Document:

usdcc_8k-1001.htm

    
      

    

    Exhibit
      10.1

    
      

       

      THESE
        SECURITIES HAVE NOT BEEN REGISTERED WITH THE U.S. SECURITIES AND EXCHANGE
        COMMISSION IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES
        ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
        OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
        THE
        SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION
        NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
        ACT.

       

      THIS
        NOTE IS ISSUED WITH ORIGINAL ISSUE DISCOUNT FOR PURPOSES OF SECTIONS 1271,
        1272
        AND 1273 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.  BEGINNING
        NO LATER THAN 10 DAYS AFTER THE ISSUE DATE OF THIS NOTE, F. KIM COX, C/O
        U.S.
        DRY CLEANING CORPORATION, 125 E. TAHQUITZ CANYON, SUITE 203, PALM SPRINGS,
        CA
        92262, WILL MAKE AVAILABLE, UPON REQUEST OF THE HOLDER OF THIS NOTE, THE
        ISSUE
        PRICE OF THIS NOTE PER PRINCIPAL AMOUNT OF $1,000 AT MATURITY; THE ISSUE
        DATE OF
        THIS NOTE; THE YIELD-TO-MATURITY OF THIS NOTE PER ANNUM, COMPOUNDED
        SEMI-ANNUALLY; AND THE TOTAL AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THIS NOTE
        AS
        OF THE ISSUE DATE PER PRINCIPAL AMOUNT OF $1,000 AT
        MATURITY.

       

      U.S.
        DRY CLEANING CORPORATION

       

      10%
        SENIOR SECURED CONVERTIBLE NOTE

       

      
        	
                Note
                  No.:  ___

              	
                Original
                  Principal Amount: $______________________

              
	
                Issuance
                  Date:  ________, 2007

              	
                Palm
                  Springs, California

              

      

       

      This
        Note
        (this “Note”) is one of a duly authorized issue of Notes issued
        by U.S. DRY CLEANING CORPORATION, a corporation duly organized
        and existing under the laws of the State of Delaware (the
“Company”), designated as the Company's 10% Senior Secured
        Convertible Notes in an aggregate principal amount of up to Twenty Million
        U.S.
        Dollars (U.S. $20,000,000) (the “Notes”).  All
        principal and unpaid interest under this Note shall become due and payable
        on
        ________, 2009 (the “Maturity Date”).

       

      For
        Value
        Received, the Company hereby promises to pay to the order of
        ________________, or its registered assigns or
        successors-in-interest (“Holder”), the principal sum of
        _________________________________ (U.S. $__________) together with all accrued
        but unpaid interest thereon, if any, on the Maturity Date, in accordance
        with
        the terms hereof.  Interest on the unpaid principal balance hereof
        shall accrue at the rate of 10.0% per annum from the issuance date specified
        above (the “Issuance Date”), until the same becomes due and
        payable on the Maturity Date, or such earlier date upon acceleration in
        accordance with the terms hereof or of the other Transaction Documents (as
        defined below).  Interest on this Note shall accrue daily commencing
        on the Issuance Date and shall be computed on the basis of a 360-day year,
        30-day months and actual days elapsed and shall be payable in accordance
        with
        Section 1 hereof.  Unless otherwise agreed or required by applicable
        law, payments will be applied first to any unpaid collection costs, then
        to
        unpaid interest and fees and any remaining amount to principal.

       

      Except
        as
        otherwise provided herein, all payments of principal and interest on this
        Note
        shall be made in lawful money of the United States of America by wire transfer
        of immediately available funds to such account as the Holder may from time
        to
        time designate by written notice in accordance with the provisions of this
        Note.  This Note may be prepaid in whole or in part at any time
        without penalty.  Whenever any amount expressed to be due by the terms
        of this Note is due on any day which is not a Business Day (as defined below),
        the same shall instead be due on the next succeeding day which is a Business
        Day.

       

       

      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

       

      Capitalized
        terms used herein and not otherwise defined shall have the meanings set forth
        in
        the Subscription Agreement dated on or about the Issuance Date pursuant to
        which
        the Note was originally issued (the “Subscription
        Agreement”).  For purposes hereof the following terms shall
        have the meanings ascribed to them below:

       

      “Affiliate”
        shall mean, with respect to any specified Person, any other Person who,
        directly, or indirectly through one or more intermediaries, is in control
        of, is
        controlled by, or is under common control with, such specified Person. For
        purposes of this definition: (a) "control" (including its correlative meanings,
        the terms "controlling," "controlled by" and "under common control with")
        means
        the possession directly or indirectly of the power to direct or cause the
        direction of the management and policies of a Person, whether through the
        ownership of voting securities or other equity interest, or by contract or
        otherwise; and (b) “Person” means any individual, corporation, partnership,
        trust, limited liability company, association or other entity.

       

      “Business
        Day” shall mean any day other than a Saturday, Sunday
        or
        a day on which commercial banks in the City of New York are authorized or
        required by law or executive order to remain closed.

       

      “Common
        Stock” shall mean the shares of common stock, par value $.001 per
        share, of the Company.

       

      “Conversion
        Price” shall be $2.50 (U.S.) per share, as adjusted as
        set forth herein.

       

      “Convertible
        Securities” means any convertible securities, warrants,
        stock options or other rights to subscribe for or to purchase or exchange
        for,
        shares of Common Stock.

       

       

      “Debt”
        shall mean indebtedness of any kind including without limitation (a) all
        obligations for borrowed money; (b) any direct or contingent obligations
        arising under letters of credit (including standby and commercial), banker’s
        acceptances, bank guaranties, surety bonds and similar instruments; (c) all
        obligations to pay the deferred purchase price of property or services, and
        indebtedness secured by a lien on property owned or being purchased (including
        indebtedness arising under conditional sales or other title retention
        agreements), whether or not such indebtedness shall have been assumed by
        the
        Company or is limited in recourse; and (d) all guarantees in respect of the
        foregoing, including without limitation any assurance, agreement, letter of
        responsibility, letter of awareness, undertaking or arrangement with respect
        to
        the payment or performance of any of the foregoing, whether direct, indirect
        or
        contingent.

       

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

       

      “Guarantees”
        shall mean, collectively, the Guarantees provided by each of the operating
        subsidiaries of the Company on the signature page thereof.

       

      “Principal
        Amount” shall refer to any unpaid principal amounts outstanding
        under this Note.

       

      “Principal
        Market” shall mean the principal market, exchange or
        quotation service on which the Common Stock is then listed for trading or
        quoted.

       

      “Registration
        Statement” shall have the meaning set forth in the Subscription
        Agreement.

       

       

      
        
           

        

        
          2

          
            

          

        

        
           

        

      

       

      “Securities
        Act” shall mean the Securities Act of 1933, as
        amended.

       

      “Trading
        Day” shall mean a day on which there is trading on the Principal
        Market.

       

      “Transaction
        Documents” shall mean, collectively, this Note, the Subscription
        Agreement, the Security Agreement (as defined below), the Guarantees, and
        all
        other documents, certificates, resolutions and agreements to be entered into,
        executed and/or delivered in connection with the loan evidenced by this
        Note.

       

      “Underlying
        Shares”  means the shares of Common Stock into which
        this Note is convertible in accordance with the terms hereof.

       

       

      The
        following terms and conditions shall apply to this Note:

       

       

      Section
        1.              Payments
        of Principal and Interest.

       

       

      (a)           Interest
        Payments.  The Company shall pay all accrued but unpaid interest
        on the Principal Amount of this Note (the “Quarterly Amount”),
        on the first business day of each consecutive calendar quarter (each an
“Interest Payment Date”) beginning on __________,
        2008.  The Quarterly Amount shall be paid in cash.

       

      (b)           Payment
        of Principal.  Subject to the provisions hereof, the Principal
        Amount of this Note and all remaining accrued and unpaid interest shall be
        due
        and payable on the Maturity Date.  Payment of the Principal Amount
        shall be effected in cash.

       

      (c)           Taxes.  The
        Company may withhold and pay over to the relevant authorities any appropriate
        tax or other legally required withholdings from any interest payment to be
        made
        to the Holder to the extent that such withholding is required by the Internal
        Revenue Code or any other applicable law, rule, or regulation.

       

      (d)           Security.  This
        Note is secured by a security interest in certain assets of the Company pursuant
        to that certain Security Agreement, dated of even date herewith, among the
        Company, the Holder, and the other “Subscribers” under the Subscription
        Agreement (the “Security Agreement”). The obligations of the
        Company under this Note are guaranteed by the Guarantees provided by each
        operating subsidiary of the Company.

       

      Section
        2.              Seniority.  The
        obligations of the Company hereunder shall rank senior to all other Debt
        of the
        Company and its subsidiaries, whether now or hereinafter existing, except
        for a
        credit facility with a bank or other financial institution whose lending
        activities are regulated by law, in an amount of not more than $5,000,000
        entered into after the date hereof secured solely by accounts receivable
        and
        inventory, and equipment (capital) leases, and the proceeds
        thereof.

       

       

      
        
           

        

        
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      Section
        3.              Defaults
        and Remedies.

       

       

      (a)           Events
        of Default.      An “Event of
        Default” is:  (i) a default in payment of the Principal
        Amount, when due, or failure to pay any accrued but unpaid interest thereon
        of
        the Note within five (5) days after the date such interest payment is due;
        (ii)
        a default in the timely issuance of the Underlying Shares upon and in accordance
        with the terms hereof (where for purposes of this Note, the term timely shall
        mean within ten (10) days following the conversion date); (iii) failure by
        the
        Company for thirty (30) days after written notice has been received by the
        Company to comply with any other material provision of this Note, the
        Subscription Agreement or the Transaction Documents; (iv) a material breach
        by
        the Company of its representations or warranties in the Subscription Agreement
        or  Transaction Documents that remains uncured for thirty (30) days
        after notice  to the Company; (v) any event or condition shall occur
        which (x) results in the acceleration of the maturity of any material Debt
        (other than this Note) of the Company or any of its subsidiaries, or (y)
        enables
        (or, with the giving of notice or lapse of time or both, would enable) the
        holder of such material Debt or any or person acting on behalf of such holder’s
        behalf to accelerate the maturity thereof; or (vi) if the Company or any
        of its
        subsidiaries is subject to any Bankruptcy Event.  “Bankruptcy
        Event” means any of the following events: (a) the Company or any
        subsidiary commences a case or other proceeding under any bankruptcy,
        reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
        insolvency or liquidation or similar law of any jurisdiction relating to
        the
        Company or any subsidiary thereof; (b) there is commenced against the Company
        or
        any subsidiary any such case or proceeding that is not dismissed within 60
        days
        after commencement; (c) the Company or any subsidiary is adjudicated insolvent
        or bankrupt or any order of relief or other order approving any such case
        or
        proceeding is entered; (d) the Company or any subsidiary suffers any appointment
        of any custodian or the like for it or any substantial part of its property
        that
        is not discharged or stayed within 60 days; (e) the Company or any subsidiary
        makes a general assignment for the benefit of creditors; (f) any material
        writ
        of attachment shall be levied against any property or other assets of the
        Company or any subsidiary; (g) the Company or any subsidiary, by any act
        or
        failure to act, indicates its consent to, approval of or acquiescence in
        any of
        the foregoing or takes any corporate or other action for the purpose of
        effecting any of the foregoing; (h) the Company or any subsidiary is unable,
        or
        admits in writing its inability, to pay its debts generally as they mature;
        or
        (i) the Company ceases to carry on all or substantially all of its business
        or
        operations for a period in excess of 15 consecutive days (other than due
        to
        force majeure).

