Exhibit 10.1



 


SECURITY AGREEMENT


This Security Agreement is made as of January 22, 2004 by and
between LAURUS MASTER FUND, LTD., a Cayman Islands corporation ("Laurus") and
Home Solutions of America, Inc., a Delaware corporation (the "Company"). 


BACKGROUND


Company has requested that Laurus make advances available to
Company; and


Laurus has agreed to make such advances to Company on the terms
and conditions set forth in this Agreement.


AGREEMENT


NOW, THEREFORE, in consideration of the mutual covenants and
undertakings and the terms and conditions contained herein, the parties hereto
agree as follows:


1.     (a) General Definitions.  Capitalized terms used in this
Agreement shall have the meanings assigned to them in Annex A.


(b)   
 Accounting Terms. 
Any accounting terms used in this Agreement which are not specifically defined
shall have the meanings customarily given them in accordance with GAAP and all
financial computations shall be computed, unless specifically provided herein,
in accordance with GAAP consistently applied.


(c)    Other
Terms.  All other terms
used in this Agreement and defined in the UCC, shall have the meaning given
therein unless otherwise defined herein.


(d)   Rules of
Construction.  All
Schedules, Addenda, Annexes and Exhibits hereto or expressly identified to this
Agreement are incorporated herein by reference and taken together with this
Agreement constitute but a single agreement.  The words "herein", hereof" and
"hereunder" or other words of similar import refer to this Agreement as a
whole, including the Exhibits, Addenda, Annexes and Schedules thereto, as the
same may be from time to time amended, modified, restated or supplemented, and
not to any particular section, subsection or clause contained in this
Agreement.  Wherever from the context it appears appropriate, each term stated
in either the singular or plural shall include the singular and the plural, and
pronouns stated in the masculine, feminine or neuter gender shall include the
masculine, the feminine and the neuter.  The term "or" is not exclusive.  The
term "including" (or any form thereof) shall not be limiting or exclusive.  All
references to statutes and related regulations shall include any amendments of
same and any successor statutes and regulations.  All references in this
Agreement or in the Schedules, Addenda, Annexes and Exhibits to this Agreement
to sections, schedules, disclosure schedules, exhibits, and attachments shall
refer to the corresponding sections, schedules, disclosure schedules, exhibits,
and attachments of or to this Agreement.  All references to any instruments or
agreements, including references to any of this Agreement or the
Ancillary Agreements shall include any and all modifications or amendments
thereto and any and all extensions or renewals thereof.


 













2.      Loans.  (i) 
Subject to the terms and conditions set forth herein and in the Ancillary
Agreements, Laurus may make loans (the "Loans") to Company from time to time
during the Term which, in the aggregate at any time outstanding, will not
exceed the lesser of (x) (I) the Capital Availability Amount minus (II) such
reserves as Laurus may reasonably in its good faith judgment deem proper and
necessary from time to time (the "Reserves") or (y) an amount equal to (I) the
Accounts Availability minus (II) the Reserves.  The amount derived at any time
from Section 2(a)(i)(y)(I) minus 2(a)(i)(y)(II) shall be referred to as the
"Formula Amount".  Company shall execute and deliver to Laurus on the
Closing Date a Minimum Borrowing Note and a
Secured Revolving Note evidencing the Loans funded on the Closing Date.  From
time to time thereafter, Company shall execute and deliver to Laurus
immediately prior to the final funding of each additional $1,500,000 tranche of
Loans (calculated on a cumulative basis for each such tranche) an additional
Minimum Borrowing Note evidencing such tranche, in the form of Note delivered
by Company to Laurus on the Closing Date. Notwithstanding
anything herein to the contrary, whenever during the Term the outstanding
balance on the Revolving Note should equal or exceed $1,500,000, to the extent
that the outstanding balance on Minimum Borrowing Note shall be less than
$1,500,000 (the difference of $1,500,000 less the actual balance of the Minimum
Borrowing Note, the "Available Minimum Borrowing"), such portion of the balance
of the Revolving Note as shall equal the Available Minimum Borrowing shall be
deemed to be simultaneously extinguished on the Revolving Note and transferred
to, and evidenced by, a Minimum Borrowing Note (e.g., the Available Minimum
Borrowing shall be $0).


(ii)           
Notwithstanding the limitations set
forth above, if requested by the Company, Laurus retains the right to lend to
Company from time to time such amounts in excess of such limitations as Laurus
may determine in its sole discretion.


(iii)           
Company acknowledges that the exercise
of Laurus' discretionary rights (such discretion to be exercised in good faith)
hereunder may result during the Term in one or more increases or decreases in
the advance percentages used in determining Accounts Availability and Company hereby
consents to any such increases or decreases which may limit or restrict
advances requested by Company.


(iv)           
If Company does not pay any interest,
fees, costs or charges to Laurus when due, Company shall thereby be deemed to
have requested, and Laurus is hereby authorized at its discretion to make and
charge to Company's account, a Loan to Company as of such date in an amount
equal to such unpaid interest, fees, costs or charges.


(v)           
If Company at any time fails to perform
or observe any of the covenants contained in this Agreement or any Ancillary
Agreement, Laurus may, but need not, perform or observe such covenant on behalf
and in the name, place and stead of Company (or, at Laurus' option, in Laurus'
name) and may, but need not, take any and all other actions which Laurus may
deem necessary to cure or correct such failure (including the payment of taxes,
the satisfaction of Liens, the performance of obligations owed to Account
Debtors, lessors or other obligors, the procurement and maintenance of
insurance, the execution of assignments, security agreements and financing
statements, and the endorsement of instruments).  The amount of all monies
expended and all costs and expenses (including attorneys' fees and legal
expenses) incurred by Laurus in connection with or as a result of the
performance or observance of such agreements or the taking of such action by
Laurus shall be charged to Company's account as a Loan and added to the
Obligations.  To facilitate Laurus' performance or observance of such covenants
of Company, Company hereby irrevocably appoints Laurus, or Laurus' delegate,
acting alone, as Company's attorney in fact (which appointment is coupled with
an interest) with the right (but not the duty) from time to time to create,
prepare, complete, execute, deliver, endorse or file in the name and on behalf
of Company any and all instruments, documents, assignments, security
agreements, financing statements, applications for insurance and other
agreements and writings required to be obtained, executed delivered or endorsed
by Company.


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(vi)           
Laurus will account to Company monthly
with a statement of all Loans and other advances, charges and payments made
pursuant to this Agreement, and such account rendered by Laurus shall be deemed
final, binding and conclusive unless Laurus is notified by Company in writing
to the contrary within thirty (30) days of the date each account was rendered
specifying the item or items to which objection is made.


(vii)           
During the Term, Company may borrow and
prepay Loans in excess of the Minimum Borrowing Amount, all in accordance with the terms and conditions hereof. 



(viii)           
If any Eligible Account is not paid by
the Account Debtor within one hundred twenty (120) days after the date that
such Eligible Account was invoiced or if any Account Debtor asserts a
deduction, dispute, contingency, set-off, or counterclaim with respect to any
Eligible Account, (a "Delinquent Account"), the Company shall (i) reimburse
Laurus for the amount of the Revolving Credit Advance made with respect to such
Delinquent Account plus an adjustment fee in an amount equal to (0.375%)
of the gross face amount of such Eligible Account or
(ii) immediately replace such Delinquent Account with an otherwise Eligible
Account.


(b)   Following the occurrence of an Event
of Default which continues to exist, Laurus may, at its option, elect to
convert the credit facility contemplated hereby to an accounts receivable
purchase facility.  Upon such election by Laurus (subsequent notice of which
Laurus shall provide to Company), Company shall be deemed to hereby have sold,
assigned, transferred, conveyed and delivered to Laurus, and Laurus shall be
deemed to have purchased and received from Company, all right, title and
interest of Company in and to all Accounts which shall at any time constitute
Eligible Accounts (the "Receivables Purchase").  All outstanding Loans
hereunder shall be deemed obligations under such accounts receivable purchase
facility.  The conversion to an accounts receivable purchase facility in
accordance with the terms hereof shall not be deemed an exercise by Laurus of
its secured creditor rights under Article 9 of the UCC.  Immediately following
Laurus' request, Company shall execute all such further documentation as may be
required by Laurus to more fully set forth the accounts receivable purchase
facility herein contemplated, including, without limitation, Laurus' standard
form of accounts receivable purchase agreement and account debtor notification
letters, but Company's failure to enter into any such documentation shall not impair
or affect the Receivables Purchase in any manner whatsoever.


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(c)        Minimum Borrowing Amount.  After a
registration statement registering the Registrable Securities has been declared
effective by the SEC, conversions of the Minimum Borrowing Amount into the
Common Stock of the Company may be initiated as set forth in the Note. From and
after the date upon which any outstanding principal of the Minimum Borrowing
Amount (as evidenced by the first Minimum Borrowing Note) is converted into
Common Stock (the "First Conversion Date"), (i) corresponding amounts of all
outstanding Loans (not attributable to the then outstanding Minimum Borrowing
Amount) existing on or made after the First Conversion Date will be aggregated
until they reach the sum of $1,500,000 and (ii) the Company will issue a new
(serialized) Minimum Borrowing Note to Laurus in respect of such $1,500,000
aggregation, and (iii) the Company shall prepare and file a subsequent
registration statement with the SEC to register such subsequent Minimum Borrowing
Note as set forth in the Registration Rights Agreement.


3.     
Repayment of the Loans. Company (a) may prepay the
Obligations in excess of the Minimum Borrowing
Amount from time to time in accordance with
the terms and provisions of the Notes (and Section 16 hereof if such prepayment is due to a termination of this
Agreement); and (b) shall repay on the
expiration of the Term (i) the then aggregate outstanding principal balance of
the Loans made by Laurus to Company hereunder together with accrued and unpaid
interest, fees and charges and (ii) all other amounts owed Laurus under this
Agreement and the Ancillary Agreements.  Any payments of principal, interest,
fees or any other amounts payable hereunder or under any Ancillary Agreement
shall be made prior to 12:00 noon (New York time) on the due date thereof in
immediately available funds.


4.     
Procedure for Loans.  Company may by written notice
request a borrowing of Loans prior to 12:00 p.m.. (New York time) on the
Business Day of its request to incur, on the next business day, a Loan. 
Together with each request for a Loan (or at such other intervals as Laurus may
request), Company shall deliver to Laurus a Borrowing Base Certificate in the
form of Exhibit A, which shall be certified as true and correct by the Chief
Executive Officer or Chief Financial Officer of Company together with all
supporting documentation relating thereto.  All Loans shall be disbursed from
whichever office or other place Laurus may designate from time to time and
shall be charged to Company's account on Laurus' books.  The proceeds of each
Loan made by Laurus shall be made available to Company on the Business Day
following the Business Day so requested in accordance with the terms of this
Section 4 by way of credit to Company's operating account maintained with such
bank as Company designated to Laurus.  Any and all Obligations due and owing
hereunder may be charged to Company's account and shall constitute Loans.


5.      Interest and Payments. 



(a)    Interest.


(i)           
Except as modified by Section 5(a)(iii)
below, Company shall pay interest at the Contract Rate on the unpaid principal
balance of each Loan until such time as such Loan is collected in full in good
funds in dollars of the United States of America.


(ii)           
Interest and payments shall be computed
on the basis of actual days elapsed in a year of 360 days.  At Laurus' option,
Laurus may charge Company account for said interest.


 


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(iii)           
Effective upon the occurrence of any
Event of Default and for so long as any Event of Default shall be continuing,
the Contract Rate shall automatically be increased by five percent (5%) per
annum (such increased rate, the "Default Rate"), and all outstanding
Obligations, including unpaid interest, shall continue to accrue interest from
the date of such Event of Default at the Default Rate applicable to such
Obligations. 


(iv)           
In no event shall the aggregate
interest payable hereunder exceed the maximum rate permitted under any
applicable law or regulation, as in effect from time to time (the "Maximum
Legal Rate") and if any provision of this Agreement or any Ancillary Agreement
is in contravention of any such law or regulation, interest payable under this
Agreement and each Ancillary Agreement shall be computed on the basis of the
Maximum Legal Rate (so that such interest will not exceed the Maximum Legal
Rate). 


(v)           
Company shall pay principal, interest
and all other amounts payable hereunder, or under any Ancillary Agreement,
without any deduction whatsoever, including any deduction for any set-off or
counterclaim.


(b)   Payments.


(i)           
Closing/Annual Payments.  Upon execution of this Agreement by Company and Laurus,
Company shall pay to Laurus Capital Management, LLC a closing payment in an
amount equal to three and nine tenths percent (3.9%) of the Capital
Availability Amount. Such payment shall be deemed fully earned on the Closing
Date and shall not be subject to rebate or proration for any reason.  



(ii)           
Unused Line Payment.  If, for any month, the average outstanding Loans (the
"Average Loan Amount") do not equal the Capital Availability Amount, Company shall
pay to Laurus at the end of such month a payment (calculated on a per annum
basis) in an amount equal to  0.375% of the amount by which the Capital
Availability Amount exceeds the Average Loan Amount.  Notwithstanding the
foregoing, any unpaid fee shall be immediately due and payable upon termination
of this Agreement.


(iii)           
Overadvance Payment.  Without affecting Laurus' rights hereunder in the event
the Loans exceed the amounts permitted by Section 2 ("Overadvances"), in the
event an Overadvance occurs or is made by Laurus, all such Overadvances shall
bear interest at an annual rate equal to one percent (1%) of the amount of such
Overadvances for each month or portion thereof as such amounts shall be
outstanding.


(iv)           
Financial Information Default.  Without affecting Laurus' other rights and remedies, in
the event Company fails to deliver the financial information required by
Section 11(c) on or before the date required by this Agreement, Company shall
pay Laurus a fee in the amount of $400.00 per week (or portion thereof) for
each such failure until such failure is cured to Laurus' satisfaction or waived
in writing by Laurus.  Such fee shall be charged to Company's account upon the
occurrence of each such failure.  


