Exhibit 10.5

 

SECURITY AND PLEDGE AGREEMENT

 

SECURITY AND PLEDGE AGREEMENT, dated as of October 26, 2005, among DynTek, Inc.,
a Delaware corporation (the “Company), DynTek Services, Inc., a Delaware
corporation (the “Subsidiary” and, together with the Company, the “Debtors”),
and those purchasers (the “Purchasers”) who are parties to that certain Purchase
Agreement (as hereinafter defined).

 

Recitals

 

WHEREAS, the Company and the Purchasers are parties to a Note Purchase Agreement
dated as of the date hereof (the “Purchase Agreement”);

 

WHEREAS, it is a condition precedent to the agreement of the Purchasers to enter
into the Purchase Agreement and to extend credit to the Company thereunder that
the Debtors execute and deliver this Security Agreement as security for the
payment and performance of all obligations of the Debtors to the Purchasers; and

 

WHEREAS, it is also a condition precedent to the agreement of the Purchasers to
enter into the Purchase Agreement and to extend credit to the Company thereunder
that the Subsidiary guarantee all of the obligations of the Debtors under the
Purchase Agreement and this Agreement:

 

NOW, THEREFORE, in consideration of the premises contained herein and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

 

ARTICLE 1

 

GRANT OF SECURITY

 

Section 1.1.                                Grant of Security.  The Debtors
hereby grant to the Purchasers a lien and continuing security interest
(“Security Interest”) in and to, and a right of set-off against, all of the
following personal property and fixtures of the Debtors, whether now owned by or
owing to, or hereafter acquired by or arising in favor of, such Debtor
(including under any trade names, styles or derivations thereof), and whether
owned or consigned by or to, or leased from or to, such Debtor, and regardless
of where located (all of which being hereinafter collectively referred to as the
“Collateral”):

 

(a)                                  all Accounts;

 

(b)                                 all Chattel Paper;

 

(c)                                  all Documents;

 

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(d)                                 all General Intangibles (including Marks,
Copyrights, Patents, payment intangibles, Proprietary Information and Trade
Secrets);

 

(e)                                  all Goods (including Inventory, Equipment
and Fixtures);

 

(f)                                    all Instruments;

 

(g)                                 all Investment Property, including (i) all
shares of the capital stock or membership interests of each subsidiary owned or
held by each Debtor, whether now owned or hereafter formed or acquired (those
shares and membership interests being listed and described on Schedule A
attached hereto), and all substitutions and additions to such shares (herein,
the “Pledged Securities”), (ii) all dividends, distributions, and sums
distributable or payable from, upon or in respect of the Pledged Securities, and
(iii) all other rights and privileges incident to the Pledged Securities (all of
the foregoing being hereinafter referred to collectively as the “Stock
Collateral”);

 

(h)                                 all Deposit Accounts of such Debtor,
including all blocked accounts, concentration accounts, disbursement accounts,
and all other bank and all deposits therein;

 

(i)                                     all money, cash or cash equivalents of
such Debtor;

 

(j)                                     all Supporting Obligations and
Letter-of-Credit Rights of such Debtor;

 

(k)                                  the commercial tort claims identified on
Schedule B hereto; and

 

(l)                                     to the extent not otherwise included,
all Proceeds, tort claims, insurance claims and other rights to payments not
otherwise included in the foregoing and products of the foregoing and all
accessions to, substitutions and replacements for, and rents and profits of,
each of the foregoing;

 

provided, however, liens on the Purchased Assets (as that term is defined by the
Asset Purchase Agreement and Liability Assumption Agreement, dated as of
August 8, 2005 (the “NETF Agreement”), among the Debtors and New England
Technology Finance, LLC, a Delaware limited liability company) shall not be
granted if the grant of a Lien in such Purchased Assets or in the manner
contemplated by this Agreement is prohibited by the terms of the NETF Agreement,
but only to the extent that any such prohibition is not rendered ineffective
pursuant to the Uniform Commercial Code of the State of California or any other
applicable law; provide further, however, that with respect to the Purchased
Assets described in the preceding clause that are excluded from the Collateral
by virtue of the NETF Agreement shall be excluded from the Collateral only to
the extent and for so long as this Agreement constitutes a default or event of
default under the NETF Agreement and the NETF Agreement continues validly to
prohibit the creation of such security interest pursuant to this Agreement, and
upon the expiration of such prohibition, the Purchased Assets shall
automatically be included in the Collateral, without further action on the part
of any Debtor or Purchaser.

 

Section 1.2.                                Security for Obligations.  This
Agreement and the Security Interest shall secure the payment and performance of
the Obligations.

 

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ARTICLE 2

 

GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS

 

Each Debtor represents, warrants and covenants, which representations,
warranties and covenants shall survive execution and delivery of this Agreement,
as follows:

 

Section 2.1.                                Necessary Filings.  All financing
statements necessary or appropriate to perfect the security interest granted by
each Debtor to the Purchasers hereby in respect of the Collateral, which can be
perfected by the filing of a financing statement, have been filed and the
Security Interest granted to the Purchasers pursuant to this Agreement in and to
such Collateral constitutes a perfected Security Interest therein (to the extent
that the same can be perfected by filing) prior to the rights of all other
persons or entities therein (other than any such rights pursuant to the
Permitted Liens) and subject to no other Liens (other than Permitted Liens) and
is entitled to all the rights, priorities and benefits afforded by the Uniform
Commercial Code of the State of California to perfected security interests.

 

Section 2.2.                                No Liens.  Each Debtor is, and as to
Collateral acquired by it from time to time after the date hereof such Debtor
will be, the owner of all Collateral pledged by it hereunder free from any Lien,
security interest, encumbrance or other right, title or interest of any person
or entity (other than Permitted Liens), and each Debtor shall defend the
Collateral against all claims and demands of all persons or entities at any time
claiming the same or any interest therein (other than in connection with
Permitted Liens) adverse to the Purchasers.

 

Section 2.3.                                Other Financing Statements.  To the
best knowledge of each Debtor, as of the date hereof, there is no financing
statement covering or purporting to cover any interest of any kind in the
Collateral (other than financing statements filed in respect of Permitted
Liens), and so long as any Purchaser Obligations or commitments with respect
thereto are outstanding, no Debtor will execute or authorize to be filed in any
public office any financing statement (or similar statement or instrument of
registration under the law of any jurisdiction) or statements relating to the
Collateral, except financing statements filed or to be filed in respect of and
covering the security interests granted hereby by such Debtor or in connection
with Permitted Liens.

 

Section 2.4.                                Chief Executive Office; Records.

 

(a)                                  As of the date hereof, the chief executive
office of each Debtor is located at the address indicated on Schedule C hereto
for such Debtor.  No Debtor will move its chief executive office except to such
new location as such Debtor may establish in accordance with the last sentence
of this Section 2.4. A complete set of books of account and records of each
Debtor relating to the Accounts, Chattel Paper and Documents are, and will
continue to be, kept at such chief executive office, at one or more of the other
record locations set forth on Schedule C hereto for such Debtor or at such new
locations as such Debtor may establish in accordance with the last sentence of
this Section 2.4.

