Exhibit 10.1


 


SECURITY AND
PURCHASE AGREEMENT


 


 


LAURUS MASTER FUND, LTD.



and


 


 


MICRO COMPONENT TECHNOLOGY, INC.


 


 


Dated as of: February 17, 2006


 

















 


TABLE OF CONTENTS


 


	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  1.

  	
  General Definitions and Terms; Rules of Construction

  	
  1

  
	
   

  	
   

  	
   

  
	
  2.

  	
  Loan Facility

  	
  2

  
	
   

  	
   

  	
   

  
	
  3.

  	
  Repayment of the Loans

  	
  4

  
	
   

  	
   

  	
   

  
	
  4.

  	
  Procedure for Loans

  	
  4

  
	
   

  	
   

  	
   

  
	
  5.

  	
  Interest and Payments

  	
  5

  
	
   

  	
   

  	
   

  
	
  6.

  	
  Security Interest

  	
  6

  
	
   

  	
   

  	
   

  
	
  7.

  	
  Representations, Warranties and Covenants Concerning the Collateral

  	
  7

  
	
   

  	
   

  	
   

  
	
  8.

  	
  Payment of Accounts

  	
  9

  
	
   

  	
   

  	
   

  
	
  9.

  	
  Collection and Maintenance of Collateral

  	
  10

  
	
   

  	
   

  	
   

  
	
  10.

  	
  Inspections and Appraisals

  	
  10

  
	
   

  	
   

  	
   

  
	
  11.

  	
  Financial Reporting

  	
  11

  
	
   

  	
   

  	
   

  
	
  12.

  	
  Additional Representations and Warranties

  	
  12

  
	
   

  	
   

  	
   

  
	
  13.

  	
  Covenants

  	
  22

  
	
   

  	
   

  	
   

  
	
  14.

  	
  Further Assurances

  	
  28

  
	
   

  	
   

  	
   

  
	
  15.

  	
  Representations, Warranties and Covenants of Laurus

  	
  28

  
	
   

  	
   

  	
   

  
	
  16.

  	
  Power of Attorney

  	
  30

  
	
   

  	
   

  	
   

  
	
  17.

  	
  Term of Agreement

  	
  31

  
	
   

  	
   

  	
   

  
	
  18.

  	
  Termination of Lien

  	
  31

  
	
   

  	
   

  	
   

  
	
  19.

  	
  Events of Default

  	
  31

  
	
   

  	
   

  	
   

  
	
  20.

  	
  Remedies

  	
  34

  
	
   

  	
   

  	
   

  
	
  21.

  	
  Waivers

  	
  35

  
	
   

  	
   

  	
   

  
	
  22.

  	
  Expenses

  	
  35

  
	
   

  	
   

  	
   

  
	
  23.

  	
  Assignment By Laurus

  	
  36

  



 


i

















 


	
   

  	
   

  	
  Page(s)

  
	
   

  	
   

  	
   

  
	
  24.

  	
  No Waiver; Cumulative Remedies

  	
  36

  
	
   

  	
   

  	
   

  
	
  25.

  	
  Application of Payments

  	
  36

  
	
   

  	
   

  	
   

  
	
  26.

  	
  Indemnity

  	
  36

  
	
   

  	
   

  	
   

  
	
  27.

  	
  Revival

  	
  37

  
	
   

  	
   

  	
   

  
	
  28.

  	
  Borrowing Agency Provisions

  	
  37

  
	
   

  	
   

  	
   

  
	
  29.

  	
  Notices

  	
  38

  
	
   

  	
   

  	
   

  
	
  30.

  	
  Governing Law, Jurisdiction and Waiver of Jury Trial

  	
  39

  
	
   

  	
   

  	
   

  
	
  31.

  	
  Limitation of Liability

  	
  40

  
	
   

  	
   

  	
   

  
	
  32.

  	
  Entire Understanding

  	
  40

  
	
   

  	
   

  	
   

  
	
  33.

  	
  Severability

  	
  40

  
	
   

  	
   

  	
   

  
	
  34.

  	
  Captions

  	
  41

  
	
   

  	
   

  	
   

  
	
  35.

  	
  Counterparts; Telecopier Signatures

  	
  41

  
	
   

  	
   

  	
   

  
	
  36.

  	
  Construction

  	
  41

  
	
   

  	
   

  	
   

  
	
  37.

  	
  Publicity

  	
  41

  
	
   

  	
   

  	
   

  
	
  38.

  	
  Joinder

  	
  41

  
	
   

  	
   

  	
   

  
	
  39.

  	
  Legends

  	
  41

  



 


ii

















 


SECURITY AND
PURCHASE AGREEMENT


 


This
Security and Purchase Agreement is made as of February 17, 2006 by and among
LAURUS MASTER FUND, LTD., a Cayman Islands company (“Laurus”), MICRO
COMPONENT TECHNOLOGY, INC., a corporation organized under the laws of the State
of Minnesota (“the Parent”), and each party listed on Exhibit A
attached hereto (each an “Eligible Subsidiary” and collectively, the “Eligible
Subsidiaries”) the Parent and each Eligible Subsidiary, each a “Company”
and collectively, the “Companies”).


 


BACKGROUND


 


The
Companies have requested that Laurus make advances available to the Companies;
and


 


Laurus
has agreed to make such advances 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.             General
Definitions and Terms; Rules of Construction.


 


(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 that 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.             Loan
Facility.


 


(a)           Revolving
Loans.


 


(i)            Subject
to the terms and conditions set forth herein and in the Ancillary Agreements,
Laurus may make revolving loans (the “Revolving Loans”) to the Companies
from time to time during the Revolving 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”)
and (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 Section 2(a)(i)(y)(II) shall be referred to as
the “Formula Amount.”  The
Companies shall, jointly and severally, execute and deliver to Laurus on the
Closing Date the Secured Non-Convertible Revolving Note and the Secured
Non-Convertible Term Note.  The Companies
hereby each acknowledge and agree that Laurus’ obligation to purchase the
Secured Non-Convertible Revolving Note and the Secured Non-Convertible Term
Note from the Companies on the Closing Date shall be contingent upon the
satisfaction (or waiver by Laurus in its sole discretion) of the items and
matters set forth in the closing checklist provided by Laurus to the Companies
on or prior to the Closing Date.


 


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


 


(iii)          The
Companies acknowledge that the exercise of Laurus’ discretionary rights
hereunder may result during the Revolving Term in one or more increases or
decreases in the advance percentages used in determining Accounts Availability
and/or Inventory Availability and each of the Companies hereby consent to any
such increases or decreases which may limit or restrict advances requested by
the Companies.


 


(iv)          If any
interest, fees, costs or charges payable to Laurus hereunder are not paid when
due, each of the Companies shall thereby be deemed to have requested, and Laurus
is hereby authorized at its discretion to make and charge to the Companies’
account, a Loan as of such date in an amount equal to such unpaid interest,
fees, costs or charges.


 


(v)           If any
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 such
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


 


2

















 


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 the
Companies’ account as a Revolving Loan and added to the Obligations.  To facilitate Laurus’ performance or
observance of such covenants by each Company, each Company hereby irrevocably
appoints Laurus, or Laurus’ delegate, acting alone, as such 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 such 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 such Company.


 


(vi)          Laurus will
account to Company Agent 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 Agent 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 Revolving Term, the Companies may borrow and prepay Revolving Loans in
accordance with the terms and conditions hereof.


 


(viii)        If
any Eligible Account is not paid by the Account Debtor within ninety (90) 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 Companies
shall jointly and severally (i) reimburse Laurus for the amount of the Loans
made with respect to such Delinquent Account plus an adjustment fee in an
amount equal to one-half of one percent (0.50%) of the gross face amount of
such Eligible Account or (ii) immediately replace such Delinquent Account with
an otherwise Eligible Account.


 


(b)           Receivables
Purchase.  Following the occurrence
and during the continuance of an Event of Default, 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
Agent), the Companies 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 the Companies, all right, title and interest of the Companies
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, the Companies 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


 


3

















 


notification letters, but any Company’s failure to enter into any such
documentation shall not impair or affect the Receivables Purchase in any manner
whatsoever.


 


(c)           Term Loan.  Subject to the terms and
conditions set forth herein and in the Ancillary Agreements, Laurus shall make
a term loan (the “Term Loan”) to Company Agent (for the benefit of Companies)
in an aggregate amount equal to $5,250,000. 
The Term Loan shall be advanced on the Closing Date and shall be, with
respect to principal, payable in consecutive monthly installments of principal
commencing on March 1, 2007 and on the first day of each month thereafter,
subject to acceleration upon the occurrence of an Event of Default or
termination of this Agreement. The Term Loan shall be evidenced by the Secured
Non-Convertible Term Note.


 


3.             Repayment
of the Loans.  The Companies (a) may prepay the Obligations
from time to time in accordance with the terms and provisions of the Notes (and
Section 17 hereof if such prepayment is due to a termination of this
Agreement); (b) shall repay on the Maturity Date (as defined in the Secured
Non-Convertible Term Note) (i) the then aggregate outstanding principal balance
of the Term Loan together with accrued and unpaid interest, fees and charges
and: (ii) all other amounts owed Laurus under the Secured Non-Convertible Term
Note; (c) shall repay on the expiration of the Revolving Term (i) the then
aggregate outstanding principal balance of the Revolving Loans together with
accrued and unpaid interest, fees and charges and; (ii) all other amounts owed
Laurus under this Agreement and the Ancillary Agreements; and (c) subject to
Section 2(a)(ii), shall repay on any day on which the then aggregate
outstanding principal balance of the Loans are in excess of the Formula Amount
at such time, Loans in an amount equal to such excess. 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 Revolving Loans.  Company Agent may by written notice request a
borrowing of Revolving Loans prior to 12:00 noon (New York time) on the
Business Day of its request to incur, on the next Business Day, a Revolving
Loan.  Together with each request for a
Revolving Loan (or at such other intervals as Laurus may request), Company
Agent shall deliver to Laurus a Borrowing Base Certificate in the form of Exhibit
B attached hereto, which shall be certified as true and correct by the
Chief Executive Officer or Chief Financial Officer of Company Agent together
with all supporting documentation relating thereto.  All Revolving Loans shall be disbursed from
whichever office or other place Laurus may designate from time to time and
shall be charged to the Companies’ account on Laurus’ books.  The proceeds of each Revolving Loan made by
Laurus shall be made available to Company Agent on the Business Day following
the Business Day so requested in accordance with the terms of this Section 4 by
way of credit to the applicable Company’s operating account maintained with
such bank as Company Agent designated to Laurus.  Any and all Obligations due and owing
hereunder may be charged to the Companies’ account and shall constitute
Revolving Loans.


 


4

















 


5.             Interest
and Payments.


 


(a)           Interest.


 


(i)            Except as
modified by Section 5(a)(iii) below, the Companies shall jointly and severally
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 the Companies’ account for said interest.


 


(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
as set forth in the Notes (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)           The
Companies shall jointly and severally 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;
Certain Closing Conditions.


 


(i)            Closing/Annual
Payments.  Upon execution of this
Agreement by each Company and Laurus, the Companies shall jointly and severally
pay to Laurus Capital Management, LLC a closing payment in an amount equal to
$56,280.  Such payment shall be deemed
fully earned on the Closing Date and shall not be subject to rebate or proration
for any reason.


 


(ii)           Overadvance
Payment.  Without affecting Laurus’
rights hereunder in the event the Loans exceed the Formula Amount (each such
event, an “Overadvance”), all such Overadvances shall bear additional
interest at a rate equal to two percent (2%) per month of the amount of such
Overadvances for all times such amounts shall be in excess of the Formula
Amount.  All amounts that are incurred
pursuant to this Section 5(b)(ii) shall be due and payable by the Companies
monthly, in arrears, on the first business day of each calendar month and upon
expiration of the Revolving Term.


