Exhibit 10.18

 

THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS.  THIS NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO IWT TESORO CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

 

THIS NOTE IS SUBJECT TO THE TERMS OF THE SENIOR SUBORDINATION AGREEMENT BETWEEN
LAURUS MASTER FUND, LTD. AND FLEET CAPITAL CORPORATION TO WHICH REFERENCE IS
MADE FOR THE TERMS OF SUBORDINATION AND FOR LIMITATIONS OF ENFORCEMENT OF THE
PROVISIONS HEREOF.

 

SECURED REVOLVING NOTE

 

FOR VALUE RECEIVED, each of IWT TESORO CORPORATION, a Nevada corporation (the
“Parent”), and the other companies listed on Exhibit A attached hereto (such
other companies together with the Parent, each a “Company” and collectively, the
“Companies”), jointly and severally, promises to pay to LAURUS MASTER FUND,
LTD., c/o M&C Corporate Services Limited, P.O. Box 309 GT, Ugland House, South
Church Street, George Town, Grand Cayman, Cayman Islands, Fax: 345-949-8080 (the
“Holder”) or its registered assigns or successors in interest, the sum of Five
Million Dollars ($5,000,000), without duplication of any amounts owing by the
Companies to the Holder under the Minimum Borrowing Notes (as defined in the
Security Agreement referred to below), or, if different, the aggregate principal
amount of all Loans (as defined in the Security Agreement referred to below),
together with any accrued and unpaid interest hereon, on August 25, 2008 (the
“Maturity Date”) if not sooner indefeasibly paid in full.

 

Capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Security Agreement among the Companies and the
Holder dated as of the date hereof (as amended, modified and/or supplemented
from time to time, the “Security Agreement”).

 

The following terms shall apply to this Secured Revolving Note (this “Note”):

 

ARTICLE I
CONTRACT RATE AND MINIMUM BORROWING NOTE

 

1.1                                 CONTRACT RATE.  SUBJECT TO SECTIONS 3.2 AND
4.10, INTEREST PAYABLE ON THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE (THE
“PRINCIPAL AMOUNT”) SHALL ACCRUE AT A RATE PER ANNUM EQUAL TO THE “PRIME RATE”
PUBLISHED IN THE WALL STREET JOURNAL FROM TIME TO TIME (THE “PRIME RATE”), PLUS
ONE AND ONE-HALF PERCENT (1.5%) (THE “CONTRACT RATE”).  THE CONTRACT RATE SHALL
BE INCREASED OR DECREASED AS THE CASE MAY BE FOR EACH INCREASE OR DECREASE IN
THE PRIME

 

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RATE IN AN AMOUNT EQUAL TO SUCH INCREASE OR DECREASE IN THE PRIME RATE; EACH
CHANGE TO BE EFFECTIVE AS OF THE DAY OF THE CHANGE IN THE PRIME RATE.  SUBJECT
TO SECTION 1.2, THE CONTRACT RATE SHALL NOT AT ANY TIME BE LESS THAN SIX PERCENT
(6.0%).  INTEREST SHALL BE (I) CALCULATED ON THE BASIS OF A 360 DAY YEAR, AND
(II) PAYABLE MONTHLY, IN ARREARS, COMMENCING ON OCTOBER 1, 2005 ON THE FIRST
BUSINESS DAY OF EACH CONSECUTIVE CALENDAR MONTH THEREAFTER THROUGH AND INCLUDING
THE MATURITY DATE, AND ON THE MATURITY DATE, WHETHER BY ACCELERATION OR
OTHERWISE.

 

1.2                                 CONTRACT RATE ADJUSTMENTS AND PAYMENTS.  THE
CONTRACT RATE SHALL BE CALCULATED ON THE LAST BUSINESS DAY OF EACH CALENDAR
MONTH HEREAFTER (OTHER THAN FOR INCREASES OR DECREASES IN THE PRIME RATE WHICH
SHALL BE CALCULATED AND BECOME EFFECTIVE IN ACCORDANCE WITH THE TERMS OF
SECTION 1.1) UNTIL THE MATURITY DATE (EACH A “DETERMINATION DATE”) AND SHALL BE
SUBJECT TO ADJUSTMENT AS SET FORTH HEREIN.  IF (I) THE PARENT SHALL HAVE
REGISTERED THE SHARES OF THE COMMON STOCK UNDERLYING THE CONVERSION OF EACH
MINIMUM BORROWING NOTE AND EACH WARRANT ON A REGISTRATION STATEMENT DECLARED
EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION (THE “SEC”), AND (II) THE
MARKET PRICE (THE “MARKET PRICE”) OF THE COMMON STOCK AS REPORTED BY BLOOMBERG,
L.P. ON THE PRINCIPAL MARKET FOR THE FIVE (5) TRADING DAYS IMMEDIATELY PRECEDING
A DETERMINATION DATE EXCEEDS THE THEN APPLICABLE FIXED CONVERSION PRICE BY AT
LEAST TWENTY-FIVE PERCENT (25%), THE CONTRACT RATE FOR THE SUCCEEDING CALENDAR
MONTH SHALL AUTOMATICALLY BE REDUCED BY 200 BASIS POINTS (200 B.P.) (2%) FOR
EACH INCREMENTAL TWENTY-FIVE PERCENT (25%) INCREASE IN THE MARKET PRICE OF THE
COMMON STOCK ABOVE THE THEN APPLICABLE FIXED CONVERSION PRICE.  NOTWITHSTANDING
THE FOREGOING (AND ANYTHING TO THE CONTRARY CONTAINED HEREIN), IN NO EVENT SHALL
THE CONTRACT RATE AT ANY TIME BE LESS THAN ZERO PERCENT (0%).

