Exhibit 10.3
SECURITY AGREEMENT
     This SECURITY AGREEMENT (this “Agreement”), dated as of April [___], 2011,
is made by and among the grantors listed on the signature pages hereof
(collectively, jointly and severally, the “Grantors” and each, individually, a
“Grantor”), and the secured parties listed on the signature pages hereof
(collectively, the “Secured Parties” and each, individually, a “Secured Party”).
RECITALS
     WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as
of April 1, 2011 (as may be amended, restated, supplemented, or otherwise
modified from time to time, including all schedules thereto, collectively, the
“Securities Purchase Agreement”), by and among Converted Organics Inc., a
Delaware corporation (“Parent”), and each of the Secured Parties, Parent has
agreed to sell, and each of the Secured Parties have each agreed to purchase,
severally and not jointly, certain Notes and Warrants; and
     WHEREAS, each Grantor other than Parent is a direct or indirect
wholly-owned Subsidiary (as defined below) of Parent and will receive direct and
substantial benefits from the purchase by each of the Secured Parties of the
Notes and Warrants; and
     WHEREAS, in order to induce the Secured Parties to purchase, severally and
not jointly, the Notes and Warrants as provided for in the Securities Purchase
Agreement, Grantors have agreed to grant a continuing security interest in and
to the Collateral in order to secure the prompt and complete payment, observance
and performance of the Secured Obligations.
AGREEMENTS
     NOW, THEREFORE, for and in consideration of the recitals made above and
other good and valuable consideration, the receipt, sufficiency and adequacy of
which are hereby acknowledged, the parties hereto agree as follows:
     1. Defined Terms. All capitalized terms used herein (including in the
preamble and recitals hereof) without definition shall have the meanings
ascribed thereto in the Notes. Any terms used in this Agreement that are defined
in the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein or in the Notes; provided, however, if the Code is used
to define any term used herein and if such term is defined differently in
different Articles of the Code, the definition of such term contained in
Article 9 of the Code shall govern. In addition to those terms defined elsewhere
in this Agreement, as used in this Agreement, the following terms shall have the
following meanings:
     (a) “Account” means an account (as that term is defined in the Code).
     (b) “Account Debtor” means an account debtor (as that term is defined in
the Code).
     (c) “Bankruptcy Code” means title 11 of the United States Code, as in
effect from time to time.

 

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     (d) “Books” means books and records (including, without limitation, each
Grantor’s Records) indicating, summarizing, or evidencing each Grantor’s assets
(including the Collateral) or liabilities, each Grantor’s Records relating to
its business operations (including, without limitation, stock ledgers) or
financial condition, and each Grantor’s goods or General Intangibles related to
such information.
     (e) “Chattel Paper” means chattel paper (as that term is defined in the
Code) and includes tangible chattel paper and electronic chattel paper.
     (f) “Code” means the New York Uniform Commercial Code, as in effect from
time to time; provided, however, in the event that, by reason of mandatory
provisions of law, any or all of the attachment, perfection, priority, or
remedies with respect to any Secured Party’s Lien on any Collateral is governed
by the Uniform Commercial Code as enacted and in effect in a jurisdiction other
than the State of New York, the term “Code” shall mean the Uniform Commercial
Code as enacted and in effect in such other jurisdiction solely for purposes of
the provisions thereof relating to such attachment, perfection, priority, or
remedies.
     (g) “Collateral” has the meaning specified therefor in Section 2.
     (h) “Commencement Notice” means a written notice, given by any Secured
Party to the other Secured Parties in accordance with the notice provisions set
forth in the Securities Purchase Agreement, pursuant to which such Secured Party
notifies the other Secured Parties of the existence of one or more Events of
Default and of such Secured Party’s intent to commence the exercise of one or
more of the remedies provided for under this Agreement with respect to all or
any portion of the Collateral as a consequence thereof, which notice shall
incorporate a reasonably detailed description of each Event of Default then
existing and of the remedial action proposed to be taken.
     (i) “Commercial Tort Claims” means commercial tort claims (as that term is
defined in the Code), and includes those commercial tort claims listed on
Schedule 1 attached hereto.
     (j) “Control Agreement” means a control agreement, in form and substance
satisfactory to Secured Parties, executed and delivered by a Grantor, one or
more Secured Parties, and the applicable securities intermediary (with respect
to a Securities Account) or bank (with respect to a Deposit Account), as may be
amended, restated, supplemented, or otherwise modified from time to time.
     (k) “Copyrights” means all copyrights and copyright registrations, and also
includes (i) the copyright registrations and recordings thereof and all
applications in connection therewith listed on Schedule 2 attached hereto and
made a part hereof, (ii) all reissues, continuations, extensions or renewals
thereof, (iii) all income, royalties, damages and payments now and hereafter due
or payable under and with respect thereto, including payments under all licenses
entered into in connection therewith and damages and payments for past or future
infringements or dilutions thereof, (iv) the right to sue for past, present and
future infringements and dilutions thereof, (v) the goodwill of each

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Grantor’s business symbolized by the foregoing or connected therewith, and
(vi) all of each Grantor’s rights corresponding thereto throughout the world.
     (l) “Copyright Security Agreement” means each Copyright Security Agreement
among Grantors, or any of them, and Secured Parties, in substantially the form
of Exhibit A attached hereto, pursuant to which Grantors have granted to each
Secured Party a security interest in all their respective Copyrights, as may be
amended, restated, supplemented, or otherwise modified from time to time.
     (m) “Deposit Account” means a deposit account (as that term is defined in
the Code).
     (n) “Equipment” means all equipment (as that term is defined in the Code)
in all of its forms of the applicable Grantor, wherever located, and including,
without limitation, all machinery, apparatus, installation facilities and other
tangible personal property, and all parts thereof and all accessions, additions,
attachments, improvements, substitutions, replacements and proceeds thereto and
therefor.
     (o) “Event of Default” has the meaning specified therefor in the Notes.
     (p) “General Intangibles” means general intangibles (as that term is
defined in the Code) and, in any event, includes payment intangibles, contract
rights, rights to payment, rights arising under common law, statutes, or
regulations, choses or things in action, goodwill (including the goodwill
associated with any Trademark, Patent, or Copyright), Patents, Trademarks,
Copyrights, URLs and domain names, industrial designs, other industrial or
Intellectual Property or rights therein or applications therefor, whether under
license or otherwise, programs, programming materials, blueprints, drawings,
purchase orders, customer lists, monies due or recoverable from pension funds,
route lists, rights to payment and other rights under any royalty or licensing
agreements, including Intellectual Property Licenses, infringement claims,
computer programs, information contained on computer disks or tapes, software,
literature, reports, catalogs, pension plan refunds, pension plan refund claims,
insurance premium rebates, tax refunds, and tax refund claims, interests in a
partnership or limited liability company which do not constitute a security
under Article 8 of the Code, and any other personal property other than
Commercial Tort Claims, money, Accounts, Chattel Paper, Deposit Accounts, goods,
Investment Related Property, Negotiable Collateral, and oil, gas, or other
minerals before extraction.
     (q) “Governmental Authority” means any domestic or foreign federal, state,
local, or other governmental or administrative body, instrumentality, board,
department, or agency or any court, tribunal, administrative hearing body,
arbitration panel, commission, or other similar dispute-resolving panel or body.
     (r) “Guaranty” means each Guaranty, in the form attached hereto as
Exhibit D, executed by each Guarantor in favor of any or all of the Secured
Parties, together with any other guaranty or similar agreement now or hereafter
executed by a Guarantor in favor of any or all of the Secured Parties in
connection with the Notes or any of the other

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Transaction Documents, as may be amended, restated, supplemented, or otherwise
modified from time to time, and all of the foregoing are collectively referred
to herein as the “Guaranties.”
     (s) “Guarantor” means each Grantor, other than Parent, and each other
Person that now or hereafter executes a Guaranty.
     (t) “Insolvency Proceeding” means any proceeding commenced by or against
any Person under any provision of the Bankruptcy Code or under any other state
or federal bankruptcy or insolvency law or any equivalent laws in any other
jurisdiction, assignments for the benefit of creditors, formal or informal
moratoria, compositions, extensions generally with creditors, or proceedings
seeking reorganization, arrangement, or other similar relief.
     (u) “Intellectual Property” means Patents, Copyrights, Trademarks, the
goodwill associated with such Trademarks, trade secrets and customer lists, and
Intellectual Property Licenses.
     (v) “Intellectual Property Licenses” means rights under or interests in any
patent, trademark, copyright or other intellectual property, including software
license agreements with any other party, whether the applicable Grantor is a
licensee or licensor under any such license agreement, including the license
agreements listed on Schedule 3 attached hereto and made a part hereof, as may
be amended, restated, supplemented, or otherwise modified from time to time.
     (w) “Inventory” means all inventory (as that term is defined in the Code)
in all of its forms of the applicable Grantor, wherever located, including,
without limitation, (i) all goods in which the applicable Grantor has an
interest in mass or a joint or other interest or right of any kind (including
goods in which the applicable Grantor has an interest or right as consignee),
and (ii) all goods which are returned to or repossessed by the applicable
Grantor, and all accessions thereto, products thereof and documents therefor.
     (x) “Investment Related Property” means (i) investment property (as that
term is defined in the Code), and (ii) all of the following (regardless of
whether classified as investment property under the Code): all Pledged
Interests, Pledged Operating Agreements, and Pledged Partnership Agreements.
     (y) “Lien” has the meaning specified therefor in the Notes.
     (z) “Negotiable Collateral” means letters of credit, letter-of-credit
rights, instruments, promissory notes, drafts, and documents.
     (aa) “New Subsidiary” has the meaning specified therefor in the Notes.
     (bb) “Notes” has the meaning specified therefor in the Securities Purchase
Agreement.

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     (cc) “Patents” means all patents and patent applications, and also includes
(i) the patents and patent applications listed on Schedule 4 attached hereto and
made a part hereof, (ii) all renewals thereof, (iii) all income, royalties,
damages and payments now and hereafter due or payable under and with respect
thereto, including payments under all licenses entered into in connection
therewith and damages and payments for past or future infringements or dilutions
thereof, (iv) the right to sue for past, present and future infringements and
dilutions thereof, and (v) all of each Grantor’s rights corresponding thereto
throughout the world.
     (dd) “Patent Security Agreement” means each Patent Security Agreement among
Grantors and Secured Parties in substantially the form of Exhibit B attached
hereto, pursuant to which Grantors have granted to each Secured Party a security
interest in all their respective Patents, as may be amended, restated,
supplemented, or otherwise modified from time to time.
     (ee) “Permitted Liens” has the meaning specified therefor in the Notes.
     (ff) “Permitted Secured Party” means, with respect to the exercise of any
remedy provided for under this Agreement, any Secured Party that has delivered a
Commencement Notice with respect to the exercise of such remedy to the other
Secured Parties and has not received a Veto Notice with respect thereto within
the Veto Period; provided, however, there shall only be a single Permitted
Secured Party that may exercise any specific remedy at any one time (it being
agreed that if a Commencement Notice is delivered by more than one Secured Party
with respect to any remedy provided for under this Agreement, then the first
Secured Party to deliver a Commencement Notice and not receive a Veto Notice
within the Veto Period shall be the only Secured Party that may exercise such
remedy).
     (gg) “Person” has the meaning specified therefor in the Securities Purchase
Agreement.
     (hh) “Pledged Companies” means, each Person listed on Schedule 5 hereto as
a “Pledged Company,” together with each other Person all or a portion of whose
Stock is acquired or otherwise owned by a Grantor after the date hereof.
     (ii) “Pledged Interests” means all of each Grantor’s right, title and
interest in and to all of the Stock now or hereafter owned by such Grantor,
regardless of class or designation, including all substitutions therefor and
replacements thereof, all proceeds thereof and all rights relating thereto, also
including any certificates representing the Stock, the right to receive any
certificates representing any of the Stock, all warrants, options, share
appreciation rights and other rights, contractual or otherwise, in respect
thereof, and the right to receive dividends, distributions of income, profits,
surplus, or other compensation by way of income or liquidating distributions, in
cash or in kind, and cash, instruments, and other property from time to time
received, receivable, or otherwise distributed in respect of or in addition to,
in substitution of, on account of, or in exchange for any or all of the
foregoing.