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6.      Security Interest.


(a)   
To secure
the prompt payment to Laurus of the Obligations, Company hereby assigns,
pledges and grants to Laurus a continuing security interest in and Lien upon
all of the Collateral.  All of Company's Books and Records relating to the
Collateral shall, until delivered to or removed by Laurus, be kept by Company
in trust for Laurus until all Obligations have been paid in full.  Each
confirmatory assignment schedule or other form of assignment hereafter executed
by Company shall be deemed to include the foregoing grant, whether or not the
same appears therein. 


(b)   Company hereby (i) authorizes Laurus
to file any financing statements, continuation statements or amendments thereto
that (x) indicate the Collateral (1) as all assets of Company or words of
similar effect, regardless of whether any particular asset comprised in the
Collateral falls within the scope of Article 9 of the UCC of such jurisdiction,
or (2) as being of an equal or lesser scope or with greater detail, and (y)
contain any other information required by Part 5 of Article 9 of the UCC for
the sufficiency or filing office acceptance of any financing statement,
continuation statement or amendment and (ii) ratifies its authorization for
Laurus to have filed any initial financial statements, or amendments thereto if
filed prior to the date hereof.  Company acknowledges that it is not authorized
to file any financing statement or amendment or termination statement with
respect to any financing statement without the prior written consent of Laurus
and agrees that it will not do so without the prior written consent of Laurus,
subject to Company's rights under Section 9-509(d)(2) of the UCC.


(c)   
Company
hereby grants to Laurus an irrevocable, non-exclusive license (exercisable upon
the termination of this Agreement due to an occurrence and during the
continuance of an Event of Default without payment of royalty or other
compensation to Company) to use, transfer, license or sublicense any
Intellectual Property now owned, licensed to, or hereafter acquired by Company,
and wherever the same may be located, and including in such license access to
all media in which any of the licensed items may be recorded or stored and to
all computer and automatic machinery software and programs used for the
compilation or printout thereof, and represents, promises and agrees that any
such license or sublicense is not and will not be in conflict with the
contractual or commercial rights of any third Person; provided, that such
license will terminate on the termination of this Agreement and the payment in
full of all Obligations.


7.     
Representations, Warranties and
Covenants Concerning the Collateral.  Company represents, warrants (each of which such
representations and warranties shall be deemed repeated upon the making of each
request for a Loan and made as of the time of each and every Loan hereunder)
and covenants as follows:


(a)   
all of
the Collateral (i) is owned by Company free and clear of all Liens (including
any claims of infringement) except those in Laurus' favor and Permitted Liens
and (ii) is not subject to any agreement prohibiting the granting of a Lien or
requiring notice of or consent to the granting of a Lien.


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(b)   Company shall not encumber,
mortgage, pledge, assign or grant any Lien in any Collateral of Company or any
of Company's other assets to anyone other than Laurus and except for Permitted
Liens.


(c)   
The Liens
granted pursuant to this Agreement, upon completion of the filings and other
actions listed on Exhibit 7(c) (which, in the case of all filings and
other documents referred to in said Exhibit, have been delivered to Laurus in
duly executed form) constitute valid perfected security interests in all of the
Collateral in favor of Laurus as security for the prompt and complete payment
and performance of the Obligations, enforceable in accordance with the terms
hereof against any and all creditors of and any purchasers from Company and such
security interest is prior to all other Liens in existence on the date hereof.


(d)   No effective security agreement,
mortgage, deed of trust, financing statement, equivalent security or Lien
instrument or continuation statement covering all or any part of the Collateral
is or will be on file or of record in any public office, except those relating
to Permitted Liens.


(e)   
Company
shall not dispose of any of the Collateral whether by sale, lease or otherwise
except for the sale of Inventory in the ordinary course of business and for the
disposition or transfer in the ordinary course of business during any fiscal
year of obsolete and worn-out Equipment having an aggregate fair market value
of not more than $25,000 and only to the extent that (i) the proceeds of any
such disposition are used to acquire replacement Equipment which is subject to
Laurus' first priority security interest or are used to repay Loans or to pay
general corporate expenses, or (ii) following the occurrence of an Event of
Default which continues to exist the proceeds of which are remitted to Laurus
to be held as cash collateral for the Obligations.


(f)    
Company
shall defend the right, title and interest of Laurus in and to the Collateral
against the claims and demands of all Persons whomsoever, and take such
actions, including (i) all actions necessary to grant Laurus "control" of any
Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic
Chattel Paper owned by Company, with any agreements establishing control to be
in form and substance satisfactory to Laurus, (ii) the prompt (but in no event
later than five (5) Business Days following Laurus' request therefor) delivery
to Laurus of all original Instruments, Chattel Paper, negotiable Documents and
certificated Stock owned by the Company (in each case, accompanied by stock
powers, allonges or other instruments of transfer executed in blank), (iii)
notification of Laurus' interest in Collateral at Laurus' request, and (iv) the
institution of litigation against third parties as shall be prudent in order to
protect and preserve Company's and Laurus' respective and several interests in
the Collateral. 


(g)   
Company
shall promptly, and in any event within five (5)  Business Days after the same
is acquired by it, notify Laurus of any commercial tort claim (as defined in
the UCC) acquired by it and unless otherwise consented by Laurus, Company shall
enter into a supplement to this Agreement granting to Laurus a Lien in such
commercial tort claim.


(h)   
Company
shall place notations upon its Books and Records and any financial statement of
Company to disclose Laurus' Lien in the Collateral.


 


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(i)     
If
Company retains possession of any Chattel Paper or Instrument with Laurus'
consent, upon Laurus' request such Chattel Paper and Instruments shall be
marked with the following legend:  "This writing and obligations evidenced or
secured hereby are subject to the security interest of Laurus Master Fund,
Ltd."


(j)    
Company
shall perform in a reasonable time all other steps requested by Laurus to
create and maintain in Laurus' favor a valid perfected first Lien in all
Collateral subject only to Permitted Liens.


(k)   Company shall notify Laurus promptly
and in any event within three (3)  Business Days after obtaining knowledge
thereof (i) of any event or circumstance that to Company's knowledge would
cause Laurus to consider any then existing Account as no longer constituting an
Eligible Account; (ii) of any material delay in Company's performance of any of
its obligations to any Account Debtor; (iii) of any assertion by any Account
Debtor of any material claims, offsets or counterclaims; (iv) of any
allowances, credits and/or monies granted by Company to any Account Debtor; (v)
of all material adverse information relating to the financial condition of an
Account Debtor; (vi) of any material return of goods; and (vii) of any loss,
damage or destruction of any of the Collateral.


(l)     
All
Eligible Accounts (i) which are billed on a construction completion basis but
not payable until the project is completed, represent complete bona fide
transactions which require no further act under any circumstances on Company's
part to make such Accounts payable by the Account Debtors, (ii) are not subject
to any present, future contingent offsets or counterclaims, and (iii) do not
represent bill and hold sales, consignment sales, guaranteed sales, sale or
return or other similar understandings or obligations of any Affiliate or
Subsidiary of Company.  Company has not made, and will not make any agreement
with any Account Debtor for any extension of time for the payment of any
Account, any compromise or settlement for less than the full amount thereof,
any release of any Account Debtor from liability therefor, or any deduction therefrom
except a discount or allowance for prompt or early payment allowed by Company
in the ordinary course of its business consistent with historical practice and
as previously disclosed to Laurus in writing.


(m)   Company shall keep and maintain its
Equipment in good operating condition, except for ordinary wear and tear, and
shall make all necessary repairs and replacements thereof so that the value and
operating efficiency shall at all times be maintained and preserved.  Company
shall not permit any such items to become a Fixture to real estate or
accessions to other personal property.


(n)   
Company
shall maintain and keep all of its Books and Records concerning the Collateral
at Company's executive offices listed in Exhibit 12(d).


(o)   Company shall maintain and keep the
tangible Collateral at the addresses listed in Exhibit 12(d), provided,
that Company may change such locations or open a new location, provided that
Company provides Laurus at least thirty (30) days prior written notice of such
changes or new location and (ii) prior to such change or opening of a new
location where Collateral having a value of more than $50,000 will be located,
Company executes and delivers to Laurus such agreements as Laurus may request,
including landlord agreements, mortgagee agreements and warehouse agreements,
each in form and substance satisfactory to Laurus.


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(p)   Exhibit 7(p) lists all banks and other financial institutions at which
Company maintains deposits and/or other accounts, and such Exhibit correctly
identifies the name, address and telephone number of each such depository, the
name in which the account is held, a description of the purpose of the account,
and the complete account number.  The  Company shall not establish any
depository or other bank account of any with any financial institution
(other than the accounts set forth on Exhibit 7(p)) without Laurus'
prior written consent.


8.      Payment of Accounts.



(a)   
Company
will irrevocably direct all of its present and future Account Debtors and other
Persons obligated to make payments constituting Collateral to make such
payments directly to the lockbox maintained by Company (the "Lockbox") with
Commerce Bank (the "Lockbox Bank") pursuant to the terms of the Clearing
Account Agreement  dated January 22, 2004 or such other financial institution
accepted by Laurus in writing as may be selected by Company.  On or prior to
the Closing Date, Company shall and shall cause the Lockbox Bank to enter into
all such documentation acceptable to Laurus pursuant to which, among other
things, the Lockbox Bank agrees to:  (a) sweep the Lockbox on a daily basis and
deposit all checks received therein to an account designated by Laurus in
writing and (b) comply only with the instructions or other directions of Laurus
concerning the Lockbox.  All of Company's invoices, account statements and
other written or oral communications directing, instructing, demanding or
requesting payment of any Account of Company or any other amount constituting
Collateral shall conspicuously direct that all payments be made to the Lockbox
or such other address as Laurus may direct in writing.  If, notwithstanding the
instructions to Account Debtors, Company receives any payments, Company shall
immediately remit such payments to Laurus in their original form with all
necessary endorsements.  Until so remitted, Company shall hold all such
payments in trust for and as the property of Laurus and shall not commingle
such payments with any of its other funds or property.


(b)   At Laurus' election, following the
occurrence of an Event of Default which is continuing, Laurus may notify
Company's Account Debtors of Laurus' security interest in the Accounts, collect
them directly and charge the collection costs and expenses thereof to Company's
account.


9.      Collection and Maintenance of Collateral.


(a)   
Laurus
may verify Company's Accounts from time to time, but not more often than once
every three (3) months unless an Event of Default has occurred and is
continuing, utilizing an audit control company or any other agent of Laurus.


(b)   Proceeds of Accounts received by
Laurus will be deemed received on the Business Day after Laurus' receipt of
such proceeds in good funds in dollars of the United States of America in
Laurus' account.  Any amount received by Laurus after 12:00 noon (New York
time) on any Business Day shall be deemed received on the next Business Day.


 


 


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(c)   
As Laurus
receives the proceeds of Accounts, it shall remit all such proceeds (net of
interest, fees and other amounts then due and owing to Laurus hereunder) to
Company upon request (but no more often than twice a week).  Notwithstanding
the foregoing, following the occurrence and during the continuance of an Event
of Default, Laurus, at its option, may (a) apply such proceeds to the
Obligations in such order as Laurus shall elect, (b) hold such proceeds as cash
collateral for the Obligations and Company hereby grants to Laurus a security
interest in such cash collateral amounts as security for the Obligations and/or
(c) do any combination of the foregoing.


10.  Inspections and Appraisals.  At all times during normal
business hours, Laurus, and/or any agent of Laurus shall have the right to (a)
have access to, visit, inspect, review, evaluate and make physical verification
and appraisals of Company's properties and the Collateral, (b) inspect, audit
and copy (or take originals if necessary) and make extracts from Company's
Books and Records, including management letters prepared by independent
accountants, and (c) discuss with Company's principal officers, and independent
accountants, Company's business, assets, liabilities, financial condition,
results of operations and business prospects.  Company will deliver to Laurus
any instrument necessary for Laurus to obtain records from any service bureau
maintaining records for Company.  If any internally prepared financial
information, including that required under this Section is unsatisfactory in
any manner to Laurus, Laurus may request that the Accountants review the same.


11.  Financial
Reporting.  Company will
deliver, or cause to be delivered, to Laurus each of the following, which shall
be in form and detail acceptable to Laurus:


(a)   
As soon
as available, and in any event within ninety (90) days after the end of each
fiscal year of Company, Company's audited financial statements with a report of
independent certified public accountants of recognized standing selected by
Company and acceptable to Laurus (the "Accountants"), which annual financial
statements shall include Company's balance sheet as at the end of such fiscal
year and the related statements of Company's income, retained earnings and cash
flows for the fiscal year then ended, prepared, if Laurus so requests, on a
consolidating and consolidated basis to include all Subsidiaries and
Affiliates, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters
prepared by such accountants; and (ii) a certificate of Company's President,
Chief Executive Officer or Chief Financial Officer stating that such financial
statements have been prepared in accordance with GAAP and whether or not such
officer has knowledge of the occurrence of any Default or Event of Default
hereunder and, if so, stating in reasonable detail the facts with respect
thereto;


(b)   As soon as available and in any
event within forty five (45) days after the end of each quarter, an
unaudited/internal balance sheet and statements of income, retained earnings
and cash flows of Company as at the end of and for such quarter and for the
year to date period then ended, prepared, if Laurus so requests, on a
consolidating and consolidated basis to include all Subsidiaries and
Affiliates, in reasonable detail and stating in comparative form the figures
for the corresponding date and periods in the previous year, all prepared in
accordance with GAAP, subject to year-end adjustments and accompanied by a
certificate of Company's President, Chief Executive Officer or
Chief Financial Officer, stating (i) that such financial statements have been
prepared in accordance with GAAP, subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder not theretofore reported and remedied and, if so,
stating in reasonable detail the facts with respect thereto;  


10













 


(c)   
Within
thirty (30) days after the end of each month (or more frequently if Laurus so
requests), agings of Company's Accounts, unaudited trial balances and their
accounts payable and a calculation of Company's Accounts, Eligible Accounts and
thirty (30) days after the end of each fiscal quarter for Inventory  ledger as
at the end of such month or shorter time period, provided, however, that if Laurus
shall request the foregoing information more often than as set forth in the
immediately preceding clause, the Company shall have thirty (30) days from each
such request to comply with Laurus' demand; and


(d)   Promptly after (i) the filing
thereof, copies of Company's most recent registration statements and annual,
quarterly, monthly or other regular reports which Company files with the Securities
and Exchange Commission (the "SEC"), and (ii) the issuance thereof, copies of
such financial statements, reports and proxy statements as Company shall send
to its stockholders.


