillary Agreements and (ii) paid to Calliope any early
payment fees due under the Secured Convertible Term Note.
     18. Termination of Lien. The Liens and rights granted to Calliope hereunder
and any Ancillary Agreements and the financing statements filed in connection
herewith or therewith shall continue in full force and effect, notwithstanding
the termination of this Agreement or the fact that Parent’s account may from
time to time be temporarily in a zero or credit position, until all of the
Obligations have been indefeasibly paid or performed in full and this Agreement
has been terminated in accordance with the terms of this Agreement. Calliope
shall not be required to send termination statements to Parent, or to file them
with any filing office, unless and until this Agreement and the Ancillary
Agreements shall have been terminated in accordance with their terms and all
Obligations indefeasibly paid in full in immediately available funds.
     19. Events of Default. The occurrence of any of the following shall
constitute an “Event of Default”:
     (a) failure to make payment of any of the Obligations when required
hereunder, and, in any such case, such failure shall continue for a period of
three (3) days following the date upon which any such payment was due;
     (b) failure by Parent to pay any taxes when due unless such taxes are being
contested in good faith by appropriate proceedings and with respect to which
adequate reserves have been provided on Parent’s and/or such Subsidiary’s books;
     (c) failure to perform under, and/or committing any breach of, in any
material respect, this Agreement or any covenant contained herein, which failure
or breach shall continue without remedy for a period of thirty (30) days after
the occurrence thereof;
     (d) any representation, warranty or statement made by Parent hereunder, in
any Ancillary Agreement, any certificate, statement or document delivered
pursuant to the terms hereof, or in connection with the transactions
contemplated by this Agreement should prove to be false or misleading in any
material respect on the date as of which made or deemed made;
     (e) the occurrence of any default (or similar term) in the observance or
performance of any other agreement or condition relating to any indebtedness or
contingent obligation of Parent in amount in excess of $100,000, beyond the
period of grace (if any), the effect of which default is to cause, or permit the
holder or holders of such indebtedness or beneficiary or beneficiaries of such
contingent obligation to cause, such indebtedness to become due prior to its
stated maturity or such contingent obligation to become payable;
     (f) attachments or levies in excess of $100,000 in the aggregate are made
upon Parent’s assets or a judgment is rendered against Parent’s property
involving a liability of
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more than $100,000 which shall not have been vacated, discharged, stayed or
bonded within thirty (30) days from the entry thereof;
     (g) any change in Parent’s condition or affairs (financial or otherwise)
which results in a Material Adverse Effect;
     (h) any Lien created hereunder or under any Ancillary Agreement for any
reason ceases to be or is not a valid and perfected Lien having a first priority
interest, if such Lien is not reinstated as a first priority Lien within thirty
(30) days;
     (i) Parent shall (i) apply for, consent to or suffer to exist the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of all or a substantial part of its property,
(ii) make a general assignment for the benefit of creditors, (iii) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (iv) be adjudicated a bankrupt or insolvent, (v) file a petition
seeking to take advantage of any other law providing for the relief of debtors,
(vi) acquiesce to without challenge within ten (10) days of the filing thereof,
or failure to have dismissed within sixty (60) days, any petition filed against
it in any involuntary case under such bankruptcy laws, or (vii) take any action
for the purpose of effecting any of the foregoing;
     (j) Parent shall admit in writing its inability, or be generally unable, to
pay its debts as they become due or cease operations of its present business;
     (k) Parent directly or indirectly sells, assigns, transfers, conveys, or
suffers or permits to occur any sale, assignment, transfer or conveyance of any
assets of Parent or any interest therein, except as permitted herein;
     (l) any “Person” or “group” (as such terms are defined in Sections 13(d)
and 14(d) of the Exchange Act, as in effect on the date hereof), other than
Calliope, is or becomes the “beneficial owner” (as defined in Rules 13(d)-3 and
13(d)-5 under the Exchange Act), directly or indirectly, of 35% or more on a
fully diluted basis of the then outstanding voting equity interest of the Parent
(other than a “Person” or “group” that beneficially owns 35% or more of such
outstanding voting equity interests of the Parent on the date hereof), (ii) the
Board of Directors of the Parent shall cease to consist of a majority of the
Board of Directors of the Parent on the date hereof (or directors appointed by a
majority of the board of directors in effect immediately prior to such
appointment) or (iii) the Parent merges or consolidates with, or sells all or
substantially all of its assets to, any other person or entity;
     (m) the indictment of Parent or any of its named executive officers (as
that term is used in Item 402 of Regulation S-K promulgated by the Securities
and Exhange Commission, hereinafter the “NEOs”) under any criminal statute, or
the commencement of criminal or civil proceedings in the United States by any
governmental authority against the Parent or any of its NEOs, pursuant to which
the prosecuting agency seeks forfeiture of a material portion of the Parent’s
property;
     (n) an Event of Default (or similar term) shall occur under and as defined
in any Note or in any other Ancillary Agreement;
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     (o) Parent shall breach any term or provision of any Ancillary Agreement to
which it is a party (including, without limitation, Section 7(e) of the
Registration Rights Agreement), in any material respect which breach is not
cured within any applicable cure or grace period provided in respect thereof (if
any);
     (p) Parent attempts to terminate, challenges the validity of, or its
liability under this Agreement or any Ancillary Agreement, or any proceeding
shall be brought to challenge the validity, binding effect of any Ancillary
Agreement or any Ancillary Agreement ceases to be a valid, binding and
enforceable obligation of Parent (to the extent such Persons are a party
thereto);
     (q) an SEC stop trade order or Principal Market trading suspension of the
Common Stock shall be in effect for five (5) consecutive trading days or five
(5) days during a period of ten (10) consecutive trading days, excluding in all
cases a suspension of all trading on a Principal Market, provided that the
Parent shall not have been able to cure such trading suspension within thirty
(30) days of the notice thereof or list the Common Stock on another Principal
Market within sixty (60) days of such notice; or
     (r) The Parent’s failure to deliver Common Stock to Calliope pursuant to
and in the form required by the Secured Convertible Term Note, the Warrant and
this Agreement, if such failure to deliver Common Stock shall not be cured
within three (3) Business Days or Parent is required to issue a replacement Note
to Calliope and Parent shall fail to deliver such replacement Note within seven
(7) Business Days.
     20. Remedies. Following the occurrence of an Event of Default, Calliope
shall have the right to demand repayment in full of all Obligations, whether or
not otherwise due. Until all Obligations have been fully and indefeasibly
satisfied, Calliope shall retain its Lien in all Collateral. Calliope shall
have, in addition to all other rights provided herein and in each Ancillary
Agreement, the rights and remedies of a secured party under the UCC, and under
other applicable law, all other legal and equitable rights to which Calliope may
be entitled, including the right to take immediate possession of the Collateral,
to require Parent to assemble the Collateral, at Parent’ joint and several
expense, and to make it available to Calliope at a place designated by Calliope
which is reasonably convenient to both parties and to enter any of the premises
of Parent or wherever the Collateral shall be located, with or without force or
process of law, and to keep and store the same on said premises until sold (and
if said premises be the property of Parent, Parent agrees not to charge Calliope
for storage thereof), and the right to apply for the appointment of a receiver
for Parent’s property. Further, Calliope may, at any time or times after the
occurrence of an Event of Default, sell and deliver all Collateral held by or
for Calliope at public or private sale for cash, upon credit or otherwise, at
such prices and upon such terms as Calliope, in Calliope’s sole discretion,
deems advisable or Calliope may otherwise recover upon the Collateral in any
commercially reasonable manner as Calliope, in its sole discretion, deems
advisable. The requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Company Agent at Company Agent’s address as shown in
Calliope’s records, at least ten (10) days before the time of the event of which
notice is being given. Calliope may be the purchaser at any sale, if it is
public. In connection with the exercise of the foregoing remedies, Calliope is
granted permission to use all of Parent’s Intellectual Property. The proceeds of
sale shall be applied first to all costs and expenses of sale, including
attorneys’
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fees, and second to the payment (in whatever order Calliope elects) of all
Obligations. After the indefeasible payment and satisfaction in full of all of
the Obligations, and after the payment by Calliope of any other amount required
by any provision of law, including Section 9-608(a)(1) of the UCC (but only
after Calliope has received what Calliope considers reasonable proof of a
subordinate party’s security interest), the surplus, if any, shall be paid to
Company Agent (for the benefit of the applicable Parent) or its representatives
or to whosoever may be lawfully entitled to receive the same, or as a court of
competent jurisdiction may direct. The Parent shall remain liable to Calliope
for any deficiency. Parent and Calliope acknowledge that the actual damages that
would be incurred by Calliope after the occurrence of an Event of Default would
be difficult to quantify and that Parent and Calliope have agreed that the fees
and obligations set forth in this Section and in this Agreement would constitute
fair and appropriate liquidated damages in the event of any such termination.
The parties hereto each hereby agrees that the exercise by any party hereto of
any right granted to it or the exercise by any party hereto of any remedy
available to it (including, without limitation, the issuance of a notice of
redemption, a borrowing request and/or a notice of default), in each case,
hereunder or under any Ancillary Agreement shall not constitute confidential
information and no party shall have any duty to the other party to maintain such
information as confidential, except for the portions of such publicly filed
documents that are subject to confidential treatment request made by the Parent
to the SEC.
     21. Waivers. To the full extent permitted by applicable law, Parent hereby
waives (a) presentment, demand and protest, and notice of presentment, dishonor,
intent to accelerate, acceleration, protest, default, nonpayment, maturity,
release, compromise, settlement, extension or renewal of any or all of this
Agreement and the Ancillary Agreements or any other notes, commercial paper,
Accounts, contracts, Documents, Instruments, Chattel Paper and guaranties at any
time held by Calliope on which Parent may in any way be liable, and hereby
ratifies and confirms whatever Calliope may do in this regard; (b) all rights to
notice and a hearing prior to Calliope’s taking possession or control of, or to