       

      (b)           Remedies.  If
        an Event of Default occurs and is continuing with respect to this Note, all
        outstanding principal and accrued but unpaid interest payable by the Company
        hereunder, together with all fees, costs and expenses (including without
        limitation reasonable attorneys’ fees and expenses) as may be incurred by the
        Holder in collecting any sums due on this Note or otherwise enforcing any
        of its
        rights, shall, upon written notice to the Company (except in the case of
        a
        Bankruptcy Event, which shall be without notice), become immediately due
        and
        payable.  In addition to the foregoing remedies, upon the occurrence
        and during the continuance of any Event of Default, Holder may exercise any
        other right, power or remedy granted to it by this Note, the Transaction
        Documents or otherwise permitted to it by law, either by suit in equity or
        by
        action at law, or both, it being expressly understood that no such remedy
        is
        intended to be exclusive of any other remedy or remedies; but each and every
        remedy shall be cumulative and shall be in addition to every other remedy
        given
        herein or now or hereafter existing at law or in equity or by statute, and
        may
        be exercised from time to time as often as may be deemed expedient by the
        Holder, nor shall the giving, taking or enforcement of any other or additional
        security, collateral or guaranty for the payment of the indebtedness under
        this
        Note operate to prejudice, waive or affect the security of this Note or any
        rights, powers or remedies hereunder, nor shall the Holder be required to
        first
        look to, enforce or exhaust such other or additional security, collateral
        or
        guaranties. All covenants, conditions, provisions, warranties, guaranties,
        indemnities and other undertakings of the Company contained in this Note,
        or in
        any document referred to herein or in any agreement supplementary hereto
        or in
        any other Transaction Documents, shall be deemed cumulative to and not in
        derogation or substitution of any of the terms, covenants, conditions, or
        agreements of the Company contained herein.

       

       

       

      
        
           

        

        
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      Section
        4.               Covenants;
        Representations and Warranties.

       

      (a)           Covenants.  The
        Company hereby covenants and agrees that, for so long as any Notes remain
        outstanding, unless the Required Holders (as defined in Section 6(e)(i) below)
        shall otherwise consent in writing, the Company shall not, and shall not
        permit
        any subsidiary to, directly or indirectly after the date hereof (a) create,
        assume, or otherwise become or remain obligated in respect of, or permit
        or
        suffer to exist or to be created, assumed or incurred or to be outstanding
        any
        Debt, other than as permitted in Section 2 of this Note; (b) assign, transfer,
        create any encumbrance, mortgage pledge, lien or charge upon, or otherwise
        dispose of, any Collateral (as defined in the Security Agreement) or any
        other
        assets, except in the ordinary course of business or to create Permitted
        Liens
        (as defined in the Security Agreement) and except that the Company may sell
        assets if within 180 days after completing any such sale substantially all
        of
        the proceeds thereof are used to purchase additional assets for use in the
        Company’s business; (c) declare or pay any dividends, or make any distribution
        of cash or property, or both, to any person or entity in respect of any of
        the
        shares of the capital stock or other equity securities of the Company, or
        redeem, purchase or otherwise acquire for consideration any securities or
        shares
        of the capital stock or other equity securities of the Company; (d) enter
        into
        any contract, agreement or transaction with any Affiliate of the Company
        except
        in the ordinary course of business consistent with past practice; (e) merge
        with
        or consolidate into any other corporation or other entity, or sell, lease
        or
        other transfer all or substantially all of its business, properties or assets
        to
        any other corporation or other entity, unless in each such case the successor
        corporation or entity executes an agreement, in form and substance reasonably
        acceptable to the Holders, pursuant to which such successor shall assume
        all of
        the Company’s obligations under this Note; or (f) make any material change in
        the character of its business.

       

      (b)           Representations
        and Warranties.  The Company represents and warrants to Holder
        that:

       

      (i)           The
        Company is a corporation duly organized, validly existing and in good standing
        under the laws of Delaware; has all requisite corporate power and authority
        to
        own or lease and operate its properties and to carry on its business as now
        conducted; and is duly qualified or licensed to do business as a foreign
        corporation in all jurisdictions in which it owns or leases property or in
        which
        the conduct of its business requires it to so qualify or be licensed, except
        where the failure to be so qualified could not reasonably be expected to
        have a
        material adverse effect on the Company.

       

      (ii)           The
        Company has all requisite power and authority to enter into and perform all
        of
        its obligations under this Note and the other Transaction Documents and to
        carry
        out the transactions contemplated hereby and thereby. The Company has taken
        all
        corporate or stockholder actions necessary to authorize it to enter into
        and
        perform all of its obligations under this Note and the other Transaction
        Documents and to consummate the transactions contemplated hereby and thereby.
        The execution and delivery of this Note and the other Transaction Documents
        does
        not, and the consummation of the transactions contemplated hereby and thereby,
        and compliance with the provisions hereof and thereof, will not conflict
        with,
        or result in any violation of, or default (with or without notice or lapse
        of
        time, or both) under, or give rise to a right of termination, cancellation
        or
        acceleration of any obligation or loss of a benefit under, or result in the
        creation of any lien upon any of the properties or assets of the Company
        under,
        (i) its certificate of incorporation, by-laws or other governing documents,
        (ii)
        any agreement, contract, lease, license, mortgage, indenture, guarantee,
        or
        other instrument, undertaking or commitment to which the Company is a party
        or
        by which it or its properties or assets are bound or (iii) any judgment,
        order,
        injunction, decree, statute, law, ordinance, rule or regulation applicable
        to
        the Company or its properties or assets.

       

       

      
        
           

        

        
          5

          
            

          

        

        
           

        

      

       

      (iii)           This
        Note has been duly executed and delivered and is, and each other Transaction
        Document will be, when executed and delivered, the legal, valid and binding
        obligation of the Company, enforceable in accordance with their respective
        terms, except as (A) the enforceability thereof may be limited by bankruptcy,
        insolvency or similar laws affecting the enforcement of creditors’ rights
        generally and (B) the availability of equitable remedies may be limited by
        equitable principles of general applicability.

       

       

      Section
        5.              Conversion.

       

      (a)           Conversion
        by Holder.  From and after the Issuance Date and subject to the
        terms hereof and restrictions and limitations contained herein, the Holder
        shall
        have the right, at Holder's option, at any time and from time to time to
        convert, in part or in whole, the outstanding Principal Amount and all accrued
        and unpaid interest under this Note into shares of the Company’s common stock,
        par value $.001 per share (“Common Stock”), at the then
        applicable Conversion Price, by delivering to the Company a fully executed
        notice of conversion in the form of conversion notice attached hereto as
        Exhibit A (the “Conversion Notice”), which may be
        transmitted by facsimile (with the original mailed on the same date by certified
        or registered mail, postage prepaid and return receipt
        requested).  The Conversion Notice shall specify a date for the
        conversion to be effective, which date shall be no earlier than the date
        on
        which the Conversion Notice is delivered (the “Conversion
        Date”), and the Conversion Notice shall be irrevocable when
        delivered.

       

      (b)           Conversion
        Procedures.  Upon conversion of this Note pursuant to this Section
        5, the outstanding Principal Amount and/or accrued interest hereunder shall
        be
        converted into such number of fully paid, validly issued and non-assessable
        shares of Common Stock, free of any liens, claims and encumbrances, as is
        determined by dividing the outstanding Principal Amount and/or accrued interest
        being converted by the then applicable Conversion Price.  The Company
        will deliver to the Holder not later than five (5) Trading Days after the
        Conversion Date, a certificate or certificates which shall be free of
        restrictive legends and trading restrictions (assuming that the Registration
        Statement has been declared effective), representing the number of shares
        of
        Common Stock being acquired upon the conversion of this Note.

       

      (c)           Conversion
        Price Adjustments.

       

      (i)           Stock
        Dividends, Splits and Combinations.  If the Company or any of its
        subsidiaries, at any time while the Note is outstanding (A) shall pay a stock
        dividend or otherwise make a distribution or distributions on any equity
        securities (including instruments or securities convertible into or exchangeable
        for such equity securities) in shares of Common Stock, (B) subdivide outstanding
        Common Stock into a larger number of shares, (C) combine outstanding Common
        Stock into a smaller number of shares, or (D) issues new securities by
        reclassification of the shares of Common Stock of the Company, then, and
        in each
        such case, the Conversion Price in effect immediately prior to such event
        or the
        record date therefor, whichever is earlier, shall be adjusted so that the
        Holder
        shall be entitled to receive the number of shares of Common Stock or other
        securities of the Company which such Holder would have owned or have been
        entitled to receive after the occurrence of any of the events described above,
        had such Note been surrendered for conversion immediately prior to the
        occurrence of such event or record date therefore, whichever is
        earlier.  Any adjustment made pursuant to this Section 5(c) shall
        become effective (x) in the case of any such dividend or distribution,
        immediately after the close of business on the record date for the determination
        of holders of shares of Common Stock entitled to receive such dividend or
        distribution, or (y) in the case of such subdivision, reclassification or
        combination, at the close of business on the day upon which such corporate
        action becomes effective.

       

       

      
        
           

        

        
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      (ii)           Distributions.  If
        the Company or any of its subsidiaries, at any time while this Note is
        outstanding, shall distribute to all holders of Common Stock evidences of
        its
        indebtedness or assets or cash or rights or warrants to subscribe for or
        purchase any security of the Company or any of its subsidiaries (excluding
        those
        referred to in Section 5(c)(i) above), then concurrently with such distributions
        to holders of Common Stock, the Company shall distribute to the Holder of
        this
        Note the amount of such indebtedness, assets, cash or rights or warrants
        which
        the Holder of this Note would have received had this Note been converted
        into
        Common Stock at the then applicable the Conversion Price immediately prior
        to
        the record date for such distribution.

       

      (iii)           Rounding
        of Adjustments. All calculations under this Section
        5(c) shall be made to the nearest cent or the nearest 1/100th of a share,
        as the
        case may be.

       

      (iv)           Notice
        of Adjustments. Whenever the Conversion Price is
        adjusted pursuant to this Section 5(c), the Company shall promptly deliver
        to
        the Holder of this Note, a written notice setting forth the Conversion Price
        after such adjustment and setting forth a brief statement of the facts requiring
        such adjustment, provided that any failure to so provide such notice shall
        not
        affect the automatic adjustment hereunder.