 

(b)                                 All Accounts, Chattel Paper and Documents of
each Debtor are, and will continue to be, maintained at, and controlled and
directed (including, without limitation, for

 

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general accounting purposes) from, the office locations described above or such
new location established in accordance with the last sentence of this
Section 2.4.  No Debtor shall establish new locations for such offices until
(a) it shall have given to the Purchasers not less than 30 days’ prior written
notice of its intention to do so, clearly describing such new location and
providing such other information in connection therewith as the Purchasers may
reasonably request and (b) with respect to such new location, it shall have
taken all action reasonably satisfactory to the Purchasers, to maintain the
security interest of the Purchasers in the Collateral intended to be granted
hereby at all times fully perfected and in full force and effect.

 

Section 2.5.                                Location of Inventory and
Equipment.  As of the date hereof, all Inventory and Equipment held by each
Debtor is located at one of the locations shown on Schedule D hereto.  Each
Debtor agrees that all Inventory and Equipment now held or subsequently acquired
by it shall be kept at (or shall be in transport to) any one of the locations
shown on Schedule D hereto, or such new location as such Debtor may establish in
accordance with the last sentence of this Section 2.5.  Each Debtor may
establish a new location for Inventory and Equipment in a jurisdiction in which
such Debtor currently does business and with respect to which the Purchasers
have a first perfected security interest in such Inventory and Equipment
(subject to Permitted Liens).  Each Debtor may establish a new location outside
of a jurisdiction in which it currently does business and with respect to which
the Purchasers have a first perfected security interest in such Inventory and
Equipment only if (a) it shall have given to the Purchasers not less than 30
days’ prior written notice of its intention so to do, clearly describing such
new location and providing such other information in connection therewith as the
Purchasers may reasonably request and (b) with respect to such new location, it
shall have taken all action reasonably satisfactory to the Purchasers to
maintain the security interest of the Purchasers in the Collateral intended to
be granted hereby at all times fully perfected and in full force and effect.

 

Section 2.6.                                Recourse.  This Agreement is made
with full recourse to each Debtor and pursuant to and upon all the warranties,
representations, covenants and agreements on the part of each Debtor contained
herein, in the Purchase Agreement and otherwise in writing in connection
herewith or therewith.

 

Section 2.7.                                Trade Names; Change of Name.  Each
Debtor’s legal name, jurisdiction of organization and organizational number (if
any) are correctly set forth under Column 1 on Schedule E of this Agreement.  No
Debtor has 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 E attached hereto.  No Debtor shall change its
jurisdiction of organization without the Purchasers’ prior written consent.  No
Debtor shall 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 Purchasers.  With respect to such new name or jurisdiction of
organization, such Debtor shall have taken all action reasonably requested by
the Purchasers, to maintain the Security Interest at all times fully perfected
and in full force and effect.

 

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ARTICLE 3

 

SPECIAL PROVISIONS CONCERNING
ACCOUNTS; INSTRUMENTS

 

Section 3.1.                                Additional Representations and
Warranties.  As of the time when each of its Accounts arises, each Debtor shall
be deemed to have represented and warranted that such Account, and all records,
papers and documents relating thereto are what they purport to be in all
material respects, and that such Account will, to the best knowledge of each
Debtor, evidence true and valid obligations of the account debtor named therein.

 

Section 3.2.                                Maintenance of Records.  Each Debtor
will keep and maintain at its own cost and expense, records of its Accounts and
each Debtor will make the same available on such Debtor’s premises to the
Purchasers for inspection, at such Debtor’s own cost and expense, at any and all
commercially reasonable times upon commercially reasonable prior notice to such
Debtor.  Upon the occurrence and during the continuance of an Event of Default
and at the commercially reasonable request of the Purchasers, each Debtor shall,
at its own cost and expense, deliver all tangible evidence of its Accounts,
including, without limitation, all documents evidencing the Accounts) and such
books and records to the Purchasers or to its representatives (copies of which
evidence and books and records may be retained by each Debtor).  If the
Purchasers so direct, upon the occurrence and during the continuance of an Event
of Default, each Debtor shall legend, in form and manner satisfactory to the
Purchasers, the Accounts, as well as books, records and documents of such Debtor
evidencing or pertaining to such Receivables and Contracts with an appropriate
reference to the fact that such Receivables and Contracts have been assigned to
the Purchasers and that the Purchasers have a security interest therein.

 

Section 3.3.                                Direction to Account Debtors;
Contracting Parties; etc.  Upon the occurrence and during the continuance of an
Event of Default, and if the Purchasers so direct each Debtor if such Debtor
does not have a Senior Lender, each Debtor agrees (a) to cause all payments on
account of the Accounts to be made directly to the Cash Collateral Account,
(b) that the Purchasers may, at their option, directly notify the obligors with
respect to any Accounts to make payments with respect thereto as provided in
preceding clause (a) and (c) that the Purchasers may enforce collection of any
such Accounts and may adjust, settle or compromise the amount of payment
thereof, in the same manner and to the same extent as such Debtor.  Without
notice to or assent by each Debtor, the Purchasers may apply any or all amounts
then in, or thereafter deposited in, the Cash Collateral Account which
application shall be effected in the manner provided in Section 7.4 of this
Agreement.  The reasonable costs and expenses (including reasonable attorneys’
fees) of collection, whether incurred by such Debtor or the Purchasers, shall be
borne by such Debtor.  The Purchasers shall deliver a copy of each notice
referred to in the preceding clause (b) to such Debtor; provided, that the
failure by the Purchasers to so notify such Debtor shall not affect the
effectiveness of such notice or the other rights of the Purchasers created by
this Section 3.3.

 

Section 3.4.                                Modification of Terms; etc.  No
Debtor shall rescind or cancel any indebtedness evidenced by any Account, or
modify any term thereof or make any adjustment with respect thereto, or extend
or renew the same, or compromise or settle any material dispute,

 

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claim, suit or legal proceeding relating thereto, or sell any Account, or
interest therein, without the prior written consent of the Purchasers, except in
accordance with such Debtor’s commercially reasonable business practices.

 

Section 3.5.                                Collection. Each Debtor shall
endeavor in accordance with commercially reasonable business practices to cause
to be collected from the account debtor named in each of its Accounts, as and
when due (including, without limitation, amounts which are delinquent, such
amounts to be collected in accordance with generally accepted lawful collection
procedures) any and all amounts owing under or on account of such Accounts and
apply forthwith upon receipt thereof all such amounts as are so collected to the
outstanding balance of such Account.  The reasonable costs and expenses
(including, without limitation, attorneys’ fees) of collection, if incurred by
each Debtor or the Purchasers, shall be borne by such Debtor.

 

Section 3.6.                                Instruments.  If a Debtor owns or
acquires any Instrument constituting Collateral, at Purchasers’ request upon the
occurrence and during the continuation of an Event of Default and if such Debtor
does not have a Senior Lender, such Debtor will promptly deliver such Instrument
to the Purchasers appropriately endorsed to the order of the Purchasers as
further security hereunder.  At the Purchasers’ request, such Debtor that owns
or acquires any other Instrument constituting Collateral will, within 5 business
days, promptly deliver such Instrument to the Purchasers appropriately endorsed
to the order of the Purchasers as further security hereunder.

