EXHIBIT 10.4
 
Security Agreement
 
This Security Agreement (the “Agreement”) is dated as of April 29, 2010, between
CTI Industries Corporation, an Illinois corporation (the “Debtor”), with its
mailing address as set forth in Section 12(b) hereof, and Harris N.A., a
national banking association (the “Secured Party”), with its mailing address as
set forth in Section 12(b) hereof.
 
Preliminary Statement
 
A.    The Debtor has requested that the Secured Party from time to time extend
credit or otherwise make financial accommodations available to or for the
account of the Debtor, including, without limitation, pursuant to the terms of
that certain Credit Agreement dated as of April 29, 2010, between Debtor and
Secured Party, as the same may from time to time be amended, modified or
restated (the “Credit Agreement”; capitalized terms used herein and not
otherwise defined shall have the meanings given such terms in the Credit
Agreement).
 
B.    As a condition to extending credit or otherwise making financial
accommodations available to or for the account of the Debtor, the Secured Party
requires, among other things, that the Debtor grant the Secured Party a security
interest in the Debtor’s personal property described herein subject to the terms
and conditions hereof.
 
Now, Therefore, in consideration of the benefits accruing to the Debtor, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
 
Section 1.    Grant of Security Interest.  The Debtor hereby grants to the
Secured Party a lien on and security interest in, and acknowledges and agrees
that the Secured Party has and shall continue to have a continuing lien on and
security interest in, all right, title, and interest of the Debtor, whether now
owned or existing or hereafter created, acquired, or arising, in and to all of
the following:
 
(a)      Accounts (including Health-Care-Insurance Receivables, if any);
 
(b)      Chattel Paper;
 
(c)      Instruments (including Promissory Notes);
 
(d)      Documents;
 
(e)      General Intangibles (including Payment Intangibles and Software,
patents, trademarks, tradestyles, copyrights, and all other intellectual
property rights, including all applications, registration, and licenses
therefor, and all goodwill of the business connected therewith or represented
thereby);
 
 
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(f)       Letter-of-Credit Rights;
 
(g)      Supporting Obligations;
 
(h)      Deposit Accounts;
 
(i)      Investment Property (including certificated and uncertificated
Securities, Securities Accounts, Security Entitlements, Commodity Accounts, and
Commodity Contracts);
 
(j)       Inventory;
 
(k)      Equipment (including all software, whether or not the same constitutes
embedded software, used in the operation thereof);
 
(l)       Fixtures;
 
(m)     Commercial Tort Claims (as described on Schedule G hereto or on one or
more supplements to this Agreement);
 
(n)      Rights to merchandise and other Goods (including rights to returned or
repossessed Goods and rights of stoppage in transit) which is represented by,
arises from, or relates to any of the foregoing;
 
(o)     Monies, personal property, and interests in personal property of the
Debtor of any kind or description now held by the Secured Party or at any time
hereafter transferred or delivered to, or coming into the possession, custody,
or control of, the Secured Party, or any agent or affiliate of the Secured
Party, whether expressly as collateral security or for any other purpose
(whether for safekeeping, custody, collection or otherwise), and all dividends
and distributions on or other rights in connection with any such property;
 
(p)     Supporting evidence and documents relating to any of the above-described
property, including, without limitation, computer programs, disks, tapes and
related electronic data processing media, and all rights of the Debtor to
retrieve the same from third parties, written applications, credit information,
account cards, payment records, correspondence, delivery and installation
certificates, invoice copies, delivery receipts, notes, and other evidences of
indebtedness, insurance certificates and the like, together with all books of
account, ledgers, and cabinets in which the same are reflected or maintained;
 
(q)     Accessions and additions to, and substitutions and replacements of, any
and all of the foregoing; and
 
(r)      Proceeds and products of the foregoing, and all insurance of the
foregoing and proceeds thereof;
 
 
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all of the foregoing being herein sometimes referred to as the
“Collateral”.   All terms which are used in this Agreement which are defined in
the Uniform Commercial Code of the State of Illinois as in effect from time to
time (“UCC”) shall have the same meanings herein as such terms are defined in
the UCC, unless this Agreement shall otherwise specifically provide.  For
purposes of this Agreement, the term "Receivables" means all rights to the
payment of a monetary  obligation, whether or not earned by performance, and
whether evidenced by an Account, Chattel Paper, Instrument, General Intangible,
or otherwise.
 
Section 2.    Obligations Hereby Secured.  The lien and security interest herein
granted and provided for is made and given to secure, and shall secure, the
payment and performance of (a) any and all indebtedness, obligations and
liabilities of whatsoever kind and nature of the Debtor to the Secured Party
(whether arising before or after the filing of a petition in bankruptcy),
whether direct or indirect, absolute or contingent, due or to become due, and
whether now existing or hereafter arising and howsoever held, evidenced or
acquired, and whether several, joint or joint and several and (b) any and all
expenses and charges, legal or otherwise, suffered or incurred by the Secured
Party in collecting or enforcing any of such indebtedness, obligations or
liabilities or in realizing on or protecting or preserving any security
therefor, including, without limitation, the lien and security interest granted
hereby (all of the foregoing being hereinafter referred to as the
“Obligations”).
 
Section 3.    Covenants, Agreements, Representations and Warranties.  The Debtor
hereby covenants and agrees with, and represents and warrants to, the Secured
Party that:
 
(a)    The Debtor is a corporation duly organized and validly existing in good
standing under the laws of the jurisdiction of its organization. The Debtor
shall not change its jurisdiction of organization without the Secured Party’s
prior written consent.  The Debtor is the sole and lawful owner of the
Collateral, and has full right, power and authority to enter into this Security
Agreement and to perform each and all of the matters and things herein provided
for.  The execution and delivery of this Security Agreement, and the observance
and performance of each of the matters and things herein set forth, will not
(i) contravene or constitute a default under any provision of law or any
judgment, injunction, order or decree binding upon the Debtor or any provision
of the Debtor’s organizational documents (e.g., charter, articles or certificate
of incorporation and by-laws, articles or certificate of formation and limited
liability company operating agreement, partnership agreement, or similar
organizational documents) or any covenant, indenture or agreement of or
affecting the Debtor or any of its property or (ii) result in the creation or
imposition of any lien or encumbrance on any property of the Debtor except for
the lien and security interest granted to the Secured Party hereunder.  The
Debtor’s organizational registration number (if any) is 61786341.
 
(b)    The Debtor’s chief executive office and principal place of business is
at, and the Debtor keeps and shall keep all of its books and records relating to
Receivables only at, 22160 North Pepper Road, Barrington, Illinois; and the
Debtor has no other executive offices or places of business other than those
listed under Item 1 on Schedule A.  The Collateral is and shall remain in the
Debtor’s possession or control at the locations listed under Item 2 on
Schedule A attached hereto (collectively, the “Permitted Collateral Locations”),
except for (i) Collateral which in the ordinary course of the Debtor’s business
is in transit between Permitted Collateral Locations and (ii) Collateral
aggregating less than $50,000 in fair market value outstanding at any one
time.   If for any reason any Collateral is at any time kept or located at a
location other than a Permitted Collateral Location, the Secured Party shall
nevertheless have and retain a lien on and security interest therein.  The
Debtor owns and shall at all times own all Permitted Collateral Locations,
except to the extent otherwise disclosed under Item 2 on Schedule A.  The Debtor
shall not move its chief executive office or maintain a place of business at a
location other than those specified under Item 1 on Schedule A or permit the
Collateral to be located at a location other than those specified under Item 2
on Schedule A, in each case without first providing the Secured Party 30 days’
prior written notice of the Debtor’s intent to do so; provided that the Debtor
shall at all times maintain its chief executive office and, unless otherwise
specifically agreed to in writing by the Secured Party, Permitted Collateral
Locations in the United States of America and, with respect to any new chief
executive office or place of business or location of Collateral, the Debtor
shall have taken all action requested by the Secured Party to maintain the lien
and security interest of the Secured Party in the Collateral at all times fully
perfected and in full force and effect.
 