       

      (v)           Fundamental
        Changes.  In case any transaction or event (including, without
        limitation, any merger, consolidation, combination, recapitalization, sale
        of
        assets, tender or exchange offer, reclassification, compulsory share exchange
        or
        liquidation) shall occur in which all or substantially all outstanding shares
        of
        Common Stock are converted into or exchanged or acquired for or constitute
        the
        right to receive stock, or other securities, cash, property or assets (each,
        “Fundamental Change”), the Holder of this Note outstanding
        immediately prior to the occurrence of such Fundamental Change shall have
        the
        right upon any subsequent conversion to receive the kind and amount of stock,
        other securities, cash, property or assets that such holder would have received
        if such share had been converted immediately prior to such Fundamental
        Change.

       

      (d)           Reservation
        and Issuance of Underlying Securities.  The Company covenants that
        it will at all times reserve and keep available out of its authorized and
        unissued Common Stock solely for the purpose of issuance upon conversion
        of this
        Note, free from preemptive rights or any other actual contingent purchase
        rights
        of persons other than the Holder of this Note, not less than such number
        of
        shares of Common Stock as shall be issuable (taking into account the adjustments
        under this Section 5) upon the conversion of this Note hereunder in Common
        Stock.  The Company covenants that all shares of Common Stock that
        shall be so issuable shall, upon issue, be duly authorized, validly issued,
        fully paid, nonassessable and freely tradable, and free of all taxes, liens
        and
        charges created by the Company.  If the Common Stock is or becomes
        listed on any national securities exchange or quoted on The Nasdaq Stock
        Market,
        the Company shall at its expense cause all shares of Common Stock issuable
        upon
        conversion of this Note to be listed on such exchange subject to notice of
        issuance or quoted on The Nasdaq Stock Market, as the case may be.

       

      (e)           No
        Fractions.  Upon a conversion hereunder the Company shall not be
        required to issue stock certificates representing fractions of shares of
        Common
        Stock, but may if otherwise permitted, make a cash payment in respect of
        any
        final fraction of a share based on the closing price of a share of Common
        Stock
        at such time.  If the Company elects not, or is unable, to make such
        cash payment, the Holder shall be entitled to receive, in lieu of the final
        fraction of a share, one whole share of Common Stock.

       

       

      
        
           

        

        
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      (f)           Charges,
        Taxes and Expenses.  Issuance of certificates for shares of Common
        Stock upon the conversion of this Note shall be made without charge to the
        holder hereof for any issue or transfer tax or other incidental expense in
        respect of the issuance of such certificate, all of which taxes and expenses
        shall be paid by the Company, and such certificates shall be issued in the
        name
        of the Holder or in such name or names as may be directed by the Holder;
        provided, however, that in the event certificates for shares of
        Common Stock are to be issued in a name other than the name of the Holder,
        this
        Note when surrendered for conversion shall be accompanied by an assignment
        form;
        and providedfurther, that the Company shall not be required to pay
        any tax or taxes which may be payable in respect of any such
        transfer.

       

      (g)           Cancellation.  After
        all of the Principal Amount and all accrued but unpaid interest and default
        payments at any time owed on this Note have been paid in full or converted
        into
        Common Stock, this Note shall automatically be deemed canceled and the Holder
        shall promptly surrender the Note to the Company at the Company’s principal
        executive offices.

       

      (h)           Mandatory
        Conversion.

       

      (i)           If
        at any time after the Issuance Date, the closing per share price of the Common
        Stock exceeds $5.00 (as such price may be proportionally adjusted for stock
        splits, reverse splits, combinations of shares, stock dividends and
        recapitalizations or other such events) for 20 consecutive Trading Days (the
        “Pricing Event”), and further provided that at all times from
        the first day of such 20 Trading Day period up to and including the Mandatory
        Conversion Date (as defined below) (i) the Registration Statement shall be
        effective, (ii) the Principal Market for the Common Stock shall be a national
        securities exchange or the Nasdaq Stock Market, and (iii) the Underlying
        Shares
        shall not be subject to any lock-up agreement or other contractual restrictions
        on transferability, the Company shall have the option, exercisable by delivering
        an irrevocable notice to the Holder (the “Mandatory Conversion
        Notice”) to provide that the Note (including the Principal Amount and
        all accrued and unpaid interest) shall be converted at the then-applicable
        Conversion Price on a date (the “Mandatory Conversion Date”) at
        least 30 but no more than 60 days from the date of the Mandatory Conversion
        Notice.  The foregoing shall not affect the right of the Holder to
        convert this Note pursuant to Section 5(a) above at all times up to and
        including the Mandatory Conversion Date.

       

      (ii)           Notwithstanding
        the preceding subsection (h)(i), the Holder of this Note shall not be obligated
        to convert this Note on a Mandatory Conversion Date unless and until each
        of the
        following conditions has been satisfied at all times from the date of the
        Mandatory Conversion Notice up to and including the Mandatory Conversion
        Date:

       

       

      
        	
                 

              	
                (A)

              	
                The
                  Registration Statement has been
                  effective;

              

      

       

       

      
        	
                 

              	
                (B)

              	
                No
                  Event of Default has occurred and is continuing;
                  and

              

      

       

       

      
        	
                 

              	
                (C)

              	
                The
                  Holder has received unlegended certificates representing shares
                  of Common
                  Stock with respect to all conversions for which Conversion Notices
                  have
                  been given.

              

      

       

      (iii)           A
        mandatory conversion shall be subject to and governed by all the provisions
        relating to voluntary conversion of the Note contained herein.

       

       

      
        
           

        

        
          8

          
            

          

        

        
           

        

      

       

      Section
        6.              General

       

      (a)           Payment
        of Expenses.  The Company agrees to pay all reasonable charges and
        expenses, including attorneys' fees and expenses, which may be incurred by
        the
        Holder in successfully enforcing this Note and/or collecting any amount due
        under this Note.

       

      (b)           Savings
        Clause.  In case any provision of this Note is held by a court of
        competent jurisdiction to be excessive in scope or otherwise invalid or
        unenforceable, such provision shall be adjusted rather than voided, if possible,
        so that it is enforceable to the maximum extent possible, and the validity
        and
        enforceability of the remaining provisions of this Note will not in any way
        be
        affected or impaired thereby.  In no event shall the amount of
        interest paid hereunder exceed the maximum rate of interest on the unpaid
        principal balance hereof allowable by applicable law.  If any sum is
        collected in excess of the applicable maximum rate, the excess collected
        shall
        be applied to reduce the principal debt.  If the interest actually
        collected hereunder is still in excess of the applicable maximum rate, the
        interest rate shall be reduced so as not to exceed the maximum allowable
        under
        law.

       

      (c)           Amendment.  Neither
        this Note nor any term hereof may be amended, waived, discharged or terminated
        other than by a written instrument signed by the Company and the
        Holder.

       

      (d)           Assignment,
        Etc.  The Holder may assign or transfer this Note to any
        transferee.  The Holder shall notify the Company of any such
        assignment or transfer promptly.  This Note shall be binding upon the
        Company and its successors and shall inure to the benefit of the Holder and
        its
        successors and permitted assigns.

       

      (e)           Amendments
        and Waivers.

       

      (i)           The
        provisions of this Note, including, but not limited to, any waiver of the
        restrictive covenants, may from time to time be amended, modified or waived,
        if
        such amendment, modification or waiver is in writing and consented to by
        the
        Company and the Holders of not less than 50% in Principal Amount of the Notes
        then outstanding (the “Required Holders”); provided,
however, that no such amendment, modification
        or waiver which would (i)
        modify this Section 6(e), (ii) extend the Maturity Date, (iii) reduce the
        Principal Amount or any amounts payable hereunder, (iv) change the Conversion
        Price or the adjustments thereto, or (v) not be uniform and non-discriminatory
        as to any particular Note, shall be made without the consent of the Holder
        of
        each Note so affected.

       

      (ii)           Except
        as provided herein, no failure or delay on the part of the Holder in exercising
        any power or right under this Note shall operate as a waiver thereof, nor
        shall
        any single or partial exercise of any such power or right preclude any other
        or
        further exercise thereof or the exercise of any other power or
        right.  No notice to or demand on the Company in any case shall
        entitle it to any notice or demand in similar or other
        circumstances.  No waiver or approval by the Holder shall, except as
        may be otherwise stated in such waiver or approval, be applicable to subsequent
        transactions.  No waiver or approval hereunder shall require any
        similar or dissimilar waiver or approval thereafter to be granted
        hereunder.

       

      (f)           Governing
        Law; Jurisdiction.

       

      (i)           Governing
        Law.  THIS NOTE WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
        WITH THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO ANY CONFLICTS
        OF LAWS
        PROVISIONS THEREOF THAT WOULD OTHERWISE REQUIRE THE APPLICATION OF THE LAW
        OF
        ANY OTHER JURISDICTION.

       

      
        
           

        

        
          9

          
            

          

        

        
           

        

      

       

      (ii)           Jurisdiction.  The
        Company irrevocably submits to the jurisdiction of any State or Federal Court
        sitting in the State of California, County of Orange, over any suit, action,
        or
        proceeding arising out of or relating to this Note.  The Company
        irrevocably waives, to the fullest extent permitted by law, any objection
        which
        it may now or hereafter have to the laying of the venue of any such suit,
        action, or proceeding brought in such a court and any claim that suit, action,
        or proceeding has been brought in an inconvenient forum.

       

       

      The
        Company agrees that the service of process upon it mailed by certified or
        registered mail, postage prepaid and return receipt requested (and service
        so
        made shall be deemed complete three days after the same has been posted as
        aforesaid) or by personal service shall be deemed in every respect effective
        service of process upon it in any such suit or proceeding.  Nothing
        herein shall affect Holder's right to serve process in any other manner
        permitted by law.  The Company agrees that a final non-appealable
        judgment in any such suit or proceeding shall be conclusive and may be enforced
        in other jurisdictions by suit on such judgment or in any other lawful
        manner.

       

      (iii)           No
        Jury Trial.  The Company hereby knowingly and voluntarily waives
        any and all rights it may have to a trial by jury with respect to any litigation
        based on, or arising out of, under, or in connection with, this
        Note.

       

      (g)           Replacement
        Notes.  This Note may be exchanged by Holder at any time and from
        time to time for a Note or Notes with different denominations representing
        an
        equal aggregate outstanding Principal Amount, as reasonably requested by
        Holder,
        upon surrendering the same.  No service charge will be made for such
        registration or exchange.  In the event that Holder notifies the
        Company that this Note has been lost, stolen or destroyed, a replacement
        Note
        identical in all respects to the original Note (except for registration number
        and Principal Amount, if different than that shown on the original Note),
        shall
        be issued to the Holder, provided that the Holder executes and delivers to
        the
        Company an agreement reasonably satisfactory to the Company to indemnify
        the
        Company from any loss incurred by it in connection with the Note.

       

      (h)           Cancellation.  After
        all of the Principal Amount and all accrued but unpaid interest and default
        payments at any time owed on this Note have been paid in full or converted
        into
        Common Stock, this Note shall automatically be deemed canceled and the Holder
        shall promptly surrender the Note to the Company at the Company’s principal
        executive offices.