 

1.3                                 ALLOCATION OF PRINCIPAL TO MINIMUM BORROWING
NOTE.  NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, WHENEVER DURING THE TERM
THE OUTSTANDING BALANCE ON THE MINIMUM BORROWING NOTE SHALL BE LESS THAN THE
MINIMUM BORROWING AMOUNT (SUCH AMOUNT BEING REFERRED TO HEREIN AS THE
“TRANSFERABLE AMOUNT”) TO THE EXTENT THAT THE OUTSTANDING BALANCE ON THE
REVOLVING NOTE SHOULD EQUAL OR EXCEED $2,000,000, THAT PORTION OF THE BALANCE OF
THE REVOLVING NOTE THAT EXCEEDS $2,000,000, BUT DOES NOT EXCEED THE TRANSFERABLE
AMOUNT, SHALL BE SEGREGATED FROM THE OUTSTANDING BALANCE UNDER THE REVOLVING
NOTE AND ALLOCATED TO AND AGGREGATED WITH THE THEN EXISTING BALANCE OF THE NEXT
UNISSUED SERIALIZED MINIMUM BORROWING NOTE (THE “NEXT UNISSUED SERIALIZED
NOTE”); PROVIDED THAT SUCH SEGREGATED BALANCE SHALL REMAIN SUBJECT TO THE TERMS
AND CONDITIONS OF SUCH REVOLVING NOTE UNTIL A NEW SERIALIZED MINIMUM BORROWING
NOTE IS ISSUED AS SET FORTH BELOW.  THE NEXT UNISSUED SERIALIZED NOTE SHALL
REMAIN IN BOOK ENTRY FORM UNTIL THE BALANCE THEREUNDER SHALL EQUAL THE MINIMUM
BORROWING AMOUNT, AT WHICH TIME A NEW SERIALIZED MINIMUM BORROWING NOTE IN THE
FACE AMOUNT EQUAL TO THE MINIMUM BORROWING AMOUNT WILL BE ISSUED AND REGISTERED
AS SET FORTH IN THE REGISTRATION RIGHTS AGREEMENT (AND THE OUTSTANDING BALANCE
UNDER THE REVOLVING NOTE SHALL AT SUCH TIME BE CORRESPONDINGLY REDUCED IN THE
AMOUNT EQUAL TO THE MINIMUM BORROWING AMOUNT AS A RESULT OF THE ISSUANCE OF SUCH
NEW SERIALIZED MINIMUM BORROWING NOTE).

 

ARTICLE II
CONVERSION RIGHTS AND FIXED CONVERSION PRICE

 

2.1                                 OPTIONAL CONVERSION.  SUBJECT TO THE TERMS
OF THIS ARTICLE II, THE HOLDER SHALL HAVE THE RIGHT, BUT NOT THE OBLIGATION, AT
ANY TIME UNTIL THE MATURITY DATE, OR DURING AN EVENT OF DEFAULT (AS DEFINED IN
ARTICLE III), AND, SUBJECT TO THE LIMITATIONS SET FORTH IN SECTION 2.2

 

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HEREOF, TO CONVERT ALL OR ANY PORTION OF THE OUTSTANDING PRINCIPAL AMOUNT AND/OR
ACCRUED INTEREST AND FEES DUE AND PAYABLE INTO FULLY PAID AND NONASSESSABLE
RESTRICTED SHARES OF THE COMMON STOCK AT THE FIXED CONVERSION PRICE (DEFINED
BELOW).  FOR PURPOSES HEREOF, SUBJECT TO SECTION 2.6 HEREOF, THE INITIAL “FIXED
CONVERSION PRICE” MEANS $ 2.74 SUBJECT TO ADJUSTMENT AS PROVIDED IN SECTION 2.6
OF THIS NOTE.  THE SHARES OF COMMON STOCK TO BE ISSUED UPON SUCH CONVERSION ARE
HEREIN REFERRED TO AS THE “CONVERSION SHARES.”