Calliope’s replevy, attachment or levy upon, any Collateral or any bond or
security that might be required by any court prior to allowing Calliope to
exercise any of its remedies; and (c) the benefit of all valuation, appraisal
and exemption laws. Parent acknowledges that it has been advised by counsel of
its choices and decisions with respect to this Agreement, the Ancillary
Agreements and the transactions evidenced hereby and thereby.
     22. Expenses. The Parent shall pay all of Calliope’ out-of-pocket costs and
expenses, including reasonable fees and disbursements of in-house or outside
counsel and appraisers, in connection with (x) subject to the limitations set
forth in Section 5(b)(iii), the preparation, execution and delivery of this
Agreement and the Ancillary Agreements, and (y) in connection with the
prosecution or defense of any action, contest, dispute, suit or proceeding
concerning any matter in any way arising out of, related to or connected with
this Agreement or any Ancillary Agreement. The Parent shall also pay all of
Calliope’ reasonable and documented fees, charges, out-of-pocket costs and
expenses, including fees and disbursements of counsel and appraisers, in
connection with (a) the preparation, execution and delivery of any waiver, any
amendment thereto or consent proposed or executed in connection with the
transactions contemplated by this Agreement or the Ancillary Agreements,
(b) Calliope’ obtaining performance of the Obligations under this Agreement and
any Ancillary Agreements, including, but not limited to, the enforcement or
defense of Calliope’ security interests, assignments of rights and Liens
hereunder as valid perfected security interests, (c) any attempt to inspect,
verify,
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protect, collect, sell, liquidate or otherwise dispose of any Collateral,
(d) any appraisals or re-appraisals of any property (real or personal) pledged
to Calliope by Parent as Collateral for, or any other Person as security for,
the Obligations hereunder and (e) any consultations in connection with any of
the foregoing. The Parent shall also pay Calliope’ customary bank charges for
all bank services (including wire transfers) performed or caused to be performed
by Calliope for Parent at Parent’s or such Subsidiary’s request or in connection
with Parent’s loan account with Calliope. All such costs and expenses together
with all filing, recording and search fees, taxes and interest payable by the
Parent to Calliope shall be payable within five (5) days of presentment and
shall be secured by the Collateral. If any tax by any Governmental Authority is
or may be imposed on or as a result of any transaction between Parent and/or any
Subsidiary thereof, on the one hand, and Calliope on the other hand, which
Calliope is or may be required to withhold or pay (including, without
limitation, as a result of a breach by Parent of Section 13(u) herein), the
Parent hereby indemnifies and holds Calliope harmless in respect of such taxes,
and the Parent will repay to Calliope the amount of any such taxes which shall
be charged to the Parent’ account; and until the Parent shall furnish Calliope
with indemnity therefor (or supply Calliope with evidence satisfactory to it
that due provision for the payment thereof has been made), Calliope may hold
without interest any balance standing to Parent’s credit and Calliope shall
retain its Liens in any and all Collateral.
     23. Assignment. Calliope may assign any or all of the Obligations together
with any or all of the security therefor to any Person and any such assignee
shall succeed to all of Calliope’s rights with respect thereto; provided that
Calliope shall not be permitted to effect any such assignment to a competitor of
Parent unless an Event of Default has occurred and is continuing. Upon such
assignment, Calliope shall be released from all responsibility for the
Collateral to the extent same is assigned to any transferee. Calliope may from
time to time sell or otherwise grant participations in any of the Obligations
and the holder of any such participation shall, subject to the terms of any
agreement between Calliope and such holder, be entitled to the same benefits as
Calliope with respect to any security for the Obligations in which such holder
is a participant. Parent agrees that each such holder may exercise any and all
rights of banker’s lien, set-off and counterclaim with respect to its
participation in the Obligations as fully as though Parent were directly
indebted to such holder in the amount of such participation. No Company may
assign any of its rights or obligations hereunder without the prior written
consent of Calliope. All of the terms, conditions, promises, covenants,
provisions and warranties of this Agreement shall inure to the benefit of
undersigned, and shall bind the representatives, successors and permitted
assigns of Parent.
     24. No Waiver; Cumulative Remedies. Failure by Calliope to exercise any
right, remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between or among Parent and
Calliope or delay by Calliope in exercising the same, will not operate as a
waiver; no waiver by Calliope will be effective unless it is in writing and then
only to the extent specifically stated. Calliope’s rights and remedies under
this Agreement and the Ancillary Agreements will be cumulative and not exclusive
of any other right or remedy which Calliope may have.
     25. Application of Payments. Parent irrevocably waives the right to direct
the application of any and all payments at any time or times hereafter received
by Calliope from or on Parent’s behalf and Parent hereby irrevocably agrees that
Calliope shall have the continuing
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exclusive right to apply and reapply any and all payments received at any time
or times hereafter against the Obligations hereunder in such manner as Calliope
may deem advisable notwithstanding any entry by Calliope upon any of Calliope’s
books and records.
     26. Indemnity. Parent hereby indemnifies and holds Calliope, and its
respective affiliates, employees, attorneys and agents (each, an “Indemnified
Person”), harmless from and against any and all suits, actions, proceedings,
claims, damages, losses, liabilities and expenses of any kind or nature
whatsoever (including attorneys’ fees and disbursements and other costs of
investigation or defense, including those incurred upon any appeal) which may be
instituted or asserted against or incurred by any such Indemnified Person as the
result of credit having been extended, suspended or terminated under this
Agreement or any of the Ancillary Agreements or with respect to the execution,
delivery, enforcement, performance and administration of, or in any other way
arising out of or relating to, this Agreement, the Ancillary Agreements or any
other documents or transactions contemplated by or referred to herein or therein
and any actions or failures to act with respect to any of the foregoing, except
to the extent that any such indemnified liability is finally determined by a
court of competent jurisdiction to have resulted solely from such Indemnified
Person’s gross negligence or willful misconduct. NO INDEMNIFIED PERSON SHALL BE
RESPONSIBLE OR LIABLE TO PARENT OR TO ANY OTHER PARTY OR TO ANY SUCCESSOR,
ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS
DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR
CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN
EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY ANCILLARY
AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR
THEREUNDER.
     27. Revival. The Parent further agrees that to the extent Parent makes a
payment or payments to Calliope, which payment or payments or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy act, state or federal law, common law or equitable cause,
then, to the extent of such payment or repayment, the obligation or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if said payment had not been made.
     28. Borrowing Agency Provisions.
     (a) Parent hereby irrevocably designates Company Agent to be its attorney
and agent and in such capacity to borrow, sign and endorse notes, and execute
and deliver all instruments, documents, writings and further assurances now or
hereafter required hereunder, on behalf of Parent, and hereby authorizes
Calliope to pay over or credit all loan proceeds hereunder in accordance with
the request of Company Agent.
     (b) The handling of this credit facility as a co-borrowing facility with a
borrowing agent in the manner set forth in this Agreement is solely as an
accommodation to the Parent and at their request. Calliope shall not incur any
liability to Parent as a result thereof. To induce Calliope to do so and in
consideration thereof, Parent hereby indemnifies Calliope and holds Calliope
harmless from and against any and all liabilities, expenses, losses, damages and
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claims of damage or injury asserted against Calliope by any Person arising from
or incurred by reason of the handling of the financing arrangements of the
Parent as provided herein, reliance by Calliope on any request or instruction
from Company Agent or any other action taken by Calliope with respect to this
Paragraph 28.
     (c) All Obligations shall be joint and several, and the Parent shall make
payment upon the maturity of the Obligations by acceleration or otherwise, and
such obligation and liability on the part of the Parent shall in no way be
affected by any extensions, renewals and forbearance granted by Calliope to
Parent, failure of Calliope to give Parent notice of borrowing or any other
notice, any failure of Calliope to pursue to preserve its rights against Parent,
the release by Calliope of any Collateral now or thereafter acquired from
Parent, and such agreement by Parent to pay upon any notice issued pursuant
thereto is unconditional and unaffected by prior recourse by Calliope to Parent
or any Collateral for Parent’s Obligations or the lack thereof.
     (d) Parent expressly waives any and all rights of subrogation,
reimbursement, indemnity, exoneration, contribution or any other claim which
Parent may now or hereafter have against the other or other Person directly or
contingently liable for the Obligations, or against or with respect to any
other’s property (including, without limitation, any property which is
Collateral for the Obligations), arising from the existence or performance of
this Agreement, until all Obligations have been indefeasibly paid in full and
this Agreement has been irrevocably terminated.
     (e) Parent represents and warrants to Calliope that (i) Parent have common
shareholders, directors and officers, (ii) the businesses and corporate
activities of Parent are closely related to, and substantially benefit, the
business and corporate activities of Parent, (iii) the financial and other
operations of Parent are performed on a combined basis as if Parent constituted
a consolidated corporate group, (iv) Parent will receive a substantial economic
benefit from entering into this Agreement and will receive a substantial
economic benefit from the application of each Loan hereunder, in each case,
whether or not such amount is used directly by Parent and (v) all requests for
Loans hereunder by the Company Agent are for the exclusive and indivisible
benefit of the Parent as though, for purposes of this Agreement, the Parent
constituted a single entity.
     29. Notices. Any notice or request hereunder may be given to Parent,
Company Agent or Calliope at the respective addresses set forth below or as may
hereafter be specified in a notice designated as a change of address under this
Section. Any notice or request hereunder shall be given by registered or
certified mail, return receipt requested, hand delivery, overnight mail or
telecopy (confirmed by mail). Notices and requests shall be, in the case of
those by hand delivery, deemed to have been given when delivered to any officer
of the party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) Business Days after the date when
deposited in the mail or with the overnight mail carrier, and, in the case of a
telecopy, when confirmed.
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Notices shall be provided as follows:

         
 
  If to Calliope:   Calliope Capital Corporation
 
      c/o United Corporate Services, Inc. 874 Walker
 
      Road, Suite C Dover Delaware 19904
 
      Facsimile: 212-541-4410
 
       
 
  With a copy to:   Laurus Capital Management, LLC
 
      335 Madison Avenue, 10th Fl.
 
      New York, New York 10017
 
      Attention: Portfolio Services
 
      Telephone: (212) 541-5800
 
      Telecopier: (212) 581-5037
 
       
 
  If to Parent, or Company Agent:   Chad Therapeutics, Inc.
 
      21622 Plummer Street
 
      Chatsworth, CA 91311
 
      Attention: Tracy Kern
 
      Telephone: (818) 882-8803 ext.288
 
      Facsimile: (818) 407-4122
 
       
 
  With a copy to:    
 
      Morrison & Foerster
 
      555 West Fifth Street, Suite 3500
 
      Los Angeles, California 90013-1024
 
       
 
      Attention: Hillel T. Cohn, Esq.
 
      Phone: (213) 892-5251
 
      Fax: (213) 892-5454

or such other address as may be designated in writing hereafter in accordance
with this Section 29 by such Person.
     30. Governing Law, Jurisdiction and Waiver of Jury Trial.
     (a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
     (b) PARENT HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS
LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN PARENT, ON THE
ONE HAND, AND CALLIOPE, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY
OF THE ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO
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THIS AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT CALLIOPE AND
PARENT ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A
COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER
PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE
CALLIOPE FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY
OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF CALLIOPE. PARENT EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND PARENT
HEREBY WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL
JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. PARENT HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO COMPANY AGENT
AT THE ADDRESS SET FORTH IN SECTION 29 AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE EARLIER OF COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR THREE
(3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
     (c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING
SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN CALLIOPE,
AND/OR PARENT ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.
     31. Limitation of Liability. Parent acknowledges and understands that in
order to assure repayment of the Obligations hereunder Calliope may be required
to exercise any and all of Calliope’s rights and remedies hereunder and agrees
that, except as limited by applicable law, neither Calliope nor any of
Calliope’s agents shall be liable for acts taken or omissions made in connection
herewith or therewith except for actual bad faith.
     32. Entire Understanding; Maximum Interest. This Agreement and the
Ancillary Agreements contain the entire understanding between Parent and
Calliope as to the subject matter hereof and thereof and any promises,
representations, warranties or guarantees not herein contained shall have no
force and effect unless in writing, signed by Parent’s and Calliope’s respective
officers. Neither this Agreement, the Ancillary Agreements, nor any portion or
provisions thereof may be changed, modified, amended, waived, supplemented,
discharged, cancelled or terminated orally or by any course of dealing, or in
any manner other than by an agreement in writing, signed by the party to be
charged. Nothing contained in this
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Agreement, any Ancillary Agreement or in any document referred to herein or
delivered in connection herewith shall be deemed to establish or require the
payment of a rate of interest or other charges in excess of the maximum rate
permitted by applicable law. In the event that the rate of interest or dividends
required to be paid or other charges hereunder exceed the maximum rate permitted
by such law, any payments in excess of such maximum shall be credited against
amounts owed by the Parent to Calliope and thus refunded to the Parent.
     33. Severability. Wherever possible each provision of this Agreement or the
Ancillary Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or the
Ancillary Agreements shall be prohibited by or invalid under applicable law such
provision shall be ineffective to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
thereof.
     34. Survival. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by Calliope and the closing of
the transactions contemplated hereby to the extent provided therein. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Parent pursuant hereto in connection
with the transactions contemplated hereby shall be deemed to be representations
and warranties by the Parent hereunder solely as of the date of such certificate
or instrument. All indemnities set forth herein shall survive the execution,
delivery and termination of this Agreement and the Ancillary Agreements and the
making and repaying of the Obligations.
     35. Captions. All captions are and shall be without substantive meaning or
content of any kind whatsoever.
     36. Counterparts; Telecopier Signatures. This Agreement may be executed in
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same agreement. Any signature delivered by
a party via telecopier transmission shall be deemed to be any original signature
hereto.
     37. Construction. The parties acknowledge that each party and its counsel
have reviewed this Agreement and that the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments,
schedules or exhibits thereto.
     38. Publicity. Parent hereby authorizes Calliope to make appropriate
announcements of the financial arrangement entered into by and among Parent and
Calliope, including, without limitation, announcements which are commonly known
as tombstones, in such publications and to such selected parties as Calliope
shall in its sole and absolute discretion deem appropriate, or as required by
applicable law.
     39. Joinder. It is understood and agreed that any Person that desires to
become a Company hereunder, or is required to execute a counterpart of this
Agreement after the date hereof pursuant to the requirements of this Agreement
or any Ancillary Agreement, shall become a Company hereunder by (a) executing a
Joinder Agreement in form and substance
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satisfactory to Calliope, (b) delivering supplements to such exhibits and
annexes to this Agreement and the Ancillary Agreements as Calliope shall
reasonably request and (c) taking all actions as specified in this Agreement as
would have been taken by Parent had it been an original party to this Agreement,
in each case with all documents required above to be delivered to Calliope and
with all documents and actions required above to be taken to the reasonable
satisfaction of Calliope.
     40. Legends. The Securities shall bear legends as follows;
     (a) The Secured Convertible Term Note shall bear substantially the
following legend:
“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (b) Any shares of Common Stock issued pursuant to conversion of the Secured
Convertible Term Note or exercise of the Warrants, shall bear a legend which
shall be in substantially the following form until such shares are covered by an
effective registration statement filed with the SEC:
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE, STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”
     (c) The Warrants shall bear substantially the following legend:
“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
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AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON
SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO PARENT THAT SUCH REGISTRATION IS NOT REQUIRED.”
[Balance of page intentionally left blank; signature page follows.]
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     IN WITNESS WHEREOF, the parties have executed this Security Agreement as of
the date first written above.

                  CHAD THERAPEUTICS, INC.    
 
           
 
  By:
Name:   /s/ Earl Yager
 
Earl Yager    
 
  Title:   President & CEO    
 
                CALLIOPE CAPITAL CORPORATION    
 
                By: LAURUS CAPITAL MANAGEMENT,
Its Investment Advisor    
 
           
 
  By:
Name:
Title:   /s/ David Grin
 
David Grin
 
Director
 
     