 


5

















 


(iii)          Financial
Information Default.  Without
affecting Laurus’ other rights and remedies, in the event any Company fails to
deliver the financial information required by Section 11 on or before the date
required by this Agreement, the Companies shall jointly and severally pay
Laurus an aggregate fee in the amount of $500.00 per week (or portion thereof)
for each such failure until such failure is cured to Laurus’ satisfaction or
waived in writing by Laurus.  All amounts
that are incurred pursuant to this Section 5(b)(iii) shall be due and payable
by the Companies monthly, in arrears, on the first business of each calendar month
and upon the later of (x) the expiration of the Revolving Term and (y) the
Maturity Date (as defined in the Secured Non-Convertible Term Note).


(iv)          Expenses.  The Companies shall jointly and severally
reimburse Laurus for its expenses (including reasonable legal fees and
expenses) incurred in connection with the preparation and negotiation of this
Agreement and the Ancillary Agreements, and expenses incurred in connection
with Laurus’ due diligence review of each Company and its Subsidiaries and all
related matters.  Amounts required to be
paid under this Section 5(b)(iv) will be paid on the Closing Date and shall be
$5,000 for such expenses referred to in this Section 5(b)(iv) plus the cost of
any required third-party appraisals and/or extraordinary diligence, subject to
the Parent’s prior approval, as well as fees and expenses of outside counsel to
the extent the retention of same is deemed prudent by Laurus.


6.             Security
Interest.


 


(a)           To secure
the prompt payment to Laurus of the Obligations, each Company hereby assigns,
pledges and grants to Laurus a continuing security interest in and Lien upon
all of the Collateral.  All of each
Company’s Books and Records relating to the Collateral shall, until delivered
to or removed by Laurus, be kept by such 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 each Company shall be deemed to include the foregoing grant, whether or not
the same appears therein.


 


(b)           Each
Company hereby (i) authorizes Laurus to file any financing statements,
continuation statements or amendments thereto that (x) indicate the Collateral
(1) as all assets and personal property of such 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.  Each
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 such Company’s rights
under Section 9-509(d)(2) of the UCC.


 


(c)           Each
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 such


 


6

















 


Company) to use, transfer, license or sublicense any Intellectual
Property now owned, licensed to, or hereafter acquired by such 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.  Each Company represents,
warrants (each of which such representations and warranties shall be deemed
repeated upon the making of each request for a Revolving Loan and made as of
the time of each and every Revolving Loan hereunder) and covenants as follows:


 


(a)           all of the
Collateral (i) is owned by it 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.


 


(b)           it shall
not encumber, mortgage, pledge, assign or grant any Lien in any Collateral or
any 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 Schedule 7(c) (which, in the case of all filings and
other documents referred to in said Schedule, 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 of its creditors and purchasers 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)           it 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)            it 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


 


7

















 


(i) all actions necessary to grant Laurus “control” of any
Investment Property, Deposit Accounts, Letter-of-Credit Rights or electronic
Chattel Paper owned by it, 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 it (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 its and/or Laurus’ respective and several interests in the
Collateral.


 


(g)           it 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, it shall enter
into a supplement to this Agreement granting to Laurus a Lien in such
commercial tort claim.


 


(h)           it shall
place notations upon its Books and Records and any of its financial statements
to disclose Laurus’ Lien in the Collateral.


 


(i)            if it
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.” Notwithstanding the foregoing, upon the reasonable
request of Laurus, such Chattel Paper and Instruments shall be delivered to
Laurus.


 


(j)            it 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)           it 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 its
knowledge, would cause Laurus to consider any then existing Account as no
longer constituting an Eligible Account; (ii) of any material delay in its
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 it 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) represent complete bona fide transactions which require
no further act under any circumstances on its 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 such
Company.  It has not made, nor will it
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 it in the ordinary course


 


8

















 


of its business consistent with historical practice and as previously
disclosed to Laurus in writing.


 


(m)          it 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.  It shall not
permit any such items to become a Fixture to real estate or accessions to other
personal property.


 


(n)           it shall
maintain and keep all of its Books and Records concerning the Collateral at its
executive offices listed in Schedule 12(aa).


 


(o)           it shall
maintain and keep the tangible Collateral at the addresses listed in Schedule
12(aa), provided, that it may change such locations or open a new location,
provided that it 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, it executes and delivers to Laurus such agreements deemed reasonably
necessary or prudent by Laurus, including landlord agreements, mortgagee
agreements and warehouse agreements, each in form and substance satisfactory to
Laurus, to adequately protect and maintain Laurus’ security interest in such
Collateral.


 


(p)           Schedule
7(p) lists all banks and other financial institutions at which it maintains
deposits and/or other accounts, and such Schedule 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.  It shall not
establish any depository or other bank account with any financial institution
(other than the accounts set forth on Schedule 7(p)) without Laurus’
prior written consent.


 


(q)           All
Inventory manufactured by it in the United States of America shall be produced
in accordance with the requirements of the Federal Fair Labor Standards Act of
1938, as amended and all rules, regulations and orders related thereto or
promulgated thereunder.


 


8.             Payment
of Accounts.


 


(a)           Each
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 lockboxes maintained by such Company (the “Lockboxes”)
with Wells Fargo Bank or such other financial institution accepted by Laurus in
writing as may be selected by such Company (the “Lockbox Bank”) pursuant
to the terms of the certain agreements among one or more Companies, Laurus
and/or the Lockbox Bank.  On or prior to
the Closing Date, each 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 each Company’s invoices,
account statements and other written or oral communications directing,
instructing, demanding or requesting payment of any Account of any Company or
any other amount constituting Collateral shall conspicuously direct


 


9

















 


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, any Company receives any
payments, such Company shall immediately remit such payments to Laurus in their
original form with all necessary endorsements. 
Until so remitted, such 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 each 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 and the Eligible Subsidiaries joint and several
account.


 


9.             Collection
and Maintenance of Collateral.


 


(a)           Laurus may
verify each 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 or Laurus believes that such verification is necessary to preserve
or protect the Collateral, 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 to an account designated by Laurus.  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.


 


(c)           As Laurus
receives the proceeds of Accounts of any Company, it shall (i) apply such
proceeds, as required, to amounts outstanding under the Notes, and (ii) remit
all such remaining proceeds (net of interest, fees and other amounts then due
and owing to Laurus hereunder) to Company Agent (for the benefit of the
applicable Companies) 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 all such proceeds as cash collateral for the Obligations
and each 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 each
Company’s properties and the Collateral, (b) inspect, audit and copy (or take
originals if necessary) and make extracts from each Company’s Books and
Records, including management letters prepared by the Accountants, and (c)
discuss with each Company’s directors, principal officers, and independent
accountants, each Company’s business, assets, liabilities, financial condition,
results of operations and business prospects. 
Each Company will deliver to Laurus any instrument necessary for Laurus
to obtain records from any service bureau maintaining records for such
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.


 


10

















 


11.           Financial
Reporting.  Company Agent 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 the Parent, each Company’s audited financial statements with a
report of independent certified public accountants of recognized standing
selected by the Parent and acceptable to Laurus (the “Accountants”),
which annual financial statements shall be without qualification and shall
include each Company’s balance sheet as at the end of such fiscal year and the
related statements of each 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
of each Company, all in reasonable detail and prepared in accordance with GAAP,
together with (i) if and when available, copies of any management letters
prepared by the Accountants; and (ii) a certificate of the Parent’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 each 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 of each Company, 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 the Parent’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;


 


(c)           Within
fifteen (15) days after the end of each month (or more frequently if Laurus so
requests), agings of each Company’s Accounts, unaudited trial balances and
their accounts payable and a calculation of each Company’s Accounts, Eligible
Accounts, Inventory and/or Eligible Inventory, provided, however, that if
Laurus shall request the foregoing information more often than as set forth in
the immediately preceding clause, each Company shall have fifteen (15) days
from each such request to comply with Laurus’ demand; and


 


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


 


(e)           Each
Company shall deliver such other information as Laurus shall reasonably
request.


 


11

















 


12.           Additional
Representations and Warranties.  Each Company hereby represents and warrants
to Laurus as follows:


 


(a)           Organization,
Good Standing and Qualification.  It
and each of its Subsidiaries is a corporation, partnership or limited liability
company, as the case may be, duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization.  It and each of its Subsidiaries has the
corporate, limited liability company or partnership, as the case may be, power
and authority to own and operate its properties and assets and, insofar as it
is or shall be a party thereto, to (i) execute and deliver this Agreement and
the Ancillary Agreements, (ii) to issue and sell the Notes, (iii) to issue and
sale the Warrants and the shares of Common Stock issuable upon exercise of the
Warrants (the “Warrant Shares”) and to (iv) carry out the provisions of
this Agreement and the Ancillary Agreements and to carry on its business as
presently conducted.  It and each of its
Subsidiaries is duly qualified and is authorized to do business and is in good
standing as a foreign corporation, partnership or limited liability company, as
the case may be, in all jurisdictions in which the nature or location of its
activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to do
so has not had, or could not reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect.


 


(b)           Subsidiaries.  Each of its direct and indirect Subsidiaries,
the direct owner of each such Subsidiary and its percentage ownership thereof,
is set forth on Schedule 12(b).


 


(c)           Capitalization;
Voting Rights.


 


(i)            The
authorized capital stock of the Parent, as of the date hereof consists of
56,000,000 shares, of which 55,000,000 are shares of Common Stock, par value
$0.01 per share, 27,215,361 shares of which are issued and outstanding, and
1,000,000 are shares of preferred stock, par value $0.01 per share of which –0-
shares are issued and outstanding.  The
authorized, issued and outstanding capital stock of each Subsidiary of each
Company is set forth on Schedule 12(c).


 


(ii)           Except as
disclosed on Schedule 12(c), other than: 
(i) the shares reserved for issuance under the Parent’s stock option
plans; and (ii) shares which may be issued pursuant to this Agreement and the
Ancillary Agreements, there are no outstanding options, warrants, rights
(including conversion or preemptive rights and rights of first refusal), proxy
or stockholder agreements, or arrangements or agreements of any kind for the
purchase or acquisition from the Parent of any of its securities.  Except as disclosed on Schedule 12(c),
neither the offer, issuance or sale of any of the Notes or the Warrants or the
issuance of any of the Warrant Shares, nor the consummation of any transaction
contemplated hereby will result in a change in the price or number of any
securities of the Parent outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.


 


(iii)          All
issued and outstanding shares of the Parent’s Common Stock:  (i) have been duly authorized and validly
issued and are fully paid and non-assessable; and (ii) were issued in
compliance with all applicable state and federal laws concerning the issuance
of securities.


 


12

















 


(iv)          The rights,
preferences, privileges and restrictions of the shares of the Common Stock are
as stated in the Parent’s Certificate of Incorporation (the “Charter”).  The Warrant Shares have been duly and validly
reserved for issuance.  When issued in
compliance with the provisions of this Agreement and the Parent’s Charter, the
Securities will be validly issued, fully paid and nonassessable, and will be
free of any liens or encumbrances; provided, however, that the
Securities may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by such
laws at the time a transfer is proposed.