12.  Additional
Representations and Warranties.  Company represents and warrants
(each of which such representations and warranties shall be deemed repeated
upon the making of a request for a Loan and made as of the time of each Loan
made hereunder), as follows:


(a)   
Company
is a corporation duly incorporated and validly existing under the laws of the
jurisdiction of its incorporation and duly qualified and in good standing in
every other state or jurisdiction in which the nature of Company's business
requires such qualification.


(b)   The execution, delivery and
performance of this Agreement and the Ancillary Agreements (i) have been duly
authorized, (ii) are not in contravention of Company's certificate of
incorporation, by-laws or of any indenture, agreement or undertaking to which
Company is a party or by which Company is bound and (iii) are within Company's
corporate powers.


(c)   
This
Agreement and the Ancillary Agreements executed and delivered by Company are
Company's legal, valid and binding obligations, enforceable in accordance with
their terms.


(d)   Exhibit 12(d) sets forth Company's name as it appears in official filing
in the state of its incorporation, the type of entity of Company, the
organizational identification number issued by Company's state of incorporation
or a statement that no such number has been issued, Company's state of incorporation,
and the location of Company's chief executive office, corporate offices,
warehouses, other locations of Collateral and locations where records with
respect to Collateral are kept (including in each case the county of such
locations) and, except as set forth in such Exhibit 12(d), such
locations have not changed during the preceding twelve months.  As of the
Closing Date, during the prior five years, except as set forth in Exhibit
12(d), Company has not been known as or conducted business in any other
name (including trade names).  Company has only one state of incorporation.


11













 


(e)   
Based
upon the Employee Retirement Income Security Act of 1974 ("ERISA"), and the
regulations and published interpretations thereunder: (i) Company has not
engaged in any Prohibited Transactions as defined in Section 406 of ERISA and
Section 4975 of the Internal Revenue Code, as amended; (ii) Company has met all
applicable minimum funding requirements under Section 302 of ERISA in respect
of its plans; (iii) Company has no knowledge of any event or occurrence which
would cause the Pension Benefit Guaranty Corporation to institute proceedings
under Title IV of ERISA to terminate any employee benefit plan(s); (iv) Company
has no fiduciary responsibility for investments with respect to any plan
existing for the benefit of persons other than Company's employees; and (v)
except as disclosed in Exhibit 12(e) attached hereto, Company has not
withdrawn, completely or partially, from any multi-employer pension plan so as
to incur liability under the Multiemployer Pension Plan Amendments Act of 1980.


(f)    
There is
no pending or threatened litigation, court order, judgment, writ, suit, action
or proceeding which could reasonably be expected to have a Material Adverse
Effect.


(g)   
All
balance sheets and income statements which have been delivered to Laurus
fairly, accurately and properly state Company's financial condition on a basis
consistent with that of previous financial statements and except as reflected
in such financial statements there has been no material adverse change in
Company's financial condition as reflected in such statements since the balance
sheet date of the statements last delivered to Laurus and such statements do
not fail to disclose any fact or facts which might have a Material Adverse
Effect on Company's financial condition.


(h)   
Company
possesses or has licenses to use all of the Intellectual Property necessary to
conduct its business.  There has been no assertion or claim of violation or
infringement with respect to any Intellectual Property.  Exhibit 12(i)
describes all Intellectual Property of Company.


(i)     
Neither
this Agreement, the exhibits and schedules hereto, the Ancillary Agreements nor
any other document delivered by Company to Laurus or its attorneys or agents in
connection herewith or therewith or with the transactions contemplated hereby
or thereby, contain any untrue statement of a material fact nor omit to state a
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances in which they are made, not misleading. 

The issuance of the Notes and the Warrants and the shares
of common stock issued upon conversion of the Notes and exercise of the
Warrants will be exempt from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), and will have been registered
or qualified (or are exempt from registration and qualification) under the
registration, permit or qualification requirements of all applicable state
securities laws.  Neither Company nor any of its Affiliates, nor any person
acting on its or their behalf, has engaged in any form of general solicitation
or general advertising (within the meaning of Regulation D under the Securities
Act) in connection with the offer or sale of the Securities. 


12













 


(j)    
The common stock of the Company is registered pursuant to Section 12(b)
or 12(g) of the Exchange Act and, except with respect to certain matters set
forth on Exhibit 12(j) attached hereto, the Company has timely filed all
proxy statements, reports, schedules, forms, statements and other documents
required to be filed by it under the Exchange Act.  The Company has filed (i)
its Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002
and (ii) its Quarterly Report on Form 10-QSB for the fiscal quarters ended
March 31, 2003 June 30, 2003, and September 30, 2003 (collectively, the "SEC
Reports").  Each SEC Report was, at the time of its filing, in substantial
compliance with the requirements of its respective form and none of the SEC Reports,
nor the financial statements (and the notes thereto) included in the SEC
Reports, as of their respective filing dates, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.  The financial
statements of the Company included in the SEC Reports comply as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the Commission or other applicable rules and
regulations with respect thereto.  Such financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") applied on
a consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes
or may be condensed) and fairly present in all material respects the financial
condition, the results of operations and the cash flows of the Company and its
subsidiaries, on a consolidated basis, as of, and for, the periods presented in
each such SEC Report.


(k)  
The common stock of the Company is listed for trading on the American
Stock Exchange ("AMEX") and satisfies all requirements for the continuation of
such listing.  The Company has not received any notice that its common stock
will be delisted from the AMEX or that the common stock does not meet all
requirements for the continuation of such listing.


(l)     
Neither the Company, nor any of its Affiliates, nor any person acting on
its or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement and the
Ancillary Agreements to be integrated with prior offerings by the Company for
purposes of the Securities Act which would prevent the Company from selling the
Securities pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will the Company or any
of its Affiliates or Subsidiaries take any action or steps that would cause the
offering of the Securities to be integrated with other offerings (other than
such concurrent offering to Laurus).


(m) 
  The Securities are all restricted securities under the Securities Act
as of the date of this Agreement.  The Company will not issue any stop transfer
order or other order impeding the sale and delivery of any of the Securities at
such time as such Securities are registered for public sale or an exemption
from registration is available, except as required by federal or state
securities laws.


(n)   
The Company understands the nature of the Securities issuable under the
Ancillary Agreements and recognizes that the issuance of such Securities may
have a potential dilutive effect.  The Company specifically acknowledges that
its obligation to issue the Securities is binding upon the Company and
enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.


 


13













(o)  
Except for agreements made in the ordinary course of business, there is
no agreement that has not been filed with the Commission as an exhibit to a
registration statement or to a form required to be filed by the Company under
the Exchange Act, the breach of which could reasonably be expected to have a
Material Adverse Effect or would prohibit or otherwise interfere with the
ability of the Company to enter into and perform any of its obligations under
this Agreement the Registration Rights Agreement executed by Company in favor
of Laurus in any material respect.


13.  Covenants. 
Company covenants as follows:


(a)   
Company
will not, without the prior written consent of Laurus, change (i) its name as
it appears in the official filings in the state of its incorporation or
formation, (ii) the type of legal entity it is, (iii) its organization
identification number, if any, issued by its state of incorporation, (iv) its
state of incorporation or (v) amend its certificate of incorporation, by-laws
or other organizational document. 


(b)   The operation of Company's business
is and will continue to be in compliance in all material respects with all
applicable federal, state and local laws, rules and ordinances, including to
all laws, rules, regulations and orders relating to taxes, payment and
withholding of payroll taxes, employer and employee contributions and similar
items, securities, employee retirement and welfare benefits, employee health
safety and environmental matters.


(c)   
Company
will pay or discharge when due all taxes, assessments and governmental charges
or levies imposed upon Company or any of the Collateral unless such amounts are
being diligently contested in good faith by appropriate proceedings provided
that (i) adequate reserves with respect thereto are maintained on the books of
Company in conformity with GAAP and (ii) the related Lien shall have no effect
on the priority of the Liens in favor of Laurus or the value of the assets in
which Laurus has a Lien.


(d)   Company will promptly inform Laurus
in writing of: (i) the commencement of all proceedings and investigations by or
before and/or the receipt of any notices from, any governmental or
nongovernmental body and all actions and proceedings in any court or before any
arbitrator against or in any way concerning any event which could reasonable be
expected to have singly or in the aggregate, a Material Adverse Effect; (ii)
any amendment of Company's certificate of incorporation, by-laws or other
organizational document; (iii) any change which has had or could reasonably be
expected to have a Material Adverse Effect; (iv) any Event of Default or
Default; (v) any default or any event which with the passage of time or giving
of notice or both would constitute a default under any agreement for the
payment of money to which Company is a party or by which Company or any of
Company's properties may be bound the breach of which would have a Material
Adverse Effect and (vi) any change in Company's name or any other name used in
its business.


 


 


14













(e)   
The
Company will not (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt) whether secured or unsecured other than Company's
indebtedness to Laurus and as set forth on Exhibit 13(e)(i) attached
hereto and made a part hereof; (ii) cancel any debt owing to it in excess of
$50,000 in the aggregate during any 12 month period; (iii) assume, guarantee,
endorse or otherwise become directly or contingently liable in connection with
any obligations of any other Person, except the endorsement of negotiable
instruments by a Company for deposit or collection or similar transactions in
the ordinary course of business; (iv) directly or indirectly declare, pay or
make any dividend or distribution on any class of its Stock other than to pay
dividends on shares of its outstanding Preferred Stock or the preferred stock
to be issued and sold by the Company pursuant to the Preferred Sale (below) or
apply any of its funds, property or assets to the purchase, redemption or other
retirement of any Stock of the Company except as required under the terms of
the Company's outstanding Preferred Stock issued and outstanding on the date
hereof; (v) purchase or hold beneficially any Stock or other securities or
evidences of indebtedness of, make (except that the Company shall
not be prohibited from entering into, nor required to seek the prior consent of
Laurus or any other party, agreements related to the issuance and sale of up to
Two Million Dollars ($2,000,000) million of preferred stock by the Company (the
"Preferred Sale"), including any ancillary agreements required by such
purchasers of preferred stock, provided, however, that the Preferred Sale shall
be consummated by March 15, 2004; notwithstanding the immediately foregoing,
Laurus shall not be entitled to the benefit of Section  3.5 (C) of the Minimum
Borrowing Note or Section 2.5(C) of the Secured Revolving Note in respect of
the Preferred Sale) or permit
to exist any loans or advances to, or make any investment or acquire any
interest whatsoever in, any other Person, including any partnership or joint
venture, except (x) travel advances, (y) loans to Company's officers and employees
not exceeding at any one time an aggregate of $10,000, and (z) existing
Subsidiaries of the Company; (vi) create or permit to exist any Subsidiary,
other than any Subsidiary in existence on the date hereof and listed in Exhibit
13(e)(ii) unless such new Subsidiary is designated by Laurus as either a
co-borrower or guarantor hereunder and such Subsidiary shall have entered into
all such documentation required by Laurus to grant to Laurus a first priority
perfected security interest in such Subsidiary's assets to secure the
Obligations; (vii) directly or indirectly, prepay any indebtedness (other than
to Laurus and in the ordinary course of business), or repurchase, redeem,
retire or otherwise acquire any indebtedness (other than to Laurus and in the ordinary
course of business) except to make scheduled payments of principal and interest
thereof; (viii) enter into any merger, consolidation or other reorganization
with or into any other Person or acquire all or a portion of the assets or
Stock of any Person or permit any other Person to consolidate with or merge
with it, unless (1) Company is the surviving entity of such merger or
consolidation, (2) no Event of Default shall exist immediately prior to and
after giving effect to such merger or consolidation, (3) Company shall have
provided Laurus copies of all documentation relating to such merger or
consolidation and (4) Company shall have provided Laurus with at least thirty
(30) days' prior written notice of such merger or consolidation; (ix) materially
change the nature of the business in which it is presently engaged; (x) change
its fiscal year or make any changes in accounting treatment and reporting
practices without prior written notice to Laurus except as required by GAAP or
in the tax reporting treatment or except as required by law; (xi) enter into
any transaction with any employee, director or Affiliate, except in the
ordinary course on arms-length terms; or (xii) bill Accounts under any name
except the present name of Company or its existing Subsidiaries. Notwithstanding any
other provision in this Security Agreement or any Ancillary Agreement, if any
acquisition contemplated by the Company after the date hereof is not
consummated, in whole or in part, with the proceeds of Loans, the Company shall
not be prohibited from entering into, or be required to seek the prior consent
of Laurus in connection with such transactions (including any borrowing or
financing transactions necessary to complete such acquisitions). Any companies
or assets acquired by the Company through such transactions shall be
specifically excluded from the scope of this Security Agreement and the
Ancillary Agreements, including but not limited to the definitions of
"Collateral" and "Accounts" contained herein, provided, however, that any
acquisition consummated by the Company by March 1, 2004 or with the proceeds of
Loans shall be specifically included in the scope of this Security Agreement
and the Ancillary Agreements, including but not limited to the definitions of
"Collateral" and "Accounts" contained herein.