       

      (i)           Notices
        Procedures.  Any and all notices or other communications or
        deliveries to be provided by the Holder hereunder, shall be in writing and
        delivered personally, by confirmed facsimile, or by a nationally recognized
        overnight courier service to the Company at the facsimile telephone number
        or
        address of the principal place of business of the Company as set forth in
        the
        Purchase Agreement.  Any and all notices or other communications or
        deliveries to be provided by the Company hereunder shall be in writing and
        delivered personally, by facsimile, or by a nationally recognized overnight
        courier service addressed to the Holder at the facsimile telephone number
        or
        address of the Holder appearing on the books of the Company, or if no such
        facsimile telephone number or address appears, at the principal place of
        business of the Holder.  Any notice or other communication or
        deliveries hereunder shall be deemed delivered (i) upon receipt, when delivered
        personally, (ii) when sent by facsimile, upon receipt if received on a Business
        Day prior to 5:00 p.m. (Pacific Time), or on the first Business Day following
        such receipt if received on a Business Day after 5:00 p.m. (Pacific Time)
        or
        (iii) upon receipt, when deposited with a nationally recognized overnight
        courier service.

       

       

      
        
           

        

        
          10

          
            

          

        

        
           

        

      

       

      (j)           Waivers.  Except
        for any notice specifically required hereunder, or under any other Transaction
        Document(s), the Company hereby waives notice (including without limitation
        notice of default, notice of intention to accelerate maturity, notice of
        acceleration of maturity, notice of on payment or dishonor and notice of
        protest), demand, presentment for payment, protest, bringing of suit and
        diligence in taking any action to collect amounts owing hereunder or in
        proceeding against any of the rights and properties securing payment hereof,
        and
        is directly and primarily liable for the amount of all sums owing or to be
        owing
        hereon.  The Company consents to the acceptance of further security or
        the release of any existing security for this Note without in any manner
        affecting the Company’s liability with respect to this Note.  The
        Company agrees that its liability on or with respect to this Note shall not
        be
        affected by any release of or change in any guaranty or security at any time
        or
        by any failure to perfect or maintain perfection of any lien against or security
        interest in any such security or the partial or complete unenforceability
        of any
        guaranty or other surety obligation, in each case in whole or in part, with
        or
        without notice and before or after maturity. No extension of the time for
        the
        payment of this Note made by agreement with any person now or hereafter liable
        for the payment of this Note shall operate to release, discharge, modify,
        change
        or affect the original liability of the Company under this Note.

       

      

       

      ***Signatures
        on following page***

       

       

      
        
           

        

        
          11

          
            

          

        

        
           

        

      

       

       

      IN
        WITNESS WHEREOF, the Company has caused this Note to be duly executed
        on the date first set forth above.

       

       

      
        	 	
                U.S.
                  DRY CLEANING CORPORATION

                 

                 

                By:                                                                           

                Robert
                  Y. (Robbie) Lee

                President
                  and Chief Executive Officer

              

      

       

      

      

      The
        undersigned, being all the current operating subsidiaries of the Company,
        each
        hereby jointly and severally, absolutely and unconditionally, guarantees
        for the
        benefit of the Holders the payment and performance by the Company of all
        of its
        obligations under the foregoing Note.  This is a guaranty of payment
        and performance (and not merely of collection), and the Holder may proceed
        directly against the undersigned without any requirement to first proceed
        or
        obtain any judgment against or exhaust any remedies with respect to the
        Company.  This guaranty shall in no manner be affected or impaired by
        (a) any amendment, modification, waiver, consent, compromise or other indulgence
        granted to the Company under or in respect of the foregoing Note or any related
        agreement, (b) any failure by the Holder to insist upon strict performance
        or
        observance by the Company of any of the terms of the foregoing Note or any
        related agreement, (c) any forbearance by the Holder, (d) any bankruptcy,
        insolvency, receivership, reorganization, liquidation or other such proceeding
        relating to the Company, or (e) any relief of the Company from any of its
        obligations as aforesaid by operation of law, in equity or
        otherwise.

       

       

      
        	 	
                STEAM
                  PRESS HOLDINGS, INC.

                (dba
                  Young Laundry & Dry Cleaning)

                 

                By:                                                                

                Robert
                  Y. (Robbie) Lee

                President

                 

                CLEANERS
                  CLUB ACQUISITION SUB, INC.

                (dba
                  Boston Cleaners)

                 

                By:                                                                

                Robert
                  Y. (Robbie) Lee

                President

                 

                USDCC
                  CVR MERGER SUB, LLC

                (dba
                  Roadrunner Cleaners)

                 

                By:                                                                

                Robert
                  Y. (Robbie) Lee

                President

              

      

       

       

       

      
        
           

        

        
          12

          
            

          

        

        
           

        

      

      EXHIBIT
        A

       

      FORM
        OF CONVERSION NOTICE

       

       

      (To
        be
        Executed by the Holder

      in
        order
        to Convert a Note)

       

      The
        undersigned hereby elects to convert the aggregate outstanding Principal
        Amount
        (as defined in the Note) and/or accrued interest indicated below of this
        Note
        into shares of Common Stock, par value $.001 per share (the “Common Stock”), of
        U.S. DRY CLEANING CORPORATION (the “Company”) according to the conditions
        hereof, as of the date written below.  If shares are to be issued in
        the name of a person other than the undersigned, the undersigned will pay
        all
        transfer taxes payable with respect thereto and is delivering herewith such
        certificates and opinions as reasonably requested by the Company in accordance
        therewith.  No fee will be charged to the holder for any conversion,
        except for such transfer taxes, if any.

       

      
        	
                Conversion
                  information:

              	
                
                  
                    

                  

                  Date
                    to Effect Conversion

                

              
	 	
                 

              
	 	 
	 	
                 

              
	 	
                
                  

                

                Aggregate
                  Principal Amount and/or Accrued Interest of Note Being
                  Converted

              
	 	
                 

              
	 	
                
                  

                

                Number
                  of shares of Common Stock to be Issued

              
	 	
                 

              
	 	
                
                  

                

                Applicable
                  Conversion Price

              
	 	
                 

              
	 	
                
                  

                

                Signature

              
	 	
                 

              
	 	
                
                  

                

                Name

              
	 	
                 

              
	 	
                
                  

                

                Address

              
	 	
                 

              
	 	
                
                  

                

                Taxpayer
                  Identification/Social Security
                  Number

              

      

      

       

       

      

      13usdcc_8k-1002.htm

    
      

    

     

    

    EXHIBIT
      10.2

    U.S.
      DRY CLEANING CORPORATION

    

    SECURITY
      AGREEMENT

    

    THIS
      SECURITY AGREEMENT (this “Agreement”) is made and entered into
      as of ____________, 2007, by and between U.S. DRY CLEANING CORPORATION, a
      Delaware corporation and issuer of the Notes (the “Company”),
      STEAM PRESS HOLDINGS, INC., a California corporation, CLEANERS CLUB ACQUISITION
      SUB, INC., a California corporation, and USDCC CVR MERGER SUB, LLC a California
      limited liability company (together with the Company, a “Borrower” and
      collectively, the “Borrowers”), and MERCER CAPITAL, LTD., a Texas
      corporation (“Mercer” or “Agent”) and each other person or entity
      listed as an “Investor” on Schedule 1 attached to this Agreement (the
“Investors” or the “Secured Parties”).  Capitalized
      terms used herein and not otherwise defined shall have the meanings set forth
      or
      incorporated in the Subscription Agreement of even date herewith between the
      Company and the Investors (“Subscription Agreement”).

    

    RECITALS

    

    WHEREAS,
      the Secured Parties have agreed to purchase Notes from the Company pursuant
      to
      the terms of the Subscription Agreement; and

    

    WHEREAS,
      the Secured Parties have required, as a condition to entering into the
      Subscription Agreement, that Borrowers grant Secured Parties a first priority
      security interest in all of  Borrowers’ Collateral listed in
Exhibit A hereto, and to that end have required the execution and
      delivery of this Agreement by Borrowers.

    

    NOW,
      THEREFORE, in consideration of the mutual covenants and agreements
      contained in the Subscription Agreement and herein, the parties hereto,
      intending to be legally bound, agree as follows:

    

    1.           Incorporation
      of Recitals, Subscription Agreement and Note.  The
      foregoing Recitals are hereby incorporated herein in their entirety by this
      reference.

    

    2.           Definitions.  The
      following terms shall have the meanings set forth below:

    

    “Collateral”
      shall mean all of the items set forth on Exhibit A hereto existing on
      ______________, 2007 (and any replacement Collateral).

    

    “Lien”
      shall mean any security interest, lien, charge, encumbrance or other adverse
      interest. For the avoidance of doubt, it is understood and agreed that any
      Borrower may, as part of its ordinary course of business, grant licenses to
      third parties to use intellectual property owned or developed by such Borrower,
      and for purposes of this Agreement such licensing activity shall not constitute
      a “Lien” on such intellectual property provided such activity does not interfere
      in any material respect with the business of such Borrower.

    

    “Permitted
      Liens” shall mean, collectively, the following: (i) liens for current taxes
      or other governmental or regulatory assessments which are not delinquent, or
      which are being contested in good faith by the appropriate procedures and for
      which appropriate reserves are maintained; (ii) liens in favor of Agent and/or
      the Secured Parties; and (iii) liens or security interests granted by the
      Borrowers pursuant to a credit facility with a bank or other financial
      institution whose lending activities are regulated by law in an amount of not
      more than $5,000,000 entered into after the date hereof secured solely by
      accounts receivable and inventory, and equipment (capital) leases, and the
      Proceeds thereof.

    

    
      
        
           

        

        
          
          

          
            

          

        

        
           

        

      

    

    

    

    “Proceeds”
      shall mean  “proceeds” as such term is defined in Section 9-102(a)(64)
      of the California Uniform Commercial Code and, in any event, shall include,
      without limitation, any consideration received from the sale, exchange, lease
      or
      other disposition of any asset or property which constitutes Collateral, any
      other value received as a consequence of the possession of any Collateral and
      any payment received from any insurer or other person or entity as a result
      of
      the destruction, loss, theft or other involuntary conversion of whatever nature
      of any asset or property that constitutes Collateral.

    

    “Secured
      Obligations” has the meaning given in Section 3(a) below.

    

    “Security
      Interest” has the meaning given in Section 3(b) below.

    

    In
      addition, terms not defined in this
      Agreement or the Subscription Agreement that are defined in the California
      Uniform Commercial Code (the “Code”) shall have the same meaning in this
      Agreement as in the Code.  It is expressly understood and agreed that,
      to the extent the Code is revised subsequent to the date hereof such that the
      definition of any of the terms included in the description of Collateral is
      changed, the parties hereto desire that any property which is included in such
      changed definitions which would not otherwise be included in the foregoing
      grant
      on the date hereof be included in such grant immediately upon the effective
      date
      of such revision.