 
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(c)    The Debtor’s legal name and jurisdiction of organization is correctly set
forth in the first paragraph of this Agreement.  The Debtor has not transacted
business at any time during the immediately preceding five-year period, and does
not currently transact business, under any other legal names or trade names
other than the prior legal names and trade names (if any) set forth on
Schedule B attached hereto.  The Debtor shall not change its legal name or
transact business under any other trade name without first giving 30 days’ prior
written notice of its intent to do so to the Secured Party.
 
(d)    The Collateral and every part thereof is and shall be free and clear of
all security interests, liens (including, without limitation, mechanics’,
laborers’ and statutory liens), attachments, levies, and encumbrances of every
kind, nature and description, whether voluntary or involuntary, except for the
lien and security interest of the Secured Party therein and as otherwise
provided on Schedule C attached hereto.  The Debtor shall warrant and defend the
Collateral against any claims and demands of all persons at any time claiming
the same or any interest in the Collateral adverse to the Secured Party.
 
(e)    The Debtor shall promptly pay when due all taxes, assessments and
governmental charges and levies upon or against the Debtor or any of the
Collateral, in each case before the same become delinquent and before penalties
accrue thereon, unless and to the extent that the same are being contested in
good faith by appropriate proceedings which prevent foreclosure or other
realization upon any of the Collateral and preclude interference with the
operation of the Debtor’s business in the ordinary course, and the Debtor shall
have established adequate reserves therefor.
 
(f)    The Debtor shall not use, manufacture, sell, or distribute any Collateral
in violation of any statute, ordinance, or other governmental requirement.  The
Debtor shall not waste or destroy the Collateral or any part thereof or be
negligent in the care or use of any Collateral.  The Debtor shall perform its
obligations under any contract or other agreement constituting part of the
Collateral, it being understood and agreed that the Secured Party has no
responsibility to perform such obligations.
 
(g)    Subject to Sections 4(b), 6(b), 6(c), and 7(c) hereof, the Debtor shall
not, without the Secured Party’s prior written consent, sell, assign, mortgage,
lease or otherwise dispose of the Collateral or any interest therein.
 
 
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(h)    The Debtor shall at all times insure the Collateral consisting of
tangible personal property against such risks and hazards as other persons
similarly situated insure against, and including in any event loss or damage by
fire, theft, burglary, pilferage, loss in transit and such other hazards as the
Secured Party may specify.  All insurance required hereby shall be maintained in
amounts and under policies and with insurers reasonably acceptable to the
Secured Party, and all such policies shall contain loss payable clauses naming
the Secured Party as loss payee as its interest may appear (and, if the Secured
Party requests, naming the Secured Party as an additional insured therein) in a
form reasonably acceptable to the Secured Party.  All premiums on such insurance
shall be paid by the Debtor.  Certificates of insurance evidencing compliance
with the foregoing and, at the Secured Party’s request, the policies of such
insurance shall be delivered by the Debtor to the Secured Party.  All insurance
required hereby shall provide that any loss shall be payable to the Secured
Party notwithstanding any act or negligence of the Debtor, shall provide that no
cancellation thereof shall be effective until at least 30 days after receipt by
the Debtor and the Secured Party of written notice thereof, and shall be
reasonably satisfactory to the Secured Party in all other respects.  In case of
any material loss, damage to, or destruction of the Collateral or any part
thereof, the Debtor shall promptly give written notice thereof to the Secured
Party generally describing the nature and extent of such damage or
destruction.  In case of any loss, damage to or destruction of the Collateral or
any part thereof, the Debtor, whether or not the insurance proceeds, if any,
received on account of such damage or destruction shall be sufficient for that
purpose, at the Debtor’s cost and expense, shall promptly repair or replace the
Collateral so lost, damaged, or destroyed, except to the extent such Collateral,
prior to its loss, damage, or destruction, had become uneconomical, obsolete or
worn out and is not necessary for or of importance to the proper conduct of the
Debtor’s business in the ordinary course.  In the event the Debtor shall receive
any proceeds of such insurance, the Debtor shall immediately pay over such
proceeds to the Secured Party.  The Debtor hereby authorizes the Secured Party,
at the Secured Party’s option, to adjust, compromise and settle any losses under
any insurance afforded at any time during the existence of any Event of Default
or any other event or condition which with the lapse of time or the giving of
notice, or both, would constitute an Event of Default, and the Debtor does
hereby irrevocably constitute the Secured Party, and each of its nominees,
officers, agents, attorneys, and any other person whom the Secured Party may
designate, as the Debtor’s attorneys-in-fact, with full power and authority to
effect such adjustment, compromise and/or settlement and to endorse any drafts
drawn by an insurer of the Collateral or any part thereof and to do everything
necessary to carry out such purposes and to receive and receipt for any unearned
premiums due under policies of such insurance.  Unless the Secured Party elects
to adjust, compromise or settle losses as aforesaid, any adjustment, compromise
and/or settlement of any losses under any insurance shall be made by the Debtor
subject to final approval of the Secured Party (regardless of whether or not an
Event of Default shall have occurred) in the case of losses exceeding
$100,000.  Net insurance proceeds received by the Secured Party under the
provisions hereof or under any policy of insurance covering the Collateral or
any part thereof shall be applied to the reduction of the Obligations (whether
or not then due); provided, however, that the Secured Party may in its sole
discretion release any or all such insurance proceeds to the Debtor.  All
insurance proceeds shall be subject to the lien and security interest of the
Secured Party hereunder.
 
Unless the Debtor provides the Secured Party with evidence of the insurance
coverage required by this Security Agreement, the Secured Party may purchase
insurance at the Debtor’s expense to protect the Secured party’s interests in
the Collateral.  This insurance may, but need not, protect the debtor’s
interests in the Collateral.  The coverage purchased by the Secured Party may
not pay any claims that the Debtor makes or any claim that is made against the
Debtor in connection with the Collateral.  The Debtor may later cancel any such
insurance purchased by the Secured Party, but only after providing the Secured
Party with evidence that the Debtor has obtained insurance as required by this
Security Agreement.  If the Secured Party purchases insurance for the
Collateral, the Debtor will be responsible for the costs of that insurance,
including interest and any other charges that the Secured Party may impose in
connection with the placement of the insurance, until the effective date of the
cancellation or expiration of the insurance.  The costs of the insurance may be
added to the Obligations secured hereby.  The costs of the insurance may be more
than the cost of insurance the Debtor may be able to obtain on its own.
 
 
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(i)     The Debtor shall at all times allow the Secured Party and its
representatives free access to and right of inspection of the Collateral;
provided that, unless the Secured Party believes in good faith an Event of
Default, or any other event or condition which with the lapse of time or the
giving of notice, or both, would constitute an Event of Default, exists, any
such access or inspection shall only be required during the Debtor’s normal
business hours.
 