15













(f)    
None of
the proceeds of the Loans hereunder will be used directly or indirectly to
"purchase" or "carry" "margin stock" or to repay indebtedness incurred to
"purchase" or "carry" "margin stock" within the respective meanings of each of
the quoted terms under Regulation U of the Board of Governors of the Federal
Reserve System as now and from time to time hereafter in effect. 


(g)    Company will bear the full risk of
loss from any loss of any nature whatsoever with respect to the Collateral.  At
Company's own cost and expense in amounts and with carriers acceptable to
Laurus, Company shall (i) keep all its insurable properties and properties in
which it has an interest insured against the hazards of fire, sprinkler
leakage, those hazards covered by extended coverage insurance and such other
hazards, and for such amounts, as is customary in the case of companies engaged
in businesses similar to Company's including business interruption insurance;
(ii) maintain a bond in such amounts as is customary in the case of companies
engaged in businesses similar to Company's insuring against larceny,
embezzlement or other criminal misappropriation of insured's officers and
employees who may either singly or jointly with others at any time have access
to the assets or funds of Company either directly or
through Governmental Authority to draw upon such funds or to direct generally
the disposition of such assets; (iii) maintain public and product liability
insurance against claims for personal injury, death or property damage suffered
by others; (iv) maintain all such worker's compensation or similar insurance as
may be required under the laws of any state or jurisdiction in which Company is
engaged in business; and (v) furnish Laurus with (x) certificates as to all
such insurance coverages and evidence of the maintenance of such policies at
least thirty (30) days before any expiration date, (y) endorsements to such
policies naming Laurus as "co-insured" or "additional insured" and appropriate
loss payable endorsements  in form and substance satisfactory to Laurus, naming
Laurus as loss payee, and (z) evidence that as to Laurus the insurance coverage
shall not be impaired or invalidated by any act or neglect of Company and the
insurer will provide Laurus with at least thirty (30) days notice prior to
cancellation or expiration thereof.  Company shall instruct the insurance
carriers that in the event of any loss thereunder, the carriers shall make
payment for such loss to Laurus and not to Company and Laurus jointly.  If any
insurance losses are paid by check, draft or other instrument payable to
Company and Laurus jointly, Laurus may endorse Company's name thereon and do
such other things as Laurus may deem advisable to reduce the same to cash. 
Laurus is hereby authorized to adjust and compromise claims.  All loss
recoveries received by Laurus upon any such insurance may be applied to the
Obligations, in such order as Laurus in its sole discretion shall determine or
shall otherwise be delivered to the Company.  Any surplus shall be paid by
Laurus to Company or applied as may be otherwise required by law.  Any
deficiency thereon shall be paid by Company to Laurus, on demand.   


 


16













(h)     Company will at all times have
authorized and reserved a sufficient number of shares of Common Stock to
provide for the conversion of the Notes and exercise of the Warrants.


14. 
Further Assurances.  At any time and from time to
time, upon the written request of Laurus and at the sole expense of Company,
Company shall promptly and duly execute and deliver any and all such further
instruments and documents and take such further action as Laurus may request
(a) to obtain the full benefits of this Agreement and the Ancillary Agreements,
(b) to protect, preserve and maintain Laurus' rights in the Collateral and
under this Agreement or any Ancillary Agreement, or (c) to enable
Laurus to exercise all or any of the rights and powers herein granted or any
Ancillary Agreement.


15. 
Power of Attorney.  Company hereby appoints Laurus,
or any other Person whom Laurus may designate as Company's attorney, with power
to:  (i) endorse Company's name on any checks, notes, acceptances, money
orders, drafts or other forms of payment or security that may come into Laurus'
possession; (ii) sign Company's name on any invoice or bill of lading relating
to any Accounts, drafts against Account Debtors, schedules and assignments of
Accounts, notices of assignment, financing statements and other public records,
verifications of Account and notices to or from Account Debtors; (iii) verify
the validity, amount or any other matter relating to any Account by mail,
telephone, telegraph or otherwise with Account Debtors; (iv) do all things
necessary to carry out this Agreement, any Ancillary Agreement and all related
documents; and (v) on or after the occurrence and continuation of an Event of
Default, notify the post office authorities to change the address for delivery
of Company's mail to an address designated by Laurus, and to receive, open and
dispose of all mail addressed to Company.  Company hereby ratifies and approves
all acts of the attorney.  Neither Laurus, nor the attorney will be liable for
any acts or omissions or for any error of judgment or mistake of fact or law,
except for gross negligence or willful misconduct.  This power, being coupled
with an interest, is irrevocable so long as Laurus has a security interest and
until the Obligations have been fully satisfied.


16. 
Term of Agreement.  Laurus' agreement to make Loans
and extend financial accommodations under and in accordance with the terms of
this Agreement or any Ancillary Agreement shall continue in full force and
effect until the expiration of the Initial Term.  At Laurus' election following
the occurrence of an Event of Default, Laurus may terminate this Agreement. 
The termination of the Agreement shall not affect any of Laurus' rights
hereunder or any Ancillary Agreement and the provisions hereof and thereof
shall continue to be fully operative until all transactions entered into,
rights or interests created and the Obligations have been disposed of,
concluded or liquidated.  Notwithstanding the foregoing, Laurus shall release
its security interests at any time after thirty (30) days notice upon payment
to it of all Obligations if Company shall have (i) provided Laurus with an
executed release of any and all claims which Company may have or thereafter
have under this Agreement and all Ancillary Agreements and (ii) paid to Laurus
an early payment fee in an amount equal to (1) ten  percent (10%) of the
Capital Availability Amount if such payment occurs prior to the first
anniversary of (A) the Closing Date or (B) any applicable renewal term, and (2)
five  (5%) of the Capital Availability Amount if such payment occurs on or
after the first anniversary and prior to the second anniversary of (A) the
Closing Date or (B) any applicable renewal term; such fee being intended to
compensate Laurus for its costs and expenses incurred in initially approving
this Agreement or extending same. Such early
payment fee shall be due and payable by Company to Laurus upon termination by
acceleration of this Agreement by Laurus due to the occurrence and continuance
of an Event of Default.


 



17













17. 
Termination of Lien.  The Liens and rights granted to
Laurus hereunder and any Ancillary Agreements and the financing statements
filed in connection herewith or therewith shall continue in full force and
effect, notwithstanding the termination of this Agreement or the fact that
Company's account may from time to time be temporarily in a zero or credit position,
until (a) all of the Obligations of Company have been paid or performed in full
after the termination of this Agreement.  Laurus shall not be required to send
termination statements to Company, or to file them with any filing office,
unless and until this Agreement and the Ancillary Agreements shall have been
terminated in accordance with their terms and all Obligations paid in full in
immediately available funds.


18.  Events
of Default.  The occurrence of any of the following shall constitute
an Event of Default:


(a)   
failure
to make payment of any of the Obligations when required hereunder; 


(b)   failure to pay any taxes when due
unless such taxes are being contested in good faith by appropriate proceedings
and with respect to which adequate reserves have been provided on Company's
books;


(c)   
failure
to perform under and/or committing any breach of this Agreement or any
Ancillary Agreement or any other agreement between Company and Laurus which
shall continue for a period of  twenty two (22)  days after the occurrence thereof;


(d)   the occurrence of a default under
any agreement to which Company is a party with third parties which has a
Material Adverse Effect;


(e)   
any
representation, warranty or statement made by Company hereunder, in any
Ancillary Agreement, any certificate, statement or document delivered pursuant
to the terms hereof, or in connection with the transactions contemplated by
this Agreement should at any time be false or misleading in any material
respect; 


(f)     an attachment or levy is made upon
Company's assets having an aggregate value in excess of $50,000 or a judgment
is rendered against Company or Company's property involving a liability of more
than $50,000 which shall not have been vacated, discharged, stayed or bonded
pending appeal within thirty (30) days from the entry thereof;


(g)   
any
change in Company's condition or affairs (financial or otherwise) which in
Laurus' reasonable, good faith opinion, could reasonably be expected to have  a
Material Adverse Effect; 


(h)   
any Lien
created hereunder or under any Ancillary Agreement for any reason ceases to be
or is not a valid and perfected Lien having a first priority interest;


 


18







 


(i)     
if
Company shall (i) apply for, consent to or suffer to exist the appointment of,
or the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of creditors, (iii) commence a voluntary case under
the federal bankruptcy laws (as now or hereafter in effect), (iv) be
adjudicated a bankrupt or insolvent, (v) file a petition seeking to take
advantage of any other law providing for the relief of debtors, (vi) acquiesce
to, or fail to have dismissed, within thirty (30) days, any petition filed
against it in any involuntary case under such bankruptcy laws, or (vii) take
any action for the purpose of effecting any of the foregoing;


(j)    
Company
shall admit in writing its inability, or be generally unable to pay its debts
as they become due or cease operations of its present business;


(k)   any Affiliate or Subsidiary of the
Company shall (i) apply for, consent to or suffer to exist the appointment of,
or the taking possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) admit in writing its
inability, or be generally unable, to pay its debts as they become due or cease
operations of its present business, (iii) make a general assignment for the
benefit of creditors, (iv) commence a voluntary case under the federal
bankruptcy laws (as now or hereafter in effect), (v) be adjudicated a bankrupt
or insolvent, (vi) file a petition seeking to take advantage of any other law
providing for the relief of debtors, (vii) acquiesce to, or fail to have
dismissed, within thirty (30) days, any petition filed against it in any
involuntary case under such bankruptcy laws or (viii) take any action for the
purpose of effecting any of the foregoing;


(l)     
Company
directly or indirectly sells, assigns, transfers, conveys, or suffers or
permits to occur any sale, assignment, transfer or conveyance of any assets of
Company or any interest therein, except as permitted herein;


(m)    the occurrence of a change in the
controlling ownership of the Company;


(n)   
a default
by Company in the payment, when due, of any principal of or interest on any
other indebtedness for money borrowed in an amount greater than $25,000, which
is not cured within any applicable cure or grace period; 


(o)   the indictment or threatened
indictment of Company or any executive officer of Company under any criminal
statute, or commencement or threatened commencement of criminal or civil
proceeding against Company or any executive officer of Company pursuant to
which statute or proceeding penalties or remedies sought or available include
forfeiture of any of the property of Company;  


(p)   if an Event of Default shall occur
under and as defined in any Note; or


(q)   any Guarantor shall breach any term
or provision of any Ancillary Agreement which is not cured within any
applicable cure or grace period;


(r)    
if any
Guarantor attempts to terminate, challenges the validity of, or its liability
under any Guaranty or any Guarantor Security Agreement; or


 


19







 


(s)   
should
any Guarantor default in its obligations under any Guaranty or any Guarantor
Security Agreement or if any proceeding shall be brought to challenge the
validity, binding effect of any Guaranty or any Guarantor Security Agreement or
should any Guarantor breach any representation, warranty or covenant contained
in any Guaranty Agreement or any Guarantor Security Agreement or should any Guaranty
or Guarantor Security Agreement cease to be a valid, binding and enforceable
obligation. 


19. 
Remedies. Following the occurrence of an
Event of Default, Laurus shall have the right to demand repayment in full of
all Obligations, whether or not otherwise due.  Until all Obligations have been
fully satisfied, Laurus shall retain its Lien in all Collateral.  Laurus shall
have, in addition to all other rights provided herein and in each Ancillary
Agreement, the rights and remedies of a secured party under the UCC, and under
other applicable law, all other legal and equitable rights to which Laurus may
be entitled, including the right to take immediate possession of the
Collateral, to require Company to assemble the Collateral, at Company's
expense, and to make it available to Laurus at a place designated by Laurus
which is reasonably convenient to both parties and to enter any of the premises
of Company or wherever the Collateral shall be located, with or without force
or process of law, and to keep and store the same on said premises until sold
(and if said premises be the property of Company, Company agrees not to charge
Laurus for storage thereof), and the right to apply for the appointment of a
receiver for Company's property.  Further, Laurus may, at any time or times
after the occurrence of an Event of Default, sell and deliver all Collateral
held by or for Laurus at public or private sale for cash, upon credit or
otherwise, at such prices and upon such terms as Laurus, in Laurus' sole
discretion, deems advisable or Laurus may otherwise recover upon the Collateral
in any commercially reasonable manner as Laurus, in its sole discretion, deems
advisable.  The requirement of reasonable notice shall be met if such notice is
mailed postage prepaid to Company at Company's address as shown in Laurus'
records, at least ten (10) days before the time of the event of which notice is
being given.  Laurus may be the purchaser at any sale, if it is public.  In
connection with the exercise of the foregoing remedies, Laurus is granted
permission to use all of Company's trademarks, tradenames, tradestyles,
patents, patent applications, licenses, franchises and other proprietary
rights.  The proceeds of sale shall be applied first to all costs and expenses
of sale, including attorneys' fees, and second to the payment (in whatever
order Laurus elects) of all Obligations.  After the indefeasible payment and
satisfaction in full in cash of all of the Obligations, and after the payment
by Laurus of any other amount required by any provision of law, including
Section 608(a)(1) of the Code (but only after Laurus has received what Laurus
considers reasonable proof of a subordinate party's security interest), the
surplus, if any, shall be paid to Company or its representatives or to whosoever
may be lawfully entitled to receive the same, or as a court of competent
jurisdiction may direct.  Company shall remain liable to Laurus for any
deficiency.  In addition, Company shall pay Laurus a liquidation fee
("Liquidation Fee") in the amount of five percent (5%) of the actual amount
collected in respect of each Account outstanding at any time during a
"liquidation period".  For purposes hereof, "liquidation period" means a
period:  (i) beginning on the earliest date of (x) an event
referred to in Section 18(i) or 18(j), or (y) the cessation of Company's
business; and (ii) ending on the date on which Laurus has actually received all
Obligations due and owing it under this Agreement and the Ancillary
Agreements.  The Liquidation Fee shall be paid on the date on which Laurus
collects the applicable Account by deduction from the proceeds thereof.. 
Company and Laurus acknowledge that the actual damages that would be incurred
by Laurus after the occurrence of an Event of Default would be difficult to quantify
and that Company and Laurus have agreed that the fees and obligations set forth
in this Section and in this Agreement would constitute fair and appropriate
liquidated damages in the event of any such termination.