     

    
 

    3.           Security
      for Obligations.

    

    (a)           Secured
      Obligations.  This Agreement secures, and the Collateral is
      collateral security for, the prompt payment or performance in full when due,
      whether at stated maturity, by required prepayment, declaration, acceleration,
      conversion, demand or otherwise (including the payment of amounts that would
      become due but for the operation of the automatic stay under Section 363(a)
      of
      the Bankruptcy Code, 11 U.S.C. §362(a) or the existence of any other bankruptcy,
      reorganization or similar proceeding involving any of the Borrowers) of all
      obligations and liabilities of every nature of Borrowers now or hereafter
      existing under or arising out of the Notes, and this Agreement and all
      extensions or renewals thereof, whether for principal, interest (including,
      without limitation, interest that, but for the filing of a petition in
      bankruptcy with respect to any Borrower, would accrue on such obligations),
      fees, expenses, indemnities or otherwise, whether voluntary or involuntary,
      direct or indirect, absolute or contingent, liquidated or unliquidated, whether
      or not jointly owed with others, and whether or not from time to time decreased
      or extinguished and later increased, created or incurred, and all or any portion
      of such obligations or liabilities that are paid, to the extent all or any
      part
      of such payment is avoided or recovered directly or indirectly from Agent or
      any
      Secured Party as a preference, fraudulent transfer or otherwise (all such
      obligations of Borrowers being the “Secured Obligations”).

    

    (b)           Security
      Interest.  As security for the payment or performance, as the case
      may be, of the Secured Obligations, the Borrowers hereby jointly and severally
      create and grant to the Agent, its successors and its assigns, for the pro
      rata
      benefit of the Investors, their successors and their assigns, a security
      interest in the Collateral (the “Security Interest”).  Without
      limiting the foregoing, the Agent is hereby authorized to file one or more
      financing statements, continuation statements or other documents for the purpose
      of perfecting, confirming, continuing, enforcing or protecting the Security
      Interest, naming the Borrowers as debtors and the Agent as secured party for
      the
      pro rata benefit of the Investors.

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

    

    

    The
      Borrowers agree at all times to keep in all material respects accurate and
      complete accounting records with respect to the Collateral, including, but
      not
      limited to, a record of all payments and Proceeds received.

    

    Notwithstanding
      (a) the date, manner or order of perfection of the Security Interest created
      hereunder, (b) the provisions of the Code or any other applicable law or
      decisions, (c) the provisions of any contract between any Secured Party and
      the
      Borrowers and (d) whether any agent or bailee holds possession of any part
      or
      all of the Collateral, the security interests of the Secured Parties in the
      Collateral shall rank equally and without priority and, at any time of
      determination, each Secured Party shall share therein and in the proceeds
      thereof pro rata according to the Secured Obligations owed to such Secured
      Party
      as at such time of determination.

    

    4.           Representations
      and Warranties.  Each Borrower jointly and severally
      represents and warrants as follows:

    

    Financing
      Statements.  Except for the financing statements in favor of
      Secured Parties, at the time of granting the security interest described herein,
      no financing statement, security agreement, mortgage or similar document
      covering the Collateral or any portion thereof will be on file in any public
      office, and except for Permitted Liens, each Borrower agrees not to execute
      or
      authorize the filing of any such additional financing statement in favor of
      any
      person, entity or governmental agency (whether federal, state or local) other
      than Secured Parties as long as any portion of the Secured Obligations evidenced
      by the Note remain unpaid.

    

    Legal
      Name.  Each Borrower’s exact legal name is as set forth in the
      first paragraph of this Security Agreement.  No Borrower shall change
      its legal name or its form of organization without 30 days’ prior written notice
      to the Agent.

    

    Title
      and Authority.  Each Borrower (i) is the legal and beneficial
      owner of, and has good and marketable title to, the Collateral in which such
      Borrower is granting a security interest hereunder, free and clear of all Liens
      and (ii) has the requisite corporate power and authority to grant to the Secured
      Parties the Security Interest in such Collateral pursuant hereto and to execute,
      deliver and perform its obligations in accordance with the terms of this
      Agreement, without the consent or approval of any other person other than any
      consent or approval which has been obtained.  The execution, delivery
      and performance of the obligations of the Borrowers set forth in this Agreement
      have been duly authorized by all necessary corporate action of the respective
      Borrowers.  This Agreement constitutes the legal, valid and binding
      obligation of each Borrower, enforceable against such Borrower in accordance
      with its terms, except as (A) the enforceability thereof may be limited by
      bankruptcy, insolvency or similar laws affecting the enforcement of creditors’
rights generally and (B) the availability of equitable remedies may be limited
      by equitable principles of general applicability.  The execution and
      delivery of this Agreement and the performance by the Borrowers of their
      obligations hereunder will not (i) violate any federal, state or local law,
      rule
      or regulation applicable to any of the Borrowers, or any provision of any
      Borrower’s Articles of Organization, By-laws or any other governing documents,
      or any order, injunction, judgment, decree or writ applicable to any Borrower,
      or (ii) constitute a breach of or a default under any material agreement,
      contract, lease, license, indenture, mortgage, instrument, undertaking or
      commitment to which any Borrower is a party or by which it or its properties
      or
      assets are bound, or (iii) cause any Lien to be created or imposed on any
      Borrower’s properties or assets by reason thereof.

     

    

    

    
      
        
           

        

        
          3

          
            

          

        

        
           

        

      

    

    

    Filing.  The
      Borrowers will execute and deliver to the Secured Parties Uniform Commercial
      Code financing statements in form and substance satisfactory to the Agent
      containing a description of the Collateral, in a form such that they can be
      filed of record in every governmental, municipal or other office in every
      jurisdiction in which any portion of the Collateral is located necessary to
      publish notice of and protect the validity of and to establish a valid, legal
      and perfected security interest in favor of the Agent in respect of the
      Collateral in which a security interest may be perfected by filing in the United
      States and its territories and possessions, and no further or subsequent filing,
      refiling, recording, rerecording, registration or reregistration is necessary
      in
      any such jurisdiction, except as provided under applicable law with respect
      to
      the filing of Uniform Commercial Code continuation statements. Borrowers jointly
      and severally promise to pay to the Agent all fees and expenses (including
      reasonable attorneys’ fees and expenses) incurred in filing such financing
      statements and any continuation statements or amendments thereto in all public
      offices where filing is deemed by the Agent to be necessary or
      desirable.

    

    Validity
      of Security Interest.  The Security Interest constitutes a valid,
      legal and perfected first priority security interest in all of the Collateral
      for payment and performance of the Secured Obligations, enforceable in
      accordance with the terms hereof against all creditors of the Borrowers and
      any
      persons purporting to purchase any Collateral from such Borrowers, and such
      Security Interest is prior to all other Liens on the Collateral in existence
      on
      the date hereof, subject only to Permitted Liens.

    

    Locations
      of Collateral; Place of Business.  Borrowers hereby represent and
      warrant that all the Collateral is located at the locations listed on
Schedule A hereto and that their respective federal employer
      identification numbers are as set forth on said Schedule.  The
      Borrowers agree not to establish, or permit to be established, any other
      location where it will hold the Collateral or records relating thereto, except
      upon prior written notice to the Secured Parties, and provided that all filings
      under the Uniform Commercial Code as in effect in any state or otherwise which
      are required by this Agreement or the Note to be made with respect to the
      Collateral have been made and the Secured Parties continue to have a valid,
      legal and perfected first priority security interest in the
      Collateral.  Each Borrower confirms that its chief executive office is
      located at the office indicated on Schedule A hereto.  Each
      Borrower agrees not to change, or permit to be changed, the location of its
      principal executive office unless all filings under the Uniform Commercial
      Code
      or otherwise which are required by this Agreement or the Note to be made have
      been made and the Secured Parties continue to have a valid, legal and perfected
      first priority security interest in the Collateral.

    

    Covenants
      and Agreements.  Each Borrower jointly and severally
      covenants and agrees as follows:

    

    Restrictions.  Each
      Borrower agrees that until the Secured Obligations shall have been satisfied
      in
      full, such Borrower shall not, without the Agent’s prior written consent,
      assign, transfer, encumber or otherwise dispose of the Collateral, any interest
      therein, or any other assets, except that such Borrower may (i) sell Inventory
      in the ordinary course of business or sell obsolete equipment or inventory
      for
      the reasonable fair value thereof and (ii) sell assets if within 180 days after
      completing any such sale substantially all of the proceeds thereof are used
      to
      purchase additional assets for use in such Borrower’s business.  Each
      Borrower further agrees that it will not take any action, or permit any action
      to be taken by others subject to its control, including licensees, or fail
      to
      take any action, which would affect the validity or enforcement of the rights
      transferred to the Secured Parties under this Agreement.

    

    Defense.  Each
      Borrower shall, at its own cost and expense, take any and all actions reasonably
      necessary to defend title to the Collateral owned by it against all persons
      and
      to defend the Security Interest in such Collateral, and the priority thereof,
      against any adverse Lien of any nature whatsoever (other than Permitted Liens),
      and will otherwise take all steps to maintain the security interest of the
      Secured Parties as a valid and fully perfected first priority security interest,
      in each case subject only to the Permitted Liens.

    

    
      
        
           

        

        
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    Maintenance.  Each
      Borrower shall at all times and at its own expense maintain and keep, or cause
      to be maintained and kept, the Collateral.

    

    Agent’s
      Right to Take Action.  If, after ten days written notice from
      Agent, Borrowers fail to perform or observe any of their respective covenants
      or
      agreements set forth in this Section 5 or if any Borrower notifies Agent
      that it intends to abandon all or any part of the Collateral, the Agent may
      (but
      need not) perform or observe such covenant or agreement or take steps to prevent
      such intended abandonment on behalf and in the name, place and stead of any
      Borrower (or, in the case of intended abandonment, in Agent’s own name) and may
      (but need not) take any and all other actions that Agent may reasonably deem
      necessary to cure or correct such failure or prevent such intended abandonment,
      provided that the taking of any such action shall not relieve Borrowers of
      any
      of their obligations hereunder, or in any way limit the exercise by the Agent
      or
      any Investor of any other or further right which it may have under this
      Agreement, at law or otherwise.

    

    Costs
      and Expenses.  Except to the extent that the effect of such
      payment would be to render any loan or forbearance of money usurious or
      otherwise illegal under any applicable law, Borrowers shall jointly and
      severally pay Agent on demand the amount of all moneys expended and all costs
      and expenses (including reasonable attorneys’ fees and disbursements) incurred
      by Agent or the Secured Parties in connection with or as a result of Agent’s
      taking action under this Agreement, including without limitation any actions
      taken or rights exercised by the Agent under Section 3(b), Section 5(d), or
      Section 0, together with interest thereon
      from the date expended or incurred by the Agent or Secured Parties.