 


(d)           Authorization;
Binding Obligations.  All corporate,
partnership or limited liability company, as the case may be, action on its and
its Subsidiaries’ part (including their respective officers and directors)
necessary for the authorization of this Agreement and the Ancillary Agreements,
the performance of all of its and its Subsidiaries’ obligations hereunder and
under the Ancillary Agreements on the Closing Date and, the authorization,
issuance and delivery of the Notes and the Warrant has been taken or will be
taken prior to the Closing Date.  This
Agreement and the Ancillary Agreements, when executed and delivered and to the
extent it is a party thereto, will be its and its Subsidiaries’ valid and
binding obligations enforceable against each such Person in accordance with
their terms, except:


 


(i)            as
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other laws of general application affecting enforcement of creditors’ rights;
and


 


(ii)           general
principles of equity that restrict the availability of equitable or legal
remedies.


 


The issuance
of the Notes is not and will not be subject to any preemptive rights or rights
of first refusal that have not been properly waived or complied with.  The issuance of the Warrants and the
subsequent exercise of the Warrants for Warrant Shares are not and will not be
subject to any preemptive rights or rights of first refusal that have not been
properly waived or complied with.


 


(e)           Liabilities.  Neither it nor any of its Subsidiaries has
any liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any Exchange Act Filings.


 


(f)            Agreements;
Action.  Except as set forth on Schedule
12(f) or as disclosed in any Exchange Act Filings:


 


(i)            There are
no agreements, understandings, instruments, contracts, proposed transactions,
judgments, orders, writs or decrees to which it or any of its Subsidiaries is a
party or to its knowledge by which it is bound which may involve:  (i) obligations (contingent or otherwise) of,
or payments to, it or any of its Subsidiaries in excess of $50,000 (other than
obligations of, or payments to, it or any of its Subsidiaries arising from
purchase or sale agreements entered into in the ordinary course of business);
or (ii) the transfer or license of any patent, copyright, trade secret or other
proprietary right to or from it (other than licenses arising from the purchase
of “off the shelf” or other standard products); or (iii) provisions restricting
the development, manufacture or distribution of its or any of its Subsidiaries’
products or services;


 


13

















 


or (iv) indemnification by it or any of its Subsidiaries with respect
to infringements of proprietary rights.


 


(ii)           Since
December 31, 2004 (the “Balance Sheet Date”) neither it nor any of its
Subsidiaries has:  (i) declared or paid
any dividends, or authorized or made any distribution upon or with respect to
any class or series of its capital stock; (ii) incurred any indebtedness for
money borrowed or any other liabilities (other than ordinary course
obligations) individually in excess of $50,000 or, in the case of indebtedness
and/or liabilities individually less than $50,000, in excess of $100,000 in the
aggregate; (iii) made any loans or advances to any Person not in excess, individually
or in the aggregate, of $100,000, other than ordinary advances for travel
expenses; or (iv) sold, exchanged or otherwise disposed of any of its assets or
rights, other than the sale of its Inventory in the ordinary course of
business.


 


(iii)          For
the purposes of subsections (i) and (ii) of this Section 12(f), all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same Person (including Persons it or
any of its applicable Subsidiaries has reason to believe are affiliated
therewith or with any Subsidiary thereof) shall be aggregated for the purpose
of meeting the individual minimum dollar amounts of such subsections.


 


(iv)          the
Parent maintains disclosure controls and procedures (“Disclosure Controls”)
designed to ensure that information required to be disclosed by the Parent in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
rules and forms of the SEC.


 


(v)           The
Parent makes and keeps books, records, and accounts, that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of its
assets.  It maintains internal control
over financial reporting (“Financial Reporting Controls”) designed by,
or under the supervision of, its principal executive and principal financial
officers, and effected by its board of directors, management, and other
personnel, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with GAAP, including that:


 


(1)           transactions
are executed in accordance with management’s general or specific authorization;


 


(2)           unauthorized
acquisition, use, or disposition of the Parent’s assets that could have a
material effect on the financial statements are prevented or timely detected;


 


(3)           transactions
are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that its receipts and expenditures are being made
only in accordance with authorizations of the Parent’s management and board of
directors;


 


(4)           transactions
are recorded as necessary to maintain accountability for assets; and


 


14

















 


(5)           the
recorded accountability for assets is compared with the existing assets at
reasonable intervals, and appropriate action is taken with respect to any
differences.


 


(vi)          There is no
weakness in any of its Disclosure Controls or Financial Reporting Controls that
is required to be disclosed in any of the Exchange Act Filings, except as so
disclosed.


 


(g)           Obligations
to Related Parties.  Except as set
forth on Schedule 12(g), neither it nor any of its Subsidiaries has any
obligations to their respective officers, directors, stockholders or employees
other than:


 


(i)            for
payment of salary for services rendered and for bonus payments;


 


(ii)           reimbursement
for reasonable expenses incurred on its or its Subsidiaries’ behalf;


 


(iii)          for
other standard employee benefits made generally available to all employees
(including stock option agreements outstanding under any stock option plan
approved by its and its Subsidiaries’ Board of Directors, as applicable); and


 


(iv)          obligations
listed in its and each of its Subsidiary’s financial statements or disclosed in
any of the Parent’s Exchange Act Filings.


 


Except
as described above or set forth on Schedule 12(g), none of its officers,
directors or, to the best of its knowledge, key employees or stockholders, any
of its Subsidiaries or any members of their immediate families, are indebted to
it or any of its Subsidiaries, individually or in the aggregate, in excess of
$50,000 or have any direct or indirect ownership interest in any Person with
which it or any of its Subsidiaries is affiliated or with which it or any of
its Subsidiaries has a business relationship, or any Person which competes with
it or any of its Subsidiaries, other than passive investments in publicly
traded companies (representing less than one percent (1%) of such company)
which may compete with it or any of its Subsidiaries. Except as described
above, none of its officers, directors or stockholders, or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with it or any of its Subsidiaries and no agreements, understandings
or proposed transactions are contemplated between it or any of its Subsidiaries
and any such Person.  Except as set forth
on Schedule 12(g), neither it nor any of its Subsidiaries is a guarantor
or indemnitor of any indebtedness of any other Person.


 


(h)           Changes.  Since the Balance Sheet Date, except as
disclosed in any Exchange Act Filing or in any Schedule to this Agreement or to
any of the Ancillary Agreements, there has not been:


 


(i)            any
change in its or any of its Subsidiaries’ business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects, which,
individually or in the aggregate, has had, or could reasonably be expected to
have, a Material Adverse Effect;


 


15

















 


(ii)           any
resignation or termination of any of its or its Subsidiaries’ officers, key
employees or groups of employees;


 


(iii)          any
material change, except in the ordinary course of business, in its or any of
its Subsidiaries’ contingent obligations by way of guaranty, endorsement,
indemnity, warranty or otherwise;


 


(iv)          any damage,
destruction or loss, whether or not covered by insurance, which has had, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;


 


(v)           any waiver
by it or any of its Subsidiaries of a valuable right or of a material debt owed
to it;


 


(vi)          any direct
or indirect material loans made by it or any of its Subsidiaries to any of its
or any of its Subsidiaries’ stockholders, employees, officers or directors,
other than advances made in the ordinary course of business;


 


(vii)         any
material change in any compensation arrangement or agreement with any employee,
officer, director or stockholder;


 


(viii)        any
declaration or payment of any dividend or other distribution of its or any of
its Subsidiaries’ assets;


 


(ix)           any labor
organization activity related to it or any of its Subsidiaries;


 


(x)            any debt,
obligation or liability incurred, assumed or guaranteed by it or any of its
Subsidiaries, except those for immaterial amounts and for current liabilities
incurred in the ordinary course of business;


 


(xi)           any sale,
assignment or transfer of any Intellectual Property or other intangible assets;


 


(xii)          any
change in any material agreement to which it or any of its Subsidiaries is a
party or by which either it or any of its Subsidiaries is bound which, either
individually or in the aggregate, has had, or could reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect;


 


(xiii)         any
other event or condition of any character that, either individually or in the
aggregate, has had, or could reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect; or


 


(xiv)        any
arrangement or commitment by it or any of its Subsidiaries to do any of the
acts described in subsection (i) through (xiii) of this Section 12(h).


 


(i)            Title
to Properties and Assets; Liens, Etc. 
Except as set forth on Schedule 12(i), it and each of its
Subsidiaries has good and marketable title to their respective


 


16

















 


properties and assets, and good title to its leasehold interests, in
each case subject to no Lien, other than Permitted Liens.


 


All facilities,
Equipment, Fixtures, vehicles and other properties owned, leased or used by it
or any of its Subsidiaries are in good operating condition and repair and are
reasonably fit and usable for the purposes for which they are being used.  Except as set forth on Schedule 12(i),
it and each of its Subsidiaries is in compliance with all material terms of
each lease to which it is a party or is otherwise bound.


 


(j)            Intellectual
Property.


 


(i)            It and
each of its Subsidiaries owns or possesses sufficient legal rights to all
Intellectual Property necessary for their respective businesses as now
conducted and, to its knowledge as presently proposed to be conducted, without
any known infringement of the rights of others. 
There are no outstanding options, licenses or agreements of any kind
relating to its or any of its Subsidiary’s Intellectual Property, nor is it or
any of its Subsidiaries bound by or a party to any options, licenses or
agreements of any kind with respect to the Intellectual Property of any other
Person other than such licenses or agreements arising from the purchase of “off
the shelf” or standard products.


 


(ii)           Neither it
nor any of its Subsidiaries has received any communications alleging that it or
any of its Subsidiaries has violated any of the Intellectual Property or other
proprietary rights of any other Person, nor is it or any of its Subsidiaries
aware of any basis therefor.


 


(iii)          Neither
it nor any of its Subsidiaries believes it is or will be necessary to utilize
any inventions, trade secrets or proprietary information of any of its
employees made prior to their employment by it or any of its Subsidiaries,
except for inventions, trade secrets or proprietary information that have been
rightfully assigned to it or any of its Subsidiaries.


 


(k)           Compliance
with Other Instruments.  Neither it
nor any of its Subsidiaries is in violation or default of (x) any term of its
Charter or Bylaws, or (y) any provision of any indebtedness, mortgage, indenture,
contract, agreement or instrument to which it is party or by which it is bound
or of any judgment, decree, order or writ, which violation or default, in the
case of this clause (y), has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect.  The execution, delivery and performance of
and compliance with this Agreement and the Ancillary Agreements to which it is
a party, and the issuance of the Notes and the other Securities each pursuant
hereto and thereto, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or
constitute a default under any such term or provision, or result in the
creation of any Lien upon any of its or any of its Subsidiary’s properties or
assets or the suspension, revocation, impairment, forfeiture or nonrenewal of
any permit, license, authorization or approval applicable to it or any of its
Subsidiaries, their businesses or operations or any of their assets or
properties.


 


17

















 


(l)            Litigation.  Except as set forth on Schedule 12(l),
there is no action, suit, proceeding or investigation pending or, to its
knowledge, currently threatened against it or any of its Subsidiaries that
prevents it or any of its Subsidiaries from entering into this Agreement or the
Ancillary Agreements, or from consummating the transactions contemplated hereby
or thereby, or which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect, or could result in
any change in its or any of its Subsidiaries’ current equity ownership, nor is
it aware that there is any basis to assert any of the foregoing.  Neither it nor any of its Subsidiaries is a
party to or subject to the provisions of any order, writ, injunction, judgment
or decree of any court or government agency or instrumentality.  There is no action, suit, proceeding or
investigation by it or any of its Subsidiaries currently pending or which it or
any of its Subsidiaries intends to initiate.