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Annex A — Definitions
     “Account Debtor” means any Person who is or may be obligated with respect
to, or on account of, an Account.
     “Accountants” has the meaning given to such term in Section 11(a).
     “Accounts” means all “accounts”, as such term is defined in the UCC, now
owned or hereafter acquired by any Person, including: (a) all accounts
receivable, other receivables, book debts and other forms of obligations (other
than forms of obligations evidenced by Chattel Paper or Instruments) (including
any such obligations that may be characterized as an account or contract right
under the UCC); (b) all of such Person’s rights in, to and under all purchase
orders or receipts for goods or services; (c) all of such Person’s rights to any
goods represented by any of the foregoing (including unpaid sellers’ rights of
rescission, replevin, reclamation and stoppage in transit and rights to
returned, reclaimed or repossessed goods); (d) all rights to payment due to such
Person for Goods or other property sold, leased, licensed, assigned or otherwise
disposed of, for a policy of insurance issued or to be issued, for a secondary
obligation incurred or to be incurred, for energy provided or to be provided,
for the use or hire of a vessel under a charter or other contract, arising out
of the use of a credit card or charge card, or for services rendered or to be
rendered by such Person or in connection with any other transaction (whether or
not yet earned by performance on the part of such Person); and (e) all
collateral security of any kind given by any Account Debtor or any other Person
with respect to any of the foregoing.
     “Accounts Availability” means ninety percent (90%) of the net face amount
of Eligible Accounts.
     “Affiliate” means, with respect to any Person, (a) any other Person (other
than a Subsidiary) which, directly or indirectly, is in control of, is
controlled by, or is under common control with such Person, (b) any other Person
that, directly or indirectly, owns or controls, whether beneficially, or as
trustee, guardian or other fiduciary, 25% or more of the Stock having ordinary
voting power in the election of directors of such Person, (c) any other Person
who is a director, officer, joint venturer or partner (i) of such Person,
(ii) of any Subsidiary of such Person or (iii) of any Person described in clause
(a) above or (d) in the case of the Parent, the immediate family members,
spouses and lineal descendants of individuals who are Affiliates of such Parent.
For the purposes of this definition, control of a Person shall mean the power
(direct or indirect) to direct or cause the direction of the management and
policies of such Person whether by contract or otherwise; provided however, that
the term “Affiliate” shall specifically exclude Calliope.
     “Ancillary Agreements” means the Notes, the Warrants, the Registration
Rights Agreements, each Security Document and all other agreements, instruments,
documents, mortgages, pledges, powers of attorney, consents, assignments,
contracts, notices, security agreements, trust agreements and guarantees whether
heretofore, concurrently, or hereafter executed by or on behalf of Parent, any
of its Subsidiaries or any other Person or delivered to Calliope, relating to
this Agreement or to the transactions contemplated by this Agreement or
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otherwise relating to the relationship between or among Parent and Calliope, as
same may be amended, supplemented, restated or otherwise modified from time to
time.
     “Balance Sheet Date” has the meaning given such term in Section 12(f)(ii).
     “Books and Records” means all books, records, board minutes, contracts,
licenses, insurance policies, environmental audits, business plans, files,
computer files, computer discs and other data and software storage and media
devices, accounting books and records, financial statements (actual and pro
forma), filings with Governmental Authorities and any and all records and
instruments relating to the Collateral or otherwise necessary or helpful in the
collection thereof or the realization thereupon.
     “Business Day” means a day on which Calliope is open for business and that
is not a Saturday, a Sunday or other day on which banks are required or
permitted to be closed in the State of New York.
     “Capital Availability Amount” means $2,750,000.
     “Charter” has the meaning given such term in Section 12(c)(iv).
     “Chattel Paper” means all “chattel paper,” as such term is defined in the
UCC, including electronic chattel paper, now owned or hereafter acquired by any
Person.
     “Closing Date” means the date on which Parent shall first receive proceeds
of the initial Loans or the date hereof, if no Loan is made under the facility
on the date hereof.
     “Code” has the meaning given such term in Section 15(i).
     “Collateral” means all of Parent’s property and assets, whether real or
personal, tangible or intangible, and whether now owned or hereafter acquired,
or in which it now has or at any time in the future may acquire any right, title
or interests including all of the following property in which it now has or at
any time in the future may acquire any right, title or interest:
     (a) all Inventory;
     (b) all Equipment;
     (c) all Fixtures;
     (d) all Goods;
     (e) all General Intangibles;
     (f) all Accounts;
     (g) all Deposit Accounts, other bank accounts and all funds on deposit
therein;
     (h) all Investment Property;
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     (i) all Stock;
     (j) all Chattel Paper;
     (k) all Letter-of-Credit Rights;
     (l) all Instruments;
     (m) all commercial tort claims set forth on Schedule 1(A);
     (n) all Books and Records;
     (o) all Intellectual Property;
     (p) all Supporting Obligations including letters of credit and guarantees
issued in support of Accounts, Chattel Paper, General Intangibles and Investment
Property;
     (q) (i) all money, cash and cash equivalents and (ii) all cash held as cash
collateral to the extent not otherwise constituting Collateral, all other cash
or property at any time on deposit with or held by Calliope for the account of
Parent (whether for safekeeping, custody, pledge, transmission or otherwise);
and
     (r) all products and Proceeds of all or any of the foregoing, tort claims
and all claims and other rights to payment including (i) insurance claims
against third parties for loss of, damage to, or destruction of, the foregoing
Collateral and (ii) payments due or to become due under leases, rentals and
hires of any or all of the foregoing and Proceeds payable under, or unearned
premiums with respect to policies of insurance in whatever form.
     “Common Stock” means the shares of stock representing the Parent’s common
equity interests.
     “Company Agent” means the Parent.
     “Contract Rate” has the meaning given such term in the respective Note.
     “Default” means any act or event that, with the giving of notice or passage
of time or both, would constitute an Event of Default.
     “Deposit Accounts” means all “deposit accounts” as such term is defined in
the UCC, now or hereafter held in the name of any Person, including, without
limitation, the Lockboxes.
     “Disclosure Controls” has the meaning given such term in Section 12(f)(iv).
     “Documents” means all “documents”, as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including all bills
of lading, dock warrants, dock receipts, warehouse receipts, and other documents
of title, whether negotiable or non-negotiable.
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     “Eligible Accounts” means each Account of Parent which conforms to the
following criteria: (a) shipment of the merchandise or the rendition of services
has been completed; (b) no return, rejection or repossession of the merchandise
has occurred; (c) merchandise or services shall not have been rejected or
disputed by the Account Debtor and there shall not have been asserted any
offset, defense or counterclaim; (d) continues to be in full conformity with the
representations and warranties made by Parent to Calliope with respect thereto;
(e) Calliope is, and continues to be, satisfied with the credit standing of the
Account Debtor in relation to the amount of credit extended; (f) there are no
facts existing or threatened which are likely to result in any adverse change in