 


20







 


 


20. 
Waivers.  To the full extent permitted by
applicable law, Company waives (a) presentment, demand and protest, and notice
of presentment, dishonor, intent to accelerate, acceleration, protest, default,
nonpayment, maturity, release, compromise, settlement, extension or renewal of
any or all of this Agreement and the Ancillary Agreements or any other notes,
commercial paper, Accounts, contracts, Documents, Instruments, Chattel Paper
and guaranties at any time held by Laurus on which Company may in any way be
liable, and hereby ratifies and confirms whatever Laurus may do in this regard;
(b) all rights to notice and a hearing prior to Laurus' taking possession or
control of, or to Laurus' replevy, attachment or levy upon, any Collateral or
any bond or security that might be required by any court prior to allowing
Laurus to exercise any of its remedies; and (c) the benefit of all valuation,
appraisal and exemption laws.  Company acknowledges that it has been advised by
counsel of its choices and decisions with respect to this Agreement, the Ancillary
Agreements and the transactions evidenced hereby and thereby. 


21. 
Expenses.  Company shall pay all of Laurus'
reasonable out-of-pocket costs and expenses, including reasonable fees and
disbursements of in-house or outside counsel and appraisers, in connection with
the preparation, execution and delivery of this Agreement and the Ancillary
Agreements, and in connection with the prosecution or defense of any action,
contest, dispute, suit or proceeding concerning any matter in any way arising
out of, related to or connected with this Agreement or any Ancillary
Agreement.  Company shall also pay all of Laurus' reasonable fees, charges,
out-of-pocket costs and expenses, including fees and disbursements of counsel
and appraisers, in connection with (a) the preparation, execution and delivery
of any waiver, any amendment thereto or consent proposed or executed in
connection with the transactions contemplated by this Agreement or the
Ancillary Agreements, (b) Laurus' obtaining performance of the Obligations
under this Agreement and any Ancillary Agreements, including, but not limited
to, the enforcement or defense of Laurus' security interests, assignments of
rights and Liens hereunder as valid perfected security interests, (c) any
attempt to inspect, verify, protect, collect, sell, liquidate or otherwise
dispose of any Collateral, (d) any appraisals or re-appraisals of any property
(real or personal) pledged to Laurus by Company as Collateral for, or any other
Person as security for, Company's Obligations hereunder and (e) any
consultations in connection with any of the foregoing.  Company shall also pay
Laurus' customary bank charges for all bank services (including wire transfers)
performed or caused to be performed by Laurus for Company at Company's request
or in connection with Company's loan account with Laurus.  All such costs and
expenses together with all filing, recording and search fees, taxes and
interest payable by Company to Laurus shall be payable on demand and shall be
secured by the Collateral.  If any tax by any Governmental Authority is
or may be imposed on or as a result of any transaction between Company and
Laurus which Laurus is or may be required to withhold or pay, Company agrees to
indemnify and hold Laurus harmless in respect of such taxes, and Company will
repay to Laurus the amount of any such taxes which shall be charged to
Company's account; and until Company shall furnish Laurus with indemnity
therefor (or supply Laurus with evidence satisfactory to it that due provision
for the payment thereof has been made), Laurus may hold without interest any
balance standing to Company's credit and Laurus shall retain its Liens in any
and all Collateral.


 


21







 


22. 
Assignment By Laurus.  Laurus may assign any or all of
the Obligations together with any or all of the security therefor to any Person
which is not a competitor of the Company and any such transferee shall succeed
to all of Laurus' rights with respect thereto.  Upon such transfer, Laurus
shall be released from all responsibility for the Collateral to the extent same
is assigned to any transferee.  Laurus may from time to time sell or otherwise
grant participations in any of the Obligations and the holder of any such
participation shall, subject to the terms of any agreement between Laurus and
such holder, be entitled to the same benefits as Laurus with respect to any
security for the Obligations in which such holder is a participant.  Company
agrees that each such holder may exercise any and all rights of banker's lien,
set-off and counterclaim with respect to its participation in the Obligations
as fully as though Company were directly indebted to such holder in the amount
of such participation.


23. 
No Waiver; Cumulative Remedies.  Failure by Laurus to exercise any
right, remedy or option under this Agreement, any Ancillary Agreement or any
supplement hereto or thereto or any other agreement between Company and Laurus
or delay by Laurus in exercising the same, will not operate as a waiver; no
waiver by Laurus will be effective unless it is in writing and then only to the
extent specifically stated.  Laurus' rights and remedies under this Agreement
and the Ancillary Agreements will be cumulative and not exclusive of any other
right or remedy which Laurus may have.


24. 
Application of Payments.  Company irrevocably waives the
right to direct the application of any and all payments at any time or times
hereafter received by Laurus from or on Company's behalf and Company hereby
irrevocably agrees that Laurus shall have the continuing exclusive right to
apply and reapply any and all payments received at any time or times hereafter
against the Obligations hereunder in such manner as Laurus may deem advisable
notwithstanding any entry by Laurus upon any of Laurus' books and records.


25. 
Indemnity.  Company agrees to indemnify and hold
Laurus, and its respective affiliates, employees, attorneys and agents (each,
an "Indemnified Person"), harmless from and against any and all suits, actions,
proceedings, claims, damages, losses, liabilities and expenses of any kind or
nature whatsoever (including attorneys' fees and disbursements and other costs
of investigation or defense, including those incurred upon any appeal) which
may be instituted or asserted against or incurred by any such Indemnified
Person as the result of credit having been extended, suspended or terminated
under this Agreement or any of the Ancillary Agreements or with respect to the
execution, delivery, enforcement, performance and administration of, or in any
other way arising out of or relating to, this Agreement, the Ancillary Agreements
or any other documents or transactions contemplated by or referred to herein or
therein and any actions or failures to act with respect to any of the
foregoing, except to the extent that any such indemnified liability is finally
determined by a court of competent jurisdiction to have resulted solely from
such Indemnified Person's gross negligence or willful misconduct. NO
INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO COMPANY OR TO ANY OTHER
PARTY OR TO ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER
PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT,
PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT
OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR
ANY ANCILLARY AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED
HEREUNDER OR THEREUNDER.


 


22







 


 


26. 
Revival.  Company further agrees that to
the extent Company makes a payment or payments to Laurus, which payment or
payments or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside and/or required to be repaid to a
trustee, receiver or any other party under any bankruptcy act, state or federal
law, common law or equitable cause, then, to the extent of such payment or
repayment, the obligation or part thereof intended to be satisfied shall be
revived and continued in full force and effect as if said payment had not been
made.


27. 
Notices.  Any notice or request hereunder
may be given to Company or Laurus at the respective addresses set forth below
or as may hereafter be specified in a notice designated as a change of address
under this Section.  Any notice or request hereunder shall be given by
registered or certified mail, return receipt requested, hand delivery,
overnight mail or telecopy (confirmed by mail).  Notices and requests shall be,
in the case of those by hand delivery, deemed to have been given when delivered
to any officer of the party to whom it is addressed, in the case of those by
mail or overnight mail, deemed to have been given three (3)
business days after the date when
deposited in the mail or with the overnight mail carrier, and, in the case of a
telecopy, when confirmed.


Notices shall be provided as
follows:


	
  If to Laurus:

  	
  Laurus Master Fund, Ltd.

  c/o
  Laurus Capital Management, LLC

  825 Third Avenue 14th
  Fl.

  New York,
  New York 10022

  Attention: 
  John E. Tucker, Esq.

  Telephone: 
  (212) 541-4434

  Telecopier: 
  (212) 541-5800


  
	

  

  
	

  

  




 


 


23







 


 


	
  If to Company:

  	
  Home
  Solutions of America, Inc.. 

  Address:
  11850 Jones Road

  Houston, TX 
  77070

  Attention:
  Chief Financial Officer

  Telephone:
  (281) 970-9859 

  Telecopier: (281) 970-9854

   

  
	
  With a copy to:

  	
  J. Paul
  Caver

  Attorney at
  Law

  3102 Maple
  Avenue, Suite 220

  Dallas, TX 
  75201

  Telephone:
  (214) 468-8868

  Telecopier:
  (214) 220-1288

  



 


or such other address as may be designated in writing
hereafter in accordance with this Section 27 by such Person.


28.  Governing Law, Jurisdiction and Waiver of Jury Trial.  (a) THIS AGREEMENT AND THE ANCILLARY AGREEMENTS SHALL BE
GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE
OF NEW YORK APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE.


(b)   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 COMPANY AND LAURUS PERTAINING TO THIS AGREEMENT OR ANY OF THE
ANCILLARY AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS
AGREEMENT OR ANY OF THE ANCILLARY AGREEMENTS; PROVIDED, THAT LAURUS AND
COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE HEARD BY
A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK; AND
FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE
TO PRECLUDE LAURUS FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER
JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY
OTHER SECURITY FOR THE OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT
ORDER IN FAVOR OF LAURUS.  COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO
SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND
COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS.  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 COMPANY AT THE ADDRESS SET FORTH IN SECTION 27 AND THAT SERVICE SO
MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF COMPANY'S ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE
PREPAID.


24







 


 


(c)   
THE
PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS.  THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO
TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY
DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LAURUS AND
COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY
ANCILLARY AGREEMENT OR THE TRANSACTIONS RELATED THERETO.


29. 
Limitation of Liability.  Company acknowledges and
understands that in order to assure repayment of the Obligations hereunder
Laurus may be required to exercise any and all of Laurus' rights and remedies
hereunder and agrees that, except as limited by applicable law, neither Laurus
nor any of Laurus' agents shall be liable for acts taken or omissions made in
connection herewith or therewith except for actual bad faith.


30. 
Entire Understanding.  This Agreement and the Ancillary
Agreements contain the entire understanding between Company and Laurus as to
the subject matter hereof and thereof and any promises, representations,
warranties or guarantees not herein contained shall have no force and effect
unless in writing, signed by Company's and Laurus' respective officers. 
Neither this Agreement, the Ancillary Agreements, nor any portion or provisions
thereof may be changed, modified, amended, waived, supplemented, discharged,
cancelled or terminated orally or by any course of dealing, or in any manner
other than by an agreement in writing, signed by the party to be charged.


31. 
Severability.  Wherever possible each provision
of this Agreement or the Ancillary Agreements shall be interpreted in such
manner as to be effective and valid under applicable law, but if any provision
of this Agreement or the Ancillary Agreements shall be prohibited by or invalid
under applicable law such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision
or the remaining provisions thereof.


32. 
Captions.  All captions are and shall be
without substantive meaning or content of any kind whatsoever.


33. 
Counterparts; Telecopier Signatures.  This Agreement may be executed in
one or more counterparts, each of which shall constitute an original and all of
which taken together shall constitute one and the same agreement.  Any
signature delivered by a party via telecopier transmission shall be deemed to
be any original signature hereto.



25







 


34. 
Construction.  The parties acknowledge that each
party and its counsel have reviewed this Agreement and that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall not be employed in the interpretation of this Agreement or
any amendments, schedules or exhibits thereto.


35.  Publicity.  Company hereby authorizes Laurus
to make appropriate announcements of the financial arrangement entered into by
and between Company and Laurus, including, without limitation,
announcements which are commonly known as tombstones, in such publications and
to such selected parties as Laurus shall in its sole and absolute discretion
deem appropriate, or as required by applicable law.


36.  Legends.  The Securities shall bear legends as follows;


(a)        The Note
shall bear substantially the following legend: 


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




(b)        Any
shares of Common Stock issued pursuant to conversion of the Note or exercise of
the Warrants, shall bear a legend which shall be in substantially the following
form until such shares are covered by an effective registration statement filed
with the SEC:




"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE,
STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO  HOME SOLUTIONS OF AMERICA, INC. THAT SUCH REGISTRATION IS NOT
REQUIRED."




 




26









 




 




(c)        The Warrants shall bear
substantially the following legend:


"THIS WARRANT AND THE COMMON SHARES ISSUABLE
UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND
THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON
STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO HOME SOLUTIONS OF AMERICA, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED."


37.  Shorting.  Neither Laurus nor any of its
Affiliates or investment partners has, will, or will cause any person or
entity, directly or indirectly to, engage in "short sales" of Company's common
stock or any other hedging strategies directly related to Company's Common
Stock as long as Notes shall be outstanding.


38. 
  Financing Right of First Refusal.  The Company hereby grants
Laurus a right of first refusal to enter into all subsequent financing
arrangements (specifically excluding the Preferred Sale) of the Company in
excess of Two Hundred Fifty Thousand Dollars ($250,000). The Company shall
submit fully executed term sheets setting out the terms, conditions and pricing
of any proposed financing (such financing to be negotiated on "arm's length"
terms) to be entered into by the Company. Laurus shall have the right, but not
the obligation, to offer financing, to the Company on terms no less favorable
than those outlined in the previously negotiated term sheet (which such term
sheet shall be negotiated in good faith) within five business days of receipt
of such proposed term sheet. If the provisions of the Laurus term sheet shall
be at least as favorable to the Company, the Company shall enter into the
financing arrangement outlined in the Laurus  term sheet.  If Laurus declines
to exercise it right of first refusal hereunder, it hereby agrees to give its
consent, which consent shall not be unreasonably withheld, to allow the Company
to enter into such documentation as necessary in order to proceed to consummate
the transaction outlined in the term sheet submitted to Laurus. 