 

2.2                                 CONVERSION LIMITATION.  NOTWITHSTANDING
ANYTHING CONTAINED HEREIN TO THE CONTRARY, THE HOLDER SHALL NOT BE ENTITLED TO
CONVERT PURSUANT TO THE TERMS OF THIS NOTE AN AMOUNT THAT WOULD BE CONVERTIBLE
INTO THAT NUMBER OF CONVERSION SHARES WHICH WOULD EXCEED THE DIFFERENCE BETWEEN
(I) 4.99% OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK AND (II) THE
NUMBER OF SHARES OF COMMON STOCK BENEFICIALLY OWNED BY THE HOLDER.  FOR PURPOSES
OF THE IMMEDIATELY PRECEDING SENTENCE, BENEFICIAL OWNERSHIP SHALL BE DETERMINED
IN ACCORDANCE WITH SECTION 13(D) OF THE EXCHANGE ACT AND REGULATION 13D-3
THEREUNDER.  THE CONVERSION SHARES LIMITATION DESCRIBED IN THIS SECTION 2.2
SHALL AUTOMATICALLY BECOME NULL AND VOID FOLLOWING NOTICE TO ANY COMPANY UPON
THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, OR UPON 120
DAYS PRIOR NOTICE TO THE PARENT, EXCEPT THAT AT NO TIME SHALL THE NUMBER OF
SHARES OF COMMON STOCK BENEFICIALLY OWNED BY THE HOLDER EXCEED 19.99% OF THE
OUTSTANDING SHARES OF COMMON STOCK.  NOTWITHSTANDING ANYTHING CONTAINED HEREIN
TO THE CONTRARY, THE TOTAL NUMBER OF SHARES OF COMMON STOCK ISSUABLE BY THE
PARENT AND ACQUIRABLE BY THE HOLDER AT A PRICE BELOW $2.65 PER SHARE PURSUANT TO
THE TERMS OF THIS NOTE, THE SECURITY AGREEMENT OR ANY OTHER ANCILLARY AGREEMENT,
SHALL NOT EXCEED AN AGGREGATE OF 2,339,050 SHARES OF COMMON STOCK (SUBJECT TO
APPROPRIATE ADJUSTMENT FOR STOCK SPLITS, STOCK DIVIDENDS, OR OTHER SIMILAR
RECAPITALIZATIONS AFFECTING THE COMMON STOCK) (THE “MAXIMUM COMMON STOCK
ISSUANCE”), UNLESS THE ISSUANCE OF COMMON STOCK HEREUNDER IN EXCESS OF THE
MAXIMUM COMMON STOCK ISSUANCE SHALL FIRST BE APPROVED BY THE PARENT’S
SHAREHOLDERS IN ACCORDANCE WITH APPLICABLE STATE AND FEDERAL LAWS.  IF AT ANY
POINT IN TIME AND FROM TIME TO TIME THE NUMBER OF SHARES OF COMMON STOCK ISSUED
PURSUANT TO THE TERMS OF THIS NOTE, THE SECURITY AGREEMENT OR ANY OTHER
ANCILLARY AGREEMENT, TOGETHER WITH THE NUMBER OF SHARES OF COMMON STOCK THAT
WOULD THEN BE ISSUABLE BY THE PARENT TO THE HOLDER IN THE EVENT OF A CONVERSION
OR EXERCISE PURSUANT TO THE TERMS OF THIS NOTE, THE SECURITY AGREEMENT OR ANY
OTHER ANCILLARY AGREEMENT, WOULD EXCEED THE MAXIMUM COMMON STOCK ISSUANCE BUT
FOR THIS SECTION 2.2, THE PARENT SHALL PROMPTLY CALL A SHAREHOLDERS MEETING TO
SOLICIT SHAREHOLDER APPROVAL FOR THE ISSUANCE OF THE SHARES OF COMMON STOCK
HEREUNDER IN EXCESS OF THE MAXIMUM COMMON STOCK ISSUANCE.  NOTWITHSTANDING
ANYTHING CONTAINED HEREIN TO THE CONTRARY, THE PROVISIONS OF THIS SECTION 2.2
ARE IRREVOCABLE AND MAY NOT BE WAIVED BY THE HOLDER OR ANY COMPANY.

 

2.3                                 MECHANICS OF HOLDER’S CONVERSION.  IN THE
EVENT THAT THE HOLDER ELECTS TO CONVERT THIS NOTE INTO COMMON STOCK, THE HOLDER
SHALL GIVE NOTICE OF SUCH ELECTION BY DELIVERING AN EXECUTED AND COMPLETED
NOTICE OF CONVERSION IN SUBSTANTIALLY THE FORM OF EXHIBIT B HERETO
(APPROPRIATELY COMPLETED) (“NOTICE OF CONVERSION”) TO THE PARENT AND SUCH NOTICE
OF CONVERSION SHALL PROVIDE A BREAKDOWN IN REASONABLE DETAIL OF THE PRINCIPAL
AMOUNT, ACCRUED INTEREST AND FEES THAT ARE BEING CONVERTED.  ON EACH CONVERSION
DATE (AS HEREINAFTER DEFINED) AND IN ACCORDANCE WITH ITS NOTICE OF CONVERSION,
THE HOLDER SHALL MAKE THE APPROPRIATE REDUCTION TO THE PRINCIPAL AMOUNT, ACCRUED
INTEREST AND FEES AS ENTERED IN ITS RECORDS AND SHALL PROVIDE WRITTEN NOTICE
THEREOF TO THE PARENT WITHIN FIVE (5) BUSINESS DAYS AFTER THE CONVERSION DATE. 
EACH DATE