 

ARTICLE 4

 

SPECIAL PROVISIONS CONCERNING MARKS

 

Section 4.1.                                Additional Representations and
Warranties.  Each Debtor represents and warrants that, as of the date hereof, it
is the true and lawful owner of all right, title and interest to or otherwise
has the right to use the registered Marks listed in Schedule F hereto and that,
as of the date hereof said listed Marks constitute all the marks and
applications for marks registered in the United States Patent and Trademark
Office that such Debtor presently owns or uses in connection with its business. 
Each Debtor represents and warrants that it owns, is licensed to use or
otherwise has the right to use all material Marks that it uses.  Each Debtor
further warrants that it has no knowledge of any third party claim that any
aspect of such Debtor’s present or contemplated business operations infringes or
will infringe any trademark, service mark or trade name in any respect which
could reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities or condition (financial or otherwise)
of such Debtor.  Each Debtor represents and warrants that except as listed on
Schedule F, as of the date hereof it is the beneficial and record owner of all
trademark registrations and applications listed in Schedule F hereto and that
said registrations are valid and subsisting, and that no Debtor is aware of any
third-party claim that any of said registrations in respect of any material Mark
is invalid or unenforceable.  Each Debtor hereby grants to the Purchasers an
absolute power of attorney to sign, upon the occurrence and during the
continuance of an Event of Default, any document which may be required by the
United States Patent and Trademark Office in order to effect an absolute
assignment of all right, title and interest in each Mark, and record the same;
provided that such power of attorney may be exercised only if such Debtor does
not have a Senior Lender.

 

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Section 4.2.                                Infringements.  Each Debtor agrees,
promptly upon learning thereof, to notify the Purchasers in writing of the name
and address of, and to furnish such pertinent information that may be available
with respect to, any party who such Debtor believes is infringing or diluting or
otherwise violating in any material respect any of such Debtor’s rights in and
to any material Mark, or with respect to any party claiming that such Debtor’s
use of any material Mark violates in any material respect any property right of
that party.  Each Debtor further agrees to prosecute any Person infringing any
material Mark in accordance with commercially reasonable business practices.

 

Section 4.3.                                Preservation of Marks.  Each Debtor
agrees to use its Marks as required in each of the applicable jurisdictions
during the time in which this Agreement is in effect, sufficiently to preserve
such Marks (and any registrations thereto) as trademarks or service marks under
the laws of the United States and any other applicable law; provided, that,
prior to any Default, no Debtor shall be obligated to preserve any Mark in the
event such Debtor determines, in its commercially reasonable business judgment,
that the preservation of such Mark is no longer desirable in the conduct of its
business.

 

Section 4.4.                                Maintenance of Registration.  Each
Debtor shall, at its own expense, diligently process all documents required by
the Trademark Act of 1946, 15 U.S.C. §§ 1051 et seq. to maintain trademark
registrations, including but not limited to affidavits of use and applications
for renewals of registration in the United States Patent and Trademark Office
for all of its registered Marks pursuant to 15 U.S.C. §§ 1058(a), 1059 and 1065,
and shall pay all fees and disbursements in connection therewith and shall not
abandon any such filing of affidavit of use or any such application of renewal
prior to the exhaustion of all administrative and judicial remedies without
prior written consent of the Purchasers; provided, that, prior to any Default,
no Debtor shall be obligated to maintain any Mark in the event that such Debtor
determines, in its commercially reasonable business judgment, that the
maintenance of such Mark is no longer necessary or desirable in the conduct of
its business.

 

Section 4.5.                                Future Registered Marks.  If any
Mark registration issues hereafter to a Debtor as a result of any application
now or hereafter pending before the United States Patent and Trademark Office,
within 60 days of receipt of such certificate, such Debtor shall deliver to the
Purchasers a copy of such certificate, and an assignment for security in such
Mark, to the Purchasers and at the expense of such Debtor, confirming the
assignment for security in such Mark to the Purchasers hereunder, in such form
as may be reasonably satisfactory to the Purchasers.

 

Section 4.6.                                Remedies.  If an Event of Default
shall occur and be continuing, the Purchasers may take any or all of the
following actions if such Debtor does not have a Senior Lender:  (a) declare the
entire right, title and interest of such Debtor in and to each of the Marks,
together with all trademark rights and rights of protection to the same, vested
in the Purchasers for the benefit of the Purchasers, in which event the rights,
title and interest shall immediately vest, in the Purchasers for the benefit of
the Purchasers, and the Purchasers shall be entitled to exercise the power of
attorney referred to in Section 4.1 hereof to execute, cause to be acknowledged
and notarized and record said absolute assignment with the applicable agency;
(b) take and use or sell the Marks and the goodwill of such Debtor’s business
symbolized by the Marks and the right to carry on the business and use the
assets of such Debtor in connection with

 

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which the Marks have been used; and (c) direct such Debtor to refrain, in which
event such Debtor shall refrain, from using the Marks in any manner whatsoever,
directly or indirectly, and, if requested by the Purchasers, change such
Debtor’s corporate name to eliminate therefrom any use of any Mark and execute
such other and further documents that the Purchasers may request to further
confirm this and to transfer ownership of the Marks and registrations and any
pending trademark application in the United States Patent and Trademark Office
to the Purchasers.

 

Section 4.7.                                Collateral Assignment.  This
Agreement is made for collateral security purposes only.  This Agreement and
Purchasers’ Security Interest in the Marks shall continue in full force and
effect as long as any Obligations shall be owed to the Purchasers (or any of
said Purchasers).  Upon payment in full of the Obligations and termination of
the Purchase Agreement, this Agreement shall terminate and Purchasers shall
promptly execute and deliver to each Debtor, at such Debtor’s expense, all
termination statements and other instruments as may be necessary or proper to
terminate Purchasers’ security interest in the Marks, subject to any disposition
thereof which may have been made by Purchasers pursuant to this Agreement or the
Purchase Agreement.

 

ARTICLE 5

 

SPECIAL PROVISIONS CONCERNING
PATENTS, COPYRIGHTS AND TRADE SECRETS

 

Section 5.1.                                Additional Representations and
Warranties.  Each Debtor represents and warrants that, as of the date hereof, it
is the true and lawful owner of all rights in (a) all material Trade Secrets and
Proprietary Information necessary to operate the business of such Debtor,
(b) the Patents listed in Schedule G hereto for the Debtor and that said Patents
constitute all the patents and applications for patents that the Debtor owns on
the date hereof and (c) the Copyrights listed in Schedule H hereto and that said
Copyrights constitute all registrations of copyrights and applications for
copyright registrations that such Debtor owns on the date hereof.  Each Debtor
further warrants that it has no knowledge of any third party claim that any
aspect of such Debtor’s present or contemplated business operations infringes or
will infringe any patent or any copyright or such Debtor has misappropriated any
Trade Secret or Proprietary Information, in each case in any respect which could
reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities or condition (financial or otherwise)
of such Debtor.  Each Debtor hereby grants to the Purchasers an absolute power
of attorney to sign, upon the occurrence and during the continuance of an Event
of Default, any document which may be required by the United States Patent and
Trademark Office or the United States Copyright Office in order to effect an
absolute assignment of all right, title and interest in each Patent and
Copyright, and to record the same; provided that such power of attorney may be
exercised only if Debtor does not have a Senior Lender.