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     (jj) “Pledged Operating Agreements” means all of each Grantor’s rights,
powers, and remedies under the limited liability company operating agreements of
each of the Pledged Companies that are limited liability companies, as may be
amended, restated, supplemented, or otherwise modified from time to time.
     (kk) “Pledged Partnership Agreements” means all of each Grantor’s rights,
powers, and remedies under the partnership agreements of each of the Pledged
Companies that are partnerships, as may be amended, restated, supplemented, or
otherwise modified from time to time.
     (ll) “Proceeds” has the meaning specified therefor in Section 2.
     (mm) “PPSA” means the Personal Property Security Act (British Columbia), as
in effect from time to time.
     (nn) “Real Property” means any estates or interests in real property now
owned or hereafter acquired by any Grantor and the improvements thereto.
     (oo) “Records” means information that is inscribed on a tangible medium or
which is stored in an electronic or other medium and is retrievable in
perceivable form.
     (pp) “Secured Obligations” mean all of the present and future payment and
performance obligations of Grantors arising under this Agreement, the Notes, the
Guaranties, and the other Transaction Documents, including, without duplication,
reasonable attorneys’ fees and expenses and any interest, fees, or expenses that
accrue after the filing of an Insolvency Proceeding, regardless of whether
allowed or allowable in whole or in part as a claim in any Insolvency
Proceeding.
     (qq) “Securities Account” means a securities account (as that term is
defined in the Code).
     (rr) “Security Documents” means, collectively, this Agreement, each
Copyright Security Agreement, each Patent Security Agreement, each Trademark
Security Agreement, each Control Agreement, and each other security agreement,
pledge agreement, assignment, mortgage, security deed, deed of trust, and other
agreement or document executed and delivered by a Grantor as security for any of
the Secured Obligations, as may be amended, restated, supplemented, or otherwise
modified from time to time.
     (ss) “Security Interest” and “Security Interests” have the meanings
specified therefor in Section 2.
     (tt) “Significant Secured Party” means, on any date of determination, any
Secured Party holding twenty five percent (25%) or more of the aggregate
principal amount of Notes outstanding on such date.
     (uu) “Stock” means all shares, options, warrants, interests (including,
without limitation, membership and partnership interests), participations, or
other equivalents

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(regardless of how designated) of or in a Person, 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 United States Securities and Exchange Commission and any successor
thereto under the Securities Exchange Act of 1934, as in effect from time to
time).
     (vv) “Subsidiaries” and “Subsidiary” each have the meanings specified
therefor in the Notes.
     (ww) “Supporting Obligations” means supporting obligations (as such term is
defined in the Code).
     (xx) “Trademarks” means all trademarks, trade names, trademark
applications, service marks, service mark applications, and also includes
(i) the trade names, trademarks, trademark applications, service marks, and
service mark applications listed on Schedule 6 attached hereto and made a part
hereof, and (ii) all renewals thereof, (iii) all income, royalties, damages and
payments now and hereafter due or payable under and with respect thereto,
including payments under all licenses entered into in connection therewith and
damages and payments for past or future infringements or dilutions thereof,
(iv) the right to sue for past, present and future infringements and dilutions
thereof, (v) the goodwill of each Grantor’s business symbolized by the foregoing
or connected therewith, and (vi) all of each Grantor’s rights corresponding
thereto throughout the world.
     (yy) “Trademark Security Agreement” means each Trademark Security Agreement
among Grantors and Secured Parties in substantially the form of Exhibit C
attached hereto, pursuant to which Grantors have granted to each Secured Party a
security interest in all their respective Trademarks.
     (zz) “Transaction Documents” has the meaning specified therefor in the
Securities Purchase Agreement.
     (aaa) “URL” means “uniform resource locator,” an internet web address.
     (bbb) “Veto Notice” means, with respect to any Commencement Notice, a
written notice given by any Significant Secured Party to the other Secured
Parties in accordance with the notice provisions set forth in the Securities
Purchase Agreement pursuant to which such Significant Secured Party notifies the
other Secured Parties of its objection to the commencement of the remedial
action specified in such Commencement Notice and certifies that, to the best of
its knowledge, it is a Significant Secured Party.
     (ccc) “Veto Period” means, with respect to any Commencement Notice (other
than a Commencement Notice given by a Significant Secured Party at a time when
such Significant Secured Party is the only the Significant Secured Party), the
period of ten (10) consecutive calendar days following the delivery of such
Commencement Notice to the Secured Parties.

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     2. Grant of Security. Each Grantor hereby unconditionally grants, assigns,
and pledges to each Secured Party a separate, continuing security interest
(each, a “Security Interest” and, collectively, the “Security Interests”) in all
assets of such Grantor (other than Real Property) whether now owned or hereafter
acquired or arising and wherever located (collectively, the “Collateral”),
including, without limitation, such Grantor’s right, title, and interest in and
to the following, whether now owned or hereafter acquired or arising and
wherever located:
     (a) all of such Grantor’s Accounts;
     (b) all of such Grantor’s Books;
     (c) all of such Grantor’s Chattel Paper;
     (d) all of such Grantor’s Deposit Accounts;
     (e) all of such Grantor’s Equipment and fixtures;
     (f) all of such Grantor’s General Intangibles;
     (g) all of such Grantor’s Inventory;
     (h) all of such Grantor’s Investment Related Property;
     (i) all of such Grantor’s Negotiable Collateral;
     (j) all of such Grantor’s rights in respect of Supporting Obligations;
     (k) all of such Grantor’s Commercial Tort Claims;
     (l) all of such Grantor’s money, cash, cash equivalents, or other assets of
each such Grantor that now or hereafter come into the possession, custody, or
control of any Secured Party;
     (m) all of the proceeds and products, whether tangible or intangible, of
any of the foregoing, including proceeds of insurance or Commercial Tort Claims
covering or relating to any or all of the foregoing, and any and all Accounts,
Books, Chattel Paper, Deposit Accounts, Equipment, General Intangibles,
Inventory, Investment Related Property, Negotiable Collateral, Supporting
Obligations, money, or other tangible or intangible property resulting from the
sale, lease, license, exchange, collection, or other disposition of any of the
foregoing, the proceeds of any award in condemnation with respect to any of the
foregoing, any rebates or refunds, whether for taxes or otherwise, and all
proceeds of any such proceeds, or any portion thereof or interest therein, and
the proceeds thereof, and all proceeds of any loss of, damage to, or destruction
of the above, whether insured or not insured, and, to the extent not otherwise
included, any indemnity, warranty, or guaranty payable by reason of loss or
damage to, or otherwise with respect to any of the foregoing (the “Proceeds”).
Without limiting the generality of the foregoing, the term “Proceeds” includes
whatever is receivable or received when Investment Related

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Property or proceeds are sold, exchanged, collected, or otherwise disposed of,
whether such disposition is voluntary or involuntary, and includes proceeds of
any indemnity or guaranty payable to any Grantor or any Secured Party from time
to time with respect to any of the Investment Related Property.
     3. Security for Obligations. This Agreement and the Security Interests
created hereby secure the payment and performance of the Secured Obligations,
whether now existing or arising hereafter. Without limiting the generality of
the foregoing, this Agreement secures the payment of all amounts which
constitute part of the Secured Obligations and would be owed by Grantors, or any
of them, to Secured Parties, or any of them, but for the fact that they are
unenforceable or not allowable due to the existence of an Insolvency Proceeding
involving any Grantor.
     4. Grantors Remain Liable. Anything herein to the contrary notwithstanding,
(a) each of the Grantors shall remain liable under the contracts and agreements
included in the Collateral, including the Pledged Operating Agreements and the
Pledged Partnership Agreements, to perform all of the duties and obligations
thereunder to the same extent as if this Agreement had not been executed,
(b) the exercise by Secured Parties, or any of them, of any of the rights
hereunder shall not release any Grantor from any of its duties or obligations
under such contracts and agreements included in the Collateral, and (c) no
Secured Party shall have any obligation or liability under such contracts and
agreements included in the Collateral by reason of this Agreement, nor shall any
Secured Party be obligated to perform any of the obligations or duties of any
Grantor thereunder or to take any action to collect or enforce any claim for
payment assigned hereunder. Until an Event of Default shall occur and be
continuing, except as otherwise provided in this Agreement or any other
Transaction Document, Grantors shall have the right to possession and enjoyment
of the Collateral for the purpose of conducting the ordinary course of their
respective businesses, subject to and upon the terms hereof and the other
Transaction Documents. Without limiting the generality of the foregoing, it is
the intention of the parties hereto that record and beneficial ownership of the
Pledged Interests, including all voting, consensual, and dividend rights, shall
remain in the applicable Grantor until the occurrence of an Event of Default and
until any Secured Party shall notify the applicable Grantor of such Secured
Party’s exercise of voting, consensual, or dividend rights with respect to the
Pledged Interests pursuant to Section 15 hereof.
     5. Representations and Warranties. Each Grantor hereby represents and
warrants as follows:
     (a) The exact legal name of each of the Grantors is set forth on the
signature pages of this Agreement.
     (b) Schedule 7 attached hereto sets forth (i) all Real Property owned or
leased by Grantors, together with all other locations of Collateral, as of the
date hereof, and (ii) the chief executive office of each Grantor as of the date
hereof.
     (c) As of the date hereof, no Grantor has any interest in, or title to, any
Copyrights, Intellectual Property Licenses, Patents, or Trademarks except as set
forth on Schedules 2, 3, 4 and 6, respectively, attached hereto. This Agreement
is effective to

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create a valid and continuing Lien on such Copyrights, Intellectual Property
Licenses, Patents and Trademarks and, upon filing of the Copyright Security
Agreement with the United States Copyright Office and filing of the Patent
Security Agreement and the Trademark Security Agreement with the United States
Patent and Trademark Office, and the filing of appropriate financing statements
in the jurisdictions listed on Schedule 8 hereto, all action necessary or
desirable to protect and perfect the Security Interests in and to each Grantor’s
Patents, Trademarks, or Copyrights has been taken and such perfected Security
Interests are enforceable as such as against any and all creditors of and
purchasers from any Grantor. No Grantor has any interest in any Copyright that
is necessary in connection with the operation of such Grantor’s business, except
for those Copyrights identified on Schedule 2 attached hereto which have been
registered with the United States Copyright Office.
     (d) This Agreement creates a valid security interest in all of the
Collateral of each Grantor, to the extent a security interest therein can be
created under the Code or the PPSA (as applicable), securing the payment of the
Secured Obligations. Except to the extent a security interest in the Collateral
cannot be perfected by the filing of a financing statement under the Code or the
PPSA, all filings and other actions necessary or desirable to perfect and
protect such security interest have been duly taken or will have been taken upon
the filing of financing statements listing each applicable Grantor, as a debtor,
and Secured Parties, as secured parties, in the jurisdictions listed next to
such Grantor’s name on Schedule 8 attached hereto. Upon the making of such
filings, Secured Parties shall each have a first priority perfected security
interest in all of the Collateral of each Grantor to the extent such security
interest can be perfected by the filing of a financing statement. All action by
any Grantor necessary to protect and perfect such security interest on each item
of Collateral has been duly taken.
     (e) (i) Except for the Security Interests created hereby, such Grantor is
and will at all times be the sole holder of record and the legal and beneficial
owner, free and clear of all Liens other than Permitted Liens, of the Pledged
Interests indicated on Schedule 5 as being owned by such Grantor and, when
acquired by such Grantor, any Pledged Interests acquired after the date hereof;
(ii) all of the Pledged Interests are duly authorized, validly issued, fully
paid and non-assessable and the Pledged Interests constitute or will constitute
the percentage of the issued and outstanding Stock of the Pledged Companies of
such Grantor identified on Schedule 5 hereto; (iii) such Grantor has the right
and requisite authority to pledge all Investment Related Property pledged by
such Grantor to each Secured Party as provided herein; (iv) all actions
necessary or desirable to perfect, establish the first priority of, or otherwise
protect, Secured Parties’ respective Liens in the Investment Related Property
pledged hereunder, and the proceeds thereof, have been duly taken, (A) upon the
execution and delivery of this Agreement; (B) upon the taking of possession by
any Secured Party of any certificates constituting the Pledged Interests, to the
extent such Pledged Interests are represented by certificates, together with
undated powers endorsed in blank by the applicable Grantor; (C) upon the filing
of financing statements in the applicable jurisdiction set forth on Schedule 8
attached hereto for such Grantor with respect to the Pledged Interests of such
Grantor that are not represented by certificates, and (D) with respect to any
Securities Accounts, upon the delivery of Control Agreements with respect
thereto; and (v) each Grantor has