    

    Use
      and Disposition of Collateral.  No Borrower shall make or permit
      to be made any Lien, assignment, pledge or hypothecation of the Collateral
      other
      than Permitted Liens or sales of assets permitted by Section 5(a) above, or
      grant any security interest in the Collateral except for the Security Interest
      and Permitted Liens.  No Borrower shall make or permit to be made any
      transfer of any Collateral or any other assets, except in the ordinary course
      of
      business or as permitted by Section 5(a) above, and each Borrower shall remain
      at all times in possession of the Collateral owned by it other than transfers
      to
      the Agent pursuant to the provisions hereof and as otherwise provided in this
      Agreement.  The Agent shall have the right, as the true and lawful
      agent of the Borrowers, with power of substitution for each Borrower and in
      each
      Borrower's name, the Agent's name or otherwise, for the use and benefit of
      the
      Agent and the Investors and solely to effect the purposes of this Agreement,
      (i)
      to endorse each Borrower’s name upon any notes, acceptances, checks, drafts,
      money orders or other evidences of payment with respect to the Collateral that
      may come into its possession; (ii) to sign the name of each Borrower on any
      invoice relating to any of the Collateral and (iii) upon the occurrence and
      during the continuance of an Event of Default under this Agreement or under
      the
      Note, (A) to receive, endorse, assign and/or deliver any and all notes,
      acceptances, checks, drafts, money orders or other evidences or instruments
      of
      payment relating to the Collateral or any part thereof, and Borrowers hereby
      waive notice of presentment, protest and non-payment of any instrument so
      endorsed, (B) to demand, collect, receive payment of, give receipt for, extend
      the time of payment of and give discharges and releases of all or any of the
      Collateral and/or release the obligor thereon, (C) to commence and prosecute
      any
      and all suits, actions or proceedings at law or in equity in any court of
      competent jurisdiction to collect or otherwise realize on all or any of the
      Collateral or to enforce any rights in respect of any Collateral, (D) to settle,
      compromise, compound, adjust or defend any actions, suits or proceedings
      relating to or pertaining to all or any of the Collateral, and (H) to use,
      sell,
      assign, transfer, pledge, make any agreement with respect to or otherwise deal
      with all or any of the Collateral, and to do all other acts and things necessary
      to carry out the purposes of this Agreement, as fully and completely as though
      the Agent were the absolute owner of the Collateral for all purposes;
provided, however, that nothing herein contained shall be
      construed as requiring or obligating the Agent or any Investor to make any
      commitment or to make any inquiry as to the nature or sufficiency of any payment
      received by the Agent or such Investor or to present or file any

    

    
      
        
           

        

        
          5

          
            

          

        

        
           

        

      

    

    

    claim
      or
      notice, or to take any action with respect to the Collateral or any part thereof
      or the moneys due or to become due in respect thereof or any property covered
      thereby, and no action taken by the Agent or any Investor or omitted to be
      taken
      with respect to the Collateral or any part thereof shall give rise to any
      defense, counterclaim or offset in favor of Borrowers or to any claim or action
      against the Agent or any Investor in the absence of the gross negligence or
      willful misconduct of the Agent or such Investor; and provided,
further, that the Agent shall at all times act reasonably and in good
      faith.  It is understood and agreed that the appointment of the Agent
      as the agent of the Borrowers for the purposes set forth above in this Section
      5(f) is coupled with an interest and is irrevocable.  The provisions
      of this Section 5(f) shall in no event relieve Borrowers of any of their
      obligations hereunder with respect to the Collateral or any part thereof (other
      than obligations which are impaired as a result of actions taken by the Agent
      pursuant to this Section 5(f)) or impose any obligation on the Agent or any
      Investor to proceed in any particular manner with respect to the Collateral
      or
      any part thereof, or in any way limit the exercise by the Agent or any Investor
      of any other or further right which it may have on the date of this Agreement
      or
      hereafter, whether hereunder or by law or otherwise.  Anytime action
      is taken under this Section 5(f), prompt written notice of such action shall
      be
      provided to Borrowers by Agent.

    

    Further
      Assurances.  Borrowers agree, at their expense, to execute,
      acknowledge, deliver and cause to be duly filed all such further instruments
      and
      documents and take all such actions as the Agent may from time to time
      reasonably request for the assuring and preserving of the Security Interest
      and
      the rights and remedies created hereby, including, without limitation, the
      payment of any fees and taxes required in connection with the execution and
      delivery of this Agreement, the granting of the Security Interest and the filing
      of any financing statements or other documents in connection
      herewith.  If any amount payable under or in connection with any of
      the Collateral shall be or become evidenced by any promissory note or other
      instrument, such note or instrument shall be promptly pledged and delivered
      to
      the Agent, duly endorsed in a manner satisfactory to the Agent.  Each
      Borrower agrees to notify promptly the Agent of any change in its corporate
      name
      or in the location of its chief executive office, its chief place of business
      or
      the office where it keeps its records.

    

    Inspection.
      The Borrowers will permit the Secured Parties or their duly authorized
      representatives, at the Secured Parties’ expense, upon reasonable prior notice
      (and to the extent practicable, in conjunction with the Agent) to examine all
      books and records relating to the Collateral during business hours and shall
      furnish to the Secured Parties such financial statements and other financial
      data as the Secured Parties may reasonably request from time to
      time.

     

    Accounts.  With
      respect to the accounts described in Exhibit A hereto (the “Accounts”), the
      Borrowers
      shall, upon request of the Agent, and the Agent or the Secured Parties
      themselves may, in the name of the Secured Parties or the Borrowers, at any
      time
      (whether or not the Borrowers are in default hereunder) notify the account
      debtor or other obligor on any item of the Accounts, of the Secured Parties’
security interest. Upon the occurrence and during the continuance of any Event
      of Default, upon the written request of the Agent, the Borrowers shall promptly
      notify the account debtor in respect of any Account that such Account has been
      assigned to the Secured Parties hereunder, and that any payments due or to
      become due in respect of such Account are to be made directly to the Secured
      Parties or their designees. The Agent may, in the name of the Secured Parties
      or
      the name of the Borrowers, at any time after the occurrence and during the
      continuation of an Event of Default, (i) demand, sue for, collect or receive
      any
      money or property payable or receivable on any Accounts, (ii) settle, release,
      compromise, adjust, sue upon, foreclose, realize upon or otherwise enforce
      any
      item of Accounts as the Agent may determine, (iii) for the purpose of realizing
      the Secured Parties’ rights herein, receive, open and dispose of mail addressed
      to the Borrowers and endorse notes, checks, drafts, money orders, documents
      of
      title or other forms of payment on behalf of and in the name of the Borrowers
      and (iv) transfer any notes, securities or other Accounts into the name of
      the
      Secured Parties and receive the income thereon and hold the same as Collateral
      for the Secured Obligations or apply the same to the payment of principal or
      interest due on the Secured Obligations.  The Borrowers jointly and
      severally agree to reimburse the Agent on demand for any payment made or any
      expense incurred by the Agent pursuant to the foregoing
      authorization.  This Section 5(i) shall not be applicable and no
      rights granted hereunder shall be exercised at any time when there shall be
      in
      effect any credit facility of the type described in clause (iii) of the
      definition of “Permitted Liens.”

     

    

    
      
        
           

        

        
          6

          
            

          

        

        
           

        

      

    

    

    

    Events
      of Default. Each of the following occurrences shall constitute an
      event of default under this Agreement (herein called “Event of
      Default”):

    

    an
      Event
      of Default, as defined in the Notes, shall occur; or

    

    Any
      Borrower shall fail promptly to observe or perform any covenant or agreement
      herein binding on it and such failure is not cured within 20 days after written
      notice from the Agent; or

    

    there
      is
      any levy, seizure or attachment of all or any material portion of the
      Collateral, other than as set forth in this Agreement; or

    

    any
      of
      the representations or warranties contained in Section 4 shall prove to have
      been incorrect in any material respect when made or at any time that the Secured
      Obligations remain outstanding.

    

    

    Remedies.  Upon
      the occurrence of an Event of Default and at any time thereafter, the Agent
      may,
      at its option, accelerate the Secured Obligations and shall have the right,
      in
      addition to all other rights and remedies provided herein or by applicable
      law,
      to take any or all of the following actions:

    

    exercise
      any or all remedies against the Collateral available under this Agreement or
      the
      Notes including, without limitation, any and all rights afforded to a secured
      party under, and subject to its obligations contained in, the Uniform Commercial
      Code as in effect in any state or other applicable law, including, but not
      limited to, the right to take possession of the Collateral, and the right,
      without further notice to the Borrowers, to take the Collateral in satisfaction
      of the Secured Obligations, and for those purposes the Agent may, and the
      Borrowers hereby authorize the Agent to, enter upon any premises, with or
      without process of law, on which Collateral may be located or situated and
      remove the same therefrom or without removal render the same unusable and may
      use or dispose of the Collateral on such premises without any liability for
      rent, storage, utilities or other sums, and upon request the Borrowers shall
      at
      their expense, to the extent practicable, forthwith assemble and make all or
      any
      part of the Collateral available to the Agent at a place to be
      designated  by the Agent, which is reasonably convenient to the
      Borrowers and the Agent; or

    

    sell,
      assign, transfer, pledge, encumber, or otherwise dispose of the Collateral
      or
      any part thereof at public or private sale, at such price or prices as the
      Agent, may, in its sole discretion, deem satisfactory; or

    

    enforce
      the patents comprising the Collateral and if Agent shall commence any suit
      for
      such enforcement, Borrowers shall, at the request of Agent, do any and all
      lawful acts and execute any and all proper documents reasonably required by
      Agent in aid of such enforcement; or

    

    incur
      expenses, including attorneys' fees at the regular hourly rates of the Agent’s
      counsel from time to time in effect, legal expenses and costs for the exercise
      of any right or power under this Security Agreement, which expenses shall be
      jointly and severally payable by the Borrowers to the Agent on demand and shall
      be secured by this Security Agreement.

    

    
      
        
           

        

        
          7

          
            

          

        

        
           

        

      

    

    

    

                          (e)           all
      Proceeds received by any Borrower consisting of cash, checks and other near-cash
      items shall be held by such Borrower in trust for the Agent and the Secured
      Parties, segregated from other funds of such Borrower, and shall, forthwith
      upon
      receipt by such Borrower, be turned over to the Agent in the exact form received
      by such Borrower (duly indorsed by such Borrower to the Agent, if
      required).  All Proceeds while held by the Agent (or by such Borrower
      in trust for the Agent and the Secured Parties) shall continue to be held as
      collateral security for all the Secured Obligations and shall not constitute
      payment thereof until applied to the payment of the Secured Obligations as
      provided in Section 9.