 

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ON WHICH A NOTICE OF CONVERSION IS DELIVERED OR TELECOPIED TO THE PARENT IN
ACCORDANCE WITH THE PROVISIONS HEREOF SHALL BE DEEMED A CONVERSION DATE (THE
“CONVERSION DATE”).  PURSUANT TO THE TERMS OF THE NOTICE OF CONVERSION, THE
PARENT WILL ISSUE INSTRUCTIONS TO THE TRANSFER AGENT ACCOMPANIED BY AN OPINION
OF COUNSEL WITHIN THREE (3) BUSINESS DAYS OF THE DATE OF THE DELIVERY TO THE
PARENT OF THE NOTICE OF CONVERSION AND SHALL CAUSE THE TRANSFER AGENT TO
TRANSMIT THE CERTIFICATES REPRESENTING THE CONVERSION SHARES TO THE HOLDER BY
CREDITING THE ACCOUNT OF THE HOLDER’S DESIGNATED BROKER WITH THE DEPOSITORY
TRUST CORPORATION (“DTC”) THROUGH ITS DEPOSIT WITHDRAWAL AGENT COMMISSION
(“DWAC”) SYSTEM WITHIN THREE (3) BUSINESS DAYS AFTER RECEIPT BY THE PARENT OF
THE NOTICE OF CONVERSION (THE “DELIVERY DATE”).  IN THE CASE OF THE EXERCISE OF
THE CONVERSION RIGHTS SET FORTH HEREIN THE CONVERSION PRIVILEGE SHALL BE DEEMED
TO HAVE BEEN EXERCISED AND THE CONVERSION SHARES ISSUABLE UPON SUCH CONVERSION
SHALL BE DEEMED TO HAVE BEEN ISSUED UPON THE DATE OF RECEIPT BY THE PARENT OF
THE NOTICE OF CONVERSION.  THE HOLDER SHALL BE TREATED FOR ALL PURPOSES AS THE
RECORD HOLDER OF THE CONVERSION SHARES, UNLESS THE HOLDER PROVIDES THE PARENT
WRITTEN INSTRUCTIONS TO THE CONTRARY.

 

2.4                                 LATE PAYMENTS.  EACH COMPANY UNDERSTANDS
THAT A DELAY IN THE DELIVERY OF THE CONVERSION SHARES IN THE FORM REQUIRED
PURSUANT TO THIS ARTICLE BEYOND THE DELIVERY DATE COULD RESULT IN ECONOMIC LOSS
TO THE HOLDER.  AS COMPENSATION TO THE HOLDER FOR SUCH LOSS, IN ADDITION TO ALL
OTHER RIGHTS AND REMEDIES WHICH THE HOLDER MAY HAVE UNDER THIS NOTE, APPLICABLE
LAW OR OTHERWISE, THE COMPANIES SHALL, JOINTLY AND SEVERALLY, PAY LATE PAYMENTS
TO THE HOLDER FOR ANY LATE ISSUANCE OF CONVERSION SHARES IN THE FORM REQUIRED
PURSUANT TO THIS ARTICLE II UPON CONVERSION OF THIS NOTE, IN THE AMOUNT EQUAL TO
$500 PER BUSINESS DAY AFTER THE DELIVERY DATE.  THE COMPANIES SHALL, JOINTLY AND
SEVERALLY, MAKE ANY PAYMENTS INCURRED UNDER THIS SECTION IN IMMEDIATELY
AVAILABLE FUNDS UPON DEMAND.

 

2.5                                 CONVERSION MECHANICS.  THE NUMBER OF SHARES
OF COMMON STOCK TO BE ISSUED UPON EACH CONVERSION OF THIS NOTE SHALL BE
DETERMINED BY DIVIDING THAT PORTION OF THE PRINCIPAL AND INTEREST AND FEES TO BE
CONVERTED, IF ANY, BY THE THEN APPLICABLE FIXED CONVERSION PRICE.

 

2.6                                 ADJUSTMENT PROVISIONS.  THE FIXED CONVERSION
PRICE AND NUMBER AND KIND OF SHARES OR OTHER SECURITIES TO BE ISSUED UPON
CONVERSION DETERMINED PURSUANT TO SECTION 2.1 SHALL BE SUBJECT TO ADJUSTMENT
FROM TIME TO TIME UPON THE OCCURRENCE OF CERTAIN EVENTS DURING THE PERIOD THAT
THIS CONVERSION RIGHT REMAINS OUTSTANDING, AS FOLLOWS:

 

(A)                                  RECLASSIFICATION.  IF THE PARENT AT ANY
TIME SHALL, BY RECLASSIFICATION OR OTHERWISE, CHANGE THE COMMON STOCK INTO THE
SAME OR A DIFFERENT NUMBER OF SECURITIES OF ANY CLASS OR CLASSES, THIS NOTE, AS
TO THE UNPAID PRINCIPAL AMOUNT AND ACCRUED INTEREST THEREON, SHALL THEREAFTER BE
DEEMED TO EVIDENCE THE RIGHT TO PURCHASE AN ADJUSTED NUMBER OF SUCH SECURITIES
AND KIND OF SECURITIES AS WOULD HAVE BEEN ISSUABLE AS THE RESULT OF SUCH CHANGE
WITH RESPECT TO THE COMMON STOCK (I) IMMEDIATELY PRIOR TO OR (II) IMMEDIATELY
AFTER, SUCH RECLASSIFICATION OR OTHER CHANGE AT THE SOLE ELECTION OF THE HOLDER.