an Account Debtor’s financial condition; (g) is documented by an invoice in a
form approved by Calliope and shall not be unpaid more than ninety (90) days
from invoice date; (h) not more than twenty-five percent (25%) of the unpaid
amount of invoices due from such Account Debtor remains unpaid more than ninety
(90) days from invoice date, provided, however, that invoices with 60 day
payment terms may be considered Eligible Accounts if the unpaid amount of
invoices due from such Account Debtor remains unpaid no more than one hundred
twenty (120) days from invoice date ; (i) is not evidenced by chattel paper or
an instrument of any kind with respect to or in payment of the Account unless
such instrument is duly endorsed to and in possession of Calliope or represents
a check in payment of an Account; (j) the Account Debtor is located in the
United States; provided, however, Calliope may, from time to time, in the
exercise of its sole discretion and based upon satisfaction of certain
conditions to be determined at such time by Calliope, deem certain Accounts as
Eligible Foreign Accounts notwithstanding that the Account is due from an
Account Debtor located outside of the United States; (k) Calliope has a first
priority perfected Lien in such Account and such Account is not subject to any
Lien other than Permitted Liens; (l) does not arise out of transactions with any
employee, officer, director, stockholder or Affiliate of Parent; (m) is payable
to Parent; (n) does not arise out of a bill and hold sale prior to shipment and
does not arise out of a sale to any Person to which Parent is indebted; (o) is
net of any returns, discounts, claims, credits and allowances; (p) if the
Account arises out of contracts between Parent, on the one hand, and the United
States, on the other hand, any state, or any department, agency or
instrumentality of any of them, Parent has so notified Calliope, in writing,
prior to the creation of such Account, and there has been compliance with any
governmental notice or approval requirements, including compliance with the
Federal Assignment of Claims Act; (q) is a good and valid account representing
an undisputed bona fide indebtedness incurred by the Account Debtor therein
named, for a fixed sum as set forth in the invoice relating thereto with respect
to an unconditional sale and delivery upon the stated terms of goods sold by
Parent or work, labor and/or services rendered by Parent; (r) does not arise out
of progress billings prior to completion of the order; (s) the total unpaid
Accounts from such Account Debtor does not exceed twenty-five percent (25%) of
all Eligible Accounts; (t) Parent’s right to payment is absolute and not
contingent upon the fulfillment of any condition whatsoever; (u) Parent is able
to bring suit and enforce its remedies against the Account Debtor through
judicial process; (v) does not represent interest payments, late or finance
charges owing to Parent, and (w) is otherwise satisfactory to Calliope as
determined by Calliope in the exercise of its sole discretion. In the event
Parent requests that Calliope include within Eligible Accounts certain Accounts
of of Parent’s acquisition targets, Calliope shall at the time of such request
consider such inclusion, but any such inclusion shall be at the sole option of
Calliope and shall at all times be subject to the execution and delivery to
Calliope of all such documentation (including, without limitation, guaranty and
security documentation) as Calliope may require in its sole discretion.
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     “Eligible Inventory” means Inventory owned by a Company which Calliope, in
its sole and absolute discretion, determines: (a) is subject to a first priority
perfected Lien in favor of Calliope and is subject to no other Liens whatsoever
(other than Permitted Liens); (b) is located on premises with respect to which
Calliope has received a landlord or mortgagee waiver acceptable in form and
substance to Calliope; (c) is not in transit; (d) is in good condition and meets
all standards imposed by any governmental agency, or department or division
thereof having regulatory Governmental Authority over such Inventory, its use or
sale including the Federal Fair Labor Standards Act of 1938 as amended, and all
rules, regulations and orders thereunder; (e) is currently either usable or
salable in the normal course of Parent’s business; (f) is not placed by Parent
on consignment or held by Parent on consignment from another Person; (g) is in
conformity with the representations and warranties made by Parent to Calliope
with respect thereto; (h) is not subject to any licensing, patent, royalty,
trademark, tradename or copyright agreement with any third parties not disclosed
on the Disclosure Schedules under the heading “Eligible Inventory IP Agreements
(i) does not require the consent of any Person for the completion of
manufacture, sale or other disposition of such Inventory and such completion,
manufacture or sale does not constitute a breach or default under any contract
or agreement to which Parent is a party or to which such Inventory is or may be
subject; (j) is not work-in-process; (k) is covered by casualty insurance
acceptable to Calliope and under which Calliope has been named as a lender’s
loss payee and additional insured; and (l) not to be ineligible for any other
reason.
     “Eligible Subsidiary” means each Subsidiary of the Parent set forth on
Exhibit A hereto, as the same may be updated from time to time with Calliope’s
written consent.
     “Equipment” means all “equipment” as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including any and
all machinery, apparatus, equipment, fittings, furniture, Fixtures, motor
vehicles and other tangible personal property (other than Inventory) of every
kind and description that may be now or hereafter used in such Person’s
operations or that are owned by such Person or in which such Person may have an
interest, and all parts, accessories and accessions thereto and substitutions
and replacements therefor.
     “ERISA” has the meaning given such term in Section 12(bb).
     “Event of Default” means the occurrence of any of the events set forth in
Section 19.
     “Exchange Act” means the Securities Exchange Act of 1934, as amended.
     “Exchange Act Filings” means the Parent’s filings under the Exchange Act
made prior to the date of this Agreement.
     “Existing Indebtedness” means the indebtedness of the Parent to Wells Fargo
Bank arising in connection with that certain Account Purchase Agreement dated
March 27, 2007 by and between Wells Fargo Bank, National Association and Parent.
     “Financial Reporting Controls” has the meaning given such term in
Section 12(f)(v).
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     “Fixtures” means all “fixtures” as such term is defined in the UCC, now
owned or hereafter acquired by any Person.
     “Formula Amount” has the meaning given such term in Section 2(a)(i).
     “GAAP” means generally accepted accounting principles, practices and
procedures in effect from time to time in the United States of America.
     “General Intangibles” means all “general intangibles” as such term is
defined in the UCC, now owned or hereafter acquired by any Person including all
right, title and interest that such Person may now or hereafter have in or under
any contract, all Payment Intangibles, customer lists, Licenses, Intellectual
Property, interests in partnerships, joint ventures and other business
associations, permits, proprietary or confidential information, inventions
(whether or not patented or patentable), technical information, procedures,
designs, knowledge, know-how, Software, data bases, data, skill, expertise,
experience, processes, models, drawings, materials, Books and Records, Goodwill
(including the Goodwill associated with any Intellectual Property), all rights
and claims in or under insurance policies (including insurance for fire, damage,
loss, and casualty, whether covering personal property, real property, tangible
rights or intangible rights, all liability, life, key-person, and business
interruption insurance, and all unearned premiums), uncertificated securities,
choses in action, deposit accounts, rights to receive tax refunds and other
payments, rights to received dividends, distributions, cash, Instruments and
other property in respect of or in exchange for pledged Stock and Investment