39. 
 Representations and Warranties of Laurus.


Laurus hereby represents and warrants to the Company as follows:


(a)   
Requisite Power and Authority.  Laurus has all necessary power and authority under all
applicable provisions of law to execute and deliver this Agreement and the
Ancillary Agreements and to carry out their provisions.  All corporate action
on Laurus' part required for the lawful execution and delivery of this
Agreement and the Ancillary Agreements have been or will be effectively taken
prior to the Closing Date.  Upon their execution and delivery, this Agreement
and the Ancillary Agreements will be valid and binding obligations of Laurus,
enforceable in accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights, and (b) as limited by
general principles of equity that restrict the availability of equitable and
legal remedies.


27







 


 


(b)  
Investment Representations.  Laurus understands that the Securities are being offered
and sold pursuant to an exemption from registration contained in the Securities
Act based in part upon Laurus' representations contained in this Agreement,
including, without limitation, that Laurus is an "accredited investor" within
the meaning of Regulation D under the Securities Act.  Laurus has received or
has had full access to all the information it considers necessary or
appropriate to make an informed investment decision with respect to the Note to
be purchased by it under this Agreement and the Securities acquired by it upon
the conversion of the Note.


(c)   
Laurus Bears Economic Risk.  Laurus has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests. 
Laurus must bear the economic risk of this investment until the Securities are
sold pursuant to (i) an effective registration statement under the Securities
Act, or (ii) an exemption from registration is available.


(d)  
Acquisition for Own Account.  Laurus is acquiring the Securities for its own account
for investment only, and not as a nominee or agent and not with a view towards
or for resale in connection with their distribution.


(e)   
Laurus Can Protect Its Interest.   Laurus represents that by reason of its, or of its
management's, business and financial experience, Laurus has the capacity to
evaluate the merits and risks of its investment in the Note, and the Securities
and to protect its own interests in connection with the transactions
contemplated in this Agreement, and the Ancillary Agreements.  Further, Laurus
is aware of no publication of any advertisement in connection with the
transactions contemplated in the Agreement or the Ancillary Agreements.


(f)    
Accredited Investor.   Laurus represents that it is an accredited investor within the
meaning of Regulation D under the Securities Act.


 




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




 




 







 




 


IN WITNESS WHEREOF, the parties have
executed this Security Agreement as of the date first written above.


HOME SOLUTIONS OF AMERICA, INC.


By:___________________________________

Name:_________________________________

Title:__________________________________


LAURUS MASTER FUND, LTD. 


By:___________________________________

Name:_________________________________

Title:__________________________________


 


 


 


 


29














Annex A - Definitions


"Account Debtor" means any Person who is or may be
obligated with respect to, or on account of, an Account.


"Accountants" has the meaning given to such term in
Section 11(a).


"Accounts" means all "accounts", as such term is defined
in the UCC, now owned or hereafter acquired by any Person, including:  (a) all
accounts receivable, other receivables, book debts and other forms of
obligations (other than forms of obligations evidenced by Chattel Paper or
Instruments) (including any such obligations that may be characterized as an
account or contract right under the UCC); (b) all of such Person's rights in,
to and under all purchase orders or receipts for goods or services; (c) all of
such Person's rights to any goods represented by any of the foregoing
(including unpaid sellers' rights of rescission, replevin, reclamation and
stoppage in transit and rights to returned, reclaimed or repossessed goods);
(d) all rights to payment due to such Person for Goods or other property sold,
leased, licensed, assigned or otherwise disposed of, for a policy of insurance
issued or to be issued, for a secondary obligation incurred or to be incurred,
for energy provided or to be provided, for the use or hire of a vessel under a
charter or other contract, arising out of the use of a credit card or charge
card, or for services rendered or to be rendered by such Person or in
connection with any other transaction (whether or not yet earned by performance
on the part of such Person); and (e) all collateral security of any kind given
by any Account Debtor or any other Person with respect to any of the foregoing.



"Accounts Availability" means the amount of Loans against
Eligible Accounts Laurus may from time to time make available to Company up to
ninety percent (90%) of the net face amount of Eligible Accounts based on
Accounts of Company.


"Affiliate" of any Person means (a) any Person (other
than a Subsidiary) which, directly or indirectly, is in control of, is
controlled by, or is under common control with such Person,  (b) any Person who
is a director or officer (i) of such Person, (ii) of any Subsidiary of such
Person or (iii) of any Person described in clause (a) above. For the purposes
of this definition, control of a Person shall mean the power (direct or
indirect) to direct or cause the direction of the management  and policies of
such Person whether by contract or otherwise.


"Ancillary Agreements" means, the Notes, Warrants,
Registration Rights Agreements, each Guaranty, each Guaranty Security Agreement
and all other agreements, instruments, documents, mortgages, pledges, powers of
attorney, consents, assignments, contracts, notices, security agreements, trust
agreements and guarantees whether heretofore, concurrently, or hereafter
executed by or on behalf of Company or any other Person or delivered to Laurus,
relating to this Agreement or to the transactions contemplated by this
Agreement or otherwise relating to the relationship between the  Company and
Laurus.


"Books and Records" means all books, records, board
minutes, contracts, licenses, insurance policies, environmental audits,
business plans, files, computer files, computer discs and other data and
software storage and media devices, accounting books and records, financial
statements (actual and pro forma), filings with Governmental Authorities and
any and all records and instruments relating to the Collateral or otherwise
necessary or helpful in the collection thereof or the realization thereupon.


30







 


 


"Business Day" means a day on which Laurus is open for
business and that is not a Saturday, a Sunday or other day on which banks are
required or permitted to be closed in the State of New York.


"Capital Availability Amount" means Four Million Dollars
($4,000,000).


"Chattel Paper" means all "chattel paper," as such term
is defined in the UCC, including electronic chattel paper, now owned or
hereafter acquired by any Person.


"Closing Date" means the date on which Company shall
first receive proceeds of the initial Loans.


"Collateral" means all of Company's property and assets,
whether real or personal, tangible or intangible, and whether now owned or
hereafter acquired with the proceeds of Loans, or in which it now has or at any
time in the future may acquire any right, title or interests including all of
the following property in which it now has or at any time in the future may
acquire any right, title or interest:


(g)   
all
Inventory;


(h)   
all
Equipment;


(i)     
all
Fixtures;


(j)    
all
General Intangibles;


(k)   all Accounts;


(l)     
all
Deposit Accounts, other bank accounts and all funds on deposit therein;


(m)  all Investment Property;


(n)   
all
Stock;


(o)   all Chattel Paper;


(p)   all Letter-of-Credit Rights;


(q)   all Instruments;


(r)    
all
commercial tort claims set forth on Exhibit 1(A);


(s)   
all Books
and Records;


(t)    
all
Supporting Obligations including letters of credit and guarantees issued in
support of Accounts, Chattel Paper, General Intangibles and Investment
Property;


 


31







 


 


(u)   
(i) all
money, cash and cash equivalents and (ii) all cash held as cash collateral to
the extent not otherwise constituting Collateral, all other cash or property at
any time on deposit with or held by Laurus for the account of Company (whether
for safekeeping, custody, pledge, transmission or otherwise); and


(v)   
all
products and Proceeds of all or any of the foregoing, tort claims and all
claims and other rights to payment including insurance claims against third
parties for loss of, damage to, or destruction of, and (ii) payments due or to
become due under leases, rentals and hires of any or all of the foregoing and
Proceeds payable under, or unearned premiums with respect to policies of
insurance in whatever form.




 "Contract
Rate" means an interest rate per annum equal to the Prime Rate plus
two and one half percent (2.5%) per annum, but subject to the immediately
following sentence, the Contract Rate shall not be less than six and one half
percent (6.5 %).  The Contract Rate shall be subject to adjustment if (i) the Company shall have registered the shares of
the Company's common stock underlying the conversion of all the Minumum
Borrowing Notes issued by the Company to Laurus and that certain warrant issued
to Laurus on a registration statement declared effective by the SEC, and (ii)
the volume weighted average price of the
Common Stock as reported by Bloomberg, L.P. on the principal market for any of
the ten (10) trading days immediately preceding an interest payment date
exceeds the then applicable Fixed Conversion Price in such percentages as
outlined in the table below, the Contract
Rate for the succeeding calendar month shall automatically be adjusted: 




	

  

  
	
  Contract Rate

  
	
  125% of the Fixed
  Conversion Price

  	
  Prime plus 2.25%

  
	
  150% of the Fixed
  Conversion Price

  	
  Prime plus 2.00%

  
	
  175% of the Fixed
  Conversion Price

  	
  Prime plus 1.75%

  
	
  For each incremental
  additional 25% increase, the Contract Rate shall be reduced by an additional
  25 basis points, however, in no event shall
  the Contract Rate be less than zero (0.00%).

  	
   






"Default" means
any act or event which, with the giving of notice or passage of time or both,
would constitute an Event of Default.


"Default Rate" has the meaning given to such term in
Section 5(a)(iii).


"Deposit Accounts" means all "deposit accounts" as such
term is defined in the UCC, now or hereafter held in the name of any Person,
including, without limitation, the Lockbox Account.


"Documents" means all "documents", as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including all bills of lading, dock warrants, dock receipts, warehouse
receipts, and other documents of title, whether negotiable or non-negotiable.


32







 


 


 "Eligible Accounts" means and includes each Account
which conforms to the following criteria:  (a) shipment of the merchandise or
the rendition of services has been completed; (b) no return, rejection or
repossession of the merchandise has occurred; (c) merchandise or services shall
not have been rejected or disputed by the Account Debtor and there shall not
have been asserted any offset, defense or counterclaim; (d) continues to be in
full conformity with the representations and warranties made by Company to
Laurus with respect thereto; (e) Laurus is, and continues to be, satisfied with
the credit standing of the Account Debtor in relation to the amount of credit
extended; (f) there are no facts existing or threatened which are likely to result
in any adverse change in an Account Debtor's financial condition; (g) is
documented by an invoice in a form approved by Laurus and shall not be unpaid
more than one hundred twenty (120) days from invoice date; (h) not more than
twenty-five percent (25%) of the unpaid amount of invoices due from such
Account Debtor remains unpaid more than one hundred twenty (120) days from
invoice date; (i) is not evidenced by chattel paper or an instrument of any
kind with respect to or in payment of the Account unless such instrument is
duly endorsed to and in possession of Laurus or represents a check in payment
of a Account; (j) the Account Debtor is located in the United States; provided,
however, Laurus may, from time to time, in the exercise of its sole
discretion and based upon satisfaction of certain conditions to be determined
at such time by Laurus, deem certain Accounts as Eligible Accounts
notwithstanding that such Account is due from an Account Debtor located outside
of the United States; (k) Laurus has a first priority perfected Lien in such
Account and such Account is not subject to any Lien other than Permitted Liens;
(l) does not arise out of transactions with any employee, officer, director,
stockholder or Affiliate of Company; (m) is payable to Company; (n) does not
arise out of a bill and hold sale prior to shipment and does not arise out of a
sale to any Person to which Company is indebted; (o) is net of any returns,
discounts, claims, credits and allowances; (p) if the Account arises out of
contracts between Company and the United States, any state, or any department,
agency or instrumentality of any of them, Company has so notified Laurus, in
writing, prior to the creation of such Account, and there has been compliance
with any governmental notice or approval requirements, including compliance
with the Federal Assignment of Claims Act; (q) is a good and valid account
representing an undisputed bona fide indebtedness incurred by the Account
Debtor therein named, for a fixed sum as set forth in the invoice relating
thereto with respect to an unconditional sale and delivery upon the stated
terms of goods sold by Company or work, labor and/or services rendered by
Company; (r) does not arise out of progress billings prior to completion of the
order; (s) the total unpaid Accounts from such Account Debtor does not exceed
twenty-five percent (25%) of all Eligible Accounts; (t) Company's right to
payment is absolute and not contingent upon the fulfillment of any condition
whatsoever; (u) Company is able to bring suit and enforce its remedies against
the Account Debtor through judicial process; (v) does not represent interest
payments, late or finance charges owing to Company and (w) is otherwise
satisfactory to Laurus as determined by Laurus in the exercise of its sole
discretion.  In the event Company requests that Laurus include within Eligible
Accounts certain Accounts of one or more of Company's acquisition targets,
Laurus shall at the time of such request consider such inclusion, but any such
inclusion shall be at the sole option of Laurus and shall at all times be
subject to the execution and delivery to Laurus of all such documentation
(including, without limitation, guaranty and security documentation) as Laurus
may require in its sole discretion.


33







 


 


"Equipment" means all "equipment" as such term is defined
in the UCC, now owned or hereafter acquired by any Person, wherever located,
including any and all machinery, apparatus, equipment, fittings, furniture,
fixtures, motor vehicles and other tangible personal property (other than
Inventory) of every kind and description that may be now or hereafter used in
such Person's operations or that are owned by such Person or in which such
Person may have an interest, and all parts, accessories and accessions thereto
and substitutions and replacements therefor.


"ERISA" shall have the meaning given to such term in
Section 12(g).


"Event of Default" means the occurrence of any of the
events set forth in Section 18. 


"Fixed Conversion Price" has the meaning given such term
in the Minimum Borrowing Note. 


"Fixtures" means all "fixtures" as such term is defined
in the UCC, now owned or hereafter acquired by any Person.


"Formula Amount" has the meaning set forth in Section
2(a)(i).


"GAAP" means generally accepted accounting principles,
practices and procedures in effect from time to time in the United States of
America.