 

Section 5.2.                                Infringements. Each Debtor agrees,
promptly upon learning thereof, to furnish the Purchasers in writing with all
pertinent information available to such Debtor with respect to any infringement,
contributing infringement or active inducement to infringe in any material
respect any material Patent or Copyright or to any claim that the practice of
any material Patent or the use of any material Copyright violates in any
material respect any property right of a third party, or with respect to any
misappropriation of any material Trade Secret Right or any

 

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claim that practice of any material Trade Secret Right violates in any material
respect any property right of a third party.  Each Debtor further agrees, to the
extent consistent with commercially reasonable business practices, to prosecute
any Person infringing any Patent or Copyright or any Person misappropriating any
Trade Secret Right.

 

Section 5.3.                                Maintenance of Patents.  At its own
expense, each Debtor shall make timely payment of all post-issuance fees
required pursuant to 35 U.S.C. § 41 to maintain in force rights under each
Patent, absent prior written consent of the Purchasers; provided, that no Debtor
shall be obligated to maintain any Patent in the event such Debtor determines,
in its commercially reasonable business judgment, that the maintenance of such
Patent is no longer necessary or desirable in the conduct of its business.

 

Section 5.4.                                Prosecution of Patent Application. 
At its own expense, each Debtor shall diligently prosecute all applications for
Patents for such Debtor and shall not abandon any such application prior to
exhaustion of all administrative and judicial remedies, absent written consent
of the Purchasers; provided, that no Debtor shall be obligated to prosecute any
application in the event such Debtor determines, in its commercially reasonable
business judgment, that the prosecuting of such application is no longer
necessary or desirable in the conduct of its business.

 

Section 5.5.                                Other Patents and Copyrights. 
Within 60 days of the acquisition or issuance of a Patent, registration of a
Copyright, or acquisition of a registered copyright, each Debtor shall deliver
to the Purchasers a copy of said Copyright or certificate or registration of
said Patents, as the case may be, with an assignment for security as to such
Patent or Copyright, as the case may be, to the Purchasers and at the expense of
such Debtor, confirming the assignment for security, in such form as may be
reasonably satisfactory to the Purchasers.

 

Section 5.6.                                Remedies.  If an Event of Default
shall occur and be continuing, the Purchasers may take any or all of the
following actions if a Debtor does not have a Senior Lender:  (a) declare the
entire right, title, and interest of such Debtor in each of the Patents and
Copyrights vested in the Purchasers for the benefit of the Purchasers, in which
event such right, title, and interest shall immediately vest in the Purchasers
for the benefit of the Purchasers, in which case the Purchasers shall be
entitled to exercise the power of attorney referred to in Section 5.1 hereof to
execute, cause to be acknowledged and notarized and to record said absolute
assignment with the applicable agency; (b) take and practice or sell the Patents
and Copyrights; and (c) direct such Debtor to refrain, in which event such
Debtor shall refrain, from practicing the Patents and using the Copyrights
directly or indirectly, and such Debtor shall execute such other and further
documents as the Purchasers may request further to confirm this and to transfer
ownership of the Patents and Copyrights to the Purchasers for the benefit of the
Purchasers.

 

ARTICLE 6

 

SPECIAL PROVISIONS CONCERNING STOCK COLLATERAL

 

Section 6.1.                                Additional Representations.  Each
Debtor has the right to vote the Pledged Securities and there are no
restrictions upon the voting rights associated with, or the

 

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transfer of, any of the Pledged Securities, except as provided by federal and
state laws applicable to the sale of securities generally and the terms of this
Agreement.  The Pledged Securities have been validly issued and, except as
described on Schedule A, are fully paid and non assessable.  Except as set forth
on Schedule A, there are no outstanding commitments or other obligations of the
issuers of any of the Pledged Securities to issue, and no options, warrants or
other rights of any individual or entity to acquire, any share of any class or
series of capital stock of such issuers.  The Pledged Securities listed and
described on Schedule A attached hereto constitute the percentage of the issued
and outstanding capital stock of each series and class of the issuers thereof as
set forth thereon owned by the relevant Debtor.  Each Debtor agrees that in the
event any such issuer shall issue any additional capital stock of any series or
class (whether or not entitled to vote) to such Debtor or otherwise on account
of its ownership interest therein, subject to the limitations set forth in
Section 2(a) above, such Debtor will forthwith pledge hereunder, or cause to be
pledged hereunder, all such additional shares of such capital stock.

 

Section 6.2.                                Delivery of Certificates.  Subject
to the rights of the Senior Lenders, the certificates for all shares or units of
the Pledged Securities evidenced by a certificate shall be delivered by the
relevant Debtor to the Purchasers 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.  Subject to the rights of the Senior Lenders, the Purchasers may, at
any time after the occurrence of an Event of Default, cause to be transferred
into its name or into the name of its nominee or nominees any and all of the
Pledged Securities.  The Purchasers shall at all times have the right to
exchange the certificates representing the Pledged Securities for certificates
of smaller or larger denominations.

 

Section 6.3.                                Remedies.  Unless and until an Event
of Default hereunder has occurred and is continuing and thereafter until
notified by the Purchasers hereof:

 

(a)                                  Each Debtor shall be entitled to exercise
all voting and/or consensual powers pertaining to the Collateral of such Debtor,
or any part thereof, for all purposes not inconsistent with the terms of this
Agreement or any other document evidencing or otherwise relating to any of the
Obligations.

 

(b)                                 Each Debtor shall be entitled to receive and
retain all dividends and distributions in respect of the Collateral which are
paid in cash of whatsoever nature; provided, however, that, if such Debtor does
not have a Senior Lender, such dividends and distributions representing stock or
liquidating dividends or a distribution or return of capital upon or in respect
of the Pledged Securities or any part thereof or resulting from a split up,
revision or reclassification of the Pledged Securities or any part thereof or
received in addition to, in substitution of or in exchange for the Pledged
Securities or any part thereof as a result of a merger, consolidation or
otherwise, shall be paid, delivered or transferred, as appropriate, directly to
the Purchasers immediately upon the receipt thereof by such Debtor and may, in
the case of cash, be applied by the Purchasers to the Obligations in such order
and manner as the Agent shall determine and otherwise in accordance with the
terms of the Credit Agreement, whether or not the same may then be due or
otherwise adequately secured and shall, in the case of all other property,
together with any cash received by the Agent and not applied as aforesaid, be
held by the Agent

 

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pursuant hereto as part of the Collateral pledged under and subject to the terms
of this Agreement.

 

(c)                                  In order to permit each Debtor to exercise
such voting and/or consensual powers which it is entitled to exercise under
subsection (a) above and to receive such distributions which such Debtor is
entitled to receive and retain under subsection (b) above, the Agent will, if
necessary, upon the written request of such Debtor, from time to time execute
and deliver to such Debtor appropriate proxies and dividend orders.