Property, and rights of indemnification.
     “Goods” means all “goods”, as such term is defined in the UCC, now owned or
hereafter acquired by any Person, wherever located, including embedded software
to the extent included in “goods” as defined in the UCC, manufactured homes,
fixtures, standing timber that is cut and removed for sale and unborn young of
animals.
     “Goodwill” means all goodwill, trade secrets, proprietary or confidential
information, technical information, procedures, formulae, quality control
standards, designs, operating and training manuals, customer lists, and
distribution agreements now owned or hereafter acquired by any Person.
     “Governmental Authority” means any nation or government, any state or other
political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
     “Instruments” means all “instruments”, as such term is defined in the UCC,
now owned or hereafter acquired by any Person, wherever located, including all
certificated securities and all promissory notes and other evidences of
indebtedness, other than instruments that constitute, or are a part of a group
of writings that constitute, Chattel Paper.
     “Intellectual Property” means any and all patents, trademarks, service
marks, trade names, copyrights, trade secrets, Licenses, information and other
proprietary rights and processes.
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     “Inventory” means all “inventory”, as such term is defined in the UCC, now
owned or hereafter acquired by any Person, wherever located, including all
inventory, merchandise, goods and other personal property that are held by or on
behalf of such Person for sale or lease or are furnished or are to be furnished
under a contract of service or that constitute raw materials, work in process,
finished goods, returned goods, or materials or supplies of any kind, nature or
description used or consumed or to be used or consumed in such Person’s business
or in the processing, production, packaging, promotion, delivery or shipping of
the same, including all supplies and embedded software.
     “Inventory Availability” means the lesser of (a) fifty percent (50%) of the
value of Parent’s Eligible Inventory (calculated on the basis of the lower of
cost or market, on a first-in first-out basis) and (b) $1,000,000.
     “Investment Property” means all “investment property”, as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located.
     “Letter-of-Credit Rights” means “letter-of-credit rights” as such term is
defined in the UCC, now owned or hereafter acquired by any Person, including
rights to payment or performance under a letter of credit, whether or not such
Person, as beneficiary, has demanded or is entitled to demand payment or
performance.
     “License” means any rights under any written agreement now or hereafter
acquired by any Person to use any trademark, trademark registration, copyright,
copyright registration or invention for which a patent is in existence or other
license of rights or interests now held or hereafter acquired by any Person.
     “Lien” means any mortgage, security deed, deed of trust, pledge,
hypothecation, assignment, security interest, lien (whether statutory or
otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.
     “Loans” has the meaning given such term in Section 2(a)(i) and shall
include all other extensions of credit hereunder and under any Ancillary
Agreement.
     “Lockboxes” has the meaning given such term in Section 8(a).
     “Material Adverse Effect” means a material adverse change with respect to
(a) the business, assets, liabilities, condition (financial or otherwise),
properties, operations or prospects of the Parent that materially and adversely
affects the ability of the Parent to pay or perform the Obligations in
accordance with the terms hereof or any Ancillary Agreement or (b) the
sufficiency and/or value of the Collateral, the Liens on the Collateral or the
priority of any such Lien. Without limiting the foregoing, any event or
occurrence which results, or could reasonably be expected within the next
12 months to result in a loss of revenues in excess of 30% of the Parent’s
consolidated revenues, or which results, or could reasonably be expected within
the next
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12 months to result in a reduction of more than 30% of the Parent’s total
shareholders’ equity determined on a consolidated basis, shall constitute a
Material Adverse Effect.
     “NASD” has the meaning given such term in Section 13(b).
     “Note Shares” has the meaning given such term in Section 12(a).
     “Notes” means the Secured Revolving Note and the Secured Convertible Term
Note made by Parent in favor of Calliope in connection with the transactions
contemplated hereby, as same may be amended, supplemented, restated and/or
otherwise modified from time to time.
     “Obligations” means all Loans, all advances, debts, liabilities,
obligations, covenants and duties owing by Parent and each of its Subsidiaries
to Calliope (or any corporation that directly or indirectly controls or is
controlled by or is under common control with Calliope) of every kind and
description (whether or not evidenced by any note or other instrument and
whether or not for the payment of money or the performance or non-performance of
any act), direct or indirect, absolute or contingent, due or to become due,
contractual or tortious, liquidated or unliquidated, whether existing by
operation of law or otherwise now existing or hereafter arising including any
debt, liability or obligation owing from Parent and/or each of its Subsidiaries
to others which Calliope may have obtained by assignment or otherwise and
further including all interest (including interest accruing at the then
applicable rate provided in this Agreement after the maturity of the Loans and
interest accruing at the then applicable rate provided in this Agreement after
the filing of any petition in bankruptcy, or the commencement of any insolvency,
reorganization or like proceeding, whether or not a claim for post-filing or
post-petition interest is allowed or allowable in such proceeding), charges or
any other payments Parent and each of its Subsidiaries is required to make by
law or otherwise arising under or as a result of this Agreement, the Ancillary
Agreements or otherwise, together with all reasonable expenses and reasonable
attorneys’ fees chargeable to the Parent’ or any of their Subsidiaries’ accounts
or incurred by Calliope in connection therewith.
     “Payment Intangibles” means all “payment intangibles” as such term is
defined in the UCC, now owned or hereafter acquired by any Person, including, a
General Intangible under which the Account Debtor’s principal obligation is a
monetary obligation.
     “Permitted Liens” means (a) Liens of carriers, warehousemen, artisans,
bailees, mechanics and materialmen incurred in the ordinary course of business
securing sums not overdue; (b) Liens incurred in the ordinary course of business
in connection with worker’s compensation, unemployment insurance or other forms
of governmental insurance or benefits, relating to employees, securing sums
(i) not overdue or (ii) being diligently contested in good faith provided that
adequate reserves with respect thereto are maintained on the books of the Parent
in conformity with GAAP; (c) Liens in favor of Calliope; (d) Liens for taxes
(i) not yet due or (ii) being diligently contested in good faith by appropriate
proceedings, provided that adequate reserves with respect thereto are maintained
on the books of the Parent in conformity with GAAP; and which have no effect on
the priority of Liens in favor of Calliope or the value
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of the assets in which Calliope has a Lien; (e) Purchase Money Liens securing
Purchase Money Indebtedness to the extent permitted in this Agreement and
(f) Liens specified on Schedule 2 hereto.
     “Person” means any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public benefit
corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including any instrumentality, division, agency, body or
department thereof), and shall include such Person’s successors and assigns.
     “Principal Market” means the NASD Over The Counter Bulletin Board, NASDAQ
Capital Market, NASDAQ National Market System, American Stock Exchange or New
York Stock Exchange (whichever of the foregoing is at the time the principal