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delivered to and deposited with any Secured Party (or, with respect to any
Pledged Interests created or obtained after the date hereof, will deliver and
deposit in accordance with Sections 6(a) and 8 hereof) all certificates
representing the Pledged Interests now or hereafter owned by such Grantor to the
extent such Pledged Interests are represented by certificates, and undated
powers endorsed in blank with respect to such certificates. None of the Pledged
Interests owned or held by such Grantor has been issued or transferred in
violation of any securities registration, securities disclosure, or similar laws
of any jurisdiction to which such issuance or transfer may be subject.
     (f) No consent, approval, authorization, or other order or other action by,
and no notice to or filing with, any Governmental Authority or any other Person
is required (i) for the grant of a Security Interest by such Grantor in and to
the Collateral pursuant to this Agreement or for the execution, delivery, or
performance of this Agreement by such Grantor, or (ii) for the exercise by any
Secured Party of the voting or other rights provided in this Agreement with
respect to Investment Related Property pledged hereunder or the remedies in
respect of the Collateral pursuant to this Agreement, except (A) as may be
required in connection with such disposition of Investment Related Property by
laws affecting the offering and sale of securities generally and (B) for any
consent that may be required for the assignment of any Intellectual Property
License that expressly provides that such Intellectual Property License is not
assignable (or is not assignable without the consent of the other party to such
Intellectual Property License).
     (g) Schedule 9 contains a complete and accurate list of all of each
Grantor’s Deposit Accounts and Securities Accounts, including, without
limitation, with respect to each bank or securities intermediary (a) the name
and address of such Person and (b) the account numbers of such accounts
maintained with such Person.
     6. Covenants. Each Grantor, jointly and severally, covenants and agrees
with each Secured Party that from and after the date of this Agreement and until
the date of termination of this Agreement in accordance with Section 24 hereof
(but only to the extent the particular assets described in this Section 6
constitute Collateral hereunder):
     (a) Possession of Collateral. In the event that any Collateral, including
proceeds, is evidenced by or consists of Negotiable Collateral, Investment
Related Property, or Chattel Paper, and if and to the extent that perfection or
priority of Secured Parties’ respective Security Interests is dependent on or
enhanced by possession, the applicable Grantor, immediately upon the request of
any Secured Party, shall execute such other documents and instruments as shall
be requested by such Secured Party or, if applicable, endorse and deliver
physical possession of such Negotiable Collateral, Investment Related Property,
or Chattel Paper to such Secured Party, together with such undated powers
endorsed in blank as shall be requested by such Secured Party.

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     (b) Chattel Paper.
     (i) Each Grantor shall take all steps reasonably necessary to grant each
Secured Party control of all Chattel Paper in accordance with the Code and the
PPSA and all “transferable records” as that term is defined in Section 16 of the
Uniform Electronic Purchase Act and Section 201 of the federal Electronic
Signatures in Global and National Commerce Act as in effect in any relevant
jurisdiction; and
     (ii) If any Grantor retains possession of any Chattel Paper or instruments
(which retention of possession shall be subject to the extent permitted hereby
and by the Securities Purchase Agreement), promptly upon the request of any
Secured Party, such Chattel Paper and instruments shall be marked with the
following legend: “This writing and the obligations evidenced or secured hereby
are subject to the Security Interests of [names of Secured Parties].”
     (c) Control Agreements. No Grantor shall establish or maintain any Deposit
Account or Securities Account (or any other similar account) unless (i) the
Grantors shall have provided each Secured Party with ten (10) days’ advance
written notice of each such account or (ii) the Secured Parties shall have
received a Control Agreement in respect of such account concurrently with the
opening thereof or on the Closing Date (as applicable). Each Grantor shall
ensure that all of its Account Debtors forward payment of the amounts owed by
them directly to a Deposit Account that is subject to a Control Agreement and
deposit or cause to be deposited promptly, and in any event no later than the
first Business Day after the date of receipt thereof, all of their collections
(including those sent directly by their Account Debtors to a Grantor) into a
Deposit Account subject to a Control Agreement.
     (d) Letter-of-Credit Rights. Each Grantor that is or becomes the
beneficiary of a letter of credit shall promptly (and in any event within 2
Business Days after becoming a beneficiary) notify Secured Parties thereof and,
upon the request by any Secured Party, enter into a multi-party agreement with
Secured Parties and the issuing or confirming bank with respect to
letter-of-credit rights assigning such letter-of-credit rights to Secured
Parties and directing all payments thereunder to Secured Parties, all in form
and substance satisfactory to Secured Parties.
     (e) Commercial Tort Claims. Each Grantor shall promptly (and in any event
within two (2) Business Days of receipt thereof) notify Secured Parties in
writing upon incurring or otherwise obtaining a Commercial Tort Claim after the
date hereof and, upon request of any Secured Party, promptly amend Schedule 1 to
this Agreement to describe such after-acquired Commercial Tort Claim in a manner
that reasonably identifies such Commercial Tort Claim, and hereby authorizes the
filing of additional financing statements or amendments to existing financing
statements describing such Commercial Tort Claims, and agrees to do such other
acts or things deemed necessary or desirable by any Secured Party to give
Secured Parties a first priority, perfected security interest in any such
Commercial Tort Claim.

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     (f) Government Contracts. If any Account or Chattel Paper arises out of a
contract or contracts with the United States of America, the federal or any
provincial government of Canada or any department, agency, or instrumentality
thereof, Grantors shall promptly (and in any event within 2 Business Days of the
creation thereof) notify Secured Parties thereof in writing and execute any
instruments or take any steps reasonably required by any Secured Party in order
that all moneys due or to become due under such contract or contracts shall be
assigned to Secured Parties, and shall provide written notice thereof and take
all other appropriate actions under the Assignment of Claims Act or other
applicable law to provide each Secured Party a first-priority perfected security
interest in such contract.
     (g) Intellectual Property.
     (i) Upon request of any Secured Party, in order to facilitate filings with
the United States Patent and Trademark Office and the United States Copyright
Office or any other applicable Governmental Authority, each Grantor shall
execute and deliver to Secured Parties one or more Copyright Security
Agreements, Trademark Security Agreements, or Patent Security Agreements to
further evidence Secured Parties’ respective Liens on such Grantor’s Copyrights,
Trademarks or Patents.
     (ii) Each Grantor shall have the duty (A) to promptly sue for infringement,
misappropriation, or dilution with respect to its rights in Intellectual
Property to the extent such Intellectual Property is material to the business of
such Grantor, and to recover any and all damages for such infringement,
misappropriation, or dilution, (B) to prosecute diligently any trademark
application or service mark application that is part of the Trademarks pending
as of the date hereof or hereafter until the termination of this Agreement,
(C) to prosecute diligently any patent application that is material to the
business of such Grantor that is part of the Patents pending as of the date
hereof or hereafter until the termination of this Agreement, and (D) to take all
reasonable and necessary action to preserve and maintain all of each Grantor’s
Trademarks, Patents, Copyrights, Intellectual Property Licenses, and its rights
therein, including the filing of applications for renewal, affidavits of use,
affidavits of noncontestability and opposition and interference and cancellation
proceedings. Each Grantor shall promptly file an application with the United
States Copyright Office for any Copyright that is material to the business of
such Grantor and that has not been registered with the United States Copyright
Office. Each Grantor shall promptly file an application with the United States
Patent and Trademark Office for any Patent or Trademark that is material to the
business of such Grantor and that has not been registered with the United States
Patent and Trademark Office. Any expenses incurred in connection with the
foregoing shall be borne by Grantors. Each Grantor further agrees not to abandon
any Trademark, Patent, Copyright, or Intellectual Property License that is
material to the business of such Grantor.
     (iii) Grantors acknowledge and agree that Secured Parties shall have no
duties with respect to the Trademarks, Patents, Copyrights, or Intellectual
Property

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Licenses. Without limiting the generality of this Section 6(g), Grantors
acknowledge and agree that no Secured Party shall be under any obligation to
take any steps necessary to preserve rights in the Trademarks, Patents,
Copyrights, or Intellectual Property Licenses against any other Person, but any
Secured Party may do so at its option from and after the occurrence and during
the continuance of an Event of Default, and all expenses incurred in connection
therewith (including fees and expenses of attorneys and other professionals)
shall be for the sole account of the Grantors and shall be deemed to be Secured
Obligations.
     (h) Investment Related Property.
     (i) If any Grantor shall receive or become entitled to receive any Pledged
Interests after the date hereof, it shall promptly (and in any event within 2
Business Days of receipt thereof) identify such Pledged Interests in a written
notice to Secured Parties;
     (ii) All sums of money and property paid or distributed in respect of the
Investment Related Property pledged hereunder which are received by any Grantor
shall be held by the Grantors in trust for the benefit of Secured Parties in a
Deposit Account subject to a Control Agreement;
     (iii) Each Grantor shall promptly deliver to Secured Parties a copy of each
notice or other communication received by it in respect of any Pledged
Interests;
     (iv) No Grantor shall make or consent to any material amendment or other
modification or waiver with respect to any Pledged Interests, Pledged Operating
Agreement, or Pledged Partnership Agreement, or enter into any agreement or
permit to exist any restriction with respect to any Pledged Interests;
     (v) Each Grantor agrees that it will cooperate with Secured Parties in
obtaining all necessary approvals and making all necessary filings under
federal, state, local, or foreign law in connection with the Security Interests
on the Investment Related Property pledged hereunder or any sale or transfer
thereof; and
     (vi) As to all limited liability company or partnership interests issued
under any Pledged Operating Agreement or Pledged Partnership Agreement, each
Grantor hereby represents, warrants and covenants that the Pledged Interests
issued pursuant to such agreement (A) are not and shall not be dealt in or
traded on securities exchanges or in securities markets, (B) do not and will not
constitute investment company securities, and (C) are not and will not be held
by such Grantor in a securities account. In addition, none of the Pledged
Operating Agreements, the Pledged Partnership Agreements, or any other
agreements governing any of the Pledged Interests issued under any Pledged
Operating Agreement or Pledged Partnership Agreement, provide or shall provide
that such Pledged Interests are securities governed by Article 8 of the Uniform
Commercial Code as in effect in any relevant jurisdiction.