 


(m)          Tax
Returns and Payments.  It and each of
its Subsidiaries has timely filed all tax returns (federal, state and local)
required to be filed by it.  All taxes
shown to be due and payable on such returns, any assessments imposed, and all
other taxes due and payable by it and each of its Subsidiaries on or before the
Closing Date, have been paid or will be paid prior to the time they become
delinquent.  Except as set forth on Schedule
12(m), neither it nor any of its Subsidiaries has been advised:


 


(i)            that any
of its returns, federal, state or other, have been or are being audited as of
the date hereof; or


 


(ii)           of any
adjustment, deficiency, assessment or court decision in respect of its federal,
state or other taxes.


 


Neither
it nor any of its Subsidiaries has any knowledge of any liability of any tax to
be imposed upon its properties or assets as of the date of this Agreement that
is not adequately provided for.


 


(n)           Employees.  Except as set forth on Schedule 12(n),
neither it nor any of its Subsidiaries has any collective bargaining agreements
with any of its employees.  There is no
labor union organizing activity pending or, to its knowledge, threatened with
respect to it or any of its Subsidiaries. 
Except as disclosed in the Exchange Act Filings or on Schedule 12(n),
neither it nor any of its Subsidiaries is a party to or bound by any currently
effective employment contract, deferred compensation arrangement, bonus plan,
incentive plan, profit sharing plan, retirement agreement or other employee
compensation plan or agreement.  To its
knowledge, none of its or any of its Subsidiaries’ employees, nor any
consultant with whom it or any of its Subsidiaries has contracted, is in
violation of any term of any employment contract, proprietary information
agreement or any other agreement relating to the right of any such individual
to be employed by, or to contract with, it or any of its Subsidiaries because
of the nature of the business to be conducted by it or any of its Subsidiaries;
and to its knowledge the continued employment by it and its Subsidiaries of
their present employees, and the performance of its and its Subsidiaries
contracts with its independent contractors, will not result in any such
violation.  Neither it nor any of its
Subsidiaries is aware that any of its or any of its Subsidiaries’ employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency that would interfere with their duties to it
or any of its Subsidiaries.  Neither it
nor any of its Subsidiaries has received any notice alleging that any such
violation has occurred.  Except for


 


18

















 


employees who have a current effective employment agreement with it or
any of its Subsidiaries, none of its or any of its Subsidiaries’ employees has
been granted the right to continued employment by it or any of its Subsidiaries
or to any material compensation following termination of employment with it or
any of its Subsidiaries.  Except as set
forth on Schedule 12(n), neither it nor any of its Subsidiaries is
aware that any officer, key employee or group of employees intends to terminate
his, her or their employment with it or any of its Subsidiaries, as applicable,
nor does it or any of its Subsidiaries have a present intention to terminate
the employment of any officer, key employee or group of employees.


 


(o)           Registration
Rights and Voting Rights.  Except as
set forth on Schedule 12(o) and except as disclosed in Exchange Act
Filings, neither it nor any of its Subsidiaries is presently under any
obligation, and neither it nor any of its Subsidiaries has granted any rights,
to register any of its or any of its Subsidiaries’ presently outstanding
securities or any of its securities that may hereafter be issued.  Except as set forth on Schedule 12(o)
and except as disclosed in Exchange Act Filings, to its knowledge, none of its
or any of its Subsidiaries’ stockholders has entered into any agreement with
respect to its or any of its Subsidiaries’ voting of equity securities.


 


(p)           Compliance
with Laws; Permits.  Neither it nor
any of its Subsidiaries is in violation of the Sarbanes-Oxley Act of 2002 or
any SEC related regulation or rule or any rule of the Principal Market
promulgated thereunder or any other applicable statute, rule, regulation, order
or restriction of any domestic or foreign government or any instrumentality or
agency thereof in respect of the conduct of its business or the ownership of
its properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect.  No governmental orders, permissions,
consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the
execution and delivery of this Agreement or any Ancillary Agreement and the
issuance of any of the Securities, except such as have been duly and validly
obtained or filed, or with respect to any filings that must be made after the
Closing Date, as will be filed in a timely manner.  It and each of its Subsidiaries has all
material franchises, permits, licenses and any similar authority necessary for
the conduct of its business as now being conducted by it, the lack of which
could, either individually or in the aggregate, reasonably be expected to have
a Material Adverse Effect.


 


(q)           Environmental
and Safety Laws.  Neither it nor any
of its Subsidiaries is in violation of any applicable statute, law or
regulation relating to the environment or occupational health and safety, and
to its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation.  Except as set forth on Schedule 12(q),
no Hazardous Materials (as defined below) are used or have been used, stored,
or disposed of by it or any of its Subsidiaries or, to its knowledge, by any
other Person on any property owned, leased or used by it or any of its
Subsidiaries.  For the purposes of the
preceding sentence, “Hazardous Materials” shall mean:


 


(i)            materials
which are listed or otherwise defined as “hazardous” or “toxic” under any
applicable local, state, federal and/or foreign laws and regulations that
govern the existence and/or remedy of contamination on property, the protection
of the environment


 


19

















 


from contamination, the control of hazardous wastes, or other
activities involving hazardous substances, including building materials; and


 


(ii)           any
petroleum products or nuclear materials.


 


(r)            Valid
Offering.  Assuming the accuracy of
the representations and warranties of Laurus contained in this Agreement, the
offer and issuance of the Securities 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.


 


(s)           Full
Disclosure.  It and each of its
Subsidiaries has provided Laurus with all information requested by Laurus in
connection with Laurus’ decision to enter into this Agreement, including all
information each Company and its Subsidiaries believe is reasonably necessary
to make such investment decision. 
Neither this Agreement, the Ancillary Agreements nor the exhibits and schedules
hereto and thereto nor any other document delivered by it or any of its
Subsidiaries 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.  Any financial projections and other estimates
provided to Laurus by it or any of its Subsidiaries were based on its and its
Subsidiaries’ experience in the industry and on assumptions of fact and opinion
as to future events which it or any of its Subsidiaries, at the date of the
issuance of such projections or estimates, believed to be reasonable.


 


(t)            Insurance.  It and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which it believes are customary for companies similarly situated to
it and its Subsidiaries in the same or similar business.


 


(u)           SEC
Reports and Financial Statements. 
Except as set forth on Schedule 12(u), it and each of its
Subsidiaries has filed all proxy statements, reports and other documents
required to be filed by it under the Exchange Act.  The Parent has furnished Laurus with copies
of:  (i) its Annual Report on Form 10-KSB
for its fiscal year ended December 31, 2004; and (ii) its Quarterly Reports on
Form 10-QSB for its fiscal quarters ended March 31, 2005, June 30, 2005 and September
30, 2005, and the Form 8-K filings which it has made during its fiscal year
2005 and 2006 to date (collectively, the “SEC Reports”).  Except as set forth on Schedule 12(u),
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. 
Such financial statements have been prepared in accordance with 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


 


20

















 


cash flows of the Parent and its Subsidiaries, on a consolidated basis,
as of, and for, the periods presented in each such SEC Report.


 


(v)           Listing.  The Parent’s Common Stock is listed or
quoted, as applicable, on the Principal Market and satisfies all requirements
for the continuation of such listing or quotation, as applicable, and the
Parent shall do all things necessary for the continuation of such listing or
quotation, as applicable.  The Parent has
not received any notice that its Common Stock will be delisted from, or no
longer quoted on, as applicable, the Principal Market or that its Common Stock
does not meet all requirements for such listing or quotation, as applicable.


 


(w)          No
Integrated Offering.  Neither it, nor
any of its Subsidiaries 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 or any
Ancillary Agreement to be integrated with prior offerings by it for purposes of
the Securities Act which would prevent it from issuing the Securities pursuant
to Rule 506 under the Securities Act, or any applicable exchange-related
stockholder approval provisions, nor will it 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.


 


(x)            Stop
Transfer.  The Securities are
restricted securities as of the date of this Agreement.  Neither it nor any of its Subsidiaries will
issue any stop transfer order or other order impeding the sale and delivery of
any of the Securities at such time as the Securities are registered for public
sale or an exemption from registration is available, except as required by
state and federal securities laws.


 


(y)           Dilution.  It specifically acknowledges that the Parent’s
obligation to issue the shares of Common Stock upon exercise of the Warrants is
binding upon the Parent and enforceable regardless of the dilution such
issuance may have on the ownership interests of other shareholders of the
Parent.


 


(z)            Patriot
Act.  It certifies that, to the best
of its knowledge, neither it nor any of its Subsidiaries has been designated,
nor is or shall be owned or controlled, by a “suspected terrorist” as defined
in Executive Order 13224.  It hereby
acknowledges that Laurus seeks to comply with all applicable laws concerning
money laundering and related activities. 
In furtherance of those efforts, it hereby represents, warrants and
covenants that:  (i) none of the cash or
property that it or any of its Subsidiaries will pay or will contribute to
Laurus has been or shall be derived from, or related to, any activity that is
deemed criminal under United States law; and (ii) no contribution or payment by
it or any of its Subsidiaries to Laurus, to the extent that they are within its
or any such Subsidiary’s control shall cause Laurus to be in violation of the
United States Bank Secrecy Act, the United States International Money
Laundering Control Act of 1986 or the United States International Money
Laundering Abatement and Anti-Terrorist Financing Act of 2001.  It shall promptly notify Laurus if any of
these representations, warranties and covenants ceases to be true and accurate
regarding it or any of its Subsidiaries. 
It shall provide Laurus with any additional information regarding it and
each Subsidiary thereof that Laurus deems necessary or convenient to ensure
compliance with all applicable laws concerning money laundering and similar
activities.  It understands and agrees
that if at any time


 


21

















 


it is discovered that any of the foregoing representations, warranties
and covenants are incorrect, or if otherwise required by applicable law or
regulation related to money laundering or similar activities, Laurus may
undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of
Laurus’ investment in it.  It further
understands that Laurus may release confidential information about it and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if Laurus, in its sole discretion, determines that it is in the
best interests of Laurus in light of relevant rules and regulations under the
laws set forth in subsection (ii) above.


 


(aa)         Company
Name; Locations of Offices, Records and Collateral.  Schedule 12(aa) sets forth each
Company’s name as it appears in official filings in the state of its
organization, the type of entity of each Company, the organizational
identification number issued by each Company’s state of organization or a
statement that no such number has been issued, each Company’s state of
organization, and the location of each 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 Schedule 12(aa), 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 Schedule 12(aa), no Company has been known
as or conducted business in any other name (including trade names).  Each Company has only one state of
organization.


 


(bb)         ERISA.  Based upon the Employee Retirement Income
Security Act of 1974 (“ERISA”), and the regulations and published
interpretations thereunder:  (i) neither
it nor any of its Subsidiaries has engaged in any Prohibited Transactions (as
defined in Section 406 of ERISA and Section 4975 of the Code); (ii) it and each
of its Subsidiaries has met all applicable minimum funding requirements under
Section 302 of ERISA in respect of its plans; (iii) neither it nor any of its
Subsidiaries has any 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) neither it nor any of its
Subsidiaries has any fiduciary responsibility for investments with respect to
any plan existing for the benefit of persons other than its or such Subsidiary’s
employees; and (v) neither it nor any of its Subsidiaries has withdrawn,
completely or partially, from any multi-employer pension plan so as to incur
liability under the Multiemployer Pension Plan Amendments Act of 1980.


 


13.           Covenants. 
Each Company, as applicable, covenants and agrees with Laurus as
follows:


 


(a)           Stop-Orders.  It shall advise Laurus, promptly after it
receives notice of issuance by the SEC, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Parent, or of the suspension
of the qualification of the Common Stock of the Parent for offering or sale in
any jurisdiction, or the initiation of any proceeding for any such purpose.