 

(B)                                 STOCK SPLITS, COMBINATIONS AND DIVIDENDS. 
IF THE SHARES OF COMMON STOCK ARE SUBDIVIDED OR COMBINED INTO A GREATER OR
SMALLER NUMBER OF SHARES OF COMMON STOCK, OR IF A DIVIDEND IS PAID ON THE COMMON
STOCK OR ANY PREFERRED STOCK ISSUED BY THE PARENT IN SHARES OF COMMON STOCK, THE
FIXED CONVERSION PRICE SHALL BE PROPORTIONATELY

 

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REDUCED IN CASE OF SUBDIVISION OF SHARES OR STOCK DIVIDEND OR PROPORTIONATELY
INCREASED IN THE CASE OF COMBINATION OF SHARES, IN EACH SUCH CASE BY THE RATIO
WHICH THE TOTAL NUMBER OF SHARES OF COMMON STOCK OUTSTANDING IMMEDIATELY AFTER
SUCH EVENT BEARS TO THE TOTAL NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
IMMEDIATELY PRIOR TO SUCH EVENT.

 

(C)                                  SHARE ISSUANCES.  SUBJECT TO THE PROVISIONS
OF THIS SECTION 2.6, IF THE PARENT SHALL AT ANY TIME PRIOR TO THE CONVERSION OR
REPAYMENT IN FULL OF THE PRINCIPAL AMOUNT ISSUE ANY SHARES OF COMMON STOCK OR
SECURITIES CONVERTIBLE INTO COMMON STOCK TO A PERSON OTHER THAN THE HOLDER
(EXCEPT (I) PURSUANT TO SECTIONS 2.6(A) OR (B) ABOVE; (II) PURSUANT TO OPTIONS,
WARRANTS, OR OTHER OBLIGATIONS TO ISSUE SHARES OUTSTANDING ON THE DATE HEREOF AS
DISCLOSED TO THE HOLDER IN WRITING; OR (III) PURSUANT TO OPTIONS THAT MAY BE
ISSUED UNDER ANY EMPLOYEE INCENTIVE STOCK OPTION AND/OR ANY QUALIFIED STOCK
OPTION PLAN ADOPTED BY THE PARENT) FOR A CONSIDERATION PER SHARE (THE “OFFER
PRICE”) LESS THAN THE FIXED CONVERSION PRICE IN EFFECT AT THE TIME OF SUCH
ISSUANCE, THEN THE FIXED CONVERSION PRICE SHALL BE IMMEDIATELY RESET TO SUCH
LOWER OFFER PRICE.  FOR PURPOSES HEREOF, THE ISSUANCE OF ANY SECURITY OF THE
PARENT CONVERTIBLE INTO OR EXERCISABLE OR EXCHANGEABLE FOR COMMON STOCK SHALL
RESULT IN AN ADJUSTMENT TO THE FIXED CONVERSION PRICE UPON THE ISSUANCE OF SUCH
SECURITIES.

 

(D)                                 COMPUTATION OF CONSIDERATION.  FOR PURPOSES
OF ANY COMPUTATION RESPECTING CONSIDERATION RECEIVED PURSUANT TO
SECTION 2.6(C) ABOVE, THE FOLLOWING SHALL APPLY:

 

(I)                                     IN THE CASE OF THE ISSUANCE OF SHARES OF
COMMON STOCK FOR CASH, THE CONSIDERATION SHALL BE THE AMOUNT OF SUCH CASH,
PROVIDED THAT IN NO CASE SHALL ANY DEDUCTION BE MADE FOR ANY COMMISSIONS,
DISCOUNTS OR OTHER EXPENSES INCURRED BY THE PARENT FOR ANY UNDERWRITING OF THE
ISSUE OR OTHERWISE IN CONNECTION THEREWITH;

 

(II)                                  IN THE CASE OF THE ISSUANCE OF SHARES OF
COMMON STOCK FOR A CONSIDERATION IN WHOLE OR IN PART OTHER THAN CASH, THE
CONSIDERATION OTHER THAN CASH SHALL BE DEEMED TO BE THE FAIR MARKET VALUE
THEREOF AS DETERMINED IN GOOD FAITH BY THE BOARD OF DIRECTORS OF THE PARENT
(IRRESPECTIVE OF THE ACCOUNTING TREATMENT THEREOF); AND

 

(III)                               UPON ANY SUCH EXERCISE, THE AGGREGATE
CONSIDERATION RECEIVED FOR SUCH SECURITIES SHALL BE DEEMED TO BE THE
CONSIDERATION RECEIVED BY THE PARENT FOR THE ISSUANCE OF SUCH SECURITIES PLUS
THE ADDITIONAL MINIMUM CONSIDERATION, IF ANY, TO BE RECEIVED BY THE PARENT UPON
THE CONVERSION OR EXCHANGE THEREOF (THE CONSIDERATION IN EACH CASE TO BE
DETERMINED IN THE SAME MANNER AS PROVIDED IN SUBSECTIONS (I) AND (II) OF THIS
SECTION 2.6(D)).