(j)     If any Collateral is in the possession or control of any of the Debtor’s
agents or processors and the Secured Party so requests, the Debtor agrees to
notify such agents or processors in writing of the Secured Party’s security
interest therein and instruct them to hold all such Collateral for the Secured
Party’s account and subject to the Secured Party’s instructions.  The Debtor
shall, upon the request of the Secured Party, authorize and instruct all bailees
and other parties, if any, at any time processing, labeling, packaging, holding,
storing, shipping or transferring all or any part of the Collateral to permit
the Secured Party and its representatives to examine and inspect any of the
Collateral then in such party’s possession and to verify from such party’s own
books and records any information concerning the Collateral or any part thereof
which the Secured Party or its representatives may seek to verify.  As to any
premises not owned by the Debtor wherein any of the Collateral is located, the
Debtor shall, at the Secured Party’s request, cause each party having any right,
title or interest in, or lien on, any of such premises to enter into an
agreement (any such agreement to contain a legal description of such premises)
whereby such party disclaims any right, title and interest in, and lien on, the
Collateral and allows the removal of such Collateral by the Secured Party and is
otherwise in form and substance acceptable to the Secured Party; provided,
however, that no such agreement need be obtained with respect to any one
location wherein the value of the Collateral as to which such agreement has not
been obtained aggregates less than $50,000 at any one time.
 
(k)    The Debtor agrees from time to time to deliver to the Secured Party such
evidence of the existence, identity and location of the Collateral and of its
availability as collateral security pursuant hereto (including, without
limitation, schedules describing all Receivables created or acquired by the
Debtor, copies of customer invoices or the equivalent and original shipping or
delivery receipts for all merchandise and other goods sold or leased or services
rendered, together with the Debtor’s warranty of the genuineness thereof, and
reports stating the book value of Inventory and Equipment by major category and
location), in each case as the Secured Party may request.  The Secured Party
shall have the right to verify all or any part of the Collateral in any manner,
and through any medium, which the Secured Party considers appropriate
(including, without limitation, the verification of Collateral by use of a
fictitious name), and the Debtor agrees to furnish all assistance and
information, and perform any acts, which the Secured Party may require in
connection therewith.  The Debtor shall promptly notify the Secured Party of any
Collateral which the Debtor has determined to have been rendered obsolete,
stating the prior book value of such Collateral, its type and location.
 
(l)     The Debtor shall comply with the terms and conditions of all leases,
easements, right-of-way agreements and other similar agreements binding upon the
Debtor or affecting the Collateral or any part thereof, and all orders,
ordinances, laws and statutes of any city, state or other governmental entity,
department, or agency having jurisdiction with respect to the premises wherein
such Collateral is located or the conduct of business thereon.
 
 
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(m)    Schedule D attached hereto contains a true, complete, and current listing
of all patents, trademarks, tradestyles, copyrights, and other intellectual
property rights (including all registrations and applications therefor) owned by
the Debtor as of the date hereof that are registered with any governmental
authority.  The Debtor shall promptly notify the Secured Party in writing of any
additional intellectual property rights acquired or arising after the date
hereof, and shall submit to the Secured Party a supplement to Schedule D to
reflect such additional rights (provided the Debtor’s failure to do so shall not
impair the Secured Party’s security interest therein).  The Debtor owns or
possesses rights to use all franchises, licenses, patents, trademarks, trade
names, tradestyles, copyrights, and rights with respect to the foregoing which
are required to conduct its business.  No event has occurred which permits, or
after notice or lapse of time or both would permit, the revocation or
termination of any such rights, and the Debtor is not liable to any person for
infringement under applicable law with respect to any such rights as a result of
its business operations.
 
(n)    Schedule G attached hereto contains a true, complete and current listing
of all Commercial Tort Claims held by the Debtor as of the date hereof, each
described by reference to the specific incident given rise to the claim.  The
Debtor agrees to execute and deliver to the Secured Party a supplement to this
Agreement in the form attached hereto as Schedule H, or in such other form
acceptable to the Secured Party, promptly upon becoming aware of any other
Commercial Tort Claim held or maintained by the Debtor arising after the date
hereof (provided the Debtor’s failure to do so shall not impair the Secured
Party’s security interest therein).
 
(o)    The Debtor agrees to execute and deliver to the Secured Party such
further agreements, assignments, instruments, and documents and to do all such
other things as the Secured Party may deem necessary or appropriate to assure
the Secured Party its lien and security interest hereunder, including, without
limitation, (i) such financing statements, and amendments thereof or supplements
thereto, and such other instruments and documents as the Secured Party may from
time to time require in order to comply with the UCC and any other applicable
law, (ii) such agreements with respect to patents, trademarks, copyrights, and
similar intellectual property rights as the Secured Party may from time to time
require to comply with the filing requirements of the United States Patent and
Trademark Office and the United States Copyright Office, and (iii) such control
agreements with respect to Deposit Accounts, Investment Property,
Letter-of-Credit Rights, and electronic Chattel Paper, and to cause the relevant
depository institutions, financial intermediaries, and issuers to execute and
deliver such control agreements, as the Secured Party may from time to time
require.  The Debtor hereby agrees that a carbon, photographic or other
reproduction of this Security Agreement or any such financing statement is
sufficient for filing as a financing statement by the Secured Party without
notice thereof to the Debtor wherever the Secured Party in its sole discretion
desires to file the same.  The Debtor hereby authorizes the Secured Party to
file any and all financing statements covering the Collateral or any part
thereof as the Secured Party may require, including financing statements
describing the Collateral as “all assets” or “all personal property” or words of
like meaning.  The Secured Party may order lien searches from time to time
against the Debtor and the Collateral, and the Debtor shall promptly reimburse
the Secured Party for all costs and expenses incurred in connection with such
lien searches.  In the event for any reason the law of any jurisdiction other
than Illinois becomes or is applicable to the Collateral or any part thereof, or
to any of the Obligations, the Debtor agrees to execute and deliver all such
instruments and documents and to do all such other things as the Secured Party
in its sole discretion deems necessary or appropriate to preserve, protect, and
enforce the lien and security interest of the Secured Party under the law of
such other jurisdiction.  The Debtor agrees to mark its books and records to
reflect the lien and security interest of the Secured Party in the Collateral.
    
 
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(p)    On failure of the Debtor to perform any of the covenants and agreements
herein contained, the Secured Party may, at its option, perform the same and in
so doing may expend such sums as the Secured Party may deem advisable in the
performance thereof, including, without limitation, the payment of any insurance
premiums, the payment of any taxes, liens and encumbrances, expenditures made in
defending against any adverse claims, and all other expenditures which the
Secured Party may be compelled to make by operation of law or which the Secured
Party may make by agreement or otherwise for the protection of the security
hereof.  All such sums and amounts so expended shall be repayable by the Debtor
immediately without notice or demand, shall constitute additional Obligations
secured hereunder and shall bear interest from the date said amounts are
expended at the rate per annum (computed on the basis of a 360-day year for the
actual number of days elapsed) determined by adding 2% to the per annum interest
rate applicable to Base Rate Portions under the Credit Agreement from time to
time (such rate per annum as so determined being hereinafter referred to as the
“Default Rate”).  No such performance of any covenant or agreement by the
Secured Party on behalf of the Debtor, and no such advancement or expenditure
therefor, shall relieve the Debtor of any default under the terms of this
Security Agreement or in any way obligate the Secured Party to take any further
or future action with respect thereto.  The Secured Party, in making any payment
hereby authorized, may do so according to any bill, statement or estimate
procured from the appropriate public office or holder of the claim to be
discharged without inquiry into the accuracy of such bill, statement or estimate
or into the validity of any tax assessment, sale, forfeiture, tax lien or title
or claim.  The Secured Party, in performing any act hereunder, shall be the sole
judge of whether the Debtor is required to perform same under the terms of this
Security Agreement.  The Secured Party is hereby authorized to charge any
account of the Debtor maintained with the Secured Party for the amount of such
sums and amounts so expended.
 