 

ARTICLE 7

 

PROVISIONS CONCERNING ALL COLLATERAL

 

Section 7.1.                                Protection of Purchasers’ Security. 
Each Debtor will at all times keep its Inventory and Equipment insured in favor
of the Purchasers, at such Debtor’s own expense to the extent and in the manner
provided in the Purchase Agreement; all policies or certificates with respect to
such insurance (a) subject to the rights of the Senior Lender, shall be endorsed
to the Purchasers’ commercially reasonable satisfaction for the benefit of the
Purchasers (including, without limitation, by naming the Purchasers as
additional insured and loss payee) and (b) shall state that such insurance
policies shall not be canceled without 30 days’ prior written notice thereof by
the insurer to the Purchasers; and certified copies of such policies or
certificates with respect thereto shall be deposited with the Purchasers.  If a
Debtor shall fail to insure its Inventory and Equipment in accordance with the
preceding sentence, or if Debtor shall fail to so endorse and deposit all
policies or certificates with respect thereto, the Purchasers shall have the
right (but shall be under no obligation), upon prior written notice to such
Debtor, to procure such insurance and each Debtor agrees to promptly reimburse
the Purchasers for all reasonable costs and expenses of procuring such
insurance.  The Purchasers shall, at the time any proceeds of such insurance are
distributed to the Purchasers, apply such proceeds in accordance with
Section 9.4 hereof.  Each Debtor assumes all liability and responsibility in
connection with the Collateral acquired by it and the liability of such Debtor
to pay the Obligations shall in no way be affected or diminished by reason of
the fact that such Collateral may be lost, destroyed, stolen, damaged or for any
reason whatsoever unavailable to such Debtor.

 

Section 7.2.                                Further Actions.  Each Debtor will,
at its own expense, make, execute, endorse, acknowledge, file and/or deliver to
the Purchasers from time to time such lists, descriptions and designations of
its Collateral, warehouse receipts, receipts in the nature of warehouse
receipts, bills of lading, documents of title, vouchers, invoices, schedules,
confirmatory assignments, conveyances, transfer endorsements, powers of
attorney, certificates, reports and other assurances or instruments and take
such further steps relating to the Collateral and other property or rights
covered by the security interest hereby granted, which the Purchasers deem
reasonably appropriate or advisable to perfect, preserve or protect its security
interest in the Collateral.

 

Section 7.3.                                Financing Statements; Etc.  Each
Debtor agrees to execute and deliver to the Purchasers such further agreements,
assignments, instruments, and documents, and to do all such other things, as the
Purchasers may reasonably deem necessary or appropriate to assure the Purchasers
its lien and Security Interest hereunder, including, without limitation,
(i) such

 

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financing statements or other instruments and documents as the Agent may from
time to time reasonably require to comply with the Uniform Commercial Code and
any other applicable law, (ii) such agreements with respect to patents,
trademarks, copyrights, and similar intellectual property rights as the
Purchasers may from time to time reasonably 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 Purchasers may from time to time reasonably require.  Each Debtor hereby
agrees that a carbon, photographic or other reproduction of this Agreement or
any such financing statement is sufficient for filing as a financing statement
by the Purchasers without notice thereof to such Debtor wherever the Purchasers
in their sole discretion desire to file the same.  Each Debtor hereby authorizes
the Purchasers to file any and all financing statements covering the Collateral
or any part thereof as the Purchasers may require, including financing
statements describing the Collateral as “all assets” or “all personal property”
or words of like meaning.  In the event for any reason the law of any
jurisdiction other than California becomes or is applicable to the Collateral or
any part thereof, or to any of the Obligations, each Debtor agrees to execute
and deliver all such agreements, assignments, instruments, and documents and to
do all such other things as the Purchasers reasonably deem necessary or
appropriate to preserve, protect, and enforce the security interest of the
Purchasers under the law of such other jurisdiction.

 

ARTICLE 8

 

GUARANTEE

 

Section 8.1.                                The Guarantee.  To induce the
Purchasers to enter into the Purchase Agreement and in consideration of benefits
expected to accrue to the Company by reason of the Purchase Agreement and for
other good and valuable consideration, receipt of which is hereby acknowledged,
the Subsidiary hereby unconditionally and irrevocably guarantees jointly and
severally to the Purchasers, the due and punctual payment of all present and
future Obligations, in each case as and when the same shall become due and
payable, whether at stated maturity, by acceleration, or otherwise, according to
the terms hereof and thereof (including interest which, but for the filing of a
petition in bankruptcy, would otherwise accrue on any such indebtedness,
obligation, or liability).  In case of failure by the Company or other obligor
punctually to pay any Obligations guaranteed hereby, the Subsidiary hereby
unconditionally agrees to make such payment or to cause such payment to be made
punctually as and when the same shall become due and payable, whether at stated
maturity, by acceleration, or otherwise, and as if such payment were made by the
Company or such obligor.

 

Section 8.2.                                Guarantee Unconditional.  The
obligations of the Subsidiary under this Article 8 shall be unconditional and
absolute and, without limiting the generality of the foregoing, shall not be
released, discharged, or otherwise affected by:

 

(a)                                  any extension, renewal, settlement,
compromise, waiver, or release in respect of any obligation of the Company or
other obligor or of any other guarantor under this Agreement or the Purchase
Agreement or by operation of law or otherwise;

 

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(b)                                 any modification or amendment of or
supplement to this Agreement or the Purchase Agreement;

 

(c)                                  any change in the corporate existence,
structure, or ownership of, or any insolvency, bankruptcy, reorganization, or
other similar proceeding affecting, the Company or other obligor, any other
guarantor, or any of their respective assets, or any resulting release or
discharge of any obligation of the Company or other obligor or of any other
guarantor contained in this Agreement or the Purchase Agreement;

 

(d)                                 the existence of any claim, set off, or
other rights which the Company or other obligor or any other guarantor may have
at any time against the Purchasers or any other person or entity, whether or not
arising in connection herewith;

 

(e)                                  any failure to assert, or any assertion of,
any claim or demand or any exercise of, or failure to exercise, any rights or
remedies against the Company or other obligor, any other guarantor, or any other
person or entity or property;

 

(f)                                    any application of any sums by whomsoever
paid or howsoever realized to any obligation of the Company or other obligor,
regardless of what obligations of the Company or other obligor remain unpaid;

 

(g)                                 any invalidity or unenforceability relating
to or against the Company or other obligor or any other guarantor for any reason
of this Agreement or of the Purchase Agreement or any provision of applicable
law or regulation purporting to prohibit the payment by the Company or other
obligor or any other guarantor of the principal of or interest on the Notes or
Obligations or any other amount payable under the Purchase Agreement; or

 

(h)                                 any other act or omission to act or delay of
any kind by the Purchasers, or any other person or entity or any other
circumstance whatsoever that might, but for the provisions of this paragraph,
constitute a legal or equitable discharge of the obligations of the Subsidiary
under this Article 8.

 

Section 8.3.                                Discharge Only upon Payment in Full;
Reinstatement in Certain Circumstances.  The Subsidiary’s obligations under this
Article 8 shall remain in full force and effect until the Purchase Agreement is
terminated and the principal of and interest on the Notes and all other amounts
payable by the Company under the Purchase Agreement and this Security Agreement
shall have been paid in full.  If at any time any payment of the principal of or
interest on the Notes or any Obligation or any other amount payable by the
Company or other obligor or the Subsidiary under the Purchase Agreement or this
Agreement is rescinded or must be otherwise restored or returned upon the
insolvency, bankruptcy, or reorganization of the Company or other obligor or of
any guarantor, or otherwise, the Subsidiary’s obligations under this Article 8
with respect to such payment shall be reinstated at such time as though such
payment had become due but had not been made at such time.