 

2.7                                 RESERVATION OF SHARES.  DURING THE PERIOD
THE CONVERSION RIGHT EXISTS, THE PARENT WILL RESERVE FROM ITS AUTHORIZED AND
UNISSUED COMMON STOCK A SUFFICIENT NUMBER OF SHARES TO PROVIDE FOR THE ISSUANCE
OF CONVERSION SHARES UPON THE FULL CONVERSION OF THIS NOTE AND THE WARRANT.  THE
PARENT REPRESENTS THAT UPON ISSUANCE, THE CONVERSION SHARES WILL BE DULY AND
VALIDLY ISSUED, FULLY PAID AND NON-ASSESSABLE.  THE PARENT AGREES THAT ITS
ISSUANCE OF THIS NOTE SHALL CONSTITUTE FULL AUTHORITY TO ITS OFFICERS, AGENTS,
AND TRANSFER AGENTS WHO ARE CHARGED WITH THE DUTY OF EXECUTING AND ISSUING STOCK
CERTIFICATES TO EXECUTE AND ISSUE THE NECESSARY CERTIFICATES FOR THE CONVERSION
SHARES UPON THE CONVERSION OF THIS NOTE.

 

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ARTICLE III
EVENTS OF DEFAULT AND DEFAULT RELATED PROVISIONS

 

3.1                                 EVENTS OF DEFAULT.  THE OCCURRENCE OF AN
EVENT OF DEFAULT UNDER THE SECURITY AGREEMENT SHALL CONSTITUTE AN EVENT OF
DEFAULT (“EVENT OF DEFAULT”) HEREUNDER.

 

3.2                                 DEFAULT INTEREST.  FOLLOWING THE OCCURRENCE
AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT AND THE EXPIRATION OF ANY
APPLICABLE GRACE PERIOD, THE COMPANIES SHALL, JOINTLY AND SEVERALLY, PAY
ADDITIONAL INTEREST ON THE OUTSTANDING PRINCIPAL BALANCE OF THIS NOTE IN AN
AMOUNT EQUAL TO THE CONTRACT RATE PLUS FIVE PERCENT (5%) PER ANNUM, AND ALL
OUTSTANDING OBLIGATIONS, INCLUDING UNPAID INTEREST, SHALL CONTINUE TO ACCRUE
INTEREST AT SUCH ADDITIONAL INTEREST RATE FROM THE DATE OF SUCH EVENT OF DEFAULT
UNTIL THE DATE SUCH EVENT OF DEFAULT IS CURED OR WAIVED.

 

3.3                                 DEFAULT PAYMENT.  FOLLOWING THE OCCURRENCE
AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT, THE HOLDER, AT ITS OPTION,
MAY ELECT, IN ADDITION TO ALL RIGHTS AND REMEDIES OF THE HOLDER UNDER THE
SECURITY AGREEMENT AND THE OTHER ANCILLARY AGREEMENTS AND ALL OBLIGATIONS AND
LIABILITIES OF EACH COMPANY UNDER THE SECURITY AGREEMENT AND THE OTHER ANCILLARY
AGREEMENTS, TO REQUIRE THE COMPANIES, JOINTLY AND SEVERALLY, TO MAKE A DEFAULT
PAYMENT (“DEFAULT PAYMENT”).  THE DEFAULT PAYMENT SHALL BE 130% OF THE
OUTSTANDING PRINCIPAL AMOUNT OF THE NOTE, PLUS ACCRUED BUT UNPAID INTEREST, ALL
OTHER FEES THEN REMAINING UNPAID, AND ALL OTHER AMOUNTS PAYABLE HEREUNDER.  THE
DEFAULT PAYMENT SHALL BE APPLIED FIRST TO ANY FEES DUE AND PAYABLE TO THE HOLDER
PURSUANT TO THE NOTES , THE SECURITY AGREEMENT AND/OR THE ANCILLARY AGREEMENTS,
THEN TO ACCRUED AND UNPAID INTEREST DUE ON THE NOTES AND THEN TO THE OUTSTANDING
PRINCIPAL BALANCE OF THE NOTES.  THE DEFAULT PAYMENT SHALL BE DUE AND PAYABLE
IMMEDIATELY ON THE DATE THAT THE HOLDER HAS EXERCISED ITS RIGHTS PURSUANT TO
THIS SECTION 3.3.