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     (i) Transfers and Other Liens. Grantors shall not (i) sell, lease, license,
assign (by operation of law or otherwise), transfer or otherwise dispose of, or
grant any option with respect to, any of the Collateral, except as expressly
permitted by this Agreement and the other Transaction Documents, or (ii) create
or permit to exist any Lien upon or with respect to any of the Collateral of any
of Grantors, except for Permitted Liens. The inclusion of Proceeds in the
Collateral shall not be deemed to constitute consent by any Secured Party to any
sale or other disposition of any of the Collateral except as expressly permitted
in this Agreement or the other Transaction Documents. Notwithstanding anything
contained in this Agreement to the contrary, Permitted Liens shall not be
permitted with respect to any Pledged Interests.
     (j) Preservation of Existence. Each Grantor shall maintain and preserve its
existence, rights and privileges, and become or remain duly qualified and in
good standing in each jurisdiction in which the character of the properties
owned or leased by it or in which the transaction of its business makes such
qualification necessary.
     (k) Maintenance of Properties. Each Grantor shall maintain and preserve all
of its properties which are necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted,
and comply at all times with the provisions of all leases to which it is a party
as lessee or under which it occupies property, so as to prevent any loss or
forfeiture thereof or thereunder.
     (l) Maintenance of Insurance. Each Grantor shall maintain insurance with
responsible and reputable insurance companies or associations (including,
without limitation, comprehensive general liability, property, hazard, rent and
business interruption insurance) with respect to all of its assets and
properties (including, without limitation, all real properties leased or owned
by it and any and all Inventory and Equipment) and business, in such amounts and
covering such risks as is required by any governmental authority having
jurisdiction with respect thereto or as is carried generally in accordance with
sound business practice by companies in similar businesses similarly situated,
in each case, acceptable to the Secured Parties.
     (m) Other Actions as to Any and All Collateral. Each Grantor shall promptly
(and in any event within ten (10) Business Days of acquiring or obtaining such
Collateral) notify Secured Parties in writing upon (i) acquiring or otherwise
obtaining any Collateral after the date hereof consisting of Trademarks,
Patents, registered Copyrights, Intellectual Property Licenses, Investment
Related Property, Chattel Paper (electronic, tangible or otherwise), documents
(as defined in Article 9 of the Code), promissory notes (as defined in the Code,
or instruments (as defined in the Code) or (ii) any amount payable under or in
connection with any of the Collateral being or becoming evidenced after the date
hereof by any Chattel Paper, documents, promissory notes, or instruments and, in
each such case upon the request of any Secured Party, promptly execute such
other documents, or if applicable, deliver such Chattel Paper, other documents
or certificates evidencing any Investment Related Property and do such other
acts or things deemed necessary or desirable by any Secured Party to protect
Secured Parties’ respective Security Interests therein.

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     7. Relation to Other Transaction Documents. The provisions of this
Agreement shall be read and construed with the Transaction Documents referred to
below in the manner so indicated.
     (a) Securities Purchase Agreement and Notes. In the event of any conflict
between any provision in this Agreement and any provision in the Securities
Purchase Agreement or Notes, such provision of the Securities Purchase Agreement
or Notes shall control, except to the extent the applicable provision in this
Agreement is more restrictive with respect to the rights of Grantors or imposes
more burdensome or additional obligations on Grantors, in which event the
applicable provision in this Agreement shall control.
     (b) Patent, Trademark, Copyright Security Agreements. The provisions of the
Copyright Security Agreements, Trademark Security Agreements, and Patent
Security Agreements are supplemental to the provisions of this Agreement, and
nothing contained in the Copyright Security Agreements, Trademark Security
Agreements or the Patent Security Agreements shall limit any of the rights or
remedies of any Secured Party hereunder.
     8. Further Assurances.
     (a) Each Grantor agrees that from time to time, at its own expense, such
Grantor will promptly execute and deliver all further instruments and documents,
and take all further action, that may be necessary or that any Secured Party may
reasonably request, in order to perfect and protect the Security Interests
granted or purported to be granted hereby or to enable any Secured Party to
exercise and enforce its rights and remedies hereunder with respect to any of
the Collateral.
     (b) Each Grantor authorizes the filing by any Secured Party of financing or
continuation statements, or amendments thereto, and such Grantor will execute
and deliver to such Secured Party such other instruments or notices, as may be
necessary or as such Secured Party may reasonably request, in order to perfect
and preserve the Security Interests granted or purported to be granted hereby.
     (c) Each Grantor authorizes any Secured Party at any time and from time to
time to file, transmit, or communicate, as applicable, financing statements and
amendments (i) describing the Collateral as “all personal property of debtor” or
“all assets of debtor” or words of similar effect, (ii) describing the
Collateral as being of equal or lesser scope or with greater detail, or
(iii) that contain any information required by part 5 of Article 9 of the Code
for the sufficiency or filing office acceptance. Each Grantor also hereby
ratifies any and all financing statements or amendments previously filed by any
Secured Party in any jurisdiction.
     (d) Each Grantor acknowledges that it is not authorized to file any
financing statement or amendment or termination statement with respect to any
financing statement filed in connection with this Agreement without the prior
written consent of each Secured

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Party affected thereby, subject to such Grantor’s rights under
Section 9-509(d)(2) of the Code.
     (e) Each Grantor shall permit each Secured Party or its employees,
accountants, attorneys or agents, to examine and inspect any Collateral or any
other property of such Grantor at any time during ordinary business hours upon
reasonable notice.
     9. Secured Parties’ Right to Perform Contracts, Exercise Rights, etc. Upon
the occurrence and during the continuance of an Event of Default, any Secured
Party (a) may proceed to perform any and all of the obligations of any Grantor
contained in any contract, lease, or other agreement and exercise any and all
rights of any Grantor therein contained as fully as such Grantor itself could,
(b) shall have the right to use any Grantor’s rights under Intellectual Property
Licenses in connection with the enforcement of the Secured Party’s rights
hereunder, including the right to prepare for sale and sell any and all
Inventory and Equipment now or hereafter owned by any Grantor and now or
hereafter covered by such licenses, and (c) shall have the right to request that
any Stock that is pledged hereunder be registered in the name of such Secured
Party or any of its nominees.
     10. Secured Parties Appointed Attorney-in-Fact. Each Grantor, on behalf of
itself and each New Subsidiary of such Grantor, hereby irrevocably appoints each
Secured Party as the attorney-in-fact of such Grantor and each such New
Subsidiary solely for the purposes set forth in this section. In the event any
Grantor or any New Subsidiary fails to execute or deliver in a timely manner any
Transaction Document or other agreement, document, certificate or instrument
which such Grantor or New Subsidiary now or at any time hereafter is required to
execute or deliver pursuant to the terms of the Securities Purchase Agreement or
any other Transaction Document, each Secured Party shall have full authority in
the place and stead of such Grantor or New Subsidiary, and in the name of such
Grantor, such New Subsidiary or otherwise, to execute and deliver each of the
foregoing. Without limitation of the foregoing, each Secured Party shall have
full authority in the place and stead of each Grantor and each New Subsidiary,
and in the name of any such Grantor, any such New Subsidiary or otherwise, at
such time as an Event of Default has occurred and is continuing, to take any
action and to execute any instrument which such Secured Party may reasonably
deem necessary or advisable to accomplish the purposes of this Agreement,
including, without limitation:
     (a) to ask, demand, collect, sue for, recover, compromise, receive and give
acquittance and receipts for moneys due and to become due under or in connection
with any Collateral of such Grantor or New Subsidiary;
     (b) to receive and open all mail addressed to such Grantor or New
Subsidiary and to notify postal authorities to change the address for the
delivery of mail to such Grantor or New Subsidiary to that of such Secured
Party;
     (c) to receive, indorse, and collect any drafts or other instruments,
documents, Negotiable Collateral or Chattel Paper;

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     (d) to file any claims or take any action or institute any proceedings
which such Secured Party may deem necessary or desirable for the collection of
any of the Collateral of such Grantor or New Subsidiary or otherwise to enforce
the rights of any Secured Party with respect to any of the Collateral;
     (e) to repair, alter, or supply goods, if any, necessary to fulfill in
whole or in part the purchase order of any Person obligated to such Grantor or
New Subsidiary in respect of any Account of such Grantor or New Subsidiary;
     (f) to use any labels, Patents, Trademarks, trade names, URLs, domain
names, industrial designs, Copyrights, customer lists, advertising matter or
other industrial or intellectual property rights, in advertising for sale and
selling Inventory and other Collateral and to collect any amounts due under
Accounts, contracts or Negotiable Collateral of such Grantor or New Subsidiary;
and
     (g) such Secured Party shall have the right, but shall not be obligated, to
bring suit in its own name to enforce the Trademarks, Patents, Copyrights and
Intellectual Property Licenses and, if such Secured Party shall commence any
such suit, the appropriate Grantor or New Subsidiary shall, at the request of
such Secured Party, do any and all lawful acts and execute any and all proper
documents reasonably required by such Secured Party in aid of such enforcement.
To the extent permitted by law, each Grantor hereby ratifies, for itself and
each of its New Subsidiaries, all that such attorney-in-fact shall lawfully do
or cause to be done by virtue hereof. Such power-of-attorney granted pursuant to
this Section 10 is coupled with an interest and shall be irrevocable until this
Agreement is terminated.
     11. Secured Parties May Perform. If any Grantor fails to perform any
agreement contained herein, any Secured Party may itself perform, or cause
performance of, such agreement, and the reasonable expenses of such Secured
Party incurred in connection therewith shall be payable, jointly and severally,
by Grantors.
     12. Secured Parties’ Duties; Bailee for Perfection. The powers conferred on
Secured Parties hereunder are solely to protect the Secured Parties’ respective
interests in the Collateral and shall not impose any duty upon any Secured Party
in favor of any Grantor or any other Secured Party to exercise any such powers.
Except for the safe custody of any Collateral in its actual possession and the
accounting for moneys actually received by it hereunder, no Secured Party shall
have any duty to any Grantor or any other Secured Party as to any Collateral or
as to the taking of any necessary steps to preserve rights against prior parties
or any other rights pertaining to any Collateral. A Secured Party shall be
deemed to have exercised reasonable care in the custody and preservation of any
Collateral in its actual possession if such Collateral is accorded treatment
substantially equal to that which such Secured Party accords its own property.
Each Secured Party agrees that, with respect to any Collateral at any time or
times in its possession and in which any other Secured Party has a Lien, the
Secured Party in possession of any such Collateral shall be the bailee of each
other Secured Party solely for purposes of perfecting (to the extent not
otherwise perfected) each other Secured Party’s Lien in such Collateral,
provided that no Secured Party shall be obligated to obtain or retain possession
of any