Section 4.    Special Provisions Re: Receivables.
 
(a)     As of the time any Receivable becomes subject to the security interest
provided for hereby, and at all times thereafter, the Debtor shall be deemed to
have warranted as to each and all of such Receivables that all warranties of the
Debtor set forth in this Security Agreement are true and correct with respect to
each such Receivable; that each Receivable and all papers and documents relating
thereto are genuine and in all respects what they purport to be; that each
Receivable is valid and subsisting; that no such Receivable is evidenced by any
Instrument or Chattel Paper unless such Instrument or Chattel Paper has
theretofore been endorsed by the Debtor and delivered to the Secured Party
(except to the extent the Secured Party specifically requests or authorizes the
Debtor not to do so with respect to any such Instrument or Chattel Paper); that
no surety bond was required or given in connection with such Receivable or the
contracts or purchase orders out of which the same arose; that the amount of the
Receivable represented as owing is the correct amount actually and
unconditionally owing, except for normal cash discounts on normal trade terms in
the ordinary course of business; and that the amount of such Receivable
represented as owing is not disputed and is not subject to any set-offs,
credits, deductions or countercharges other than those arising in the ordinary
course of the Debtor’s business which are disclosed to the Secured Party in
writing promptly upon the Debtor becoming aware thereof.  Without limiting the
foregoing, if any Receivable arises out of a contract with the United States of
America, or any state or political subdivision thereof, or any department,
agency or instrumentality of any of the foregoing, the Debtor agrees to notify
the Secured Party and, at the Secured Party’s request, execute whatever
instruments and documents are required by the Secured Party in order that such
Receivable shall be assigned to the Secured Party and that proper notice of such
assignment shall be given under the federal Assignment of Claims Act (or any
successor statute) or any similar state or local statute, as the case may be.
 
 
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(b)    Unless and until an Event of Default occurs, any merchandise or other
goods which are returned by a customer or account debtor or otherwise recovered
may be resold by the Debtor in the ordinary course of its business as presently
conducted in accordance with Section 6(b) hereof; and, during the existence of
any Event of Default, such merchandise and other goods shall be set aside at the
request of the Secured Party and held by the Debtor as trustee for the Secured
Party and shall remain part of the Secured Party’s Collateral.  Unless and until
an Event of Default occurs, the Debtor may settle and adjust disputes and claims
with its customers and account debtors, handle returns and recoveries and grant
discounts, credits and allowances in the ordinary course of its business as
presently conducted for amounts and on terms which the Debtor in good faith
considers advisable; and, during the existence of any Event of Default, at the
Secured Party’s request, the Debtor shall notify the Secured Party promptly of
all returns and recoveries and, on the Secured Party’s request, deliver any such
merchandise or other goods to the Secured Party.  During the existence of any
Event of Default, at the Secured Party’s request, the Debtor shall also notify
the Secured Party promptly of all disputes and claims and settle or adjust them
at no expense to the Secured Party, but no discount, credit or allowance other
than on normal trade terms in the ordinary course of business as presently
conducted shall be granted to any customer or account debtor and no returns of
merchandise or other goods shall be accepted by the Debtor without the Secured
Party’s consent.  The Secured Party may, at all times during the existence of
any Event of Default, settle or adjust disputes and claims directly with
customers or account debtors for amounts and upon terms which the Secured Party
considers advisable.
 
(c)     Unless delivered to the Secured Party or its agent, all tangible Chattel
Paper and Instruments shall contain a legend acceptable to the Secured Party
indicating that such Chattel Paper or Instrument is subject to the security
interest of the Secured Party contemplated by this Security Agreement.
 
Section 5.    Collection of Receivables.
 
(a)    Except as otherwise provided in this Security Agreement, the Debtor shall
make collection of all Receivables and may use the same to carry on its business
in accordance with sound business practice and otherwise subject to the terms
hereof.
 
(b)    Whether or not any Event of Default has occurred and whether or not the
Secured Party has exercised any or all of its rights under other provisions of
this Section 5, in the event the Secured Party requests the Debtor to do so:
 
(i)     all Instruments and Chattel Paper at any time constituting part of the
Receivables or any other Collateral (including any postdated checks) shall, upon
receipt by the Debtor, be immediately endorsed to and deposited with the Secured
Party; and/or
 
 
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(ii)    the Debtor shall instruct all customers and account debtors to remit all
payments in respect of Receivables or any other Collateral to a lockbox or
lockboxes under the sole custody and control of the Secured Party and which are
maintained at post office(s) in Chicago, Illinois selected by the Secured Party.
 
(c)    Whether or not any Event of Default has occurred and whether or not the
Secured Party has exercised any or all of its rights under other provisions of
this Section 5, the Secured Party or its designee may notify the Debtor’s
customers and account debtors at any time that Receivables or any other
Collateral have been assigned to the Secured Party or of the Secured Party’s
security interest therein, and either in its own name, or the Debtor’s name, or
both, demand, collect (including, without limitation, through a lockbox
analogous to that described in Section 5(b)(ii) hereof), receive, receipt for,
sue for, compound and give acquittance for any or all amounts due or to become
due on Receivables or any other Collateral, and in the Secured Party’s
discretion file any claim or take any other action or proceeding which the
Secured Party may deem necessary or appropriate to protect or realize upon the
security interest of the Secured Party in the Receivables or any other
Collateral.
 
(d)    Any proceeds of Receivables or other Collateral transmitted to or
otherwise received by the Secured Party pursuant to any of the provisions of
Sections 5(b) or 5(c) hereof may be handled and administered by the Secured
Party in and through a remittance account at the Secured Party, and the Debtor
acknowledges that the maintenance of such remittance account by the Secured
Party is solely for the Secured Party’s convenience and that the Debtor does not
have any right, title or interest in such remittance account or any amounts at
any time standing to the credit thereof. The Secured Party may, after the
occurrence and during the continuation of any Event of Default or of any event
or condition which with the lapse of time or the giving of notice, or both,
would constitute an Event of Default, apply all or any part of any proceeds of
Receivables or other Collateral received by it from any source to the payment of
the Obligations (whether or not then due and payable), such applications to be
made in such amounts, in such manner and order and at such intervals as the
Secured Party may from time to time in its discretion determine, but not less
often than once each week.  The Secured Party need not apply or give credit for
any item included in proceeds of Receivables or other Collateral until the
Secured Party has received final payment therefor at its office in cash or final
solvent credits current in Chicago, Illinois, acceptable to the Secured Party as
such.  However, if the Secured Party does give credit for any item prior to
receiving final payment therefor and the Secured Party fails to receive such
final payment or an item is charged back to the Secured Party for any reason,
the Secured Party may at its election in either instance charge the amount of
such item back against the remittance account or any account of the Debtor
maintained with the Secured Party, together with interest thereon at the Default
Rate.  Concurrently with each transmission of any proceeds of Receivables or
other Collateral to the remittance account, the Debtor shall furnish the Secured
Party with a report in such form as the Secured Party shall require identifying
the particular Receivable or other Collateral from which the same arises or
relates.  Unless and until an Event of Default or an event or condition which
with the lapse of time or the giving of notice, or both, would constitute an
Event of Default shall have occurred and be continuing, the Secured Party will
release proceeds of Collateral which the Secured Party has not applied to the
Obligations as provided above from the remittance account from time to time
promptly after receipt thereof.  The Debtor hereby indemnifies the Secured Party
from and against all liabilities, damages, losses, actions, claims, judgments,
costs, expenses, charges and reasonable attorneys’ fees suffered or incurred by
the Secured Party because of the maintenance of the foregoing arrangements;
provided, however, that the Debtor shall not be required to indemnify the
Secured Party for any of the foregoing to the extent they arise solely from the
gross negligence or willful misconduct of the Secured Party.  The Secured Party
shall have no liability or responsibility to the Debtor for accepting any check,
draft or other order for payment of money bearing the legend “payment in full”
or words of similar import or any other restrictive legend or endorsement
whatsoever or be responsible for determining the correctness of any remittance.
 