trading exchange or market for the Common Stock).
     “Proceeds” means “proceeds”, as such term is defined in the UCC and, in any
event, shall include: (a) any and all proceeds of any insurance, indemnity,
warranty or guaranty payable to Parent or any other Person from time to time
with respect to any Collateral; (b) any and all payments (in any form
whatsoever) made or due and payable to Parent from time to time in connection
with any requisition, confiscation, condemnation, seizure or forfeiture of any
Collateral by any governmental body, governmental authority, bureau or agency
(or any person acting under color of governmental authority); (c) any claim of
Parent against third parties (i) for past, present or future infringement of any
Intellectual Property or (ii) for past, present or future infringement or
dilution of any trademark or trademark license or for injury to the goodwill
associated with any trademark, trademark registration or trademark licensed
under any trademark License; (d) any recoveries by Parent against third parties
with respect to any litigation or dispute concerning any Collateral, including
claims arising out of the loss or nonconformity of, interference with the use
of, defects in, or infringement of rights in, or damage to, Collateral; (e) all
amounts collected on, or distributed on account of, other Collateral, including
dividends, interest, distributions and Instruments with respect to Investment
Property and pledged Stock; and (f) any and all other amounts, rights to payment
or other property acquired upon the sale, lease, license, exchange or other
disposition of Collateral and all rights arising out of Collateral.
     “Purchase Money Indebtedness” means (a) any indebtedness incurred for the
payment of all or any part of the purchase price of any fixed asset, including
indebtedness under capitalized leases, (b) any indebtedness incurred for the
sole purpose of financing or refinancing all or any part of the purchase price
of any fixed asset, and (c) any renewals, extensions or refinancings thereof
(but not any increases in the principal amounts thereof outstanding at that
time).
     “Purchase Money Lien” means any Lien upon any fixed assets that secures the
Purchase Money Indebtedness related thereto but only if such Lien shall at all
times be confined solely to the asset the purchase price of which was financed
or refinanced through the incurrence of the Purchase Money Indebtedness secured
by such Lien and only if such Lien secures only such Purchase Money
Indebtedness.
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     “Registration Rights Agreements” means that certain Registration Rights
Agreement dated as of the Closing Date by and between the Parent and Calliope
and each other registration rights agreement by and between the Parent and
Calliope, as same may be amended, modified and supplemented from time to time.
     “Revolving Loans” shall have the meaning given such term in
Section 2(a)(i).
     “SEC” means the Securities and Exchange Commission.
     “SEC Reports” has the meaning given such term in Section 12(u).
     “Secured Revolving Note” means that certain Secured Revolving Note dated as
of the Closing Date made by the Parent in favor of Calliope in the original face
amount of Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000), as the
same may be amended, supplemented, restated and/or otherwise modified from time
to time.
     “Secured Convertible Term Note” means that certain Secured Convertible Term
Note dated as of the Closing Date made by the Parent in favor of Calliope in the
original face amount of Seven Hundred Fifty Thousand Dollars ($750,000), as the
same may be amended, supplemented, restated and/or otherwise modified from time
to time.
     “Securities” means the Notes and the Warrants and the shares of Common
Stock which may be issued pursuant to conversion of the Secured Convertible Term
Note in whole or in part exercise of such Warrants.
     “Securities Act” has the meaning given such term in Section 12(r).
     “Security Documents” means all security agreements, mortgages, cash
collateral deposit letters, pledges and other agreements which are executed by
Parent in favor of Calliope.
     “Software” means all “software” as such term is defined in the UCC, now
owned or hereafter acquired by any Person, including all computer programs and
all supporting information provided in connection with a transaction related to
any program.
     “Solvent” means, with respect to any Person on a particular date, that on
such date (a) the fair value of the property of such Person is greater than the
total amount of liabilities, including contingent liabilities, of such Person;
(b) the present fair salable value of the assets of such Person is not less than
the amount that will be required to pay the probable liability of such Person on
its debts as they become absolute and matured; (c) such Person does not intend
to, and does not believe that it will, incur debts or liabilities beyond such
Person’s ability to pay as such debts and liabilities mature; and (d) such
Person is not engaged in a business or transaction, and is not about to engage
in a business or transaction, for which such Person’s property would constitute
and unreasonably small capital. The amount of contingent liabilities (such as
litigation, guaranties and pension plan liabilities) at any time shall be
computed as the amount that, in light of all the facts and circumstances
existing at the time, represents the amount that can reasonably be expected to
become an actual or matured liability.
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     “Stock” means all certificated and uncertificated shares, options,
warrants, membership interests, general or limited partnership interests,
participation or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including common stock, preferred stock, or any other
“equity security” (as such term is defined in Rule 3a11-1 of the General Rules
and Regulations promulgated by the SEC under the Securities Exchange Act of
1934).
     “Subsidiary” means, with respect to any Person, (i) any other Person whose
shares of stock or other ownership interests having ordinary voting power (other
than stock or other ownership interests having such power only by reason of the
happening of a contingency) to elect a majority of the directors or other
governing body of such other Person, are owned, directly or indirectly, by such
Person or (ii) any other Person in which such Person owns, directly or
indirectly, more than 50% of the equity interests at such time.
     “Supporting Obligations” means all “supporting obligations” as such term is
defined in the UCC.
     “Term” means the Closing Date through the close of business on the day
immediately preceding the third anniversary of the Closing Date, subject to
acceleration at the option of Calliope upon the occurrence of an Event of
Default hereunder or other termination hereunder.
     “Term Loan” has the meaning given such term in Section 2(a)(c).
     “Total Investment Amount” means Three Million Five Hundred Thousand Dollars
($3,500,000).
     “UCC” means the Uniform Commercial Code as the same may, from time to time
be in effect in the State of New York; provided, that in the event that, by
reason of mandatory provisions of law, any or all of the attachment, perfection
or priority of, or remedies with respect to, Calliope’s Lien on any Collateral
is governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, the term “UCC” shall mean the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions of
this Agreement relating to such attachment, perfection, priority or remedies and
for purposes of definitions related to such provisions; provided further, that
to the extent that UCC is used to define any term herein or in any Ancillary
Agreement and such term is defined differently in different Articles or
Divisions of the UCC, the definition of such term contained in Article or
Division 9 shall govern.
     “Warrant Shares” has the meaning given such term in Section 12(a).
     “Warrants” means that certain Common Stock Purchase Warrant dated as of the
Closing Date made by the Parent in favor of Calliope and each other warrant made
by the Parent in favor Calliope, as each of the same may be amended, restated,
modified and/or supplemented from time to time.
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Exhibit A
Eligible Subsidiaries
None
Security Agreement