 

Section 8.4.                                Subrogation.  The Subsidiary agrees
it will not exercise any rights which it may acquire by way of subrogation by
any payment made hereunder, or otherwise, until all the Obligations shall have
been paid in full subsequent to the termination of all the Purchase

 

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Agreement.  If any amount shall be paid to the Subsidiary on account of such
subrogation rights at any time prior to the later of (x) the payment in full of
the Obligations and all other amounts payable by the Company hereunder and the
Purchase Agreement and (y) the termination of the Purchase Agreement, such
amount shall be held in trust for the benefit of the Purchasers and shall
forthwith be paid to the Purchasers or be credited and applied upon the
Obligations.

 

Section 8.5.                                Waivers.  The Subsidiary irrevocably
waives acceptance hereof, presentment, demand, protest, and any notice not
provided for herein, as well as any requirement that at any time any action be
taken by the Purchasers, or any other person or entity against the Company or
other obligor, another guarantor, or any other person or entity.

 

Section 8.6.                                Limit on Recovery.  Notwithstanding
any other provision hereof, the right of recovery against the Subsidiary under
this Article 8 shall not exceed $1.00 less than the lowest amount which would
render such Subsidiary’s obligations under this Article 8 void or voidable under
applicable law, including, without limitation, fraudulent conveyance law.

 

Section 8.7.                                Stay of Acceleration.  If
acceleration of the time for payment of any amount payable by the Company or
other obligor under this Agreement or the Purchase Agreement, is stayed upon the
insolvency, bankruptcy or reorganization of the Company or such obligor, all
such amounts otherwise subject to acceleration under the terms of this Agreement
or the Purchase Agreement, shall nonetheless be payable by the Subsidiary
hereunder forthwith on demand by the Purchasers.

 

Section 8.8.                                Benefit to Subsidiary.  The Company
and the Subsidiary are engaged in related businesses and integrated to such an
extent that the financial strength and flexibility of the Company has a direct
impact on the success of the Subsidiary.  The Subsidiary will derive substantial
direct and indirect benefit from the extensions of credit hereunder.

 

Section 8.9.                                Subsidiary Covenants.  The
Subsidiary shall take such action as the Company is required by the Purchase
Agreement or this Agreement to cause the Subsidiary to take, and shall refrain
from taking such action as the Company is required by the Purchase Agreement or
this Agreement to prohibit the Subsidiary from taking.

 

ARTICLE 9

 

REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT

 

Section 9.1.                                Remedies; Obtaining the Collateral
Upon Default.  Each Debtor agrees that, if an Event of Default shall have
occurred and be continuing, then and in every such case, the Purchasers, in
addition to any rights now or hereafter existing under applicable law, shall
have all rights as a secured creditor under the UCC in all relevant
jurisdictions subject to the subordination thereof pursuant to Section 11.10
hereof, and may:

 

(a)                                  personally, or by agents or attorneys,
immediately take possession of the Collateral or any part thereof, from the
Debtors or any other Person who then has possession of any part thereof with or
without notice or process of law, and for that purpose may enter upon such
Debtor’s premises where any of the Collateral is located

 

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and remove the same and use in connection with such removal any and all
services, supplies, aids and other facilities of such Debtor;

 

(b)                                 instruct the obligor or obligors on any
agreement, instrument or other obligation (including, without limitation, the
Accounts) constituting the Collateral to make any payment required by the terms
of such agreement, instrument or other obligation directly to the Purchasers;

 

(c)                                  withdraw all monies, securities and
instruments in the Cash Collateral Account and/or in any other cash collateral
account for application to the Obligations in accordance with Section 9.4
hereof;

 

(d)                                 sell, assign or otherwise liquidate any or
all of the Collateral or any part thereof in accordance with Section 9.2 hereof,
or direct such Debtor to sell, assign or otherwise liquidate any or all of the
Collateral or any part thereof, and, in each case, take possession of the
proceeds of any such sale or liquidation;

 

(e)                                  take possession of the Collateral or any
part thereof, by directing the Debtors in writing to deliver the same to the
Purchasers at any place or places reasonably designated by the Purchasers, in
which event such Debtor shall at its own expense:

 

(i)                                     forthwith cause the same to be moved to
the place or places so designated by the Purchasers and there delivered to the
Purchasers;

 

(ii)                                  store and keep any Collateral so delivered
to the Purchasers at such place or places pending further action by the
Purchasers as provided in Section 9.2 hereof; and

 

(iii)                               while the Collateral shall be so stored and
kept, provide such guards and maintenance services as shall be necessary to
protect the same and to preserve and maintain them in good condition; and

 

(f)                                    license or sublicense, whether on an
exclusive or nonexclusive basis, any Marks, Patents or Copyrights included in
the Collateral for such term and on such conditions and in such manner as the
Purchasers shall in their commercially reasonable judgment determine;

 

it being understood that each Debtor’s obligation so to deliver the Collateral
is of the essence of this Agreement and that, accordingly, upon application to a
court of equity having jurisdiction, the Purchasers shall be entitled to a
decree requiring specific performance by each Debtor of said obligation.  The
Purchasers agree that this Agreement may be enforced only by the unanimous
action of the Purchasers and that no individual Purchaser shall have any right
individually to seek to enforce this Agreement or to realize upon the security
to be granted hereby, it being understood and agreed that such rights and
remedies may be exercised by the Purchasers for the benefit of the Purchasers
upon the terms of this Agreement.

 

Section 9.2.                                Remedies: Disposition of the
Collateral.  Any Collateral repossessed by the Purchasers under or pursuant to
Section 9.1 hereof and any other Collateral whether or not so

 

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repossessed by the Purchasers, may be sold, assigned, leased or otherwise
disposed of under one or more contracts or as an entirety, and without the
necessity of gathering at the place of sale the property to be sold, and in
general in such manner, at such time or times, at such place or places and on
such terms as the Purchasers may, in compliance with any mandatory requirements
of applicable law, determine to be commercially reasonable.  Any of the
Collateral may be sold, leased or otherwise disposed of, in the condition in
which the same existed when taken by the Purchasers or after any overhaul or
repair at the expense of each Debtor which the Purchasers shall determine to be
commercially reasonable.  Any such disposition which shall be a private sale or
other private proceedings permitted by such requirements shall be made upon not
less than 10 days’ written notice to each Debtor specifying the time at which
such disposition is to be made and the intended sale price or other
consideration therefor, and shall be subject, for the 10 days after the giving
of such notice, to the right of each Debtor or any nominee of each Debtor to
acquire the Collateral involved at a price or for such other consideration at
least equal to the intended sale price or other consideration so specified, but
in no event in an amount greater than the Obligations then outstanding and
provision for any contingent Obligations reasonably acceptable to the
Purchasers.  Any such disposition which shall be a public sale permitted by such
requirements shall be made upon not less than 10 days’ written notice to each
Debtor specifying the time and place of such sale and, in the absence of
applicable requirements of law, shall be by public auction (which may, at the
Purchasers’ option, be subject to reserve), after publication of notice of such
auction not less than 10 days prior thereto in two newspapers in general
circulation in Los Angeles, California.  To the extent permitted by any such
requirement of law, the Purchasers may bid for and become the purchaser of the
Collateral or any item thereof, offered for sale in accordance with this
Section without accountability to the Debtors.  If, under mandatory requirements
of applicable law, the Purchasers shall be required to make disposition of the
Collateral within a period of time which does not permit the giving of notice to
the Debtors as hereinabove specified, the Purchasers need give the Debtors only
such notice of disposition as shall be reasonably practicable in view of such
mandatory requirements of applicable law.