    

    Any
      disposition of Collateral by Agent
      shall be subject to the mandatory requirements of applicable law and subject
      to
      the requirement that Agent act reasonably and in good faith.  Subject
      to such conditions, Agent may sell or otherwise dispose of all or any part
      of
      the Collateral, at public or private sale, for cash, upon credit or for future
      delivery as the Agent shall deem appropriate.  Each purchaser at any
      such sale shall hold the property sold absolutely free from any claim or right
      on the part of the Borrowers, and Borrowers hereby waive (to the extent
      permitted by law) all rights of redemption, stay and appraisal which Borrowers
      now have or may at any time in the future have under any rule of law or statute
      now existing or hereafter enacted.  To the extent notice of sale shall
      be required, the Agent shall give the Borrowers ten (10) days' written notice
      (which Borrowers agree is reasonable notice within the meaning of Section
      9-504(3) of the Uniform Commercial Code) of the Agent's intention to make any
      sale of Collateral.  Such notice, in the case of a public sale, shall
      state the time and place for such sale.  Any such public sale shall be
      held at such time or times within ordinary business hours and at such place
      or
      places as the Agent may fix and state in the notice (if any) of such
      sale.  At any such sale, the Collateral, or portion thereof, to be
      sold may be sold in one lot, as an entirety or in separate parcels, as the
      Agent
      may (in its sole and absolute discretion) determine. The Borrowers shall execute
      and deliver such documents and take such other action as the Agent reasonably
      deems necessary or advisable in order that any such sale may be made in
      compliance with law.  Upon any such sale, the Agent shall have the
      right to deliver, assign and transfer to the purchaser thereof the Collateral
      so
      sold.  Each purchaser at any such sale shall hold the Collateral so
      sold to it absolutely, free from any claim or right of whatsoever kind,
      including any equity or right of redemption of the Borrowers which may be
      waived, and the Borrowers, to the extent permitted by law, hereby specifically
      waive all rights of redemption, stay or appraisal which any of them has or
      may
      have under any law now existing or hereafter adopted.  The Agent shall
      not be obligated to make any sale of any Collateral if it shall determine not
      to
      do so, regardless of the fact that notice of sale of such Collateral shall
      have
      been given.  The Agent may, without notice or publication, adjourn any
      public or private sale or cause the same to be adjourned from time to time
      by
      announcement at the time and place fixed for sale, and such sale may, without
      further notice, be made at the time and place to which the same was so
      adjourned.  In case any sale of all or any part of the Collateral is
      made on credit or for future delivery, the Collateral so sold may be retained
      by
      the Agent until the sale price is paid by the purchaser or purchasers thereof,
      but the Agent shall not incur any liability in case any such purchaser or
      purchasers shall fail to take up and pay for the Collateral so sold and, in
      case
      of any such failure, such Collateral may be sold again upon like
      notice.  At any public sale made pursuant to this Section 7, any
      Investor may bid for or purchase, free (to the extent permitted by law) from
      any
      claim or right of any kind whatsoever, including any right of redemption, stay
      or appraisal on the part of Borrowers (all said rights being also hereby waived
      and released to the extent permitted by law), the Collateral or any part thereof
      offered for sale and any such Investor may make payment on account thereof
      by
      using any claim then due and payable to any such Investor from Borrowers as
      a
      credit against the purchase price, and any such Investor may, upon compliance
      with the terms of sale, hold, retain and dispose of such property without
      further accountability to Borrowers therefor.  For purposes hereof, a
      written agreement to purchase the Collateral or any portion thereof shall be
      treated as a sale thereof; the Agent shall be free to carry out such sale and
      purchase pursuant to such agreement, and Borrowers shall not be entitled to
      the
      return of the Collateral or any portion thereof subject thereto, notwithstanding
      the fact that after the Agent shall have entered into such an agreement all
      events of default shall have been remedied and the Secured Obligations paid
      in
      full.  Borrowers shall remain liable for any deficiency.  As
      an alternative to exercising the power of sale herein conferred upon it, the
      Agent may proceed by a suit or suits at law or in equity to foreclose the
      security interests granted under this Agreement and to sell the Collateral
      or
      any portion thereof pursuant to a judgment or decree of a court or courts having
      competent jurisdiction.

    

    
      
        
           

        

        
          8

          
            

          

        

        
           

        

      

    

    

    

    The
      Agent
      shall also have the right to apply for and have a receiver appointed by a court
      of competent jurisdiction in any action taken by the Agent to enforce the rights
      and remedies provided hereunder, to manage, protect and preserve the Collateral
      or continue the operation of the business of the Borrowers, and the Agent shall
      be entitled to collect all revenues and profits thereof and apply the same
      to
      the payment of all expenses and other charges of such receivership, including
      the compensation of the receiver, and to the payment of the obligations until
      a
      sale or other disposition of such Collateral shall be finally made and
      consummated.

     

    The
      Agent’s sole duty with respect to the custody, safekeeping and physical
      preservation of the Collateral in its possession, under the Uniform Commercial
      Code of any State or otherwise, shall be to deal with it in the same manner
      as
      the Agent deals with similar property for its own account.  Neither
      the Agent, any other Secured Party nor any of their respective officers,
      directors, employees or agents shall be liable for failure to demand, collect
      or
      realize upon any of the Collateral or for any delay in doing so or shall be
      under any obligation to sell or otherwise dispose of any Collateral upon the
      request of any Borrower or any other person or to take any other action
      whatsoever with regard to the Collateral or any part thereof.  The
      powers conferred on the Agent hereunder are solely to protect the Agent’s and
      the Secured Parties’ interests in the Collateral and shall not impose any duty
      upon the Agent to exercise any such powers.  The Agent and the Secured
      Parties shall be accountable only for amounts that they actually receive as
      a
      result of the exercise of such powers, and neither they nor any of their
      officers, directors, employees or agents shall be responsible to any Borrower
      for any act or failure to act hereunder, except for their own gross negligence
      or willful misconduct.

     

    

    Designation
      of Agent.  Subject to the Investors’ right to appoint an
      alternate agent as provided in this Section 8, the Investors hereby irrevocably
      designate Mercer (and its successors and assigns) as their agent and Mercer
      hereby accepts such designation, in order to execute any and all instruments
      or
      other documents on behalf of the Investors and to do any and all other acts
      or
      things on behalf of the Investors that Mercer (or its successors or assigns)
      in
      its sole discretion deems necessary or advisable or that may be required
      pursuant to this Agreement or otherwise, to exercise the Secured Parties’ rights
      and remedies under this Agreement.  None of the Investors may take any
      action or exercise any rights under this Agreement except through Mercer as
      their agent.  Each Secured Party hereby appoints the Agent the
      attorney-in-fact of such Secured Party, in its name and on its behalf, solely
      for the purpose of carrying out the provisions of this Agreement and taking
      any
      action and executing any instrument which the Agent may reasonably deem
      necessary or advisable to accomplish the purposes hereof, which appointment
      is
      irrevocable (subject only to the Investors’ right to appoint an alternate agent
      as provided herein) so long as this Agreement and the Security Interest have
      not
      been terminated and coupled with an interest.  The Secured Parties
      may, by vote of the holders of 51% of the aggregate principal amount of Notes
      outstanding at any time (which vote shall be binding on all of the Investors),
      irrevocably appoint and authorize an agent other than Mercer to act as agent
      on
      behalf of the Investors in accordance with this Agreement, and upon the
      appointment of any such other agent the Investors will promptly provide written
      notice thereof to the Borrowers.

    

    

    
      
        
           

        

        
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               As
      to any matters not expressly provided for by this Agreement, the Agent shall
      not
      be required to exercise any discretion or take any action, but shall be entitled
      to act or to refrain from acting (and shall be fully protected in so acting
      or
      refraining from acting) upon the instructions of the holders of 51% of the
      aggregate principal amount of Notes outstanding, and such instructions shall
      be
      binding upon all Secured Parties; provided, however, that the
      Agent  shall not be required to take any action which exposes it to
      liability in such capacity, which could result in the Agent incurring any costs
      and expenses or which is contrary to this Agreement or applicable
      law.  Notwithstanding anything to the contrary contained herein, any
      action to impose additional obligations on the Secured Parties, or to amend
      any
      provision hereof or of the Notes which would affect the pro rata repayment,
      as
      among the Secured Parties, of the Secured Obligations or the pro rata
      disbursement, as among the Secured Parties, of moneys or other proceeds received
      in the enforcement of the security interests created hereby, shall require
      the
      consent of each Secured Party whose interests are adversely affected by such
      action.

    

    9.           Application
      of Proceeds.  Subject to the rights of the holders of any
      senior debt entered into in accordance with Section 2 of the Note, the proceeds
      of any collection or sale of Collateral, as well as any Collateral consisting
      of
      cash, shall be applied by the Agent as follows:

    

    FIRST,
      to
      the payment of all reasonable costs and expenses incurred by the Agent in
      connection with the collection and/or sale of the Collateral, or otherwise
      in
      connection with this Agreement or any of the Secured Obligations, including,
      but
      not limited to, all court costs and the reasonable fees and expenses of its
      agents and legal counsel, the repayment of all advances made by the Agent
      hereunder on behalf of the Borrowers and any other reasonable costs or expenses
      incurred in connection with the exercise of any right or remedy
      hereunder;

    

    SECOND,
      pro rata to the payment in full (i) first of the interest on the principal
      of
      the Notes, (ii) next to the payment of principal in respect of any amount of
      the
      Notes outstanding (pro rata as among the Investors in accordance with the
      aggregate principal amount of the Notes held by them), and next to the payment
      of all other Secured Obligations;

    

    THIRD,
      the surplus, if any, to the Borrowers, their successors and assigns, or as
      a
      court of competent jurisdiction may otherwise direct.

    

    Security
      Interest Absolute.  All rights of the Secured Parties and
      the Agent hereunder, the Security Interest, and all obligations of the Borrowers
      hereunder, shall be absolute and unconditional irrespective of (i) any partial
      invalidity or unenforceability of the Note, any other agreement with respect
      to
      any of the Secured Obligations or any other agreement or instrument relating
      to
      any of the foregoing, (ii) any change in the time, manner or place of payment
      of, or in any other term of, all or any of the Secured Obligations, or any
      other
      amendment or waiver of or consent to any departure from the Notes, or any other
      agreement or instrument, (iii) any exchange, release or nonperfection of any
      other Collateral, or any release or amendment or waiver of or consent to or
      departure from any guarantee, for all or any of the Secured Obligations, or
      (iv)
      any other circumstance which might otherwise constitute a defense available
      to,
      or discharge of the Borrowers in respect of the Secured Obligations or in
      respect of this Agreement.

     

    Indemnity.   
      Each of the Borrowers jointly and severally agrees to defend, indemnify and
      hold
      harmless the Agent and the Secured Parties from and against any and all claims,
      losses, liabilities, costs and expenses (including without limitation reasonable
      attorneys’ fees and expenses) arising out of or resulting from this Agreement
      (including, without limitation, enforcement of this Agreement or any actions
      taken by any of them pursuant to this Agreement) except claims, losses or
      liabilities resulting from the Agent’s or the Secured Parties’ own gross
      negligence or willful misconduct.

     

    

    
      
        
           

        

        
          10

          
            

          

        

        
           

        

      

    

    

    

    Miscellaneous.  This
      Agreement can be waived, modified, amended, terminated or discharged, and the
      Security Interest can be released, only explicitly in a writing signed by the
      Agent.  A waiver signed by the Agent shall be effective only in the
      specific instance and for the specific purpose given.  Mere delay or
      failure to act shall not preclude the exercise or enforcement of any of any
      Secured Parties’ or the Agent’s rights or remedies. All rights and remedies of a
      Secured Party shall be cumulative and may be exercised singularly or
      concurrently, at Agent’s option, and the exercise or enforcement of any one such
      right or remedy shall neither be a condition to nor bar the exercise or
      enforcement of any other.  The Secured Parties shall not be obligated
      to preserve any rights Borrowers may have against prior parties, to realize
      on
      the Collateral at all or in any particular manner or order, or to apply any
      cash
      proceeds of the Collateral in any particular order of
      application.  This Agreement shall be binding upon and inure to the
      benefit of Borrowers and Secured Parties and their respective participants,
      successors, and permitted assigns and shall take effect when signed by Borrowers
      and Secured Parties, and Borrowers waive notice of Secured Parties’ acceptance
      hereof; provided, however, that the Secured Parties’ rights
      hereunder may not be transferred or assigned to any third party without the
      prior written consent of Borrowers.  This Agreement shall be governed
      by the internal law of the State of California without regard to conflicts
      of
      law provisions.  If any provision or application of this Agreement is
      held unlawful or unenforceable in any respect, such illegality or
      unenforceability shall not affect other provisions or applications which can
      be
      given effect and this Agreement shall be construed as if the unlawful or
      unenforceable provision or application had never been contained herein or
      prescribed hereby.  All representations and warranties contained in
      this Agreement shall survive the execution, delivery and performance of this
      Agreement and the creation and payment of the Secured Obligations.