 
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Section 6.    Special Provisions Re:  Inventory and Equipment.
 
(a)     The Debtor shall at its own cost and expense maintain, keep and preserve
the Inventory in good and merchantable condition and keep and preserve the
Equipment in good repair, working order and condition, ordinary wear and tear
excepted, and, without limiting the foregoing, make all necessary and proper
repairs, replacements and additions to the Equipment so that the efficiency
thereof shall be fully preserved and maintained.
 
(b)    The Debtor may, until an Event of Default has occurred and is continuing
and thereafter until otherwise notified by the Secured Party, use, consume and
sell the Inventory in the ordinary course of its business, but a sale in the
ordinary course of business shall not under any circumstance include any
transfer or sale in satisfaction, partial or complete, of a debt owing by the
Debtor.
 
(c)    The Debtor may, until an Event of Default has occurred and is continuing
and thereafter until otherwise notified by the Secured Party, sell Equipment to
the extent permitted under the Credit Agreement.
 
(d)    As of the time any Inventory or Equipment becomes subject to the security
interest provided for hereby and at all times thereafter, the Debtor shall be
deemed to have warranted as to any and all of such Inventory and Equipment that
all warranties of the Debtor set forth in this Security Agreement are true and
correct with respect to such Inventory and Equipment; that all of such Inventory
and Equipment is located at a location set forth pursuant to Section 3(b)
hereof; and that, in the case of Inventory, such Inventory is new and unused and
in good and merchantable condition.  The Debtor warrants and agrees that no
Inventory is or will be consigned to any other person without the Secured
Party’s prior written consent.
 
(e)    Upon the Secured Party’s request, the Debtor shall at its own cost and
expense cause the lien of the Secured Party in and to any portion of the
Collateral subject to a certificate of title law to be duly noted on such
certificate of title or to be otherwise filed in such manner as is prescribed by
law in order to perfect such lien and shall cause all such certificates of title
and evidences of lien to be deposited with the Secured Party.
 
(f)     Except for Equipment from time to time located on the real estate
described on Schedule E attached hereto and as otherwise disclosed to the
Secured Party in writing, none of the Equipment is or will be attached to real
estate in such a manner that the same may become a fixture.
 
(g)     If any of the Inventory is at any time evidenced by a document of title,
such document shall be promptly delivered by the Debtor to the Secured Party
except to the extent the Secured Party specifically requests the Debtor not to
do so with respect to any such document.
 
 
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Section 7.    Special Provisions Re:  Investment Property and Deposits.
 
(a)     Unless and until an Event of Default has occurred and is continuing and
thereafter until notified to the contrary by the Secured Party pursuant to
Section 9(d) hereof:
 
(i)     the Debtor shall be entitled to exercise all voting and/or consensual
powers pertaining to the Investment Property or any part thereof, for all
purposes not inconsistent with the terms of this Security Agreement or any other
document evidencing or otherwise relating to any Obligations; and
 
(ii)     the Debtor shall be entitled to receive and retain all cash dividends
paid upon or in respect of the Investment Property.
 
(b)    All Investment Property (including all securities, certificated or
uncertificated, securities accounts, and commodity accounts) of the Debtor on
the date hereof is listed and identified on Schedule F attached hereto and made
a part hereof. The Debtor shall promptly notify the Secured Party of any other
Investment Property acquired or maintained by the Debtor after the date hereof,
and shall submit to the Secured Party a supplement to Schedule F to reflect such
additional rights (provided the Debtor’s failure to do so shall not impair the
Secured Party’s security interest therein).  Certificates for all certificated
securities now or at any time constituting Investment Property shall be promptly
delivered by the Debtor to the Secured Party duly endorsed in blank for transfer
or accompanied by an appropriate assignment or assignments or an appropriate
undated stock power or powers, in every case sufficient to transfer title
thereto including, without limitation, all stock received in respect of a stock
dividend or resulting from a split-up, revision or reclassification of the
Investment Property or any part thereof or received in addition to, in
substitution of or in exchange for the Investment Property or any part thereof
as a result of a merger, consolidation or otherwise.  With respect to any
uncertificated securities or any Investment Property held by a securities
intermediary, commodity intermediary, or other financial intermediary of any
kind, unless the Secured Party requests otherwise, the Debtor shall execute and
deliver, and shall cause any such issuer or intermediary to execute and deliver,
an agreement among the Debtor, the Secured Party, and such issuer or
intermediary in form and substance reasonably satisfactory to the Secured Party
which provides, among other things, for the issuer’s or intermediary’s agreement
that it shall comply with entitlement orders, and apply any value distributed on
account of any such Investment Property, as directed by the Secured Party
without further consent by the Debtor.  The Secured Party may at any time, after
the occurrence of an Event of Default or an event or condition which with the
lapse of time or the giving of notice, or both, would constitute an Event of
Default, cause to be transferred into its name or the name of its nominee or
nominees all or any part of the Investment Property hereunder.
 
(c)     Unless and until an Event of Default, or an event or condition which
with the lapse of time or the giving of notice, or both, would constitute an
Event of Default, has occurred and is continuing, the Debtor may sell or
otherwise dispose of any Investment Property, provided that the Debtor shall not
sell or otherwise dispose of any capital stock of or other equity interests in
any direct or indirect subsidiary without the prior written consent of the
Secured Party.  After the occurrence and during the continuation of any Event of
Default or of any event or condition which with the lapse of time or the giving
of notice, or both, would constitute an Event of Default, the Debtor shall not
sell all or any part of the Investment Property without the prior written
consent of the Secured Party.
 
 
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(d)    The Debtor represents that on the date of this Security Agreement, none
of the Investment Property consists of margin stock (as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System) except to
the extent the Debtor has delivered to the Secured Party a duly executed and
completed Form U-1 with respect to such stock.  If at any time the Investment
Property or any part thereof consists of margin stock, the Debtor shall promptly
so notify the Secured Party and deliver to the Secured Party a duly executed and
completed Form U-1 and such other instruments and documents reasonably requested
by the Secured Party in form and substance satisfactory to the Secured Party.
 
(e)     Notwithstanding anything to the contrary contained herein, in the event
any Investment Property is subject to the terms of a separate security agreement
in favor of the Secured Party, the terms of such separate security agreement
shall govern and control unless otherwise agreed to in writing by the Secured
Party.
 