 

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Exhibit B
Borrowing Base Certificate
As of                            , 200__

                         
ACCOUNTS RECEIVABLE per __________ Aging
                    0.00  
 
                       
Ineligible Accounts:
                       
Accounts over 90 days from Invoice Date
            0.00          
Credit Balances Over 90 days from Invoice Date
            0.00          
Intercompany and Affiliate Accounts
            0.00          
__% Concentration Cap
            0.00          
Contra Accounts
            0.00          
Cash Sales and COD Accounts
            0.00          
Foreign Receivables
            0.00          
Government Receivables (without Assignment of Claims)
            0.00          
Discounts, Credits and Allowances
            0.00          
Cross-age (__% Past Due)
            0.00          
Bill and Hold Invoices
            0.00          
Finance/Service/Late Charges
            0.00          
Other:
            0.00       0.00  
 
                   
 
                       
ELIGIBLE ACCOUNTS RECEIVABLE
                    0.00  
 
                       
Accounts Receivable Advance Rate
    90 %                
 
                       
 
                   
ACCOUNTS RECEIVABLE AVAILABILITY
                    0.00  
 
                       
INVENTORY per __________ Balance Sheet
                    0.00  
 
                       
Ineligible Inventory:
                       
Work-in-Process
            0.00          
Excess/Slow Moving
            0.00          
Supplies/Packaging
            0.00          
Damaged
            0.00          
Other:
            0.00       0.00  
 
                     
 
                       
ELIGIBLE INVENTORY
                    0.00  
 
                       
Inventory Advance Rate
    50 %                
 
                       
Inventory Cap
                    1,000,000.00  
 
                       
 
                     
INVENTORY AVAILABILITY
                    0.00  
 
                     
 
                       
TOTAL AVAILABILITY
                    0.00  
 
                       
Less Reserves
                    0.00  

Security Agreement

 

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NET AVAILABILITY
            0.00  
 
               
REVOLVING CREDIT LINE
    0.00          
MINIMUM BORROWING NOTE
    0.00          
 
               
NET BORROWING AVAILABILITY (Lesser of Line or Net Availability)
            0.00  
 
               
Less: Calliope Loans
            0.00  
 
               
 
             
EXCESS/(DEFICIT) AVAILABILITY
            0.00  
 
             

The undersigned hereby certifies that all of the foregoing information regarding
the Eligible Accounts and Eligible Inventory are true and correct on the date
hereof and all such Accounts and Inventory listed as Eligible are Eligible
within the meaning given such term in the Security Agreement dated
___/___/200___ among Borrower, the other Parent named therein and Calliope
                    , Borrowing Agent
By:                                                                     
            
Name:
Title:
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