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such Collateral. Without limiting the generality of the foregoing, Secured
Parties and Grantors hereby agree that any Secured Party that is in possession
of any Collateral at such time as the Secured Obligations owing to such Secured
Party have been paid in full may re-deliver such Collateral to the applicable
Grantor or, if requested by any Secured Party prior to such re-delivery, may
deliver such Collateral (unless otherwise restricted by applicable law or court
order and subject in all events to the receipt of an indemnification of all
liabilities arising from such delivery) to the requesting Secured Party, without
recourse to or representation or warranty by the Secured Party in such
possession.
     13. Collection of Accounts, General Intangibles and Negotiable Collateral.
At any time upon the occurrence and during the continuation of an Event of
Default, any Secured Party may (a) notify Account Debtors of any Grantor that
the Accounts, General Intangibles, Chattel Paper or Negotiable Collateral have
been assigned to such Secured Party or that such Secured Party has a security
interest therein, and (b) collect the Accounts, General Intangibles and
Negotiable Collateral directly, and any collection costs and expenses shall
constitute part of the Secured Obligations.
     14. Disposition of Pledged Interests by Secured Party. None of the Pledged
Interests existing as of the date of this Agreement are, and none of the Pledged
Interests hereafter acquired on the date of acquisition thereof will be,
registered or qualified under the various federal, state or other securities
laws of the United States or any other jurisdiction, and disposition thereof
after an Event of Default may be restricted to one or more private (instead of
public) sales in view of the lack of such registration. Each Grantor understands
that in connection with such disposition, any Secured Party may approach only a
restricted number of potential purchasers and further understands that a sale
under such circumstances may yield a lower price for the Pledged Interests than
if the Pledged Interests were registered and qualified pursuant to federal,
state and other securities laws and sold on the open market. Each Grantor,
therefore, agrees that: (a) if a Secured Party shall, pursuant to the terms of
this Agreement, sell or cause the Pledged Interests or any portion thereof to be
sold at a private sale, such Secured Party shall have the right to rely upon the
advice and opinion of any nationally recognized brokerage or investment firm
(but shall not be obligated to seek such advice and the failure to do so shall
not be considered in determining the commercial reasonableness of such action)
as to the best manner in which to offer the Pledged Interest or any portion
thereof for sale and as to the best price reasonably obtainable at the private
sale thereof; and (b) such reliance shall be conclusive evidence that such
Secured Party has handled the disposition in a commercially reasonable manner.
     15. Voting Rights.
     (a) Upon the occurrence and during the continuation of an Event of Default,
(i) any Secured Party may, at its option, and with 2 Business Days prior notice
to any Grantor, and in addition to all rights and remedies available to Secured
Parties under any other agreement, at law, in equity, or otherwise, exercise all
voting rights, and all other ownership or consensual rights in respect of the
Pledged Interests owned by such Grantor, but under no circumstances is any
Secured Party obligated by the terms of this Agreement to exercise such rights,
and (ii) if such Secured Party duly exercises its right to vote any of such
Pledged Interests, each Grantor hereby appoints such Secured Party as such

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Grantor’s true and lawful attorney-in-fact and IRREVOCABLE PROXY to vote such
Pledged Interests in any manner that such Secured Party deems advisable for or
against all matters submitted or which may be submitted to a vote of
shareholders, partners or members, as the case may be. Such power-of-attorney
granted pursuant to this Section 15 is coupled with an interest and shall be
irrevocable until this Agreement is terminated.
     (b) For so long as any Grantor shall have the right to vote the Pledged
Interests owned by it, such Grantor covenants and agrees that it will not,
without the prior written consent of Secured Parties, vote or take any
consensual action with respect to such Pledged Interests which would materially
or adversely affect the rights of Secured Parties exercising the voting rights
owned by such Grantor or the value of the Pledged Interests.
     16. Remedies. Upon the occurrence and during the continuance of an Event of
Default:
     (a) Any Secured Party may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein, in the other
Transaction Documents, or otherwise available to it, all the rights and remedies
of a secured party on default under the Code, the PPSA or any other applicable
law. Without limiting the generality of the foregoing, each Grantor expressly
agrees that, in any such event, any Secured Party without any demand,
advertisement, or notice of any kind (except a notice specified below of time
and place of public or private sale) to or upon any Grantor or any other Person
(all and each of which demands, advertisements and notices are hereby expressly
waived to the maximum extent permitted by the Code or by any other applicable
law), may take immediate possession of all or any portion of the Collateral and
(i) require Grantors to, and each Grantor hereby agrees that it will at its own
expense and upon request of such Secured Party forthwith, assemble all or part
of the Collateral as directed by such Secured Party and make it available to
such Secured Party at one or more locations where such Grantor regularly
maintains Inventory, and (ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at any of such Secured Party’s offices or elsewhere, for cash, on credit, and
upon such other terms as such Secured Party may deem commercially reasonable.
Each Grantor agrees that, to the extent notice of sale shall be required by law,
at least 10 days notice to any Grantor of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notification and specifically such notice shall constitute a
reasonable “authenticated notification of disposition” within the meaning of
Section 9-611 of the Code. No Secured Party shall be obligated to make any sale
of Collateral regardless of notice of sale having been given. Any Secured Party
may adjourn any public or private sale from time to time by announcement at the
time and place fixed therefor, and such sale may, without further notice, be
made at the time and place to which it was so adjourned.
     (b) Any Secured Party may seek the appointment of a receiver,
receiver-manager or keeper (a “Receiver”) under the laws of Canada or any
province thereof to take possession of all or any portion of the Collateral or
to operate same and, to the maximum extent permitted by law, may seek the
appointment of such a Receiver without

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the requirement of prior notice or a hearing. Any such Receiver shall, so far as
concerns responsibility for his/her acts, be deemed agent of the applicable
Grantor and not any Secured Party, and no Secured Party shall be in any way
responsible for any misconduct, negligence or non-feasance on the part of any
such Receiver, his/her servants or employees. Subject to the provisions of the
instrument appointing him/her, any such Receiver shall have power to take
possession of Collateral, to preserve Collateral or its value, to carry on or
concur in carrying on all or any part of the business of the applicable Grantor,
and to sell, lease, license or otherwise dispose of or concur in selling,
leasing, licensing or otherwise disposing of Collateral. To facilitate the
foregoing powers, any such Receiver may, to the exclusion of all others,
including Grantors, enter upon, use and occupy all premises owned or occupied by
Grantors wherein Collateral may be situated, maintain Collateral upon such
premises, borrow money on a secured or unsecured basis, and use Collateral
directly in carrying on Grantors’ business or as security for loans or advances
to enable the Receiver to carry on Grantors’ business or otherwise, as such
Receiver shall, in its discretion, determine. Except as may be otherwise
directed by a Secured Party, all money received from time to time by such
Receiver in carrying out his/her appointment shall be received in trust for and
paid over to Secured Parties. Every such Receiver may, in the discretion of any
Secured Party, be vested with all or any of the rights and powers of any Secured
Party. Any Secured Party may, either directly or through its nominees, exercise
any or all powers and rights given to a Receiver by virtue of the foregoing
provisions of this paragraph.
     (c) Each Secured Party is hereby granted a license or other right to use,
without liability for royalties or any other charge, each Grantor’s labels,
Patents, Copyrights, rights of use of any name, trade secrets, trade names,
Trademarks, service marks and advertising matter, URLs, domain names, industrial
designs, other industrial or intellectual property or any property of a similar
nature, whether owned by any Grantor or with respect to which any Grantor has
rights under license, sublicense, or other agreements (but only to the extent
(i) such license, sublicense or agreement does not prohibit such use by such
Secured Party and (ii) such Grantor will not be in default under such license,
sublicense, or other agreement as a result of such use by such Secured Party),
as it pertains to the Collateral, in preparing for sale, advertising for sale
and selling any Collateral, and each Grantor’s rights under all licenses and all
franchise agreements shall inure to the benefit of such Secured Party.
     (d) Any cash held by any Secured Party as Collateral and all proceeds
received by any Secured Party in respect of any sale of, collection from, or
other realization upon all or any part of the Collateral shall be applied
against the Secured Obligations in the order set forth in Section 17 hereof. In
the event the proceeds of Collateral are insufficient for the Satisfaction in
Full of the Secured Obligations (as defined below), each Grantor shall remain
jointly and severally liable for any such deficiency.
     (e) Each Grantor hereby acknowledges that the Secured Obligations arose out
of a commercial transaction, and agrees that if an Event of Default shall occur
and be continuing any Secured Party shall have the right to an immediate writ of
possession without notice of a hearing. Without limiting any provision of
Section 16(b) hereof, each

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Secured Party shall have the right to the appointment of a receiver for the
properties and assets of each Grantor, and each Grantor hereby consents to such
rights and such appointment and hereby waives any objection such Grantor may
have thereto or the right to have a bond or other security posted by any Secured
Party.
     (f) Notwithstanding anything in this Agreement to the contrary, each
Secured Party agrees that it will not exercise any remedy provided for under
this Agreement with respect to all or any portion of the Collateral unless such
Secured Party is a Permitted Secured Party (provided that the foregoing shall
not prevent any Secured Party from commencing or participating in any Insolvency
Proceeding or taking any action (other than with respect to the Collateral) to
enforce the payment or performance of any Grantors’ obligations under any of the
Notes, Guaranties or other Transaction Documents). This Section 16(f) is not
intended to confer any rights or benefits upon Grantors, or any of them, or any
other Person except Secured Parties, and no Person (including any or all
Grantors) other than Secured Parties shall have any right to enforce any of the
provisions of this Section 16(f). As between Grantors, or any of them, and any
Secured Party, any action that such Secured Party may take under this Agreement
shall be conclusively presumed to have been authorized and approved by the other
Secured Parties.
     (g) Each Secured Party may, in addition to other rights and remedies
provided for herein, in the other Transaction Documents, or otherwise available
to it under applicable law and without the requirement of notice to or upon any
Grantor or any other Person (which notice is hereby expressly waived to the
maximum extent permitted by the Code or any other applicable law), (i) with
respect to any Grantor’s Deposit Accounts in which any such Secured Party’s
Liens are perfected by control under Section 9-104 of the Code, instruct the
bank maintaining such Deposit Account for the applicable Grantor to pay the
balance of such Deposit Account to or for the benefit of such Secured Party, and
(ii) with respect to any Grantor’s Securities Accounts in which such Secured
Party’s Liens are perfected by control under Section 9-106 of the Code, instruct
the securities intermediary maintaining such Securities Account for the
applicable Grantor to (A) transfer any cash in such Securities Account to or for
the benefit of such Secured Party, or (B) liquidate any financial assets in such
Securities Account that are customarily sold on a recognized market and transfer
the cash proceeds thereof to or for the benefit of such Secured Party.
     17. Priority of Liens; Application of Proceeds of Collateral. Each Secured
Party hereby acknowledges and agrees that, notwithstanding the time or order of
the filing of any financing statement or other registration or document with
respect to the Collateral and the Security Interests, or any provision of this
Agreement, any other Security Document, the Code, the PPSA or other applicable
law, solely as amongst the Secured Parties, the separate Security Interests of
the Secured Parties shall have the same rank and priority; provided, that, the
foregoing shall not apply to any Security Interest of a Secured Party that is
void or voidable as a matter of law. In furtherance thereof, all proceeds of
Collateral received by any Secured Party shall be applied as follows:

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     (a) first, ratably to pay any expenses due to any of the Secured Parties
(including, without limitation, the reasonable costs and expenses paid or
incurred by any Secured Party to correct any default under or enforce any
provision of the Transaction Documents, or after the occurrence of any Event of
Default in gaining possession of, maintaining, handling, preserving, storing,
shipping, selling, preparing for sale, or advertising to sell the Collateral, or
any portion thereof, irrespective of whether a sale is consummated) or
indemnities then due to any of the Secured Parties under the Transaction
Documents, until paid in full;
     (b) second, ratably to pay any fees or premiums then due to any of the
Secured Parties under the Transaction Documents, until paid in full;
     (c) third, ratably to pay interest due in respect of the Secured
Obligations then due to any of the Secured Parties, until paid in full;
     (d) fourth, ratably to pay the principal amount of all Secured Obligations
then due to any of the Secured Parties, until paid in full;
     (e) fifth, ratably to pay any other Secured Obligations then due to any of
the Secured Parties; and
     (f) sixth, to Grantors or such other Person entitled thereto under
applicable law.
     18. Remedies Cumulative. Each right, power, and remedy of any Secured Party
as provided for in this Agreement or in any other Transaction Document or now or
hereafter existing at law or in equity or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power,
or remedy provided for in this Agreement or in the other Transaction Documents
or now or hereafter existing at law or in equity or by statute or otherwise, and
the exercise or beginning of the exercise by any Secured Party, of any one or
more of such rights, powers, or remedies shall not preclude the simultaneous or
later exercise by such Secured Party of any or all such other rights, powers, or
remedies. Each Grantor acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to each Secured Party and that the remedy
at law for any such breach may be inadequate. Each Grantor therefore agrees
that, in the event of any breach or any threatened breach, each Secured Party
shall be entitled, in addition to all other available remedies, to an injunction
restraining any such breach or any such threatened breach, without the necessity
of showing economic loss and without any bond or other security being required.
     19. Marshaling. No Secured Party shall be required to marshal any present
or future collateral security (including but not limited to the Collateral) for,
or other assurances of payment of, the Secured Obligations or any of them or to
resort to such collateral security or other assurances of payment in any
particular order, and all of its rights and remedies hereunder and in respect of
such collateral security and other assurances of payment shall be cumulative and
in addition to all other rights and remedies, however existing or arising. To
the extent that it lawfully may, each Grantor hereby agrees that it will not
invoke any law relating to the marshaling of collateral which might cause delay
in or impede the enforcement of any Secured