"General Intangibles" means all "general intangibles" as
such term is defined in the UCC, now owned or hereafter acquired by any Person
including all right, title and interest that such Person may now or hereafter
have in or under any contract, all Payment Intangibles, customer lists,
Licenses, Intellectual Property, interests in partnerships, joint ventures and
other business associations, permits, proprietary or confidential information,
inventions (whether or not patented or patentable), technical information,
procedures, designs, knowledge, know-how, Software, data bases, data, skill,
expertise, experience, processes, models, drawings, materials, Books and Records,
Goodwill (including the Goodwill associated with any Intellectual Property),
all rights and claims in or under insurance policies (including insurance for
fire, damage, loss, and casualty, whether covering personal property, real
property, tangible rights or intangible rights, all liability, life,
key-person, and business interruption insurance, and all unearned premiums),
uncertificated securities, choses in action, deposit accounts, rights to
receive tax refunds and other payments, rights to received dividends,
distributions, cash, Instruments and other property in respect of or in
exchange for pledged Stock and Investment Property, and rights of
indemnification.


"Goods" means all "goods", as such term is defined in the
UCC, now owned or hereafter acquired by any Person, wherever located, including
embedded software to the extent included in "goods" as defined in the UCC,
manufactured homes, standing timber that is cut and removed for sale and unborn
young of animals.


"Goodwill" means all goodwill, trade secrets, proprietary
or confidential information, technical information, procedures, formulae,
quality control standards, designs, operating and training manuals, customer
lists, and distribution agreements now owned or hereafter acquired by any
Person.


 


34







 


 "Guarantor" means and any Person who may guarantee
payment of performance of the whole or any part of the Obligations.


"Guarantor Security Agreements" means all security
agreements, mortgages, cash collateral deposit letters, pledges and other
agreements which are executed by any Guarantor in favor of Laurus.


"Guaranty" means all agreements to perform all or any
portion of the Obligations on behalf of Company.


"Governmental Authority" means any nation or government,
any state or other political subdivision thereof, and any agency, department or
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government. 


"Indemnified Person" shall have the meaning given to such
term in Section 25.


"Initial Term" means the Closing Date through the close
of business on the day immediately preceding the second anniversary of the
Closing Date, subject to acceleration at the option of Laurus upon the
occurrence of an Event of Default hereunder or other termination hereunder.


"Instruments" means all "instruments", as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including all certificated securities and all promissory notes and
other evidences of indebtedness, other than instruments that constitute, or are
a part of a group of writings that constitute, Chattel Paper.


"Intellectual Property" means any and all Licenses,
patents, patent registrations, copyrights, copyright registrations, trademarks,
trademark registrations, trade secrets and customer lists.


"Inventory" means all "inventory", as such term is
defined in the UCC, now owned or hereafter acquired by any Person, wherever
located, including all inventory, merchandise, goods and other personal
property that are held by or on behalf of such Person for sale or lease or are
furnished or are to be furnished under a contract of service or that constitute
raw materials, work in process, finished goods, returned goods, or materials or
supplies of any kind, nature or description used or consumed or to be used or
consumed in such Person's business or in the processing, production, packaging,
promotion, delivery or shipping of the same, including all supplies and
embedded software.


"Investment Property" means all "investment property", as
such term is defined in the UCC, now owned or hereafter acquired by any Person,
wherever located.


"Letter-of-Credit Rights" means "letter-of-credit rights"
as such term is defined in the UCC, now owned or hereafter acquired by any
Person, including rights to payment or performance under a letter of credit,
whether or not such Person, as beneficiary, has demanded or is entitled to
demand payment or performance.


 


35







 


"License" means any rights under any written agreement
now or hereafter acquired by any Person to use any trademark, trademark
registration, copyright, copyright registration or invention for which a patent
is in existence or other license of rights or interests now held or hereafter
acquired by any Person.


"Lien" means any mortgage, security deed, deed of trust,
pledge, hypothecation, assignment, security interest, lien (whether statutory
or otherwise), charge, claim or encumbrance, or preference, priority or other
security agreement or preferential arrangement held or asserted in respect of
any asset of any kind or nature whatsoever including any conditional sale or
other title retention agreement, any lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the UCC or comparable law of any
jurisdiction.


"Loans" shall have the meaning set forth in Section
2(a)(i) and shall include all other extensions of credit hereunder and under
any Ancillary Agreement.


"Material Adverse Effect" means a material adverse effect
on (a) the condition, operations, assets, business or prospects of Company, (b)
Company's ability to pay or perform the Obligations in accordance with the
terms hereof or any Ancillary Agreement, (c) the value of the Collateral, the
Liens on the Collateral or the priority of any such Lien or (d) the practical
realization of the benefits of Laurus' rights and remedies under this Agreement
and the Ancillary Agreements.


"Maximum Legal Rate" shall have the meaning given to such
term in Section 5(a)(iv).


 "Minimum Borrowing Amount" means $1,500,000, which such
aggregate amount shall be evidenced by Minimum Borrowing Notes. 


"Minimum Borrowing Notes" shall mean each Secured Convertible
Note, which shall be issued in a series, made by the Company in favor of Laurus
to evidence the Minimum Borrowing Amount. 


"Notes" means each of the Minimum Borrowing Notes and the
Revolving Note made by Company in favor of Laurus in connection with the
transactions contemplated hereby, as the same may be amended, modified and
supplemented from time to time, as applicable.


"Obligations" means all Loans, all advances, debts,
liabilities, obligations, covenants and duties owing by Company to Laurus (or
any corporation that directly or indirectly controls or is controlled by or is
under common control with Laurus) of every kind and description (whether or not
evidenced by any note or other instrument and whether or not for the payment of
money or the performance or non-performance of any act), direct or indirect,
absolute or contingent, due or to become due, contractual or tortious,
liquidated or unliquidated, whether existing by operation of law or otherwise
now existing or hereafter arising including any debt, liability or obligation
owing from Company to others which Laurus may have obtained by assignment or
otherwise and further including all interest (including interest accruing at
the then applicable rate provided in this Agreement after the maturity of the
Loans and interest accruing at the then applicable rate provided in this
Agreement after the filing of any petition in bankruptcy, or the commencement
of any insolvency, reorganization or like proceeding, whether or not a claim
for post-filing or post-petition interest is allowed in such proceeding),
charges or any other payments Company is required to make by law or otherwise
arising under or as a result of this Agreement and the Ancillary Agreements,
together with all reasonable expenses and reasonable attorneys' fees chargeable
to Company's account or incurred by Laurus in connection with Company's account
whether provided for herein or in any Ancillary Agreement.


36







 


"Payment Intangibles" means all "payment intangibles" as
such term is defined in the UCC, now owned or hereafter acquired by any Person,
including, a General Intangible under which the Account Debtor's principal
obligation is a monetary obligation.


"Permitted Liens" means (a) Liens of carriers,
warehousemen, artisans, bailees, mechanics and materialmen incurred in the
ordinary course of business securing sums not overdue; (b) Liens incurred in
the ordinary course of business in connection with workmen's compensation,
unemployment insurance or other forms of governmental insurance or benefits,
relating to employees, securing sums (i) not overdue or (ii) being diligently
contested in good faith provided that adequate reserves with respect thereto
are maintained on the books of the applicable Company in conformity with GAAP;
(c) Liens in favor of Laurus; (d) Liens for taxes (i) not yet due or (ii) being
diligently contested in good faith by appropriate proceedings, provided that
adequate reserves with respect thereto are maintained on the books of the
applicable Company in conformity with GAAP provided, that, the Lien shall have
no effect on the priority of Liens in favor of Laurus or the value of the
assets in which Laurus has a Lien; (e) Purchase Money Liens securing Purchase
Money Indebtedness to the extent permitted in this Agreement and (f) Liens
specified on Exhibit 2 hereto.


 "Person" means any individual, sole proprietorship,
partnership, limited liability partnership, joint venture, trust,
unincorporated organization, association, corporation, limited liability
company, institution, public benefit corporation, entity or government (whether
federal, state, county, city, municipal or otherwise, including any
instrumentality, division, agency, body or department thereof), and shall
include such Person's successors and assigns.


"Prime Rate" means the "prime rate" published in The
Wall Street Journal from time to time.  The Prime Rate shall be increased
or decreased as the case may be for each increase or decrease in the Prime 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 such rate.


"Proceeds" means "proceeds", as such term is defined in
the UCC and, in any event, shall include:  (a) any and all proceeds of any
insurance, indemnity, warranty or guaranty payable to Company or any other
Person from time to time with respect to any Collateral; (b) any and all
payments (in any form whatsoever) made or due and payable to Company from time
to time in connection with any requisition, confiscation, condemnation, seizure
or forfeiture of any Collateral by any governmental body, governmental authority,
bureau or agency (or any person acting under color of governmental authority);
(c) any claim of Company against third parties (i) for past, present or future
infringement of any Intellectual Property or (ii) for past, present or future
infringement or dilution of any trademark or trademark license or for injury to
the goodwill associated with any trademark, trademark registration or trademark
licensed under any trademark License; (d) any recoveries by Company against
third parties with respect to any litigation or dispute concerning any
Collateral, including claims arising out of the loss or nonconformity of,
interference with the use of, defects in, or infringement of rights in, or
damage to, Collateral; (e) all amounts collected on, or distributed on account
of, other Collateral, including dividends, interest, distributions and
Instruments with respect to Investment Property and pledged Stock; and (f) any
and all other amounts , rights to payment or other property acquired upon the
sale, lease, license, exchange or other disposition of Collateral and all
rights arising out of Collateral.


 


37







 


"Purchase Money Indebtedness" means (a) any indebtedness
incurred for the payment of all or any part of the purchase price of any fixed
asset, including indebtedness under capitalized leases, (b) any indebtedness
incurred for the sole purpose of financing or refinancing all or any part of
the purchase price of any fixed asset, and (c) any renewals, extensions or
refinancings thereof (but not any increases in the principal amounts thereof
outstanding at that time).


"Purchase Money Lien" means any Lien upon any fixed
assets that secures the Purchase Money Indebtedness related thereto but only if
such Lien shall at all times be confined solely to the asset the purchase price
of which was financed or refinanced through the incurrence of the Purchase
Money Indebtedness secured by such Lien and only if such Lien secures only such
Purchase Money Indebtedness.


"Registration Rights Agreements" means those registration
rights agreements from time to time entered into between Company and Laurus, as
amended, modified and supplemented from time to time.


"Revolving Note" means that secured revolving note made
by the Company in favor of Laurus in the aggregate principal amount of Two
Million Five Hundred Thousand Dollars ($2,500,000).


"Securities" means the Notes and the Warrants being
issued by the Company to Laurus pursuant to this Agreement and the Ancillary
Agreements and the shares of the common stock of the Company which may be
issued pursuant to conversion of such Notes in whole or in part or exercise of
such Warrants.


"Software" means all "software" as such term is defined
in the UCC, now owned or hereafter acquired by any Person, including all
computer programs and all supporting information provided in connection with a
transaction related to any program.


"Stock" means all certificated and uncertificated shares,
options, warrants, membership interests, general or limited partnership
interests, participation or other equivalents (regardless of how designated) of
or in a corporation, partnership, limited liability company or equivalent
entity whether voting or nonvoting, including common stock, preferred stock, or
any other "equity security" (as such term is defined in Rule 3a11-1 of the
General Rules and Regulations promulgated by the SEC under the Securities
Exchange Act of 1934).


"Subsidiary" of any Person means a corporation or other
entity whose shares of stock or other ownership interests having ordinary
voting power (other than stock or other ownership interests having such power
only by reason of the happening of a contingency) to elect a majority of the
directors of such corporation, or other Persons performing similar functions
for such entity, are owned, directly or indirectly, by such Person.


38







 


"Supporting Obligations" means all "supporting
obligations" as such term is defined in the UCC.


"Term" means, as applicable, the Initial Term and any
Renewal Term.


"UCC" means the Uniform Commercial Code as the same may,
from time be in effect in the State of New York; provided, that in the event
that, by reason of mandatory provisions of law, any or all of the attachment,
perfection or priority of, or remedies with respect to, Laurus' Lien on any
Collateral is governed by the Uniform Commercial Code as in effect in a
jurisdiction other than the State of New York, the term "UCC" shall mean the
Uniform Commercial Code as in effect in such other jurisdiction for purposes of
the provisions of this Agreement relating to such attachment, perfection,
priority or remedies and for purposes of definitions related to such
provisions; provided further, that to the extent that UCC is used to define any
term herein or in any Ancillary Agreement and such term is defined differently
in different Articles or Divisions of the UCC, the definition of such term
contained in Article or Division 9 shall govern.


"Warrants" has the meaning set forth in the Registration
Rights Agreements.


EXHIBITS


Exhibit 1(A) - Commercial Tort Claims

Exhibit 2 - Permitted Liens

Exhibit 7(c) - Actions for Perfection

Exhibit 7(p) - Bank Accounts

Exhibit 12(d) - Corporate Information
and Locations of Collateral

Exhibit 12(e) - ERISA

Exhibit 12(i) - Licenses, Patents,
Trademarks and Copyrights

Exhibit 12(j) - Certain SEC matters

Exhibit 13(e)(i) - Permitted
Indebtedness

Exhibit 13(e)(ii) - Existing
Subsidiaries

Exhibit A - Form of Borrowing Base
Certificate


 


 


 


39











Exhibit 1(A)


Commercial Tort Claims


 


 


 


 


 


 


40









Exhibit 2


Permitted Liens


Company's assets are subject to the
following security interests:




	
  Loan

  	
  Entity

  	
  Balance

  	
  Contact

  	
  Liens

  
	
  Cheyenne Capital Corp. #1

  	
  Home Solutions of America, Inc.

  	
   750,000.00  

  	
  (409) 866-5444  Terry Garth

  	
  Corporate Building

  
	
  Cheyenne Capital Corp. #2

  	
  Home Solutions of America, Inc.

  	
   250,000.00  

  	
  (409) 866-5444  Terry Garth

  	
  Working Capital loan from investor

  
	
  Sterling Bank # 32702010

  	
  Home Solutions of America, Inc.