 

ARTICLE IV
MISCELLANEOUS

 

4.1                                 CONVERSION PRIVILEGES.  THE CONVERSION
PRIVILEGES SET FORTH IN ARTICLE II SHALL REMAIN IN FULL FORCE AND EFFECT
IMMEDIATELY FROM THE DATE HEREOF UNTIL THE DATE THIS NOTE IS INDEFEASIBLY PAID
IN FULL AND IRREVOCABLY TERMINATED.

 

4.2                                 CUMULATIVE REMEDIES.  THE REMEDIES UNDER
THIS NOTE SHALL BE CUMULATIVE.

 

4.3                                 FAILURE OR INDULGENCE NOT WAIVER.  NO
FAILURE OR DELAY ON THE PART OF THE HOLDER HEREOF IN THE EXERCISE OF ANY POWER,
RIGHT OR PRIVILEGE HEREUNDER SHALL OPERATE AS A WAIVER THEREOF, NOR SHALL ANY
SINGLE OR PARTIAL EXERCISE OF ANY SUCH POWER, RIGHT OR PRIVILEGE PRECLUDE OTHER
OR FURTHER EXERCISE THEREOF OR OF ANY OTHER RIGHT, POWER OR PRIVILEGE.  ALL
RIGHTS AND REMEDIES EXISTING HEREUNDER ARE CUMULATIVE TO, AND NOT EXCLUSIVE OF,
ANY RIGHTS OR REMEDIES OTHERWISE AVAILABLE.

 

4.4                                 NOTICES.  ANY NOTICE HEREIN REQUIRED OR
PERMITTED TO BE GIVEN SHALL BE IN WRITING AND SHALL BE DEEMED EFFECTIVE GIVEN
(A) UPON PERSONAL DELIVERY TO THE PARTY NOTIFIED, (B) WHEN SENT BY CONFIRMED
TELEX OR FACSIMILE IF SENT DURING NORMAL BUSINESS HOURS OF THE RECIPIENT, IF
NOT, THEN ON THE NEXT BUSINESS DAY, (C) FIVE DAYS AFTER HAVING BEEN SENT BY
REGISTERED OR

 

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certified mail, return receipt requested, postage prepaid, or (d) one day after
deposit with a nationally recognized overnight courier, specifying next day
delivery, with written verification of receipt.  All communications shall be
sent to the respective Company at the address provided for such Company in the
Security Agreement executed in connection herewith, and to the Holder at the
address provided in the Security Agreement for the Holder, with a copy to John
E. Tucker, Esq., 825 Third Avenue, 14th Floor, New York, New York 10022,
facsimile number (212) 541-4434, or at such other address as the respective
Company or the Holder may designate by ten days advance written notice to the
other parties hereto.  A Notice of Conversion shall be deemed given when made to
the Parent pursuant to the Purchase Agreement.

 

4.5                                 AMENDMENT PROVISION.  THE TERM “NOTE” AND
ALL REFERENCES THERETO, AS USED THROUGHOUT THIS INSTRUMENT, SHALL MEAN THIS
INSTRUMENT AS ORIGINALLY EXECUTED, OR IF LATER AMENDED OR SUPPLEMENTED, THEN AS
SO AMENDED OR SUPPLEMENTED, AND ANY SUCCESSOR INSTRUMENT AS SUCH SUCCESSOR
INSTRUMENT MAY BE AMENDED OR SUPPLEMENTED.

 

4.6                                 ASSIGNABILITY.  THIS NOTE SHALL BE BINDING
UPON EACH COMPANY AND ITS SUCCESSORS AND ASSIGNS, AND SHALL INURE TO THE BENEFIT
OF THE HOLDER AND ITS SUCCESSORS AND ASSIGNS, AND MAY BE ASSIGNED BY THE HOLDER
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITY AGREEMENT.  NO COMPANY MAY
NOT ASSIGN ANY OF ITS OBLIGATIONS UNDER THIS NOTE WITHOUT THE PRIOR WRITTEN
CONSENT OF THE HOLDER, ANY SUCH PURPORTED ASSIGNMENT WITHOUT SUCH CONSENT BEING
NULL AND VOID.

 

4.7                                 COST OF COLLECTION.  IN CASE OF ANY EVENT OF
DEFAULT UNDER THIS NOTE, THE COMPANIES SHALL, JOINTLY AND SEVERALLY, PAY THE
HOLDER THE HOLDER’S REASONABLE COSTS OF COLLECTION, INCLUDING REASONABLE
ATTORNEYS’ FEES.