 


(b)           Listing.  It shall promptly secure the listing or
quotation, as applicable, of the shares of Common Stock issuable upon exercise
of the Warrants on the Principal Market upon which shares of Common Stock are
listed or quoted, as applicable, (subject to official notice of issuance) and
shall maintain such listing or quotation, as applicable, so long as any


 


22

















 


other shares of Common Stock shall be so listed or quoted, as
applicable.  The Parent shall maintain
the listing or quotation, as applicable, of its Common Stock on the NASDAQ OTC
Bulletin Board or other Principal Market approved in writing by Laurus, and
will comply in all material respects with the Parent’s reporting, filing and
other obligations under the bylaws or rules of the National Association of
Securities Dealers (“NASD”) and such exchanges, as applicable.


 


(c)           Market
Regulations.  It shall notify the
SEC, NASD and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall
take all other necessary action and proceedings as may be required and
permitted by applicable law, rule and regulation, for the legal and valid
issuance of the Securities to Laurus and promptly provide copies thereof to
Laurus.


 


(d)           Reporting
Requirements.  It shall timely file
with the SEC all reports required to be filed pursuant to the Exchange Act and
refrain from terminating its status as an issuer required by the Exchange Act
to file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination.


 


(e)           Use of
Funds.  It shall use the proceeds of
the Loans (i) to repay in full the Existing Indebtedness and (ii) for general
working capital purposes only.


 


(f)            Access
to Facilities.  It shall, and shall
cause each of its Subsidiaries to, permit any representatives designated by
Laurus (or any successor of Laurus), upon reasonable notice and during normal
business hours, at Company’s expense and accompanied by a representative of
Company Agent (provided that no such prior notice shall be required to be given
and no such representative shall be required to accompany Laurus in the event
Laurus believes such access is necessary to preserve or protect the Collateral
or following the occurrence and during the continuance of an Event of Default),
to:


 


(i)            visit and
inspect any of its or any such Subsidiary’s properties;


 


(ii)           examine
its or any such Subsidiary’s corporate and financial records (unless such
examination is not permitted by federal, state or local law or by contract) and
make copies thereof or extracts therefrom; and


 


(iii)          discuss
its or any such Subsidiary’s affairs, finances and accounts with its or any
such Subsidiary’s directors, officers and Accountants.


 


Notwithstanding
the foregoing, neither it nor any of its Subsidiaries shall provide any
material, non-public information to Laurus unless Laurus signs a
confidentiality agreement and otherwise complies with Regulation FD, under the
federal securities laws.


 


(g)           Taxes.  It shall, and shall cause each of its
Subsidiaries to, promptly pay and discharge, or cause to be paid and discharged,
when due and payable, all lawful taxes, assessments and governmental charges or
levies imposed upon it and its Subsidiaries’ income, profits, property or
business, as the case may be; provided, however, that any such tax, assessment,
charge or levy need not be paid currently if (i) the validity thereof shall
currently and diligently be contested in good faith by appropriate proceedings,
(ii) such tax, assessment, charge


 


23

















 


or levy shall have no effect on the Lien priority of Laurus in the
Collateral, and (iii) if it and/or such Subsidiary, as applicable, shall have
set aside on its and/or such Subsidiary’s books adequate reserves with respect
thereto in accordance with GAAP; and provided, further, that it shall, and
shall cause each of its Subsidiaries to, pay all such taxes, assessments,
charges or levies forthwith upon the commencement of proceedings to foreclose
any lien which may have attached as security therefor.


 


(h)           Insurance.  It shall bear the full risk of loss from any
loss of any nature whatsoever with respect to the Collateral.  It and each of its Subsidiaries shall keep
its assets which are of an insurable character insured by financially sound and
reputable insurers against loss or damage by fire, explosion and other risks
customarily insured against by companies in similar business similarly situated
as it and its Subsidiaries; and it and its Subsidiaries shall maintain, with
financially sound and reputable insurers, insurance against other hazards and
risks and liability to persons and property to the extent and in the manner
which it and/or such Subsidiary thereof reasonably believes is customary for
companies in similar business similarly situated as it and its Subsidiaries and
to the extent available on commercially reasonable terms.  It and each of its Subsidiaries will jointly
and severally bear the full risk of loss from any loss of any nature whatsoever
with respect to the assets pledged to Laurus as security for its obligations
hereunder and under the Ancillary Agreements. 
At its own cost and expense in amounts and with carriers reasonably
acceptable to Laurus, it and each of its Subsidiaries shall (i) keep all their
insurable properties and properties in which they have an interest insured
against the hazards of fire, flood, 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 it or the
respective Subsidiary’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 it and its Subsidiaries’ 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 its or any of its Subsidiaries assets or funds 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 it or any
of its Subsidiaries is engaged in business; and (v) furnish Laurus with
(x) copies of all policies and evidence of the maintenance of such
policies at least thirty (30) days before any expiration date, (y) excepting
its and its Subsidiaries’ workers’ compensation policy, 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 lenders loss payee, and (z) evidence that as to Laurus the insurance
coverage shall not be impaired or invalidated by any act or neglect of any
Company or any of its Subsidiaries and the insurer will provide Laurus with at
least thirty (30) days notice prior to cancellation.  It 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 any Company or any of its Subsidiaries and Laurus
jointly.  If any insurance losses are
paid by check, draft or other instrument payable to any Company and/or any of
its Subsidiaries and Laurus jointly, Laurus may endorse, as applicable, such
Company’s and/or any of its Subsidiaries’ 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


 


24

















 


applied to the Obligations, in such order as Laurus in its sole
discretion shall determine or shall otherwise be delivered to Company Agent for
the benefit of the applicable Company and/or its Subsidiaries.  Any surplus shall be paid by Laurus to
Company Agent for the benefit of the applicable Company and/or its
Subsidiaries, or applied as may be otherwise required by law.  Any deficiency thereon shall be paid, as
applicable, by Companies and their Subsidiaries to Laurus, on demand.


 


(i)            Intellectual
Property.  It shall, and shall cause
each of its Subsidiaries to, maintain in full force and effect its corporate
existence, rights and franchises and all licenses and other rights to use
Intellectual Property owned or possessed by it and reasonably deemed to be
necessary to the conduct of its business.


 


(j)            Properties.  It shall, and shall cause each of its
Subsidiaries to, keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and improvements
thereto; and it shall, and shall cause each of its Subsidiaries to, at all
times comply with each provision of all leases to which it is a party or under
which it occupies property if the breach of such provision could reasonably be
expected to have a Material Adverse Effect.


 


(k)           Confidentiality.  It shall not, and shall not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of Laurus, unless expressly agreed to by Laurus or unless and until such
disclosure is required by law or applicable regulation, and then only to the
extent of such requirement. 
Notwithstanding the foregoing, each Company and its Subsidiaries may
disclose Laurus’ identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.


 


(l)            Required
Approvals.  It shall not, and shall
not permit any of its Subsidiaries to, without the prior written consent of
Laurus, (i) create, incur, assume or suffer to exist any indebtedness
(exclusive of trade debt) whether secured or unsecured other than each Company’s
indebtedness to Laurus and as set forth on Schedule 13(l)(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 it or its Subsidiaries 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 or apply any of its funds, property or assets to the purchase,
redemption or other retirement of any of its or its Subsidiaries’ Stock
outstanding on the date hereof, or issue any preferred stock; (v) purchase or
hold beneficially any Stock or other securities or evidences of indebtedness
of, make 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 its and its
Subsidiaries’ officers and employees not exceeding at any one time an aggregate
of $10,000, and (z) loans to its existing Subsidiaries so long as such
Subsidiaries are organized in the United States and are designated as either a
co-borrower hereunder or has entered into such guaranty and security documentation
required by Laurus, including, without limitation, to grant to Laurus a first
priority perfected security interest in substantially all of such Subsidiary’s
assets to secure the Obligations; (vi) create or permit to exist any
Subsidiary, other than any Subsidiary in


 


25

















 


existence on the date hereof and listed in Schedule 12(b) unless
such new Subsidiary is a wholly-owned Subsidiary and 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, including, without
limitation, to grant to Laurus a first priority perfected security interest in
substantially all of 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) such 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) such Company shall have
provided Laurus copies of all documentation relating to such merger or
consolidation and (4) such 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) become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under
any circumstances) restrict its or any of its Subsidiaries’ right to perform
the provisions of this Agreement or any of the Ancillary Agreements; (xi)
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; (xii)
enter into any transaction with any employee, director or Affiliate, except in
the ordinary course on arms-length terms; (xiii) bill Accounts under any name
except the present name of such Company; or (xiv) sell, lease, transfer or
otherwise dispose of any of its properties or assets, or any of the properties
or assets of its Subsidiaries, except for (1) the sale of Inventory in the
ordinary course of business and (2) the disposition or transfer in the ordinary
course of business during any fiscal year of obsolete and worn-out Equipment
and only to the extent that (x) the proceeds of any such disposition are used
to acquire replacement Equipment which is subject to Laurus’ first priority
perfected security interest or are used to repay Loans or to pay general
corporate expenses, or (y) 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.


 


(m)          Reissuance
of Securities.  The Parent shall
reissue certificates representing the Securities without the legends set forth
in Section 39 below at such time as:


 


(i)            the
holder thereof is permitted to dispose of such Securities pursuant to Rule
144(k) under the Securities Act; or


 


(ii)           upon
resale subject to an effective registration statement after such Securities are
registered under the Securities Act.


 


The
Parent agrees to cooperate with Laurus in connection with all resales pursuant
to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow
such resales provided the Parent and its counsel receive reasonably requested
representations from Laurus and broker, if any.


 


26

















 


(n)           Opinion.  On the Closing Date, it shall deliver to
Laurus an opinion acceptable to Laurus from each Company’s legal counsel.  Each Company will provide, at the Companies’
joint and several expense, such other legal opinions in the future as are
reasonably necessary for the exercise of the Warrants.


 


(o)           Legal
Name, etc.  It shall not, without
providing Laurus with 30 days prior written notice, change (i) its name as it
appears in the official filings in the state of its organization, (ii) the type
of legal entity it is, (iii) its organization identification number, if
any, issued by its state of organization, (iv) its state of organization or (v)
amend its certificate of incorporation, by-laws or other organizational
document.


 


(p)           Compliance
with Laws.  The operation of each of
its and each of its Subsidiaries’ business is and shall 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 and safety and environmental matters.


 


(q)           Notices.  It and each of its Subsidiaries shall
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 reasonably be expected
to have singly or in the aggregate, a Material Adverse Effect; (ii) any change
which has had, or could reasonably be expected to have, a Material Adverse
Effect; (iii) any Event of Default or Default; and (iv) 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 it
or any of its Subsidiaries is a party or by which it or any of its Subsidiaries
or any of its or any such Subsidiary’s properties may be bound the breach of
which would have a Material Adverse Effect.


 


(r)            Margin
Stock.  It shall not permit any of
the proceeds of the Loans made hereunder to 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.


 


(s)           Offering
Restrictions.  Except as previously
disclosed in the SEC Reports or in the Exchange Act Filings, or stock or stock
options granted to its employees or directors, neither it nor any of its
Subsidiaries shall, prior to the full repayment of the Secured Non-Convertible
Term Note(together with all accrued and unpaid interest and fees related
thereto), (x) enter into any equity line of credit agreement or similar
agreement or (y) issue, or enter into any agreement to issue, any securities
with a variable/floating conversion and/or pricing feature which are or could
be (by conversion or registration) free-trading securities (i.e. common stock
subject to a registration statement).


 


27

















 


(t)            Authorization
and Reservation of Shares.  The
Parent shall at all times have authorized and reserved a sufficient number of
shares of Common Stock to provide for the exercise of the Warrants.