 

Section 9.3.                                Waiver of Claims.  Except as
otherwise provided in this Agreement or prohibited by applicable law, (a) THE
DEBTORS HEREBY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE AND
JUDICIAL HEARING IN CONNECTION WITH THE PURCHASERS’ TAKING POSSESSION OR THE
PURCHASERS’ DISPOSITION OF ANY OF THE COLLATERAL, INCLUDING, WITHOUT LIMITATION,
ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND
ANY SUCH RIGHT WHICH SUCH DEBTOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR
ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, (b) the Debtors hereby further
waive, to the extent permitted by law:

 

(i)                                     all damages occasioned by such taking of
possession except any damages which are determined by a final, non-appealable
court order to have been caused by the Purchasers’ gross negligence or willful
misconduct; and

 

(ii)                                  all other requirements as to the time,
place and terms of sale or other requirements with respect to the enforcement of
the Purchasers’ rights hereunder; and

 

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(iii)                               all rights of redemption, appraisement,
valuation, stay, extension or moratorium now or hereafter in force under any
applicable law in order to prevent or delay the enforcement of this Agreement or
the absolute sale of the Collateral or any portion thereof, and each Debtor, for
itself and all who may claim under it, insofar as it or they now or hereafter
lawfully may, hereby waives the benefit of all such laws.

 

Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral shall operate to divest all right, title, interest, claim and
demand, either at law or in equity, of the Debtors therein and thereto, and
shall be a perpetual bar both at law and in equity against the Debtors and
against any and all persons or entities claiming or attempting to claim the
Collateral so sold, optioned or realized upon, or any part thereof, from,
through and under the Debtors.

 

Section 9.4.                                Application of Proceeds.

 

(a)                                  All monies collected by the Purchasers upon
any sale or other disposition of the Collateral, together with all other moneys
received by the Purchasers hereunder, shall be applied to the payment of the
Obligations.

 

(b)                                 It is understood and agreed that each Debtor
shall remain liable to the extent of any deficiency between the amount of the
proceeds of the Collateral hereunder and the aggregate amount of the
Obligations.

 

Section 9.5.                                Remedies Cumulative.  Each and every
right, power and remedy hereby specifically given to the Purchasers shall be in
addition to every other right, power and remedy specifically given under this
Agreement, the Purchase Agreement or now or hereafter existing at law, in equity
or by statute and each and every right, power and remedy whether specifically
herein given or otherwise existing may be exercised from time to time or
simultaneously and as often and in such order as may be deemed expedient by the
Purchasers.  All such rights, powers and remedies shall be cumulative and the
exercise or the beginning of the exercise of one shall not be deemed a waiver of
the right to exercise any other or others.  No delay or omission of the
Purchasers in the exercise of any such right, power or remedy and no renewal or
extension of any of the Obligations shall impair any such right, power or remedy
or shall be construed to be a waiver of any Default or Event of Default or an
acquiescence therein.  No notice to or demand on the Debtors in any case shall
entitle it to any other or further notice or demand in similar or other
circumstances or constitute a waiver of any of the rights of the Purchasers to
any other or further action in any circumstances without notice or demand.  In
the event that the Purchasers shall bring any suit to enforce any of its rights
hereunder and shall be entitled to judgment, then in such suit the Purchasers
may recover reasonable expenses, including reasonable attorneys’ fees, and the
amounts thereof shall be included in such judgment.

 

Section 9.6.                                Discontinuance of Proceedings.  In
case the Purchasers shall have instituted any proceeding to enforce any right,
power or remedy under this Agreement by foreclosure, sale, entry or otherwise,
and such proceeding shall have been discontinued or abandoned for any reason or
shall have been determined adversely to the Purchasers, then and in every such
case the Debtors, the Purchasers and each holder of any of the Obligations shall
be restored to their former positions and rights hereunder with respect to the
Collateral subject to

 

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the Security Interest created under this Agreement, and all rights, remedies and
powers of the Purchasers shall continue as if no such proceeding had been
instituted.

 

ARTICLE 10

 

DEFINITIONS

 

Capitalized terms used in this Agreement without definition having the
respective meanings ascribed to such terms in the Purchase Agreement. All other
terms contained in this Security Agreement, unless the context indicates
otherwise, have the meanings provided for by the Uniform Commercial Code as in
effect in the State of California to the extent the same are used or defined
therein.  In addition, the following terms shall have the meanings herein
specified.  Such definitions shall be equally applicable to the singular and
plural forms of the terms defined.

 

“Agreement” shall mean this Security Agreement as the same may be modified,
supplemented or amended from time to time in accordance with its terms.

 

“Cash Collateral Account” shall mean a non-interest bearing cash collateral
account maintained with, and in the sole dominion and control of, the Purchasers
for the benefit of the Purchasers.

 

“Copyrights” shall mean any United States copyright owned (or subject to the
rights of ownership) by each Debtor, including any registrations of any
copyright, in the United States Copyright Office, as well as any application for
a copyright registration now or hereafter made with the United States Copyright
Office by such Debtor.

 

“Default” shall mean any event which, with notice or lapse of time, or both,
would constitute an Event of Default.

 

“Event of Default” shall mean any Event of Default under, and as defined in, the
Purchase Agreement and shall in any event, without limitation, include any
payment default on any of the Obligations after the expiration of any applicable
grace period.

 

“Marks” shall mean any United States trademarks, service marks and trade names
now owned, subject to a right of ownership or hereafter acquired by each Debtor,
including any registration of, or application for, any trademarks and service
marks in the United States Patent and Trademark Office, and any trade dress
including logos and/or designs used by either of the Debtors in the United
States.

 

“Obligations” shall mean (a) the full and prompt payment when due (whether at
the stated maturity, by acceleration or otherwise) of all obligations and
liabilities of the Debtors now existing or hereafter incurred under, arising out
of or in connection with the Purchase Agreement as such relates to the Notes or
any of the Notes issued thereunder and the due performance and compliance by the
Debtors with the terms of the Purchase Agreement as such relates to the Notes
and each such Note; (b) any and all sums advanced by the Purchasers in
accordance with the terms of this Agreement or the Purchase Agreement in order
to preserve the Collateral or preserve their security interest in the
Collateral; (c) in the event of any proceeding for the

 

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collection or enforcement of any obligations or liabilities referred to in
clause (a), after an Event of Default shall have occurred and be continuing, the
reasonable expenses of re-taking, holding, preparing for sale or lease, selling
or otherwise disposing of or realizing on the Collateral, or of any exercise by
the Purchasers of their rights hereunder, together with reasonable attorneys’
fees and court costs; (d) all amounts paid by any Indemnitee as to which such
Indemnitee has the right to reimbursement under this Agreement; and (e) all
other Purchaser Obligations.