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Party’s rights and remedies under this Agreement or under any other instrument
creating or evidencing any of the Secured Obligations or under which any of the
Secured Obligations is outstanding or by which any of the Secured Obligations is
secured or payment thereof is otherwise assured, and, to the extent that it
lawfully may, each Grantor hereby irrevocably waives the benefits of all such
laws.
     20. Acknowledgment.
     (a) Each Secured Party hereby agrees and acknowledges that no other Secured
Party has agreed to act for it as an administrative or collateral agent, and
each Secured Party is and shall remain solely responsible for the attachment,
perfection and priority of all Liens created by this Agreement or any other
Security Document in favor of such Secured Party. No Secured Party shall have by
reason of this Agreement or any other Transaction Document an agency or
fiduciary relationship with any other Secured Party. No Secured Party (which
term, as used in this sentence, shall include reference to each Secured Party’s
officers, directors, employees, attorneys, agents and affiliates and to the
officers, directors, employees, attorneys and agents of such Secured Party’s
affiliates) shall: (i) have any duties or responsibilities except those
expressly set forth in this Agreement and the other Security Documents or
(ii) be required to take, initiate or conduct any enforcement action (including
any litigation, foreclosure or collection proceedings hereunder or under any of
the other Security Documents). Without limiting the foregoing, no Secured Party
shall have any right of action whatsoever against any other Secured Party as a
result of such Secured Party acting or refraining from acting hereunder or under
any of the Security Documents except as a result and to the extent of losses
caused by such Secured Party’s actual gross negligence or willful misconduct (it
being understood and agreed by each Secured Party that the delivery by any
Significant Secured Party of one or more Veto Notices shall not be deemed to be
or construed as gross negligence or willful misconduct on the part of the
Secured Party delivering any such Veto Notice). No Secured Party assumes any
responsibility for any failure or delay in performance or breach by any Grantor
or any Secured Party of its obligations under this Agreement or any other
Transaction Document. No Secured Party makes to any other Secured Party any
express or implied warranty, representation or guarantee with respect to any
Secured Obligations, Collateral, Transaction Document or Grantor. No Secured
Party nor any of its officers, directors, employees, attorneys or agents shall
be responsible to any other Secured Party or any of its officers, directors,
employees, attorneys or agents for: (i) any recitals, statements, information,
representations or warranties contained in any of the Transaction Documents or
in any certificate or other document furnished pursuant to the terms hereof;
(ii) the execution, validity, genuineness, effectiveness or enforceability of
any of the Transaction Documents; (iii) the validity, genuineness,
enforceability, collectability, value, sufficiency or existence of any
Collateral, or the attachment, perfection or priority of any Lien therein; or
(iv) the assets, liabilities, financial condition, results of operations,
business, creditworthiness or legal status of any Grantor or any Account Debtor.
No Secured Party nor any of its officers, directors, employees, attorneys or
agents shall have any obligation to any other Secured Party to ascertain or
inquire into the existence of any default or Event of Default, the observance or
performance by any Grantor of any of the duties or agreements of such

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Grantor under any of the Transaction Documents or the satisfaction of any
conditions precedent contained in any of the Transaction Documents.
     (b) Each Secured Party hereby acknowledges and represents that it has,
independently and without reliance upon any other Secured Party, and based upon
such documents, information and analyses as it has deemed appropriate, made its
own credit analysis of each Grantor and its own decision to enter into the
Transaction Documents and to purchase the Notes and Warrants, and each Secured
Party has made such inquiries concerning the Transaction Documents, the
Collateral and each Grantor as such Secured Party feels necessary and
appropriate, and has taken such care on its own behalf as would have been the
case had it entered into the Transaction Documents without any other Secured
Party. Each Secured Party hereby further acknowledges and represents that the
other Secured Parties have not made any representations or warranties to it
concerning any Grantor, any of the Collateral or the legality, validity,
sufficiency or enforceability of any of the Transaction Documents. Each Secured
Party also hereby acknowledges that it will, independently and without reliance
upon the other Secured Parties, and based upon such financial statements,
documents and information as it deems appropriate at the time, continue to make
and rely upon its own credit decisions in taking or refraining to take any other
action under this Agreement or the Transaction Documents. No Secured Party shall
have any duty or responsibility to provide any other Secured Party with any
notices, reports or certificates furnished to such Secured Party by any Grantor
or any credit or other information concerning the affairs, financial condition,
business or assets of any Grantor (or any of its affiliates) which may come into
possession of such Secured Party.
     21. Indemnity and Expenses.
     (a) Without limiting any obligations of Parent under the Securities
Purchase Agreement, each Grantor agrees to indemnify all Secured Parties from
and against all claims, lawsuits and liabilities (including attorneys’ fees)
arising out of or resulting from this Agreement (including enforcement of this
Agreement) or any other Transaction Document, except claims, losses or
liabilities resulting from the gross negligence or willful misconduct of the
party seeking indemnification as determined by a final non-appealable order of a
court of competent jurisdiction. This provision shall survive the termination of
this Agreement and the Transaction Documents and the Satisfaction in Full of the
Secured Obligations.
     (b) Grantors, jointly and severally, shall, upon demand, pay to each
Secured Party all of the costs and expenses which such Secured Party may incur
in connection with (i) the administration of this Agreement, (ii) the custody,
preservation, use or operation of, or, upon an Event of Default, the sale of,
collection from, or other realization upon, any of the Collateral in accordance
with this Agreement and the other Transaction Documents, (iii) the exercise or
enforcement of any of the rights of such Secured Party hereunder or (iv) the
failure by any Grantor to perform or observe any of the provisions hereof.
     22. Merger, Amendments; Etc. THIS AGREEMENT, TOGETHER WITH THE OTHER
TRANSACTION DOCUMENTS, REPRESENTS THE FINAL AGREEMENT

25

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BETWEEN THE PARTIES SOLELY WITH RESPECT TO THE SUBJECT MATTER HEREOF AND THEREOF
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE
PARTIES. No provision of this Agreement may be amended other than by an
instrument in writing signed by each Grantor and each Significant Secured Party,
and any amendment to any provision of this Agreement made in conformity with the
provisions of this Section 22 shall be binding on all Secured Parties, provided
that no such amendment shall be effective to the extent that it (1) applies to
less than all of the Secured Parties or (2) imposes any obligation or liability
on any Secured Party without such Secured Party’s prior written consent (which
may be granted or withheld in such Secured Party’s sole discretion). No waiver
shall be effective unless it is in writing and signed by an authorized
representative of the waiving party, provided that all of the Significant
Secured Parties (in a writing signed by all of the Significant Secured Parties)
may waive any provision of this Agreement, and any waiver of any provision of
this Agreement made in conformity with the provisions of this Section 22 shall
be binding on all Secured Parties, provided that no such waiver shall be
effective to the extent that it (1) applies to less than all the Secured Parties
(unless a party gives a waiver as to itself only) or (2) imposes any obligation
or liability on any Secured Party without such Secured Party’s prior written
consent (which may be granted or withheld in such Secured Party’s sole
discretion).
     23. Addresses for Notices. All notices and other communications provided
for hereunder (a) shall be given in the form and manner set forth in the
Securities Purchase Agreement and (b) shall be delivered, (i) in the case of
notice to any Grantor, by delivery of such notice to Parent at Parent’s address
specified in the Securities Purchase Agreement or at such other address as shall
be designated by Parent in a written notice to each of the Secured Parties in
accordance with the provisions thereof, and (ii) in the case of notice to any
Secured Party, by delivery of such notice to such Secured Party at its address
specified in the Securities Purchase Agreement or at such other address as shall
be designated by such Secured Party in a written notice to Parent and each other
Secured Party in accordance with the provisions thereof.
     24. Separate, Continuing Security Interests; Assignments under Transaction
Documents. This Agreement shall create a separate, continuing security interest
in the Collateral in favor of each Secured Party and shall (a) remain in full
force and effect until Satisfaction in Full of the Secured Obligations, (b) be
binding upon each of Grantors, and their respective permitted successors and
permitted assigns, and (c) inure to the benefit of, and be enforceable by, the
Secured Parties and their respective successors, transferees and assigns.
Without limiting the generality of the foregoing clause (c), any Secured Party
may, in accordance with the provisions of the Transaction Documents, assign or
otherwise transfer all or any portion of its rights and obligations under the
Transaction Documents to any other Person, and such other Person shall thereupon
become vested with all the benefits in respect thereof granted to such Secured
Party herein or otherwise. Upon Satisfaction in Full of the Secured Obligations,
the Security Interests granted hereby shall terminate and all rights to the
Collateral shall revert to Grantors or any other Person entitled thereto. At
such time, each Secured Party will authorize the filing of appropriate
termination statements to terminate such Security Interests. No transfer or
renewal, extension, assignment, or termination of this Agreement or any other
Transaction Document, or any other instrument or document executed and delivered
by any Grantor to any Secured Party nor any additional loans made by any Secured
Party to any Grantor, nor the taking of further security, nor

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the retaking or re-delivery of the Collateral to Grantors, or any of them, by
any Secured Party, nor any other act of Secured Parties, or any of them, shall
release any of Grantors from any obligation, except a release or discharge
executed in writing by all Secured Parties. No Secured Party shall by any act,
delay, omission or otherwise, be deemed to have waived any of its rights or
remedies hereunder, unless such waiver is in writing and signed by such Secured
Party and then only to the extent therein set forth. A waiver by any Secured
Party of any right or remedy on any occasion shall not be construed as a bar to
the exercise of any such right or remedy which such Secured Party would
otherwise have had on any other occasion.
     25. Governing Law; Jurisdiction; Service of Process; Jury Trial. All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of New
York, without giving effect to any choice of law or conflict of law provision or
rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of
New York. Each party hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in The City of New York, Borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper; provided, however, any suit seeking enforcement against any Collateral
or other property may be brought, at any Secured Party’s option, in the courts
of any jurisdiction where such Secured Party elects to bring such action or
where such Collateral or other property may be found. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Without limitation of the foregoing, each Grantor other than Parent
hereby irrevocably appoints Parent as such Grantor’s agent for purposes of
receiving and accepting any service of process hereunder or under any of the
other Security Documents. Nothing contained herein shall be deemed to limit in
any way any right to serve process in any manner permitted by law. EACH PARTY
HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
     26. Miscellaneous.
     (a) This Agreement may be executed in two or more identical counterparts,
all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party. In the event that any signature is delivered by facsimile
transmission or by an e-mail which contains a portable document format (.pdf)
file of an executed signature page, such signature page shall create a valid and
binding obligation of the party executing (or on whose behalf such signature is
executed) with the same force and effect as if such signature page were an
original thereof. Any party delivering an executed counterpart of this Agreement
by facsimile or other electronic method of transmission also shall deliver