 


(u)           Financing
Right of First Refusal.


 


(i)            Each
Company hereby grants to Laurus a right of first refusal to provide any
Additional Financing (as defined below) to be issued by any Company and/or any
of its Subsidiaries (the “Additional Financing Parties”), subject to the
following terms and conditions.  From and
after the date hereof, prior to the incurrence of any additional indebtedness
and/or the sale or issuance of any equity interests of the Additional Financing
Parties (an “Additional Financing”), Company Agent shall notify Laurus
of such Additional Financing.  In
connection therewith, Company Agent shall submit a fully executed term sheet (a
“Proposed Term Sheet”) to Laurus setting forth the terms, conditions and
pricing of any such Additional Financing (such financing to be negotiated on “arm’s
length” terms and the terms thereof to be negotiated in good faith) proposed to
be entered into by the Additional Financing Parties.  Laurus shall have the right, but not the
obligation, to deliver to Company Agent its own proposed term sheet (the “Laurus
Term Sheet”) setting forth the terms and conditions upon which Laurus would
be willing to provide such Additional Financing to the Additional Financing
Parties.  The Laurus Term Sheet shall contain
terms no less favorable to the Additional Financing Parties than those outlined
in Proposed Term Sheet.  Laurus shall
deliver to Company Agent the Laurus Term Sheet within ten Business Days of
receipt of each such Proposed Term Sheet. 
If the provisions of the Laurus Term Sheet are at least as favorable to
the Additional Financing Parties as the provisions of the Proposed Term Sheet,
the Additional Financing Parties shall enter into and consummate the Additional
Financing transaction outlined in the Laurus Term Sheet.


 


(ii)           It shall
not, and shall not permit its Subsidiaries to, agree, directly or indirectly,
to any restriction with any Person which limits the ability of Laurus to
consummate an Additional Financing with it or any of its Subsidiaries.


 


14.           Further
Assurances.  At any time and from time to time, upon the
written request of Laurus and at the sole expense of Companies, each 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, and/or (c) to enable Laurus to
exercise all or any of the rights and powers herein granted or any Ancillary
Agreement.


 


15.           Representations,
Warranties and Covenants of Laurus.  Laurus hereby represents,
warrants and covenants to each 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 shall be valid and binding obligations
of


 


28

















 


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.


 


(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
Notes to be issued to it under this Agreement and the Securities acquired by it
upon the exercise of the Warrants.


 


(c)           Laurus
Bears Economic Risk.  Laurus has
substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Parent so that it is
capable of evaluating the merits and risks of its investment in the Parent 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)           Investment
for Own Account.  The Securities are
being issued to Laurus 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 Notes, 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.


 


(g)           Shorting.  Neither Laurus nor any of its Affiliates or
investment partners has, will, or will cause any Person, to directly engage in “short
sales” of the Parent’s Common Stock as long as any Note shall be outstanding.


 


(h)           Patriot
Act.  Laurus certifies that, to the
best of Laurus’ knowledge, Laurus has not been designated, and is not owned or
controlled, by a “suspected terrorist” as defined in Executive Order
13224.  Laurus seeks to comply with all
applicable laws concerning money laundering and related activities.  In furtherance of those efforts, Laurus
hereby represents, warrants and covenants that: 
(i) none of the cash or property that Laurus will use to make the Loans
has been or shall be derived from, or related to, any activity that is deemed
criminal under United States law; and (ii) no disbursement by Laurus to any
Company to the extent within Laurus’ control, shall cause Laurus to be in
violation of the United States Bank


 


29












 


Secrecy Act, the United States International Money Laundering Control
Act of 1986 or the United States International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001.  Laurus shall promptly notify the Company Agent
if any of these representations ceases to be true and accurate regarding
Laurus.  Laurus agrees to provide the
Company any additional information regarding Laurus that the Company deems
necessary or convenient to ensure compliance with all applicable laws
concerning money laundering and similar activities.  Laurus understands and agrees that if at any
time it is discovered that any of the foregoing representations are incorrect,
or if otherwise required by applicable law or regulation related to money
laundering similar activities, Laurus may undertake appropriate actions to
ensure compliance with applicable law or regulation, including but not limited
to segregation and/or redemption of Laurus’ investment in the Parent.  Laurus further understands that the Parent
may release information about Laurus and, if applicable, any underlying
beneficial owners, to proper authorities if the Parent, in its sole discretion,
determines that it is in the best interests of the Parent in light of relevant
rules and regulations under the laws set forth in subsection (ii) above.


 


(i)            Limitation
on Acquisition of Common Stock. 
Notwithstanding anything to the contrary contained in this Agreement,
any Ancillary Agreement, or any document, instrument or agreement entered into
in connection with any other transaction entered into by and between Laurus and
any Company (and/or Subsidiaries or Affiliates of any Company), Laurus shall
not acquire stock in the Parent (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Parent, or otherwise, and such options, warrants, conversion or other
rights shall not be exercisable) to the extent such stock acquisition would
cause any interest (including any original issue discount) payable by any
Company to Laurus not to qualify as portfolio interest, within the meaning of
Section 881(c)(2) of the Internal Revenue Code of 1986, as amended (the “Code”)
by reason of Section 881(c)(3) of the Code, taking into account the
constructive ownership rules under Section 871(h)(3)(C) of the Code (the “Stock
Acquisition Limitation”).  The Stock
Acquisition Limitation shall automatically become null and void without any
notice to any Company upon the earlier to occur of either (a) the Parent’s
delivery to Laurus of a Notice of Redemption (as defined in the Notes) or (b)
the existence of an Event of Default at a time when the average closing price
of the Common Stock as reported by Bloomberg, L.P. on the Principal Market for
the immediately preceding five trading days is greater than or equal to 150% of
the Exercise Price (as defined in the Warrant).


 


16.           Power
of Attorney.  Each Company hereby appoints Laurus, or any
other Person whom Laurus may designate as such Company’s attorney, with power
to:  (i) endorse such 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 such 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 during the continuation of an Event of Default, notify the post
office authorities to change the address for delivery of such Company’s mail to
an address designated by Laurus, and to receive, open and


 


30












 


dispose of all mail
addressed to such Company.  Each 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.


 


17.           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 later of (x) the expiration of the Revolving Term and (y) the
Maturity Date (as defined in the Secured Non-Convertible Term Note); provided
that Laurus’ agreement to make Revolving Loans under and in accordance with the
terms of this Agreement or any Ancillary Agreement shall terminate upon the
expiration of the Revolving 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 irrevocably disposed of, concluded or
liquidated.  Notwithstanding the
foregoing, Laurus shall release its security interests at any time after thirty
(30) days notice upon irrevocable payment to it of all Obligations if each
Company shall have (i) provided Laurus with an executed release of any and all
claims which such 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) three percent (3%) of the original principal amount of the
Secured Non-Convertible Revolving Note if such payment occurs prior to the
first anniversary of the Closing Date, and (2) two percent (2%) of the original
principal amount of the Secured Non-Convertible Revolving Note if such
termination occurs thereafter during the Revolving 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 jointly and severally by the Companies to Laurus upon termination
by acceleration of this Agreement by Laurus due to the occurrence and
continuance of an Event of Default.


 


18.           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 any Company’s
account may from time to time be temporarily in a zero or credit position,
until all of the Obligations have been indefeasibly paid or performed in full
after the termination of this Agreement. 
Laurus shall not be required to send termination statements to any
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 indefeasibly paid in full in immediately
available funds.


 


19.           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, and, in any
such case, such failure shall continue for a period of three (3) days following
the date upon which any such payment was due;


 


31

















 


(b)           failure by
any Company or any of its Subsidiaries 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 such Company’s and/or
such Subsidiary’s books;


 


(c)           failure to
perform under, and/or committing any breach of, in any material respect, this
Agreement or any covenant contained herein, which failure or breach shall
continue without remedy for a period of fifteen (15) days after the occurrence
thereof;


 


(d)           any
representation, warranty or statement made by any Company or any of its
Subsidiaries 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 prove to be false or
misleading in any material respect on the date as of which made or deemed made;


 


(e)           the
occurrence of any default (or similar term) in the observance or performance of
any other agreement or condition relating to any indebtedness or contingent
obligation of any Company or any of its Subsidiaries beyond the period of grace
(if any), the effect of which default is to cause, or permit the holder or
holders of such indebtedness or beneficiary or beneficiaries of such contingent
obligation to cause, such indebtedness to become due prior to its stated
maturity or such contingent obligation to become payable;


 


(f)            attachments
or levies in excess of $50,000 in the aggregate are made upon any Company’s
assets or a judgment is rendered against any Company’s property involving a
liability of more than $50,000 which shall not have been vacated, discharged,
stayed or bonded within thirty (30) days from the entry thereof;


 


(g)           any change
in any Company’s or any of its Subsidiary’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;


 


(i)            any
Company or any of its Subsidiaries 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 without challenge within ten (10) days of the filing
thereof, or failure 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)            any Company
or any of its Subsidiaries 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;


 


32

















 


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


 


(l)            any “Person”
or “group” (as such terms are defined in Sections 13(d) and 14(d) of the
Exchange Act, as in effect on the date hereof), other than Laurus, is or
becomes the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under
the Exchange Act), directly or indirectly, of 35% or more on a fully diluted
basis of the then outstanding voting equity interest of any Company, (ii) the
Board of Directors of the Parent shall cease to consist of a majority of the
Board of Directors of the Parent on the date hereof (or directors appointed by
a majority of the board of directors in effect immediately prior to such
appointment) or (iii) the Parent or any of its Subsidiaries merges or
consolidates with, or sells all or substantially all of its assets to, any
other person or entity;


 


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


 


(n)           an Event
of Default (or similar term) shall occur under and as defined in any Note or in
any other Ancillary Agreement;


 


(o)           any
Company or any of its Subsidiaries shall breach any term or provision of any
Ancillary Agreement to which it is a party, in any material respect which
breach is not cured within any applicable cure or grace period provided in
respect thereof (if any);


 


(p)           any
Company or any of its Subsidiaries attempts to terminate, challenges the
validity of, or its liability under this Agreement or any Ancillary Agreement,
or any proceeding shall be brought to challenge the validity, binding effect of
any Ancillary Agreement or any Ancillary Agreement ceases to be a valid,
binding and enforceable obligation of such Company or any of its Subsidiaries
(to the extent such Persons are a party thereto);


 


(q)           an SEC
stop trade order or Principal Market trading suspension of the Common Stock
shall be in effect for five (5) consecutive days or five (5) days during a
period of ten (10) consecutive days, excluding in all cases a suspension of all
trading on a Principal Market, provided that the Parent shall not have been
able to cure such trading suspension within thirty (30) days of the notice
thereof or list the Common Stock on another Principal Market within sixty (60)
days of such notice; or


 


(r)            The
Parent’s failure to deliver Common Stock to Laurus pursuant to and in the form
required by the Notes and this Agreement, if such failure to deliver Common
Stock shall not be cured within two (2) Business Days or any Company is
required to issue a replacement Note to Laurus and such Company shall fail to
deliver such replacement Note within seven (7) Business Days.