  	
   19,105.66  

  	
  (713) 507-2187  Dan Tralmer

  	
  Car Loan

  
	
  Sterling Bank # 32702018

  	
  Home Solutions of America, Inc.

  	
   11,737.77  

  	
  (713) 507-2187  Dan Tralmer

  	
  Car Loan

  
	
  BMW Bank of North America

  	
  Home Solutions of America, Inc.

  	
   46,539.76  

  	
  (800) 578-5000  Customer Service

  	
  Car Loan

  
	
  Chase Automotive Finance

  	
  Home Solutions of America, Inc.

  	
   92,474.25  

  	
  (800) 336-6675  Customer Service

  	
  Car Loan

  
	
  Stan Keith Charitable Trust

  	
  Home Solutions of America, Inc.

  	
   97,439.53  

  	
  (214) 692-1525  Stan Keith

  	
  Working Capital loan
   

  
	
  Imperial Premium Finance (D&O insurance)

  	
  Home Solutions of America, Inc.

  	
   35,558.32  

  	
  (877) 615-4242  Customer Service

  	
  Directors and Officers Insurance premiums financed

  
	
  Barber 5 Yr. Term Loan

  	
  P.W. Stephens, Inc.

  	
   990,617.00  

  	

  	
  Unsecured Jane Barber Loan

  
	
  Enterprise Leasing

  	
  P.W. Stephens, Inc.

  	
   226,899.79  

  	
  (714) 796-4424 Anne McMillen

  	
  Equipment Leases at PW Stephens

  
	
  Amherst Merritt Int'l.

  	
  Fiber Seal Systems

  	
   520,000.00  

  	

  	
  Seller Note for Fiber Seal secured by Fiber-Seal Stock

  





 

 

 

 

 

41














Exhibit 7(c)


Actions for Perfection


 


 


 


 


 


42









 Exhibit 7(p)


Bank Accounts




	
  Bank

  	
  Account Name

  	
  Account #

  	
  Phone Number

  
	
  Bank One

  	
  Home Solutions of America,
  Inc.

  	
  1559218225

  	
  (713)751-3820  Heather
  Simms

  
	
  Bank of America

  	
  P.W. Stephens, Inc.

  	
  09619-05345

  	
  (714) 778-7517  Craig
  Earley

  
	
  Bank of America

  	
  P.W. Stephens, Inc.

  	
  09610-04968

  	
  (714) 778-7517  Craig
  Earley

  
	
  Bank of America

  	
  P.W. Stephens, Inc.

  	
  09619-06274

  	
  (714) 778-7517  Craig
  Earley

  
	
  Bank of America

  	
  P.W. Stephens, Inc.

  	
  09618-09532

  	
  (714) 778-7517  Craig
  Earley

  
	
  Bank of America

  	
  P.W. Stephens, Inc.

  	
  09617-03347

  	
  (714) 778-7517  Craig
  Earley

  
	
  Bank of America

  	
  P.W. Stephens, Inc.

  	
  09612-06249

  	
  (714) 778-7517  Craig
  Earley

  
	
  Farmers & Merchants
  Bank

  	
  P.W. Stephens, Inc.

  	
  1563564

  	
  (562) 437-0011  Sharon
  Monroe

  
	
  Union Bank of CA

  	
  P.W. Stephens, Inc.

  	
  3520006841

  	
  (800) 728-6466  Customer
  Service

  
	
  Texas Community Bank

  	
  Fiber Seal Systems

  	
  00-6837-9

  	
  (214) 346-1233  Mickie
  Foster

  
	
  Texas Community Bank

  	
  Fiber Seal Systems

  	
  00-6838-7

  	
  (214) 346-1233  Mickie
  Foster

  











 

 

 

 

 



43











Exhibit 12 (d)


	
  Home Solutions of America,
  Inc.

  
	
  11850 Jones Rd.

  
	
  Houston, TX  77070

  
	
  (281) 970-9859

  
	

   
	
  P W Stephens, Inc.

  
	
  15201 Pipeline Lane #B

  
	
  Huntington Beach, CA  92649

  
	
  (714) 892-2028

  
	

   
	
  P W Stephens, Inc.

  
	
  4901 Morena Blvd.

  
	
  San Diego, CA

  
	
  (858) 270-9500

  
	

   
	
  P W Stephens, Inc.

  
	
  46716 Freemont Blvd.

  
	
  Fremont, CA

  
	
  (510) 651-9506

  
	

   
	
  Fiber Seal Systems

  
	
  5565 Red Bird Center Dr.  #150

  
	
  Dallas, TX  75237

  
	
  (214) 333-9400

  










 






 






44













Exhibit 12(i)


Licenses, Patents, Trademarks and Copyrights


	
  Licenses Exhibit
  12(i):

  	

  	

  
	
  Type

  	
  Entity

  	
  Number

  
	
  CA State Contractors
  License

  	
  P W  Stephens, Inc.

  	
  761207 C-2ASB

  
	
  DOSH Certificate

  	
  P W  Stephens, Inc.

  	
  689

  
	

   	

  	

  
	
  Patents/Trademarks:
  Exhibit 12i

  	

  
	

   	

  	

  
	
  HOM - none

  	

  	

  
	
  PWS - none

  	

  	

  
	
  FSS - faxed

  	

  	

  










 






 






45













Exhibit 13(e)(i)


Permitted Indebtedness




	
  Loan

  	
  Entity

  	
  Balance

  	
  Contact

  	
  Liens

  
	
  Cheyenne Capital Corp. #1

  	
  Home Solutions of America, Inc.

  	
   750,000.00  

  	
  (409) 866-5444  Terry Garth

  	
  Corporate Building

  
	
  Cheyenne Capital Corp. #2

  	
  Home Solutions of America, Inc.

  	
   250,000.00  

  	
  (409) 866-5444  Terry Garth

  	
  Working Capital loan from investor

  
	
  Sterling Bank # 32702010

  	
  Home Solutions of America, Inc.

  	
   19,105.66  

  	
  (713) 507-2187  Dan Tralmer

  	
  Car Loan

  
	
  Sterling Bank # 32702018

  	
  Home Solutions of America, Inc.

  	
   11,737.77  

  	
  (713) 507-2187  Dan Tralmer

  	
  Car Loan

  
	
  BMW Bank of North America

  	
  Home Solutions of America, Inc.

  	
   46,539.76  

  	
  (800) 578-5000  Customer Service

  	
  Car Loan

  
	
  Chase Automotive Finance

  	
  Home Solutions of America, Inc.

  	
   92,474.25  

  	
  (800) 336-6675  Customer Service

  	
  Car Loan

  
	
  Stan Keith Charitable Trust

  	
  Home Solutions of America, Inc.

  	
   97,439.53  

  	
  (214) 692-1525  Stan Keith

  	
  Working Capital loan
   

  
	
  Imperial Premium Finance (D&O insurance)

  	
  Home Solutions of America, Inc.

  	
   35,558.32  

  	
  (877) 615-4242  Customer Service

  	
  Directors and Officers Insurance premiums financed

  
	
  Barber 5 Yr. Term Loan

  	
  P.W. Stephens, Inc.

  	
   990,617.00  

  	

  	
  Unsecured Jane Barber Loan

  
	
  Enterprise Leasing

  	
  P.W. Stephens, Inc.

  	
   226,899.79  

  	
  (714) 796-4424 Anne McMillen

  	
  Equipment Leases at PW Stephens

  
	
  Amherst Merritt Int'l.

  	
  Fiber Seal Systems

  	
   520,000.00  

  	

  	
  Seller Note for Fiber Seal secured by Fiber-Seal Stock

  













 




 




46











Exhibit 13(e)(ii)


Existing Subsidiaries


- P W  Stephens, Inc.


- Fiber Seal Systems 13(e)(ii)


- Central Texas Residential Svcs.


 


 


 


 


 


 


47









 Exhibit A


Borrowing Base Certificate




	
  DATE:

  	
  CERTIFICATE NUMBER:

  
	
  BORROWER
  NAME: HOME SOLUTIONS OF AMERICA, INC.

  	

  
	

  	

  	

  	

  	

  	

  	

  
	
   1.

  	

  	
  Period end Accounts as of:  ____________________

  	

  	

  	

  	
  $

  
	

  	

  	

  	

  	

  	

  	

  
	

  	

  	
  Ineligible Accounts as of:  ____________________

  	

  	

  	

  	

  
	

  	

  	
  Accounts over 120 days from invoice date

  	
  $

  	

  	

  
	

  	

  	
  Intercompany and Affiliate Accounts

  	

  	
  $

  	

  	

  
	

  	

  	
  Contra Accounts

  	

  	
  $

  	

  	

  
	

  	

  	
  COD Accounts

  	

  	
  $

  	

  	

  
	

  	

  	
  Foreign Accounts

  	

  	
  $

  	

  	

  
	

  	

  	
  Discounts, Credits and Allowances

  	

  	
  $

  	

  	

  
	

  	

  	
  25% cross aging exclusion

  	

  	
  $

  	

  	

  
	

  	

  	
  Bill and Hold invoices

  	

  	
  $

  	

  	

  
	

  	

  	
  Progress Accounts

  	

  	
  $__________

  	

  	

  
	

  	

  	
  Finance/Service/Late Charges

  	

  	
  $

  	

  	

  
	

  	

  	
  Other _____________________

  	

  	
  $

  	

  	

  
	

  	

  	

  	

  	

  	

  	

  
	
   2.

  	

  	
  Total ineligibles

  	

  	

  	

  	
  $

  
	

  	

  	

  	

  	

  	

  	

  
	
   3.

  	

  	
  Eligible Accounts (Line 1 minus Line 2)

  	

  	

  	

  	
  $

  
	

  	

  	

  	

  	

  	

  	

  
	
   4.

  	

  	
  Eligible Accounts advance rate  (90% )

  	

  	

  	

  	 

	

  	

  	

  	

  	

  	

  	

  
	
   5.

  	

  	
  Accounts Availability (Line 3 multiplied by Line 4)

  	
  $

  
	

  	

  	

  	

  	

  	

  	

  
	
   6.

  	

  	
  Borrowing Availability (lesser of sum of lines 5 + 6 or the
  Capital Availability Amount)


  	
  
  $

  

  
	

  	

  	

  	

  	

  	

  	

  
	
   7.

  	

  	
  Revolving Credit Advances balance

  	

  	

  	

  	
  $

  
	

  	

  	

  	

  	

  	

  	

  
	
   8.

  	

  	
  Reserves (explain)

  	

  	

  	

  	
  $

  
	

  	

  	

  	

  	

  	

  	

  
	
   9.

  	

  	
  Net Borrowing Availability (Line 6 minus the total of Lines 7
  and 8)

  	

  	

  	

  	
  $

  
													





The
undersigned hereby certifies that all of the foregoing information regarding
the Eligible Accounts is true and correct on the date hereof and all such
Accounts listed as Eligible Accounts are Eligible Accounts within the meaning
given such term in the Security Agreement dated _____, 2004 between Borrower
and Laurus Master Fund, Ltd.




Home
Solutions of America, Inc.




By:  __________________________________

      
Name: _______________________________

      
Title:   ________________________________




 




 




 




48









 

 

 

 


LAURUS MASTER FUND,
LTD.


and


HOME SOLUTIONS OF
AMERICA, INC.,


Dated: January 22,
2004


 


 


 


 










	 	Page
	1......... (a) General
    Definitions............................................................................................	1
	(b)....... Accounting
    Terms..................................................................................................	1
	(c)....... Other
    Terms..........................................................................................................	1
	(d)....... Rules of
    Construction.............................................................................................	1
	2......... Credit
    Advances.....................................................................................................	2
	3......... Repayment of the
    Loans..........................................................................................	4
	4......... Procedure for
    Loans...............................................................................................	4
	5......... Interest and
    Payments.............................................................................................	4
	(a)....... Interest...................................................................................................................	4
	(b).......
    Payments...............................................................................................................	5
	6......... Security
    Interest......................................................................................................	6
	7......... Representations, Warranties and Covenants
    Concerning the Collateral.....................	6
	8......... Payment of
    Accounts..............................................................................................	9
	9......... Collection and Maintenance of
    Collateral.................................................................	9
	10....... Inspections and
    Appraisals......................................................................................	10
	11....... Financial
    Reporting..................................................................................................	10
	12....... Additional Representations and
    Warranties...............................................................	11
	13....... Covenants.  Company covenants as
    follows:.............................................................	14
	14....... Further
    Assurances..................................................................................................	17
	15....... Power of
    Attorney...................................................................................................	17
	16....... Term of
    Agreement..................................................................................................	17
	17....... Termination of
    Lien..................................................................................................	18
	18....... Events of
    Default......................................................................................................	18
	19.......
    Remedies.................................................................................................................	20




 

 

i










 

 


		Page(s)
	20.......
    Waivers.....................................................................................................................	21
	21.......
    Expenses...................................................................................................................	21
	22....... Assignment By Laurus................................................................................................	22
	23....... No Waiver; Cumulative
    Remedies..............................................................................	22
	24....... Application of
    Payments.............................................................................................	22
	25.......
    Indemnity...................................................................................................................	22
	26.......
    Revival.......................................................................................................................	23
	27.......
    Notices......................................................................................................................	23
	28....... Governing Law, Jurisdiction and Waiver
    of Jury..........................................................	24
	29....... Limitation of
    Liability..................................................................................................	25
	30....... Entire
    Understanding..................................................................................................	25
	31.......
    Severability................................................................................................................	25
	32.......
    Captions....................................................................................................................	25
	33....... Counterparts; Telecopier
    Signatures...........................................................................	25
	34.......
    Construction..............................................................................................................	26
	35.......
    Publicity....................................................................................................................	26




 

 

 

 

 

ii