(f)     All Deposit Accounts of the Debtor on the date hereof are listed and
identified (by account number and depository institution) on Schedule F attached
hereto and made a part hereof. The Debtor shall promptly notify the Secured
Party of any other Deposit Account opened or maintained by the Debtor after the
date hereof, and shall submit to the Secured Party a supplement to Schedule F to
reflect such additional accounts (provided the Debtor’s failure to do so shall
not impair the Secured Party’s security interest therein).  With respect to any
Deposit Account maintained by a depository institution other than the Secured
Party, and as a condition to the establishment and maintenance of any such
Deposit Account except as otherwise agreed to in writing by the Secured Party,
the Debtor, the depository institution, and the Secured Party shall execute and
deliver an account control agreement in form and substance satisfactory to the
Secured Party which provides, among other things, for the depository
institution’s agreement that it will comply with instructions originated by the
Secured Party directing the disposition of the funds in the Deposit Account
without further consent by such Debtor.
 
Section 8.    Power of Attorney.  In addition to any other powers of attorney
contained herein, the Debtor hereby appoints the Secured Party, its nominee, and
any other person whom the Secured Party may designate, as the Debtor’s
attorney-in-fact, with full power and authority upon the occurrence and during
the continuation of any Event of Default to sign the Debtor’s name on
verifications of Receivables and other Collateral; to send requests for
verification of Collateral to the Debtor’s customers, account debtors and other
obligors; to endorse the Debtor’s name on any checks, notes, acceptances, money
orders, drafts and any other forms of payment or security that may come into the
Secured Party’s possession or on any assignments, stock powers, or other
instruments of transfer relating to the Collateral or any part thereof; to sign
the Debtor’s name on any invoice or bill of lading relating to any Collateral,
on claims to enforce collection of any Collateral, on notices to and drafts
against customers and account debtors and other obligors, on schedules and
assignments of Collateral, on notices of assignment and on public records; to
notify the post office authorities to change the address for delivery of the
Debtor’s mail to an address designated by the Secured Party; to receive, open
and dispose of all mail addressed to the Debtor; and to do all things necessary
to carry out this Agreement.  The Debtor hereby ratifies and approves all acts
of any such attorney and agrees that neither the Secured Party nor any such
attorney will be liable for any acts or omissions nor for any error of judgment
or mistake of fact or law other than such person’s gross negligence or willful
misconduct.  The Secured Party may file one or more financing statements
disclosing its security interest in any or all of the Collateral without the
Debtor’s signature appearing thereon.  The Debtor also hereby grants the Secured
Party a power of attorney to execute any such financing statements, or
amendments and supplements to financing statements, on behalf of the Debtor
without notice thereof to the Debtor.  The foregoing powers of attorney, being
coupled with an interest, are irrevocable until the Obligations have been fully
paid and satisfied and all agreements of the Secured Party to extend credit to
or for the account of the Debtor have expired or otherwise have been terminated.
 
 
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Section 9.    Defaults and Remedies.
 
(a)     The occurrence of any “Event of Default” (as defined in the Credit
Agreement) shall constitute an “Event of Default” hereunder.
 
(b)     Upon the occurrence and during the continuation of any Event of Default,
the Secured Party shall have, in addition to all other rights provided herein or
by law, the rights and remedies of a secured party under the UCC (regardless of
whether the UCC is the law of the jurisdiction where the rights or remedies are
asserted and regardless of whether the UCC applies to the affected Collateral),
and further the Secured Party may, without demand and without advertisement,
notice, hearing or process of law, all of which the Debtor hereby waives, at any
time or times, sell and deliver all or any part of the Collateral (and any other
property of the Debtor attached thereto or found therein) held by or for it at
public or private sale, for cash, upon credit or otherwise, at such prices and
upon such terms as the Secured Party deems advisable, in its sole
discretion.  In addition to all other sums due the Secured Party hereunder, the
Debtor shall pay the Secured Party all costs and expenses incurred by the
Secured Party, including reasonable attorneys’ fees and court costs, in
obtaining, liquidating or enforcing payment of Collateral or the Obligations or
in the prosecution or defense of any action or proceeding by or against the
Secured Party or the Debtor concerning any matter arising out of or connected
with this Security Agreement or the Collateral or the Obligations, including,
without limitation, any of the foregoing arising in, arising under or related to
a case under the United States Bankruptcy Code (or any successor statute).  Any
requirement of reasonable notice shall be met if such notice is personally
served on or mailed, postage prepaid, to the Debtor in accordance with
Section 12(b) hereof at least 10 days before the time of sale or other event
giving rise to the requirement of such notice; provided however, no notification
need be given to the Debtor if the Debtor has signed, after an Event of Default
has occurred, a statement renouncing any right to notification of sale or other
intended disposition.  The Secured Party shall not be obligated to make any sale
or other disposition of the Collateral regardless of notice having been
given.  The Secured Party may be the purchaser at any such sale.  The Debtor
hereby waives all of its rights of redemption from any such sale.  The Secured
Party may postpone or cause the postponement of the sale of all or any portion
of the Collateral by announcement at the time and place of such sale, and such
sale may, without further notice, be made at the time and place to which the
sale was postponed or the Secured Party may further postpone such sale by
announcement made at such time and place.  The Secured Party has no obligation
to prepare the Collateral for sale.  The Secured Party may sell or otherwise
dispose of the Collateral without giving any warranties as to the Collateral or
any part thereof, including disclaimers of any warranties of title or the like,
and the Debtor acknowledges and agrees that the absence of such warranties shall
not render the disposition commercially unreasonable.
 
 
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(c)     Without in any way limiting the foregoing, upon the occurrence and
during the continuation of any Event of Default, the Secured Party shall have
the right, in addition to all other rights provided herein or by law, to take
physical possession of any and all of the Collateral and anything found therein,
the right for that purpose to enter without legal process any premises where the
Collateral may be found (provided such entry be done lawfully), and the right to
maintain such possession on the Debtor’s premises (the Debtor hereby agreeing to
lease such premises without cost or expense to the Secured Party or its designee
if the Secured Party so requests) or to remove the Collateral or any part
thereof to such other places as the Secured Party may desire.  Upon the
occurrence and during the continuation of any Event of Default, the Secured
Party shall have the right to exercise any and all rights with respect to all
Deposit Accounts of the Debtor, including, without limitation, the right to
direct the disposition of the funds in each Deposit Account and to collect,
withdraw and receive all amounts due or to become due or payable under each such
Deposit Account.  Upon the occurrence and during the continuation of any Event
of Default, the Debtor shall, upon the Secured Party’s demand, promptly assemble
the Collateral and make it available to the Secured Party at a place designated
by the Secured Party.  If the Secured Party exercises its right to take
possession of the Collateral, the Debtor shall also at its expense perform any
and all other steps requested by the Secured Party to preserve and protect the
security interest hereby granted in the Collateral, such as placing and
maintaining signs indicating the security interest of the Secured Party,
appointing overseers for the Collateral and maintaining Collateral records.
 