 


33

















 


20.           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 and indefeasibly 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 each Company to assemble the Collateral, at Companies’ joint and
several 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 any 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 any Company, such
Company agrees not to charge Laurus for storage thereof), and the right to
apply for the appointment of a receiver for such 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 Agent at
Company Agent’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 each
Company’s Intellectual Property.  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 of all of the Obligations, and
after the payment by Laurus of any other amount required by any provision of
law, including Section 9-608(a)(1) of the UCC (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 Agent (for
the benefit of the applicable Companies) or its representatives or to whosoever
may be lawfully entitled to receive the same, or as a court of competent
jurisdiction may direct.  The Companies
shall remain jointly and severally liable to Laurus for any deficiency.  In addition, the Companies shall jointly and
severally 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 19(i) or 19(j), or
(y) the cessation of any 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.  Each 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 such 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.  The
parties hereto each hereby agree that the exercise by any party hereto of any
right granted to it or the exercise by any party hereto of any remedy available
to it (including, without limitation, the issuance of a notice of redemption, a
borrowing request and/or a notice of 


 


34

















 


default), in each case,
hereunder or under any Ancillary Agreement which has been publicly filed with
the SEC shall not constitute confidential information and no party shall have
any duty to the other party to maintain such information as confidential,
except for the portions of such publicly filed documents that are subject to
confidential treatment request made by the Companies to the SEC.


 


21.           Waivers.  To
the full extent permitted by applicable law, each Company hereby 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 such 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.  Each 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.


 


22.           Expenses.  The
Companies shall jointly and severally pay all of Laurus’ 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.  The Companies shall also jointly and
severally 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 any Company or any of its Subsidiaries as Collateral for, or any other
Person as security for, the Obligations hereunder and (e) any consultations in
connection with any of the foregoing. 
The Companies shall also jointly and severally pay Laurus’ customary
bank charges for all bank services (including wire transfers) performed or
caused to be performed by Laurus for any Company or any of its Subsidiaries at
any Company’s or such Subsidiary’s request or in connection with any Company’s
loan account with Laurus.  All such costs
and expenses together with all filing, recording and search fees, taxes and
interest payable by the Companies 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 any Company and/or any Subsidiary thereof, on the one
hand, and Laurus on the other hand, which Laurus is or may be required to
withhold or pay, the Companies hereby jointly and severally indemnifies and
holds Laurus harmless in respect of such taxes, and the Companies will repay to



 


35

















 


Laurus the amount of any
such taxes which shall be charged to the Companies’ account; and until the
Companies 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 each Company’s credit
and Laurus shall retain its Liens in any and all Collateral.


 


23.           Assignment
By Laurus.  Laurus may assign any or all of the
Obligations together with any or all of the security therefor to any Person and
any such transferee shall succeed to all of Laurus’ rights with respect
thereto; provided that Laurus shall not be permitted to effect any such
assignment to a competitor of any Company unless and Event of Default has
occurred and is continuing.  Upon such
assignment, 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.  Each 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 such Company
were directly indebted to such holder in the amount of such participation.


 


24.           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 or among any 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.


 


25.           Application
of Payments.  Each 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 such Company’s behalf and each 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.


 


26.           Indemnity. 
Each Company hereby jointly and severally indemnifies and holds 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 


 


36

















 


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 ANY
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.


 


27.           Revival.  The
Companies further agree that to the extent any 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.


 


28.           Borrowing
Agency Provisions.


 


(a)           Each
Company hereby irrevocably designates Company Agent to be its attorney and
agent and in such capacity to borrow, sign and endorse notes, and execute and
deliver all instruments, documents, writings and further assurances now or
hereafter required hereunder, on behalf of such Company, and hereby authorizes
Laurus to pay over or credit all loan proceeds hereunder in accordance with the
request of Company Agent.


 


(b)           The
handling of this credit facility as a co-borrowing facility with a borrowing
agent in the manner set forth in this Agreement is solely as an accommodation
to the Companies and at their request. 
Laurus shall not incur any liability to any Company as a result
thereof.  To induce Laurus to do so and
in consideration thereof, each Company hereby indemnifies Laurus and holds
Laurus harmless from and against any and all liabilities, expenses, losses,
damages and claims of damage or injury asserted against Laurus by any Person
arising from or incurred by reason of the handling of the financing
arrangements of the Companies as provided herein, reliance by Laurus on any
request or instruction from Company Agent or any other action taken by Laurus
with respect to this Paragraph 28.


 


(c)           All Obligations
shall be joint and several, and the Companies shall make payment upon the
maturity of the Obligations by acceleration or otherwise, and such obligation
and liability on the part of the Companies shall in no way be affected by any
extensions, renewals and forbearance granted by Laurus to any Company, failure
of Laurus to give any Company notice of borrowing or any other notice, any
failure of Laurus to pursue to preserve its rights against any Company, the
release by Laurus of any Collateral now or thereafter acquired from any
Company, and such agreement by any Company to pay upon any notice issued
pursuant thereto is unconditional and unaffected by prior recourse by Laurus to
any Company or any Collateral for such Company’s Obligations or the lack thereof.


 


37

















 


(d)           Each
Company expressly waives any and all rights of subrogation, reimbursement,
indemnity, exoneration, contribution or any other claim which such Company may
now or hereafter have against the other or other Person directly or
contingently liable for the Obligations, or against or with respect to any
other’s property (including, without limitation, any property which is
Collateral for the Obligations), arising from the existence or performance of
this Agreement, until all Obligations have been indefeasibly paid in full and
this Agreement has been irrevocably terminated.


 


(e)           Each
Company represents and warrants to Laurus that (i) Companies have one or more
common shareholders, directors and officers, (ii) the businesses and corporate
activities of Companies are closely related to, and substantially benefit, the
business and corporate activities of Companies, (iii) the financial and other
operations of Companies are performed on a combined basis as if Companies
constituted a consolidated corporate group, (iv) Companies will receive a
substantial economic benefit from entering into this Agreement and will receive
a substantial economic benefit from the application of each Loan hereunder, in
each case, whether or not such amount is used directly by any Company and (v)
all requests for Loans hereunder by the Company Agent are for the exclusive and
indivisible benefit of the Companies as though, for purposes of this Agreement,
the Companies constituted a single entity.


 


29.           Notices.  Any
notice or request hereunder may be given to any Company, Company Agent 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

  



 


38

















 


	
  If to any Company,

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  or Company Agent:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Micro Component Technology, Inc.

  2340 West County Road C,

  St. Paul, Minnesota 55113-2528

  Attention: Chief Financial Officer

  Telephone: (651) 697-4000

  Telecopier: (651) 697-4200

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Best & Flanagan, LLP

  225 South Sixth St., Suite 4000,

  Minneapolis, Minnesota 55402

  Attention: James C. Diracles, Esq.

  Telephone: (612) 339-7121

  Facsimile: (612) 339-5897

  



 


or
such other address as may be designated in writing hereafter in accordance with
this Section 29 by such Person.


 


30.           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, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW.


 


(b)           EACH
COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED IN
THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO
HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN ANY COMPANY, ON THE ONE HAND,
AND LAURUS, ON THE OTHER HAND, 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
EACH 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. 
EACH COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION
IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND EACH COMPANY HEREBY
WAIVES ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE 


 


39

















 


OR FORUM NON CONVENIENS. 
EACH COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT
AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF
SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL ADDRESSED TO COMPANY AGENT AT THE ADDRESS SET FORTH IN SECTION
29 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF
COMPANY AGENT’S ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE
U.S. MAILS, PROPER POSTAGE PREPAID.


 


(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/OR ANY 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 HERETO OR THERETO.


 


31.           Limitation
of Liability.  Each 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.


 


32.           Entire
Understanding; Maximum Interest.  This Agreement and the Ancillary Agreements
contain the entire understanding among each 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 each 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. 
Nothing contained in this Agreement, any Ancillary Agreement or in any
document referred to herein or delivered in connection herewith shall be deemed
to establish or require the payment of a rate of interest or other charges in
excess of the maximum rate permitted by applicable law.  In the event that the rate of interest or
dividends required to be paid or other charges hereunder exceed the maximum
rate permitted by such law, any payments in excess of such maximum shall be
credited against amounts owed by the Companies to Laurus and thus refunded to
the Companies.


 


33.           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.


 


40

















 


34.           Survival.  The representations, warranties, covenants
and agreements made herein shall survive any investigation made by Laurus and
the closing of the transactions contemplated hereby to the extent provided
therein.  All statements as to factual matters
contained in any certificate or other instrument delivered by or on behalf of
the Companies pursuant hereto in connection with the transactions contemplated
herebly shall be deemed to be representations and warranties by the Companies
hereunder solely as of the date of such certificate or instrument.  All indemnities set forth herein shall
survive the execution, delivery and termination of this Agreement and the
Ancillary Agreements and the making and repaying of the Obligations.


 


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


 


36.           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.


 


37.           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.


 


38.           Publicity. 
Each Company hereby authorizes Laurus to make appropriate announcements
of the financial arrangement entered into by and among each 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.


 


39.           Joinder.  It
is understood and agreed that any Person that desires to become a Company
hereunder, or is required to execute a counterpart of this Agreement after the
date hereof pursuant to the requirements of this Agreement or any Ancillary
Agreement, shall become a Company hereunder by (a) executing a Joinder
Agreement in form and substance satisfactory to Laurus, (b) delivering
supplements to such exhibits and annexes to this Agreement and the Ancillary
Agreements as Laurus shall reasonably request and (c) taking all actions as
specified in this Agreement as would have been taken by such Company had it
been an original party to this Agreement, in each case with all documents
required above to be delivered to Laurus and with all documents and actions
required above to be taken to the reasonable satisfaction of Laurus.


 


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


 


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


 


“THIS
NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE, STATE SECURITIES LAWS. 
THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR


 


41

















 


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 MICRO COMPONENT TECHNOLOGY, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.”


 


(b)           Any shares
of Common Stock issued pursuant to 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
SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO MICRO
COMPONENT TECHNOLOGY, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”


 


(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 MICRO COMPONENT TECHNOLOGY, INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.”


 


42

















 


41.           Laurus
hereby acknowledges that the Existing Indebtedness is being repaid in full with
the proceeds of the indebtedness incurred in connection with the execution of
this Agreement and, following such repayment, the notes evidencing such
indebtedness shall be terminated. 
Furthermore, following such repayment, the Parent shall no longer be
required to register the shares of common stock of the Parent underlying the
Existing Indebtedness.  Each of the
Parent and Laurus hereby acknowledge and agree that nothing contained in this
Section 41, elsewhere in this Agreement or in any Ancillary Agreement shall
effect the existence or validity of any warrant, option or other security
issued by the Parent to Laurus other than the Existing Indebtedness, and Laurus
retains in all respects all rights previously granted to Laurus by the Parent
with respect to any such warrant, option or other security.


 


 


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


 


43

















 


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


 


 


	
   

  	
  MICRO COMPONENT TECHNOLOGY, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						



 


44

















 


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 sum of (i) ninety percent (90%) of the net face
amount of Eligible Accounts; plus (ii) the lesser of (x) fifty percent (50%)
of Eligible Inventory and (y) fifty percent (50%) of Eligible Accounts; plus
(iii) the remainder of (A) the lesser of (x) thirty percent (30%) of Eligible
Purchase Orders, (y) fifty percent (50%) of Eligible Inventory and (z) One
Million Dollars ($1,000,000), minus (B) the amount calculated pursuant
to subsection (ii) of this definition.


 


“Affiliate”
means, with respect to any Person, (a) any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with such Person or (b) any other 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.


 


“Agreement”
shall mean this Security and Purchase Agreement, as amended, restated, modified
or otherwise supplemented from time to time.


 


“Ancillary
Agreements” means the Notes, the Warrants, the Registration Rights
Agreements, each Security Document 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 any
Company, any of its Subsidiaries 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 or among any Company and Laurus, as each of the same may
be amended, supplemented, restated or otherwise modified from time to time.


 


 “Balance Sheet Date” has the meaning
given such term in Section 12(f)(ii).


 


“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.


 


“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).


 


“Charter”
has the meaning given such term in Section 12(c)(iv).