 

4.8                                 GOVERNING LAW, JURISDICTION AND WAIVER OF
JURY TRIAL.

 

(A)                                  THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

 

(B)                                 EACH COMPANY HEREBY CONSENTS AND AGREES THAT
THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK
SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES
BETWEEN ANY COMPANY, ON THE ONE HAND, AND THE HOLDER, ON THE OTHER HAND,
PERTAINING TO THIS NOTE, THE SECURITY AGREEMENT OR ANY OF THE OTHER ANCILLARY
AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE, THE SECURITY
AGREEMENT OR ANY OF THE OTHER ANCILLARY AGREEMENTSPROVIDED, THAT EACH COMPANY
ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY A COURT
LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND FURTHER
PROVIDED, THAT NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE
HOLDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY
FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR

 

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OTHER COURT ORDER IN FAVOR OF THE HOLDER.  EACH COMPANY EXPRESSLY SUBMITS AND
CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY
SUCH COURT, AND EACH COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED
UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS.
 EACH COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL
ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN THE SECURITY AGREEMENT AND
THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S
ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER
POSTAGE PREPAID

 

(C)                                  EACH COMPANY DESIRES THAT ITS DISPUTES BE
RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS.  THEREFORE, TO ACHIEVE THE
BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, EACH
COMPANY HERETO WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, SUIT, OR
PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR
OTHERWISE BETWEEN THE HOLDER, AND/OR ANY COMPANY ARISING OUT OF, CONNECTED WITH,
RELATED OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION
WITH THIS NOTE, THE SECURITY AGREEMENT, ANY OTHER ANCILLARY AGREEMENT OR THE
TRANSACTIONS RELATED HERETO OR THERETO.

 

4.9                                 SEVERABILITY.  IN THE EVENT THAT ANY
PROVISION OF THIS NOTE IS INVALID OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE
OR RULE OF LAW, THEN SUCH PROVISION SHALL BE DEEMED INOPERATIVE TO THE EXTENT
THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED MODIFIED TO CONFORM WITH SUCH
STATUTE OR RULE OF LAW.  ANY SUCH PROVISION WHICH MAY PROVE INVALID OR
UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF
ANY OTHER PROVISION OF THIS NOTE.

 

4.10                           MAXIMUM PAYMENTS.  NOTHING CONTAINED HEREIN SHALL
BE DEEMED TO ESTABLISH OR REQUIRE THE PAYMENT OF A RATE OF INTEREST OR OTHER
CHARGES IN EXCESS OF THE MAXIMUM PERMITTED BY APPLICABLE LAW.  IN THE EVENT THAT
THE RATE OF INTEREST REQUIRED TO BE PAID OR OTHER CHARGES HEREUNDER EXCEED THE
MAXIMUM RATE PERMITTED BY SUCH LAW, ANY PAYMENTS IN EXCESS OF SUCH MAXIMUM RATE
SHALL BE CREDITED AGAINST AMOUNTS OWED BY THE COMPANIES TO THE HOLDER AND THUS
REFUNDED TO THE COMPANIES.

 

4.11                           SECURITY INTEREST AND GUARANTEE.  THE HOLDER HAS
BEEN GRANTED A SECURITY INTEREST IN CERTAIN ASSETS OF THE COMPANIES AS MORE
FULLY DESCRIBED IN THE SECURITY AGREEMENT.  THE OBLIGATIONS OF THE COMPANIES
UNDER THIS NOTE ARE GUARANTEED BY CERTAIN SUBSIDIARIES OF THE COMPANIES PURSUANT
TO THE SUBSIDIARY GUARANTY DATED AS OF THE DATE HEREOF.

 

4.12                           CONSTRUCTION.  EACH PARTY ACKNOWLEDGES THAT ITS
LEGAL COUNSEL PARTICIPATED IN THE PREPARATION OF THIS NOTE AND, THEREFORE,
STIPULATES THAT THE RULE OF CONSTRUCTION THAT

 

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AMBIGUITIES ARE TO BE RESOLVED AGAINST THE DRAFTING PARTY SHALL NOT BE APPLIED
IN THE INTERPRETATION OF THIS NOTE TO FAVOR ANY PARTY AGAINST THE OTHER.

 

[Balance of page intentionally left blank; signature page follows]

 

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IN WITNESS WHEREOF, each Company has caused this Secured Revolving Note to be
signed in its name effective as of this      day of August, 2005.

 

 

 

IWT TESORO CORPORATION

 

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

 

WITNESS:

 

 

 

 

 

 

INTERNATIONAL WHOLESALE TILE, INC.

 

 

 

 

By:

 

 

 

 

Name:

 

 

Title:

 

 

WITNESS:

 

 

 

 

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EXHIBIT A

 

OTHER COMPANIES

 

International Wholesale Tile, Inc., a Florida corporation

 

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EXHIBIT B

 

NOTICE OF CONVERSION

 

(To be executed by the Holder in order to convert the Secured Revolving Note)

 

The undersigned hereby elects to convert $             of the principal and
$             of the interest due on the Secured Revolving Note dated as of
                  , 2005 (the “Note”) issued by IWT TESORO CORPORATION (the
“Parent”) and the other Companies named and as defined therein into shares of
Common Stock of the Parent (“Shares) in accordance with the terms and conditions
set forth in the Note, as of the date written below.

 

Date of Conversion:

 

 

 

 

 

Conversion Price:

 

 

 

 

 

Shares To Be Delivered:

 

 

 

 

 

Signature:

 

 

 

 

 

Print Name:

 

 

 

 

 

Address:

 

 

 

 

 

Holder DWAC instructions

 

 

 

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