(d)    Without in any way limiting the foregoing, upon the occurrence and during
the continuation of any Event of Default, all rights of the Debtor to exercise
the voting and/or consensual powers which it is entitled to exercise pursuant to
Section 7(a)(i) hereof and/or to receive and retain the distributions which it
is entitled to receive and retain pursuant to Section 7(a)(ii) hereof, shall, at
the option of the Secured Party, cease and thereupon become vested in the
Secured Party, which, in addition to all other rights provided herein or by law,
shall then be entitled solely and exclusively to exercise all voting and other
consensual powers pertaining to the Investment Property (including, without
limitation, the right to deliver notice of control with respect to any
Investment Property held in a securities account or commodity account and
deliver all entitlement orders with respect thereto) and/or to receive and
retain the distributions which the Debtor would otherwise have been authorized
to retain pursuant to Section 7(a)(ii) hereof and shall then be entitled solely
and exclusively to exercise any and all rights of conversion, exchange or
subscription or any other rights, privileges or options pertaining to any
Investment Property as if the Secured Party were the absolute owner
thereof.  Without limiting the foregoing, the Secured Party shall have the right
to exchange, at its discretion, any and all of the Investment Property upon the
merger, consolidation, reorganization, recapitalization or other readjustment of
the respective issuer thereof or upon the exercise by or on behalf of any such
issuer or the Secured Party of any right, privilege or option pertaining to any
Investment Property and, in connection therewith, to deposit and deliver any and
all of the Investment Property with any committee, depositary, transfer agent,
registrar or other designated agency upon such terms and conditions as the
Secured Party may determine.  In the event the Secured Party in good faith
believes any of the Collateral constitutes restricted securities within the
meaning of any applicable securities laws, any disposition thereof in compliance
with such laws shall not render the disposition commercially unreasonable.
 
(e)     Without in any way limiting the foregoing, the Debtor hereby grants to
the Secured Party a royalty-free irrevocable license and right to use all of the
Debtor’s patents, patent applications, patent licenses, trademarks, trademark
registrations, trademark licenses, trade names, trade styles, copyrights,
copyright applications, copyright licenses, and similar intangibles in
connection with any foreclosure or other realization by the Secured Party on all
or any part of the Collateral.  The license and right granted the Secured Party
hereby shall be without any royalty or fee or charge whatsoever.
 
 
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(f)     The powers conferred upon the Secured Party hereunder are solely to
protect its interest in the Collateral and shall not impose on it any duty to
exercise such powers.  The Secured Party shall be deemed to have exercised
reasonable care in the custody and preservation of the Collateral in its
possession or control if such Collateral is accorded treatment substantially
equivalent to that which the Secured Party accords its own property, consisting
of similar type assets, it being understood, however, that the Secured Party
shall have no responsibility for ascertaining or taking any action with respect
to calls, conversions, exchanges, maturities, tenders or other matters relating
to any such Collateral, whether or not the Secured Party has or is deemed to
have knowledge of such matters.  This Security Agreement constitutes an
assignment of rights only and not an assignment of any duties or obligations of
the Debtor in any way related to the Collateral, and the Secured Party shall
have no duty or obligation to discharge any such duty or obligation.  The
Secured Party shall have no responsibility for taking any necessary steps to
preserve rights against any parties with respect to any Collateral or initiating
any action to protect the Collateral against the possibility of a decline in
market value.  Neither the Secured Party nor any party acting as attorney for
the Secured Party shall be liable for any acts or omissions or for any error of
judgment or mistake of fact or law other than their gross negligence or willful
misconduct.
 
(g)     Failure by the Secured Party to exercise any right, remedy or option
under this Security Agreement or any other agreement between the Debtor and the
Secured Party or provided by law, or delay by the Secured Party in exercising
the same, shall not operate as a waiver; and no waiver by the Secured Party
shall be effective unless it is in writing and then only to the extent
specifically stated.  The rights and remedies of the Secured Party under this
Security Agreement shall be cumulative and not exclusive of any other right or
remedy which the Secured Party may have.
 
Section 10.    Application of Proceeds.  The proceeds and avails of the
Collateral at any time received by the Secured Party after the occurrence and
during the continuation of any Event of Default shall, when received by the
Secured Party in cash or its equivalent, be applied by the Secured Party as
follows:
 
(i)     first, to the payment and satisfaction of all sums paid and costs and
expenses incurred by the Secured Party hereunder or otherwise in connection
herewith, including such monies paid or incurred in connection with protecting,
preserving or realizing upon the Collateral or enforcing any of the terms
hereof, including reasonable attorneys’ fees and court costs, together with any
interest thereon (but without preference or priority of principal over interest
or of interest over principal), to the extent the Secured Party is not
reimbursed therefor by the Debtor; and
 
(ii)    second, to the payment and satisfaction of the remaining Obligations,
whether or not then due (in whatever order the Secured Party elects), both for
interest and principal.
 
The Debtor shall remain liable to the Secured Party for any deficiency.  Any
surplus remaining after the full payment and satisfaction of the foregoing shall
be returned to the Debtor or to whomsoever the Secured Party reasonably
determines is lawfully entitled thereto.
 
Section 11.    Continuing Agreement.  This Security Agreement shall be a
continuing agreement in every respect and shall remain in full force and effect
until all of the Obligations, both for principal and interest, have been fully
paid and satisfied and all agreements of the Secured Party to extend credit to
or for the account of the Debtor have expired or otherwise have been
terminated.  Upon such termination of this Security Agreement, the Secured Party
shall, upon the request and at the expense of the Debtor, forthwith release its
security interest hereunder.
 
 
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Section 12.    Miscellaneous.
 
(a)     This Security Agreement cannot be changed or terminated orally.  All of
the rights, privileges, remedies and options given to the Secured Party
hereunder shall inure to the benefit of its successors and assigns, and all the
terms, conditions, covenants, agreements, representations and warranties of and
in this Security Agreement shall bind the Debtor and its legal representatives,
successors and assigns, provided that the Debtor may not assign its rights or
delegate its duties hereunder without the Secured Party’s prior written consent.
 
(b)     Except as otherwise specified herein, all notices hereunder shall be in
writing (including, without limitation, notice by telecopy) and shall be given
to the relevant party at its address or telecopier number set forth below (or,
if no such address is set forth below, at the address of the Debtor as shown on
the records of the Secured Party), or such other address or telecopier number as
such party may hereafter specify by notice to the other given by courier, by
United States certified or registered mail, by telecopy or by other
telecommunication device capable of creating a written record of such notice and
its receipt.  Notices hereunder shall be addressed:

to the Debtor at:
to the Secured Party at:
   
CTI Industries Corporation
Harris N.A.
22160 North Pepper Road
111 West Monroe Street – 5W
Barrington, Illinois 60010
Chicago, Illinois 60603
Attention:          Stephen M. Merrick
Attention:           Timothy J. Moran
Telephone:        (847) 620-1308
Telephone:         (312) 461-2633
Facsimile:         (847) 382-1219
Facsimile:          (312) 502-3922
   
with a copy to:
with a copy to:
   
Vanasco, Genelly & Miller
McGuireWoods LLP
33 North LaSalle Street, Suite 2200
77 West Wacker Drive, Suite 4100
Chicago, Illinois 60602
Chicago, Illinois 60601
Attention:           Gerald Miller
Attention:           Arthur B. Muir
Telephone:         (312) 786-5100
Telephone:         (312) 750-3595
Facsimile:          (312) 786-5111
Facsimile:          (312) 698-4568

 
Each such notice, request or other communication shall be effective (i) if given
by telecopier, when such telecopy is transmitted to the telecopier number
specified in this Section and a confirmation of such telecopy has been received
by the sender, (ii) if given by mail, five (5) days after such communication is
deposited in the mail, certified or registered with return receipt requested,
addressed as aforesaid or (iii) if given by any other means, when delivered at
the addresses specified in this Section.
 