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an original executed counterpart of this Agreement but the failure to deliver an
original executed counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement. The foregoing shall apply to each other
Security Document mutatis mutandis.
     (b) Any provision of this Agreement which is prohibited or unenforceable
shall be ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof in that jurisdiction or
affecting the validity or enforceability of such provision in any other
jurisdiction.
     (c) Headings used in this Agreement are for convenience only and shall not
be used in connection with the interpretation of any provision hereof.
     (d) The pronouns used herein shall include, when appropriate, either gender
and both singular and plural, and the grammatical construction of sentences
shall conform thereto.
     (e) The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party. For clarification purposes, the
Recitals are part of this Agreement. Notwithstanding any references to “Secured
Parties” herein, Iroquois Master Fund Ltd. (“Iroquois”) and the Company
acknowledge and agree that Iroquois is the only Secured Party that is a party
hereto as of the date of this Agreement.
     (f) Unless the context of this Agreement or any other Transaction Document
clearly requires otherwise, references to the plural include the singular,
references to the singular include the plural, the terms “includes” and
“including” are not limiting, and the term “or” has, except where otherwise
indicated, the inclusive meaning represented by the phrase “and/or.” The words
“hereof,” “herein,” “hereby,” “hereunder,” and similar terms in this Agreement
or any other Transaction Document refer to this Agreement or such other
Transaction Document, as the case may be, as a whole and not to any particular
provision of this Agreement or such other Transaction Document, as the case may
be. Section, subsection, clause, schedule, and exhibit references herein are to
this Agreement unless otherwise specified. Any reference in this Agreement or in
any other Transaction Document to any agreement, instrument, or document shall
include all alterations, amendments, changes, extensions, modifications,
renewals, replacements, substitutions, joinders, and supplements, thereto and
thereof, as applicable (subject to any restrictions on such alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions, joinders, and supplements set forth herein). “Satisfaction in
Full of the Secured Obligations” shall mean the indefeasible payment in full in
cash and discharge, or other satisfaction in accordance with the terms of the
Transaction Documents and discharge, of all Secured Obligations in full. Any
reference herein to any Person shall be construed to include such Person’s
permitted successors and permitted assigns. Any requirement of a writing
contained herein or in any other Transaction Document shall be satisfied by the
transmission of a Record and any Record so transmitted shall constitute a
representation and warranty as to the accuracy and completeness of the
information contained therein.

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     (g) All dollar amounts referred to in this Agreement and the other
Transaction Documents are in United States Dollars (“U.S. Dollars”), and all
amounts owing under this Agreement and all other Transaction Documents shall be
paid in U.S. Dollars. All amounts denominated in other currencies shall be
converted into the U.S. Dollar equivalent amount in accordance with the Exchange
Rate on the date of calculation. “Exchange Rate” means, in relation to any
amount of currency to be converted into U.S. Dollars pursuant to this Agreement,
the U.S. Dollar exchange rate as published in the Wall Street Journal on the
relevant date of calculation.
[signature pages follow]

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     IN WITNESS WHEREOF, the undersigned parties hereto have executed this
Agreement by and through their duly authorized officers, as of the day and year
first above written.

                   GRANTORS:   CONVERTED ORGANICS INC., a Delaware corporation  
 
 
           
 
  By:
Name:    
 
   
 
  Title:  
 
   
 
     
 
   
 
                [SUBSIDIARIES]    

SECURITY AGREEMENT

 

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                   SECURED PARTIES:   IROQUOIS MASTER FUND LTD.    
 
                          By: Joshua Silverman, Authorized Signatory    

SECURITY AGREEMENT

 

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SCHEDULE 1
COMMERCIAL TORT CLAIMS

 

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SCHEDULE 2
COPYRIGHTS

 

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SCHEDULE 3
INTELLECTUAL PROPERTY LICENSES

 

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SCHEDULE 4
PATENTS

 

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SCHEDULE 5
PLEDGED COMPANIES

                  Percentage of Class Name of Pledgor   Name of Pledged Company
  Owned          

 

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SCHEDULE 6
TRADEMARKS

 

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SCHEDULE 7
REAL PROPERTY
Owned Real Property
Leased Real Property

 

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SCHEDULE 8
LIST OF UNIFORM COMMERCIAL CODE FILING JURISDICTIONS

      Grantor   Jurisdictions      

 

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SCHEDULE 9
DEPOSIT ACCOUNTS AND SECURITIES ACCOUNTS
Deposit Accounts
Securities Accounts

2

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EXHIBIT A
COPYRIGHT SECURITY AGREEMENT
     This COPYRIGHT SECURITY AGREEMENT (this “Copyright Security Agreement”) is
made this [___] day of April 2011, by the Grantors listed on the signature pages
hereof (collectively, jointly and severally, “Grantors” and each individually
“Grantor”), in favor of the Secured Parties under and as defined in the
below-described Security Agreement.
RECITALS
     WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as
of April 1, 2011 (as may be amended, restated, supplemented, or otherwise
modified from time to time, including all schedules thereto, collectively, the
“Securities Purchase Agreement”), by and among Converted Organics Inc., a
Delaware corporation (“Parent”), and each of the Secured Parties, Parent has
agreed to sell, and each of the Secured Parties have each agreed to purchase,
severally and not jointly, certain Notes and Warrants; and
     WHEREAS, in order to induce each of the Secured Parties to purchase,
severally and not jointly, the Notes and Warrants as provided for in the
Securities Purchase Agreement, Grantors have executed and delivered to each of
the Secured Parties that certain Security Agreement of even date herewith
(including all annexes, exhibits or schedules thereto, as from time to time
amended, restated, supplemented or otherwise modified, the “Security
Agreement”); and
     WHEREAS, pursuant to the Security Agreement, Grantors are required to
execute and deliver to each of the Secured Parties this Copyright Security
Agreement.
AGREEMENTS
     NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantors hereby agree as follows:
     1. DEFINED TERMS. All capitalized terms used but not otherwise defined
herein have the meanings given to them in the Security Agreement.
     2. GRANT OF SECURITY INTEREST IN COPYRIGHT COLLATERAL. Each Grantor hereby
grants to each Secured Party a continuing first priority security interest in
all of such Grantor’s right, title and interest in, to and under the following,
whether presently existing or hereafter created or acquired (collectively, the
“Copyright Collateral”):
          (a) all of each Grantor’s Copyrights and Copyright Intellectual
Property Licenses to which it is a party including those referred to on
Schedule I hereto;
          (b) all reissues, continuations or extensions of the foregoing; and

 

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          (c) all products and proceeds of the foregoing, including any claim by
such Grantor against third parties for past, present or future infringement or
dilution of any Copyright or any Copyright licensed under any Intellectual
Property License.
     3. SECURITY FOR OBLIGATIONS. This Copyright Security Agreement and the
Security Interests created hereby secures the payment and performance of all the
Secured Obligations, whether now existing or arising hereafter. Without limiting
the generality of the foregoing, this Copyright Security Agreement secures the
payment of all amounts which constitute part of the Secured Obligations and
would be owed by Grantors, or any of them, to Secured Parties, or any of them,
whether or not they are unenforceable or not allowable due to the existence of
an Insolvency Proceeding involving any Grantor.
     4. SECURITY AGREEMENT. The security interests granted pursuant to this
Copyright Security Agreement are granted in conjunction with the security
interests granted to Secured Parties pursuant to the Security Agreement. Each
Grantor hereby acknowledges and affirms that the rights and remedies of Secured
Parties with respect to their respective security interests in the Copyright
Collateral made and granted hereby are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated by reference
herein as if fully set forth herein.
     5. AUTHORIZATION TO SUPPLEMENT. To the extent required under the Security
Agreement, Grantors shall give Secured Parties prompt notice in writing of any
additional copyright registrations or applications therefor after the date
hereof. Grantors hereby authorize Secured Parties unilaterally to modify this
Agreement by amending Schedule I to include any future registered copyrights or
applications therefor of Grantors. Notwithstanding the foregoing, no failure to
so modify this Copyright Security Agreement or amend Schedule I shall in any way
affect, invalidate or detract from any Secured Party’s continuing security
interest in all Collateral, whether or not listed on Schedule I.
     6. COUNTERPARTS. This Copyright Security Agreement may be executed in two
or more identical counterparts, all of which shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party. In the event that any signature is
delivered by facsimile transmission or by an e-mail which contains a portable
document format (.pdf) file of an executed signature page, such signature page
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) with the same force and effect as if such
signature page were an original thereof. In proving this Copyright Security
Agreement or any other Transaction Document in any judicial proceedings, it
shall not be necessary to produce or account for more than one such counterpart
signed by the party against whom such enforcement is sought.
     7. CONSTRUCTION. Unless the context of this Copyright Security Agreement or
any other Transaction Document clearly requires otherwise, references to the
plural include the singular, references to the singular include the plural, the
terms “includes” and “including” are not limiting, and the term “or” has, except
where otherwise indicated, the inclusive meaning represented by the phrase
“and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms
in this Copyright Security Agreement or any other Transaction Document refer to
this Copyright Security Agreement or such other Transaction Document, as the
case may be, as a

2

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whole and not to any particular provision of this Copyright Security Agreement
or such other Transaction Document, as the case may be. Section, subsection,
clause, schedule, and exhibit references herein are to this Copyright Security
Agreement unless otherwise specified. Any reference in this Copyright Security
Agreement or in any other Transaction Document to any agreement, instrument, or
document shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, joinders, and supplements,
thereto and thereof, as applicable (subject to any restrictions on such
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, joinders, and supplements set forth herein). Any
reference herein to any Person shall be construed to include such Person’s
permitted successors and permitted assigns. Any requirement of a writing
contained herein or in any other Transaction Document shall be satisfied by the
transmission of a Record and any Record so transmitted shall constitute a
representation and warranty as to the accuracy and completeness of the
information contained therein. The language used in this Copyright Security
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party. For clarification purposes, the Recitals are part of this Copyright
Security Agreement.
[signature pages follow]

3

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

                   GRANTORS:   CONVERTED ORGANICS INC., a Delaware corporation
 
           
 
  By:        
 
  Name:  
 
   
 
           
 
  Title:        
 
           
 
                [SUBSIDIARIES]

COPYRIGHT SECURITY AGREEMENT

 

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SCHEDULE I
to
COPYRIGHT SECURITY AGREEMENT
Copyright Registrations

                                  Registration Grantor   Country   Copyright  
Registration No.   Date                  

Copyright Licenses

2

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EXHIBIT B
PATENT SECURITY AGREEMENT
     This PATENT SECURITY AGREEMENT (this “Patent Security Agreement”) is made
this [___] day of April 2011, by the Grantors listed on the signature pages
hereof (collectively, jointly and severally, “Grantors” and each individually
“Grantor”), in favor of the Secured Parties under and as defined in the
below-described Security Agreement.
RECITALS
     WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as
of April 1, 2011 (as may be amended, restated, supplemented, or otherwise
modified from time to time, including all schedules thereto, collectively, the
“Securities Purchase Agreement”), by and among Converted Organics Inc., a
Delaware corporation (“Parent”), and each of the Secured Parties, Parent has
agreed to sell, and each of the Secured Parties have each agreed to purchase,
severally and not jointly, certain Notes and Warrants; and
     WHEREAS, in order to induce each of the Secured Parties to purchase,
severally and not jointly, the Notes and Warrants as provided for in the
Securities Purchase Agreement, Grantors have executed and delivered to each of
the Secured Parties that certain Security Agreement of even date herewith
(including all annexes, exhibits or schedules thereto, as from time to time
amended, restated, supplemented or otherwise modified, the “Security
Agreement”); and
     WHEREAS, pursuant to the Security Agreement, Grantors are required to
execute and deliver to each of the Secured Parties this Patent Security
Agreement.
AGREEMENTS
     NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantors hereby agree as follows:
     1. DEFINED TERMS. All capitalized terms used but not otherwise defined
herein have the meanings given to them in the Security Agreement.
     2. GRANT OF SECURITY INTEREST IN PATENT COLLATERAL. Each Grantor hereby
grants to each Secured Party a continuing first priority security interest in
all of such Grantor’s right, title and interest in, to and under the following,
whether presently existing or hereafter created or acquired (collectively, the
“Patent Collateral”):
     (a) all of its Patents and Patent Intellectual Property Licenses to which
it is a party including those referred to on Schedule I hereto;
     (b) all reissues, continuations or extensions of the foregoing; and