    

    Waiver
      of Jury
      Trial.EACHBORROWER HEREBY
      KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT SUCH BORROWER MAY
      HAVE
      TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT
      OF,
      UNDER OR IN CONNECTION WITH THIS AGREEMENT AND ANY AGREEMENT CONTEMPLATED TO
      BE
      EXECUTED IN CONJUNCTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALING,
      STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER
      PARTY.  THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE SECURED
      PARTIES ENTERING INTO THIS AGREEMENT.

    

    Termination.  This
      Agreement and the Security Interest shall terminate when all the Secured
      Obligations have been fully and indefeasibly paid in full, at which time the
      Agent shall execute and deliver to the Borrowers all Uniform Commercial Code
      termination statements and similar documents which the Borrowers shall
      reasonably request to evidence such termination; provided,
however, that all indemnities of the Borrowers contained in this
      Agreement shall survive, and remain operative and in full force and effect
      regardless of, the termination of this Agreement.

    

    

    ***
      Signatures on following page***

    

    
      
        
           

        

        
          11

          
            

          

        

        
           

        

      

    

    

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

    

    
      	 	
              AGENT:

               

              MERCER
                CAPITAL, LTD.

               

              By:____________________________________

              Name:__________________________________

              Title:__________________________________

               

               

               

            
	 	
              BORROWERS:

               

              U.S.
                DRY CLEANING CORPORATION

               

               

              By:_________________________________

              Robert
                Y. (Robbie)
                Lee,

              Chief
                Executive
                Officer

               

            
	 	
              STEAM
                PRESS HOLDINGS, INC.

              (dba
                Young Laundry & Dry Cleaning)

            
	 	 
	 	
              By:______________________________________

            
	 	
              Robert
                Y. (Robbie)
                Lee

              President

            
	 	 
	 	
              CLEANERS
                CLUB ACQUISITION SUB, INC.

              (dba
                Boston Cleaners)

            
	 	 
	 	
              By:_____________________________________

              Robert
                Y. (Robbie)
                Lee

              President

            
	 	 
	 	
              USDCC
                CVR MERGER SUB, LLC

              (dba
                Roadrunner Cleaners)

            
	 	 
	 	
              By:_____________________________________

              Robert
                Y. (Robbie)
                Lee

              President

            

    

    

    
      
        
           

        

        
          12

          
            

          

        

        
           

        

      

    

    

    COUNTERPART
      SIGNATURE PAGE

    TO
      SECURITY AGREEMENT

    DATED
      _________, 2007,

    AMONG
      U.S. DRY CLEANING CORPORATION,

    MERCER
      CAPITAL, LTD., AND

    THE
      “INVESTORS” IDENTIFIED THEREIN

    

    The
      undersigned hereby executes
      and delivers the Security Agreement to which this Signature Page is attached,
      which, together with all counterparts of the Security Agreement and Signature
      Pages of the Borrowers, Agent and other “Investors” under the Security
      Agreement, shall constitute one and the same document in accordance with the
      terms of the Security Agreement.

     

    

    

    
      	 	
              INVESTOR:________________________________

            	 
	 	 	 
	 	 	 
	 	
              By:
                ______________________________________

            	 
	 	 	 
	 	
              Name:_____________________________________

            	 
	 	 	 
	 	
              Title:______________________________________

            	 

    

    

    

    

    

    
      
        
           

        

        
          13

          
            

          

        

        
           

        

      

    

    

    SCHEDULE
      I TO SECURITY AGREEMENT

     

    

     

    

     

    [Investors
      to be inserted]

     

     

     

     

     

     

     

     

    

    
      
        
           

        

        
          14

          
            

          

        

        
           

        

      

    

    

    SCHEDULE
      A

    

    

    Collateral
      Locations

    

    125
      E.
      Tahquitz Canyon, Suite 203

    Palm
      Springs, California 92262

    

    

    

    

    

    Federal
      Employer Identification
      Number:                                                                                     77-0357037

    

    

    

    

    

    

    

    

    
      
        
           

        

        
          15

          
            

          

        

        
           

        

      

    

    

    EXHIBIT
      A

    

    DESCRIPTION
      OF COLLATERAL

    

    The
      term
“Collateral” shall mean all of the properties and assets of the Borrowers of
      every kind and nature whatsoever, tangible or intangible, personal or mixed,
      existing on ________, 2007, wherever located, whether in the possession of
      the
      Borrowers or in transit or in the possession of any other person, and all
      rights, title and interest of the Borrowers of every kind and nature whatsoever
      in and to the foregoing, and including, without limiting the generality of
      the
      foregoing, all of the properties and assets of the Borrowers identified and
      described in clauses (a) through (k) below, and any replacement
      Collateral:

     

    All
      “accounts,” as that term is defined in Article 9 of the Uniform Commercial Code,
      as in effect in the State of California ("UCC"), including, without
      limitation, every right to payment for goods or other property of any kind
      sold
      or leased or for services rendered or for any other transaction, whether or
      not
      the right to payment has been earned by performance, and including without
      limitation every account receivable, all purchase orders, all interest in goods
      the sale or lease of which gives rise to the right to payment (including
      returned or repossessed goods and unpaid seller's rights), and the rights
      pertaining to such goods, including the right to stoppage in transit, every
      right to payment under any contract, and every lien, guaranty, or security
      interest that secures a right to payment for any of the foregoing
      ("Accounts");

     

    All
      chattel paper, consisting of a writing or writings evidencing both a monetary
      obligation and a security interest in or lease of goods, together with any
      guarantees, letters of credit, and other security therefore ("Chattel
      Paper");

     

    All
      “deposit accounts,” as defined in the UCC (“Deposit
      Accounts”);

     

    All
      “inventory” of whatever kind, as that term is used in the UCC, including without
      limitation all goods held by any of the Borrowers for sale or lease, goods
      furnished or to be furnished under a contract for service, and supplies,
      packaging, raw materials, goods in transit, work-in-process, and materials
      used
      or consumed or to be used or consumed in the Borrowers’ business, or in the
      processing, packaging, or shipping of same, all finished goods, and all
      property, the sale or lease of which has given rise to Accounts, Chattel Paper,
      or Instruments, and that has been returned to the Borrowers or repossessed
      by
      the Borrowers or stopped in transit, and all warranties and related claims,
      credits, setoffs, and other rights of recovery with respect to any of the
      foregoing (“Inventory”);

     

    All
      “equipment,” as that term is used in the UCC, including without limitation all
      equipment, machinery, and other property held for use in or purchased for the
      Borrowers’ business, together with all increases, parts, fittings, accessories,
      repair equipment, and special tools now or later affixed to, or used in
      connection with, that property, all transferable rights of the Borrowers to
      the
      licenses and warranties (express and implied) received from the sellers and
      manufacturers of the foregoing property, all related claims, credits, setoffs,
      and other rights of recovery (“Equipment”);

     

    All
      “instruments,” including without limitation every instrument of any kind, as
      that term is used in the UCC, and includes every promissory note, negotiable
      instrument, certificated security, or other writing that evidences a right
      to
      payment of money, that is not a lease or security agreement, and that is
      transferred in the ordinary course of business by delivery with any necessary
      assignment or indorsement ("Instruments");

     

    

    
      
        
           

        

        
          16

          
            

          

        

        
           

        

      

    

    

    “Investment
      property,” as that term is defined in the UCC (“Investment
      Property”) including
all securities,
      shares of capital stock, bonds, debentures, warrants,
      options, rights, partnership interests, limited liability company membership
      interests, and other securities and investments of every kind and
      description;

     

    All
      documents, including without limitation any paper that is treated in the regular
      course of business as adequate evidence that the person in possession of the
      paper is entitled to receive, hold, and dispose of the goods the paper covers,
      including warehouse receipts, bills of lading, certificates of title, and
      applications for certificates of title;

     

    All
      “general intangibles” of any kind, as that term is used in the UCC, and includes
      without limitation all intangible personal property other than Accounts,
      Documents, Instruments, and Chattel Paper, and includes without limitation
      money, contract rights of every kind and nature whatsoever, including all
      claims, demands, judgments, indemnities, rights, remedies, choses in action,
      powers and privileges of the Borrowers in, to and under all contracts,
      agreements, leases, indemnities, warranties or guarantees between any Borrower
      Debtor and any other parties or in favor of any Borrower), corporate or other
      business records, monies in bank accounts, monies in deposit accounts, cash
      on
      hand, chattel paper, all insurance policies, including the cash surrender value
      thereof and all proceeds thereof, and all federal, state local or foreign tax
      refunds and/or abatements to which Borrowers are or may from time to time become
      entitled, no matter how or when arising, inventions, designs, formulas, Patents
      (as defined in Section 2 of this Agreement), service marks, trademarks, trade
      names, trade secrets, engineering drawings, goodwill, rights to prepaid
      expenses, registrations, franchises, copyrights, licenses, customer lists,
      computer programs and other software, source code, tax refund claims, royalty,
      licensing and product rights, all claims under guarantees, security interests
      or
      other security held by or granted to Borrowers to secure payment of any of
      the
      Accounts by an Account Debtor, all indemnification rights, and rights to
      retrieval from third parties of electronically processed and recorded data
      pertaining to any Collateral, things in action, items, checks, drafts, and
      orders in transit to or from Borrowers, credits or deposits of Borrowers
      (whether general or special) that are held by Secured Parties (“General
      Intangibles”);

     

    “Supporting
      obligations,” as that term is defined in the UCC (“Supporting
      Obligations”); and

     

    To
      the
      extent not listed above in this Exhibit A as original collateral, all of
      the income, products and proceeds of, and all additions, substitutions,
      replacements, attachments and accessions to, all of the properties and assets
      of
      Borrowers identified and described in the foregoing clauses (a) through (j),
      including casualty insurance thereon, in each and every case whether now owned
      or hereafter acquired by Borrowers, wherever located, and howsoever their
      interests may arise or appear, and all other profits, products, rentals or
      receipts, in whatever form, arising from the collection, sale, lease, exchange,
      assignment, licensing or other disposition of, or other realization upon, the
      Collateral and proceeds of insurance policies insuring the Collateral, or any
      indemnity, warranty or guaranty payable by reason of loss or damage to or
      otherwise with respect to any of the Collateral.

     

     

    17

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