 

“Patents” shall mean any United States patent owned, subject to a right of
ownership by or hereafter acquired by the Debtors and any divisions,
continuations, reissues, reexaminations, extensions or renewals thereof, as well
as any application for a United States patent now or hereafter made by either of
the Debtors or subject to a right of ownership in such Debtor.

 

“Permitted Liens” shall mean any Liens set forth on Schedule I hereto.

 

“Proceeds” shall have the meaning provided in the Uniform Commercial Code as in
effect in the State of California on the date hereof or under other relevant law
and, in any event, shall include, but not be limited to, (a) any and all
proceeds of any insurance, indemnity, warranty or guaranty payable to the
Purchasers or the Debtors from time to time with respect to any of the
Collateral, (b) any and all payments (in any form whatsoever) made or due and
payable to the Debtors from time to time in connection with any requisition,
confiscation, condemnation, seizure or forfeiture of all or any part of the
Collateral by any governmental authority (or any person acting under color of
governmental authority) and (c) any and all other amounts from time to time paid
or payable under or in connection with any of the Collateral.

 

“Proprietary Information” means all information and know-how worldwide,
including, without limitation, technical data, manufacturing data, research and
development data, manufacturing data, research and development data, data
relating to compositions, processes and formulations, manufacturing and
production know-how and experience, management know-how, training programs,
manufacturing, engineering and other drawings, specifications, performance
criteria, operating instructions, maintenance manuals, technology, technical
information, software, engineering and computer data and databases, design and
engineering specifications, catalogs, promotional literature and financial,
business and marketing plans, inventions and invention disclosures.

 

“Senior Lender” shall have the meaning provided in Section 11.10 of this
Agreement.

 

“Termination Date” shall have the meaning provided in Section 11.8 of this
Agreement.

 

“Trade Secrets” means any secretly held existing engineering and other data,
information, production procedures and other know-how relating to the design,
manufacture, assembly, installation, use, operation, marketing, sale and
servicing of any products or business of the Debtors worldwide whether written
or not written.

 

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ARTICLE 11

 

MISCELLANEOUS

 

Section 11.1.                         Notices.  Except as otherwise specified
herein, all notices, requests, demands or other communications to or upon the
respective parties hereto shall be deemed to have been duly given or made when
personally delivered to the party to which such notice, request, demand or other
communication is required or permitted to be given or made under this Agreement,
addressed as follows:

 

(a)                                  if to the Debtors:

 

DynTek, Inc.

19700 Fairchild Road, Suite 2301

Irvine, California 92612

Attention: Chief Financial Officer

 

with a copy to,

 

[                     ]

 

(b)                                 if to any Purchaser, at such address as such
Purchaser shall have specified in the Purchase Agreement, with a copy to:

 

[                     ]

 

or at such other address as shall have been furnished in writing by any person
or entity described above to the party required to give notice hereunder.

 

Section 11.2.                         Waiver; Amendment.  None of the terms and
conditions of this Agreement may be changed, waived, modified or varied in any
manner whatsoever unless in writing duly signed by each Debtor and the holders
of at least a majority of the outstanding principal amount of the Notes.

 

Section 11.3.                         Obligations Absolute.  The obligations of
the Debtors hereunder shall remain in full force and effect without regard to,
and shall not be impaired by, (a) any bankruptcy, insolvency, reorganization,
arrangement, readjustment, composition, liquidation or the like of the Debtors
except as required by applicable law; (b) any exercise or non-exercise of any
right, remedy, power or privilege under or in respect of this Agreement, the
Purchase Agreement, the Notes issued thereunder or any waiver of any right,
remedy, power or privilege under any other agreement; or (c) any amendment to or
modification of this Agreement, the Purchase Agreement, the Notes issued
thereunder or any security for any of the Obligations, other than amendments or
modifications of this Agreement.

 

Section 11.4.                         Successors and Assigns.  This Agreement
shall be binding upon the Debtors and their successors and assigns and shall
inure to the benefit of the Purchasers and their respective successors and
assigns.  All agreements, statements, representations and warranties made by the
Debtors herein or in any certificate or other instrument delivered by the
Debtors or

 

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on its behalf under this Agreement shall be considered to have been relied upon
by the Purchasers and shall survive the execution and delivery of this
Agreement, the Purchase Agreement or the Notes issued thereunder regardless of
any investigation made by the Purchasers or on their behalf.

 

Section 11.5.                         Headings Descriptive.  The headings of the
several sections of this Agreement are inserted for convenience only and shall
not in any way affect the meaning or construction of any provision of this
Agreement.

 

Section 11.6.                         Governing Law.  THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE
WITH AND BE GOVERNED BY THE LAW OF THE STATE OF CALIFORNIA WITHOUT REGARD FOR
CONFLICTS OF LAWS OF CHOICE OF LAWS PRINCIPLES.

 

Section 11.7.                         Debtor’s Duties.  It is expressly agreed,
anything herein contained to the contrary notwithstanding, that the Debtors
shall remain liable to perform all of the obligations, if any, assumed by it
with respect to the Collateral and the Purchasers shall not have any obligations
or liabilities with respect to any Collateral by reason of or arising out of
this Agreement, nor shall the Purchasers be required or obligated in any manner
to perform or fulfill any of the obligations of the Debtors under or with
respect to any Collateral.

 

Section 11.8.                         Termination; Release.  After the
Termination Date, this Agreement shall terminate (provided that all indemnities
set forth in the Purchase Agreement shall survive such termination) and the
Purchasers, at the request and expense of the Debtors, will promptly execute and
deliver to the Debtors a proper instrument or instruments (including Uniform
Commercial Code termination statements on form UCC-3) acknowledging the
satisfaction and termination of this Agreement, and will duly assign, transfer
and deliver to the Debtors (without recourse and without any representation or
warranty) such of the Collateral as may be in the possession of the Purchasers
and has not theretofore been sold or otherwise applied or released pursuant to
this Agreement.  As used in this Agreement, “Termination Date” shall mean the
date upon which all Obligations then due and payable have been paid in full in
cash, all commitments with respect thereto have terminated and no Note is
outstanding.

 

Section 11.9.                         Counterparts.  This Agreement may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts, each of which when so executed and delivered shall be an
original, but all of which shall together constitute one and the same
instrument.  A set of counterparts executed by all the parties hereto shall be
lodged with the Debtors and the Purchasers.

 

Section 11.10.                  Subordination.  The Security Interest granted
pursuant to this Agreement and Purchasers’ rights and remedies under this
Agreement are subordinate to the rights and remedies of Laurus Master Fund, Ltd.
and New England Technology Finance, LLC and any replacement lender therefore
which provides working capital financing for Debtor (the “Senior Lenders”) and
the payment in full of any amounts owing to the Senior Lenders.

 

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date first above
written.

 

 

DEBTORS:

 

DYNTEK, INC.

 

 

 

 

 

By:

 

 

 

Name:

 

 

 

Title:

 

 

 

 

 

DYNTEK SERVICES, INC.

 

 

 

 

 

By:

 

 

 

Name:

 

 

 

Title:

 

 

 

 

 

 

PURCHASERS:

 

 

 

[                        ]

 

 

 

 

 

By:

 

 

Name:

 

 

Title:

 

 

 

 

By:

 

 

Name: [                        ]

 

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