 

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     (c) all products and proceeds of the foregoing, including any claim by such
Grantor against third parties for past, present or future infringement or
dilution of any Patent or any Patent licensed under any Intellectual Property
License.
     3. SECURITY FOR OBLIGATIONS. This Patent Security Agreement and the
Security Interests created hereby secures the payment and performance of all the
Secured Obligations, whether now existing or arising hereafter. Without limiting
the generality of the foregoing, this Patent Security Agreement secures the
payment of all amounts which constitute part of the Secured Obligations and
would be owed by Grantors, or any of them, to Secured Parties, or any of them,
whether or not they are unenforceable or not allowable due to the existence of
an Insolvency Proceeding involving any Grantor.
     4. SECURITY AGREEMENT. The security interests granted pursuant to this
Patent Security Agreement are granted in conjunction with the security interests
granted to Secured Parties pursuant to the Security Agreement. Each Grantor
hereby acknowledges and affirms that the rights and remedies of Secured Parties
with respect to their respective security interests in the Patent Collateral
made and granted hereby are more fully set forth in the Security Agreement, the
terms and provisions of which are incorporated by reference herein as if fully
set forth herein.
     5. AUTHORIZATION TO SUPPLEMENT. If any Grantor shall obtain rights to any
new patentable inventions or become entitled to the benefit of any patent
application or patent for any reissue, division, or continuation, of any patent,
the provisions of this Patent Security Agreement shall automatically apply
thereto. To the extent required under the Security Agreement, Grantors shall
give prompt notice in writing to Secured Parties with respect to any such new
patent rights. Without limiting each Grantor’s obligations under this Section 5,
Grantors hereby authorize Secured Parties unilaterally to modify this Agreement
by amending Schedule I to include any such new patent rights of Grantors.
Notwithstanding the foregoing, no failure to so modify this Patent Security
Agreement or amend Schedule I shall in any way affect, invalidate or detract
from any Secured Party’s continuing security interest in all Collateral, whether
or not listed on Schedule I.
     6. COUNTERPARTS. This Patent Security Agreement may be executed in two or
more identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event that any signature is
delivered by facsimile transmission or by an e-mail which contains a portable
document format (.pdf) file of an executed signature page, such signature page
shall create a valid and binding obligation of the party executing (or on whose
behalf such signature is executed) with the same force and effect as if such
signature page were an original thereof. In proving this Patent Security
Agreement or any other Transaction Document in any judicial proceedings, it
shall not be necessary to produce or account for more than one such counterpart
signed by the party against whom such enforcement is sought.

2

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     7. CONSTRUCTION. Unless the context of this Patent Security Agreement or
any other Transaction Document clearly requires otherwise, references to the
plural include the singular, references to the singular include the plural, the
terms “includes” and “including” are not limiting, and the term “or” has, except
where otherwise indicated, the inclusive meaning represented by the phrase
“and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms
in this Patent Security Agreement or any other Transaction Document refer to
this Patent Security Agreement or such other Transaction Document, as the case
may be, as a whole and not to any particular provision of this Patent Security
Agreement or such other Transaction Document, as the case may be. Section,
subsection, clause, schedule, and exhibit references herein are to this Patent
Security Agreement unless otherwise specified. Any reference in this Patent
Security Agreement or in any other Transaction Document to any agreement,
instrument, or document shall include all alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, joinders, and
supplements, thereto and thereof, as applicable (subject to any restrictions on
such alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, joinders, and supplements set forth herein). Any
reference herein to any Person shall be construed to include such Person’s
permitted successors and permitted assigns. Any requirement of a writing
contained herein or in any other Transaction Document shall be satisfied by the
transmission of a Record and any Record so transmitted shall constitute a
representation and warranty as to the accuracy and completeness of the
information contained therein. The language used in this Patent Security
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party. For clarification purposes, the Recitals are part of this Patent
Security Agreement.
[signature pages follow]

3

--------------------------------------------------------------------------------

 

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

                   GRANTORS:   CONVERTED ORGANICS INC., a Delaware corporation
 
           
 
  By:        
 
  Name:  
 
   
 
           
 
  Title:        
 
           
 
                [SUBSIDIARIES]

4

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EXHIBIT C
TRADEMARK SECURITY AGREEMENT
     This TRADEMARK SECURITY AGREEMENT (this “Trademark Security Agreement”) is
made this [___] day of April 2011, by the Grantors listed on the signature pages
hereof (collectively, jointly and severally, “Grantors” and each individually
“Grantor”), in favor of the Secured Parties under and as defined in the
below-described Security Agreement.
RECITALS
     WHEREAS, pursuant to that certain Securities Purchase Agreement, dated as
of April 1, 2011 (as may be amended, restated, supplemented, or otherwise
modified from time to time, including all schedules thereto, collectively, the
“Securities Purchase Agreement”), by and among Converted Organics Inc., a
Delaware corporation (“Parent”), and each of the Secured Parties, Parent has
agreed to sell, and each of the Secured Parties have each agreed to purchase,
severally and not jointly, certain Notes and Warrants; and
     WHEREAS, in order to induce each of the Secured Parties to purchase,
severally and not jointly, the Notes and Warrants as provided for in the
Securities Purchase Agreement, Grantors have executed and delivered to each of
the Secured Parties that certain Security Agreement of even date herewith
(including all annexes, exhibits or schedules thereto, as from time to time
amended, restated, supplemented or otherwise modified, the “Security
Agreement”); and
     WHEREAS, pursuant to the Security Agreement, Grantors are required to
execute and deliver to each of the Secured Parties this Trademark Security
Agreement.
AGREEMENTS
     NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Grantors hereby agree as follows:
     1. DEFINED TERMS. All capitalized terms used but not otherwise defined
herein have the meanings given to them in the Security Agreement.
     2. GRANT OF SECURITY INTEREST IN TRADEMARK COLLATERAL. Each Grantor hereby
grants to each Secured Party a continuing first priority security interest in
all of such Grantor’s right, title and interest in, to and under the following,
whether presently existing or hereafter created or acquired (collectively, the
“Trademark Collateral”):
     (a) all of its Trademarks and Trademark Intellectual Property Licenses to
which it is a party including those referred to on Schedule I hereto;
     (b) all goodwill, trade secrets, proprietary or confidential information,
technical information, procedures, formulae, quality control standards, designs,
operating and training manuals, customer lists, and other General Intangibles
with respect to the foregoing;

 

--------------------------------------------------------------------------------

 

     (c) all reissues, continuations or extensions of the foregoing;
     (d) all goodwill of the business connected with the use of, and symbolized
by, each Trademark and each Trademark Intellectual Property License; and
     (e) all products and proceeds of the foregoing, including any claim by such
Grantor against third parties for past, present or future (i) infringement or
dilution of any Trademark or any Trademark licensed under any Intellectual
Property License or (ii) injury to the goodwill associated with any Trademark or
any Trademark licensed under any Intellectual Property License.
     3. SECURITY FOR OBLIGATIONS. This Trademark Security Agreement and the
Security Interests created hereby secures the payment and performance of all the
Secured Obligations, whether now existing or arising hereafter. Without limiting
the generality of the foregoing, this Trademark Security Agreement secures the
payment of all amounts which constitute part of the Secured Obligations and
would be owed by Grantors, or any of them, to Secured Parties, or any of them,
whether or not they are unenforceable or not allowable due to the existence of
an Insolvency Proceeding involving any Grantor.
     4. SECURITY AGREEMENT. The security interests granted pursuant to this
Trademark Security Agreement are granted in conjunction with the security
interests granted to Secured Parties pursuant to the Security Agreement. Each
Grantor hereby acknowledges and affirms that the rights and remedies of Secured
Parties with respect to their respective security interests in the Trademark
Collateral made and granted hereby are more fully set forth in the Security
Agreement, the terms and provisions of which are incorporated by reference
herein as if fully set forth herein.
     5. AUTHORIZATION TO SUPPLEMENT. If any Grantor shall obtain rights to any
new trademarks, the provisions of this Trademark Security Agreement shall
automatically apply thereto. To the extent required under the Security
Agreement, Grantors shall give prompt notice in writing to Secured Parties with
respect to any such new trademarks or renewal or extension of any trademark
registration. Without limiting each Grantor’s obligations under this Section 5,
Grantors hereby authorize Secured Parties unilaterally to modify this Agreement
by amending Schedule I to include any such new trademark rights of Grantors.
Notwithstanding the foregoing, no failure to so modify this Trademark Security
Agreement or amend Schedule I shall in any way affect, invalidate or detract
from any Secured Party’s continuing security interest in all Collateral, whether
or not listed on Schedule I.
     6. COUNTERPARTS. This Trademark Security Agreement may be executed in two
or more identical counterparts, all of which shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party. In the event that any signature is
delivered by facsimile transmission or by an e-mail which contains a portable
document format (.pdf) file of an executed signature page, such

2

--------------------------------------------------------------------------------

 

signature page shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such signature page were an original thereof. In proving this
Trademark Security Agreement or any other Transaction Document in any judicial
proceedings, it shall not be necessary to produce or account for more than one
such counterpart signed by the party against whom such enforcement is sought.
     7. CONSTRUCTION. Unless the context of this Trademark Security Agreement or
any other Transaction Document clearly requires otherwise, references to the
plural include the singular, references to the singular include the plural, the
terms “includes” and “including” are not limiting, and the term “or” has, except
where otherwise indicated, the inclusive meaning represented by the phrase
“and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and similar terms
in this Trademark Security Agreement or any other Transaction Document refer to
this Trademark Security Agreement or such other Transaction Document, as the
case may be, as a whole and not to any particular provision of this Trademark
Security Agreement or such other Transaction Document, as the case may be.
Section, subsection, clause, schedule, and exhibit references herein are to this
Agreement unless otherwise specified. Any reference in this Trademark Security
Agreement or in any other Transaction Document to any agreement, instrument, or
document shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, joinders, and supplements,
thereto and thereof, as applicable (subject to any restrictions on such
alterations, amendments, changes, extensions, modifications, renewals,
replacements, substitutions, joinders, and supplements set forth herein). Any
reference herein to any Person shall be construed to include such Person’s
permitted successors and permitted assigns. Any requirement of a writing
contained herein or in any other Transaction Document shall be satisfied by the
transmission of a Record and any Record so transmitted shall constitute a
representation and warranty as to the accuracy and completeness of the
information contained therein. The language used in this Trademark Security
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied against
any party. For clarification purposes, the Recitals are part of this Trademark
Security Agreement.
[signature pages follow]

3

--------------------------------------------------------------------------------

 

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

                   GRANTORS:   CONVERTED ORGANICS INC., a Delaware corporation
 
           
 
  By:        
 
  Name:  
 
   
 
           
 
  Title:        
 
           
 
                [SUBSIDIARIES]

 

--------------------------------------------------------------------------------

 

SCHEDULE I
to
TRADEMARK SECURITY AGREEMENT
Trademark Registrations/Applications

                              Application/     Grantor   Country   Mark  
Registration No.   App/Reg Date                  

Trade Names
Common Law Trademarks
Trademarks Not Currently In Use
Trademark Licenses

 

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EXHIBIT D
FORM OF GUARANTY
See attached.