 
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(c)     In the event and to the extent that any provision hereof shall be deemed
to be invalid or unenforceable by reason of the operation of any law or by
reason of the interpretation placed thereon by any court, this Security
Agreement shall to such extent be construed as not containing such provision,
but only as to such locations where such law or interpretation is operative, and
the invalidity or unenforceability of such provision shall not affect the
validity of any remaining provisions hereof, and any and all other provisions
hereof which are otherwise lawful and valid shall remain in full force and
effect.
 
(d)     This Security Agreement shall be deemed to have been made in the State
of Illinois and shall be governed by, and construed in accordance with, the laws
of the State of Illinois.  Section headings used in this Security Agreement are
for convenience of reference only and are not a part of this Agreement for any
other purpose.
 
(e)     This Security Agreement may be executed in any number of counterparts,
and by different parties hereto on separate counterpart signature pages, and all
such counterparts taken together shall be deemed to constitute one and the same
instrument.  The Debtor acknowledges that this Security Agreement is and shall
be effective upon its execution and delivery by the Debtor to the Secured Party,
and it shall not be necessary for the Secured Party to execute this Security
Agreement or any other acceptance hereof or otherwise to signify or express its
acceptance hereof.
 
(f)     The Debtor hereby submits to the nonexclusive jurisdiction of the United
States District Court for the Northern District of Illinois and of any Illinois
State court sitting in the City of Chicago for purposes of all legal proceedings
arising out of or relating to this Security Agreement or the transactions
contemplated hereby. The Debtor irrevocably waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of the venue of any such proceeding brought in such a court and any claim that
any such proceeding brought in such a court has been brought in an inconvenient
forum. The Debtor and the Secured Party each hereby irrevocably waive any and
all right to trial by jury in any legal proceeding arising out of or relating to
this Security Agreement or the transactions contemplated hereby.
 
[signature page follows]

 
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In Witness Whereof, the Debtor has caused this Security Agreement to be duly
executed and delivered in Chicago, Illinois, as of the date and year first above
written.

   
CTI Industries Corporation
       
By: 
/s/ Stephen M. Merrick
   
Executive Vice-President and Chief Financial
Officer

 
Accepted and agreed to in Chicago, Illinois, as of the date and year first above
written.

   
Harris N.A.
       
By: 
/s/ Timothy J. Moran        
   
Senior Vice-President

 

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Schedule A
 
Locations
 
Item 1.
Places of Business (including Debtor’s chief executive office and principal
place of business):

 
22160 N. Pepper Road, Lake Barrington, IL 60010
 
Item 2.
Permitted Collateral Locations:

 
2760 Spectrum Drive, Elgin, IL 60124

 

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Schedule B
 
Other Names
 
A.
Prior Legal Names

 
Container Technologies, Inc.
 
CTI Merger Corporation
 
B.
Trade Names

NONE.

 

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Schedule C
 
Permitted Encumbrances

Secured Party
Collateral
 
Description of Obligation
(including Outstanding
Principal Balance)
           
RBS
leases on pouch machines
  $ 948,296.00  

 

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Schedule D
 
Intellectual Property Rights

 
See attached lists of Patents and Trademarks and License Agreements.

 

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Schedule E
 
Real Estate Legal Descriptions

THAT PART OF THE SOUTH 1/2 OF SECTION 21, TOWNSHIP 43 NORTH, RANGE 9, EAST OF
THE THIRD PRINCIPAL MERIDIAN, DESCRIBED AS FOLLOWS: COMMENCING AT A POINT IN THE
EAST LINE OF THE WEST 1/2 OF THE SOUTH EAST 1/4 OF SAID SECTION 21, 691.81 FEET
NORTH OF THE SOUTHEAST CORNER THEREOF; THENCE WEST PARALLEL WITH THE SOUTH LINE
OF SAID SOUTH EAST 1/4 746.66 FEET; THENCE NORTH PARALLEL WITH THE EAST LINE OF
THE SAID WEST 1/2 OF THE SOUTH EAST 1/4 291.81 FEET; THENCE EAST PARALLEL WITH
THE SOUTH LINE OF SAID SOUTH EAST 1/4 746.66 FEET TO THE EAST LINE OF THE WEST
1/2 OF THE SOUTH EAST 1/4; THENCE SOUTH 291.81 FEET TO THE POINT OF BEGINNING,
IN LAKE COUNTY, ILLINOIS

 

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Schedule F
 
Investment Property and Deposits
 
A.
Investment Property
             
Charter One Bank
Money Market Account
450010-877-6
         
Charles Schwab
Investment Account
6102-5669
         
Oppenheimer
Investment Account
G40-1397554
       
B.
Deposits
             
Lockbox
 
450247-274-2
         
CTI Industries Operating Acct.
 
450010-868-7
         
Money Market
 
450010-877-6

 

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Schedule G
 
Commercial Tort Claims
 
NONE.

 

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Schedule H
 
Supplement to Security Agreement
 
This Supplement to Security Agreement (the "Supplement") is dated as of this
29th day of April 2010, from CTI Industries Corporation, an Illinois corporation
(the “Debtor”), to Harris N.A. (the “Secured Party”).
 
Preliminary Statements
 
A.The Debtor and the Secured Party are parties to that certain Security
Agreement dated as of April 29, 2010 (such Security Agreement, as the same may
from time to time be amended, modified or restated, being hereinafter referred
to as the “Security Agreement”).  All capitalized terms used herein without
definition shall have the same meanings herein as such terms are defined in the
Security Agreement.
 
B.Pursuant to the Security Agreement, the Debtor granted to the Secured Party,
among other things, a continuing security interest in all Commercial Tort
Claims.
 
C.The Debtor has acquired a Commercial Tort Claim, and executes and delivers
this Supplement to confirm and assure the Secured Party's security interest
therein.
 
Now, Therefore, in consideration of the benefits accruing to the Debtor, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
 
1.In order to secure payment of the Obligations, whether now existing or
hereafter arising, the Debtor does hereby grant to the Secured Party a
continuing lien on and security interest in the Commercial Tort Claim described
below:
 

             
 
 

   
 

 
2.Schedule G (Commercial Tort Claims) to the Security Agreement is hereby
amended to include reference to the Commercial Tort Claim referred to in
Section 1 above.  The Commercial Tort Claim described herein is in addition to,
and not in substitution or replacement for, the Commercial Tort Claims
heretofore described in and subject to the Security Agreement, and nothing
contained herein shall in any manner impair the priority of the liens and
security interests heretofore granted by the Debtor in favor of the Secured
Party under the Security Agreement.
 
 

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3.The Debtor agrees to execute and deliver such further instruments and
documents and do such further acts and things as the Secured Party may deem
necessary or proper to carry out more effectively the purposes of this
Supplement.
 
4.No reference to this Supplement need be made in the Security Agreement or in
any other document or instrument making reference to the Security Agreement, any
reference to the Security Agreement in any of such items to be deemed a
reference to the Security Agreement as supplemented hereby.  The Debtor
acknowledges that this Supplement shall be effective upon its execution and
delivery by the Debtor to the Secured Party, and it shall not be necessary for
the Secured Party to execute this Supplement or any other acceptance hereof or
otherwise to signify or express its acceptance hereof.
 
5.This Agreement shall be governed by and construed in accordance with the State
of Illinois (without regard to principles of conflicts of law).
 
[SIGNATURE PAGE FOLLOWS]

 
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CTI INDUSTRIES CORPORATION
       
By: 
/s/ Stephen M. Merrick
  Executive Vice-President and Chief Financial Officer

 
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