 


“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 any Company shall first receive proceeds of
the initial Loans or the date hereof, if no Loan is made under the facility on
the date hereof.


 


“Code”
has the meaning given such term in Section 15(i).


 


“Collateral”
means all of each Company’s property and assets, whether real or personal,
tangible or intangible, and whether now owned or hereafter acquired, 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:


 


(a)           all
Inventory;


 


(b)           all
Equipment;


 


(c)           all
Fixtures;


 


(d)           all
Goods;


 


(e)           all
General Intangibles;


 


(f)            all
Accounts;


 


2

















 


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


 


(h)           all
Investment Property;


 


(i)            all
Stock;


 


(j)            all
Chattel Paper;


 


(k)           all
Letter-of-Credit Rights;


 


(l)            all
Instruments;


 


(m)          all
commercial tort claims set forth on Schedule 1(A);


 


(n)           all
Books and Records;


 


(o)           all
Intellectual Property;


 


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


 


(q)           (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 any Company
(whether for safekeeping, custody, pledge, transmission or otherwise); and


 


(r)            all
products and Proceeds of all or any of the foregoing, tort claims and all
claims and other rights to payment including (i) insurance claims against third
parties for loss of, damage to, or destruction of, the foregoing Collateral 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.


 


“Common
Stock” means the shares of stock representing the Parent’s common equity
interests.


 


“Company
Agent” means Micro Component Technology, Inc., a Minnesota corporation.


 


“Contract
Rate” has the meaning given such term in the respective Note. “Default”
means any act or event that, with the giving of notice or passage of time or
both, would constitute an Event of Default.


 


“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 Lockboxes.


 


“Disclosure
Controls” has the meaning given such term in Section 12(f)(iv).


 


3

















 


“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.


 


“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 each 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 ninety (90) 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 ninety (90) days from invoice date, provided,
however, that any Account considered current under the Company’s Foreign
Credit Insurance Association/Great American Insurance Company policy (net of
any applicable deductibles) shall be considered an Eligible Account; (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; provided,
further, that any Account considered current under the Company’s Foreign
Credit Insurance Association/Great American Insurance Company policy (net of
any applicable deductibles) shall be considered an Eligible Account; (k) Laurus
has a first priority perfected Lien (except foreign Accounts) 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 any Company; (m) is payable to any 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 any Company is indebted; (o) is net of any
returns, discounts, claims, credits and allowances; (p) if the Account arises
out of contracts between any Company and the United States, any state, or any
department, agency or instrumentality of any of them, such 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 any Company or work, labor and/or services
rendered by any 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) the
respective Company’s right to payment is absolute and not contingent upon the
fulfillment of any condition whatsoever with the exception of applicable acceptance
provisions for which such amounts will be deemed ineligible; (u) the respective



 


4

















 


Company is able to bring suit and enforce its remedies
against the Account Debtor through judicial process, provided, however,
that any Account considered current under the respective Company’s Foreign
Credit Insurance Association/Great American Insurance Company policy (net of
any applicable deductibles) shall be considered an Eligible Account; (v) does
not represent interest payments, late or finance charges owing to any Company
and (w) is otherwise satisfactory to Laurus as determined by Laurus in the
exercise of its sole discretion.  In the
event any Company requests that Laurus include within Eligible Accounts certain
Accounts of one or more of any 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.


 


“Eligible
Inventory” means Inventory owned by a Company and related to a Company’s
Strip product family (as described in more detail in Schedule A hereto),
excluding the Inventory related to the Polaris product family(as
described in more detail in Schedule B hereto) which, in any such case,
Laurus, in its sole and absolute discretion, determines:  (a) is subject to a first priority perfected
Lien in favor of Laurus and is subject to no other Liens whatsoever (other than
Permitted Liens); (b) is located on premises with respect to which Laurus has
received a landlord or mortgagee waiver acceptable in form and substance to
Laurus; (c) is not in transit; (d) is in good condition and meets all standards
imposed by any governmental agency, or department or division thereof having
regulatory Governmental Authority over such Inventory, its use or sale
including the Federal Fair Labor Standards Act of 1938 as amended, and all
rules, regulations and orders thereunder; (e) is currently either usable or
salable in the normal course of such Company’s business; (f) is not placed by
such Company on consignment or held by such Company on consignment from another
Person; (g) is in conformity with the representations and warranties made by
such Company to Laurus with respect thereto; (h) is not subject to any
licensing, patent, royalty, trademark, trade name or copyright agreement with
any third parties; (i) does not require the consent of any Person for the
completion of manufacture, sale or other disposition of such Inventory and such
completion, manufacture or sale does not constitute a breach or default under
any contract or agreement to which such Company is a party or to which such
Inventory is or may be subject; (j) is not work-in-process; (k) is covered by
casualty insurance acceptable to Laurus and under which Laurus has been named
as a lender’s loss payee and additional insured; and (l) not to be ineligible
for any other reason.  In the event
Company requests that Laurus include within Eligible Inventory certain
Inventory of one or more of any 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.


 


“Eligible
Purchase Orders” means and includes each Purchase Order which conforms to
the following criteria:  (a) a Purchase
Order that relates to products that would be included within the definition of “Eligible
Inventory” if such products were owned by a Company, and (b) 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 Purchase Orders certain Purchase Orders
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 


 


5

















 


such documentation (including, without limitation,
guaranty and security documentation) as Laurus may require in its sole
discretion.


 


“Eligible
Subsidiary” means each Subsidiary of the Parent set forth on Exhibit A
hereto, as the same may be updated from time to time with Laurus’ written
consent.


 


“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”
has the meaning given such term in Section 12(bb).


 


“Event
of Default” means the occurrence of any of the events set forth in
Section 19.


 


“Exchange
Act” means the Securities Exchange Act of 1934, as amended.


 


“Exchange
Act Filings” means the Parent’s filings under the Exchange Act made prior
to the date of this Agreement.


 


“Existing
Indebtedness” means certain obligations owed by the Companies to Laurus
under (i) that certain Secured Revolving Note dated March 8, 2004, (ii) that
certain Secured Convertible Minimum Borrowing Note dated March 8, 2004, (iii)
that certain Secured Convertible Term Note dated March 8, 2004 and (iv) that
certain Secured Convertible Term Note dated April 29, 2005, as each have been
amended, modified or supplemented from time to time.


 


“Financial
Reporting Controls” has the meaning given such term in
Section 12(f)(v).


 


“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 given such term 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, 


 


6

















 


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.


 


“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.


 


“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 patents, trademarks, service marks, trade
names, copyrights, trade secrets, Licenses, information and other proprietary
rights and processes.


 


“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 


 


7

















 


performance under a letter of credit, whether or not
such Person, as beneficiary, has demanded or is entitled to demand payment or
performance.


 


“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”
means the Revolving Loans and the Term Loan and all other extensions of credit
hereunder and under any Ancillary Agreement.


 


“Lockboxes”
has the meaning given such term in Section 8(a).


 


“Material
Adverse Effect” means a material adverse effect on (a) the business,
assets, liabilities, condition (financial or otherwise), properties, operations
or prospects of any Company or any of its Subsidiaries (taken individually and
as a whole), (b) any Company’s or any of its Subsidiary’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.


 


 “NASD” has the meaning given such term
in Section 13(b).


 


“Notes”
means the Secured Non-Convertible Revolving Note and the Secured
Non-Convertible Term Note made by Companies in favor of Laurus in connection
with the transactions contemplated hereby, as each of the same may be amended,
supplemented, restated and/or otherwise modified from time to time.


 


“Obligations”
means all Loans, all advances, debts, liabilities, obligations, covenants and
duties owing by each Company and each of its Subsidiaries 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 any Company and/or each of its Subsidiaries 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 


 


8

















 


commencement of any insolvency, reorganization or like
proceeding, whether or not a claim for post-filing or post-petition interest is
allowed or allowable in such proceeding), charges or any other payments each
Company and each of its Subsidiaries is required to make by law or otherwise
arising under or as a result of this Agreement, the Ancillary Agreements or
otherwise, together with all reasonable expenses and reasonable attorneys’ fees
chargeable to the Companies’ or any of their Subsidiaries’ accounts or incurred
by Laurus in connection therewith.


 


“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 worker’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 Companies
and their Subsidiaries, as applicable, 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
Companies and their Subsidiaries, as applicable, in conformity with GAAP; and
which 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 Schedule 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.


 


“Principal
Market” means the NASD Over The Counter Bulletin Board, NASDAQ Capital
Market, NASDAQ National Market System, American Stock Exchange or New York
Stock Exchange (whichever of the foregoing is at the time the principal trading
exchange or market for the Common Stock).


 


“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 any 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 any 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 any 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 any Company against third parties 


 


9

















 


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.


 


“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.


 


“Purchase
Order” means a written authorization from customers used to request the
Company to supply goods and services in return for a specified payment and
providing specifications and quantities, and which becomes a legally binding
contract once the the Company accepts it.


 


“Registration
Rights Agreements” means that certain Registration Rights Agreement dated
as of the Closing Date by and between the Parent and Laurus and each other
registration rights agreement by and between the Parent and Laurus, as each of
the same may be amended, modified and supplemented from time to time.


 


“Revolving
Loans” shall have the meaning given such term in Section 2(a)(i).


 


 “Revolving Term” means the Closing Date
through March 8, 2008, subject to acceleration at the option of Laurus upon the
occurrence of an Event of Default hereunder or other termination hereunder.


 


“SEC”
means the Securities and Exchange Commission.


 


“SEC
Reports” has the meaning given such term in Section 12(u).


 


“Secured
Non-Convertible Revolving Note” means that certain Secured Non-Convertible
Revolving Note dated as of the Closing Date made by the Companies in favor of
Laurus in the original face amount of Four Million Dollars ($4,000,000), as the
same may be amended, supplemented, restated and/or otherwise modified from time
to time.


 


“Secured
Non-Convertible Term Note” means that certain Secured Non-Convertible Term
Note dated as of the Closing Date made by the Companies in favor of Laurus 


 


10

















 


in the original face amount of Five Million Dollars
($5,250,000), as the same may be amended, supplemented, restated and/or
otherwise modified from time to time.


 


 “Securities” means the Notes, the
Warrants and the shares of Common Stock which may be issued pursuant to
exercise of such Warrants.


 


“Securities
Act” has the meaning given such term in Section 12(r).


 


“Security
Documents” means all security agreements, mortgages, cash collateral
deposit letters, pledges and other agreements which are executed by any Company
or any of its Subsidiaries in favor of Laurus.


 


“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” means, with respect to any
Person, (i) any other Person 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 or other governing body of such other Person, are
owned, directly or indirectly, by such Person or (ii) any other Person in which
such Person owns, directly or indirectly, more than 50% of the equity interests
at such time.


 


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


 


“Term
Loan” has the meaning given such term in Section 2(a)(c).


 


“Total
Investment Amount” means Nine Million Two Hundred Fifty Thousand Dollars
($9,250,000).


 


“UCC”
means the Uniform Commercial Code as the same may, from time to 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 


 


11

















 


different Articles or Divisions of the UCC, the
definition of such term contained in Article or Division 9 shall govern.


 


“Warrant
Shares” has the meaning given such term in Section 12(a).


 


“Warrants”
means that certain Common Stock Purchase Warrant dated as of the Closing Date
made by the Parent in favor of Laurus and each other warrant made by the Parent
in favor Laurus, as each of the same may be amended, restated, modified and/or
supplemented from time to time.


 


12

















 


Exhibit A


 


Eligible Subsidiaries


 


None


 

















 


Exhibit B


 


Borrowing Base
Certificate


 


[To be inserted]